----

----

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

| x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2012 |
|---|--------------------------------------------------------------------------------------------------------------------------------------------|

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

|  ̈ | SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Date of event requiring this shell company report.................... For the transition period from     to |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  N/A                                            | ISRAEL                                         |
|------------------------------------------------------|------------------------------------------------|
| (Translation of Registrant’sname into English) | (Jurisdiction of incorporationor organization) |

----

| o Large Accelerated Filer |  o Accelerated Filer |  þ Non-accelerated filer |
|--------------------------------|---------------------------|------------------------------------|

| U.S. GAAP þ | International Financial Reporting Standards as issued bythe International Accounting Standards Board o | Other o |
|-----------------------|--------------------------------------------------------------------------------------------------------|--------------|

----

----

| 1.1 | Articles of Association, as amended, of the Registrant, incorporated by reference to Exhibit A to our Form 6-K, File No. 000-28580, filed with the Commission on January 25, 2006. |
|-----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 1.2 | English summary from Hebrew original Memorandum of Association of the Registrant, incorporated by reference to our Registration Statement on Form F-1, File No. 333-03080, as amended, filed with the Commission on April 2, 1996. |
|-----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 4.1 | Share Purchase Agreement between the Company, ScanMaster Systems (IRT) Ltd. and the Purchaser, incorporated by reference to our Annual Report on Form 20-F, File No. 000-28580, as amended, filed with the Commission on July 15, 2010. |
|-----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 4.2 | Asset and Liability Re-allocation Agreement between the Company and ScanMaster Systems (IRT) Ltd., incorporated by reference to our Annual Report on Form 20-F, File No. 000-28580, as amended, filed with the Commission on July 15, 2010. |
|-----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 4.3 | Creditor Agreement between the Company and ScanMaster Systems (IRT) Ltd., incorporated by reference to our Annual Report on Form 20-F, File No. 000-28580, as amended, filed with the Commission on July 15, 2010. |
|-----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 4.4 | Loan Agreement between the Company and M.S.N.D. Real Estate Holdings Ltd. dated May 27, 2010, incorporated by reference to our Annual Report on Form 20-F, File No. 000-28580, as amended, filed with the Commission on July 15, 2010. |
|-----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 4.5 | Amendment to Lease Agreement between the Company and Yehezkel Yaakobi (English summary of the Hebrew language agreement.), incorporated by reference to our Annual Report on Form 20-F, File No. 000-28580, as amended, filed with the Commission on July 15, 2010. |
|-----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 4.6 | Debt Restructure Agreement between the Company and Bank Leumi LeIsrael Ltd. (English summary of the Hebrew language agreement.), incorporated by reference to our Annual Report on Form 20-F, File No. 000-28580, as amended, filed with the Commission on July 15, 2010. |
|-----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 4.7 | Framework Agreement between the Company and Bank Hapoalim Ltd. (English summary of the Hebrew language agreement), incorporated by reference to our Annual Report on Form 20-F, File No. 000-28580, as amended, filed with the Commission on July 15, 2010. |
|-----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

| 4.8 | Debt Restructure Agreement between the Company and Bank Hapoalim Ltd. (English summary of the Hebrew language agreement), incorporated by reference to our Annual Report on Form 20-F, File No. 000-28580, as amended, filed with the Commission on July 15, 2010. |
|-----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 4.9 | Loan Undertaking between the Company and Sam Cohen dated June 3, 2010, incorporated by reference to our Annual Report on Form 20-F, File No. 000-28580, as amended, filed with the Commission on July 15, 2010. |
|-----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 4.10 | Loan Undertaking between the Company and Yaron Menashe dated June 3, 2010, incorporated by reference to our Annual Report on Form 20-F, File No. 000-28580, as amended, filed with the Commission on July 15, 2010. |
|------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 4.11 | Securities Purchase Agreement between the Company and Avi Gross dated December 11, 2012, incorporated by reference to our Annual Report on Form 20-F, File No. 000-28580, filed with the Commission on April 29, 2013. |
|------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 4.12 | Registration Rights Agreement between the Company and Avi Gross dated December 11, 2012., incorporated by reference to our Annual Report on Form 20-F, File No. 000-28580, filed with the Commission on April 29, 2013. |
|------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 4.13 | Convertible Loan Agreement between the Company and Avi Gross dated December 11, 2012, incorporated by reference to our Annual Report on Form 20-F, File No. 000-28580, filed with the Commission on April 29, 2013. |
|------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 4.14 | Warrant dated December 11, 2012, issued to Avi Gross, exercisable for up to $200,000 of the Company’s ordinary shares, at a price per share of $0.095, incorporated by reference to our Annual Report on Form 20-F, File No. 000-28580, filed with the Commission on April 29, 2013. |
|------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 4.15 | Warrant dated December 11, 2012, issued to Avi Gross, exercisable for up to $1,000,000 of the Company’s ordinary shares, at a price per share of $0.20, incorporated by reference to our Annual Report on Form 20-F, File No. 000-28580, filed with the Commission on April 29, 2013. |
|------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 8.1 | List of subsidiaries, incorporated by reference to our Annual Report on Form 20-F, File No. 000-28580, filed with the Commission on April 29, 2013. |
|-----|-----------------------------------------------------------------------------------------------------------------------------------------------------|

| 12.1 | Certification by Chief Executive Officer pursuant to section 302 of the Sarbanes-Oxley Act of 2002. |
|------|-----------------------------------------------------------------------------------------------------|

| 12.2 | Certification by Chief Financial Officer pursuant to section 302 of the Sarbanes-Oxley Act of 2002. |
|------|-----------------------------------------------------------------------------------------------------|

| 13.1 | Certification by Chief Executive Officer pursuant to 18 U.S.C., Section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002. |
|------|-----------------------------------------------------------------------------------------------------------------------------------------------------|

| 13.2 | Certification by Chief Financial Officer pursuant to 18 U.S.C., Section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002. |
|------|-----------------------------------------------------------------------------------------------------------------------------------------------------|

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

| 15.1 | Consent of Deloitte Brightman Almagor, certified public accountants (Israel). |
|------|-------------------------------------------------------------------------------|

----

|   | ELBIT VISION SYSTEMS LTD. |                    |
|--------|---------------------------|-------------------------|
|   |                      |                    |   |
|   | By:                       | /S/ Sam Cohen           |   |
|   |                      | Sam Cohen               |   |
|   |                      | Chief Executive Officer |   |

----

----

|                                                                                                    | Page           |
|---------------------------------------------------------------------------------------------------------|----------------|
|                                                                                                    |           |
| REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM                                                 | F - 2          |
|                                                                                                    |           |
| CONSOLIDATED FINANCIAL STATEMENTS:                                                                      |           |
|                                                                                                    |           |
| Balance sheets as of December 31, 2012 and 2011                                                         | F - 3 - F - 4  |
|                                                                                                    |           |
| Statements of operations for the year ended December 31, 2012, 2011 and  2010                 | F - 5          |
|                                                                                                    |           |
| Statements of changes in shareholders’ equity for the year ended December 31, 2012, 2011 and 2010 | F - 6          |
|                                                                                                    |           |
| Statements of cash flows for the year ended December 31, 2012, 2011 and 2010                            | F - 7 - F - 8  |
|                                                                                                    |           |
| Notes to Financial Statements                                                                           | F - 9 - F - 29 |

----

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

----

ELBIT VISION SYSTEMS LTD.

