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SECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D.C. 20549

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FORM 20-F

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

|For the
  fiscal year ended December 31, 2002 | Commission File No. 1-8201
|--------------------------------------------- | --------------------------

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

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Israel(Jurisdiction
of incorporation or organization)

New
Industrial Park, Building 7, Yoqneam, Israel(Address of
principal executive offices)

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

Ordinary Shares, nominal value 1.00 New
Israeli Shekel per share

(Title of Class)Securities for which
there is a reporting obligation pursuant to Section 15(d) of
the Act:

None

(Title of Class)

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Indicate the number of outstanding shares of
each of the issuers classes of capital or common stock as of the close of the
period covered by the annual report: 10,166,667 Ordinary Shares

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

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

| | Item 17o | Item 18þ
| | -------- | --------

1

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|PART I   |                                                                                       |   
|-------- | ------------------------------------------------------------------------------------- | --
|         |                                                                                       |   
|ITEM 1.  | IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS                                 | 5 
|         |                                                                                       |   
|ITEM 2.  | OFFER
  STATISTICS AND EXPECTED TIMETABLE                                             | 5 
|         |                                                                                       |   
|ITEM 3.  | KEY
  INFORMATION                                                                     | 5 
|         | SELECTED
  FINANCIAL DATA                                                             | 5 
|         | RISK FACTORS                                                                          | 5 
|         | RISK FACTORS
  RELATED TO OUR ORDINARY SHARES                                         | 5 
|         | GENERAL
  RISKS                                                                       | 6 
|         | RISK FACTORS
  RELATING TO OUR TEXTILE INSPECTION BUSINESS                            | 8 
|         | RISK FACTORS
  RELATING TO OUR MICRO-ELECTRONICS INSPECTION
  BUSINESS                | 10
|         | RISK FACTORS
  RELATING TO OUR INTELLECTUAL PROPERTY                                  | 11
|         | RISKS
  FACTORS RELATING TO OUR OPERATIONS IN ISRAEL                                  | 12
|         |                                                                                       |   
|ITEM 4.  | INFORMATION
  ON THE COMPANY                                                          | 14
|         | HISTORY AND
  DEVELOPMENT OF THE COMPANY                                              | 14
|         | BUSINESS
  OVERVIEW                                                                   | 15
|         | INTELLECTUAL
  PROPERTY RIGHTS                                                        | 26
|         | ORGANIZATIONAL
  STRUCTURE                                                            | 27
|         | PROPERTY,
  PLANTS AND EQUIPMENT                                                      | 27
|         | GOVERNMENTAL
  REGULATION AFFECTING THE COMPANY                                       | 27
|         |                                                                                       |   
|ITEM 5.  | OPERATING
  AND FINANCIAL REVIEW AND PROSPECTS                                        | 28
|         | SELECTED
  FINANCIAL DATA                                                             | 28
|         | OPERATING
  RESULTS                                                                   | 29
|         | LIQUIDITY
  AND CAPITAL RESOURCES                                                     | 31
|         | IMPACT OF
  INFLATION AND DEVALUATION ON RESULTS OF OPERATIONS,LIABILITIES AND ASSETS | 31
|         | RESEARCH AND
  DEVELOPMENT, PATENTS AND LICENSES, ETC                                 | 32
|         | TREND
  INFORMATION                                                                   | 34
|         |                                                                                       |   
|ITEM 6.  | DIRECTORS,
  SENIOR MANAGEMENT AND EMPLOYEES                                          | 34
|         | COMPENSATION                                                                          | 38
|         | BOARD OF
  DIRECTORS                                                                  | 39
|         | EMPLOYEES                                                                             | 41
|         | SHARE
  OWNERSHIP                                                                     | 42
|         |                                                                                       |   
|ITEM 7.  | MAJOR
  SHAREHOLDERS AND RELATED PARTY TRANSACTIONS                                   | 44
|         | MAJOR
  SHAREHOLDERS                                                                  | 44
|         | VOTING AND
  RIGHT OF FIRST REFUSAL AGREEMENTS                                        | 44
|         | RELATED
  PARTY TRANSACTIONS                                                          | 45
|         |                                                                                       |   
|ITEM 8.  | FINANCIAL
  INFORMATION                                                               | 48
|         | CONSOLIDATED
  STATEMENTS AND OTHER FINANCIAL INFORMATION                             | 48
|         | LITIGATION                                                                            | 48
|         | DIVIDEND
  DISTRIBUTIONS                                                              | 49
|         | SIGNIFICANT
  CHANGES                                                                 | 50
|         |                                                                                       |   
|ITEM 9.  | THE OFFER
  AND LISTING                                                               | 50
|         | MARKET AND
  SHARE PRICE HISTORY                                                      | 50
|         |                                                                                       |   
|ITEM 10. | ADDITIONAL
  INFORMATION                                                              | 51
|         | MEMORANDUM AND ARTICLES OF ASSOCIATION                                                | 51
|         | MATERIAL CONTRACTS                                                                    | 55
|         | EXCHANGE
  CONTROLS                                                                   | 55
|         | TAXATION                                                                              | 56
|         | DOCUMENTS ON
  DISPLAY                                                                | 61

2

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|ITEM 11. | QUANTITATIVE
  AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                     | 62
|-------- | -------------------------------------------------------------------------------- | --
|         | FOREIGN
  CURRENCY EXCHANGE RISK                                                 | 62
|         |                                                                                  |   
|ITEM 12. | DESCRIPTION
  OF SECURITIES OTHER THAN EQUITY SECURITIES                         | 63
|        
|PART II  |                                                                                  |   
|         |                                                                                  |   
|ITEM 13. | DEFAULTS,
  DIVIDEND ARREARAGES AND DELINQUENCIES                                | 63
|         |                                                                                  |   
|ITEM 14. | MATERIAL
  MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS
  AND USE OF PROCEEDS | 63
|         |                                                                                  |   
|ITEM 15. | CONTROLS AND
  PROCEDURES                                                        | 63
|         |                                                                                  |   
|ITEM 16. | [RESERVED]                                                                       | 63
|         |                                                                                  |   
|PART III |                                                                                  |   
|         |                                                                                  |   
|ITEM 17. | FINANCIAL
  STATEMENTS                                                           | 63
|         |                                                                                  |   
|ITEM 18. | FINANCIAL
  STATEMENTS                                                           | 63
|         |                                                                                  |   
|ITEM 19. | EXHIBITS                                                                         | 64

3

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

---------------

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

---------------

4

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PART I.

|ITEM 1. | IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
|------- | -----------------------------------------------------

Not Applicable.

|ITEM 2. | OFFER STATISTICS AND EXPECTED TIMETABLE
|------- | ---------------------------------------

Not Applicable.

|ITEM 3. | KEY INFORMATION
|------- | ---------------

The selected financial data is incorporated by reference to Item 5 of
this annual report.

Risk Factors

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

Risk Factors Related to our Ordinary Shares

The market prices of
our ordinary shares have been and may continue to be volatile.

The market prices of our ordinary shares are subject to
fluctuations.  The following factors may
significantly impact the market price of our ordinary shares:

| | quarter-to-quarter
  fluctuations in our financial results;                      
|- | ---------------------------------------------------------------------------------
|  |                                                                                  
| | under or
  over performance against analysts estimates;                         
|  |                                                                                  
| | changing
  laws and government regulations relating to our business;             
|  |                                                                                  
| | increased
  market share penetration by our competitors;                         
|  |                                                                                  
| | general
  economic conditions;                                                   
|  |                                                                                  
| | increased
  operating costs, particularly with regard to machinery and personnel;
|  |                                                                                  
| | additions or
  departures of key personnel;                                      
|  |                                                                                  
| | sales of
  additional ordinary shares;                                           
|  |                                                                                  
| | political,
  economic or other developments affecting Israel; and                

5

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| | stock market
  volatility.
|- | --------------------------

Our results are
affected by volatility in the securities markets.

Due to the downturn in the world economy over recent years, the
securities markets in general have recently experienced increased volatility,
which has particularly affected the market prices of equity securities of many
high-technology companies, including companies that have a significant presence
in Israel.  Although the volatility of
these companies securities has often been unrelated to the operating
performance of these companies, they, and particularly those in the fields of
communications, software and Internet, may experience difficulties in raising
additional financing required to effectively operate and grow their
businesses.  Such failure and the
volatility of the securities market in general, and in particular in relation
to our shares, may affect our ability to raise additional financing in the
future.

General Risks

Uncertainty
following the terrorist attacks that occurred in New York and Washington on
September 11, 2001, the war in Iraq and other acts of violence or war may
materially affect the markets on which our securities trade, the markets in
which we operate, our operations and profitability.

On September 11, 2001, the United States was
subject to terrorist attacks at the World Trade Center buildings in New York
City and at the Pentagon in Washington, D.C. 
In response to these terrorist attacks, a United States-led coalition of
nations retaliated against the Taliban regime in Afghanistan. Since this time
governmental intelligence authorities issue from time to time warnings of the
imminent threat of further attacks against civilian and military installations.
On March 17, 2003, a coalition of countries led by the United States and the
United Kingdom commenced large-scale military action against Iraq, which
resulted in a change in the Iraqi regime. These attacks and armed conflicts, as
well as the uncertainty surrounding these issues, have had, and we expect will
continue in the foreseeable future to have, an adverse effect on the global
economy, and could result in a disruption of our business or that of our
customers.

The spread of the
SARS epidemic could seriously harm our profitability in Asia.

SARS is a Flu-like virus which first appeared in China in November
2002. To date, there have been thousands of cases reported worldwide with
hundreds of fatalities. Due to the ease with which SARS can spread, medical
experts recommend placing people who have contracted SARS into quarantine.
Although there have been cases of SARS reported in various regions, SARS is
most prominent in Asia and specifically China and Hong Kong. The spread of SARS
has resulted in a slowdown in our business that has been felt especially in
China, where we have an office of interest. Usually, this office of interest
generates approximately 5% of our total revenues. There is no way of knowing
when the global spread of SARS will be brought under control. Although the
substantial majority of our sales are not made in Asia, if the situation
persists or worsens, it could seriously damage our sales in Asia, and
particularly in China.

6

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

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

Our planned growth
may not be successful.

Our planned growth may strain our
administrative, operational, financial and management systems and resources.
The management of our growth will require expansion and improvement of our
systems and controls.  We may also
require an increase in our research and development and marketing and sales
operations. There can be no assurance that we will be able to implement our
plans for future growth.

We
depend on a limited number of key personnel who would be difficult to replace.

Our success depends in large part on certain
of our personnel, including our sales representatives, executive and research
and development personnel and our technical staff, the loss of the services of
whom would have a material adverse effect on us. There is considerable
competition for the services of such personnel. There can be no assurance that
we will be able either to retain our current personnel or acquire additional
qualified personnel as and when needed.

Our
international sales could be adversely affected by changes in domestic and
foreign regulations.

