---

---

|                                                                                                          
|----------------------------------------------------------------------------------------------------------
|SECURITIES AND EXCHANGE COMMISSION                                                                        
|WASHINGTON, D.C. 20549                                                                                    
|                                                                                                          
|                                                                                                          
|                                                                                                          
|FORM 20-F                                                                                                 
|                                                                                                          
|ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
  SECURITIES EXCHANGE ACT OF 1934                    
|For the fiscal year ended December 31, 2004 Commission
  File No. 000-27974                               
|                                                                                                          
|                                                                                                          
|                                                                                                          
|CIMATRON LTD.                                                                                             
|(Exact name of Registrant as specified in its charter and translation
  of Registrants name into English)
|                                                                                                          
|                                                                                                          
|                                                                                                          
|Israel                                                                                                    
|(Jurisdiction of incorporation or organization)                                                           
|                                                                                                          
|11 Gush Etzion St., Givat Shmuel 54030,
  Israel                                                          
|(Address of principal executive offices)                                                                  

---

Securities registered
 or to be registered pursuant to Section 12(b) of the Act: 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) of the Act:

None (Title of
Class)

---

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

8,001,270 Ordinary Shares

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

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

Item 17 o   Item 18
þ

1

---

---



(CIMATRON LOGO)

We have
prepared our consolidated financial statements in United States dollars and in
accordance with accounting principles generally accepted in the United
States.  All references herein to
dollars or $ are to United States dollars, and all references to Shekels
or NIS are to New Israeli Shekels.

*********

2

---

---



|                 |                                                                                |   
|---------------- | ------------------------------------------------------------------------------ | --
|PART I           |                                                                                |   
|                 |                                                                                |   
|ITEM 1.          | IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS                          | 4 
|Not
  applicable |                                                                               
|                 |                                                                                |   
|ITEM 2.          | OFFER STATISTICS AND EXPECTED TIMETABLE                                        | 4 
|Not applicable   |                                                                               
|                 |                                                                                |   
|ITEM 3.          | KEY INFORMATION                                                                | 4 
|                 |                                                                                |   
|ITEM 4.          | INFORMATION ON THE COMPANY                                                     | 16
|                 |                                                                                |   
|ITEM 5.          | OPERATING AND FINANCIAL REVIEW AND PROSPECTS                                   | 27
|                 |                                                                                |   
|ITEM 6.          | DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES                                     | 41
|                 |                                                                                |   
|ITEM 7.          | MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS                              | 52
|                 |                                                                                |   
|ITEM 8.          | FINANCIAL INFORMATION                                                          | 53
|                 |                                                                                |   
|ITEM 9.          | THE OFFER AND LISTING                                                          | 54
|                 |                                                                                |   
|ITEM 10.         | ADDITIONAL INFORMATION                                                         | 55
|                 |                                                                                |   
|ITEM 11.         | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                     | 67
|                 |                                                                                |   
|ITEM 12.         | DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES                         | 69
|                 |                                                                                |   
|PART II          |                                                                                |   
|                 |                                                                                |   
|ITEM 13.         | DEFAULTS, DIVIDEND AVERAGES AND DELINQUENCIES                                  | 69
|                 |                                                                                |   
|ITEM 14.         | MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF
  PROCEEDS | 69
|                 |                                                                                |   
|ITEM 15.         | CONTROLS AND PROCEDURES                                                        | 70
|                 |                                                                                |   
|ITEM 16A.        | AUDIT COMMITTEE FINANCIAL EXPERT                                               | 70
|                 |                                                                                |   
|ITEM 16B.        | CODE OF ETHICS                                                                 | 70
|                 |                                                                                |   
|ITEM 16C.        | PRINCIPAL ACCOUNTANT FEES AND SERVICES                                         | 71
|                 |                                                                                |   
|ITEM 16D.        | EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES                     | 71
|Not
  applicable |                                                                               
|                 |                                                                                |   
|ITEM 16E.        | REPURCHASE OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED
  PURCHASERS      | 71
|                 |                                                                                |   
|PART III         |                                                                                |   
|                 |                                                                                |   
|ITEM 17.         | FINANCIAL STATEMENTS                                                           | 71
|Not
  applicable |                                                                               
|                 |                                                                                |   
|ITEM 18.         | FINANCIAL STATEMENTS                                                           | 72
|                 |                                                                                |   
|ITEM 19.         | EXHIBITS                                                                       | 72
|                 |                                                                                |   
|SIGNATURES       | 73                                                                            

3

---

---



PART I

Item 1. Identity of
Directors, Senior Management and Advisers

Not Applicable

Item 2. Offer Statistics
and Expected Timetable

Not Applicable

Item 3. Key Information

Selected Financial Data

The
following selected financial statement of income data for the years ended
December 31, 2002, 2003 and 2004, and the balance sheet data as of
December 31, 2002, 2003 and 2004 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,
2000 and 2001 and the selected balance sheet data as of December 31, 2000, and
2001, are derived from other audited financial statements not included in this
report. The audited financial
statements have been prepared in accordance with accounting principles
generally accepted in the United States, or U.S. GAAP. The financial statements for the years
ended December 31, 2000 and 2001 were audited by BDO, Ziv & Haft,
independent auditors and the annual financial statements for 2002, 2003 and
2004 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,                               |       
|                                              |  |                                              |       
|                                              |  | 2000                                         |        | 2001 |  | 2002   |   | 2003 |        | 2004 | 
|                                              |  |                                              |        |      |  |        |   |      |        |      | 
|                                              |  | (In thousands of US$, except per share data) |       
|Statement of Income Data:                     |  |                                              |        |      |  |        |   |      |        |      |  |        |   |  |        |  
|Revenue:                                      |  |                                              |        |      |  |        |   |      |        |      |  |        |   |  |        |  
|                                              |  |                                              |        |      |  |        |   |      |        |      |  |        |   |  |        |  
|Products                                      |  |                                              | 15,300 |      |  | 12,371 |   |      | 11,150 |      |  | 10,448 |   |  | 11,370 |  
|Services                                      |  |                                              | 9,791  |      |  | 10,583 |   |      | 10,478 |      |  | 11,161 |   |  | 11,793 |  
|                                              |  |                                              |        |      |  |        |   |      |        |      |  |        |   |  |        |  
|Total                                         |  |                                              | 25,091 |      |  | 22,954 |   |      | 21,628 |      |  | 21,609 |   |  | 23,163 |  
|                                              |  |                                              |        |      |  |        |   |      |        |      |  |        |   |  |        |  
|Cost of revenue:                              |  |                                              |        |      |  |        |   |      |        |      |  |        |   |  |        |  
|Products                                      |  |                                              | 4,234  |      |  | 4,920  |   |      | 3,234  |      |  | 3,056  |   |  | 2,923  |  
|Services                                      |  |                                              | 2,922  |      |  | 2,394  |   |      | 1,783  |      |  | 1,562  |   |  | 1,678  |  
|                                              |  |                                              |        |      |  |        |   |      |        |      |  |        |   |  |        |  
|Total                                         |  |                                              | 7,156  |      |  | 7,314  |   |      | 5,017  |      |  | 4,618  |   |  | 4,601  |  
|                                              |  |                                              |        |      |  |        |   |      |        |      |  |        |   |  |        |  
|Gross profit                                  |  |                                              | 17,935 |      |  | 15,640 |   |      | 16,611 |      |  | 16,991 |   |  | 18,562 |  
|Research and development costs, net           |  |                                              | 8,269  |      |  | 7,626  |   |      | 5,562  |      |  | 5,210  |   |  | 5,554  |  
|Restructuring costs                           |  |                                              | -      |      |  | 250    |   |      | (250   | )    |  | -      |   |  | -      |  
|Selling, general and administrative expenses  |  |                                              | 13,601 |      |  | 12,711 |   |      | 11,670 |      |  | 12,645 |   |  | 13,962 |  
|                                              |  |                                              |        |      |  |        |   |      |        |      |  |        |   |  |        |  
|Operating loss                                |  |                                              | (3,935 | )    |  | (4,947 | ) |      | (371   | )    |  | (864   | ) |  | (954   | )
|Financial income (expenses), net              |  |                                              | 219    |      |  | (467   | ) |      | 428    |      |  | 369    |   |  | 445    |  
|Other income (Expenses)                       |  |                                              | 22     |      |  | (81    | ) |      | 1      |      |  | 203    |   |  | 144    |  
|                                              |  |                                              |        |      |  |        |   |      |        |      |  |        |   |  |        |  
|Income (loss) before taxes                    |  |                                              | (3,694 | )    |  | (5,495 | ) |      | 58     |      |  | (292   | ) |  | (365   | )
|Taxes on income                               |  |                                              | 26     |      |  | (163   | ) |      | (48    | )    |  | (9     | ) |  | (23    | )
|                                              |  |                                              |        |      |  |        |   |      |        |      |  |        |   |  |        |  
|Net income (loss)                             |  |                                              | (3,668 | )    |  | (5,658 | ) |      | 10     |      |  | (301   | ) |  | (388   | )
|                                              |  |                                              |        |      |  |        |   |      |        |      |  |        |   |  |        |  
|Net income (loss) per share                   |  |                                              | (0.46  | )    |  | (0.71  | ) |      | *      |      |  | (0.04  | ) |  | (0.05  | )
|Weighted average number of shares outstanding |  |                                              | 7,991  |      |  | 8,001  |   |      | 7,981  |      |  | 7,838  |   |  | 7,835  |  
|                                              |  |                                              |        |      |  |        |   |      |        |      |  |        |   |  |        |  
|* Less than $ 0.01                            |  |                                              |        |      |  |        |   |      |        |      |  |        |   |  |        |  

|                                                        |  |                       |        |      |  |        |  |      |        |      |  |        |  |  |        | 
|------------------------------------------------------- |  | --------------------- | ------ | ---- |  | ------ |  | ---- | ------ | ---- |  | ------ |  |  | ------ | 
|                                                        |  | December 31,          |       
|                                                        |  |                       |       
|                                                        |  | 2000                  |        | 2001 |  | 2002   |  | 2003 |        | 2004 | 
|                                                        |  |                       |        |      |  |        |  |      |        |      | 
|                                                        |  | (In thousands of US$) |       
|Balance Sheet Data                                      |  |                       |        |      |  |        |  |      |        |      |  |        |  |  |        | 
|Cash and cash equivalents                               |  |                       | 3,218  |      |  | 4,534  |  |      | 4,077  |      |  | 3,124  |  |  | 1,711  | 
|Short-term investments                                  |  |                       | 6,500  |      |  | 4,440  |  |      | 4,017  |      |  | 6,358  |  |  | 6,381  | 
|                                                        |  |                       |        |      |  |        |  |      |        |      |  |        |  |  |        | 
|Total cash, cash equivalents and short-term
investments |  |                       | 9,718  |      |  | 8,974  |  |      | 8,094  |      |  | 9,482  |  |  | 8,092  | 
|Working capital                                         |  |                       | 13,167 |      |  | 10,840 |  |      | 10,861 |      |  | 10,639 |  |  | 10,306 | 
|Total assets                                            |  |                       | 27,770 |      |  | 22,855 |  |      | 21,371 |      |  | 22,386 |  |  | 20,804 | 
|Total liabilities                                       |  |                       | 7,880  |      |  | 8,313  |  |      | 7,212  |      |  | 8,826  |  |  | 7,956  | 
|Shareholders equity                                    |  |                       | 19,890 |      |  | 14,542 |  |      | 14,159 |      |  | 13,521 |  |  | 12,848 | 

4

---

---



Risk Factors

This
annual report and statements that we may make from time to time may contain
forward-looking information. There can be no assurance that actual results will
not differ materially from our expectations, statements or projections. Factors that could cause actual results to
differ from our expectations, statement or projections include the risks and
uncertainties relating to our business described below.

Risks Related to our Business

We face intensive
competition in our industry.

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

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

5

---

---



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

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

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

Sales and
services related to the Cimatron E product family, including its predecessor,
the Cimatron IT, have accounted for substantially all of our revenue. If sales
of the Cimatron E family were to decline, or fail to continue to grow, or the
profit margin on these products were to decrease significantly, our business,
financial condition and results of operations would be materially and adversely
affected.

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

Our
products are designed for use by manufacturers of consumer product or
components of consumer products. The consumer products market is intensely
competitive and price sensitive. Sales of consumer products have historically
been dependent upon discretionary spending by consumers. Consumers may defer or
alter purchasing decisions based on economic conditions or other factors, and
accordingly could reduce demand for products of our customers which are
manufactures using our products. Softening consumer demand for consumer
products has in the past caused a decline in the demand for our products. As a
result, there is uncertainty with respect to our expected revenues, and delays
or reductions in consumer spending could adversely affect our revenues and
operating results.

6

---

---



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

In February
2002, two private holding companies, Koonras Technologies Ltd., or Koonras, a
subsidiary of Polar Communications Ltd., and DBSI Investments Ltd. or DBSI,
consummated a transaction with Zeevi Computers and Technology Ltd., or ZCT, by
which they acquired, for approximately $9,900,000, all of our Ordinary Shares
previously held by ZCT, representing 64.3% of our share capital (including in
this calculation 166,100 of our ordinary shares which we have repurchased and
which, pursuant to Israeli law, cannot be voted and possess no rights other
than upon liquidation). Following this transaction, each of Koonras and DBSI
beneficially owns approximately 33% of our ordinary shares. Koonras and DBSI
together are expected to continue to effectively have the ability to control
the outcome of most matters submitted to a vote of our shareholders, including
the election of members of our board of directors and approval of significant
corporate transactions. Koonras and DBSI have entered into an agreement by
which, among other matters, they will each appoint one half of our directors,
not including our external directors, and vote together at our shareholders
meetings.  The concentration of
ownership of our Ordinary Shares by Koonras and DBSI could delay or prevent
proxy contests, mergers, tender offers, open-market purchase programs or other
purchases of our Ordinary Shares that might otherwise give you the opportunity
to realize a premium over the then-prevailing market price of our Ordinary
Shares. This concentration of ownership
may also adversely affect our share price.

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

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

| | agreements
  may be difficult to enforce through a foreign companys legal system;                                                               
|- | -------------------------------------------------------------------------------------------------------------------------------------------------
|  |                                                                                                                                                  
| | foreign
  countries could impose additional withholding or other taxes on our income;                                                            
|  |                                                                                                                                                  
| | foreign
  countries could impose tariffs or adopt other restrictions on foreign trade;                                                           
|  |                                                                                                                                                  
| | fluctuations
  in exchange rates;                                                                                                                
|  |                                                                                                                                                  
| | changes in
  general economic conditions in one or more countries could affect product
  demand;                                                 
|  |                                                                                                                                                  
| | the
  protection of intellectual property rights in foreign countries may be
  limited or more difficult to enforce; and                         
|  |                                                                                                                                                  
| | difficulties
  in managing overseas subsidiaries and international operations, including
  difficulty in retaining or replacing local management.

7

---

---



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

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

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

We are affected by
volatility in the securities markets.

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

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

We rely on
independent distributors, to whom we refer as Providers, to market, sell,
service and support our products
worldwide. Generally, our relationships
with our Providers are based on agreements with two-year terms (subject to
rolling two-year extensions) and which enable Providers to purchase our
products at a discounted price. While we have exclusive relationships with
certain of our Providers, there can be no assurance that these Providers will
give high priority to the marketing and support of our products. In addition, our Providers in Italy and
Japan each accounted for more than 5% of our revenues in 2004. In May 2005 we announced that we had agreed
to acquire 27.5% of the Italian Provider and an option to purchase its
remaining outstanding shares from its stockholders. The results of our
operations could be adversely affected by changes in the financial condition of
a Provider, which could occur rapidly, or to other changes in our current
Providers business or marketing strategies.
There can be no assurance that we will retain our current Providers, nor
can there be any assurance that, in the event that we lose any of our Providers,
we will be successful in recruiting other highly professional and technically
competent Providers to represent us.
Any such changes in our distribution channels, especially those in the
Far East and Europe, could materially adversely affect our business, operating
results and financial condition. See
Item 4 - Information on the Company - Business Overview.

8

---

---



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

We incurred
net losses of approximately $5.7 million, $0.3 million and $0.4 million in
2001, 2003 and 2004, respectively. In addition, we incurred net losses of $1.0
million in the first quarter of 2005, $0.2 million, $0.4 million and $0.2
million for the second, third and fourth quarters of 2004, respectively, and we
incurred net losses during the first and third quarter of 2003 as well. In 2002 we had net income of $10,000 and in
the first quarter of 2004 we had net income of $10,000. We cannot be certain
that we will return to profitability on an annual or quarterly basis or, if we
do return to profitability, remain profitable.

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

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

|  |                                                                                                 
|- | ------------------------------------------------------------------------------------------------
| | changes in
  timing of orders, especially large orders, for our products and services;          
|  |                                                                                                 
| | changes in
  the prices for our products and services;                                          
|  |                                                                                                 
| | adverse
  economic conditions and international exchange rate and currency
  fluctuations;      
|  |                                                                                                 
| | delays in
  the implementation of our solutions by customers;                                   
|  |                                                                                                 
| | changes in
  the proportion of service and license revenues;                                    
|  |                                                                                                 
| | timing of
  product releases;                                                                   
|  |                                                                                                 
| | changes in
  the economic conditions of the various industries in which our customers
  operate;
|  |                                                                                                 
| | price and
  product competition;                                                                
|  |                                                                                                 
| | increases in
  selling and marketing expenses, as well as other operating expenses;             
|  |                                                                                                 
| | technological
  changes; and                                                                    
|  |                                                                                                 
| | political
  instability in the Middle East.                                                     

9

---

---



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

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

Although
part of our revenues are denominated and paid in U.S. dollars, the majority are
not so denominated and paid. Therefore
we believe that inflation and fluctuations in the U.S. dollar exchange rate may
have a material effect on our revenue. In addition, a significant portion of
our international sales is denominated in Euros, and in the future additional
sales may be denominated in currencies other than U.S. dollars, thereby
exposing us to gains and losses on non-U.S. currency transactions.  We may
choose to limit this exposure by entering into hedging transactions. 
However, hedging transactions may not prevent exchange-related losses, and our
business may be harmed by exchange rate fluctuations.  Furthermore, as we
seek to expand our sales to regions throughout the world, we might be exposed
to risks of customers located in countries suffering from uncertain economic
environments such as high inflation and solvency problems. Those issues and
devaluation in local currencies of our customers relative to the U.S. dollar
where our sales are denominated in U.S. dollars could cause customers to
decrease or cancel orders or default on payment.

In the years prior
to 2004, we experienced increases in our revenues from services and decreases
in our revenues from products. If this trend resumes, it may adversely affect
our gross margins and profitability.

Our
revenues from the sale of products increased to approximately $11.4 million in
2004 from approximately $10.5 million in 2003 and approximately $11.2 million
in 2002. Our revenues from services
increased in 2004 to approximately $11.8 million from approximately $11.2
million in 2003 and approximately $10.5 million in 2002. Our gross margin from products is higher
than our gross margin from services, since our cost of services, which includes
expenses of salaries and related benefits of the employees engaged in providing
the services, is relatively higher than our cost of products. If the trend of decreases in product
revenues and increases in services revenues resumes, our gross margins and
profitability may be adversely affected.

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

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

10

---

---



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

Our Chief Executive Officer, Zvika Naggan, informed us on June 30, 2005, that he is
     resigning as our Chief Executive Officer. Our board of directors accepted his resignation and has
      appointed our current Chief Operating Officer, Danny Haran, as our new  Chief Executive Officer,
                                                                              effective July 1, 2005.

Our
Chief Financial Officer, Eli Gendler, has informed us that he will be leaving the company.
 His    replacement, Ilan Erez, who joined us as VP Finance in May 2005, will become CFO
upon Mr. Gendler's departure.

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

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

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

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

We have
entered into non-competition agreements with most of our employees in Israel
and we intend to enter into non-competition with the rest of our
employees. These agreements prohibit
our employees, during the term of their employment with us and after they cease
working for us, from competing directly with us or working for our competitors
for a limited period. Under current
Israeli law, we may be unable to enforce these agreements and it may be
difficult for us to restrict our competitors from gaining the expertise our
former employees gained while working for us.
For example, Israeli courts have recently required employers seeking to
enforce non-compete undertakings of a former employee to demonstrate that the
competitive activities of the former employee will harm one of a limited number
of material interests of the employer which have been recognized by the courts,
such as the secrecy of a companys confidential commercial information or its
intellectual property. If we cannot
demonstrate that harm would be caused to us, we may be unable to prevent our
competitors from benefiting from the expertise of our former employees.

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

11

---

---



One of our
strategies is to acquire or make investments in complementary businesses,
technologies, services or products if appropriate opportunities arise. For
instance, in May 2005 we announced that we had agreed to acquire a 27.5% in our
Italian distributor and an option to purchase the remaining outstanding shares
of that company from its stockholders.  
We may in the future engage in discussions and negotiations with
companies about our acquiring or investing in those companies businesses, products,
services or technologies. We cannot make assurances that we will be able to
identify future suitable acquisition or investment candidates, or, if we do
identify suitable candidates, that we will be able to make the acquisitions or
investments on commercially acceptable terms or at all. If we acquire or invest
in another company, we could have difficulty assimilating that companys
personnel, operations, technology or products and service offerings into our
own. The key personnel of the acquired company may decide not to work for us.
These difficulties could disrupt our ongoing business, distract our management
and employees, increase our expenses and adversely affect our results of
operations. In addition, we may incur indebtedness or issue equity securities
to pay for any future acquisitions. The issuance of equity securities could be
dilutive to our existing shareholders.

Risks Related to Licenses and Intellectual
Property

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

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

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

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

12

---

---



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

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

Risks Related to our Operations in Israel

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

Our
functional currency is the U.S. dollar while a portion of our expenses,
principally salaries and the related personnel expenses, are in new Israeli
shekels, or NIS. As a result, we are exposed to the risk that the rate of
inflation in Israel will exceed the rate of devaluation of the NIS in relation
to the U.S. dollar or that the timing of this devaluation lags behind inflation
in Israel. This would have the effect of increasing the U.S. dollar cost of our
operations. We cannot predict any future trends in the rate of inflation/
deflation in Israel or the rate of devaluation of the NIS against the U.S.
dollar. If the U.S. dollar cost of our operations in Israel increases, our U.S.
dollar-measured results of operations will be adversely affected.