|                                                                                                       |   |   |   |   | December 31 |   |
|------------------------------------------------------------------------------------------------------------|--------|--------|--------|--------|-------------|--------|
|                                                                                                       |   | Note   |   |   | 2 0 1 2     |   |   | 2 0 1 1 |   |
| Assets                                                                                                     |   |   |   |   |        |   |   |   |   |
|                                                                                                       |   |   |   |   |        |   |   |   |   |
| CURRENT ASSETS:                                                                                            |   |   |   |   |        |   |   |   |   |
| Cash and cash equivalents                                                                                  |   |   |   |   |        | 1,392  |   |   |   | 730 |   |
| Restricted deposit (short term)                                                                            |   | 12a    |   |   |        | 30     |   |   |   | 90 |   |
|                                                                                                       |   |   |   |   |        |   |   |   |   |   |   |
| Trade account receivables (net of allowance for doubtful account 2012- $50 thousands, 2011- $63 thousands) |   | 13a    |   |   |        | 1,099  |   |   |   | 793 |   |
| Other receiveables                                                                                         |   |   |   |   |        | 159    |   |   |   | 121 |   |
| Inventories                                                                                                |   | 3      |   |   |        | 773    |   |   |   | 476 |   |
|                                                                                                       |   |   |   |   |        |   |   |   |   |   |   |
| Total current assets                                                                                       |   |   |   |   |        | 3,453  |   |   |   | 2,210 |   |
|                                                                                                       |   |   |   |   |        |   |   |   |   |   |   |
| INVESTMENTS AND LONG-TERM RECEIVABLES:                                                                     |   |   |   |   |        |   |   |   |   |   |   |
| Severance pay fund                                                                                         |   | 6      |   |   |        | 283    |   |   |   | 221 |   |
| Other long-term receivables and investment                                                                 |   | 4      |   |   |        | 186    |   |   |   | 225 |   |
|                                                                                                       |   |   |   |   |        |   |   |   |   |   |   |
|                                                                                                       |   |   |   |   |        | 469    |   |   |   | 446 |   |
|                                                                                                       |   |   |   |   |        |   |   |   |   |   |   |
| PROPERTY AND EQUIPMENT (net of accumulated                                                                 |   |   |   |   |        |   |   |   |   |   |   |
| depreciation and amortization)                                                                             |   | 5      |   |   |        | 43     |   |   |   | 50 |   |
|                                                                                                       |   |   |   |   |        |   |   |   |   |   |   |
| OTHER ASSETS                                                                                               |   |   |   |   |        |   |   |   |   |   |   |
| Goodwill                                                                                                   |   |   |   |   |        | 242    |   |   |   | 242 |   |
|                                                                                                       |   |   |   |   |        |   |   |   |   |   |   |
| Total assets                                                                                               |   |   |   |   |        | 4,207  |   |   |   | 2,948 |   |

----

|                                                                                                                                                                                |   |   |   |   | December 31 |    |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|--------|--------|-------------|---------|
|                                                                                                                                                                                |   | Note   |   |   | 2 0 1 2     |    |   | 2 0 1 1 |   |
| Liabilities and shareholders’ deficiency                                                                                                                                      |   |   |   |   |        |    |   |   |   |
|                                                                                                                                                                                |   |   |   |   |        |    |   |   |   |
| CURRENT LIABILITIES:                                                                                                                                                                |   |   |   |   |        |    |   |   |   |
| Credit from banks                                                                                                                                                                   |   | 13c    |   |   |        | 183     |   |   |   | 190 |   |
| Current Maturities of Long Term Loan from Shareholders and Other                                                                                                                    |   |   |   |   |        | 568     |   |   |   | 361 |   |
|                                                                                                                                                                                |   |   |   |   |        |    |   |   |   |   |   |
| Trade account payable                                                                                                                                                               |   |   |   |   |        | 917     |   |   |   | 437 |   |
| Deferred income                                                                                                                                                                     |   | 2i     |   |   |        | 64      |   |   |   | 498 |   |
| Other payable                                                                                                                                                                       |   | 13b    |   |   |        | 470     |   |   |   | 411 |   |
|                                                                                                                                                                                |   |   |   |   |        |    |   |   |   |   |   |
| Total current liabilities                                                                                                                                                           |   |   |   |   |        | 2,202   |   |   |   | 1,897 |   |
|                                                                                                                                                                                |   |   |   |   |        |    |   |   |   |   |   |
| LONG-TERM LIABILITIES:                                                                                                                                                              |   |   |   |   |        |    |   |   |   |   |   |
| Long term loans (net of current maturities)                                                                                                                                         |   | 7      |   |   |        | 1,189   |   |   |   | 1,633 |   |
| Other Long Terms Liabilities                                                                                                                                                        |   | 8      |   |   |        | 790     |   |   |   | 862 |   |
| Accrued severance pay                                                                                                                                                               |   | 6      |   |   |        | 300     |   |   |   | 241 |   |
| Total long-term liabilities                                                                                                                                                         |   |   |   |   |        | 2,279   |   |   |   | 2,736 |   |
|                                                                                                                                                                                |   |   |   |   |        |    |   |   |   |   |   |
| Total liabilities                                                                                                                                                                   |   |   |   |   |        | 4,481   |   |   |   | 4,633 |   |
|                                                                                                                                                                                |   |   |   |   |        |    |   |   |   |   |   |
| SHAREHOLDERS' DEFICIENCY:                                                                                                                                                           |   | 9      |   |   |        |    |   |   |   |   |   |
| Share capital - ordinary shares of NIS 1 par value (“Ordinary Shares”);   Authorized - 120,000,000 Ordinary Shares as of December 31, 2012 and 2011 |   |   |   |   |        |    |   |   |   |   |   |
| Issued and outstanding:                                                                                                                                                             |   |   |   |   |        |    |   |   |   |   |   |
| December 31, 2012– 74,915,937 Ordinary shares December 31, 2011 – 69,652,779 Ordinary shares                                                                       |   |   |   |   |        | 16,939  |   |   |   | 15,556 |   |
| Additional paid-in capital                                                                                                                                                          |   |   |   |   |        | 24,695  |   |   |   | 25,491 |   |
| Accumulated deficit                                                                                                                                                                 |   |   |   |   |        | (41,908 | ) |   |   | (42,732 | ) |
|                                                                                                                                                                                |   |   |   |   |        |    |   |   |   |   |   |
| Total shareholders’ deficiency                                                                                                                                                |   |   |   |   |        | (274    | ) |   |   | (1,685 | ) |
|                                                                                                                                                                                |   |   |   |   |        |    |   |   |   |   |   |
| Total liabilities and shareholders’ deficiency                                                                                                                                |   |   |   |   |        | 4,207   |   |   |   | 2,948 |   |

----

ELBIT VISION SYSTEMS LTD.