Our systems have been sold primarily in the
United States, Europe and the Far East. We are subject to the risks inherent in
international business activities. 
These risks include unexpected changes in regulatory requirements,
compliance with a wide variety of foreign laws and regulations, import
restrictions, tariffs and other trade barriers, staffing and managing foreign
operations, transportation delays and seasonal reduction of business
activities. Additionally, if for any reason exchange or price controls or other
restrictions on conversion of foreign currencies were imposed, our business
could be adversely affected.

We
depend on a limited group of subcontractors and suppliers.

Any material interruption in production at
our facility could have a material adverse effect on our business, operating
results and financial condition. In addition, certain components and
subassemblies included in our products are obtained from a single source or a
limited group of suppliers and subcontractors. Our reliance on a single or a
limited group of suppliers could result in the inability to obtain adequate
supplies of certain components and reduced control over pricing and timely
delivery of components. There can be no assurance that supplies will be
available to us on an acceptable basis. Inability to obtain adequate supplies
of components or to manufacture such components internally could have an
adverse effect on us.

7

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We
may require additional financing.

Due to our recent history of losses, it may
be difficult for us to obtain additional financing, should we require it.  We are currently finalizing negotiations
with our principal shareholder Altro Warenhandelsgesmbh (an Austrian company,
controlled by Nir Alon), or Altro, which has agreed to
invest a further $700,000 dollars, in installments over the course of
approximately one year, in consideration for the purchase of 2,000,000 of our
ordinary shares. The negotiations relate principally to the amount to be paid
in each installment by Altro. For more information see Item 7, Major
Shareholders and Related Party Transactions Plan of Arrangement and Warrant
Offering.

We have a history of
losses and may not be profitable in the future.

We have not generated net income on an annual
basis since 1997. We incurred net losses of $8.34 million, $1.31 million, and
$1.68 million in 2000, 2001, and 2002, respectively. As of December 31, 2002,
we had an accumulated deficit of approximately $17.56 million. We may continue
to operate at a loss for the foreseeable future and we cannot estimate when or
if we will achieve profitability.

Risk Factors Relating
to our Textile Inspection Business

We
rely heavily on sales of I-TEX systems.

Sales of our I-TEX systems have in the past
accounted for all, and continue to account for the majority of our revenues. In
addition, we anticipate that sales of I-TEX systems and related textile systems
will continue to account for a substantial portion of our revenues in the
foreseeable future. Accordingly, our business and results of operations are
dependent on sales of I-TEX systems and any decrease in sales of I-TEX systems
would have a material adverse effect on our business and results.

The textile
automatic inspection market has become highly competitive.

We understand that several companies claim to have developed products
with similar visual inspection or shade analyzing capabilities. It is possible
that systems developed by these or other future competitors will prove more
effective than our I-Tex systems and our Shade Variation Analyzer and that potential customers will prefer them. If we
are unable to maintain our competitive advantage or are unable to convince
potential customers of the superiority of our products, our business will be
seriously harmed.

Competition in our
industry is intense.

The competition for the development and sale of advanced automated
vision systems in other industries and for other applications is intense. To
the extent providers of automated vision systems choose to focus on or develop
advanced automated vision technology for the fabric industry or other industries
for which we attempt to develop products, we could face significant competition
in the future.  Our potential
competitors may be more established, benefit from greater market recognition
and have greater financial, production and marketing resources than we have.
There can be no assurance that our potential competitors will not develop
products that render our products less competitive.

8

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We may not be successful in keeping pace
with the rapid technological changes that characterize our industry.

The technology incorporated in vision
inspection and quality management systems is characterized by rapid changes.
Moreover, the emergence of new technologies can rapidly render existing
products obsolete and unmarketable. Our ability to anticipate changes in
technology and industry standards and successfully develop and introduce new
and enhanced products which can gain market acceptance on a timely basis will
be a critical factor in our ability to grow and to remain competitive. In
addition, we intend to diversify our business by developing new products based
on our core technology. There can be no assurance that we will timely or
successfully complete the development of new or enhanced products or
successfully manage transitions from one product release to the next, or that
our future products will achieve market acceptance.

There is uncertainty
of market acceptance for our products, and the nature of the industry is
cyclical.

Our success depends on the acceptance of our
products by existing and new customers. Market acceptance of our automated
visual inspection and quality management systems will depend, in large part, on
the pricing of the products and our ability to demonstrate the cost and quality
advantages of our system over human visual inspection and quality monitoring of
fabrics. There can be no assurance that we will be able to market our products
successfully or that any of our current or future products will be accepted in
the marketplace. In addition, most of our sales have been to manufacturers of
textiles used for apparel. The textile industry, which is substantially
dependent on apparel, has been subject to cyclical variations. For the
foreseeable future, our operations will continue to depend on the volume of
capital expenditures in the textile manufacturing industry. While our current
strategy is to diversify beyond the textile industry (see Item 4, Information
on the Company -- The Micro-Electronics Industry), our results of operations
would be adversely affected by a slowdown in the textile industry.

The
long payment cycle in our industry may have a negative effect on our cash flow.

As is the case with many suppliers of
equipment to the textile industry, we often receive a deposit upon receipt of
an order, a partial payment upon delivery or installation and final payment
pursuant to negotiated payment terms or final payment after an evaluation
and/or acceptance period for systems sold subject to an evaluation period.  The time required for installation and
evaluation varies from customer to customer and may be delayed by a variety of
factors, including the customers production cycle, assimilation of systems
into the customers manufacturing process, required modifications to the
customers production line and the availability of qualified technicians to
monitor system operations. For systems sold without an evaluation period,
revenue is recognized immediately upon installation of the system.  For systems sold subject to an evaluation
period, revenue is recognized upon customer acceptance. The length of the
customers evaluation and acceptance period generally varies from one to twelve
months after installation. Because of these factors, there is a long payment
cycle with respect to our sales process.

9

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We may experience fluctuations in quarterly results.

We may from time to time experience
significant fluctuations in quarterly operating results due to a variety of
factors. Historically, our highest level of net sales has been in the fourth
quarter of each year. Significant fluctuations in our net sales can occur from
period to period depending upon the timing of the receipt of customer orders
and shipment, installation and/or acceptance of systems. The timing of customer
orders can be affected by a variety of factors, including a customers internal
purchasing policies, capital equipment budget and manufacturing cycles,
industry trade shows and anticipated new product introductions by us or by
others. We believe that period-to-period comparisons of our results of
operations are not necessarily meaningful and should not be relied upon as
indications of future performance.

We
rely on a small number of customers for a significant portion of our revenues.

Although the composition of our customers has
changed from year to year, and sales to individual customers are subject to
material increases and decreases depending on customer capital equipment
requirements. In 2002, 2001 and 2000 one of our customers accounted for 9.5%
21% and 15% of our net sales respectively. While no other customer accounted
for more than 10% of our net sales in 2000, 2001 or 2002, we expect that sales
of our products to relatively few customers could continue to account for a
substantial percentage of our net sales in the foreseeable future. There can be
no assurance that we will be able to retain these key customers or that such
customers will not cancel purchase orders, reschedule, or decrease their level
of purchases.

Risk Factors Relating to our
Micro-Electronics Inspection Business

We may not be able
to develop or market the new products successfully.

In the third quarter of 2002, we made a strategic decision to expand
our business by the adaptation of our automated inspection technology and its
application to the micro-electronics inspection industry. To that end, we
created an electronic inspection division, which is utilized for the purpose of
developing know-how related to the automated inspection of wafers in the
micro-electronics industry. While textile inspection is still our only
revenue-creating business, we have invested a material amount of our resources
for the development of our new field of wafer inspection. If we are unable to
successfully develop or market products for this new part of our business, this
could significantly affect our longer-term plans for profitability.

The
micro-electronics industry is highly volatile and unpredictable.

As a supplier to the micro-electronics industry, we would be subject to
the business cycles that characterize the industry  the timing, length and
volatility of these cycles are difficult to predict. The micro-electronics
industry has historically been cyclical because of sudden changes in demand for
micro-electronics and capacity requirements, including capacity utilizing the
latest technology. These changes affect the timing and amounts of customers
capital equipment purchases and investments in new technology. Consequently, in
the event that we successfully develop our inspection devices for the industry,
these cycles could create pressure on our ability to launch new products to
market or adapt existing products in a timely manner, which could affect our
net sales, gross margin and net income. Additionally, these cycles could
challenge key management, engineering and other employees, who are vital to our
success.

10

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The current weakness
in the micro-electronics industry could affect our ability to launch our
products.

While our business model for the micro-electronics industry is based on
the current weakness in the industry by focusing on add-on products (e.g. wax
and haze inspection technologies) to the installed manufacturing capacity
rather than new capital equipment, the micro-electronics industry is currently
experiencing what our management believes may be the most severe decline in its
history. We cannot predict when a recovery will begin or what the industrys
rate of growth will be in such a recovery. Should the decline continue into the
long-term or a slow recovery rate, this may affect our ability to reach the
full marketing potential of our products.

Our business would
rely on a small number of customers.

According to our research there are approximately seven companies,
which produce 80% of all wafers sold globally. Consequently, there are a
limited number of customers to which we could sell our products. While we are
not aware of any competitors in our field, should any of our target customers
seek to purchase similar products from other companies, or such target
customers reduce or cancel expected orders, this could have a material adverse
affect on our profitability in this segment industry.

Risk Factors Relating to Our Intellectual
Property

We may not be able
to protect our intellectual proprietary rights.

We rely primarily upon a combination of trademark, copyright, know-how
and trade secrets and contractual restrictions to protect our intellectual
property rights. In addition, our employees who have access to confidential
information are required to sign confidentiality and invention assignment
agreements. Certain elements of our technology are licensed from Dr. Ilan
Tamches. We have certain exclusive rights to this technology with respect to
the textile industry and certain non-exclusive rights with respect to other
industries. Neither we, nor, to our knowledge, Dr. Tamches have any patents or
patent applications pending with respect to this technology. We do have a
patent in France and Germany and patent applications pending in Canada and Israel
with respect to certain technology incorporated in the video cameras used by
our systems. For our developments for the micro-electronic industry we intend
to apply for patents for haze and wax inspection technologies. We believe that
such measures provide only limited protection of our proprietary information,
and there is no assurance that our confidentiality and non-competition
agreements will be enforceable and that our proprietary technology will remain
a secret or that others will not develop similar technology and use this
technology to compete with us. Despite our efforts to protect our proprietary
rights, former employees and other unauthorized parties may attempt to copy
aspects of our products or to obtain and use information that we regard as
proprietary. For more information see Item 4, Information on the Company --
Intellectual Property Rights.

11

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We may not be able to avoid others from successfully
claiming that we have infringed their proprietary rights.

Significant and protracted litigation may be necessary to protect our
intellectual property rights, to determine the scope of the proprietary rights
of others or to defend against claims of infringement, regardless of whether
the claims are valid.  For more
information see Item 8, Financial Information -- Lemelson Patent Infringement
Claim.

Risk Factors Relating to Our Operations in
Israel

Conditions in Israel
may affect our operations.