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

Our
principal executive offices and research and development facilities are located
in Israel.  In addition, a portion of
our sales is made to customers in Israel. 
Accordingly, security, political and economic conditions in Israel may
directly affect our business.  Over the
past several decades, a number of armed conflicts have occurred between Israel
and its Arab neighbors. Any hostilities involving Israel or the interruption or
curtailment of trade between Israel and its present trading partners could
affect adversely our operations.  From
October 2000 until recently, terrorist violence in Israel increased significantly
and negotiations between Israel and Palestinian representatives effectively
ceased.  There can be no assurance that
the recent relative calm and renewed discussions with Palestinian
representatives will continue. 
Increased hostilities, future armed conflicts, political developments in
other states in the region, or continued or increased terrorism could make it
more difficult for us to conduct our operations in Israel, which could increase
our costs and adversely affect our financial results.  Furthermore,
several countries still restrict business with Israel and Israeli companies.
These restrictive laws and policies may limit our ability to sell our products
in those countries.

13

---

---



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

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

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

We benefit
from certain government programs and tax benefits, particularly as a result of
tax exemptions and reductions resulting from the approved enterprise status of
our manufacturing facilities in Israel. To be eligible for these programs and
tax benefits, we must continue to meet 
conditions, including making specified investments in property and
equipment and financing a percentage of investments with share capital. If we
fail to meet such conditions in the future, the tax benefits would be canceled
and we could be required to refund the tax benefits already received, together
with an adjustment based on the Israeli consumer price index and an interest
factor. These programs and tax benefits may not be continued in the future at
their current levels or at any level. The Israeli government has reduced the
benefits available under some of these programs in recent years, and Israeli
governmental authorities have indicated that the government may further reduce
or eliminate some of these benefits in the future. The termination or reduction
of existing programs and tax benefits could increase our expenses, thereby
reducing our profits or increasing our losses. In addition, the law and
regulations prescribing the benefits provide an expiration date for the grant
of new benefits. The expiration date has been extended several times in the
past. The expiration date currently in effect is December 31, 2007, and no new
benefits will be granted after that date unless the expiration date is extended
again. There can be no assurance that new benefits will be available after
December 31, 2007, or that existing benefits will be continued in the future at
their current levels or at any level.

14

---

---



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

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

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

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

15

---

---



Item 4. Information on the Company

History and development
of the Company

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

In May 2005
we announced that we had entered into an agreement with Microsystem Srl, our
Italian distributor, to acquire 27.5% of its shares for 575,000 Euro. Under the
agreement, we will also receive an option to acquire up to 100% of Microsystem
from Microsystems shareholders within the next 2 years. The transaction is
designed to significantly enhance Microsystems financial position and balance
sheet. Under the terms of the agreement, Microsystems marketing, sales, and
support groups will remain in their current offices throughout Italy. Enrico
Gardini, Microsystems founder, President and CEO will join our management team.  The transaction is expected to close in
July
2005.

On
June 30, 2005, Zvika Naggan resigned as our President and CEO. Our board of directors
accepted   his resignation and appointed our current Chief Operating Officer, Danny
Haran, as our new President and CEO, effective July 1, 2005.

Our full
name is Cimatron Ltd. and we were incorporated under Israeli law in 1982. Our
corporate headquarters are located at 11 Gush Etzion Street, Givat Shmuel
54030, Israel.  Our telephone number is
972-3-531-2121 and our web site is located at www.cimatron.com. Our U.S.
agent is CT Corporation System, with an address at 3 Winners Circle, Albany, NY
12205.

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.

16

---

---



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

|  |                                                                                                                                                                                    
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | conceptual
  design of the product and its components;                                                                                                                             
|  |                                                                                                                                                                                    
| | tool design
  and detailed design for manufacturing;                                                                                                                               
|  |                                                                                                                                                                                    
| | creating the
  toolpath data in the form of numerical control, or NC, codes that provide the
  instructions for a machine to cut a part according to specifications
  received; and
|  |                                                                                                                                                                                    
| | manufacturing
  the product.                                                                                                                                                       

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

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

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

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.

17

---

---



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

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

Business Overview

Principal Operations, Products and
Developments

Cimatron
E

Cimatron E,
our current generation of CAD/CAM solutions for the tooling industry, was
initially released in September 2001. 
Since its release, it has achieved rapid market acceptance and to date
we have successfully sold copies of the product worldwide.  We released our newest version of the
Cimatron E (Version 6.0) in November 2004. 
This product provides comprehensive tools, applications and
process-automation solutions for the tooling industry. Cimatron E is designed
with the tooling industry in mind, where all stages involved in the tooling
process are supported by applications that perform at new levels of speed and
flexibility.

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

18

---

---



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.

The
Cimatron E product family
includes the following basic modules:

Designer Solution

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

NC Solution

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

19

---

---



Master Solution

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

Electrode Solution

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

Electrode Pro Solution

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

Student Package

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

View Only System

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

20

---

---



In addition
to these basic modules, we offer over 20 optional modules for a wide variety of
additional applications that allow customers to purchase those components most
helpful for their businesses and grant customers greater control over the rate
of investment in our products.

Cimatron
IT

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

QuickConcept

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

Marketing and Distribution

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

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

We
distribute our products to end-users in approximately 28 countries in five
continents through certain of our subsidiaries (in the United States, the
United Kingdom, Canada, Germany, China and France), directly in Israel and
through a network of 32 independent Providers. Between us, our subsidiaries and
our Providers, our family of products is currently supported at over 8,500
customer sites with more than 17,000 installations.

21

---

---



Our sales
operations are organized on a regional basis. 
In each region we appoint a vice president in charge of sales in such
region. We believe that this will result in a more efficient sales structure.

Providers

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

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

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

A typical
agreement with a Provider is for a term of two years (subject to rolling
two-year extensions).  Our Providers are
distributors and our agreements with them enable the Providers to purchase our
products at a discounted price. Certain of our Providers act as our exclusive
distributors in a single country or region. Other than our Providers in Italy
and Japan, no Provider accounted for more than 5% of our total revenue for the
year ended December 31, 2004.  In
May 2005 we announced that we had agreed to acquire 27.5% of the Italian
Provider and an option to purchase its remaining outstanding shares from its
stockholders.

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

22

---

---



Subsidiaries

In 1996, we
adopted a strategy of increasing our direct involvement in certain key markets
in which we felt the Providers were not maximizing the business opportunities,
through the formation or acquisition of marketing and support subsidiaries. In
furtherance of this strategy, in September 1996, we acquired all of the
outstanding voting interests in Cimatron Technologies, Inc., our North American
Provider.  In addition, between August
and October 1997, we entered into a series of agreements with our German
Provider, pursuant to which our German Provider transferred all of its
Cimatron-related business, including goodwill, assets and employees (with the exception
of distribution rights), in certain regions of Southern Germany, to our German
subsidiary, Cimatron GmbH, and in December 1997, we also formed a subsidiary in
France, Cimatron Sarl. More recently, we established a Japanese subsidiary that
commenced operations in March 2001; a United Kingdom subsidiary that commenced
operations in August 2002; and a Chinese subsidiary, which was formed in
December 2002.  In December 2002, we
also entered into a joint venture in Korea with a third party in which we held
30% as of December 31, 2004.  However,
this joint venture only accounted for an immaterial portion of our revenues in
2003 and 2004. In January 2005 we announced the formation of Cimatron South
China, a new joint venture in Guangzhou, China, with SGV, a distributor
of our products since 1998. Since we started increasing our direct involvement
in certain key markets through our subsidiaries, we have witnessed an
improvement in sales conducted by such subsidiaries, and we expect to increase
this marketing channel.

Marketing Representatives

In 1998 we
funded the formation and operations of a marketing office in India, and in
February 2001 we opened a marketing office in South Korea. This marketing
office is currently inactive as its activities are now undertaken by our Korean
JV.   The purpose of these offices is to
assist our local Providers in educating the market on our products. In 2005, we
intend to expand our operations in India through the establishment of a
wholly-owned subsidiary.

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
28 countries worldwide.

In the
years ended December 31, 2004, 2003 and 2002, approximately 57%, 56% and
54%, respectively, of our revenues were from Europe; approximately 8%, 10% and
11%, respectively, of our revenues were from Israel; approximately 19%, 20% and
23%, respectively, of our revenues were from the Far East; approximately 15%,
13% and 12%, respectively, of our revenues were from North America; and
approximately 0.7%, 0.5% and 0.5%, respectively, of our revenues were from
other countries.

Geographical
Breakdown of Our Revenue

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

23

---

---



2004

|                    |  |          |        |          |  |        |   |         |        |  |  |      |  
|------------------- |  | -------- | ------ | -------- |  | ------ | - | ------- | ------ |  |  | ---- | -
|                    |  | Products |        | Services | 
|                    |  |          |        |          | 
|Geographical Region |  | Amount   |        | Percent  |  | Amount |   | Percent |       
|                    |  |          |        |          |  |        |   |         |       
|Europe              |  |          | 6,039  |          |  | 53.1   | % |         | 7,216  |  |  | 61.2 | %
|Israel              |  |          | 734    |          |  | 6.5    | % |         | 1,206  |  |  | 10.2 | %
|Far East            |  |          | 3,033  |          |  | 26.7   | % |         | 1,373  |  |  | 11.6 | %
|North
  America     |  |          | 1,498  |          |  | 13.1   | % |         | 1,911  |  |  | 16.2 | %
|Other               |  |          | 66     |          |  | 0.6    | % |         | 87     |  |  | 0.8  | %
|Total               |  |          | 11,370 |          |  | 100    | % |         | 11,793 |  |  | 100  | %

2003

|                    |  |          |        |          |  |        |   |         |        |  |  |      |  
|------------------- |  | -------- | ------ | -------- |  | ------ | - | ------- | ------ |  |  | ---- | -
|                    |  | Products |        | Services | 
|                    |  |          |        |          | 
|Geographical Region |  | Amount   |        | Percent  |  | Amount |   | Percent |       
|                    |  |          |        |          |  |        |   |         |       
|Europe              |  |          | 5,394  |          |  | 51.6   | % |         | 6,809  |  |  | 61.0 | %
|Israel              |  |          | 756    |          |  | 7.2    | % |         | 1,328  |  |  | 11.9 | %
|Far East            |  |          | 3,028  |          |  | 29.0   | % |         | 1,366  |  |  | 12.2 | %
|North
  America     |  |          | 1,240  |          |  | 11.9   | % |         | 1,568  |  |  | 14.0 | %
|Other               |  |          | 30     |          |  | 0.3    | % |         | 90     |  |  | 0.8  | %
|Total               |  |          | 10,448 |          |  | 100    | % |         | 11,161 |  |  | 100  | %

24

---

---



2002

|                    |  |          |        |          |  |        |   |         |        |  |  |      |  
|------------------- |  | -------- | ------ | -------- |  | ------ | - | ------- | ------ |  |  | ---- | -
|                    |  | Products |        | Services | 
|                    |  |          |        |          | 
|Geographical Region |  | Amount   |        | Percent  |  | Amount |   | Percent |       
|                    |  |          |        |          |  |        |   |         |       
|Europe              |  |          | 5,933  |          |  | 53.2   | % |         | 5,715  |  |  | 54.5 | %
|Israel              |  |          | 734    |          |  | 6.6    | % |         | 1,610  |  |  | 15.4 | %
|Far East            |  |          | 3,340  |          |  | 30.0   | % |         | 1,570  |  |  | 15.0 | %
|North
  America     |  |          | 1,104  |          |  | 9.9    | % |         | 1,495  |  |  | 14.3 | %
|Other               |  |          | 39     |          |  | 0.3    | % |         | 88     |  |  | 0.8  | %
|Total               |  |          | 11,150 |          |  | 100    | % |         | 10,478 |  |  | 100  | %

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

Potential Fluctuations in Operating Results;
Seasonality

Potential
Fluctuations in Operating Results

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

Seasonality

We sell our
products to corporations and our sales are therefore subject to the fiscal and
budgeting cycles of these corporations. 
Accordingly, a large percentage of our sales occur in the fourth
quarter, while sales in the first quarter are relatively slower.

Organizational Structure

Our
principal shareholders, Koonras and DBSI, hold 2,560,360 and 2,573, 350 shares,
representing approximately 32.68% and 32.84% of our outstanding share capital,
respectively.  Koonras and DBSI have
entered into an agreement by which a number of their shares equal to, or
greater than, 25.05% of our issued and outstanding share capital cannot be sold
by either party without first offering such holding to the other party.
Additionally, under such agreement, in the event that the selling partys offer
is refused, the other party shall then have the right to participate, pro-rata,
with the selling party in the sale of his shares to a third party.
Additionally, Koonras and DBSI have agreed that they will each appoint half of
our directors, not including our external directors required to be appointed
under Israeli law and independent directors required to be appointed under the
NASDAQ listing qualifications, and that they will vote together at our
shareholders meetings.

25

---

---



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

Property, Plants and Equipment

We do not
own any real property.  We lease the
office premises that we occupy in Givat Shmuel, Israel from a private
commercial property owner pursuant to the terms of a lease agreement we entered
into in February 2003. We occupy an aggregate of approximately 2100 square
meters at this facility. In 2004, the aggregate annual lease payments for the
office premises were approximately $188,000. The term of this lease ends during
February 2006 and we have an
option to extend the lease for an additional three years.

The
following table represents a breakdown of our approximate aggregate annual
lease payments for office premises worldwide for the year 2004 (in thousands of
U.S. Dollars):

|                            |                                                 |                                                       | 
|--------------------------- | ----------------------------------------------- | ----------------------------------------------------- | 
|ENTITY                      | LOCATIONS                                       | APPROXIMATE 
  ANNUAL EXPENSE
  (in thousands of US$)
|                            |                                                 |                                                      
|Headquarters
  in Israel    | Givat Shmuel                                    | 188                                                   | 
|                            |                                                 |                                                       | 
|North
  American subsidiary | Michigan and
  Illinois (U.S.)*                 | 90                                                    | 
|                            |                                                 |                                                       | 
|German
  subsidiary         | Ettlingen,
  Hamm, Nurenberg, Koln and Ismaning | 253                                                   | 
|                            |                                                 |                                                       | 
|French
  subsidiary         | Oyonnax
  (Since February 2005  - Lyons)        | 24                                                    | 
|                            |                                                 |                                                       | 
|UK
  subsidiary             | Huddersfield                                    | 21                                                    | 
|                            |                                                 |                                                       | 
|Japanese
  subsidiary       | Tokyo                                           | 41                                                    | 
|                            |                                                 |                                                       | 
|Chinese
  subsidiary        | Beijing 
  Wuxi 
  Chengdu                      | 45                                                    | 
|                            |                                                 |                                                       | 
|South Korean
  affiliate    | Seoul                                           | 21                                                    | 
|                            |                                                 |                                                      
|                            | Total                                           | 683                                                   | 

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

26

---

---



Item 5.Operating and
Financial Review and Prospects

Overview

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

In May 2005
we announced that we had entered into an agreement with Microsystem Srl, our
Italian distributor, to acquire 27.5% of its shares for 575,000 Euro. Under the
agreement, we will also receive an option to acquire up to 100% of Microsystem
from Microsystems shareholders within the next 2 years. The transaction is
expected to close in July 2005. 
Assuming the transaction closes, we will account for it under the equity
method and accordingly will record our share of Microsystemss profits or
losses in our consolidated financial statements.

Revenues

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

Cost
of Revenues

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

27

---

---



Software
Development Costs

Costs for
the development of new software products and substantial enhancements to
existing software products are expensed as incurred until technological
feasibility has been established, at which time any additional development
costs are capitalized.  Based on our
product development process, technological feasibility is established upon
completion of a working model.  Any
capitalization of software development costs continues up to the time the
software is available for general release to customers. However, during 2002,
2003 and 2004 costs incurred between the completion of the working model and
the point at which the products are ready for general release have been
insignificant. Therefore, all research and development costs incurred in 2002,
2003 and 2004 have been expensed.

Primary
and Reporting Currency

We market
and sell our products and services in Europe, the Far East, North America and
Israel and derive a significant portion of our revenues from customers in
Europe and Asia. A majority of our revenues in 2002, 2003 and 2004 were from
customers in Europe. Since our financial results are reported in U.S. dollars,
decreases in the rate of exchange of non-U.S. dollar currencies in which we
make sales relative to the U.S. dollar will decrease the U.S. dollar-based
reported value of those sales. In 2001 and the first quarter of 2002, decreases
in Euro - U.S. dollar exchange rates adversely affected our results of
operation. However, during the last three quarters of 2002, 2003 and the last
quarter of 2004 our results of operations benefited from the increase in the
Euro - U.S. dollar exchange rates during these periods. To the extent that
decreases in exchange rates are not offset by a reduction in our costs, they
may in the future materially adversely affect our results of operations.

Our
reporting currency is the U.S. dollar while a portion of our expenses,
principally salaries and the related personnel expenses, are in new Israeli
shekels, or NIS. As a result, we are exposed to the risk that the rate of
inflation in Israel will exceed the rate of devaluation of the NIS in relation
to the U.S. dollar or that the timing of this devaluation lags behind inflation
in Israel. This would have the effect of increasing the U.S. dollar cost of our
operations. In 2001 and 2002, the rate of devaluation of the NIS against the
U.S. dollar exceeded the rate of inflation. In 2003, there was on one hand a
devaluation of the U.S. dollar against the NIS and on the other hand a
deflation. In 2004 there was inflation coupled with a devaluation of the U.S.
dollar against the NIS. If the U.S. dollar cost of our operations in Israel
increases, our U.S. dollar-measured results of operations will be adversely
affected.

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

Critical Accounting Policies

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

28

---

---



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

Revenue
Recognition

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

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

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

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

29

---

---



Our
sales are made pursuant to standard purchase orders, containing payment terms
averaging between 90 - 120 days. For some customers with whom we have
long-standing relationships and based on past experience with those customers
and the same software products, we may grant payment terms of not over 180
days. Any payment terms that are above 90-120 days must be approved by our
Chief Financial Officer prior to the signing of any purchase order.

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

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

Allowance
for Doubtful Accounts

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

30

---

---



Operating Results

|                                                  |  |                                                |        |      |  |        |   |  |        |  
|------------------------------------------------- |  | ---------------------------------------------- | ------ | ---- |  | ------ | - |  | ------ | -
|                                                  |  | December
  31,                                 |       
|                                                  |  |                                                |       
|                                                  |  | 2002                                           |        | 2003 |  | 2004   |  
|                                                  |  |                                                |        |      |  |        |  
|                                                  |  | In thousands of US$ (except per 
  share data) |       
|Statement of Income Data:                         |  |                                                |        |      |  |        |   |  |        |  
|Revenue:                                          |  |                                                |        |      |  |        |   |  |        |  
|                                                  |  |                                                |        |      |  |        |   |  |        |  
|Products                                          |  |                                                | 11,150 |      |  | 10,448 |   |  | 11,370 |  
|Services                                          |  |                                                | 10,478 |      |  | 11,161 |   |  | 11,793 |  
|                                                  |  |                                                |        |      |  |        |   |  |        |  
|Total                                             |  |                                                | 21,628 |      |  | 21,609 |   |  | 23,163 |  
|                                                  |  |                                                |        |      |  |        |   |  |        |  
|Cost of revenue:                                  |  |                                                |        |      |  |        |   |  |        |  
|Products                                          |  |                                                | 3,234  |      |  | 3,056  |   |  | 2,923  |  
|Services                                          |  |                                                | 1,783  |      |  | 1,562  |   |  | 1,678  |  
|                                                  |  |                                                |        |      |  |        |   |  |        |  
|Total                                             |  |                                                | 5,017  |      |  | 4,618  |   |  | 4,601  |  
|                                                  |  |                                                |        |      |  |        |   |  |        |  
|Gross profit                                      |  |                                                | 16,611 |      |  | 16,991 |   |  | 18,562 |  
|Research and development costs                    |  |                                                | 5,562  |      |  | 5,210  |   |  | 5,554  |  
|Restructuring costs                               |  |                                                | (250   | )    |  | --     |   |  | --     |  
|Selling, general and administrative expenses      |  |                                                | 11,670 |      |  | 12,645 |   |  | 13,962 |  
|                                                  |  |                                                |        |      |  |        |   |  |        |  
|Operating loss                                    |  |                                                | (371   | )    |  | (864   | ) |  | (954   | )
|Financial income (expenses), net                  |  |                                                | 428    |      |  | 369    |   |  | 445    |  
|Other income (expenses)                           |  |                                                | 1      |      |  | 203    |   |  | 144    |  
|                                                  |  |                                                |        |      |  |        |   |  |        |  
|Income (loss) before taxes                        |  |                                                | 58     |      |  | (292   | ) |  | (365   | )
|Taxes on income                                   |  |                                                | (48    | )    |  | (9     | ) |  | (23    | )
|                                                  |  |                                                |        |      |  |        |   |  |        |  
|Net income (loss)                                 |  |                                                | 10     |      |  | (301   | ) |  | (388   | )
|                                                  |  |                                                |        |      |  |        |   |  |        |  
|Net income (loss) per share (basic and
  diluted) |  |                                                | (*     | )    |  | (0.04  | ) |  | (0.05  | )
|                                                  |  |                                                |        |      |  |        |   |  |        |  
|Weighted average number of shares
  outstanding   |  |                                                | 7,981  |      |  | 7,838  |   |  | 7,835  |  
|                                                  |  |                                                |        |      |  |        |   |  |        |  
|                                                  |  |                                                |        |      |  |        |   |  |        |  
|* Less than $0.01                                 |  |                                                |        |      |  |        |   |  |        |  

|                                                          |  |                       |        |      |  |        |  |  |        | 
|--------------------------------------------------------- |  | --------------------- | ------ | ---- |  | ------ |  |  | ------ | 
|                                                          |  | December 31,          |       
|                                                          |  |                       |       
|                                                          |  | 2002                  |        | 2003 |  | 2004   | 
|                                                          |  |                       |        |      |  |        | 
|                                                          |  | In
  thousands of US$ |       
|Balance Sheet Data                                        |  |                       |        |      |  |        |  |  |        | 
|Cash and cash equivalents                                 |  |                       | 4,077  |      |  | 3,124  |  |  | 1,711  | 
|Short-term investments                                    |  |                       | 4,017  |      |  | 6,358  |  |  | 6,381  | 
|                                                          |  |                       |        |      |  |        |  |  |        | 
|Total cash, cash equivalents and short-term
  investments |  |                       | 8,094  |      |  | 9,482  |  |  | 8,092  | 
|Working capital                                           |  |                       | 10,861 |      |  | 10,639 |  |  | 10,306 | 
|Total assets                                              |  |                       | 21,371 |      |  | 22,386 |  |  | 20,804 | 
|Total liabilities                                         |  |                       | 7,212  |      |  | 8,865  |  |  | 7,956  | 
|Shareholders equity                                      |  |                       | 14,159 |      |  | 13,521 |  |  | 12,848 | 

Revenue

Our total
revenues increased to approximately $23.1 million in 2004 from approximately
$21.6 in 2003 and 2002, an increase of approximately 7%.  Our revenues from the sale of products
increased to approximately $11.4 million in 2004 from approximately $10.4
million in 2003 and approximately $11.1 million in 2002.  The increase in the sale of products in 2004
was mainly due to an increase of 22.5% and 9.3% in sales in the U.S. and Asia,
respectively.  We believe that the
increase in sales resulted from increased market penetration of new versions of
our products.  In addition, 41% of the
increase in sales revenues was due to the rise in the Euro - dollar exchange
rate.  As 57% of our 2004 revenues were
derived from European countries, changes in the Euro - dollar exchange rate can
significantly influence our revenues. 
Total revenues in 2003 were primarily influenced by (a) decreased demand
for consumer products resulting from the recession in the U.S. and other global
markets, which caused decreased activity and consumer products manufacturers,
including our customers, and (b) mold, tool, die and fixture makers migrating
their operations to low cost labor markets in the Far East, which markets are
also characterized by lower prices and by higher usage of pirated copies of
software products.  As a percentage of
revenues, our revenues from the sale of products decreased from approximately
51.6% in 2002 to approximately 48.4% in 2003 and to approximately 49.1% in
2004.  Our revenues from services
increased in 2004 to approximately $11.8 million from approximately $11.2
million in 2003 and $10.5 million in 2002. 
The increase in service revenues in 2004 was 15% due to an increase in
service contract renewals and the increase in our installed base of Cimatron E
version 5.1 users and 84% due to the rise in the Euro - dollar exchange
rate.  The increase in 2003 resulted
primarily from exchange rate fluctuations.As
a percentage of revenues, our revenues from services increased from
approximately 48.4% in 2002 to approximately 51.6% in 2003 and approximately
50.9% in 2004.