|                                                         |   |   |   |   | Year ended December 31, |   |
|--------------------------------------------------------------|--------|--------|--------|--------|-------------------------|--------|
|                                                         |   | Note   |   |   | 2 0 1 2                 |   |   | 2 0 1 1 |   |   | 2 0 1 0 |   |
| Revenues:                                                    |   |   |   |   |                    |   |   |   |   |   |   |   |
| Sale of products                                             |   |   |   |   |                    | 5,882  |   |   |   | 4,802 |   |   |   | 3,273 |   |
| Services rendered                                            |   |   |   |   |                    | 826    |   |   |   | 843 |   |   |   | 639 |   |
|                                                         |   |   |   |   |                    | 6,708  |   |   |   | 5,645 |   |   |   | 3,912 |   |
| Cost of revenues:                                            |   | 13d    |   |   |                    |   |   |   |   |   |   |   |   |   |   |
| Cost of products sold                                        |   |   |   |   |                    | 2,507  |   |   |   | 1,564 |   |   |   | 1,540 |   |
| Cost of services rendered                                    |   |   |   |   |                    | 454    |   |   |   | 456 |   |   |   | 420 |   |
|                                                         |   |   |   |   |                    | 2,961  |   |   |   | 2,020 |   |   |   | 1,960 |   |
|                                                         |   |   |   |   |                    |   |   |   |   |   |   |   |   |   |   |
| Gross profit                                                 |   |   |   |   |                    | 3,747  |   |   |   | 3,625 |   |   |   | 1,952 |   |
|                                                         |   |   |   |   |                    |   |   |   |   |   |   |   |   |   |   |
| Research and development costs – net                   |   |   |   |   |                    | 682    |   |   |   | 643 |   |   |   | 494 |   |
|                                                         |   |   |   |   |                    |   |   |   |   |   |   |   |   |   |   |
| Marketing and selling                                        |   |   |   |   |                    | 1,371  |   |   |   | 1,244 |   |   |   | 921 |   |
| General and administrative                                   |   |   |   |   |                    | 734    |   |   |   | 656 |   |   |   | 802 |   |
| Operating Profit (loss)                                      |   |   |   |   |                    | 960    |   |   |   | 1,082 |   |   |   | (265 | ) |
| Financial income (expenses)  - net                 |   | 13e    |   |   |                    | (134   | ) |   |   | 31 |   |   |   | (291 | ) |
| Profit (loss) before other expenses                          |   |   |   |   |                    | 826    |   |   |   | 1,113 |   |   |   | (556 | ) |
| Other expenses                                               |   |   |   |   |                    | (2     | ) |   |   | (24 | ) |   |   | (307 | ) |
| Profit (loss) before taxes on income                         |   |   |   |   |                    | 824    |   |   |   | 1,089 |   |   |   | (863 | ) |
| Taxes on income                                              |   | 10d    |   |   |                    | -      |   |   |   | - |   |   |   | - |   |
| Net Profit (loss) for the year before discontinued operation |   |   |   |   |                    | 824    |   |   |   | 1,089 |   |   |   | (863 | ) |
|                                                         |   |   |   |   |                    |   |   |   |   |   |   |   |   |   |   |
| Loss from discontinued operation                             |   |   |   |   |                    | -      |   |   |   | - |   |   |   | (1,946 | ) |
| Net profit from disposal of discontinued operation           |   |   |   |   |                    | -      |   |   |   | - |   |   |   | 5,436 |   |
| Total profit from disposal of discontinued operation         |   |   |   |   |                    | -      |   |   |   | - |   |   |   | 3,490 |   |
|                                                         |   |   |   |   |                    |   |   |   |   |   |   |   |   |   |   |
| Net Profit for the year                                      |   |   |   |   |                    | 824    |   |   |   | 1,089 |   |   |   | 2,627 |   |
|                                                         |   |   |   |   |                    |   |   |   |   |   |   |   |   |   |   |
| Profit (loss) per share:                                     |   |   |   |   |                    |   |   |   |   |   |   |   |   |   |   |
| Basic earnings (loss) per share from continuing operations   |   |   |   |   |                    | 0.012  |   |   |   | 0.016 |   |   |   | (0.012 | ) |
| Diluted earnings (loss) per share from continuing operations |   |   |   |   |                    | 0.012  |   |   |   | 0.015 |   |   |   | (0.012 | ) |
| Basic earnings per share from discontinued operations        |   |   |   |   |                    | -      |   |   |   | - |   |   |   | 0.05 |   |
| Diluted earnings per share from discontinued operations      |   |   |   |   |                    | -      |   |   |   | - |   |   |   | 0.05 |   |
|                                                         |   |   |   |   |                    |   |   |   |   |   |   |   |   |   |   |
| Weighted average number of shares used in                    |   |   |   |   |                    |   |   |   |   |   |   |   |   |   |   |
| Computation of loss per share –                        |   |   |   |   |                    |   |   |   |   |   |   |   |   |   |   |
| Basic (in thousands)                                         |   |   |   |   |                    | 70,042 |   |   |   | 69,653 |   |   |   | 69,653 |   |
| Diluted (in thousands)                                       |   |   |   |   |                    | 71,639 |   |   |   | 71,309 |   |   |   | 69,741 |   |

----

ELBIT VISION SYSTEMS LTD.

|                                              |   | Share capital |   |   | Additional                |   |   |     |   |   | Total       |   |
|---------------------------------------------------|--------|---------------|--------|--------|---------------------------|--------|--------|----------|--------|--------|-------------|--------|
|                                              |   | Number        |   |   |                      |   |   | paid-in  |   |   | Accumulated |   |   | shareholders’ |   |
|                                              |   | of shares     |   |   | Amount                    |   |   | Capital* |   |   | deficit     |   |   | Deficiency |   |
|                                              |   | In thousands  |   |   | U.S. dollars in thousands |   |
|                                              |   |          |   |   |                      |   |   |     |   |   |        |   |   |   |   |
| BALANCE – January 1, 2010                   |   |          | 69,653 |   |                      |   | 15,556 |     |   |   | 25,463      |   |   |   | (46,448 | ) |   |   | (5,429 | )  |
|                                              |   |          |   |   |                      |   |   |     |   |   |        |   |   |   |   |   |   |   |   |   |
| CHANGES DURING 2010:                              |   |          |   |   |                      |   |   |     |   |   |        |   |   |   |   |   |   |   |   |   |
| Profit for the year                               |   |          | -      |   |                      |   | -      |     |   |   | -           |   |   |   | 2,627 |   |   |   | 2,627 |   |
| Share based compensation expenses                 |   |          | -      |   |                      |   | -      |     |   |   | (7          | )      |   |   | - |   |   |   | (7 | )  |
| BALANCE – DECEMBER 31, 2010                 |   |          | 69,653 |   |                      |   | 15,556 |     |   |   | 25,463      |   |   |   | (46,448 | ) |   |   | (5,429 | ) |
|                                              |   |          |   |   |                      |   |   |     |   |   |        |   |   |   |   |   |   |   |   |   |
| CHANGES DURING 2011:                              |   |          |   |   |                      |   |   |     |   |   |        |   |   |   |   |   |   |   |   |   |
| Profit for the year                               |   |          | -      |   |                      |   | -      |     |   |   | -           |   |   |   | 1,089 |   |   |   | 1,089 |   |
| Share based compensation expenses                 |   |          | -      |   |                      |   | -      |     |   |   | 35          |   |   |   | - |   |   |   | 35 |   |
| BALANCE – DECEMBER 31, 2011                 |   |          | 69,653 |   |                      |   | 15,556 |     |   |   | 25,491      |   |   |   | (42,732 | ) |   |   | (1,685 | ) |
|                                              |   |          |   |   |                      |   |   |     |   |   |        |   |   |   |   |   |   |   |   |   |
| CHANGES DURING 2012:                              |   |          |   |   |                      |   |   |     |   |   |        |   |   |   |   |   |   |   |   |   |
| Profit for the year                               |   |          | -      |   |                      |   | -      |     |   |   | -           |   |   |   | 824 |   |   |   | 824 |   |
| Issuance of share capital and warrants (note 10a) |   |          | 5,263  |   |                      |   | 1,383  |     |   |   | (872        | )      |   |   | - |   |   |   | 511 |   |
| Issuance of debt beneficiary conversion feature   |   |          | -      |   |                      |   | -      |     |   |   | 51          |   |   |   | - |   |   |   | 51 |   |
| Share based compensation expenses                 |   |          | -      |   |                      |   | -      |     |   |   | 25          |   |   |   |   |   |   |   | 25 |   |
| BALANCE – DECEMBER 31, 2012                 |   |          | 74,916 |   |                      |   | 16,939 |     |   |   | 24,695      |   |   |   | (41,908 | ) |   |   | (274 | ) |
|                                              |   |          |   |   |                      |   |   |     |   |   |        |   |   |   |   |   |   |   |   |   |