We are incorporated under the laws of, and our corporate offices,
research and development operations and production facilities are located in,
Israel.  Although almost all of our
current sales are made to customers outside Israel, we are nonetheless directly
influenced by the political, economic and military conditions affecting Israel
and the Middle East.  Any major
hostilities involving Israel or the interruption or curtailment of trade
between Israel and its present trading partners could have a material adverse
effect on our business, financial condition and results of operations.

Since the establishment of the State of Israel in 1948, a state of
hostility has existed, varying in degree and intensity, between Israel and the
Arab countries.  In addition, Israel and
companies doing business with Israel have been the subject of an economic
boycott by the Arab countries.  Israel
has entered into peace agreements with Egypt and Jordan, various agreements
with certain Arab countries and the Palestine Liberation Organization and the
Palestinian Authority, and various declarations have been signed in connection
with efforts to resolve some of the economic and political problems in the
Middle East. Nevertheless, there has been a significant escalation in violence
since September 2000, which has continued with varying levels of severity into
2001, 2002, and 2003. Negotiations between Israeli and Palestinian
representatives have ceased in light of heightened terrorist activity of groups
operating within the Palestinian Authority. 
The political and security situation in Israel may result in certain
parties, with whom we have entered into contractual relations, claiming that
they are not obligated, pursuant to force majeure provisions, to perform their
commitments under such agreements. Any hostilities involving Israel or the
interruption or curtailment of trade between Israel and its present trading
partners could adversely affect our operations and could preclude us from
raising capital. Furthermore, our main facilities are located in Israel, which
is currently experiencing civil unrest, terrorist activity and military action.
Since we do not have a detailed disaster recovery plan that would allow us to
quickly resume business activity, we could experience serious disruptions if
events associated with this conflict result in any serious damage to our
facilities. Our business interruption insurance may not adequately compensate
us for losses that may occur and any losses and/or damages incurred by us could
have a material adverse effect on our business. We cannot give any assurance
that security and political conditions will not have such an effect in the
future. Any future armed conflicts or political instability in the region would
likely negatively affect business conditions and harm our results of
operations.  While these developments
have not had a material impact on our business, we can give no assurance that
it will not have such an effect in the future.

12

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Furthermore, all
non-exempt male adult permanent residents of Israel under the age of 48 are
obligated to perform military reserve duty and may be called to active duty
under emergency circumstances. 
Recently, there has been a significant call-up of military reservists,
and it is possible that there will be additional call-ups in the future.  While we have operated effectively despite
these conditions in the past, we cannot assess what impact such conditions may
have in the future, particularly if emergency circumstances arise. Our
operations could be disrupted by the extended absence of one or more of our
executive officers or key employees or a significant number of our other
employees due to military service. Any disruption in our operations would harm
our business.

The Israeli rate of
inflation may negatively impact our costs if it exceeds the rate of devaluation
of the New Israeli Shekel against the U.S. dollar.

Most of our sales are made in U.S. dollars.  We occasionally agree to make sales in other currencies, usually
the Japanese Yen and the Euro. During each of 2001 and 2002, less than 10% of
our sales were made in non-U.S. dollar currencies. This exposes us to market
risk from changes in foreign exchange rates vis-a-vis the U.S. dollar.  We generally utilize foreign currency
exchange contracts to mitigate these risks. 
Under these contracts, increases or decreases in our foreign currency
transactions are partially offset by gains and loses on the forward contracts,
so as to mitigate the possibility of foreign currency transaction gains and
losses. However, our dollar costs in Israel
will increase if inflation in Israel exceeds the devaluation of the NIS against
the dollar or if the timing of such devaluation lags behind inflation in
Israel. Resulting from the strong devaluation of the NIS against the dollar
during 2002, the Consumer Price Index steadily rose during that year and has
continued to rise into 2003 (in spite of the relative strength of the NIS
against the dollar). For further discussion of such devaluation, see Item 5, Operating And Financial Review And Prospects --
Impact of Inflation and Devaluation on Results of Operations, Liabilities and
Assets. There can be no assurance
that we will not incur losses from such fluctuations.

We benefit from certain
government programs and tax benefits, which may change or be withdrawn.

We benefit from certain Israeli government
grants, programs and tax benefits. To be eligible for these grants, programs
and tax benefits, we must continue to meet certain conditions, including making
certain specified investments in fixed assets. If we fail to meet such
conditions in the future, we could be required to refund payments under these
programs or pay certain taxes. There can be no assurance that such programs and
tax benefits will be continued in the future, at their current levels or
otherwise. The termination or reduction of certain programs and tax benefits
could have a material adverse affect on our business, results of operations and
financial conditions.

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Israeli
courts might not enforce judgments rendered outside of Israel.

We are incorporated in Israel. Most of our
executive officers and all of the directors are non-residents of the United
States, and a substantial portion of our assets and the assets of these persons
are located outside the United States. Therefore, it may be difficult to
enforce a judgment obtained in the United States against us or any such
persons.  It may also be difficult to
enforce civil liabilities under U.S. federal securities laws in original
actions instituted in Israel.

If a foreign judgment is enforced by an Israeli court, it generally
will be payable in New Israeli Shekels, which can then be converted into
foreign currency at the rate of exchange of such foreign currency on the date
of payment. Pending collection, the amount of the judgment of an Israeli court
stated in New Israeli Shekels (without any linkage to a foreign currency)
ordinarily will be linked to the Israeli consumer price index plus interest at
the annual statutory rate prevailing at such time.  Judgment creditors bear the risk of unfavorable exchange rates.

|ITEM 4. | INFORMATION ON THE COMPANY
|------- | --------------------------

History and Development of the Company

Elbit Vision Systems Ltd. (EVS) designs,
develops, manufactures, markets and supports automatic visual inspection and
quality monitoring systems for the textile and other fabric industries.  Our systems are designed to increase the
accuracy, consistency and speed of the detection of defects in the
manufacturing process of fabrics in order to reduce labor costs, improve
product quality and increase manufacturing efficiency.  We currently market four product lines
designed to address the quality monitoring needs of different sectors within
the fabric manufacturing industry: I-Tex, for the visual inspection and quality
monitoring of woven and knitted fabrics; PRIN-TEX, for the detection of
printing defects on fabric; Broken Filaments Analyzer, for the detection of
filament defects in glass fabrics; and Shade Variation Analyzer, for the detection
of shade inconsistencies in dyed fabric. We adapted our core visual
interpretation technologies for other applications, such as those in the
non-woven fabric and printing industries, which have visual inspection and
quality monitoring needs similar to those of the fabric industry.Potential
applications in the non-woven industry include air filtration media, diapers,
surgical dressings and other non-woven based products.

In the third quarter of 2002, we decided to
leverage our expertise in designing visual inspection systems and expand our
business into the field of machines for the inspection of wafers manufactured
for the micro-electronic industry. During 2003, we have continued to invest
time and resources in our efforts to expand our business into new areas of
production. We intend to these efforts to be on-going.

Our legal and commercial name is Elbit Vision
Systems Ltd.  We were established in
Israel on September 2, 1992 and organized pursuant to the Israel Companies
Ordinance, which was replaced in February 2000 by the Israel Companies Law. We
commenced independent commercial operations on January 1, 1994, as a
subsidiary of Elbit Ltd.  Prior to such
date, our business operated as a division of Elbit.  In July 1996, we consummated an initial public offering of
2,000,000 ordinary shares.  At such time
the ordinary shares were quoted on the NASDAQ National Market.  Effective December 29, 2000, our ordinary
shares were delisted from the NASDAQ National Market and traded on the
over-the-counter bulletin board until June 21, 2001 when they were transferred
to the NASDAQ SmallCap Market.

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The
discussion on the investments by Mr. Nir Alon and/or Altro is incorporated by
reference to Item 7 Major Shareholders and Related Party Transactions.

Our executive offices are located at New
Industrial Park, Building 7, Yoqneam, Israel and our telephone number is
972-4-993-6400.  Our Web site is
www.evs.co.il. Information on our Web site is not incorporated by reference in
this annual report.

Business Overview

The Textile Industry

The textile industry has traditionally been a labor-intensive industry.
The principle stages of the textile manufacturing process include raw materials
production, yarn spinning, fabric-forming, fabric spreading fabric cutting and fabric
finishing. End uses for textiles include fabric for apparel, home textiles,
industrial fabric and technical fabric.

In recent years, textile manufacturers have
successfully incorporated automation technology into their manufacturing
process. While automation has permeated virtually every component of the
textile manufacturing process, inspection and quality monitoring remain
principally labor-intensive operations and consequently can be impediments to
greater efficiency and profitability. Textile manufacturers inspect fabric in
order to:

| | determine the quality of the fabric, thereby enabling a determination
  of its end usage and price;                                           
|- | ----------------------------------------------------------------------------------------------------------------------------------------------
|  |                                                                                                                                               
| | locate, label and trace major defects (a requirement in the industry)
  for rapid identification in later stages of the manufacturing process;
|  |                                                                                                                                               
| | prevent the reoccurrence of defects caused by manufacturing
  equipment; and                                                                  
|  |                                                                                                                                               
| | reduce rebate payments for textiles delivered with defects.                                                                                   

Fabric inspection can be performed at various
stages of the production process and is often performed two to three times
during a complete production cycle.

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Manual
inspection of fabrics is generally performed by running the fabric over a wide
table under appropriate lighting.  A
human inspector is generally expected to detect a variety of defects, including holes of various sizes and shapes,
tears, cuts, thick ends, missing threads, width distortion and variations in
the fabric density and width, and mark them according to their type and
location on the fabric roll.  In the
case of inspection of printed fabrics, the human inspector is expected to
detect defects such as misfits, lint, stick-ins and off-center and narrow
prints.  Inspectors inspecting dyed
fabrics are also expected to detect variations in the color and shades of the
dyed fabric.Human inspection of fabrics is unreliable for
the following reasons:

| | the inspection environment is influenced by factors such as the speed
  at which the fabric passes in front of the inspector, the lighting in the
  testing area and the distance and angle at which the inspector views the
  fabric. Differences in inspection environments can lead to varying
  assessments of fabric quality;
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  |                                                                                                                                                                                                                                                                                                                                   
| | the accuracy of the inspection is affected by the attention span and
  fatigue of the human inspector, who is normally expected to view fabrics for
  a period of several hours;                                                                                                                                                  
|  |                                                                                                                                                                                                                                                                                                                                   
| | perception problems caused by the fatigue of specific nerve cells in
  the case of patterned and printed material; and                                                                                                                                                                                                            
|  |                                                                                                                                                                                                                                                                                                                                   
| | manual inspection is performed by numerous persons worldwide, each
  with a different perception of product quality.                                                                                                                                                                                                              

These factors have led to inconsistent
assessments of fabric quality and have caused fabric inspection to be a
time-consuming and costly process. These limitations also make it difficult to
establish a reliable industry-wide standard for fabric quality.  The limitations of manual inspection, along
with the general trend in the textile industry towards automation, in order to
reduce costs and improve quality, have created an opportunity for an effective
automatic visual inspection and quality monitoring systems, for various niche
markets in the textile industry.