31

---

---



There can
be no assurance that our total revenues will continue to increase; furthermore,
if revenues from services increase and revenues from products decrease, our
gross margins and profitability may be adversely affected.See Item 3  Risk Factors In the years
prior to 2004, we have experienced increases in revenues from services and
decreases in revenues from products. If this trend reoccurs, it may adversely
affect our gross margins and profitability.

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

Cost
of Revenue

Cost of
revenue remained in 2004 at $4.6 million, as in 2003, which reflects a decrease
from $5.0 million in 2002.  However,
cost of revenues in 2004 included an increase in royalties to the Chief
Scientist in the amount of $0.2 million, which offset a decrease in the amount
of $0.2 million in salaries and employee benefits. The decrease in the cost of
revenue for 2003 was primarily due to (a) the decrease in the sales of products
in 2003 and (b) decreases in salary expenses. 
The decreases in salary expenses were due to reductions in employees and
increases in our effective U.S. dollar  NIS exchange rate resulting from the
level at which we hedged NIS denominated expenses under currency forward
contracts at the end of 2002, resulting in lower dollar costs.

Gross
Profit

Gross
profits, as a percentage of total revenue, was 80.1%, 78.7% and 76.8% in 2004,
2003 and 2002, respectively.

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 2004, $5.2 million in 2003
and $5.6 million in 2002.  The increase
in 2004 was due to increased investment of resources in the development of
Cimatron E version 6.0, as well as to an increases in salary and termination
payment expenses and to the operation of a development team in Russia.  In 
addition, the devaluation of the US dollar against the NIS contributed
24% of the 2004 increase. The decrease in 2003 was due to a continued reduction
in salaries and personnel.  The decrease
in 2003 was also due to increases in our effective U.S. dollar  NIS exchange
rate resulting from the level at which we hedged NIS denominated expenses under
currency forward contracts at the end of 2002, resulting in lower dollar
costs.

Selling,
General and Administrative Expenses

Selling
expenses consist of costs relating to promotion, advertising, trade shows and
exhibitions, compensation (including sales commissions), sales support, travel
and travel-related expenses and royalties to the Fund for the Encouragement of
Marketing of the Government of Israel, or the Marketing Fund, including all
such expenses for our subsidiaries. We did not receive any grants from the
Marketing Fund in the years 2002, 2003 or 2004 and do not expect to receive any
such grants in the future. General and administrative expenses consist of
(a) compensation costs for administration, finance and general management
personnel, (b) office maintenance and administrative costs, (c) rent,
(d) fees paid for management services to ZCT in January and February 2002
and to DBSI and Polar from March 2002 onwards and (e) reserves for doubtful
debts.

32

---

---



In 2004,
selling, general and administrative expenses increased by 10% from $12.6
million in 2003 to $14.0 million, which increase was due to (a) the relatively
high Euro  U.S. dollar exchange rate throughout 2004, which resulted in
increased selling expenses consisting of the salaries of the personnel of our
European subsidiaries, (b) increased selling activities, especially in the
U.S., and (c) organizational changes resulting in termination and severance
payments. Of the increase in selling, general and administrative expenses, 32%
was due to the rise in the Euro - dollar exchange rate. In 2003, selling,
general and administrative expenses increased by 6% from $11.7 million in 2002
to $12.6 million, which increase was due to (a) the relatively high Euro  U.S.
dollar exchange rate throughout 2003, which resulted in increase selling
expenses consisting of the salaries of the personnel of our European
subsidiaries, (b) the expenses we incurred in connection with a full year of
operations of our U.K. and Chinese subsidiaries, both of which we opened in
2002 and (c) expenses we incurred in connection with severance payments to our
former chief executive officer.

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 trade
receivables and tax rebates and currency translation adjustments between the
U.S. dollar exchange rate imposed on our assets and liabilities.  Financial income was $445,000 in 2004, an
increase of 21% and 4% compared to financial income of $369,000 in 2003 and
$428,000 in 2002, respectively. The increase in financial income in 2004 was
due primarily to the revaluation of the Euro in relation to the U.S. dollar.
The decrease in financial income in 2003 was due primarily to our not selling
any bonds held by us, as opposed to 2002, in which we gained $359,000 from such
sales.  The increase in the year 2002
was primarily due to (a) the gain from the sale of bonds, a part of which was
recorded in our financial statements for the previous year under other
comprehensive income; and (b) the revaluation of the Euro in relation to the
U.S. dollar.

33

---

---



Effective Corporate Tax Rate

We and each
of our subsidiaries are subject to corporate taxes in various countries in
which we and they operate. We are currently most significantly affected by
corporate taxes in Israel where we received a final tax assessment through the
tax year ended December 31, 2000. Generally,
Israeli companies are subject to corporate tax at the rate of 34% on taxable
income and are subject to capital gains tax at a rate of 25% on capital gains
(other than gains derived from the sale of listed securities that are taxed at
the prevailing corporate tax rates) derived after January 1, 2003.  The corporate tax rate was reduced in June
2004, from 36% to 35% for the 2004 tax year, 34% for the 2005 tax year, 32% for
the 2006 tax year and 30% for the 2007 tax year and thereafter.  However,
the effective tax rate payable by a company that derives income from an
approved enterprise (as discussed below) may be considerably less. Our
effective tax rate in Israel would have been approximately 30% for the year
ended December 31, 2004, had we not incurred tax losses in Israel. We believe
that our effective tax rates in the U.S., Germany, France, the U.K. and Japan
would have been approximately 35%, 27%, 33%, 30% and 41%, respectively, for the
year ended December 31, 2004, had we not incurred tax losses in such countries.
We believe that we had tax loss carryforwards in Israel in the aggregate amount
of $2,184,000 as of the end of 2004.  In
addition, as of December 31, 2004, we had approximately $7,640,000 in net
operating loss carryforwards in North America, $2,200,000 in Germany,
$3,000,000 in France and $650,000 in the U.K. 
We expect that as our profits increase and our subsidiaries utilize
their respective loss carryforwards, particularly in countries with relatively
high corporate tax rates, our consolidated effective tax rate will increase.

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

34

---

---



Liquidity and Capital Resources

During 2004
we generated (i) $11,154,000 from sales of software licenses, (ii) $216,000
from sales of hardware, (iii) $9,400,000 from software and hardware maintenance
fees, (iv) $691,000 from service bureau activities (in Israel),
(v) $1,703,000 from other services related to the software, (vi) $334,000
from proceeds from the maturity of bonds and mutual funds and (vii) $221,000
from the sale of property and equipment. In addition, we utilized a renewable loan
in the amount of $500,000 from a Swiss bank, which is secured by a deposit in
the amount of $500,000. We classify this deposit under short term investments,
as the interest payable on the loan is 3.24% per annum, and the interest
payable on the deposit is 10% per annum, resulting in finance income of
approximately $33,800 per annum. The loan has a 6 month term and is renewable
every 6 months provided that the deposit remains in place. So long as amounts under the loan are
outstanding, we are not allowed to use the deposit. The loan is not
subordinated to any other debt we have.

During
2004, we invested $0.6 million in bonds and $0.5 million in the purchase of
property and equipment, and we used $0.9 million in operating activities. These transactions caused our aggregate
amount of cash and cash equivalents to be $1.7 million as of December 31, 2004
as compared to $3.1 million as of December 31, 2003, and our short-term
investments to be $6.4 million as of December 31, 2004, the same as at December
31, 2003. The decrease in cash and cash equivalents was primarily due to (a)
our funding of net loss, as we fund our operations primarily from operating
income and cash resources, and (b) increased severance payments to employees
due to the need to fund severance payment accrual shortfalls.

As
of December 31, 2004, our cash and cash equivalents and short-term investments
totaled $8,092,000, compared to $9,482,000 as of December 31, 2003. This decrease was primarily the result of
cash used in operations. As of December 31, 2004, our working capital was
$10,306,000 and our total assets were $20,804,000, compared to $10,639,000 and
$22,386,000, respectively, as of December 31, 2003. The change in total assets resulted from a decrease in cash and
cash equivalents and othe assets (due to an amortization of software
development costs), offset by an increase in accounts receivable.

Our
trade receivables, net of allowance for doubtful accounts on December 31, 2004
totaled $6,130,000, compared to $5,725,000 on December 31, 2003. The increase was due our increased sales in
2004. The collection cycle remained unchanged during 2004 compared to
2003. We believe that, generally, the
quality of receivables remained unchanged and we will continue our efforts to
shorten the collection cycle.

Our
capital expenditures for 2004 amounted to approximately $543,000 and were
mostly for the purchase of computers, computer equipment and other office
equipment.

35

---

---



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

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

Impact
of Tax Assessments

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

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

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

The
exchange rate between NIS and the U.S. dollar has fluctuated during the past
six months (December 2004  May 2005) from a low of NIS 4.299 to the dollar to
a high of NIS 4.5 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
  2004 |  |                       |  | 4.308                  |  |  |  |  | 4.374 |  | 
|January 2005    |  |                       |  | 4.352                  |  |  |  |  | 4.414 |  | 
|February
  2005 |  |                       |  | 4.357                  |  |  |  |  | 4.392 |  | 
|March 2005      |  |                       |  | 4.299                  |  |  |  |  | 4.379 |  | 
|April 2005      |  |                       |  | 4.36                   |  |  |  |  | 4.395 |  | 
|May 2005        |  |                       |  | 4.348                  |  |  |  |  | 4.416 |  | 

36

---

---



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,
  2000 - December 31, 2000 |  |               |  | 4.067 NIS/$1 |  | 
| | January 1,
  2001 - December 31, 2001 |  |               |  | 4.219 NIS/$1 |  | 
| | January 1,
  2002 - December 31, 2002 |  |               |  | 4.738 NIS/$1 |  | 
| | January 1,
  2003 - December 31, 2003 |  |               |  | 4.548 NIS/$1 |  | 
| | January 1,
  2004 - December 31, 2004 |  |               |  | 4.478 NIS/$1 |  | 

In 2000,
the rate of inflation was approximately 0% and the devaluation rate was -2.7%.
During 2001, the NIS was devalued against the dollar by 9.3%. As a result of the differential between the
rate of inflation and the rate of devaluation of the NIS, we experienced
increases and decreases in the costs of our Israel operations, as expressed in
U.S. dollars, in 2001, but they did not materially affect our results of
operations in such periods. In 2002 the rate of inflation was 6.5% and the rate
of devaluation of the NIS against the dollar was 7.27%. In 2003, there was on
the one hand a devaluation of the U.S. dollar against the NIS and on the other
hand a deflation. In 2004 the rate of
inflation was approximately 1.2% and the U.S. dollar was devaluated against the
NIS by 1.6%.

Since our
financial results are reported in dollars, fluctuations in the rates of
exchange between the dollar and non-dollar currencies may have a material
effect on our results of operations. We therefore use currency exchange forward
contracts and currency exchange options to hedge the impact of the variability
in the exchange rates on accounts receivable and future cash flows from certain
Euro-denominated transactions as well as certain NIS-denominated expenses. Our
policy is to hedge 60% to 80% of our Euro denominated future cash flows to
protect against a reduction in reported operating income arising from decreases
in the Euro  U.S. dollar exchange rate and to hedge 60% to 80% of our NIS
denominated expenses to protect against an increase in reported expenses
arising from increases in the U.S. dollar  NIS exchange rate. However, we may decide not to hedge in
accordance with this policy where, in our judgment, the applicable exchange
rate is sufficiently low. The
counter-parties to our forward contracts and currency exchange options are
major financial institutions with high credit ratings. We believe the risk of
incurring losses on such forward contracts and currency exchange options
related to credit risks is remote and that any losses would be immaterial. As
of December 31, 2004, we had currency exchange options to sell up to 2.65
million Euro for a total amount of $3.34 million, and had written currency
exchange options to sell up to 2.65 million Euro for a total amount of $3.6
million that were scheduled to expire prior to June 30, 2005. On June 15, 2005
we exercised currency exchange options to sell 600,000 Euro for $756,000. See Item 11 - Quantitative and Qualitative
Disclosure about Market Risk for a description of hedging and other similar
transactions.

37

---

---



Research and development, patents, licenses,
etc.

We conduct
our research and development operations primarily in Israel and to a small
extent in Germany and Russia. Our research and development efforts have been
financed through internal resources and through plans sponsored by the Chief
Scientist of the Government of Israel. In the years ended December 31, 2002,
2003 and 2004 our gross research and development expenditures were $5,562,000,
$5,210,000 and $5,554,000 respectively (26%, 24% and 24% of total revenues,
respectively). Prior to 2001, we were granted royalty-bearing grants from the
Chief Scientist of the Government of Israel for research and development
activities. Under the provisions of Israeli law in effect until 1996, royalties
of 2%-3% of the revenues derived from the sale of software products developed
under a research and development program funded by the Chief Scientist and
certain related services must be paid to the State of Israel. Pursuant to an
amendment effected in 1996 effective with respect to Chief Scientist plans
funded in or after 1994, royalties generally at the rate of 3% during the first
three years, 4% over the following three years and 5% in or after the seventh
year of the revenues derived in connection with products developed according to
such plans are payable to the State of Israel. The maximum aggregate royalties
will not exceed 100% (for funding prior to 1994, 100% to 150%) of the U.S.
dollar-linked value of the total grants received. Pursuant to an amendment
effected in 2000, effective with respect to Chief Scientist plans funded in or
after 2000, the royalty rates described above were updated to 3% during the
first three years and 3.5% in or after the fourth year, of the revenues derived
in connection with products developed under such plans. Pursuant to an
amendment effected on January 1, 1999, effective with respect to Chief
Scientist plans approved in or after 1999, funds received from the Chief
Scientist shall bear annual interest at a rate equal to LIBOR for twelve
months. As of December 31, 2004, the
Companys contingent liability with respect to such grants was $3,182,000,
contingent upon the Company generating revenues from sales of products
developed with funds provided by the Chief Scientist.

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

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

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

38

---

---



|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Transfer of Manufacturing Rights.The
  committee is authorized to approve transfers of manufacturing rights only if
  the transfer is conditioned upon either (1) payment of increased aggregate
  royalties, ranging from 120% to 300% of the amount of the grant plus
  interest, depending on the percentage of foreign manufacture or (2) a
  transfer of manufacturing rights into Israel of another product of similar or
  more advanced technology.                                                                                                                                       
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | Merger or Acquisition.If the committee
  approves a merger or similar transaction in which the surviving entity is not
  an Israeli company, such a transaction would be subject to the payment to the
  OCS of a portion of the consideration paid.
  The amount payable would be a fraction of the consideration equal to
  the relative amount invested by the OCS in the development of such technology
  compared to the total investment in the company, net of financial assets that
  the company has at the time of the transaction, but in no event less than the
  amount of the grant.

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

Based upon
the aggregate participation payments received to date, we expect that we will
continue to pay royalties to the Chief Scientist on sales of our products and
related services for the foreseeable future. In the years ended December 31,
2002, 2003 and 2004, we paid or accrued royalties to the Chief Scientist in the
amount of $578,000, $668,000 and $791,000, respectively.

In addition
to the Chief Scientist grants, we received grants from the Fund for the
Encouragement of Overseas Marketing of the Israeli Governments Ministry of
Industry and Trade, with respect to which we are obligated to pay royalties
amounting to 3% to 4% of the incremental exports, up to a maximum of 100% of
the grants received. Our contingent liability as of December 31, 2004 with
respect to such grants was $558,000, contingent upon the Companys incremental
exports.

Trend
Information

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

39

---

---



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

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

Decrease
in prices. The strong competition in the software
business generally, and in the CAD/CAM business specifically, along with the
economic downturn since 2001, has caused revenues of companies in our industry
to decrease. Such decrease in software prices has resulted in a decrease in our
revenues and thus in our profits. As a result, we have been forced to employ
cost-cutting measures. If the foregoing trend continues, we may have to employ
additional cost-reduction measures.

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

E. Off-Balance Sheet Arrangements

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

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

2.          As
consideration for grants received from the Fund for the Encouragement of
Overseas Marketing of the Israeli Governments Ministry of Industry and Trade,
we are obligated to pay the Fund royalties amounting to 3% to 4% of the
incremental exports, up to a maximum of 100% of the grants received. Our contingent liability as of December 31,
2004 was $558,000, contingent upon our incremental exports.

40

---

---



F. Tabular
Disclosure of Contractual Obligations

The
following table summarizes our contractual obligations and commercial
commitments as of December 31, 2004:

|                                                  |  |                                              |       |                    |   |           |  |           |       |                 |   |    |  |  |   | 
|------------------------------------------------- |  | -------------------------------------------- | ----- | ------------------ | - | --------- |  | --------- | ----- | --------------- | - | -- |  |  | - | 
|                                                  |  | Payments due by Period 
  (US$ in thousands) |      
|                                                  |  |                                              |      
|Contractual
  Obligations as of December 31, 2004 |  | Total                                        |       | Less than 1
  Year |   | 1-3 Years |  | 4-5 Years |       | After 5
  Years |  
|                                                  |  |                                              |       |                    |   |           |  |           |       |                 |  
|                                                  |  |                                              |       |                    |   |           |  |           |       |                 |   |    |  |  |   | 
|Operating
  Leases                                |  | $                                            | 2685  |                    | $ | 1,302     |  | $         | 1,342 |                 | $ | 41 |  |  | 0 | 
|Purchase
  Obligations and Commitments            |  | $                                            | 623   |                    | $ | 623       |  |           | 0     |                 |   | 0  |  |  | 0 | 
|Other
  Long-Term Liabilities                     |  | $                                            | 3,268 | (1)                |   | 0         |  |           | 0     |                 |   | 0  |  |  | 0 | 
|Total
  Contractual Cash Obligations              |  | $                                            | 6,576 |                    | $ | 1,925     |  | $         | 1,342 |                 | $ | 41 |  |  | 0 | 

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

G. Safe Harbor

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

Item 6. Directors, Senior Management
and Employees

Directors and Senior Management

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

41

---

---



|                   |  |     |  |                                                         
|------------------ |  | --- |  | --------------------------------------------------------
|Name               |  | Age |  | Position                                                
|                   |  |     |  |                                                         
|Yossi Ben
  Shalom |  | 50  |  | Chairman of
  the Board                                 
|Rimon
  Ben-Shaoul |  | 60  |  | Director                                                
|Barak Dotan        |  | 37  |  | Director                                                
|Kenny Lalo         |  | 47  |  | Director                                                
|David Golan        |  | 64  |  | Director                                                
|Ofra Brown         |  | 51  |  | External
  Director                                     
|Rami Entin         |  | 54  |  | External
  Director                                     
|Zvika Naggan       |  | 46  |  | President
  and Chief Executive Officer                 
|Eli Gendler        |  | 37  |  | Chief
  Financial Officer                               
|Danny Haran        |  | 47  |  | Vice
  President of Marketing and ChiefOperating Officer

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

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.

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 Lalo has
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.

42

---

---



David Golan has been
a director on our board since 1992 and is a former Chairman of the board. Mr. Golan is currently an independent
businessman and a director. Previously he was an executive director in the
Binat Group and served on the board of directors of several public and private
companies. From May 1998 to September
2000 Mr. Golan was Managing Director in charge of Zeevi Holdings investments,
not including ZCT. From March 1997 to
May 1998, he was the Chief Executive Officer of 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 German Stock Exchange in Frankfurt, Germany and on the Oslo Stock Exchange
in Norway. From 1999 to 2001, Ms. Brown served as the Chief Financial Officer
of BVR Technologies Ltd., a company publicly traded on the NASDAQ. From 1978 through 1998 Ms. Brown served as
the Credit Manager for Electronic and Hi-Tech Industries  Industrial
Development Bank of Israel Ltd. Ms.
Brown holds a bachelors degree in economics from Tel Aviv University and a
masters degree in business administration from City University of Seattle.

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

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

43

---

---



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

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

Mr. Naggan informed us on June 30, 2005, that he is resigning as our President and CEO. Our board of
directors accepted his resignation and has appointed our current Chief Operating Officer, Danny
Haran, as our new President and CEO, effective July 1, 2005.

Mr. Gendler has informed us that he will be leaving Cimatron. His replacement, Ilan Erez, joined us as
VP
Finance in May 2005 and will become CFO upon Mr. Gendlers departure. Mr.
Erez has been the Chief Financial Officer of
Silicom Ltd., a NASDAQ listed company engaged in the design,
manufacturing and selling of server-networking cards, for the last seven years. He also served as VP Operations of
Silicom from May 2001 until his departure. From 1996 to 1998 Mr. Erez served as
a Controller and assistant to the Chief Executive Officer at Bio-Dar Ltd. From
1994 until 1996 Mr. Erez served as an Auditor at Kesselman & Kesselman, a
member of PriceWaterhouseCoopers. Mr. Erez is a Certified Public Accountant in
Israel and holds a B.A in Accounting and Economics from the Hebrew University
in Jerusalem and an LL.M. in Business Law from Bar-Ilan University.