----

CONSOLIDATED STATEMENTS OF CASH FLOWS

|                                                                             |   | Year ended December 31 |   |
|----------------------------------------------------------------------------------|--------|------------------------|--------|
|                                                                             |   | 2 0 1 2                |   |   | 2 0 1 1 |   |   | 2 0 1 0 |   |
| Cash flows from operating activities:                                            |   |                   |   |   |   |   |   |   |   |
| Net profit (loss)                                                                |   |                   | 824    |   |   |   | 1,089 |   |   |   | 2,627 |   |
| Capital gain from disposal of discontinued operations                            |   |                   | -      |   |   |   | - |   |   |   | (5,436 | ) |
| Net profit (loss) from discontinued operations                                   |   |                   | -      |   |   |   | - |   |   |   | 1,946 |   |
| Net profit (loss) from continuing operations                                     |   |                   | 824    |   |   |   | 1,089 |   |   |   | (863 | ) |
| Adjustments to reconcile net profit (loss) for the period                        |   |                   |   |   |   |   |   |   |   |   |   |   |
|                                                                             |   |                   |   |   |   |   |   |   |   |   |   |   |
| Net cash provided by (used in) operating activities:                             |   |                   |   |   |   |   |   |   |   |   |   |   |
| Depreciation and amortization                                                    |   |                   | 7      |   |   |   | 13 |   |   |   | 384 |   |
| Loss from disposal of property                                                   |   |                   | -      |   |   |   | - |   |   |   | 75 |   |
| Liability for employee rights upon retirement                                    |   |                   | 59     |   |   |   | 42 |   |   |   | (655 | ) |
| Stock based compensation                                                         |   |                   | 25     |   |   |   | 35 |   |   |   | - |   |
| Changes in operating assets and liabilities:                                     |   |                   |   |   |   |   |   |   |   |   |   |   |
| Decrease (increase) in trade accounts receivable                                 |   |                   | (306   | ) |   |   | (556 | ) |   |   | 1,041 |   |
| Decrease (increase) in other accounts receivable                                 |   |                   | (38    | ) |   |   | (51 | ) |   |   | 245 |   |
| Increase (decrease) in trade accounts payable                                    |   |                   | 480    |   |   |   | (127 | ) |   |   | (103 | ) |
| Changes in Deferred income                                                       |   |                   | (434   | ) |   |   | 297 |   |   |   | 654 |   |
| Increase (decrease) in other accounts payable                                    |   |                   | 59     |   |   |   | 28 |   |   |   | (2,829 | ) |
| Decrease (increase) in inventories                                               |   |                   | (297   | ) |   |   | (1 | ) |   |   | (3 | ) |
| Net cash provided by (used in) operating activities –continuing operations |   |                   | 379    |   |   |   | 769 |   |   |   | (2,054 | ) |
| Net cash used in operating activities –discontinued operations             |   |                   | -      |   |   |   | - |   |   |   | (1,945 | ) |
|                                                                             |   |                   |   |   |   |   |   |   |   |   |   |   |
| Net cash provided by (used in) operating activities                              |   |                   | 379    |   |   |   | 769 |   |   |   | (3,999 | ) |
|                                                                             |   |                   |   |   |   |   |   |   |   |   |   |   |
| Cash flows from investing activities:                                            |   |                   |   |   |   |   |   |   |   |   |   |   |
| Purchase of property and equipment                                               |   |                   | (2     | ) |   |   | (13 | ) |   |   | (25 | ) |
| Long-term receivables                                                            |   |                   | 39     |   |   |   | 46 |   |   |   | (70 | ) |
| Redemption of (investment in) restricted deposit                                 |   |                   | 60     |   |   |   | (58 | ) |   |   | 435 |   |
| Proceeds from disposal of discontinued operations                                |   |                   | 2      |   |   |   | - |   |   |   | 547 |   |
| Funds severance pay                                                              |   |                   | (62    | ) |   |   | (77 | ) |   |   | 228 |   |
| Net cash provided by (used in) investing activities–continuing operations  |   |                   | 37     |   |   |   | (102 | ) |   |   | 1,115 |   |
| Net cash provided by investing activities–discontinued operations          |   |                   | -      |   |   |   | - |   |   |   | 897 |   |
|                                                                             |   |                   |   |   |   |   |   |   |   |   |   |   |
| Net cash provided by (used in) investing activities                              |   |                   | 37     |   |   |   | (102 | ) |   |   | 2,012 |   |

----

|                                                                            |   | Year ended December 31, |   |
|---------------------------------------------------------------------------------|--------|-------------------------|--------|
|                                                                            |   | 2 0 1 2                 |   |   | 2 0 1 1 |   |   | 2 0 1 0 |   |
|                                                                            |   |                    |   |   |   |   |   |   |   |
|                                                                            |   |                    |   |   |   |   |   |   |   |
| Cash flows from financing activities:                                           |   |                    |   |   |   |   |   |   |   |
| Issuance of share capital and warrants - net of issuance costs                  |   |                    | 760    |   |   |   | - |   |   |   | - |   |
| Short-term credit from bank – net                                         |   |                    | (7     | ) |   |   | 20 |   |   |   | (744 | ) |
| Proceeds from loan from shareholder                                             |   |                    | -      |   |   |   | - |   |   |   | 270 |   |
| Repayments of loan from Shareholder                                             |   |                    | (260   | ) |   |   | (120 | ) |   |   | - |   |
| Proceeds from Long- terms loan                                                  |   |                    | -      |   |   |   | - |   |   |   | 920 |   |
| Repayments of Long- terms loan                                                  |   |                    | (175   | ) |   |   | (203 | ) |   |   | - |   |
| Other Long terms liabilities                                                    |   |                    | (72    | ) |   |   | (181 | ) |   |   | 1,043 |   |
| Loans from related parties and other                                            |   |                    |   |   |   |   | - |   |   |   | 820 |   |
|                                                                            |   |                    |   |   |   |   |   |   |   |   |   |   |
| Net cash provided by (used in) financing activities–continuing operations |   |                    | 246    |   |   |   | (484 | ) |   |   | 2,309 |   |
|                                                                            |   |                    |   |   |   |   |   |   |   |   |   |   |
| Net cash used in financing activities–discontinued operations             |   |                    | -      |   |   |   | - |   |   |   | (4 | ) |
|                                                                            |   |                    |   |   |   |   |   |   |   |   |   |   |
| Net cash provided by (used in) financing activities                             |   |                    | 246    |   |   |   | (484 | ) |   |   | 2,305 |   |
|                                                                            |   |                    |   |   |   |   |   |   |   |   |   |   |
| Net increase in cash and cash equivalents                                       |   |                    | 662    |   |   |   | 183 |   |   |   | 318 |   |
|                                                                            |   |                    |   |   |   |   |   |   |   |   |   |   |
| Balance of cash and cash equivalents atBeginning of year                        |   |                    | 730    |   |   |   | 547 |   |   |   | 229 |   |
|                                                                            |   |                    |   |   |   |   |   |   |   |   |   |   |
| Balance ofcash and cash equivalents at end of year                              |   |                    | 1,392  |   |   |   | 730 |   |   |   | 547 |   |
|                                                                            |   |                    |   |   |   |   |   |   |   |   |   |   |
| Supplemental disclosure of cash flow                                            |   |                    |   |   |   |   |   |   |   |   |   |   |
| Information - cash paid during the year for:                                    |   |                    |   |   |   |   |   |   |   |   |   |   |
| Interest paid - net                                                             |   |                    | 46     |   |   |   | 58 |   |   |   | 50 |   |
|                                                                            |   |                    |   |   |   |   |   |   |   |   |   |   |
| Income taxes paid - net                                                         |   |                    | -      |   |   |   | - |   |   |   | - |   |

----

ELBIT VISION SYSTEMS LTD.