The EVS Solution for
the Textile Industry

We develop sophisticated automatic visual
inspection systems designed to overcome the limitations of human visual
inspection.  Our systems combine
high-performance computer processing with unique image processing capabilities
based on proprietary vision understanding and interpretation algorithms.  The unique image processing capabilities
include image acquisition, mathematical transformation, image analysis and
learning and decision making elements. 
The mathematical algorithms which enable these image interpretations and
understanding capabilities are performed by high-speed dedicated parallel processing
computers based on specialized architectures which are capable of performing
tens, and in some of our products, hundreds of billions of operations per
second. These algorithms enable our systems to recognize fabric flaws in real
time and to learn the types and severity of the flaws a customer wishes to
detect, ignoring flaws that do not fall into such categories.  Our systems then analyze detected defects
and provide information regarding their nature.  Our systems are an integral part of the manufacturing process and
can be integrated with the customers management information systems, providing
valuable information for the production planning process. We believe that our
systems enable customers to reduce direct labor, increase manufacturing efficiency
and improve product quality.

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Products

We currently offer four families of visual
inspection systems: I-TEX, for the visual inspection and quality monitoring of
woven, knitted and non-woven fabrics; PRIN-TEX, for the detection of printing
defects on fabric; Broken Filaments Analyzer, for the detection of broken
filaments defects in glass fabric; SVA LITE, a Shade Variation Analyzer for the
detection of shade inconsistencies in dyed fabric.

I-TEX
Family of Products

The I-TEX family of automatic web inspection
systems is designed to provide textile manufacturers with a comprehensive
solution to their quality monitoring, grading and cutting needs.  I-TEX systems detect numerous
types of defects on any unicolor web as well as some complex fabrics such as fabrics for the automative
industry and denim fabrics, including: yarn and weaving faults; holes; oil,
water and dye stains; missing threads; starting marks; broken yarn; and dyeing,
coating and finishing irregularities. 
They then provide the manufacturer with information regarding the location,
size and shape of the defect.  Depending
on the model, I-TEX systems can detect defects as small as 0.5 mm on a variety
of web widths ranging from 150 to 600 centimeters, at maximum speeds ranging
from 10 to 800 meters per minute.  In
addition, I-TEX systems can be configured to mark defects during inspection and
advise the user as to the most efficient manner to cut web to eliminate
unacceptable defects.

The modular design of the I-TEX systems
enables their use for a wide range of applications throughout the
fabric-forming process, including greige, dyed fabrics and finished fabrics,
and for inspection of a variety of fabrics including those used for apparel,
home textile and technical and industrial textiles.  The modular design also enables the configuration of the system
to match the manufacturers demands with respect to matters such as web width,
web speed, desired resolution, auxiliaries, information distribution channels
within the plant and grading standards. 
I-TEX systems can be integrated in-line with existing textile production
equipment or can be used as off-line stand-alone units to inspect web after
manufacturing is complete.

Quality
Monitoring Process

The I-TEX quality monitoring process is
comprised of three primary phases: the pre-inspection phase, the inspection
phase and the post-inspection phase.

Pre-Inspection Phase.  The
pre-inspection phase is the preliminary learning stage in which a sample of web
of acceptable quality is scanned through the system. Based on the information
obtained, the system creates a parameters file for the web style to be
inspected that defines the statistical features of a good web based on the
customers specifications. The system then uses these parameters to learn what
to look for when inspecting the fabric. Once the system has learned the
parameters of the sample, the system is ready to begin inspecting the fabric.

Inspection Phase.  The
system moves the web being inspected through the image acquisition unit.  The image acquisition unit acquires the
image of the web being inspected and transforms video signals of the web into
digital signals for processing and analysis. This unit then transfers the web
image to the systems computer. The computer processes the web image and
distinguishes between inherent product irregularities and product defects.  It then groups product defects according to
their size, direction and shape and grades them in terms of severity. The
system displays a map of the defects in real-time, stores the defect image and
records information with respect to each defect detected.  The system may also be programmed to
activate external units such as marking units and alarms upon detection of a
defect.

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Post-Inspection Phase. 
Following the inspection of the fabric, the system provides an
inspection report, which may be printed or archived, containing a record of
each defect that has been detected, statistics regarding the type and position
of the defect, and the overall grading of the rolls according to pre-defined
guidelines. In the in-line mode, the inspection report may be sent directly to
the manufacturers host computer thereby enabling an operator to take immediate
actions to remedy the cause of the defects or take actions to eliminate such
defects in the future. The images can also be analyzed using the video album
workstation described below, enabling customers to identify the cutting points
for optimal web yield, and to re-grade the fabric.

Models

|I-TEX. I-TEX systems are currently available in four
  basic models: I-TEX 100, I-TEX 200, I-TEX 2000 and I-TEX Lite.
|---------------------------------------------------------------------------------------------------------------------
|                                                                                                                    
|                                                                                                                    
|                                                                                                                    
|                                                                                                                    

Modules

We offer the following three modules for
defect analysis and cut optimization for our I-TEX systems: the Video Album
workstation, the DMSS (Defect Monitoring Sub System) and the Cut Optimization
software.

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Video Album Workstation.  This
module is a stand-alone PC-based station for review and analysis of defect
images and data using a Windows-based interface. The images and inspection
results are automatically transferred from the systems computer to the video
album workstation via a local area network.

The Video Album workstation enables rapid
review of web images and provides visual documentation of defects and overall
roll quality. The video album workstation enables review of all recorded
information, such as images and data, for each defect. This information
enables:

| | regarding and editing of defect data;                                                                  
|- | -------------------------------------------------------------------------------------------------------
|  |                                                                                                        
| | generation of management reports;                                                                      
|  |                                                                                                        
| | archiving of defect data; and                                                                          
|  |                                                                                                        
| | definition of points of interest and mandatory cutting points, for
  the cutting table and DMSS system.

Cut Optimization.A software which enables the user to cut a large
I-TEX Inspected roll of web into
smaller rolls while optimizing the fabrics yield per class (A; B; C )
according to the users specifications. 
Our Cut Optimization software offers the following benefits:

| | maximizes web rolls selling price;                           
|- | -------------------------------------------------------------
|  |                                                              
| | reduces the quantity of second and third quality product; and
|  |                                                              
| | consistent fulfillment of customers demands.                

Smart Table. The Smart Table interfaces the I-TEX system and
the cutting table and provides users with the following benefits:

| | allows for an accurate stop or slowing the table speed on point of
  interest which were defined on the video album such as: selected defects,
  cutting points and mending points;
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  |                                                                                                                                                                                      
| | contains a trigger for invisible ink or metallic labels defects
  marking signs; and                                                                                                 
|  |                                                                                                                                                                                      
| | operates the roll cutting device following the cut optimization
  results.                                                                                                           

These modules can be purchased separately or
together to form the I-TEX Inspected Process that provides an integrated link
between the web forming and cutting segments of the textile industry.

Accessories

We offer an extensive line of accessories designed to provide, along
with the I-TEX systems, a comprehensive solution for the web inspection and
grading process.  These accessories
include invisible ink or sticker marking units, alarm sets, ultra violet ink
for marking and external connecting devices for marking and measuring.

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PRIN-TEX Family of Products

PRIN-TEX is an in-line, full-color fabric
defect detection and quality control system designed to detect defects in
printed fabric.  It is designed to be
mounted on rotary screen printing machines. 
The system is capable of processing and analyzing large amounts of data
acquired by cameras positioned over moving printed fabric and comparing this
data with data acquired from good repeats of fabric.  The system alerts the operator of printed fabric defects and
displays them in real-time on a video monitor. 
These features enable the operator to locate the defect and take
required corrective measures during the printing process, thereby significantly
reducing fabric defects and improving yield of quality fabric.

PRIN-TEX systems can detect printed defects
as small as 0.5 mm on an array of fabrics, including woven, knitted and
paper.  Defects detectable by PRIN-TEX
systems include misfits, lint, stick-ins, insufficient paste, defects due to
damaged or blocked screens, defects due to glue problems and off-center and
narrow prints. The pattern repetitive length for PRIN-TEX is up to 143.6
centimeters with a maximum fabric speed of 70 meters per minute.

The PRIN-TEX quality monitoring process is
comprised of the calibration phase and the inspection phase.

Calibration Phase.  During
the calibration phase, the PRIN-TEX system learns the characteristics of the
fabric pattern and extracts the appropriate pattern parameters.  The system provides automatic light or
integration time calibration in order to ensure optimal lighting conditions for
the processing unit based on the type of fabric being inspected.  The fabric length generally required for the
automatic calibration is approximately 20 meters.

Inspection Phase.  The
inspection phase begins after the calibration phase has been concluded.  During this phase, the system analyzes the
determined extracted features and parameters. 
The system enables the operator to manipulate the following parameters
during the inspection phase: sensitivity, light intensity, zoom control, left
margin vertical marker positioning and right margin vertical marker positioning

The system produces detailed reports of the
detected defects in the fabric roll. 
These reports include information with respect to date, time, total
fabric length, total length of defects on the fabric, fabrics length of
calibration and the inspection starting point. 
The system also reports location and dimensions of each defect and shows
its image type and nature.

PRIN-TEX 2000 is the new generation of our
printing monitoring systems. It implements improved image understanding
algorithms, specially designed color CCD line cameras, upgraded color displays
and synchronization to the rotary printers screen. PRIN-TEX 2000 provides
better detection performances, better human interface and better ROI
results.  We offer PRINT-TEX 2000 in one
model or fabric widths of up to 3.2 meters. The list price of PRINT-TEX 2000 is
$170,000  $250,000.

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Broken
Filaments Analyzer

The Broken Filaments Analyzer (BFA) is a visual inspection system
designed for the detection of broken filaments in glass fabrics used for the
electronic printed circuit board (PCB) industry.  Broken glass filaments are small filaments that protrude from
glass fabric, generally used for the PCB industry. Broken glass filaments are
hardly visible to the human eye, at low web speeds, and are practically
invisible at normal production speeds. 
They can be as small as a few microns and as short as 0.5
millimeters.  Broken glass filaments can
cause defects in the lamination of glass fabrics and the production of printed
circuit boards, and may short-circuit or disconnect the end product incorporating
the PCB.  For this reason, it is
important to effectively detect broken glass filaments and grade glass web in
terms of broken filament content. Human inspectors are unable to effectively
detect broken glass filaments.

The BFA utilizes proprietary processing and
software technology, cameras and lighting systems to inspect glass web in
real-time at speeds exceeding 120 meters per minute.  The broken filaments detected by BFA are displayed on a monitor
that shows the running map of the fabric, in real time, and are recorded for
further analysis.  The BFA produces a
detailed report of each web roll, showing the broken filaments distribution in
the roll, its statistics and the fabrics grading.  The BFA is integrated with the I-TEX 100 system, which can be
used for the detection of other defects in glass fabrics, and with the Video
Album to provide a more comprehensive solution to the visual inspection and
quality monitoring of glass fabrics.  
The BFA can also be used for the detection of surface defects in other
fabrics or webs including airbags and technical fabrics.  The list price for the BFA system is
$120,000.