44

---

---



Arrangements for the election of Directors

Koonras
Ltd. and DBSI Investments Ltd., our two largest shareholders (each holding
approximately 33% of our share capital), control the outcome of most matters
submitted to a vote of our shareholders, including the election of members of
our board of directors. Polar and DBSI
have entered into an agreement by which, among other matters, they will each
appoint one half of our directors, not including our external directors, and
vote together at our shareholders meetings.

Compensation

During
the year ended December 31, 2004, we paid, in the aggregate, approximately
$1,104,000 in direct remuneration to our directors and officers for services
provided by them to the Company in such capacities, including compensation paid
to Arie Feldman, our former CTO, who retired in February 2005 and Eli Gendler,
our current CFO who recently announced that he intends to leave Cimatron. 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.

Board of Directors

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

Substitute
Directors

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

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

45

---

---



External
Directors

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

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

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

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

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

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

The initial
term of an external director is three years and may be extended for an
additional three years. External 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 external 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 external director. Our external
directors are Ofra Brown and Rami Entin, who will complete their current terms
in May 2008, in accordance with Israeli law.

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

46

---

---



Under
recent amendments to the Companies Law, at least one of the external directors
serving on a companys board of directors is required to have financial
expertise and the other external director or directors are required to have
professional expertise. The
definition of each of these terms is to be determined under relevant
regulations, which have not yet been published.

Audit
Committee

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

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

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

|  |                                                                                                                                                                                                                                                                                                     
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Have the
  sole authority to review in advance, and grant any appropriate pre-approvals
  of, (i) all audit and non-audit services to be provided by the independent
  auditors and (ii) all fees and other terms of engagement;                                                                    
|  |                                                                                                                                                                                                                                                                                                     
| | Review and
  discuss with management and the independent auditors the companys quarterly
  financial statements (including the independent auditors review of the
  quarterly financial statements) prior to any required submission to
  shareholders, the SEC, any stock exchange or the public;
|  |                                                                                                                                                                                                                                                                                                     
| | Review and
  discuss with management and the independent auditors the companys annual
  audited financial statements prior to any required submission to
  shareholders, the SEC, any stock exchange or the public;                                                                                
|  |                                                                                                                                                                                                                                                                                                     
| | Recommend to
  the Board, if appropriate, that the companys annual audited financial
  statements be included in the companys annual report;                                                                                                                                                      
|  |                                                                                                                                                                                                                                                                                                     
| | Review and
  discuss with management all disclosures made by the company concerning any
  material changes in the financial condition or operations of the company;                                                                                                                                 

47

---

---



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

As
of the date of this annual report, Mr. Kenny Lalo, Ms. Ofra Brown and Mr. Rami
Entin are serving as members of our audit committee.

Internal
Auditor

Under the
Companies Law, the board of directors must appoint an internal auditor,
nominated by the audit committee. The
role of the internal auditor is to examine, among other matters, whether the
companys actions comply with the law and orderly business procedure. Under the Companies Law, the internal
auditor may be an employee of the company but not an office holder, or an
affiliate, or a relative of an office holder or affiliate, and he may not be
the companys independent accountant or its representative. Ernst & Young  Kost, Forer, Gabbay
& Kasierer Business Risk Services serves as our internal auditor.

Nasdaq
Listing Requirements

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

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,                        |  | 2004 |     | 2003 |  | 2002 | 
| |                                                   |  |      |     |      |  |      | 
| | Research and Development                          |  |      | 84  |      |  | 84   |  |  | 80  | 
| | Marketing, Sales and Customer Support             |  |      | 106 |      |  | 109  |  |  | 132 | 
| | Administration Management and Information Systems |  |      | 24  |      |  | 22   |  |  | 10  | 
| | Total                                             |  |      | 214 |      |  | 215  |  |  | 222 | 

48

---

---



As of
May 31, 2005, we employed 214 full-time personnel, of whom 77 (most of
whom hold advanced technical degrees) were employed in research and
development, 113 were employed in marketing, sales and customer support and 24
were employed in various administrative, information systems and management
positions. Of these employees, 113 were
employed in Israel operations, 20 were employed by our North American
subsidiary, 41 were employed by our German subsidiary, 3 were employed by our
French subsidiary, 2 were employed by our Japanese subsidiary, 4 were employed
by our British subsidiary, 28 were employed by our Chinese subsidiary, and 3
were employed by our Indian office. In
addition, we employed 18part-time persons on average during the year 2004 and
as of May 31, 2005 we employed 18 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.

49

---

---



Share Ownership

1996
Share Option Plan

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

1998
Share Option Plan

In April
1998, the board of directors adopted an additional share option plan (the 1998
Share Option Plan) pursuant to which 620,000 Ordinary Shares were reserved for
issuance upon the exercise of options to be granted to our directors, officers,
employees and consultants. The 1998 Share Option Plan is administered by a
committee of the Board, which designates the optionees and dates of grant. The
exercise price of an option granted under the 1998 Share Option Plan may be no
less than 85% of the fair market value of an Ordinary Share, as determined by
that committee on the date that the option is granted. Options granted vest
over a period determined by the option committee, terminate three years after
they become exercisable, and are non-assignable except by the laws of descent.
The option committee has the authority to amend the terms of option grants,
provided that any such amendment is in the best interest of the grantee. As of
May 31, 2004, options to purchase 102,500 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 October
1999, the option committee approved the grant of options to purchase 160,000 of
the Companys shares at a price of $2.00 per share to the former president and
CEO of the Company. These options are exercisable commencing one year after the
date of grant at a rate of 33.3% per year, subject to the continued employment
of the former president CEO. All such options were outstanding as of May 31,
2004. On January 13, 2002, ZCT sold all of its holdings in the Company and upon
such transaction all the unvested options that were granted to the former
president and CEO of the Company immediately vested and became exerciseable.

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

50

---

---



Such
options are exercisable commencing two years after the date of grant at a rate
of 50% on the second anniversary of the date of grant and 25% in each of the
following two years, subject to the continued employment of the grantee.

In August
2003, the board of directors approved the grant of options to purchase 150,000
of the Companys shares at a price of $2.50 per share to two officers of the
Company. These options are exercisable commencing one year after the date of
grant at a rate of 25%-33.3% per year, subject to the continued employment of
the officers. All of such options were outstanding as of May 31, 2004.

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

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

2004
Share Option Plan

In October
2004, our board of directors and shareholders adopted the 2004 Share Option and
Restricted Shares Incentive Plan pursuant to which 240,000 Ordinary Shares were
reserved for issuance upon the exercise of options to be granted to our
directors, officers, employees and consultants. The 2004 Share Option Plan is
administered by a committee of the Board, which designates the optionees and
dates of grant. The exercise price of an option granted under the 2004 Share
Option Plan may be no less than 95% of the fair market value of an Ordinary
Share, as determined by 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, 2005, options to purchase 218,500 of
such shares were outstanding at a price of $2.20 per share under the 2004 Share
Option Plan.These options are
exercisable pursuant to a three (3) year vesting schedule as follows: (i)
thirty three percent (33%) of the shares covered by the options become
exercisable on the first anniversary of the grant date; and (ii) sixteen and
one-half percent (16.5%) of the shares covered by the options become
exercisable at the end of each subsequent six months period over the course of
the following two (2) years, subject to the continued employment of each
employee. The grantee will be responsible for all personal tax consequences of
the grant and the exercise thereof.

Repurchase
of Our Shares

We
purchased these 159,600 of our shares in the open market between September 2002
and February 2003 at an average price of $0.95 per share. During 2003, we
repurchased 26,000 shares at an average price of $1.04 per share. Under Israeli
law, while these shares are considered to be part of our outstanding share
capital that can be reissued by us in the future, they are dormant shares and
as such they cannot be voted and do not provide any other rights, other than
upon liquidation.

51

---

---



Beneficial Ownership by Officers and Directors

Messrs.
Ben Shalom, Ben Shaoul, Dotan and Lalo may be deemed to have beneficial
ownership of an aggregate of 5,133,710 of our shares, representing 65.5% of our
issued and outstanding capital share, by virtue of their positions with Polar
and DBSI and the voting agreement between Polar and DBSI described elsewhere in
this report.

Item 7. Major Shareholders and
Related Party Transactions

Major Shareholders

The
following table sets forth information, as of May 31, 2005, concerning the
beneficial ownership (as defined in Rule 13d-3 under the Securities Exchange
Act of 1934) of ordinary shares by (i) any person who is known to own at least
5% of the ordinary shares of our company and (ii) all directors and executive
officers as a group.  The voting rights
of our major shareholders do not differ from the voting rights of holders of
all our ordinary shares.

|                                                               |  |                              |  |                              |     |  |  |  |       |   |  | 
|-------------------------------------------------------------- |  | ---------------------------- |  | ---------------------------- | --- |  |  |  | ----- | - |  | 
|Name and
  Address                                             |  | Number of
  Ordinary  Shares |  | Percent of
  Ordinary Shares |    
|                                                               |  |                              |  |                              |    
|                                                              
|Koonras Ltd.21 Haarbaah St.Tel-Aviv,
  Israel                |  |                              |  | 2,560,360                    |     |  |  |  | 32.68 | % | 
|DBSI Investments Ltd.85 Medinat Hayehudim St.Herzliya, Israel  |  |                              |  | 2,573,350                    |     |  |  |  | 32.84 | % | 
|                                                               |  |                              |  |                              |     |  |  |  |       |   | 
|All directors and executive officers as a
  group (11 persons) |  |                              |  | 5,759,710                    | (1) |  |  |  | 73.5  | % | 

(1)    Includes
an aggregate of   5,133,710 shares beneficially held by Koonras and DBSI, by virtue of
the   positions held by certain of our directors on the board of directors of   Koonras
and DBSI, as to which such individuals disclaim beneficial ownership.   Also includes
626,000 Ordinary Shares owned by our former CTO, Mr. Arie   Feldman, who retired in
February 2005.

Record Holders

As of May
31, 2005, there were 29 record holders of our ordinary shares, of which 15
represented United States record holders owning an aggregate of approximately
28% of our outstanding ordinary shares.

52

---

---



Related Party Transactions

Services Agreement
and Lease Agreement

Until
February 2002, our former principal shareholder ZCT, provided us with certain
corporate and administrative services, including, but not limited to, executive
management, facilities and other such services as were agreed upon from time to
time between us and ZCT. The primary executive management services that we
received under the agreement represented the services of the chief executive
officer and the chief financial officer of ZCT, who did not receive separate
fees for such services. Pursuant to such agreement, we shared the expenses
relating to the specific services we received from ZCT with the other
subsidiaries of ZCT that also received such services from ZCT.  For the period of January 1, 2002, through
February 21, 2002 we paid ZCT an aggregate of $230,000 for such services and
for rent payments for such months.

As of
February 21, 2002, ZCT assigned all rights and obligations under the foregoing
services agreement to Koonras and DBSI. An assignment of this agreement to Koonras and DBSI was ratified by our
shareholders on July 11, 2002. From February 21, 2002 through December 31, 2003
we paid Koonras and DBSI an aggregate of NIS 2,919,500 for these services.
Koonras and DBSI will continue to provide these services to the Company for an
annual fee of NIS 1,560,000 (linked to the Israeli Consumer Price Index as of
July 2002).

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

Item 8.Financial
Information

Consolidated Statements and Other Financial
Information

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

Legal
Proceedings

In
April 2004, Omega  Adem Technologies Ltd., an Israeli privately held company
engaged in the development of software, filed a lawsuit against Cimatron,
claiming that Cimatron caused four employees of the plaintiff located in Russia
to terminate their employment with the plaintiff and join Cimatron.  During a period of two years (until March
2003), the plaintiff provided certain services to Cimatron. The four employees
were among several employees who provided such services to Cimatron. The
plaintiff claimed, among other things, that the four employees are restricted
from working for any competitor of the plaintiff for a period of three years
following termination of their employment with the plaintiff.  The plaintiff requested the District Court
in Tel Aviv, Israel to grant an injunction and a permanent order that would
prevent Cimatron from hiring the four employees.  In June, 2004, the court rejected the plaintiffs request for an
injunction.  However, in
September 2004, Omega initiated arbitration proceedings against us pursuant to
the services agreement between the parties and submitted to an arbitrator
agreed upon between the parties a statement of claim for an amount of
$20,000,000 caused to Omega due to the employment of  the four employees in question.  
In November 2004, we submitted a statement of defense denying all of
Omegas claims and asserting, among other things, that we engaged the employees
through Manpower Russia only following the expiration of a year following the
conclusion of their relationship with Omega and that we therefore were allowed
to do so. This proceeding is currently at its preliminary stage.  The
parties have submitted a joint request to the District Court seeking to dismiss
the request for an injunction. Cimatron believes that there is no merit to the
claim and intends to oppose it vigorously.

53

---

---



Dividend Distribution Policy

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

Significant
Changes

Since the
date of our consolidated financial statements there has not been a significant
change in our Company other then as set forth in the Financial Statements,
other than the transaction we announced with Microsystems srl. See Item 4.
History and development of the Company for more information regarding that
transaction.

Item 9.TheOffer
and Listing

Offer and listing details

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

54

---

---



|                                                               |  |                 |  |                |  |  |  |  |      |  | 
|-------------------------------------------------------------- |  | --------------- |  | -------------- |  |  |  |  | ---- |  | 
|Period                                                         |  | High (U.S.
  $) |  | Low (U.S.
  $) | 
|                                                               |  |                 |  |                | 
|Six most
  recent months:                                      |  |                 |  |                |  |  |  |  |      |  | 
|May 2005                                                       |  |                 |  | 1.71           |  |  |  |  | 1.02 |  | 
|April 2005                                                     |  |                 |  | 1.93           |  |  |  |  | 1.44 |  | 
|March 2005                                                     |  |                 |  | 2.15           |  |  |  |  | 1.58 |  | 
|February
  2005                                                |  |                 |  | 2.14           |  |  |  |  | 1.91 |  | 
|January 2005                                                   |  |                 |  | 2.14           |  |  |  |  | 1.72 |  | 
|December 2004                                                  |  |                 |  | 2.38           |  |  |  |  | 1.85 |  | 
|                                                               |  |                 |  |                |  |  |  |  |      |  | 
|Two most
  recent full financial years and subsequent periods: |  |                 |  |                |  |  |  |  |      |  | 
|First
  Quarter 2005                                           |  |                 |  | 2.15           |  |  |  |  | 1.58 |  | 
|Fourth
  Quarter 2004                                          |  |                 |  | 2.38           |  |  |  |  | 1.26 |  | 
|Third
  Quarter 2004                                           |  |                 |  | 1.99           |  |  |  |  | 1.25 |  | 
|Second
  Quarter 2004                                          |  |                 |  | 2.65           |  |  |  |  | 1.75 |  | 
|First
  Quarter 2004                                           |  |                 |  | 2.95           |  |  |  |  | 2.05 |  | 
|Fourth
  Quarter 2003                                          |  |                 |  | 2.48           |  |  |  |  | 1.85 |  | 
|Third
  Quarter 2003                                           |  |                 |  | 2.48           |  |  |  |  | 1.2  |  | 
|Second
  Quarter 2003                                          |  |                 |  | 1.29           |  |  |  |  | 0.9  |  | 
|First
  Quarter 2003                                           |  |                 |  | 1.01           |  |  |  |  | 0.88 |  | 
|                                                               |  |                 |  |                |  |  |  |  |      |  | 
|Five most
  recent years:                                      |  |                 |  |                |  |  |  |  |      |  | 
|2004                                                           |  |                 |  | 2.95           |  |  |  |  | 1.25 |  | 
|2003                                                           |  |                 |  | 2.48           |  |  |  |  | 0.88 |  | 
|2002                                                           |  |                 |  | 1.49           |  |  |  |  | 0.7  |  | 
|2001                                                           |  |                 |  | 1.63           |  |  |  |  | 0.51 |  | 
|2000                                                           |  |                 |  | 7.00           |  |  |  |  | 1.03 |  | 

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; Israeli Companies
Law

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

55

---

---



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

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

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

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

|  |                                                                                                                                                                                                                                                                     
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | amendments
  to our Articles (other than modifications of shareholders rights as mentioned
  above);                                                                                                                                                                
|  |                                                                                                                                                                                                                                                                     
| | appointment
  or termination of our auditors;                                                                                                                                                                                                                       
|  |                                                                                                                                                                                                                                                                     
| | appointment
  and dismissal of directors;                                                                                                                                                                                                                           
|  |                                                                                                                                                                                                                                                                     
| | approval of
  acts and transactions requiring general meeting approval under the Companies
  Law;                                                                                                                                                                   
|  |                                                                                                                                                                                                                                                                     
| | increase or
  reduction of our authorized share capital or the rights of shareholders or a
  class of shareholders;                                                                                                                                                 
|  |                                                                                                                                                                                                                                                                     
| | any merger
  as provided in section 320 of the Companies Law;                                                                                                                                                                                                       
|  |                                                                                                                                                                                                                                                                     
| | the exercise
  of the board of directors powers by a general meeting, if the board of
  directors is unable to exercise its powers and the exercise of any of its
  powers is vital for our proper management, as provided in section 52(a) of
  the Companies Law.

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

56

---

---



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

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

Transactions
with Certain Shareholders

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

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

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

57

---

---



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

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

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

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

In
addition, a private placement of securities that will increase the relative
holdings of a shareholder that holds five percent or more of the companys
outstanding share capital, assuming the exercise of all of the securities
convertible into shares held by that person, or that will cause any person to
become, as a result of the issuance, a holder of more than five percent of the
companys outstanding share capital, requires approval by the board of
directors and the shareholders of the company. 
The regulations to the Companies Law provide certain exceptions. Any
placement of securities that does not fit the above description may be issued
at the discretion of the Board of Directors.

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

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

58

---

---



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

Limitation
on Ownership of Securities

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

Mergers
and Acquisitions; Anti-Takeover Provisions

The
Companies Law includes provisions with respect to the approval of corporate
mergers that are applicable to us. 
These provisions require that the board of directors of each company
that is party to the merger approve the transaction.  In addition, the shareholders of each company must approve the
merger by a vote of 75% of the companys shares, present and voting on the
proposed merger at a shareholders meeting. 
In determining whether the requisite majority has approved the merger,
shares held by the other party to the merger or any person holding at least 25%
of such other party or otherwise affiliated with such other party are excluded
from the vote.

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

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

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

59

---

---



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

Material Contracts

Other than
the service agreement and lease agreement described in Item 6 - Major
Shareholders and Related Party Transactions  Related Party Transactions, our
current lease agreement described below and the Microsystems investment
contract described in Item 4. History and development of the Company, all of
the contracts that we have entered into over the past two years have been in
the ordinary course of our business.

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

Exchange Controls

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

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

Taxation

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

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

60

---

---



General Corporate Tax Structure

Until 2003,
Israeli companies were generally subject to corporate tax at the rate of 36% of
their taxable income.  However, as a
result of legislation adopted in July 2004, tax rates were reduced to 35% for
2004, 34% for 2005, 32% for 2006 and 30% for 2007 and thereafter. 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.

61

---

---



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

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

|                              |  |                  |  |    |   | 
|----------------------------- |  | ---------------- |  | -- | - | 
|Foreign
  Investments         |  | 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.

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.

62

---

---



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 13 of our financial statements.

In March
2005, the government of Israel passed an amendment to the Investment Law in
which it revised the criteria for investments qualified to receive tax benefits
as an approved enterprise. Among other things, companies that meet the
criteria of the alternate package of tax benefits will receive those benefits
without prior approval. However, no assurance can be given that we will,
in the future, be eligible to receive additional tax benefits under this law.

Law for the Encouragement of Industrial
Research and Development, 1984

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

63

---

---



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

Tax Benefits and Grants for Research and
Development

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

Law for the Encouragement of Industry
(Taxes), 1969

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

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

Taxation under Inflationary Conditions

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

64

---

---



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.

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

65

---

---



U.S.-Israel Tax Treaty

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

Taxation of Non-Residents

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

Documents on Display

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

66

---

---



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

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

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

Item 11. Quantitative
and Qualitative Disclosures About Market Risks

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

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

As of
December 31, 2004, we had currency exchange options to sell up to 5.5 million
Euro for a total amount of $6.93 million, and had written currency exchange
options to sell up to 5.5 million Euro for a total amount of $7.5 million that
were scheduled to expire prior to December 31, 2005. The total fair value of
all such options on December 31,2004 amounted to a liability of $154,000. All
such options are designated as cash flow hedges. On June 15, 2005 we exercised
currency exchange options to sell 600,000 Euro for $756,000.

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, 2004, we had financial assets totaling approximately $8.1
million.  Fixed rate financial assets,
comprised of debt securities, totaled approximately $5.1 million. For the year
2004 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 $3.0 million. The net decrease in our earnings for
the next year from our variable rate financial assets resulting from a 10%
interest rate decrease would be approximately $12,000, holding other variables
constant. Assuming an interest rate increase of 10%, the fair value of our
marketable debt securities would be reduced by approximately $41,000.

67

---

---



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 $520,000 excluding the effect
of our hedging transactions.

Our
Providers - Commencing on June 1, 2000 we initiated a
Euro denominated price list for all of our Providers in countries whose
currency is linked to the Euro.  Our
revenues from these Providers are therefore exposed to exchange rate
differences between the Euro and the United States dollar.  Assuming an adverse 20% foreign exchange
rate fluctuation, we would experience exchange rate losses from these providers
of approximately $843,000 excluding the effect of our hedging transactions.

Expenses
in New Israeli Shekels

The cost of
our Israel operations, as expressed in U.S. dollars, is influenced by the
extent to which any increase in the rate of inflation in Israel is not offset
(or is offset on a lagging basis) by a devaluation of the NIS in relation to
the U.S. dollar. The inflation rate in Israel was 1.2%, -1.9%, and 6.5% in
2004, 2003 and 2002, respectively.  The
devaluation (revaluation) of the NIS against the U.S. dollar was  (1.6)%, (7.6)% and 7.3% in 2004, 2003, and
2002, respectively.  Assuming a 10%
devaluation of the U.S. dollar against the NIS, and assuming a maximum
deviation of 1% in inflation, we would experience exchange rate losses of
approximately $914,000.

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.

68

---

---



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.