----

|   | (1) | Property and equipment are stated at cost. Depreciation is calculated by the straight-line method over the estimated useful lives of assets, as follows: |
|--------|-----|----------------------------------------------------------------------------------------------------------------------------------------------------------|

|                           |   | %                  |   |
|--------------------------------|--------|--------------------|--------|
|                           |   |               |   |
| Machinery and equipment        |   | 10-33 (mainly 33%) |   |
| Office furniture and equipment |   | 6-20               |   |
| Vehicles                       |   | 15-20              |   |

----

|   | (2) | Impairment of long-lived assets - Impairment examinations and recognition are performed and determined based on the provisions of ASC 360-10, “Accounting for the Impairment or Disposal of Long-Lived Assets” ("ASC 360-10"). ASC 360-10 requires that long-lived assets and certain identifiable assets held for use be reviewed for impairment on a periodic basis, or whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.  Recoverability of an asset to be held and used is determined by a comparison of the carrying amount of the asset and the amount of undiscounted future net cash flows to be generated by the asset or assets group.  In the event that an asset is considered to be impaired, an impairment charge is recorded in the amount by which the carrying amount of the asset exceeds its estimated fair value. |
|--------|-----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | Goodwill |
|--------|--------|----------|

|                 |   | %      |   |
|----------------------|--------|--------|--------|
|                 |   |   |   |
| Technology           |   | 10-20  |   |
| Customer relations   |   | 10-20  |   |
| Distribution network |   | 10     |   |
| Brand name           |   | 8.33   |   |

----

----

----

----

|              |   | December 31    |   |
|-------------------|--------|----------------|--------|
|              |   | 2 0 1 2        |   |   | 2 0 1 1 |   |
|              |   | $ in thousands |   |
|              |   |           |   |   |   |   |
| Raw materials     |   |           | 562    |   |   |   | 275 |   |
| Work in process   |   |           | 77     |   |   |   | 107 |   |
| Finished products |   |           | 134    |   |   |   | 94 |   |
|              |   |           | 773    |   |   |   | 476 |   |

|                                                    |   | December 31    |   |
|---------------------------------------------------------|--------|----------------|--------|
|                                                    |   | 2 0 1 2        |   |   | 2 0 1 1 |   |
|                                                    |   | $ in thousands |   |
|                                                    |   |           |   |   |   |   |
| Deposits on leased vehicle and other(see also Note 9b2) |   |           | 22     |   |   |   | 12 |   |
| Loan to former subsidiary (Scanmaster) (see Note 1)     |   |           | 103    |   |   |   | 152 |   |
| Investment (1)                                          |   |           | 61     |   |   |   | 61 |   |
|                                                    |   |           | 186    |   |   |   | 225 |   |

|   | (1) | On July 22, 2004, the Company converted a convertible loan that had been granted to Micro Components Ltd. ("MCL") into 197,217 ordinary shares of MCL. As of December 31, 2012 the Company holds 2.5% of MCL's ordinary shares. |
|--------|-----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|                                             |   | December 31    |   |
|--------------------------------------------------|--------|----------------|--------|
|                                             |   | 2 0 1 2        |   |   | 2 0 1 1 |   |
|                                             |   | $ in thousands |   |
|                                             |   |           |   |   |   |   |
| Machinery and equipment                          |   |           | 1,705  |   |   |   | 1,721 |   |
| Leasehold improvements                           |   |           | 24     |   |   |   | 22 |   |
| Office furniture and equipment                   |   |           | 44     |   |   |   | 44 |   |
|                                             |   |           | 1,773  |   |   |   | 1,787 |   |
| Less - accumulated depreciation and amortization |   |           | 1,730  |   |   |   | 1,737 |   |
|                                             |   |           | 43     |   |   |   | 50 |   |

|   | B.  | Depreciation and amortization expenses totaled $7 thousands, $ 13 thousands, and $33 thousands, in the years ended December 31, 2012, 2011 and 2010, respectively. |
|--------|----------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

|   | A. | The Company's liability for severance pay is calculated in accordance with Israeli law based on the latest salary paid to employees and the length of employment in the Company. |
|--------|----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | A.  | Composed as follows: |
|--------|----------|----------------------|

|                        |   | December 31    |   |
|-----------------------------|--------|----------------|--------|
|                        |   | 2 0 1 2        |   |   | 2 0 1 1 |   |
|                        |   | $ in thousands |   |
|                        |   |           |   |   |   |   |
| Loans from banks (1)        |   |           | 849    |   |   |   | 1,024 |   |
| Loans from Shareholders (2) |   |           | -      |   |   |   | 100 |   |
| Loans from Other (3)        |   |           | 340    |   |   |   | 509 |   |
|                        |   |           | 1,189  |   |   |   | 1,633 |   |

----

|                |   | December 31 |   |
|---------------------|--------|------------------|--------|
|                |   | 2 0 1 2          |   |   | 2 0 1 1 |   |
|                |   | $ in thousands   |   |
|                |   |             |   |   |   |   |
| 2013                |   |             | 364    |   |   |   | 464 |   |
| 2014                |   |             | 364    |   |   |   | 364 |   |
| 2015                |   |             | 194    |   |   |   | 363 |   |
| 2016 and thereafter |   |             | 267    |   |   |   | 442 |   |
|                |   |             | 1,189  |   |   |   | 1,633 |   |

|   | (1) | The Company is committed to pay royalties to the Government of Israel based on proceeds from sales of products in the research and development of which the Government participates by way of grants.  At the time the grants were received, successful development of the related projects was not assured. |
|--------|-----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (2) | The Company is committed to pay royalties to the Government of Israel in respect of marketing expenses in which the Government participated by way of grants.  At the time the grants were received, successful development of the related projects was not assured.  In the case of failure of a project that was partly financed as above, the Company is not obligated to pay any such royalties.  The royalties are payable at the rate of 4% of the increase in export sales, up to the amount of the dollar-linked grant received.  No royalties were paid in the reported years to the Government of Israel. |
|--------|-----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

|   | (1) | The premises occupied by the Company and certain subsidiaries are rented under various operating lease agreements. The lease agreements for the premises expire in 2014 with extended options for another 4 years. |
|--------|-----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|                     |   | $ in thousands |   |
|--------------------------|--------|----------------|--------|
| Year ending December 31: |   |           |   |
| 2013                     |   |           | 81     |   |
| 2014                     |   |           | 46     |   |
|                     |   |           |   |   |
|                     |   |           | 127    |   |
|                     |   |           |   |   |

|   | (2) | The Company leases motor vehicles under long-term operating lease agreements. The lease agreements expire on various dates ending in 2012 – 2014 (with prior notice of cancellation clauses). |
|--------|-----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   |   | $ in thousands |   |
|--------|--------|----------------|--------|
|   |   |           |   |
| 2013   |   |           | 76     |   |
| 2014   |   |           | 23     |   |
| 2015   |   |           | 8      |   |
|   |   |           | 107    |   |