Shade
Variation Analyzer

The Shade Variation Analyzer (SVA LITE) is an
in-line system designed to measure shade variation in textiles during normal
web flow. The SVA LITE is a modular system utilizing calibrated traversing
sensors and proprietary signal-processing algorithms. Sensor readings are
compared to readings received at the beginning of the roll, or at any other user
selected point, to detect side-to-side and beginning-to-end shade variations.
The system is designed to be either fully integrated with I-TEX systems or to
operate as an independent stand-alone unit.The
SVA LITE can be used in two modes of operation.In the first mode, the SVA LITE
is installed after the dryer of the dyeing range and alerts the user when shade
variation exceeds the preset limits. 
This enables the operator to modify the process parameters. In the second
mode, the SVA LITE is installed at the exit of a finishing range together with
an I-TEX system or as a stand-alone unit. 
The results of the inspection can be used to sort the rolls by their
shade or to identify problems during the dyeing-finishing process.  Data from the SVA LITE inspection process
can be incorporated into the I-TEX system reports or into a separate SVA LITE
report. The list price of the SVA LITE is between $80,000 and $150,000.

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The Micro-Electronics Industry

We have
adopted a two-year research and development program which aims to develop
add-on devices for the optical inspection of bare wafers in the
micro-electronics industry in the near term and stand-alone products for the
longer-term when we expect to see growth in the micro-electronics industry.

Most
microchips are built on a bare silicon wafer and include a variety of
components such as transistors and other devices that are connected by multiple
layers of wiring. As the density of the circuit components is increased to
enable greater computing power in the same or smaller area, the complexity of
building the chip also increases, necessitating the formation of smaller
structures and more intricate wiring schemes. To build a chip, the transistors,
capacitors and other circuit components are first created on the surface of the
wafer by performing a series of processes to deposit and remove selected film
layers. Similar processes are then used to build the layers of wiring
structures on the wafer. The quality of a bare wafer will affect the ability to
build the correct circuitry. By constant assessment of the quality of the bare
wafer, a microchip producer can better ensure that the product will suit the
market for which the chips are being produced.

The
production of the bare wafer is a mechanical process requiring several stages,
including the preparation of a carrier block by depositing waxy layers on its
upper  -mounting - surface, and polishing (hazing). Currently there is no
method to inspect wafers during the early production process.

The EVS Solution for the Micro-Electronics
Industry

Due to the
overcapacity caused by the downturn in the micro-electronics industry,
manufacturers are reluctant to invest in new capital equipment and their main
concern is to maximize yield using the existing equipment and reduce labor
costs.Given that
the competition between wafer manufacturers is mainly price versus quality, the
most efficient way to improve the yield is to perform an effective automated
inspection at the end of the wafer production process.

In order to
answer the inspection/monitoring requirements in the industry, we are in the
process of developing a number of proprietary technologies dedicated to the
bare wafer segment.  In spite of their
sophistication and novelty, the technologies we are developing are rather
inexpensive, robust and scalable.

Our primary
goal in this segment industry is to produce devices to be added on to existing
machinery one of the devices will inspect the thick transparent layers (wax)
as they are added to the wafer, and which will monitor the results of the
polishing process. In the longer-term we intend to produce devices which will
inspect the wafers at other stages of the manufacturing process.

As we
improve the performance envelope of our technologies we foresee additional
applications in the micro-electronics industry.

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Sales and Markets

Sales
Network

We market our products through in-house sales
personnel in conjunction with independent sales representatives. As of
May 31, 2003, 8 in-house sales personnel and 20 independent sales
representatives marketed our products. 
Our independent sales representatives provide essential pre-and-post
sales support for our products in their territories and account for a
substantial percentage of our sales worldwide. We believe that our sales
representatives network will enable us to introduce new products and to
penetrate additional web manufacturers around the world. We intend to further
expand our international sales representatives network by entering into
relationships with additional sales representatives and forming joint ventures
in target markets.

We utilize the services of independent sales
representatives in Europe, Latin America, and the Far East.  Our independent sales representatives do not
have the authority to enter into contracts on our behalf or otherwise bind us.
To promote our products, we devote significant resources towards participation
in the key annual textile equipment trade shows.  We also advertise in trade magazines and conduct customer
seminars.

We maintain sales and support centers located
in the United States, Europe, Asia, and Israel.  When a high level of technical expertise is needed, the sales
effort is supported by product marketing managers and our engineers who work
closely with customers and potential customers to find solutions to their
current and future web inspection challenges. 
We work closely with customers in a continuous improvement process on
selected technical aspects of our products. 
Such improvements often become standard on products sold worldwide.  A specified number of training classes are
included in the purchase price of our products.  Subsequent training is provided for a nominal fee.

I-TEX
Inspected Standard

A significant portion of our marketing effort
is focused on making web inspection by I-TEX systems, and the corresponding
labeling of the inspected web as I-TEX Inspected, an industry standard for
web quality inspection.  We believe that
the best way to increase demand for our I-TEX systems is to convince end product
manufacturers of the benefits of I-TEX inspection, in terms of the quality,
uniformity and reliability of the inspection. 
If we are successful in doing so, fashion designers will increasingly
demand that the fabrics they purchase from web manufacturers be inspected by
I-TEX systems.  As more and more
designers make these demands, web manufacturers will be required to purchase
our systems.  Our efforts include
performing tests of the capabilities of I-TEX with leading clothing
manufacturers.  Although inspection by
I-TEX systems has not yet become an industry standard, many designers express
preference for I-TEX Inspected fabrics. 
There can be no assurance that we will be successful in our efforts to
make inspection by I-TEX an industry standard.

Relationships
with Leading Equipment Manufacturers

Another important element of our marketing
strategy is to establish and strengthen relationships with leading textile
equipment manufacturers. These relationships bolster our marketing abilities
and assist us in ensuring that our products are technically advanced and
designed in conjunction with the development of the textile manufacturers web
inspection requirements and industry trends.

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Principal Markets

In 2000, approximately 60% of our sales were
in the United States, approximately 39% were in Europe and 1% were in the Far
East.In 2001, approximately 54%
of our sales were in the United States, approximately 31.1% were in Europe,
approximately 12.2% were in the Far East and 2.1% were in the Central America.In 2002, approximately 45% of our sales
were in the United States, approximately 45% were in Europe, and approximately
10% were in the Far East.One
customer accounted for 15%, 21 %, and 9.5% in 2000, 2001, and 2002
respectively.  No other customers
accounted for more than 10% of our net sales in 2000, 2001, or 2002.

Manufacturing

The principal manufacturing and assembly of
our basic systems are conducted by subcontractors. We perform logistics and
purchasing activities, integration and final testing in-house. In addition, we
perform the software installation and configuration, final hardware
configuration, quality control and any special system customization needed for
a particular customer. Production is based upon firm customer commitments and anticipated
orders and is generally planned six months in advance.  We contract with third party subcontractors
to perform the manufacturing of our systems so that we can focus on design and
product development strengths and minimize fixed costs and capital expenditures.
Our engineers work closely with subcontractors to increase manufacturing
yields, lower manufacturing costs and assure quality. Our manufacturing
facilities and those of our subcontractors are in compliance with ISO-9000
standards.The proprietary cameras and spectrophotometer
included in our products are manufactured by a single source supplier. Some of
the electronic components included in our product are manufactured especially
for us by exclusive suppliers. If any of these exclusive suppliers stop
manufacturing these components we will need to find alternative suppliers. Our
reliance on sole suppliers involves several risks, including a potential
inability to obtain adequate supplies of these components and reduced control
over pricing and timely delivery of these components.  We believe that we maintain a sufficient
inventory of these components to meet our foreseeable needs. However, if our
single source supplier ceases to produce these components, we would have to
transfer the manufacture of the components to another supplier or
suppliers.  We estimate that such a
transfer would take approximately up to six months and could delay the
production and supply of our products, which could harm our results of
operations.

There are seven companies that manufacture approximately 80% of wafers
worldwide. The leading companies are located in USA, Europe and Far East.

For the sale, distribution and servicing of our products we are
negotiating with several companies across the world.

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Competition

Over the past few years there have been
several academic and commercial attempts to develop systems that will be
competitive with our I-TEX family of products. Most of those projects did not
reach a commercial stage. Uster Technologies AG (formally Zelleweger Uster)
manufactures a system that offers automatic visual inspection technology
similar to the primary generations of our I-TEX systems. Uster is a provider of
quality control equipment for the textile spinning industry and has greater
financial, production and marketing resources than we do. We believe that the
capabilities of our technology, along with our experience in implementing these
technologies and our wide customer base, provide us with a competitive
advantage over them. Other potential competitors are small suppliers of
automatic inspection solutions with PC based or smart camera technologies.
These suppliers, who offer low-cost solutions for low-end applications such as
NonWoven, are attempting to penetrate the field of textile inspection, yet,
thus far, have not been commercially successful. We are familiar with several
companies that are working on an On Loom automatic inspection solution for
the greige fabric market, including BarcoVision. It is possible that when On
Loom inspection systems are commercially available, they will be competitive
with us in the greige inspection market.

EVS is targeting the Non Woven industry as a
high potential market for its automatic inspection systems. The main competitor
on this industry is Cognex Corporation - based in the US. Cognex Corporation is
specialized on supplying machine vision components for the industry. We believe
that our capabilities for supplying tailor made solutions for our customers
together with the high growth rate of the Non Woven industry, will allow us to
produce revenues from it. For a discussion of legal proceedings commenced
against Panoptes Ltd., see Item 8, Financial Information --Litigation --
Panoptes Litigation.

The presence of competitors in the textile
automatic inspection field may increase awareness of the benefits of automatic
fabric inspection, and maybe help us enlarge our market. However, it is
possible that systems developed by these or other future competitors will prove
more effective than our I-TEX systems or that potential customers will prefer
them for other reasons.  If we are
unable to maintain our technological advantage or are unable to convince
potential customers of the superiority of our I-TEX systems, our business would
be seriously harmed.

We are not aware of any automated visual
inspection and quality control systems, in existence or currently under
development, which will compete with the PRIN-TEX family of production.

Several manufactures of equipment for the
fabric manufacturing industry offer products that compete with our Shade
Variation Analyzer.  Our main competitor
is Mahlo GmbH & Co. KG.

The competition for the development and sale
of advanced automated vision systems in other industries and for other
applications is intense. To the extent providers of automated vision systems
choose to focus on or develop advanced automated vision technology for the
fabric industry or other industries for which we attempt to develop products,
we could face significant competition in the future.  Potential competitors may be more established, benefit from
greater market recognition and have greater financial, production and marketing
resources than we do.

25

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We
are not aware of any competition in the field of wafer inspection for the
micro-electronic industry.