69

---

---



Item 15. Controls and Procedures

(a) Disclosure Controls and
Procedures - our
management evaluated, with the participation of our principal executive and
principal financial officers, the effectiveness of our disclosure controls and
procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange
Act), as of December 31, 2004.  Based on their evaluation, our
principal executive and principal financial officers concluded that our
disclosure controls and procedures were effective as of December 31, 2004.

(b) Not
applicable.

(c) Not
applicable.

(d) Changes in Internal Control Over
Financial Reporting 
- There has been no change in our internal control over financial reporting (as
defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred
during 2004, that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.

Item 16A. Audit Committee Financial
Expert

Our Board
of Directors has determined that Ofra Brown qualifies to serve as our audit
committee financial expert.

Item 16B. Code of Ethics

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

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

70

---

---



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

Item 16C. Principal Accountant Fees and Services

Audit and
Audit-related Fees

The
aggregate fees billed for professional services rendered to us by our principal
accountants for the audit of our financial statements and for audit-related
services in 2003 and 2004 were $116,000 and $69,000, respectively.

Tax Fees

The
aggregate fees billed for professional services rendered to us by our principal
accountants for tax compliance, tax advice and tax planning in 2003 and 2004
were $27,000 and $37,000, respectively.
The services provided to us by our principal accountants in both 2003
and 2004 related to the preparation and filing of our tax returns with income
tax authorities.

All Other Fees

We
did not receive from our principal accountants any other products or services,
other than the services disclosed above, in 2003 and 2004.

Audit Committee
Approval

In
December 2003, our shareholders approved the engagement of Brightman
Almagor & Co., a member of Deloitte Touche Tohmatsu, as our independent
auditors for the fiscal year ended December 31, 2004.  Such approval followed the approval by our board of directors and
audit committee of such engagement.

|          |                                                                             
|--------- | ----------------------------------------------------------------------------
|Item 16D. | Exemptions From the Listing Standards for Audit Committees Not
  applicable

|          |                                                                                                                                                              
|--------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------
|Item 16E. | Repurchase of Equity Securities by the Issuer and Affliated
  Purchasers During 2003, we repurchased 26,000
  shares at an average price of $1.04 per share.

PART III

Item 17. Financial Statements

Not Applicable

---

---



Item 18. Financial Statements

See page F-1 through F-25.

Item 19. Exhibits

|     |                                                                                                                                              
|---- | ---------------------------------------------------------------------------------------------------------------------------------------------
|1.1  | Articles of Association.*                                                                                                                    
|4.1  | Services Agreement with Koonras Technologies Ltd. and DBSI
  Investments Ltd., as assigned to them by Zeevi Computers and Technology
  Ltd.*.
|8.1  | List of subsidiaries.                                                                                                                        
|12.1 | Certificate
  of Chief Executive Officer pursuant to Rule 13a-14(a)/Rule 15d-14(a)                                                           
|12.2 | Certificate
  of Chief Financial Officer pursuant to Rule 13a-14(a)/Rule 15d-14(a)                                                           
|13.1 | Certification
  of Chief Executive Officer pursuant to 18 U.S.C. Section 1350                                                                
|13.2 | Certification
  of Chief Financial Officer pursuant to 18 U.S.C. Section 1350                                                                
|14.1 | Consent of
  Independent Public Accountants.                                                                                                 

---

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

72

---

---



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 30 day of June,
2005.

| |                                                | 
| | ---------------------------------------------- | 
| | CIMATRON LTD.                                 
| |                                               
| | By: /s/ Zvika Naggan                          
| |                                               
| | Name: Zvika
  Naggan                          
| | Title:
  President and Chief
Executive Officer

73

---

---

CIMATRON LIMITED

CONSOLIDATED
FINANCIAL STATEMENTS

TABLE OF
CONTENTS

|                                                                                                                         |               
|------------------------------------------------------------------------------------------------------------------------ | --------------
|                                                                                                                         | Page          
|                                                                                                                         |               
|Report of Independent Registered Public
Accounting Firm                                                                  | F - 2         
|                                                                                                                         |               
|Consolidated
  Financial Statements:                                                                                     |               
|                                                                                                                         |               
|Balance Sheets as of December
  31, 2004 and 2003                                                                        | F - 3         
|                                                                                                                         |               
|Statements of Operations for
  the years ended December 31, 2004, 2003 and 2002                                          | F - 4         
|                                                                                                                         |               
|Statement of Shareholders Equity and
Comprehensive Income (Loss) for
  the years ended December 31, 2004, 2003 and 2002 | F - 5         
|                                                                                                                         |               
|Statements of Cash Flows for
  the years ended December 31, 2004, 2003 and 2002                                          | F - 6         
|                                                                                                                         |               
|Notes to the Consolidated Financial
Statements                                                                           | F - 7  F - 25

---

---



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the
Shareholders of
Cimatron Limited

We
have audited the accompanying consolidated balance sheets of Cimatron Limited
and subsidiaries (the Company) as of December 31, 2004 and 2003
and the related consolidated statements of operations, shareholders equity and
comprehensive income (loss) and cash flows for each of the three years in the
period ended December 31, 2004. These consolidated financial statements are the
responsibility of the Companys management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.

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

We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
consideration of internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion of the effectiveness of the companys
internal control over financial reporting. Accordingly, we express no such
opinion. An audit also includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by the management, as
well as evaluating the overall financial statement presentation. We believe
that our audits and the reports of other auditors provide a reasonable basis
for our opinion.

In
our opinion, based on our audits and the reports of the other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the consolidated financial position of the Company as of
December 31,2004 and 2003 and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 2004 in conformity
with U.S. generally accepted accounting principles.

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

Tel-Aviv,
Israel
March 3, 2005

F - 2

---

---



CIMATRON
LIMITED

CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)

|                                                                                                                                                    |  |                |        |         |   |        |  
|--------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------- | ------ | ------- | - | ------ | -
|                                                                                                                                                    |  | December
  31, |       
|                                                                                                                                                    |  |                |       
|                                                                                                                                                    |  | 2 0 0 4        |        | 2 0 0 3 |  
|                                                                                                                                                    |  |                |        |         |  
|ASSETS                                                                                                                                              |  |                |        |         |   |        |  
|                                                                                                                                                    |  |                |        |         |   |        |  
|Current assets                                                                                                                                      |  |                |        |         |   |        |  
|Cash
  and cash equivalents                                                                                                                         |  | $              | 1,711  |         | $ | 3,124  |  
|Short-term
  investments (Note 3)                                                                                                                   |  |                | 6,381  |         |   | 6,358  |  
|Trade
  accounts receivable (Note 4)                                                                                                                |  |                | 6,130  |         |   | 5,725  |  
|Other
  accounts receivable and prepaid expenses (Note 5)                                                                                           |  |                | 712    |         |   | 783    |  
|Inventory                                                                                                                                           |  |                | 60     |         |   | 67     |  
|                                                                                                                                                    |  |                |        |         |   |        |  
|Total
  current assets                                                                                                                              |  |                | 14,994 |         |   | 16,057 |  
|                                                                                                                                                    |  |                |        |         |   |        |  
|                                                                                                                                                    |  |                |        |         |   |        |  
|Deposits with
  insurance companies and severance pay funds
  (Note 10)                                                                             |  |                | 2,946  |         |   | 3,045  |  
|                                                                                                                                                    |  |                |        |         |   |        |  
|                                                                                                                                                    |  |                |        |         |   |        |  
|Property and
  equipment (Note 6)                                                                                                                   |  |                |        |         |   |        |  
|Cost                                                                                                                                                |  |                | 5,478  |         |   | 5,418  |  
|Less - accumulated
  depreciation                                                                                                                   |  |                | 4,405  |         |   | 4,326  |  
|                                                                                                                                                    |  |                |        |         |   |        |  
|Property and equipment, net                                                                                                                         |  |                | 1,073  |         |   | 1,092  |  
|                                                                                                                                                    |  |                |        |         |   |        |  
|Other assets                                                                                                                                        |  |                |        |         |   |        |  
|Software development costs,
  net (Note 7)                                                                                                          |  |                | 1,204  |         |   | 1,605  |  
|Goodwill, net (Note 8)                                                                                                                              |  |                | 587    |         |   | 587    |  
|                                                                                                                                                    |  |                |        |         |   |        |  
|Total other assets                                                                                                                                  |  |                | 1,791  |         |   | 2,192  |  
|                                                                                                                                                    |  |                |        |         |   |        |  
|                                                                                                                                                    |  |                |        |         |   |        |  
|Total assets                                                                                                                                        |  | $              | 20,804 |         | $ | 22,386 |  
|                                                                                                                                                    |  |                |        |         |   |        |  
|LIABILITIES
  AND SHAREHOLDERS EQUITY                                                                                                              |  |                |        |         |   |        |  
|                                                                                                                                                    |  |                |        |         |   |        |  
|Current
  liabilities                                                                                                                               |  |                |        |         |   |        |  
|Short-term bank credit                                                                                                                              |  | $              | 500    |         | $ | 500    |  
|Related parties                                                                                                                                     |  |                | 99     |         |   | 97     |  
|Trade payables                                                                                                                                      |  |                | 778    |         |   | 785    |  
|Other liabilities and accrued
  expenses (Note 9)                                                                                                   |  |                | 3,131  |         |   | 3,595  |  
|Deferred revenues                                                                                                                                   |  |                | 180    |         |   | 441    |  
|                                                                                                                                                    |  |                |        |         |   |        |  
|Total current liabilities                                                                                                                           |  |                | 4,688  |         |   | 5,418  |  
|                                                                                                                                                    |  |                |        |         |   |        |  
|                                                                                                                                                    |  |                |        |         |   |        |  
|Long-term
  liabilities                                                                                                                             |  |                |        |         |   |        |  
|Accrued severance pay (Note
  10)                                                                                                                   |  |                | 3,268  |         |   | 3,447  |  
|                                                                                                                                                    |  |                |        |         |   |        |  
|                                                                                                                                                    |  |                |        |         |   |        |  
|Contingent
  liabilities and commitments (Note 11)                                                                                                  |  |                |        |         |   |        |  
|                                                                                                                                                    |  |                |        |         |   |        |  
|Shareholders
  equity                                                                                                                              |  |                |        |         |   |        |  
|Share capital (Note 12):                                                                                                                            |  |                |        |         |   |        |  
|Ordinary shares
  of NIS 0.10 par value (Authorized - 19,950,000 shares, issued and
  outstanding - 8,001,270 shares at December 31, 2004 and 2003) |  |                | 264    |         |   | 264    |  
|Additional paid-in capital                                                                                                                          |  |                | 13,417 |         |   | 13,417 |  
|Accumulated other
  comprehensive income (loss):                                                                                                    |  |                |        |         |   |        |  
|Foreign currency translation
  adjustments                                                                                                          |  |                | (299   | )       |   | (410   | )
|Unrealized loss on available
  for-sale securities                                                                                                  |  |                | (266   | )       |   | (44    | )
|Unrealized gain on derivative
  instruments                                                                                                         |  |                | -      |         |   | 174    |  
|Retained earnings
  (accumulated deficit)                                                                                                           |  |                | (109   | )       |   | 279    |  
|                                                                                                                                                    |  |                |        |         |   |        |  
|                                                                                                                                                    |  |                | 13,007 |         |   | 13,680 |  
|Treasury stock, at cost;
  166,100 shares at December 31, 2004 and
  2003                                                                           |  |                | (159   | )       |   | (159   | )
|                                                                                                                                                    |  |                |        |         |   |        |  
|Total shareholders equity                                                                                                                          |  |                | 12,848 |         |   | 13,521 |  
|                                                                                                                                                    |  |                |        |         |   |        |  
|                                                                                                                                                    |  |                |        |         |   |        |  
|Total liabilities and
  shareholders equity                                                                                                        |  | $              | 20,804 |         | $ | 22,386 |  
|                                                                                                                                                    |  |                |        |         |   |        |  

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

F - 3

---

---



CIMATRON
LIMITED

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

|                                                                    |  |                         |        |         |   |         |   |   |        |  
|------------------------------------------------------------------- |  | ----------------------- | ------ | ------- | - | ------- | - | - | ------ | -
|                                                                    |  | Year ended December 31, |       
|                                                                    |  |                         |       
|                                                                    |  | 2 0 0 4                 |        | 2 0 0 3 |   | 2 0 0 2 |  
|                                                                    |  |                         |        |         |   |         |  
|                                                                    |  |                         |        |         |   |         |   |   |        |  
|Revenues (Note 15a):                                                |  |                         |        |         |   |         |   |   |        |  
|Products                                                            |  | $                       | 11,370 |         | $ | 10,448  |   | $ | 11,150 |  
|Services                                                            |  |                         | 11,793 |         |   | 11,161  |   |   | 10,478 |  
|                                                                    |  |                         |        |         |   |         |   |   |        |  
|Total                                                               |  |                         | 23,163 |         |   | 21,609  |   |   | 21,628 |  
|                                                                    |  |                         |        |         |   |         |   |   |        |  
|                                                                    |  |                         |        |         |   |         |   |   |        |  
|Cost of revenues (Note 15b):                                        |  |                         |        |         |   |         |   |   |        |  
|Products                                                            |  |                         | 2,923  |         |   | 3,056   |   |   | 3,234  |  
|Services                                                            |  |                         | 1,678  |         |   | 1,562   |   |   | 1,783  |  
|                                                                    |  |                         |        |         |   |         |   |   |        |  
|Total                                                               |  |                         | 4,601  |         |   | 4,618   |   |   | 5,017  |  
|                                                                    |  |                         |        |         |   |         |   |   |        |  
|                                                                    |  |                         |        |         |   |         |   |   |        |  
|Gross profit                                                        |  |                         | 18,562 |         |   | 16,991  |   |   | 16,611 |  
|                                                                    |  |                         |        |         |   |         |   |   |        |  
|Research and development
  expenses                                 |  |                         | 5,554  |         |   | 5,210   |   |   | 5,562  |  
|Restructuring costs                                                 |  |                         | -      |         |   | -       |   |   | (250   | )
|Selling, general and
  administrative expenses (Note 15c)           |  |                         | 13,962 |         |   | 12,645  |   |   | 11,670 |  
|                                                                    |  |                         |        |         |   |         |   |   |        |  
|                                                                    |  |                         |        |         |   |         |   |   |        |  
|Operating loss                                                      |  |                         | (954   | )       |   | (864    | ) |   | (371   | )
|                                                                    |  |                         |        |         |   |         |   |   |        |  
|Financial income, net                                               |  |                         | 445    |         |   | 369     |   |   | 428    |  
|Other income                                                        |  |                         | 144    |         |   | 203     |   |   | 1      |  
|                                                                    |  |                         |        |         |   |         |   |   |        |  
|                                                                    |  |                         |        |         |   |         |   |   |        |  
|Income (loss) before taxes on
  income                              |  |                         | (365   | )       |   | (292    | ) |   | 58     |  
|                                                                    |  |                         |        |         |   |         |   |   |        |  
|Taxes on income (Note 13)                                           |  |                         | (23    | )       |   | (9      | ) |   | (48    | )
|                                                                    |  |                         |        |         |   |         |   |   |        |  
|                                                                    |  |                         |        |         |   |         |   |   |        |  
|Net income (loss)                                                   |  | $                       | (388   | )       | $ | (301    | ) | $ | 10     |  
|                                                                    |  |                         |        |         |   |         |   |   |        |  
|                                                                    |  |                         |        |         |   |         |   |   |        |  
|Net income (loss) per share
  (basic and diluted)                   |  | $                       | (0.05  | )       | $ | (0.04   | ) | $ | (*     | )
|                                                                    |  |                         |        |         |   |         |   |   |        |  
|                                                                    |  |                         |        |         |   |         |   |   |        |  
|Weighted average number of
  shares outstanding (basic and diluted) |  |                         | 7,835  |         |   | 7,838   |   |   | 7,981  |  
|                                                                    |  |                         |        |         |   |         |   |   |        |  



|    |                 
|--- | ----------------
|(*) | Less than $0.01.

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

F - 4

---

---



CIMATRON
LIMITED

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

|                                                   |  |                 |     |                                |   |                         |  |                                                     |        |                                               |   |                  |   |                               |        |                                |   |      |   |   |      |   |   |        |  
|-------------------------------------------------- |  | --------------- | --- | ------------------------------ | - | ----------------------- |  | --------------------------------------------------- | ------ | --------------------------------------------- | - | ---------------- | - | ----------------------------- | ------ | ------------------------------ | - | ---- | - | - | ---- | - | - | ------ | -
|                                                   |  | Share
  capital |     | Additional
  paid-in
  capital |   | Other capital
  surplus |  | Accumulated
  other
  comprehensive
  income (loss) |        | Retained
  earnings
  (accumulated
  deficit) |   | Treasury
  stock |   | Comprehensive
  income (loss) |        | Total
  shareholders
  equity |  
|                                                   |  |                 |     |                                |   |                         |  |                                                     |        |                                               |   |                  |   |                               |        |                                |  
|                                                   |  |                 |     |                                |   |                         |  |                                                     |        |                                               |   |                  |   |                               |        |                                |   |      |   |   |      |   |   |        |  
|Balance at January 1, 2002                         |  | $               | 264 |                                | $ | 13,417                  |  | $                                                   | 9,957  |                                               | $ | 291              |   | $                             | (9,387 | )                              | $ | -    |   |   |      |   | $ | 14,542 |  
|Changes
  during the year ended December 31, 2002: |  |                 |     |                                |   |                         |  |                                                     |        |                                               |   |                  |   |                               |        |                                |   |      |   |   |      |   |   |        |  
|Net income                                         |  |                 |     |                                |   |                         |  |                                                     |        |                                               |   |                  |   |                               | 10     |                                |   |      |   |   | 10   |   |   | 10     |  
|Unrealized loss on
  available-for-sale securities |  |                 |     |                                |   |                         |  |                                                     |        |                                               |   | (288             | ) |                               |        |                                |   |      |   |   | (288 | ) |   | (288   | )
|Unrealized gain on derivative
  instruments        |  |                 |     |                                |   |                         |  |                                                     |        |                                               |   | 104              |   |                               |        |                                |   |      |   |   | 104  |   |   | 104    |  
|Foreign currency translation
  adjustment          |  |                 |     |                                |   |                         |  |                                                     |        |                                               |   | (77              | ) |                               |        |                                |   |      |   |   | (77  | ) |   | (77    | )
|Transfer of capital surplus to
  retained earnings |  |                 |     |                                |   |                         |  |                                                     | (9,957 | )                                             |   |                  |   |                               | 9,957  |                                |   |      |   |   |      |   |   | -      |  
|Investment in treasury stock                       |  |                 |     |                                |   |                         |  |                                                     |        |                                               |   |                  |   |                               |        |                                |   | (132 | ) |   |      |   |   | (132   | )
|                                                   |  |                 |     |                                |   |                         |  |                                                     |        |                                               |   |                  |   |                               |        |                                |   |      |   |   |      |   |   |        |  
|Total
  comprehensive loss                         |  |                 |     |                                |   |                         |  |                                                     |        |                                               |   |                  |   |                               |        |                                |   |      |   | $ | (251 | ) |   |        |  
|                                                   |  |                 |     |                                |   |                         |  |                                                     |        |                                               |   |                  |   |                               |        |                                |   |      |   |   |      |   |   |        |  
|Balance at December 31, 2002                       |  |                 | 264 |                                |   | 13,417                  |  |                                                     | -      |                                               |   | 30               |   |                               | 580    |                                |   | (132 | ) |   |      |   |   | 14,159 |  
|Changes
  during the year ended December 31, 2003: |  |                 |     |                                |   |                         |  |                                                     |        |                                               |   |                  |   |                               |        |                                |   |      |   |   |      |   |   |        |  
|Net loss                                           |  |                 |     |                                |   |                         |  |                                                     |        |                                               |   |                  |   |                               | (301   | )                              |   |      |   |   | (301 | ) |   | (301   | )
|Unrealized loss on
  available-for-sale securities |  |                 |     |                                |   |                         |  |                                                     |        |                                               |   | (97              | ) |                               |        |                                |   |      |   |   | (97  | ) |   | (97    | )
|Unrealized gain on derivative
  instruments        |  |                 |     |                                |   |                         |  |                                                     |        |                                               |   | 120              |   |                               |        |                                |   |      |   |   | 120  |   |   | 120    |  
|Foreign currency translation
  adjustment          |  |                 |     |                                |   |                         |  |                                                     |        |                                               |   | (333             | ) |                               |        |                                |   |      |   |   | (333 | ) |   | (333   | )
|Investment in treasury stock                       |  |                 |     |                                |   |                         |  |                                                     |        |                                               |   |                  |   |                               |        |                                |   | (27  | ) |   |      |   |   | (27    | )
|                                                   |  |                 |     |                                |   |                         |  |                                                     |        |                                               |   |                  |   |                               |        |                                |   |      |   |   |      |   |   |        |  
|Total
  comprehensive loss                         |  |                 |     |                                |   |                         |  |                                                     |        |                                               |   |                  |   |                               |        |                                |   |      |   | $ | (611 | ) |   |        |  
|                                                   |  |                 |     |                                |   |                         |  |                                                     |        |                                               |   |                  |   |                               |        |                                |   |      |   |   |      |   |   |        |  
|Balance at December 31, 2003                       |  |                 | 264 |                                |   | 13,417                  |  |                                                     | -      |                                               |   | (280             | ) |                               | 279    |                                |   | (159 | ) |   |      |   |   | 13,521 |  
|Changes
  during the year ended December 31, 2004: |  |                 |     |                                |   |                         |  |                                                     |        |                                               |   |                  |   |                               |        |                                |   |      |   |   |      |   |   |        |  
|Net loss                                           |  |                 |     |                                |   |                         |  |                                                     |        |                                               |   |                  |   |                               | (388   | )                              |   |      |   |   | (388 | ) |   | (388   | )
|Unrealized loss on
  available-for-sale securities |  |                 |     |                                |   |                         |  |                                                     |        |                                               |   | (222             | ) |                               |        |                                |   |      |   |   | (222 | ) |   | (222   | )
|Unrealized loss on derivative
  instruments        |  |                 |     |                                |   |                         |  |                                                     |        |                                               |   | (174             | ) |                               |        |                                |   |      |   |   | (174 | ) |   | (174   | )
|Foreign currency translation
  adjustment          |  |                 |     |                                |   |                         |  |                                                     |        |                                               |   | 111              |   |                               |        |                                |   |      |   |   | 111  |   |   | 111    |  
|                                                   |  |                 |     |                                |   |                         |  |                                                     |        |                                               |   |                  |   |                               |        |                                |   |      |   |   |      |   |   |        |  
|Total
  comprehensive loss                         |  |                 |     |                                |   |                         |  |                                                     |        |                                               |   |                  |   |                               |        |                                |   |      |   | $ | (673 | ) |   |        |  
|                                                   |  |                 |     |                                |   |                         |  |                                                     |        |                                               |   |                  |   |                               |        |                                |   |      |   |   |      |   |   |        |  
|Balance at December 31, 2004                       |  | $               | 264 |                                | $ | 13,417                  |  | $                                                   | -      |                                               | $ | (565             | ) | $                             | (109   | )                              | $ | (159 | ) |   |      |   | $ | 12,848 |  
|                                                   |  |                 |     |                                |   |                         |  |                                                     |        |                                               |   |                  |   |                               |        |                                |   |      |   |   |      |   |   |        |  