----

|   | (1) | The Company’s Ordinary Shares are traded in the United States on the OTC Bulletin Board market under the symbol EVSNF.OB. |
|--------|-----|---------------------------------------------------------------------------------------------------------------------------------|

|   | (2) | In June 2007 the Company completed a transaction with a group of Israeli institutional investors, for the purchase of its 9,465,544 ordinary shares for $0.315 per share, of an aggregate price of $2,981 thousands. Pursuant to the transaction, the investors were also issued warrants to purchase 4,732,774 of the Company's ordinary shares at an exercise price per share of $0.45, exercisable for a period of 4 years. These warrants terminated in June 2011. |
|--------|-----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (3) | On June 21, 2007, following the approval of the Company's board of directors and the Company's audit committee, the Company executed an agreement with Elbit Ltd., or the Elbit Agreement. This agreement was approved by the Company's shareholders in a meeting held on July 31, 2007. Pursuant to this agreement Elbit Ltd.(i) converted an existing loan to the Company in the amount of $470 thousands (including accrued interest up until March 31, 2007) into 1,492,063 ordinary shares, at a price of $0.315 per share; and (ii) invested $250 thousands in consideration for 793,651 of the Company's ordinary shares at a price of $0.315 per share and received a 4-year warrant to purchase 396,825 of the Company's ordinary shares at an exercise price of $0.45 per share. At consummation the Company paid all interest accrued on the loan between April 1, 2007 and the closing date. These warrants terminated in June 2011 On February 21, 2006, the Company consummated the Mivtach Agreement. Pursuant to the agreement, Mivtach Shamir Holdings Ltd. ("Mivtach") provided the Company with a two-year $3 million loan, which Mivtach Shamir was entitled at its sole discretion, for a period of 24 months following the provision of the loan, to convert into 6,000,000 of the Company's ordinary shares, at a price per share of $0.5 (half the loan was being held in escrow subject to the completion of a certain milestone, or conversion of the loan). Mivtach was also granted a two-year warrant to purchase 4,000,000 of the Company's ordinary shares at an exercise price of $0.5 per share, exercisable only if the loan was converted. On June 21, 2007 the Company executed an amendment agreement with M.S.N.D., pursuant to the Amendment Agreement, the terms of the Mivtach Agreement and the loan therein, were amended, such that in consideration for M.S.N.D.'s undertaking to convert the full loan amount by no later than August 1, 2007 (a).Mivtach was issued with 9,523,810 of ordinary shares; and (b) Mivtach received a 4-year warrant to purchase 2,380,952 of the Company's ordinary shares at an exercise price of $0.45 per share. Mivtach also agreed to waive its rights to exercise at least 3,000,000 ordinary shares issuable under the Mivtach Agreement, agreeing to exercise no more than 1,000,000 ordinary shares issuable under the Amendment Agreement, which warrants expired on February 21, 2008. |
|--------|-----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

|   | (4) | In December 2009 the Company issued Mivtach Shamir Holdings Ltd. 18,664,078 ordinary shares for $0.097 per share for a total amount of $1,810,416.This amount include convertion of Loan received from Mivtach during 2009 in an amount of $627,000.Pursuant to the transaction, Mivtach was also issued warrants to purchase 9,332,039 of the Company's ordinary shares at an exercise price per share of $0.139, exercisable for a period of 4 years. |
|--------|-----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (5)  | In December 2012, The Company issued Mr. Gross some financial instruments in consideration of $760 thousands (net of $40 thousands issuance expenses) which includes shares, warrants and a convertible note. The Company issued 5,263,158 ordinary shares for $0.095 per share. The Company also issued warrants ("The first warrants") to purchase 2,105,263 of the Company's ordinary shares at an exercise price per share of $0.095 amounting $200 thousands, vested in fully upon issuance, exercisable through February 2015. The Convertible Note Agreement is on the principal amount of $300 thousands. The maturity date of the Note is, May 2013, after the maturity date the conversion option expires, and the loan is supposed to be returned in 12 monthly installments. The Note bears interest at a per annum rate of Libor rate. The Note and accrued interest are convertible to common stock of the Company at a conversion rate of $0.095 per share. In case that Mr. Gross would convert more than 50% of the aggregated amount of the principal amount of the convertible note and the first warrants, the Company would issue Mr. gross warrants ("the second warrants"). The principal amount of the second warrants would be in proportion to percentage converted/exercised from the principal amount of the convertible note and the first warrants. The second warrants could amount up to $1 miilion of the Company's ordinary shares at an exercise price per share of $0.17 or $0.20 depends on The company's revenue on the year ended 2014. The second warrants would be vested in fully upon issuance, exercisable through February 2015. |
|--------|-----------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

|   | (1) | The plans: |
|--------|-----|------------|

|   | (a) | In April 2000, the board of directors of the Company adopted the Employee Share Option Plan (2000) (hereafter – The 2000 Plan). |
|--------|-----|---------------------------------------------------------------------------------------------------------------------------------------|

|   | (b) | In November 2003, the Board of Directors of the Company adopted the Employee Share Option Plan (2003) (hereafter – The 2003 Plan). |
|--------|-----|------------------------------------------------------------------------------------------------------------------------------------------|

----

|   | (1) | The plans: (Cont.) |
|--------|-----|--------------------|

|   | (c) | In March 2006, the Board of Directors of the Company adopted the Employee Share Option Plan (2006) (hereafter – The 2006 Plan). |
|--------|-----|---------------------------------------------------------------------------------------------------------------------------------------|

----

|                                                                      |   | Year ended December 31 |      |
|---------------------------------------------------------------------------|--------|-----------------------------|-----------|
|                                                                      |   | 2 0 2 1                     |      |   | 2 0 1 1 |   |   | 2 0 1 0 |   |
|                                                                      |   |                        |      |   | Weighted |   |   |   |   |   | Weighted |   |   |   |   |   | Weighted |   |
|                                                                      |   |                        |      |   | average |   |   |   |   |   | average |   |   |   |   |   | average |   |
|                                                                      |   |                        |      |   | exercise |   |   |   |   |   | exercise |   |   |   |   |   | exercise |   |
|                                                                      |   | Number                      |      |   | price |   |   | Number |   |   | price |   |   | Number |   |   | price |   |
|                                                                      |   |                        |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Options outstanding at beginning of year                                  |   |                        | 6,139,463 |   |   |   | 0.45 |   |   |   | 6,755,463 |   |   |   | 0.45 |   |   |   | 5,159,102 |   |   |   | 0.71 |   |
| Changes during the year:                                                  |   |                        |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Granted (1)                                                               |   |                        | 85,000    |   |   |   | 0.08 |   |   |   | 150,000 |   |   |   | 0.09 |   |   |   | 2,900,000 |   |   |   | 0.05 |   |
| Exercised                                                                 |   |                        | -         |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |
| Forfeited                                                                 |   |                        | (714,900  | ) |   |   | 0.42 |   |   |   | (766,000 | ) |   |   | 0.39 |   |   |   | (1,303,639 | ) |   |   | 0.61 |   |
| Options outstanding at end of year                                        |   |                        | 5,509,563 |   |   |   | 0.45 |   |   |   | 6,139,463 |   |   |   | 0.45 |   |   |   | 6,755,463 |   |   |   | 0.45 |   |
| Options exercisable at year end                                           |   |                        | 4,627,071 |   |   |   | 0.55 |   |   |   | 4,371,053 |   |   |   | 0.45 |   |   |   | 3,907,131 |   |   |   | 0.71 |   |
| Weighted average fair value of options granted   during the year (2) |   | $                           | 0.08      |   |   |   |   |   |   | $ | 0.09 |   |   |   |   |   |   | $ | 0.04 |   |   |   |   |   |

|   | (1) | Options granted in 2012, 2011 and 2010 were granted with exercise price that was at market value or above. |
|--------|-----|------------------------------------------------------------------------------------------------------------|