Intellectual Property Rights

In May 2002, we entered into an agreement
with our former principal shareholder Elbit Ltd. and Dr. Ilan Tamches, which
amended the license agreement existing between us and Elbit, dated June 12,
1996. According to this agreement, Elbit transferred to Dr. Ilan Tamches
certain elements of our technology (Elbit Technology), which we formerly
licensed from Elbit, and other elements of our technology were directly
transferred to us by Elbit (Elbit Modified Technology). Consequently, we
currently license the Elbit Technology from Dr. Tamches, its original
developer. Pursuant to this agreement, we have certain non-exclusive rights to
this technology with respect to the development, production, distribution,
modification, use and repair of any of the I-TEX systems, for as long as we
continue to produce, distribute, modify, use and repair any I-TEX systems. In
consideration for the royalties that we have agreed to pay Dr. Tamches, he has
agreed not to license Elbit Technology to any third party which competes with
I-TEX systems.

Neither we nor, to our knowledge, Dr.
Tamches, have any patents or patent applications pending with respect to this
technology. We do have a patent in France and Germany and patent applications pending in
Canada and Israel with respect to certain technology incorporated in
the video cameras used by our systems. We rely primarily upon a combination of
trademark, copyright, know-how and trade secrets and contractual restrictions
to protect our intellectual property rights.

Our employees who have access to confidential
information are required to sign confidentiality and invention assignment
agreements. We believe that such measures provide only limited protection of
our proprietary information, and there is no assurance that our proprietary
technology will remain a secret or that others will not develop similar
technology and use this technology to compete with us. Despite our efforts to
protect our proprietary rights, unauthorized parties may attempt to copy
aspects of our products or to obtain and use information that we regard as
proprietary.

We have registered trademarks with respect to
the name I-TEX in the United States, Mexico, Spain, Germany, Turkey,
Portugal, Brazil, France, China and Japan, and have filed applications for
registered trademarks for the name I-TEX in India and Italy. We have filed
applications for registered trademarks of the name and design I-TEX Inspected
in Taiwan and South Africa.  We have
registered trademarks with respect to the name and a new design I-TEX
Inspected in the United States, Mexico, Brazil, Germany, France, Turkey,
Italy, the European Community, China and Taiwan, and have filed applications
for registered trademarks of the name and a new design I-TEX Inspected in
India and South Africa. We also have registered trademarks with respect to the
name PRIN-TEX in Spain, Portugal, France, Turkey and Japan, and have filed
applications for registered trademarks with respect to the name PRIN-TEX in
Italy. We also have a registered trademark with respect to the name and old
design PRIN-TEX in the United States. 
In addition, we have a registered trademark with respect to the name
KNI-TEX in the United States and Italy. We also have a registered
trademark with respect to the name EVS in the European Community, Japan and
the United States.    In addition, we
have registered trademarks for the name LOOM-TEX in the European Community
and in the United States.  Our trademark
rights include rights associated with the use of our trademarks.

26

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For
our developments for the micro-electronic industry we intend to apply for
patents for hazing and wax inspection technologies

Significant and protracted litigation may be
necessary to protect our intellectual property rights, to determine the scope
of the proprietary rights of others or to defend against claims of
infringement. Item 8. Litigation below contains description of a current
patent infringement claim that has come to our attention.

Organizational
Structure

We own all of the issued and outstanding
shares of our two subsidiaries Elbit Vision Systems US, Inc. and Elbit Vision
Systems B.V.  Elbit Vision Systems US,
Inc. is incorporated in the United States under the Business Corporations Act
of the State of Delaware. Elbit Vision Systems US, Inc. predominantly functions
as a sales and support center for our products.

Elbit Vision Systems B.V. is incorporated in
Holland.  Elbit Vision Systems B.V.
predominantly functions as a support center for our products.

Property, Plants and
Equipment

Our facilities are located at New Industrial
Park in Yoqneam, Israel. We do not own any real property. We lease
approximately 7,000 square feet at our facilities in Israel, at an annual rent
of approximately $120,000. Our lease expires on December 31 2005.  Elbit Vision Systems US, Inc. leases office
space in Greenville, South Carolina, at an annual rent of approximately
$30,000.

We believe that our current facilities are
adequate for our operations as currently conducted. In the event that
additional facilities are required, we believe that we could obtain such
additional facilities at commercially reasonable prices.

Governmental Regulation Affecting the Company

As a company which focuses on research and development and which receives
grants in order to do so from the Government of Israel, we are affected by the
terms of the grants we have received from the Office of the Chief Scientist of
Israel.  Under the terms of these
grants, we are responsible to pay royalties based on the net sales of our
products.  In addition, manufacturing of
products developed with these grants must be performed in Israel, or we may be
subject to the payment of additional royalties.  Approval must be obtained to transfer technologies developed
through projects in which the government participates.  See Item 5, Operating And Financial Review And Prospects --Research and
Development, Patents and Licenses, etc.

In addition, we receive certain tax benefits and reduced tax rates from
the government of Israel.  See Item 10,
Additional Information -- Effective Corporate Tax Rate.  The entitlement to these benefits is
conditional upon our fulfillment of the conditions stipulated by the law,
regulations published thereunder and the instruments of approval for the
specific investments.  In the event of a
failure to comply with these conditions, the benefits could be canceled and we
would be required to refund the amount of the benefits, in whole or in part,
with the addition of linkage differences and interest.

27

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|ITEM 5. | OPERATING AND FINANCIAL REVIEW AND PROSPECTS
|------- | --------------------------------------------

Selected Financial Data

The following selected financial data for the
years ended December 31, 1998 and 1999, which are not set forth elsewhere
in this annual report; and for the years ended December 31, 2000 and 2001,
which are derived from the financial statements set forth elsewhere in this
annual report, have been audited by Luboshitz Kasierer, which during such years
was a member firm of Arthur Andersen, independent public accountants.  The selected financial data for the year
ended December 31, 2002 is derived from the financial statements set forth
elsewhere in this annual report that have been audited by Luboshitz Kasierer,
which is now a member firm of Ernst & Young International, independent public
accountants. Our financial statements have been prepared in accordance with US
GAAP. For all periods for which financial data is set forth below, Israeli GAAP
and U.S. GAAP were substantially identical in all material respects. The
financial data set forth below should be read in conjunction with the financial
statements, related notes and other financial information contained in this
annual report. For discussion of our significant accounting principles, see
Note 2 of our Consolidated Financial Statements incorporated herein by
reference.

|                                                               |  | 1998 |        | 1999 |  | 2000 |        | 2001 |  | 2002 |       
|-------------------------------------------------------------- |  | ---- | ------ | ---- |  | ---- | ------ | ---- |  | ---- | ------
|                                                               |  |      |        |      |  |      |        |      |  |      |       
|Statement of Operations Data:                                  |  |      |        |      |  |      |        |      |  |      |       
|Net sales                                                      |  | $    | 16,067 |      |  | $    | 13,057 |      |  | $    | 8,875 
|Cost of sales                                                  |  |      | 9,928  |      |  |      | 9,462  |      |  |      | 9,562 
|Gross profit (loss)                                            |  |      | 6,139  |      |  |      | 3,595  |      |  |      | (687  
|Research and development expenses,
  net                       |  |      | 2,726  |      |  |      | 2,116  |      |  |      | 1,620 
|Marketing and selling expenses, net                            |  |      | 3,318  |      |  |      | 2,509  |      |  |      | 1,699 
|General and administrative expenses                            |  |      | 2,002  |      |  |      | 2,543  |      |  |      | 1,411 
|Total operating expenses                                       |  |      | 8,046  |      |  |      | 7,168  |      |  |      | 4,730 
|Operating income (loss)                                        |  |      | (1907  | )    |  |      | (3,573 | )    |  |      | (5,417
|Other expenses (income)                                        |  |      |        |      |  |      |        |      |  |      | 310   
|Financing expenses (income), net                               |  |      | 17     |      |  |      | (72    | )    |  |      | (50   
|Income (loss) before taxes                                     |  |      | (1924  | )    |  |      | (3,501 | )    |  |      | (5,677
|Income taxes                                                   |  |      | 72     |      |  |      | 67     |      |  |      | 38    
|Net Income (loss) from continuing
  operations                 |  |      | (1996  | )    |  |      | (3,568 | )    |  |      | (5,715
|Cumulative effect of change in
  accounting principle, net (1) |  |      |       |      |  |      |        |      |  |      | (2,625
|Net Income (loss)                                              |  |      | (1,996 | )    |  |      | (3,568 | )    |  |      | (8,340
|Basic earnings per share, net loss                             |  |      | (0.23  | )    |  |      | (0.41  | )    |  |      | (0.66 
|Cumulative effect of change in
  accounting principle, net     |  |      |       |      |  |      |       |      |  |      | (0.30 
|Net Income (loss) per share (2)                                |  |      | (0.23  | )    |  |      | (0.41  | )    |  |      | (0.96 
|Pro Forma (3)                                                  |  |      |        |      |  |      |        |      |  |      |       
|Net loss                                                       |  |      | (1,091 | )    |  |      | (2,798 | )    |  |      |      
|Net loss per share                                             |  |      | (0.13  | )    |  |      | (0.32  | )    |  |      |      
|Weighted average number of shares
  outstanding (2)            |  |      | 8,667  |      |  |      | 8,667  |      |  |      | 8,667 

28

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|                         |  | 1998 |        | 1999 |  | 2000 |        | 2001 |  | 2002 |       
|------------------------ |  | ---- | ------ | ---- |  | ---- | ------ | ---- |  | ---- | ------
|                         |  |      |        |      |  |      |        |      |  |      |       
|                         |  |      |        |      |  |      |        |      |  |      |       
|Balance Sheet Data:      |  |      |        |      |  |      |        |      |  |      |       
|Working capital          |  | $    | 12,776 |      |  | $    | 9,110  |      |  | $    | 1,810 
|Total assets             |  |      | 20,100 |      |  |      | 16,611 |      |  |      | 9,022 
|                         |  |      |        |      |  |      |        |      |  |      |       
|Total liabilities        |  |      | 5,182  |      |  |      | 5,261  |      |  |      | 6,012 
|Accumulated deficit      |  |      | 2,662  |      |  |      | 6,230  |      |  |      | 14,570
|Shareholders equity (4) |  |      | 14,918 |      |  |      | 11,350 |      |  |      | 3,010 

|(1) | Effective January 1, 2000, the Company changed its revenue
  recognition policy so that it is now in accordance with guideline SAB 101 of
  the United States Securities and Exchange Commission.  As a result, revenues in an amount of $4.9
  million have been moved from 1999 to 2000 and $4.3 have been moved from 2000
  to 2001.  As well, a non-cash charge
  of $2.6 million has been recorded as a cumulative effect of a change in the
  accounting principles. See Note 2U to our Consolidated Financial Statements.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(2) | Computed on the basis set forth in Note 2. R. to our Consolidated
  Financial Statements.                                                                                                                                                                                                                                                                                                                                                                                                                                       
|(3) | See Note 2U to our Consolidated Financial Statements.                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|(4) | We are currently finalizing negotiations with Altro, which has agreed
  to invest an additional $700,000. See Item 7  Major Shareholders and
  Related Party Transactions  Plan of Arrangement and Warrant Offering.                                                                                                                                                                                                                                                                                                        