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

F - 5

---

---



CIMATRON
LIMITED

CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)

|                                                                                                       |  |                         |        |         |   |         |   |   |        |  
|------------------------------------------------------------------------------------------------------ |  | ----------------------- | ------ | ------- | - | ------- | - | - | ------ | -
|                                                                                                       |  | Year ended December 31, |       
|                                                                                                       |  |                         |       
|                                                                                                       |  | 2 0 0 4                 |        | 2 0 0 3 |   | 2 0 0 2 |  
|                                                                                                       |  |                         |        |         |   |         |  
|                                                                                                       |  |                         |        |         |   |         |   |   |        |  
|CASH FLOWS -
  OPERATING ACTIVITIES                                                                    |  |                         |        |         |   |         |   |   |        |  
|                                                                                                       |  |                         |        |         |   |         |   |   |        |  
|Net income (loss)                                                                                      |  | $                       | (388   | )       | $ | (301    | ) | $ | 10     |  
|                                                                                                       |  |                         |        |         |   |         |   |   |        |  
|Adjustments
  to reconcile net income (loss) to net cash provided by (used in) operating
  activities: |  |                         |        |         |   |         |   |   |        |  
|Depreciation and amortization                                                                          |  |                         | 820    |         |   | 859     |   |   | 964    |  
|Increase (decrease) in accrued
  severance pay                                                         |  |                         | (179   | )       |   | 473     |   |   | (248   | )
|Loss (gain) from sale of
  property and equipment, net                                                 |  |                         | (71    | )       |   | (2      | ) |   | 9      |  
|Loss (gain) from sale and
  devaluation (revaluation) of bonds and funds                               |  |                         | (2     | )       |   | 58      |   |   | (369   | )
|                                                                                                       |  |                         |        |         |   |         |   |   |        |  
|Changes in
  assets and liabilities:                                                                   |  |                         |        |         |   |         |   |   |        |  
|Decrease (increase) in
  accounts receivable and prepaid expenses                                      |  |                         | (416   | )       |   | 855     |   |   | 83     |  
|Decrease in inventory                                                                                  |  |                         | 13     |         |   | 19      |   |   | 18     |  
|Decrease (increase) in
  deposits with insurance companies and severance pay fund                      |  |                         | 99     |         |   | (407    | ) |   | 4      |  
|Increase (decrease) in debts
  to related parties                                                      |  |                         | 2      |         |   | 13      |   |   | (212   | )
|Increase (decrease) in trade
  payables, accrued expenses and other liabilities                        |  |                         | (797   | )       |   | (115    | ) |   | (869   | )
|                                                                                                       |  |                         |        |         |   |         |   |   |        |  
|Net cash
  provided by (used in) operating activities                                                  |  |                         | (919   | )       |   | 1,452   |   |   | (610   | )
|                                                                                                       |  |                         |        |         |   |         |   |   |        |  
|                                                                                                       |  |                         |        |         |   |         |   |   |        |  
|CASH FLOWS -
  INVESTING ACTIVITIES                                                                    |  |                         |        |         |   |         |   |   |        |  
|Investment in bonds                                                                                    |  |                         | (577   | )       |   | (3,138  | ) |   | (3,471 | )
|Proceeds from sale and
  redemption of bonds                                                           |  |                         | 334    |         |   | 642     |   |   | 1,572  |  
|Proceeds from sale of funds                                                                            |  |                         | -      |         |   | -       |   |   | 2,403  |  
|Purchase of property and
  equipment                                                                   |  |                         | (505   | )       |   | (538    | ) |   | (349   | )
|Proceeds from sale of property
  and equipment                                                         |  |                         | 221    |         |   | 44      |   |   | 94     |  
|Investment in affiliate                                                                                |  |                         | -      |         |   | 43      |   |   | (43    | )
|                                                                                                       |  |                         |        |         |   |         |   |   |        |  
|Net cash
  provided by (used in) investing activities                                                  |  |                         | (527   | )       |   | (2,947  | ) |   | 206    |  
|                                                                                                       |  |                         |        |         |   |         |   |   |        |  
|                                                                                                       |  |                         |        |         |   |         |   |   |        |  
|CASH FLOWS -
  FINANCING ACTIVITIES                                                                    |  |                         |        |         |   |         |   |   |        |  
|Short-term bank credit                                                                                 |  |                         | -      |         |   | 500     |   |   | -      |  
|Investment in treasury stock                                                                           |  |                         | -      |         |   | (27     | ) |   | (132   | )
|                                                                                                       |  |                         |        |         |   |         |   |   |        |  
|Net cash
  provided by (used in) financing activities                                                  |  |                         | -      |         |   | 473     |   |   | (132   | )
|                                                                                                       |  |                         |        |         |   |         |   |   |        |  
|                                                                                                       |  |                         |        |         |   |         |   |   |        |  
|Net decrease in cash and cash
  equivalents                                                            |  |                         | (1,446 | )       |   | (1,022  | ) |   | (536   | )
|Effect of exchange rate
  changes on cash                                                              |  |                         | 33     |         |   | 69      |   |   | 79     |  
|Cash and cash equivalents at
  beginning of year                                                       |  |                         | 3,124  |         |   | 4,077   |   |   | 4,534  |  
|                                                                                                       |  |                         |        |         |   |         |   |   |        |  
|Cash and cash
  equivalents at end of year                                                             |  | $                       | 1,711  |         | $ | 3,124   |   | $ | 4,077  |  
|                                                                                                       |  |                         |        |         |   |         |   |   |        |  
|                                                                                                       |  |                         |        |         |   |         |   |   |        |  
|Supplemental information:                                                                              |  |                         |        |         |   |         |   |   |        |  
|Cash paid during the year for
  income taxes                                                           |  | $                       | 173    |         | $ | 25      |   | $ | 30     |  
|                                                                                                       |  |                         |        |         |   |         |   |   |        |  
|                                                                                                       |  |                         |        |         |   |         |   |   |        |  
|Appendix
  A - Non-cash transactions                                                                   |  |                         |        |         |   |         |   |   |        |  
|                                                                                                       |  |                         |        |         |   |         |   |   |        |  
|Purchase of property on credit                                                                         |  | $                       | 38     |         | $ | 28      |   | $ | 11     |  
|                                                                                                       |  |                         |        |         |   |         |   |   |        |  

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

F - 6

---

---



CIMATRON LIMITED

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

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

F - 7

---

---



CIMATRON LIMITED

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

|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|----------- | --------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 2     | SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|            |                                        
|            | E.                                      | Marketable securities                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|            |                                         | The
  Company accounts for its investments in marketable securities using SFAS No.
  115, Accounting for Certain Investments in Debt and Equity Securities
  (SFAS No. 115).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|            |                                         | Management
  determines the appropriate classification of its investments in marketable
  debt and equity securities at the time of purchase and reevaluates such
  determinations at each balance sheet date.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|            |                                         | The short-term investments
  as of December 31, 2004 and 2003 are classified as available-for-sale and
  presented at market value. Unrealized gains and
  losses are reflected in other comprehensive income.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|            | F.                                      | 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.                                                                                                                                                                                                                                                                                                                                              
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|            | G.                                      | 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.
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|            | H.                                      | Allowance for doubtful accounts                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|            |                                         | The
  allowance for doubtful accounts is computed on the specific identification
  basis for accounts, the collection of which, in managements estimation, is
  doubtful.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|            | I.                                      | Inventory                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|            |                                         | Inventory
  is presented at the lower of cost or market.
  Cost is determined by the first in, first out method.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|            | J.                                      | Property and equipment                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|            |                                         | Property
  and equipment are stated at cost. Depreciation is computed using the
  straight-line method, over the estimated useful life of assets, as follows:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        

| |                                  |              |      
| | -------------------------------- | ------------ | -----
| | Computers
  and software         | 3            | years
| | Furniture
  and office equipment | 6.5
  - 16.5 | years
| | Vehicles                         | 6.5          | years

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

F - 8

---

---



CIMATRON LIMITED

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

|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|----------- | --------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 2     | SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|            |                                        
|            | K.                                      | Impairment of long-lived assets                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|            |                                         | The
  Company regularly reviews whether facts and circumstances exist which
  indicate that the carrying amount of assets may not be recoverable. The
  Company assesses the recoverability of the carrying amount of its long-lived
  assets based on expected undiscounted cash flows. If an assets carrying
  amount is determined to be not recoverable, the Company recognizes an
  impairment loss based upon the difference between the carrying amount and the
  fair value of such assets, in accordance with SFAS No. 144 Accounting for
  the Impairment or Disposal of Long-Lived Assets (SFAS No. 144).                                                                                                                 
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|            | L.                                      | Software development costs                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|            |                                         | The
  Company capitalized certain software development costs in accordance with
  SFAS No. 86 Accounting for Costs of Computer Software to be Sold, Leased or
  Otherwise Marketed.  Capitalization
  of software development costs begins upon the establishment of technological
  feasibility and continues up to the time the software is available for
  general release to customers, at which time capitalized software costs are
  amortized to product development expenses on the straight-line basis over
  the expected life of the related product which is greater than the ratio that
  current gross revenues for a product bear to the total of current and
  anticipated future gross revenues, generally six years.
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|            |                                         | Management believes that future revenues related to capitalized software development costs
  will be sufficient to realize the amounts capitalized at December 31, 2004
  and, as such, these amounts will be recovered over the lives of the related
  projects. The estimates of anticipated future revenues and remaining useful
  life of the Companys products are subject to risk inherent in the software
  industry, such as changes in technology and customer perceptions.                                                                                                                                                                                                                                                     
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|            | M.                                      | Acquisition-related intangible assets                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|            |                                         | The
  Company accounts for its business combinations in accordance with SFAS No.
  141 Business Combinations (SFAS 141) and the related acquired intangible
  assets and goodwill in accordance with SFAS No. 142 Goodwill and Other
  Intangible Assets (SFAS 142). SFAS 141 specifies the accounting for
  business combinations and the criteria for recognizing and reporting
  intangible assets apart from goodwill.                                                                                                                                                                                                                                                                                                        
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|            |                                         | Acquisition-related intangible assets result from
  the Companys acquisitions of businesses accounted for under the purchase
  method and consist of the values of identifiable intangible assets including
  developed software products, established workforce and trade names, as well
  as goodwill. Goodwill is the amount by which the acquisition cost exceeds the
  fair values of identifiable acquired net assets on the date of purchase.
  Acquisition-related intangible assets are reported at cost, net of
  accumulated amortization.                                                                                                                                                                                    

F - 9

---

---



CIMATRON LIMITED

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

|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|----------- | --------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 2     | SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|            |                                        
|            | N.                                      | Stock-based compensation                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|            |                                         | The Company accounts for employee stock-based
  compensation in accordance with Accounting Principles Board Opinion No. 25,
  Accounting for Stock Issued to Employees (APB No. 25) and in accordance
  with FASB Interpretation No. 44. Pursuant to these accounting pronouncements,
  the Company records compensation for stock options granted to employees over
  the vesting period of the options based on the difference, if any, between
  the exercise price of the options and the market price of the underlying
  shares at the date of grant.
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|            |                                         | Deferred compensation is amortized to
  compensation expense over the vesting period of the options.                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|            |                                         | Had compensation cost for
  the Companys option plans been determined on the basis of the fair value at
  the grant dates in accordance with the provisions of SFAS No. 123 Accounting
  for Stock-Based Compensation, as amended by SFAS No. 148 Accounting for
  Stock-Based compensation (SFAS No. 148), the Companys pro forma net loss
  and pro forma basic and diluted net loss per share would have been as
  follows:                                                                                                                         

| |                                                             |  |                         |       |         |   |         |   |   |       |  
| | ----------------------------------------------------------- |  | ----------------------- | ----- | ------- | - | ------- | - | - | ----- | -
| |                                                             |  | Year ended December 31, |      
| |                                                             |  |                         |      
| |                                                             |  | 2 0 0 4                 |       | 2 0 0 3 |   | 2 0 0 2 |  
| |                                                             |  |                         |       |         |   |         |  
| | Pro forma net income (loss):                                |  |                         |       |         |   |         |   |   |       |  
| | Net income (loss) for the year, as reported                 |  | $                       | (388  | )       | $ | (301    | ) | $ | 10    |  
| | Deduct - stock-based
  compensation determined under APB 25 |  |                         | -     |         |   | -       |   |   | -     |  
| | Add - stock-based
  compensation determined under SFAS 123  |  |                         | 70    |         |   | 90      |   |   | 139   |  
| |                                                             |  |                         |       |         |   |         |   |   |       |  
| |                                                             |  | $                       | (458  | )       | $ | (391    | ) | $ | (129  | )
| |                                                             |  |                         |       |         |   |         |   |   |       |  
| |                                                             |  |                         |       |         |   |         |   |   |       |  
| | Pro forma basic and dilutedloss per share:                  |  |                         |       |         |   |         |   |   |       |  
| | As reported                                                 |  | $                       | (0.05 | )       | $ | (0.04   | ) | $ | (*    | )
| |                                                             |  |                         |       |         |   |         |   |   |       |  
| |                                                             |  |                         |       |         |   |         |   |   |       |  
| | Pro forma                                                   |  | $                       | (0.06 | )       | $ | (0.05   | ) | $ | (0.02 | )
| |                                                             |  |                         |       |         |   |         |   |   |       |  

| |  |                                                                                                                                                                                                                                                                                                                                                                                                                       |                 
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------------
| |  | (*)                                                                                                                                                                                                                                                                                                                                                                                                                   | Less than $0.01.
| |  |                                                                                                                                                                                                                                                                                                                                                                                                                       |                 
| |  | Datain respect of
  the stock option plans                                                                                                                                                                                                                                                                                                                                                                           
| |  |                                                                                                                                                                                                                                                                                                                                                                                                                       |                 
| |  | For purposes of estimating fair value in
  accordance with SFAS No. 123, the Company utilized the Black-Scholes
  option-pricing model. The following assumptions were used for grants in 2003:
  a dividend yield of 0.0%; weighted average expected volatility of 96%;
  weighted average risk-free interest rates of 3.3%; and weighted average
  expected lives of 4 years. No grants were made in 2004 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.                                                                                                                                                                     

F - 10

---

---



CIMATRON LIMITED

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

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

F - 11

---

---



CIMATRON LIMITED

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

|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|----------- | --------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 2     | SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|            |                                        
|            | R.                                      | Deferred income taxes                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|            |                                         | Deferred income taxes are provided for temporary
  differences between the assets and liabilities, as measured in the financial
  statements and for tax purposes, at the tax rates expected to be in effect
  when these differences reverse, in accordance with SFAS No. 109 Accounting
  for Income Taxes (SFAS No. 109).                                                                                                                                                                                                                                                                                                             
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|            | S.                                      | Net loss per ordinary share                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|            |                                         | Basic and diluted net loss per share have been
  computed in accordance with SFAS No. 128 Earning per Share using the
  weighted average number of ordinary shares outstanding. Basic loss per share
  excludes any dilutive effect of options and warrants. A total of 12,000,
  3,000 and 0 incremental shares were excluded from the calculation of diluted
  net loss per ordinary share for 2004, 2003 and 2002, respectively due to the
  anti-dilutive effect.                                                                                                                                                                      
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|            | T.                                      | Derivative financial instruments                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|            |                                         | The Companys primary objective for holding
  derivative financial instruments is to manage mainly currency market risks.
  The Company transacts business in various currencies other than the U.S.
  dollar, primarily the Euro and NIS. The Company has established balance sheet
  and forecasted transaction risk management programs to protect against
  volatility of future cash flows caused by changes in exchange rates. It uses
  currency forward contracts and currency options in these risk management
  programs. These programs reduce, but do not always entirely eliminate, the
  impact of currency exchange movements.
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|            |                                         | In accordance with SFAS No. 133, Accounting for
  Derivative Instruments and Hedging Activities, as amended, the Company
  recognizes all derivative instruments as either assets or liabilities on the
  balance sheet at fair value. Fair values of currency forward contracts and
  currency options are based on quoted market prices or pricing models using
  current market rates. The accounting for gains or losses from changes in fair
  value of a derivative instrument depends on whether it has been designated
  and qualifies as part of a hedging relationship as well as on the type of
  hedging relationship.         
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|            |                                         | The Companys accounting policies for these
  instruments are based on whether they meet the criteria for designation as
  hedging transactions, either as cash flow or fair value hedges. The criteria
  for designating a derivative as a hedge include the instruments effectiveness
  in risk reduction and one-to-one matching for the derivative instrument to
  its underlying transaction. Gains and losses on derivatives that are not
  designated as hedges for accounting purposes are recognized currently in
  earnings, and generally offset changes in the value of assets and
  liabilities.                               
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|            |                                         | The Companys outstanding derivative instruments
  as of balance sheet date are included in other receivables and other accrued
  liabilities.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               

F - 12

---

---



CIMATRON LIMITED

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

|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|----------- | --------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 2     | SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|            | T.                                      | Derivative financial instruments (Cont.)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|            |                                         | Currency forward contracts and currency options,
  which generally expire within 12 months and are used to hedge exposures to
  variability in expected future foreign-denominated cash flows, are designated
  as cash flows hedges. For these derivatives, the effective portion of the
  gain or loss is reported as a component of other comprehensive income in
  stockholders equity and is reclassified into earnings in the same period or
  periods during which the hedged transaction affects earnings, and within the
  same income statement line item.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|            |                                         | The ineffective portion of the gain or loss on
  the derivative in excess of the cumulative change in the present or future
  cash flows of the hedged item, if any, is recognized in financial income
  (expenses) net during the period of change.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|            |                                         | The carrying amount of foreign currency forward
  contracts and foreign currency options outstanding at December 31, 2004 and
  2003 is $14,430 and $9,800, respectively. As of the balance sheet dates, the
  fair values of these contracts approximates their carrying amount.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|            | U.                                      | Recently issued accounting standards                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|            |                                         | In November 2004 the FASB issued SFAS No. 151,
  Inventory Costs, an Amendment of ARB No. 43, Chapter 4. SFAS No. 151 amends
  the guidance in ARB 43, Chapter 4, Inventory Pricing, which provides
  guidance on the allocation of certain costs to inventory. SFAS 151 clarifies
  that abnormal amounts of idle facility expense, freight, handling costs, and
  wasted material (spoilage) should
  be recognized as current-period charges. In addition, SFAS 151 requires that
  allocation of fixed production overheads to the costs of conversion be based
  on the normal capacity of the production facilities. The provisions of this
  statement are effective for inventory costs incurred during fiscal years
  beginning after June 2005. The provisions of this statement shall be applied
  prospectively. The Company is assessing the impact of the adoption of this
  Standard, and currently estimates that its adoption is not expected to have a
  material effect on the Companys financial position and results of
  operations.
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|            |                                         | In December 2004, the FASB issued SFAS No. 123
  (revised 2004) Share Based Payments (SFAS 123(R)). This Statement is a
  revision of FASB Statement No. 123, Accounting for Stock-Based
  Compensation, which supersedes APB Opinion No. 25, Accounting for Stock
  Issued to Employees and its authoritative interpretations. SFAS 123(R)
  establishes standards for the accounting for transactions in which an entity
  exchanges its equity instruments for goods or services; focuses primarily on
  accounting for transactions in which an entity obtains employee and directors
  services in share-based payment transactions; and does not change the
  accounting guidance for share-based payment transactions with parties other
  than employees.                                                                                                                                                                                                                                                                                      

F - 13

---

---



CIMATRON LIMITED

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

|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|----------- | --------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 2     | SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|            |                                        
|            | U.                                      | Recently issued accounting standards (Cont.)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|            |                                         | SFAS 123(R) eliminates the alternative to use APB
  25s intrinsic value method of accounting that was provided in SFAS 123 as
  originally issued and requires to measure the cost of employee services
  received in exchange for an award of equity instruments based on the
  grant-date fair value of the award. The fair-value-based method in this
  Statement is similar to the fair-value-based method in SFAS 123 in most
  respects. The costs associated with the awards will be recognized over the
  period during which an employee is required to provide service in exchange
  for the award - the requisite service period (usually the vesting period).
  The grant-date fair value of employee share options and similar instruments
  will be estimated using option-pricing models adjusted for the unique
  characteristics of those instruments (unless observable market prices for the
  same or similar instruments are available). If an equity award is modified
  after the grant date, incremental compensation cost will be recognized in an
  amount equal to the excess of the fair value of the modified award over the
  fair value of the original award immediately before the modification.
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|            |                                         | The provisions of SFAS 123(R) apply to all awards
  to be granted by the Company after June 30, 2005 and to awards modified,
  repurchased, or cancelled after that date. When initially applying the provisions
  of SFAS 123(R), in the third quarter of 2005, the Company will be required to
  elect between using either the modified prospective method or the modified
  retrospective method. Under the modified prospective method, the Company is
  required to recognize compensation cost for all awards granted after the
  adoption of SFAS 123(R) and for the unvested portion of previously granted
  awards that are outstanding on that date.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|            |                                         | Under the modified retrospective method, the
  Company is required to restate its previously issued financial statements to
  recognize the amounts previously calculated and reported on a pro forma
  basis, as if the original provisions of SFAS 123 had been adopted. Under both
  methods, it is permitted to use either a straight line or an accelerated method to
  amortize the cost as an expense for awards with graded vesting.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|            |                                         | Management has recently commenced identifying the
  potential future impact of applying the provisions of SFAS 123(R), including
  each of its proposed transition methods, yet is currently unable to fully
  quantify the effect of this Standard on the Companys future financial
  position and results of operations. Nonetheless, it is expected that the
  adoption of SFAS 123(R) will increase the stock-based-award expenses the
  Company is to record in the future in comparison to the expenses recorded
  under the guidance currently applied by the Company.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|            |                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|            |                                         | In December 2004, the FASB issued SFAS No. 153,
  Exchanges of Nonmonetary Assets an amendment of APB No. 29. This Statement
  amends Opinion 29 to eliminate the exception for nonmonetary exchanges of
  similar productive assets and replaces it with a general exception for
  exchanges of nonmonetary assets that do not have commercial substance. The
  Statement specifies that a nonmonetary exchange has commercial substance if
  the future cash flows of the entity are expected to change significantly as a
  result of the exchange. This Statement is effective for nonmonetary asset
  exchanges occurring in fiscal periods beginning after June 15, 2005. Earlier
  application is permitted for nonmonetary asset exchanges occurring in fiscal
  periods beginning after the date this Statement is issued. Retroactive
  application is not permitted.                                                                                                                                                                                                                                                                                                                                                 