----

|   | (2) | Options granted to employees: |
|--------|-----|-------------------------------|

|   | (a) | (Cont.) |
|--------|-----|---------|

|   | (2) | The fair value of each option granted is estimated on the date of grant using the Black-Scholes option-pricing model in 2011 and 2012, with the following weighted average assumptions: |
|--------|-----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|                     |   | Year ended December 31 |   |
|--------------------------|--------|-----------------------------|--------|
|                     |   | 2 0 1 2                     |   |   | 2 0 1 1 |   |   | 2 0 1 0 |   |
| Dividend yield           |   |                        | 0      | % |   |   | 0 | % |   |   | 0 | % |
| Expected volatility      |   |                        | 92     | % |   |   | 99 | % |   |   | 92 | % |
| Risk-free interest rate  |   |                        | 1.5    | % |   |   | 2.02 | % |   |   | 3.3 | % |
| Expected life - in years |   |                        | 4      |   |   |   | 4 |   |   |   | 4 |   |

|   | (b) | The following table summarizes certain information about options granted to employees and directors of the Company which were outstanding and exercisable under the above plans as of December 31, 2012: |
|--------|-----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| Options outstanding |   |   | Options exercisable |      |
|---------------------|--------|--------|---------------------|-----------|
|                |   |   |                |      |   | Weighted |   |   |   |   |   | Weighted |   |
|                |   |   | Number              |      |   | average |   |   | Number |   |   | average |   |
|                |   |   | outstanding at      |      |   | remaining |   |   | exercisable at |   |   | remaining |   |
| Exercise            |   |   | December 31,   |      |   | contractual |   |   | December 31, |   |   | contractual |   |
| prices              |   |   | 2012                |      |   | life |   |   | 2012 |   |   | life |   |
| $                   |   |   |                |      |   |   | Years |   |   |   |   |   | Years |   |
|                |   |   |                |      |   |   |   |   |   |   |   |   |   |   |
| 0.05-0.32           |   |   |                | 3,123,036 |   |   | 0.63-8.39 |   |   |   | 2,240,544 |   |   | 0.63-8.39 |   |
| 0.4-0.46            |   |   |                | 127,500   |   |   | 4.28-5.12 |   |   |   | 127,500 |   |   | 4.28-5.12 |   |
| 0.49-0.70           |   |   |                | 403,193   |   |   | 0.08-5.01 |   |   |   | 403,193 |   |   | 0.08-5.01 |   |
| 0.75-0.85           |   |   |                | 1,084,334 |   |   | 0.89-4.29 |   |   |   | 1,084,334 |   |   | 0.89-4.29 |   |
| 1.2-1.25            |   |   |                | 771,500   |   |   | 1.2-1.95 |   |   |   | 771,500 |   |   | 1.2-1.95 |   |
|                |   |   |                | 5,509,563 |   |   |   |   |   |   | 4,627,071 |   |   |   |   |

----

|   | A. | Tax Rates Applicable To The Income Of The Company: |
|--------|----|----------------------------------------------------|

|   | 1. | Cancellation of the previous planned gradual reduction of income taxes and corporate income taxes commencing in 2012 (the previous amendment stated that the corporate tax rate will be further reduced in subsequent tax years as follows: in 2012 - 23%, in 2013  - 22%, 2014 - 21% , 2015 – 20% and thereafter 18%). |
|--------|----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 2. | Increase of the corporate income tax rate to 25% in 2012. |
|--------|----|-----------------------------------------------------------|

|   | 3. | Increase of the capital gains tax rate and betterment tax rate to 25%. |
|--------|----|------------------------------------------------------------------------|

|                                              |   | YEAR ENDED DECEMBER 31, |    |
|---------------------------------------------------|--------|-------------------------|---------|
|                                              |   | 2012                    |    |   | 2011 |   |
|                                              |   |                    |    |   |   |   |
| Net loss carry-forward                            |   |                    | 9,785   |   |   |   | 10,055 |   |
| Other additions for tax Purposes                  |   |                    | 114     |   |   |   | 107 |   |
|                                              |   |                    |    |   |   |   |   |   |
| Net deferred tax asset before valuation allowance |   |                    | 9,899   |   |   |   | 10,162 |   |
| Valuation allowance                               |   |                    | (9,899  | ) |   |   | (10,162 | ) |
|                                              |   |                    |    |   |   |   |   |   |
| Net deferred tax asset                            |   |                    | – |   |   |   | – |   |

|          |   | YEAR ENDED DECEMBER 31, |   |
|---------------|--------|-------------------------|--------|
|          |   | 2012                    |   |   | 2011 |   |
|          |   |                    |   |   |   |   |
| United States |   |                    | (40    | ) |   |   | 49 |   |
| Israel        |   |                    | 864    |   |   |   | 1,040 |   |

----

| Israel          |   |   | 38,500 |   |
|-----------------|--------|--------|--------|--------|
| United States * |   |   | 500    |   |
|            |   |   |   |   |
|            |   |   | 39,000 |   |

|   | * | Utilization of U.S. net operating losses may be subject to substantial annual limitation due to the “change in ownership” provisions of the Internal Revenue Code of 1986 and similar state provisions. The annual limitation may result in the expiration of net operating losses before utilization. |
|--------|---|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | A. | The Company has registered fixed charge on bank deposits in favor of certain banks. The bank deposits are used to secure a credit line granted to the Company by the banks, and as collateral for guarantees provided to its customers. |
|--------|----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | B. | The Company have registered floating liens on all of their assets in favor of. |
|--------|----|--------------------------------------------------------------------------------|

----

|                                                                                    |   | December 31    |   |
|-----------------------------------------------------------------------------------------|--------|----------------|--------|
|                                                                                    |   | 2 0 1 2        |   |   | 2 0 1 1 |   |
|                                                                                    |   | $ in thousands |   |
|                                                                                    |   |           |   |   |   |   |
| A.           Accounts receivable |   |           |   |   |   |   |
|                                                                                    |   |           |   |   |   |   |
| (1)       Trade - allowance for doubtful accounts:   |   |           |   |   |   |   |
|                                                                                    |   |           |   |   |   |   |
| Balance at beginning of year                                                            |   |           | 63     |   |   |   | 9 |   |
| Charged to statement of operations                                                      |   |           | (13    | ) |   |   | 54 |   |
|                                                                                    |   |           |   |   |   |   |   |   |
| Balance at end of year                                                                  |   |           | 50     |   |   |   | 63 |   |
|                                                                                    |   |           |   |   |   |   |   |   |
| (2)       Other:                                          |   |           |   |   |   |   |   |   |
|                                                                                    |   |           |   |   |   |   |   |   |
| Prepaid expenses                                                                        |   |           | 73     |   |   |   | 52 |   |
| Israeli Government departments and agencies                                             |   |           | 86     |   |   |   | 69 |   |
|                                                                                    |   |           | 159    |   |   |   | 121 |   |