Operating Results

The following table sets forth, for the periods indicated, our selected
financial data as a percentage of net sales:

|                                                           |  |  | 2000  |   | 2001 |       | 2002
|---------------------------------------------------------- |  |  | ----- | - | ---- | ----- | ----
|                                                           |  |  |       |   |      |       |     
|Net sales                                                  |  |  | 100.0 |   |      | 100.0 |     
|Cost of sales                                              |  |  | 107.7 |   |      | 73.9  |     
|Gross profit                                               |  |  | (7.7  | ) |      | 26.1  |     
|                                                           |  |  |       |   |      |       |     
|Research and development expenses, net                     |  |  | 18.3  |   |      | 14.9  |     
|                                                           |  |  |       |   |      |       |     
|Marketing and selling expenses, net                        |  |  | 19.1  |   |      | 16.7  |     
|General and administrative expenses                        |  |  | 15.9  |   |      | 9.5   |     
|Total operating expenses                                   |  |  | 53.3  |   |      | 41.1  |     
|Operating (loss)                                           |  |  | (61.0 | ) |      | (15.1 | )   
|Other expenses                                             |  |  | 3.5   |   |      | (0.2  | )   
|Financing expenses (income), net                           |  |  | (0.6  | ) |      | (0.9  | )   
|Income (Loss) before taxes                                 |  |  | (64.0 | ) |      | (13.9 | )   
|Income taxes                                               |  |  | 0.4   |   |      | 0.06  |     
|Cumulative effect of change in   accounting principle, net |  |  | (29.6 | ) |      |      |     
|Net (loss)                                                 |  |  | (94.0 | ) |      | (14.0 | )   

Sales in 2002 decreased by approximately
23.4% to $ 7.178 million compared with sales of $9.373 million in 2001.  This decrease was primarily attributable to
a decrease in sales in USA.

29

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Cost of sales consists of
component costs, hardware costs, technical support costs, royalty payments,
compensation costs and overheads related to the production and assembly
of our products.

Cost of sales as a percentage of net sales was 73.9% in 2001 and 65.0%
in 2002. In 2002 we earned a gross profit of 
$2.510 million as compared to a gross profit of  $2.443 million in 2001. Gross profit as a
percentage of net sales was 35% in 2002 as compared to 26% in 2001. This
improvement was primarily due to the reduction in labor costs and royalties
accrual in 2002.

Net research and development expenses in 2002
were $1.340 million compared with 
$1.405 million in 2001. Our research and development expenses consist of
our total costs less grants from the Government of Israel. Gross research and
development expenditures consist primarily of salaries and related costs of
employees engaged in ongoing research and development, and, to a lesser extent,
costs of materials, depreciation and other expenditures. Gross research and
development expenditures decreased to 1.49 million in 2002 from $1.530 million
in 2001, and were offset by Israeli government grants of $150,000 in 2002 and $126,000
in 2001.

Gross marketing and selling expenditures
consist primarily of costs relating to promotion, advertising and trade shows,
payroll and related expenses, sales commissions, travel expenses. Marketing and
selling expenses amounted to $1.487 million in 2002, compared to $1.568 million
in 2001.

General and administrative expenses consist
of payroll and related expenses, doubtful and bad accounts, professional fees
paid to auditors, legal advisors and other consultants and other related
expenses. As a percentage of net sales, general and administrative expenses
increased to 19.55% in 2002 from 9.5% in 2001. General and administrative
expenses in 2002 were $1,404 million, compared to $0.886 million in 2001. The
increase in expenses from 2001 to 2002 was primarily attributable to an
increase in allowance for doubtful and bad accounts.

Financial income consists primarily of
interest earned on our cash reserves and marketable securities, as well as
interest on our loan from Elbit and currency translation adjustments between
U.S. dollar exchange rate imposed on our assets and liabilities.  Financial income decreased from $89,000 in
2001 to $34,000 in 2002.

Our principal investing activities to date
have been investment in short-term investment-grade securities and the purchase
of equipment, consisting primarily of computer and office equipment and
leasehold improvements. We invested $6.1 million of the net proceeds of its
initial public offering in short-term investment-grade securities (of which
$3.6 million and $2.5 million was used to finance our operations in 1997 and
1998, respectively). Purchases of equipment totaled $56,000 and $49,000 in 2001
and 2002, respectively.

Net loss increased from $1.31 million in 2001
to $1.68 million in 2002.  This increase
in losses was primarily due a reduction in sales in 2002 and
increase in allowance for doubtful accounts.

30

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For
a discussion comparing the results of our operations from 2001 to 2000, see
pages 24-26) of our annual report on Form 20-F for the year ending December 31, 2001 filed with the
Securities and Exchange Commission on June 28, 2002, which is hereby
incorporated by reference.

Liquidity and Capital
Resources

Prior to our initial public offering, our
principal source of financing for our operations and working capital
requirements were loans from Elbit and grants from the Government of Israel. In
July 1996, we raised approximately $15.7 million, net of expenses, through the
initial public offering of our securities. Since our initial public offering,
we have financed our operations primarily through (i) cash reserves, (ii) cash
generated from operations, (iii) grants from the Government of Israel and (iv)
the use of a bank credit line. As of December 31, 2002, we had working
capital of $0.951 million.

We anticipate that we will
continue to incur significant operating expenses in connection with the
development and marketing of our products. 
We believe that our current assets, together with anticipated cash
generated from operations and available credit lines, will be sufficient to
meet our cash requirements for working capital and capital expenditures for at
least twelve months following the date of this annual report.Thereafter, if cash generated from
operations is insufficient to satisfy our liquidity requirements, we may sell
additional equity or debt securities or seek to obtain additional credit
facilities.

Investment by Altro

The discussion on the investments by Mr. Nir
Alon and/or Altro is incorporated by reference to Item 7 Major Shareholders
and Related Party Transactions.

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

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

31

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

|LOW
  1 U.S. dollar = |  |  | HIGH
  1 U.S. dollar = |  |  | MONTH                 | 
|--------------------- |  |  | ---------------------- |  |  | --------------------- | 
|                      |  |  |                        |  |  |                       | 
|4.632                 |  |  | 4.791                  |  |  | December   2002       | 
|4.737                 |  |  | 4.898                  |  |  | January       2003    | 
|4.810                 |  |  | 4.924                  |  |  | February     2003     | 
|4.687                 |  |  | 4.858                  |  |  | March         2003    | 
|4.564                 |  |  | 4.671                  |  |  | April            2003 | 
|4.373                 |  |  | 4.577                  |  |  | May             2003  | 

The average exchange rate, using the average of the exchange rates on
the last day of each month during the period, for each of the five most recent
fiscal years, was as follows:

|Exchange
  Rate | Period                               
|--------------- | -------------------------------------
|                |                                      
|                |                                      
|3.810 NIS/$1    | January 1,
  1998 - December 31, 1998
|4.154 NIS/$1    | January 1,
  1999 - December 31, 1999
|4.067 NIS/$1    | January 1,
  2000 - December 31, 2000
|4.219 NIS/$1    | January 1,
  2001 - December 31, 2001
|4.723 NIS/$1    | January 1,
  2002 - December 31, 2002

In 1999, the rate of inflation was approximately 1.3% and the rate of
devaluation was -0.3%.  In 2000, the
rate of inflation was approximately 0% and the devaluation rate was -2.7%.
During 2001, the NIS was devalued against the dollar by 9.3%. In 2002, the rate
on inflation was approximately 6.5% and the rate of devaluation was 7.26%. As a result of the differential between
the rate of inflation and the rate of devaluation of the NIS, we experienced
decreases in the costs of our Israel operations, as expressed in U.S. dollars,
in 2002, but they did not materially affect our results of operations in such
periods.

From time to time, we   engage
in hedging or other transactions intended to manage the risks relating to
foreign currency exchange rate or interest rate fluctuations. Although, we do
not undertake such transactions on a regular basis, our management may
determine that it is necessary to further minimize such risks.

Research and
Development, Patents and Licenses, etc.

Our research and development group focuses on
adapting our technologies to the development of new products for applications
in the fabric and micro-electronic industries as well as enhancing our existing
products.  We devote a significant
portion of our resources to improving our current systems through enhancements
in the areas of sharpness of resolution, processing speed, sensor accuracy and
illumination. We also continually work to enhance the ease of use and
flexibility of our systems software and to develop product add-ons to augment
our systems currently in use by customers. These product add-ons are being
designed to further integrate our systems into each phase of our customers
manufacturing process.

32

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We
have a number of product and technology initiatives underway at any given
time.  Our research and development
activities have generally resulted in periodic introductions of new products,
new auxiliaries and upgrades to our
existing products.  Current product and
technology initiatives include, among others, the following:

| | The
  development of a visual inspection system for the inspection of woven fabrics
  during weaving.  The system is already
  operating in a few weavers sites for final tests before becoming commercial.
  The system is based on a contact sensor, which was specially developed by EVS
  for an easy integration with the loom. It is operated through a central
  computer connected to a network of dedicated computers, each of which is
  monitoring a number of looms.  LOOMTEX
  will inspect 100% of the fabric, automatically pinpointing faults based on
  learned criteria, and will be capable of being updated in real-time by user
  feedback.
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | For our developments for the micro-electronic industry we intend to
  apply for patents for hazing and wax inspection technologies. We currently
  intend to apply for a patent in Israel and Europe. According to a preliminary
  patent search conducted on our behalf no patents will be infringed by
  developing the inspection heads as proposed.                                                                                                                                                                                                                                                                                                          

As of May 31, 2003, our research and
development staff working on products for the textile industry consisted of 15
full-time employees, all of whom are located in Israel and hold advanced
technical degrees. Our research and development staff for the textile industry
engages in hardware and electro-optics development, real-time software
development, PC software development, manufacturing engineering, system
engineering and customer support engineering. In 2000 our gross research and
development expenditures for the textile industry were approximately $1.6
million, in 2001 they were approximately $1.5 million, and in 2002 they were
$1.2 million. These expenditures were partially offset by grants by the Office
of the Chief Scientist of the Ministry of Industry and Trade of the Government
of Israel of approximately $95,000, $126,000, and $150,000 in each of 2000,
2001, and 2002, respectively.

As of May 31, 2003, our research and development
staff working on adapting our technology for use in the micro-electronic
industry consisted of 2 full-time employees, all of whom are located in Israel,
and hold advanced technical degrees. Our research and development staff engages
in electro-optics development and real-time software development. In 2002, our
gross research and development expenditures for the micro-electronic industry
were approximately $0.14 million. We expect to continue to commit substantial
resources to research and development in the future.