F - 14

---

---



CIMATRON LIMITED

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

|            |                        |                        
|----------- | ---------------------- | -----------------------
|NOTE 3     | SHORT-TERM INVESTMENTS
|            |                        |                        
|            | A.                     | Comprised as
  follows:

| |                                                   |  |                |       |         |   |       | 
| | ------------------------------------------------- |  | -------------- | ----- | ------- | - | ----- | 
| |                                                   |  | December
  31, |      
| |                                                   |  |                |      
| |                                                   |  | 2 0 0 4        |       | 2 0 0 3 |  
| |                                                   |  |                |       |         |  
| |                                                   |  |                |       |         |   |       | 
| | Trading
  marketable securities - Corporate bonds |  | $              | 6,381 |         | $ | 6,358 | 
| |                                                   |  |                |       |         |   |       | 

| |    |                                                                                                                                                               
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------
| | B. | As of
  December 31, 2004 and 2003 all the investments are classified in accordance
  with SFAS No. 115 as available-for-sale.                                
| |    |                                                                                                                                                               
| | C. | Unrealized
  loss on available-for-sale securities of $222 and $97 at December 31, 2004
  and 2003, respectively, were recorded in other comprehensive income.
| |    |                                                                                                                                                               
| | D. | Aggregate
  maturities of marketable securities are as follows:                                                                                               

| |                         |  |                |       | 
| | ----------------------- |  | -------------- | ----- | 
| |                         |  | December
  31, |      
| |                         |  |                |      
| |                         |  | 2 0 0 4        |      
| |                         |  |                |      
| | Within one
  year       |  | $              | 665   | 
| | One to five
  years     |  |                | 4,285 | 
| | Six to
  fourteen years |  |                | 1,431 | 
| |                         |  |                |       | 
| |                         |  | $              | 6,381 | 
| |                         |  |                |       | 

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

| |                                          |  |                |        |         |   |        |  
| | ---------------------------------------- |  | -------------- | ------ | ------- | - | ------ | -
| |                                          |  | December
  31, |       
| |                                          |  |                |       
| |                                          |  | 2 0 0 4        |        | 2 0 0 3 |  
| |                                          |  |                |        |         |  
| |                                          |  |                |        |         |   |        |  
| | Accounts
  receivable                    |  | $              | 7,447  |         | $ | 7,145  |  
| | Less -
  allowance for doubtful accounts |  |                | (1,317 | )       |   | (1,420 | )
| |                                          |  |                |        |         |   |        |  
| |                                          |  | $              | 6,130  |         | $ | 5,725  |  
| |                                          |  |                |        |         |   |        |  

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

| |                          |  |                |     |         |   |     | 
| | ------------------------ |  | -------------- | --- | ------- | - | --- | 
| |                          |  | December
  31, |    
| |                          |  |                |    
| |                          |  | 2 0 0 4        |     | 2 0 0 3 |  
| |                          |  |                |     |         |  
| |                          |  |                |     |         |   |     | 
| | Prepaid
  expenses       |  |                | 346 |         |   | 359 | 
| | Derivative
  instruments |  |                | -   |         |   | 174 | 
| | Advances to
  suppliers  |  |                | -   |         |   | 100 | 
| | Interest
  receivable    |  |                | 113 |         |   | 86  | 
| | Others                   |  |                | 253 |         |   | 64  | 
| |                          |  |                |     |         |   |     | 
| |                          |  | $              | 712 |         | $ | 783 | 
| |                          |  |                |     |         |   |     | 

F - 15

---

---



CIMATRON LIMITED

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

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

| |                                  |  |                |       |         |   |       | 
| | -------------------------------- |  | -------------- | ----- | ------- | - | ----- | 
| |                                  |  | December
  31, |      
| |                                  |  |                |      
| |                                  |  | 2 0 0 4        |       | 2 0 0 3 |  
| |                                  |  |                |       |         |  
| | Cost:                            |  |                |       |         |   |       | 
| | Computers
  and software         |  | $              | 3,965 |         | $ | 3,481 | 
| | Office
  furniture and equipment |  |                | 961   |         |   | 901   | 
| | Vehicles                         |  |                | 103   |         |   | 588   | 
| | Leasehold
  improvements         |  |                | 449   |         |   | 448   | 
| |                                  |  |                |       |         |   |       | 
| |                                  |  |                | 5,478 |         |   | 5,418 | 
| |                                  |  |                |       |         |   |       | 
| | Accumulated depreciation:        |  |                |       |         |   |       | 
| | Computers
  and software         |  |                | 3,395 |         |   | 3,135 | 
| | Office
  furniture and equipment |  |                | 688   |         |   | 602   | 
| | Vehicles                         |  |                | 96    |         |   | 426   | 
| | Leasehold
  improvements         |  |                | 226   |         |   | 163   | 
| |                                  |  |                |       |         |   |       | 
| |                                  |  |                | 4,405 |         |   | 4,326 | 
| |                                  |  |                |       |         |   |       | 
| |                                  |  |                |       |         |   |       | 
| | Property and equipment, net      |  | $              | 1,073 |         | $ | 1,092 | 
| |                                  |  |                |       |         |   |       | 

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

| |                                          |  |                |        |         |   |        |  
| | ---------------------------------------- |  | -------------- | ------ | ------- | - | ------ | -
| |                                          |  | December
  31, |       
| |                                          |  |                |       
| |                                          |  | 2 0 0 4        |        | 2 0 0 3 |  
| |                                          |  |                |        |         |  
| |                                          |  |                |        |         |   |        |  
| | Capitalized
  software development costs |  | $              | 9,160  |         | $ | 9,160  |  
| | Government
  grants                      |  |                | (3,495 | )       |   | (3,495 | )
| | Accumulated
  amortization (*)           |  |                | (4,461 | )       |   | (4,060 | )
| |                                          |  |                |        |         |   |        |  
| |                                          |  | $              | 1,204  |         | $ | 1,605  |  
| |                                          |  |                |        |         |   |        |  

| |     |                                                                                                                                                        
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------
| | (*) | All
  capitalized modules are amortized over six years.                                                                                                
| |     | Amortization
  expenses for the years ended December 31, 2004, 2003 and 2002, were $401,
  $402 and $401, respectively, and were charged to operations.

F - 16

---

---



CIMATRON LIMITED

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

|            |              
|----------- | -------------
|NOTE 8     | GOODWILL, NET

| |                            |  |                |       |         |   |       |  
| | -------------------------- |  | -------------- | ----- | ------- | - | ----- | -
| |                            |  | December
  31, |      
| |                            |  |                |      
| |                            |  | 2 0 0 4        |       | 2 0 0 3 |  
| |                            |  |                |       |         |  
| |                            |  |                |       |         |   |       |  
| | Original
  amounts         |  | $              | 1,021 |         | $ | 1,021 |  
| | Accumulated
  amortization |  |                | (434  | )       |   | (434  | )
| |                            |  |                |       |         |   |       |  
| |                            |  | $              | 587   |         | $ | 587   |  
| |                            |  |                |       |         |   |       |  

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

| |                                     |  |                |       |         |   |       | 
| | ----------------------------------- |  | -------------- | ----- | ------- | - | ----- | 
| |                                     |  | December
  31, |      
| |                                     |  |                |      
| |                                     |  | 2 0 0 4        |       | 2 0 0 3 |  
| |                                     |  |                |       |         |  
| |                                     |  |                |       |         |   |       | 
| | Employees
  and related liabilities |  | $              | 1,831 |         | $ | 2,096 | 
| | Derivative
  instruments            |  |                | 154   |         |   | 557   | 
| | Accrued
  expenses                  |  |                | 623   |         |   | 487   | 
| | Accrued
  royalties                 |  |                | 367   |         |   | 322   | 
| | Taxes to
  government institutions  |  |                | 156   |         |   | 114   | 
| | Others                              |  |                | -     |         |   | 19    | 
| |                                     |  |                |       |         |   |       | 
| |                                     |  | $              | 3,131 |         | $ | 3,595 | 
| |                                     |  |                |       |         |   |       | 

|            |                                                                                                                                                                                                                                                                                                                                     
|----------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 10    | ACCRUED SEVERANCE PAY (DEPOSITS WITH INSURANCE COMPANIES AND SEVERANCE
  PAY FUNDS)                                                                                                                                                                                                                                                 
|            |                                                                                                                                                                                                                                                                                                                                     
|            | The
  Companys liability for severance pay is calculated pursuant to Israeli
  severance pay law based on the most recent salary of the employee multiplied
  by the number of years of employment as of the balance sheet date. Employees
  are entitled to one months salary for each year of employment or a portion
  thereof.
|            |                                                                                                                                                                                                                                                                                                                                     
|            | The
  Companys liability for all of its employees is funded by monthly deposits
  with severance pay funds and insurance policies. An accrual is set up for any
  unfunded amount.                                                                                                                                                 
|            |                                                                                                                                                                                                                                                                                                                                     
|            | The
  deposited funds include profits accumulated up to the balance sheet date. The
  deposited funds may be withdrawn only upon the fulfillment of the obligation
  pursuant to Israeli severance pay law or labor agreements. The value of the
  deposited funds is based on the cash surrender value of the policies.            

|           |                                        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|---------- | -------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 11   | CONTINGENT LIABILITIES AND COMMITMENTS
|           |                                        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|           | A.                                     | In
  consideration of grants by the Chief Scientist of the Ministry of Industry
  and Trade of the Government of Israel (the Chief Scientist), the Company is
  obligated to pay the Chief Scientist, in respect of awarded grants, royalties
  of 3.5% of sales of products developed with funds provided by the Chief
  Scientist, until the dollar-linked amount is equal 100% of the grants
  payments received by the Company plus Libor interest rate (the Libor interest
  rate applies to grants received since January 1999). The Companys contingent
  liability as of December 31, 2004 is approximately $3,182 contingent upon the
  Company generating revenues from sales of products developed with funds
  provided by the Chief Scientist.

F - 17

---

---



CIMATRON LIMITED

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

|            |                                                |                                                                                                                                                                                                                                                                                                                                      
|----------- | ---------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 11    | CONTINGENT LIABILITIES AND COMMITMENTS (Cont.)
|            |                                                |                                                                                                                                                                                                                                                                                                                                      
|            | B.                                             | Regarding
  commitments in respect of the Approved Enterprise, see Note 13a.                                                                                                                                                                                                                                                       
|            |                                                |                                                                                                                                                                                                                                                                                                                                      
|            | C.                                             | In
  consideration of grants received from the Fund for the Encouragement of
  Overseas Marketing of the Israeli Governments Ministry of Industry and Trade
  (the Fund), the Company is obligated to pay the Fund royalties amounting to
  3% to 4% of the incremental exports, up to a maximum of 100% of the grants
  received.
|            |                                                |                                                                                                                                                                                                                                                                                                                                      
|            |                                                | The
  Companys contingent liability as of December 31, 2004 is $558, contingent
  upon the Companys incremental exports.                                                                                                                                                                                                           
|            |                                                |                                                                                                                                                                                                                                                                                                                                      
|            | D.                                             | The Company
  uses technology in respect of which it is obligated to pay royalties up to an
  amount of $623, until 2006.                                                                                                                                                                                                            
|            |                                                |                                                                                                                                                                                                                                                                                                                                      
|            | E.                                             | Lease commitments                                                                                                                                                                                                                                                                                                                    
|            |                                                |                                                                                                                                                                                                                                                                                                                                      
|            |                                                | The premises
  of the Company and its subsidiaries are leased under various operating lease
  agreements, which expire on various dates.                                                                                                                                                                                             
|            |                                                |                                                                                                                                                                                                                                                                                                                                      
|            |                                                | Rent
  expenses for the years ended December 31, 2004, 2003 and 2002, were
  approximately $661, $722 and $752, respectively.                                                                                                                                                                                                        
|            |                                                |                                                                                                                                                                                                                                                                                                                                      
|            |                                                | The Company
  leases its motor vehicles under cancelable operating lease agreements for
  periods through 2007.                                                                                                                                                                                                                      
|            |                                                |                                                                                                                                                                                                                                                                                                                                      
|            |                                                | The minimum
  payment under these operating leases, upon cancellation of these lease
  agreements, amounted to $661 as of December 31, 2004.                                                                                                                                                                                         
|            |                                                |                                                                                                                                                                                                                                                                                                                                      
|            |                                                | Future
  minimum lease commitments under operating leases as of December 31, 2003 are
  as follows:                                                                                                                                                                                                                                  

| |                         |  |   |       | 
| | ----------------------- |  | - | ----- | 
| | Year ended December 31, |  |   |       | 
| | 2005                    |  | $ | 1,302 | 
| | 2006                    |  |   | 893   | 
| | 2007                    |  |   | 386   | 
| | 2008                    |  |   | 64    | 
| | 2009 and thereafter     |  |   | 41    | 
| |                         |  |   |       | 
| |                         |  | $ | 2,685 | 
| |                         |  |   |       | 

| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | F. | Tax assessments                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |    | The Company
  has been issued final tax assessments by the Israeli income tax authorities
  through tax year 2000.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | G. | Legal claim                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |    | In April 2004, Omega 
  Adem Technologies Ltd., an Israeli privately held company engaged in the
  development of software, filed a lawsuit against Cimatron, claiming that
  Cimatron caused four employees of the plaintiff located in Russia to
  terminate their employment with the plaintiff and join Cimatron.  During a period of two years (until March
  2003), the plaintiff provided certain services to Cimatron. The four
  employees were among several employees who provided such services to
  Cimatron. The plaintiff claimed, among other things, that the four employees
  are restricted from working for any competitor of the plaintiff for a period
  of three years following termination of their employment with the
  plaintiff.  The plaintiff requested
  the District Court in Tel Aviv, Israel to grant an injunction and a permanent
  order that would prevent Cimatron from hiring the four employees.  In June, 2004, the court rejected the
  plaintiffs request for an injunction. 
  However, in September 2004, Omega initiated arbitration
  proceedings against us pursuant to the services agreement between the parties
  and submitted to an arbitrator agreed upon between the parties a statement of
  claim for an amount of $20,000,000 caused to Omega due to the employment
  of  the four employees in question. In
  November 2004, we submitted a statement of defense denying all of Omegas claims
  and asserting, among other things, that we engaged the Employees through
  Manpower Russia only following the expiration of a year following the
  conclusion of their relationship with Omega and that we therefore were
  allowed to do so. This proceeding is currently at its preliminary stage. 
  The parties have submitted a joint request to the District Court
  seeking to dismiss the request for an injunction. Cimatron believes that
  there is no merit to the claim and intends to oppose it vigorously.

F - 18

---

---



CIMATRON LIMITED

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

|            |                      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|----------- | -------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 12    | SHAREHOLDERS EQUITY
|            |                     
|            | A.                   | Share issuance                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|            |                      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|            |                      | The Companys shares are traded in the United States and are listed
  on the Nasdaq SmallCap Market.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|            |                      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|            | B.                   | Share Option Plan                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|            |                      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|            |                      | In January
  1996, the Companys Board of Directors adopted a share option plan (the
  Share Option Plan) pursuant to which 316,000 Ordinary Shares were reserved
  for issuance upon the exercise of options to be granted to Directors,
  officers, employees and consultants of the Company. The Share Option Plan is
  administrated by a committee of the Board, which designates the optionees and
  dates of grant.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|            |                      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|            |                      | The exercise
  price of an option granted under the Share Option Plan may be no less than
  85% of the fair market value of an Ordinary Share, as determined by that
  committee on the date that the option is granted. The options are for a
  10-year term and are non-assignable except by the laws of descent.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|            |                      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|            |                      | The option
  committee has the authority to amend the terms of option grants, provided
  that any such amendment is in the best interest of the grantee. In March and
  April 2000, options to purchase 39,750 shares were exercised. As of December
  31, 2004, options to purchase 27,000 of such shares were outstanding. All of
  these options were originally granted with an exercise price of $8.00 per
  share. In January, 1998, the Board of Directors amended the exercise price of
  such options to $5.00 per share.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|            |                      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|            |                      | These
  outstanding options are, subject to the continued employment of each
  employee, exercisable commencing two years after the date of grant at a rate
  of 25% per year. The grantee is responsible for all personal tax consequences
  of the grant and the exercise thereof.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|            |                      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|            |                      | In April
  1998, the Board of Directors adopted an additional share option plan (the
  1998 Share Option Plan) pursuant to which 620,000 Ordinary Shares were
  reserved for issuance upon the exercise of options to be granted to
  Directors, officers, employees and consultants of the Company. The 1998 Share
  Option Plan is administrated by a committee of the Board, which designates
  the optionees and dates of grant. The exercise price of an option granted
  under the 1998 Share Option Plan may be no less than 85% of the fair market
  value of an Ordinary Share, as determined by that committee on the date that
  the option is granted. Options granted vest over a period determined by the
  option committee, terminate three years after they become exercisable, and
  are non-assignable except by the laws of descent. The option committee has
  the authority to amend the terms of option grants, provided that any such
  amendment is in the best interest of the grantee.
|            |                      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|            |                      | As of
  December 31, 2004, options to purchase 48,250 of such shares were outstanding
  at a price of $4.00 per share under the 1998 Share Option Plan. These options
  are exercisable commencing two years after the date of grant at a rate of 25%
  per year, subject to the continued employment of each employee. The grantee
  will be responsible for all personal tax consequences of the grant and the
  exercise thereof. The Company intends to grant additional options under the
  1998 Share Option Plan to various Directors, executive officers and employees
  of the Company.                                                                                                                                                                                                                                                                                                                                                                                                                   

F - 19

---

---



CIMATRON LIMITED

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

|            |                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|----------- | ---------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 12    | SHAREHOLDERS EQUITY (Cont.)
|            |                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|            | B.                           | Share Option Plan (Cont.)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|            |                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|            |                              | In October
  1999, the option committee approved the grant of options to purchase 160,000
  of the Companys shares at a price of $2.00 per share to former president and
  CEO of the Company. These options are exercisable commencing one year after
  the date of grant at a rate of 33.3% per year, subject to the continued
  employment of the CEO. All such options were outstanding at December 31,
  2004. In January 13, 2002 Zeevi Computers and Technology Ltd (ZCT) (the
  holding company) sold all its shareholdings in the Company (see Note 14),
  upon such transaction all the unvested options that were granted to the
  president and CEO of the Company immediately vested and become exercisable.
|            |                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|            |                              | In March
  2000, the option committee adopted new guidelines for the options to purchase
  Ordinary Shares reserved for issuance under each of the 1996 Share Option
  Plan and the 1998 Share Option Plan upon the exercise of options to be
  granted to Directors, officers, employees and consultants of the Company.
  Such options are exercisable commencing two years after the date of grant at
  a rate of 50% on the second anniversary of the date of grant and 25% in each
  of the following two years, subject to the continued employment of each
  employee. As of December 31, 2004, options to purchase 103,000 of such shares
  were outstanding at a price of $4.50 per share.                       
|            |                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|            |                              | In August
  2003 the Companys Board of Directors approved the grant of options to
  purchase 150,000 of the Companys shares at a price of $2.50 per share to two
  officers in the Company. These options are exercisable commencing one year
  after the date of grant at a rate of 25%-33.3% per year, subject to the
  continued employment of the officers. All such options were outstanding at
  December 31, 2004.                                                                                                                                                                                                                                                                                               
|            |                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|            |                              | At December
  31, 2004 options to purchase 558,000 of Company shares were available for
  grants to Directors, officers, employees and consultants of the Company.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|            |                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|            |                              | The grantee
  will be responsible for all personal tax consequences of the grant and the
  exercise thereof. The Company intends to grant additional options to various
  Directors, executive officers and employees of the Company.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     