|                                                                                                             |   | December 31    |   |
|------------------------------------------------------------------------------------------------------------------|--------|----------------|--------|
|                                                                                                             |   | 2 0 1 2        |   |   | 2 0 1 1 |   |
|                                                                                                             |   | $ in thousands |   |
|                                                                                                             |   |           |   |   |   |   |
| B.           Accounts payable and accruals – other: |   |           |   |   |   |   |
|                                                                                                             |   |           |   |   |   |   |
| Employees and employee institutions                                                                              |   |           | 63     |   |   |   | 52 |   |
| Israeli Government departments and agencies                                                                      |   |           | 115    |   |   |   | 154 |   |
| Provision for vacation and recreation pay                                                                        |   |           | 82     |   |   |   | 63 |   |
| Provision for product warranty                                                                                   |   |           | 95     |   |   |   | 57 |   |
| Liability for commissions to agents                                                                              |   |           | 47     |   |   |   | 39 |   |
| Accrued expenses and sundry                                                                                      |   |           | 68     |   |   |   | 46 |   |
|                                                                                                             |   |           | 470    |   |   |   | 411 |   |

|   | C. | Credit from banks: |
|--------|----|--------------------|

|                         |   | % interest rate   |   |   | December 31    |   |
|------------------------------|--------|-------------------|--------|--------|----------------|--------|
|                         |   | as of             |   |   | 2 0 1 2        |   |   | 2 0 1 1 |   |
|                         |   | December 31, 2012 |   |   | $ in thousands |   |
| Short-term loans from banks: |   |              |   |   |           |   |   |   |   |
| Linked to the Dollar         |   | 2.5               |   |   |           | 183    |   |   |   | 190 |   |
| Linked to the Euro           |   |              |   |   |           | -      |   |   |   | - |   |
|                         |   |              |   |   |           | 183    |   |   |   | 190 |   |

----

|   | D.  | Cost of revenues: |
|--------|----------|-------------------|

|                          |   | Year ended December 31 |   |
|-------------------------------|--------|------------------------|--------|
|                          |   | 2 0 1 2                |   |   | 2 0 1 1 |   |   | 2 0 1 0 |   |
|                          |   | $ in thousands         |   |
| Industrial operations:        |   |                   |   |   |   |   |   |   |   |
| Materials consumed            |   |                   | 1,746  |   |   |   | 1,063 |   |   |   | 945 |   |
| Payroll and related expenses  |   |                   | 373    |   |   |   | 362 |   |   |   | 318 |   |
| Subcontracted work            |   |                   | 244    |   |   |   | 160 |   |   |   | 158 |   |
| Depreciation and amortization |   |                   | 3      |   |   |   | 2 |   |   |   | 208 |   |
| Other production expenses     |   |                   | 595    |   |   |   | 416 |   |   |   | 211 |   |
| Royalties (see Note 10a)      |   |                   | -      |   |   |   | 17 |   |   |   | 120 |   |
|                          |   |                   | 2,961  |   |   |   | 2,020 |   |   |   | 1,960 |   |

|   | E. | Financial expenses, net: |
|--------|----|--------------------------|

|                                       |   | Year ended December 31 |   |
|--------------------------------------------|--------|------------------------|--------|
|                                       |   | 2 0 1 2                |   |   | 2 0 1 1 |   |   | 2 0 1 0 |   |
|                                       |   | $ in thousands         |   |
| Income:                                    |   |                   |   |   |   |   |   |   |   |
| Exchange differences                       |   |                   | -      |   |   |   | 3 |   |   |   | - |   |
| Other                                      |   |                   | 2      |   |   |   | 120 |   |   |   | - |   |
|                                       |   |                   | 2      |   |   |   | 123 |   |   |   | - |   |
| Expenses:                                  |   |                   |   |   |   |   |   |   |   |   |   |   |
| Interest                                   |   |                   |   |   |   |   |   |   |   |   |   |   |
| In respect of liability to related parties |   |                   | -      |   |   |   | 9 |   |   |   | - |   |
| In respect of credit from banks            |   |                   | 46     |   |   |   | 83 |   |   |   | 69 |   |
| Exchange differences                       |   |                   | 21     |   |   |   | - |   |   |   | 156 |   |
| Other                                      |   |                   | 69     |   |   |   | - |   |   |   | 66 |   |
|                                       |   |                   | 136    |   |   |   | 92 |   |   |   | 291 |   |
|                                       |   |                   |   |   |   |   |   |   |   |   |   |   |
|                                       |   |                   | (134   | ) |   |   | (31 | ) |   |   | 291 |   |

|                                                            |   | Year ended December 31 |   |
|-----------------------------------------------------------------|--------|------------------------|--------|
|                                                            |   | 2 0 1 2                |   |   | 2 0 1 1 |   |   | 2 0 1 0 |   |
|                                                            |   | $ in thousands         |   |
|                                                            |   |                   |   |   |   |   |   |   |   |
| Managements fees – included in General and administrative |   |                   | 354    |   |   |   | 375 |   |   |   | 302 |   |

|             |   | Year ended December 31 |   |
|------------------|--------|------------------------|--------|
|             |   | 2 0 1 2                |   |   | 2 0 1 1 |   |   | 2 0 1 0 |   |
|             |   | $ in thousands         |   |
|             |   |                   |   |   |   |   |   |   |   |
| Short Terms Loan |   |                   | 200    |   |   |   | 191 |   |   |   | 270 |   |
|             |   |                   |   |   |   |   |   |   |   |   |   |   |
| Long Terms Loan  |   |                   | -      |   |   |   | 100 |   |   |   | 139 |   |

----

|   | (1) | The Company’s revenues by geographic areas (based on location of customers) are as follows: |
|--------|-----|---------------------------------------------------------------------------------------------------|

|                                     |   | Year ended December 31 |   |
|------------------------------------------|--------|------------------------|--------|
|                                     |   | 2 0 1 2                |   |   | 2 0 1 1 |   |   | 2 0 1 0 |   |
|                                     |   | $ in thousands         |   |
|                                     |   |                   |   |   |   |   |   |   |   |
| North America (mainly the United States) |   |                   | 1,966  |   |   |   | 1,737 |   |   |   | 1,812 |   |
| Germany                                  |   |                   | 950    |   |   |   | 182 |   |   |   | 400 |   |
| Italy                                    |   |                   | 175    |   |   |   | 730 |   |   |   | 83 |   |
| Other European countries                 |   |                   | 1,609  |   |   |   | 734 |   |   |   | 570 |   |
| China                                    |   |                   | 1,246  |   |   |   | 660 |   |   |   | 580 |   |
| Japan                                    |   |                   | -      |   |   |   | 100 |   |   |   | - |   |
| Korea                                    |   |                   | -      |   |   |   | 270 |   |   |   | 380 |   |
| Israel                                   |   |                   | 123    |   |   |   | 268 |   |   |   | - |   |
| Other Far Eastern countries              |   |                   | 639    |   |   |   | 964 |   |   |   | 87 |   |
|                                     |   |                   | 6,708  |   |   |   | 5,645 |   |   |   | 3,912 |   |

|   | (2) | The Company’s long-lived assets by geographic areas are as follows: |
|--------|-----|---------------------------------------------------------------------------|

|   |   | Year ended     |   |
|--------|--------|----------------|--------|
|   |   | December 31    |   |
|   |   | 2 0 1 2        |   |   | 2 0 1 1 |   |
|   |   | $ in thousands |   |
|   |   |           |   |   |   |   |
| Israel |   |           | 737    |   |   |   | 718 |   |
| U.S.A. |   |           | 17     |   |   |   | 20 |   |
|   |   |           | 754    |   |   |   | 738 |   |

----

----