F - 20

---

---



CIMATRON LIMITED

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

|            |                              |                                                                                                                                                                                 
|----------- | ---------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 12    | SHAREHOLDERS EQUITY (Cont.)
|            |                              |                                                                                                                                                                                 
|            | B.                           | Share Option Plan (Cont.)                                                                                                                                                       
|            |                              |                                                                                                                                                                                 
|            |                              | A summary of
  the status of the Companys stock option plan as of December 31, 2004, 2003
  and 2002, and changes during the years ending on those dates, is presented
  below:

|                                                                 |  |                           |          |                                       |   |         |  |                                       |         |        |   |                                       |  |  |         |   |   |      | 
|---------------------------------------------------------------- |  | ------------------------- | -------- | ------------------------------------- | - | ------- |  | ------------------------------------- | ------- | ------ | - | ------------------------------------- |  |  | ------- | - | - | ---- | 
|                                                                 |  | Year ended
  December 31, |         
|                                                                 |  |                           |         
|                                                                 |  | 2 0 0 4                   |          | 2 0 0 3                               |   | 2 0 0 2 | 
|                                                                 |  |                           |          |                                       |   |         | 
|                                                                 |  | (in
  thousands)          |         
|                                                                 |  |                           |         
|                                                                 |  | Shares                    |          | Weighted
  average
  exercise
  price |   | Shares  |  | Weighted
  average
  exercise
  price |         | Shares |   | Weighted
  average
  exercise
  price | 
|                                                                 |  |                           |          |                                       |   |         |  |                                       |         |        |   |                                       | 
|Outstanding at beginning of year                                 |  |                           | 635,000  |                                       | $ | 3.33    |  |                                       | 520,000 |        | $ | 3.62                                  |  |  | 547,000 |   | $ | 3.65 | 
|Granted                                                          |  |                           | -        |                                       |   | -       |  |                                       | 150,000 |        | $ | 2.50                                  |  |  | -       |   |   | -    | 
|Exercised                                                        |  |                           | -        |                                       |   | -       |  |                                       | -       |        |   | -                                     |  |  | -       |   |   | -    | 
|Cancelled                                                        |  |                           | (146,750 | )                                     | $ | 4.28    |  |                                       | (35,000 | )      | $ | 4.07                                  |  |  | (27,000 | ) | $ | 4.22 | 
|                                                                 |  |                           |          |                                       |   |         |  |                                       |         |        |   |                                       |  |  |         |   |   |      | 
|Outstanding at year end                                          |  |                           | 488,250  |                                       | $ | 3.04    |  |                                       | 635,000 |        | $ | 3.33                                  |  |  | 520,000 |   | $ | 3.62 | 
|                                                                 |  |                           |          |                                       |   |         |  |                                       |         |        |   |                                       |  |  |         |   |   |      | 
|Options exercisable at year end                                  |  |                           | 392,417  |                                       | $ | 3.18    |  |                                       | 473,160 |        | $ | 3.56                                  |  |  | 403,125 |   | $ | 3.41 | 
|                                                                 |  |                           |          |                                       |   |         |  |                                       |         |        |   |                                       |  |  |         |   |   |      | 
|Weighted average fair value of options
  granted during the year |  |                           | -        |                                       |   |         |  | $                                     | 1.11    |        |   |                                       |  |  | -       |   |   |      | 
|                                                                 |  |                           |          |                                       |   |         |  |                                       |         |        |   |                                       |  |  |         |   |   |      | 

| |  |                                                                                                     
| |  | ----------------------------------------------------------------------------------------------------
| |  | The
  following table summarizes information about stock options outstanding at
  December 31, 2004:

|                           |  |                                                           |         |                                                             |  |                                     |  |                                                           |      |                                     |  |         |  |   |      | 
|-------------------------- |  | --------------------------------------------------------- | ------- | ----------------------------------------------------------- |  | ----------------------------------- |  | --------------------------------------------------------- | ---- | ----------------------------------- |  | ------- |  | - | ---- | 
|                           |  | Options
  outstanding                                     |         | Option
  exercisable                                        | 
|                           |  |                                                           |         |                                                             | 
|Range of
  exercise prices |  | Number of
  shares
  outstanding at
  December 31,
  2004 |         | Weighted
  average
  remaining
  contractual
  life (years) |  | Weighted
  average
  exercise price |  | Number of
  shares
  exercisable at
  December 31,
  2004 |      | Weighted
  average
  exercise price | 
|                           |  |                                                           |         |                                                             |  |                                     |  |                                                           |      |                                     | 
|                           |  |                                                           |         |                                                             |  |                                     |  |                                                           |      |                                     |  |         |  |   |      | 
|$2.00 to
  $3.00           |  |                                                           | 310,000 |                                                             |  | 2.16                                |  | $                                                         | 2.24 |                                     |  | 214,167 |  | $ | 2.13 | 
|$3.01 to
  $4.00           |  |                                                           | 48,250  |                                                             |  | 1.01                                |  | $                                                         | 4.00 |                                     |  | 48,250  |  | $ | 4.00 | 
|$4.01 to
  $5.00           |  |                                                           | 130,000 |                                                             |  | 1.71                                |  | $                                                         | 4.60 |                                     |  | 130,000 |  | $ | 4.60 | 
|                           |  |                                                           |         |                                                             |  |                                     |  |                                                           |      |                                     |  |         |  |   |      | 
|                           |  |                                                           | 488,250 |                                                             |  |                                     |  |                                                           |      |                                     |  | 392,417 |  |   |      | 
|                           |  |                                                           |         |                                                             |  |                                     |  |                                                           |      |                                     |  |         |  |   |      | 

F - 21

---

---



CIMATRON LIMITED

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

|              |                |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|------------- | -------------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE
  13    | INCOME
  TAXES
|              |               
|              | A.             | The Law for Encouragement
  of Capital Investments, 1959 (hereafter: the law)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|              |                |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|              |                | Since 1994, the Companys
  operations have approved enterprise status under the law. Reduced tax rates
  apply to the Companys income from the approved enterprise (which is
  determined in accordance with the increase in the Companys revenue during
  the first year of its having the abovementioned status as compared to the
  year before).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|              |                |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|              |                | During the period
  1994-2000 the Company was granted four approved enterprise statuses. All
  four statuses have expired.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|              |                |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|              |                | In April 2001 the Company
  was granted a fifth approved enterprise status, subject to the following
  terms:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|              |                |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|              |                | Tax exemption for 2 years,
  commencing in the first year the Company generates taxable income. For the
  remainder of the benefit period - 5 years - a reduced tax rate of 25%.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|              |                |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|              |                | The period of tax benefits
  for this approved enterprise will expire in 2015 or earlier, depending on
  whether the Company generates taxable income from this approved enterprise.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|              |                |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|              |                | In
  the event of a distribution of cash dividends to shareholders of earnings
  subject to the exemption, the Company will be liable to tax at a rate
  of 25%. The Company has not provided deferred taxes on future
  distributions of tax-exempt earnings, as management and the Board of
  Directors have determined not to make any distribution that may result in a
  tax liability for the Company. Accordingly, such earnings have been
  considered to be permanently reinvested. The tax-exempt earnings may be
  distributed to shareholders without subjecting the Company to taxes only upon
  a complete liquidation of the Company.                                                                                                                                                                                                                   
|              |                |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|              |                | The tax benefits and
  grants described above are subject to
  fulfillment of the conditions stipulated by the Law for Encouragement of
  Capital Investments, 1959, as amended, the regulations promulgated thereunder
  and the criteria set forth in the certificate of approval. The entitlement to
  the benefits is subject to completion and final approval by the Investment
  Center, such approval being subject to fulfillment of all terms of the
  approved program. In the event of failure by an enterprise to comply with
  these conditions, the tax benefits could be cancelled, in whole or in part,
  and the enterprise would be required to refund the amount of cancelled
  benefits, including interest. The
  completion of the Companys first, second and third approved enterprises has
  received final approval by the Investment Center.
|              |                |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|              |                |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        

F - 22

---

---



CIMATRON LIMITED

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

|              |                        |                      
|------------- | ---------------------- | ---------------------
|NOTE
  13    | INCOME
  TAXES (Cont.)
|              |                       
|              | B.                     | Comprised as follows:

| |                                       |  |                           |        |         |   |         |   |   |        |  
| | ------------------------------------- |  | ------------------------- | ------ | ------- | - | ------- | - | - | ------ | -
| |                                       |  | Year ended
  December 31, |       
| |                                       |  |                           |       
| |                                       |  | 2 0 0 4                   |        | 2 0 0 3 |   | 2 0 0 2 |  
| |                                       |  |                           |        |         |   |         |  
| |                                       |  |                           |        |         |   |         |   |   |        |  
| | Income (loss) before taxes on income: |  |                           |        |         |   |         |   |   |        |  
| | Israel                                |  | $                         | 807    |         | $ | 1,611   |   | $ | 1,406  |  
| | Non-Israeli                           |  |                           | (1,172 | )       |   | (1,903  | ) |   | (1,348 | )
| |                                       |  |                           |        |         |   |         |   |   |        |  
| |                                       |  | $                         | (365   | )       | $ | (292    | ) | $ | 58     |  
| |                                       |  |                           |        |         |   |         |   |   |        |  
| |                                       |  |                           |        |         |   |         |   |   |        |  
| | Current taxes                         |  | $                         | (12    | )       | $ | (9      | ) | $ | (11    | )
| | Tax in respect of prior years         |  |                           | (11    | )       |   | -       |   |   | (37    | )
| |                                       |  |                           |        |         |   |         |   |   |        |  
| |                                       |  | $                         | (23    | )       | $ | (9      | ) | $ | (48    | )
| |                                       |  |                           |        |         |   |         |   |   |        |  

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

| |                                             |  |                |   |         |   |        |  
| | ------------------------------------------- |  | -------------- | - | ------- | - | ------ | -
| |                                             |  | December
  31, |  
| |                                             |  |                |  
| |                                             |  | 2 0 0 4        |   | 2 0 0 3 |  
| |                                             |  |                |   |         |  
| |                                             |  |                |   |         |   |        |  
| | Deferred tax assets:                        |  |                |   |         |   |        |  
| | Loss carryforwards                          |  | $              |   |         | $ | 4,394  |  
| | Other cumulative temporary differences, net |  |                |   |         |   | 545    |  
| |                                             |  |                |   |         |   |        |  
| |                                             |  |                |   |         |   | 4,939  |  
| | Less - valuation allowance                  |  |                |   |         |   | (4,457 | )
| |                                             |  |                |   |         |   |        |  
| |                                             |  |                |   |         |   | 482    |  
| | Deferred tax liabilities:                   |  |                |   |         |   |        |  
| | Software development costs                  |  |                |   |         |   | (482   | )
| |                                             |  |                |   |         |   |        |  
| |                                             |  | $              | - |         | $ | -      |  
| |                                             |  |                |   |         |   |        |  

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

F - 23

---

---



CIMATRON LIMITED

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



|              |                        |                                                                                                                                                                                                                                                                                                                                              
|------------- | ---------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 13
     | INCOME
  TAXES (Cont.)
|              |                       
|              | D.                     | Under the Income Tax Law
  (Adjustments for Inflation) 1985, income for tax purposes is measured in
  terms of earnings in NIS, adjusted for the changes in the C.P.I.  Following is a reconciliation of in come
  taxes calculated at the statutory corporate rate in Israel to the actual
  income tax expense in the financial statements:

| |                                                                       |  |                           |      |         |   |         |   |   |     |  
| | --------------------------------------------------------------------- |  | ------------------------- | ---- | ------- | - | ------- | - | - | --- | -
| |                                                                       |  | Year ended
  December 31, |     
| |                                                                       |  |                           |     
| |                                                                       |  | 2 0 0 4                   |      | 2 0 0 3 |   | 2 0 0 2 |  
| |                                                                       |  |                           |      |         |   |         |  
| |                                                                       |  |                           |      |         |   |         |   |   |     |  
| | Theoretical tax expense (benefit) (35% in 2004, 36% in 2003 and
2002) |  | $                         | (128 | )       | $ | (105    | ) | $ | 21  |  
| | Increase (decrease) in taxes:                                         |  |                           |      |         |   |         |   |   |     |  
| | Disallowed deductions, net                                            |  |                           |      |         |   | 44      |   |   | (64 | )
| | Tax in respect of prior year                                          |  |                           |      |         |   | -       |   |   | 37  |  
| | Carryforward losses for which valuation allowance was not
provided    |  |                           |      |         |   | 70      |   |   | -   |  
| | Other                                                                 |  |                           |      |         |   | -       |   |   | 54  |  
| |                                                                       |  |                           |      |         |   |         |   |   |     |  
| | Taxes on income in the statements of operations                       |  | $                         | 23   |         | $ | 9       |   | $ | 48  |  
| |                                                                       |  |                           |      |         |   |         |   |   |     |  

|              |                                     |                                                                                                                                                                                                                                                                                                            
|------------- | ----------------------------------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|              | E.                                  | The Company has final tax
  assessments up to 2000.                                                                                                                                                                                                                                                        
|              |                                     |                                                                                                                                                                                                                                                                                                            
|              | F.                                  | As of December 31, 2004,
  the Company has approximately $2,184 of Israeli net operating loss
  carryforwards. The Israeli loss carryforwards have no expiration date.                                                                                                                                     
|              |                                     |                                                                                                                                                                                                                                                                                                            
|              |                                     | Tax loss carryforwards of
  a U.S. subsidiary totaling $6,914 expires between 2008 and 2023.                                                                                                                                                                                                               
|              |                                    
|NOTE 14
     | TRANSACTIONS
  WITH RELATED PARTIES
|              |                                    
|              | A.                                  | In February 2002, Koonras
  Technologies Ltd., a subsidiary of Polar Investments Ltd. (Koonras) and DBSI
  Investments Ltd. (DBSI) consummated a transaction with Zeevi Computers and
  Technology Ltd. (ZCT), by which they acquired all of Ordinary Shares of the
  Company previously held by ZCT.
|              |                                     |                                                                                                                                                                                                                                                                                                            
|              | B.                                  | The following transactions
  with companies affiliated with ZCT (in 2002 until February 22, 2002), Koonras
  and DBSI are included in the financial statements:                                                                                                                                            

| |                                                                       |  |                           |     |         |   |         |  |   |     | 
| | --------------------------------------------------------------------- |  | ------------------------- | --- | ------- | - | ------- |  | - | --- | 
| |                                                                       |  | Year ended
  December 31, |    
| |                                                                       |  |                           |    
| |                                                                       |  | 2 0 0 4                   |     | 2 0 0 3 |   | 2 0 0 2 | 
| |                                                                       |  |                           |     |         |   |         | 
| |                                                                       |  |                           |     |         |   |         |  |   |     | 
| | Reimbursement of ZCT for joint rental, maintenance and other
expenses |  | $                         | -   |         | $ | -       |  | $ | 152 | 
| | Management fees to Koonras and DBSI                                   |  | $                         | 353 |         | $ | 359     |  | $ | 284 | 

F - 24

---

---



CIMATRON LIMITED

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

|              |                                          |         
|------------- | ---------------------------------------- | --------
|NOTE 15
     | SELECTED
  STATEMENTS OF OPERATIONS DATA
|              |                                         
|              | A.                                       | Revenues
|              |                                          |         

| |                                                                          |           |                           |        |         |   |         |       |   |        |       | 
| | ------------------------------------------------------------------------ | --------- | ------------------------- | ------ | ------- | - | ------- | ----- | - | ------ | ----- | 
| |                                                                          |           | Year ended
  December 31, |       
| |                                                                          |           |                           |       
| |                                                                          |           | 2 0 0 4                   |        | 2 0 0 3 |   | 2 0 0 2 |      
| |                                                                          |           |                           |        |         |   |         |      
| | Revenue by geographical region:                                          |           |                           |        |         |   |         |       |   |        |      
| | Israel                                                                   |           | $                         | 1,939  |         | $ | 2,084   |       | $ | 2,344  |      
| | Europe      (1)                                                          |           |                           | 13,255 |         |   | 12,203  |       |   | 11,648 |      
| | Far East    (2)                                                          |           |                           | 4,407  |         |   | 4,394   |       |   | 4,910  |      
| | North America                                                            |           |                           | 3,409  |         |   | 2,808   |       |   | 2,599  |      
| | Others                                                                   |           |                           | 153    |         |   | 120     |       |   | 127    |      
| |                                                                          |           |                           |        |         |   |         |       |   |        |      
| |                                                                          |           | $                         | 23,163 |         | $ | 21,609  |       | $ | 21,628 |      
| |                                                                          |           |                           |        |         |   |         |       |   |        |      
| | (1)                                                                      | Includes: |                           |        |         |   |         |       |   |        |       | 
| |                                                                          | Italy     |                           | $      | 2,703   |   | $       | 2,453 |   | $      | 2,579 | 
| |                                                                          | Germany   |                           | $      | 7,782   |   | $       | 7,065 |   | $      | 6,622 | 
| |                                                                          |           |                           |        |         |   |         |       |   |        |       | 
| | (2)                                                                      | Includes: |                           |        |         |   |         |       |   |        |       | 
| |                                                                          | Japan     |                           | $      | 2,443   |   | $       | 2,334 |   | $      | 2,691 | 
| |                                                                          |           |                           |        |         |   |         |       |   |        |      
| | Revenue through major distributors, as a percentage of total
  revenues: |           |                           |        |         |   |         |       |   |        |      
| | Distributor (A)                                                          |           |                           | 12     | %       |   | 11      | %     |   | 12     | %    
| | Distributor (B)                                                          |           |                           | 9      | %       |   | 9       | %     |   | 11     | %    
| |                                                                          |           |                           |        |         |   |         |       |   |        |      

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

| |                                                       |  |                           |       |         |   |         |  |   |       | 
| | ----------------------------------------------------- |  | ------------------------- | ----- | ------- | - | ------- |  | - | ----- | 
| |                                                       |  | Year ended
  December 31, |      
| |                                                       |  |                           |      
| |                                                       |  | 2 0 0 4                   |       | 2 0 0 3 |   | 2 0 0 2 | 
| |                                                       |  |                           |       |         |   |         | 
| |                                                       |  |                           |       |         |   |         |  |   |       | 
| | Hardware and software                                 |  | $                         | 1,731 |         | $ | 1,726   |  | $ | 2,007 | 
| | Salaries and employee benefits                        |  |                           | 1,120 |         |   | 1,306   |  |   | 1,563 | 
| | Amortization of capitalized software development cost |  |                           | 401   |         |   | 402     |  |   | 401   | 
| | Royalties to the Chief Scientist                      |  |                           | 791   |         |   | 586     |  |   | 455   | 
| | Depreciation                                          |  |                           | 27    |         |   | 49      |  |   | 70    | 
| | Other                                                 |  |                           | 524   |         |   | 545     |  |   | 515   | 
| |                                                       |  |                           |       |         |   |         |  |   |       | 
| |                                                       |  |                           | 4,594 |         |   | 4,614   |  |   | 5,011 | 
| | Decrease in inventory                                 |  |                           | 7     |         |   | 4       |  |   | 6     | 
| |                                                       |  |                           |       |         |   |         |  |   |       | 
| |                                                       |  | $                         | 4,601 |         | $ | 4,618   |  | $ | 5,017 | 
| |                                                       |  |                           |       |         |   |         |  |   |       | 

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

| |                                       |  |                           |        |         |   |         |  |   |        | 
| | ------------------------------------- |  | ------------------------- | ------ | ------- | - | ------- |  | - | ------ | 
| |                                       |  | Year ended
  December 31, |       
| |                                       |  |                           |       
| |                                       |  | 2 0 0 4                   |        | 2 0 0 3 |   | 2 0 0 2 | 
| |                                       |  |                           |        |         |   |         | 
| |                                       |  |                           |        |         |   |         |  |   |        | 
| | Marketing costs                       |  | $                         | 664    |         | $ | 690     |  | $ | 729    | 
| | Selling expenses                      |  |                           | 10,668 |         |   | 9,054   |  |   | 8,075  | 
| | General and administrative
  expenses |  |                           | 2,442  |         |   | 2,702   |  |   | 2,632  | 
| | Depreciation                          |  |                           | 188    |         |   | 199     |  |   | 234    | 
| |                                       |  |                           |        |         |   |         |  |   |        | 
| |                                       |  | $                         | 13,962 |         | $ | 12,645  |  | $ | 11,670 | 
| |                                       |  |                           |        |         |   |         |  |   |        | 

| |  |                                                                                                                                       
| |  | --------------------------------------------------------------------------------------------------------------------------------------
| |  | Advertising
  expenses for the years ended December 31, 2004, 2003 and 2002 were
  approximately $157, $195 and  $164,
  respectively.

F - 25

---

---

(GRANT THORNTON LOGO)

Independent Auditors Reportto the Shareholder of Cimatron GmbH

We have reviewed the accompanying balance
sheet of Cimatron GmbH (the Company) as of December 31, 2003 and
the related statements of income, changes in shareholders equity and cash flows for the
twelve months peroid then ended. These financial statements are the responsibility of the
Companys management. Our responsibility is to express an opinion on these
financial statements based on our limited review as of December 31, 2003

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

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

---

---



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

Wiesbaden/Germany, February 6, 2004

| |                                                    |                           
| | -------------------------------------------------- | --------------------------
| | Grant Thornton GmbHWirtschaftsprüfungsgesellschaft
| | (-s- A. Groß)                                      | (-s- R. Binder)           
| | A. GroßWirtschaftsprüferin                         | R. BinderWirtschaftsprüfer

We confirm
that the above auditors report was issued by Grant Thornton GmbH and give approval to attach the report to the form 2004
20-F.

-2-

---

---

(GRANT THORNTON LOGO)

Accountants and Business Advisors

Report of Independent Registered Public Accounting
Firm

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | To the Shareholder of
  Cimatron Technologies, Inc.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | We have audited the
  accompanying balance sheet of Cimatron Technologies, Inc. as of December 31,
  2003 and the related statements of operations, shareholders deficit, and cash
  flows for each of the two years in the period ended December 31, 2003. These financial
  statements are the responsibility of the Companys management. Our responsibility
  is to express an opinion on these financial statements based on our audits.                                                                                                                                                                                                                           
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | We conducted our audits in
  accordance with standards of the Public Company Accounting Oversight Board
  (United States). Those standards require that we plan and perform the audit
  to obtain reasonable assurance about whether the financial statements are
  free of material misstatement. An audit includes examining, on a test basis,
  evidence supporting the amounts and disclosures in the financial statements,
  assessing the accounting principles used and significant estimates made by
  management, as well as evaluating the overall financial statement
  presentation. We believe that our audits provide a reasonable basis for our
  opinion.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | In our opinion, the
  financial statements referred to above present fairly, in all material respects,
  the financial position of Cimatron Technologies, Inc. as of December 31, 2003
  and the results of their operations and their cash flows for each of the two
  years in the period ended December 31, 2003 in conformity with accounting
  principles generally accepted in the United States of America.                                                                                                                                                                                                                                                       
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | (-s- Grant Thornton LLP)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | Southfield, Michigan 
  January 9, 2004                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  

27777
Franklin Road
Suite
800Southfield,
MI 48034T   248.262.1950F   248.350.3581W www.grantthornton.com

Grant Thornton LLP
US member of Grant Thornton International

---

---



(GRANT THORNTON LOGO)

Accountants and Business Advisors

Report of Independent Registered Public Accounting
Firm

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | To the Shareholder of
  Cimatron Technologies, Inc.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | We have audited the
  accompanying balance sheet of Cimatron Technologies, Inc. (A Michigan
  Corporation) as of December 31, 2003 and the related statements of operations,
  shareholders deficit, and cash flows for each of the two years in the period
  ended December 31, 2003. These financial statements are the responsibility of
  the Companys management. Our responsibility is to express an opinion on
  these financial statements based on our audits.                                                                                                                                                                                                
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | We conducted our audits in
  accordance with standards of the Public Company Accounting Oversight Board
  (United States). Those standards require that we plan and perform the audit
  to obtain reasonable assurance about whether the financial statements are
  free of material misstatement. An audit includes examining, on a test basis,
  evidence supporting the amounts and disclosures in the financial statements,
  assessing the accounting principles used and significant estimates made by
  management, as well as evaluating the overall financial statement
  presentation. We believe that our audits provide a reasonable basis for our
  opinion.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | In our opinion, the financial statements referred to
  above present fairly, in all material respects, the financial position of
  Cimatron Technologies, Inc. (A Michigan Corporation) as of December 31, 2003
  and the results of their operations and their cash flows for each of the two
  years in the period ended December 31, 2003, in conformity with accounting principles
  generally accepted in the United States of America.                                                                                                                                                                                                                             
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | (-s- Grant Thornton LLP)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | Southfield, Michigan 
  January 9, 2004                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  

27777 Franklin Road
Suite 800Southfield, MI 48034T   248.262.1950F   248.350.3581W www.grantthornton.com

Grant Thornton LLP
US member of Grant Thornton International

---

---