The Government of Israel encourages research and development projects
oriented towards products for export through the Office of the Chief Scientist.
Since inception, we have received grants from the OCS for the development of
various systems and products. Under the terms of these grants, a royalty of 3%
to 5% of the net sales of products developed from a project funded by the OCS
must be paid, beginning with the commencement of sales of products developed
with grant funds and ending when 100% of the dollar value of the grant is
repaid. The terms of Israeli government participation also require that the
manufacture of products developed with government grants be performed in
Israel, unless a special approval has been granted by the OCS.  Such approval, if granted, is generally
subject to an increase in the total amount to be repaid to the OCS to between
120% and 300% of the amount granted, depending on the extent of the
manufacturing to be conducted outside of Israel.

33

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Separate Israeli government consent is required to transfer to
third parties technologies developed through projects in which the government
participates. Such restrictions do not apply to exports from Israel of products
developed with such technologies.

Pursuant to recent regulations,
effective with regard to OCS grants received under programs approved after
January 1, 1999, repayments of such grants will be subject to interest at an
annual rate of LIBOR for 12 months applicable to dollar deposits, which will
accrue annually based on the LIBOR rate published on the first day of each
year.

Research
and Development Grants

Royalty-bearing grants received from the
Government of Israel for research and development are offset against our gross
research and development expenditures on development of products only for the
textile industry. We expect that we will continue to commit substantial
resources to research and development in the future.

The following table sets forth-net research
and development expenses, the grants received from the OCS and the gross
research and development expenditures for the periods indicated:

|                                            |  | 2000 |       | 2001 |   | 2002  | 
|------------------------------------------- |  | ---- | ----- | ---- | - | ----- | 
|                                            |  |      |       |      |   |       | 
|Research and development expenses, net      |  | $    | 1,620 |      | $ | 1,405 | 
|OCS grants                                  |  |      | 95    |      |   | 126   | 
|Gross research and development expenditures |  |      | 1,715 |      |   | 1,531 | 

Trend Information

Trends and changes in the world textile
industry are having an influence on our markets, customers and sales.  World textile production has transferred to
the Far East due to low labor costs. The Far East market is increasing with
large investments in textile machinery (especially in China). The investments
are currently in productive equipment for increasing the production volume and
achieving the demands of western markets and not in automatic inspection
technology.  Our traditional markets in
Western Europe and the United States, are becoming smaller, with less
willingness for capital expenditures. 
Unless textile manufacturers in the Far East begin investing in
automatic inspection technology, the growth in our sales revenue may not keep
pace with the growth in the Far East market. Nevertheless, the recent spread of
the SARS epidemic in the Far East and mainly China has had a negative impact on
our business there. We can give no assurance that if SARS persists in that
region, there will be no further effect on our operations in the Far East.

An additional trend is the worldwide slowdown
in technology-based companies. This trend may have an effect on the adoption of
our newly developed applications for the micro-electronic industry. Currently,
manufacturers of wafers are reluctant to spend capital on expanding and
purchasing new equipment. The further growth of this target market for our
products depends on the global economy emerging from its current recession. We
can give no assurance that if the current global downturn continues, that it
will not affect our results.

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|ITEM 6. | DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
|------- | ------------------------------------------

As of May 31, 2003, our directors, senior managers and key employees
are as follows:

|Name               | Age | Position                                                               
|------------------ | --- | -----------------------------------------------------------------------
|                   |     |                                                                        
|                   |     |                                                                        
|Nir Alon           | 40  | Chairman of the Board                                                  
|                   |     |                                                                        
|Zami Aberman*      | 49  | Chief Executive Officer                                                
|                   |     |                                                                        
|Yaky Yanay*        | 32  | Vice president, Chief Financial Officer and
  Secretary                
|                   |     |                                                                        
|Idan Kleifeld*     | 41  | Vice President of Sales & Marketing                                    
|                   |     |                                                                        
|Michael Lollis*    | 39  | Vice President and Managing Director of
  Elbit Vision Systems US, Inc.
|                   |     |                                                                        
|Avigdor Rosenberg* | 45  | Vice President of Research and Development                             
|                   |     |                                                                        
|Ilan Laver*        | 59  | Vice President of Electronic Inspection
  Division                     
|Jossef Barath      | 52  | Director                                                               
|                   |     |                                                                        
|Tsvi Piran         | 54  | External Director                                                      
|                   |     |                                                                        
|Meir Amit          | 81  | External Director                                                      
|                   |     |                                                                        
|Israel Gal         | 51  | Director                                                               
|                   |     |                                                                        
|Benny Yehezkel     | 36  | Director                                                               
|                   |     |                                                                        
|Shlomo Alon        | 64  | Director                                                               
|                   |     |                                                                        
|Naomi Livne        | 57  | Director                                                               

* Beneficially owns less than 1% of our
outstanding ordinary shares.

Nir
Alon was
appointed chairman of the Board of Directors in February 2001. Since 1990, he
has been the president of Altro Warenhandels GmbH, a cotton and textile
company. From 1986 until 1990, he was part of the management of an Israeli
based textile company.  Mr. Alon holds a
Bachelor of Arts degree in social sciences from Tel-Aviv University.

Zami Aberman has 15
years of experience in managing industrial companies, international marketing
of breakthrough technological solutions to automotive, aerospace, metal
industry, and flat panel manufacturing, as well as experience in establishing
and managing start-up companies active in the field of software development,
chip development, advanced system development, flexible automation inspection
and image processing. Mr. Aberman served as the President & CEO of
Robomatix Technologies Ltd. from 1987 until 1996. From 1996, Mr. Aberman
founded and managed high-tech companies active in various fields. In 1992, Mr.
Aberman was awarded the prestigious Rothschild Prize by the President of the
State of Israel, for the development of a unique, laser based, flexible
manufacturing system for the automotive industry. Mr. Aberman holds a Bachelor
of Science degree in Mechanical Engineering from Ben-Gurion University.

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Yaky Yanayhas served as our chief financial officer since July 2002. From 1999
until 2002 Mr. Yanay worked as a manager at Ernst &Young Israel. From 1993,
he served at the Israeli Ministry of Foreign affairs. Mr. Yanay holds a
Bachelor of Business Administration and Accounting from the College of
Management and he is a Certified Public Accountant in Israel.

Idan Kleifeldhas
been vice president of sales& marketing and
managing director of Asia and Africa region since May 2000. From 1998 through May 2000, Mr.
Kleifeld served as director of operations and logistics at Delta Galil. From
1993 through 1997, Mr. Kleifeld served at Kitan in Nazareth Elit, first as
project manager and later as the plant manager.  From 1992 through 1993, he worked at LET, a development company,
as a member of the marketing staff. 
From 1991 through 1992, Mr. Kleifeld served as a system engineer at
Elbit Computers, Haifa.  Mr. Kleifeld
holds a Bachelor of Science degree in industrial management from the Technion.

Michael
Lollis is the vice
president and managing director of Elbit Vision Systems US, Inc. and has been
with the company since June 1997.  Mr.
Lollis has served in various management roles at Elbit Vision Systems US, Inc.
including vice president - sales & marketing, and sales manager. Prior to
his affiliation with Elbit Vision Systems US, Inc., Mr. Lollis was employed by
John D. Hollingsworth, Inc., in Greenville, South Carolina, where he held a
variety of sales management positions from 1989 until 1997, the most recent
being regional sales manager.  Mr.
Lollis graduated from Lander University in Greenwood, South Carolina, with a
Bachelors Degree in Business Administration.

Avigdor Rosenberg has been vice president of
research and development since October 1999. Mr. Rosenberg is one of our
founders. From 1990 to 1999 he served in various engineering and technical
management positions, including image processing and acquisition engineer,
hardware development engineer, system engineer, group leader and project manager
of various of our products. From 1987 to 1990, he worked at Elbit Computers
Ltd.s digital signal processing computers development group as electronics
design engineer.  From 1984 to 1987 he
worked at Elbit Computers Ltd.s image processing lab as an algorithms and
software development engineer. Mr. Rosenberg holds a Bachelor of Science degree
in electrical engineering from the Technion, Israel Institute of Technology.

Ilan
Laver served as
general manager at DDIS/BNS, between 1995 and 2001, where he founded and
managed an activity in the field of high quality surfaces optical inspection (a
spin-off from Robomatix Technologies Ltd.). From 1993, Mr. Laver served for 2
years as general manager at Robomatix Israel Ltd. where he managed the Israeli
operation in the areas of machine vision, laser robotics and advanced
computing.  In 1987, Mr. Laver
co-founded and served for 6 years as general manager at DPA Technologies
Israel, a company which focuses on the testing and inspection of equipment for
the electronics industry. From 1984 Mr. Laver served as product line manger and
chief mechanical engineer at Elron Advanced Technologies Center and managed the
development of automated optical inspection and gauging systems for metal parts
industries. From 1982 Mr. Laver served as technical office manager at IMI,
Plant 77 and was mainly involved in the development of the ground optical
guidance system for beam riding missiles. From 1976 he served as R&D
manager at Laser Industries \MLI where he designed and
developed medical (Laser Industries) and industrial (MLI) laser systems. Prior
to that he served 3 years at Elscint Ltd. as mechanical team leader. Mr. Laver
holds a Bachelor of Science in Mechanical Engineering from the Technion.

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Jossef (Yossi)
Barathis
one of the founders and has been a director since the Companys inception. He
was president and chief executive officer from inception until May 1998.  Mr. Barath is a member of the Board of
Directors of SADOT Research & Development Fund Ltd. (TASE).  From 1987 to 1990, Mr. Barath served as
director of marketing and business development at Inframetrics, Inc., a
subsidiary of Elbit. From 1984 to 1987, he served as head of marketing of
Elbits Ground Systems Division. From 1982 to 1983, Mr. Barath was the
managing director of Elbit Data System Ltd., a British subsidiary of Elbit.
Previously, Mr. Barath served as a research and development officer in the
communications and technology division of the Israeli Defense Forces. Mr. Barath
has a Bachelor of Science degree in electrical engineering from the Technion
and is a graduate of the Executive Business Program at the Sloan School of
Business at Massachusetts Institute of Technology.

Tsvi Piran
is and has been a Professor of Physics at the Hebrew University in Jerusalem
since 1986. Prior to that, he served as a visiting professor to various
Ivy-League universities worldwide, including the Universities of Harvard and
Columbia in the United States. He has been a member of the Steering Committee
for the Israel Space Agency since 1999 and the Chairman of the Appointment
Committee for Sciences, Medicine and Agriculture since 2001. Mr. Piran is also
the Founder of the Jerusalem Winter School for Theoretical Physics and was its
Chairman from 1981-1992. He is the author of 11 scientific books, including the
popular Hebrew book - The Big Bang, and of over 200 publications in
scientific journals worldwide. Mr. Piran holds a Bachelors degree in Physics
from Tel-Aviv University, a Masters degree in Space Science from Tel-Aviv
University, a Ph.D in Physics from Hebrew University and completed his
post-doctoral fellowship in Oxford University, England and at the University of
Texas in Austin, Texas.

Major-General (Res.)
Meir Amit served in several command positions in
the Haganah (the pre-state Israeli army), Israel Defense Force and Defense
establishment for over thirty years, ending his military career in 1968 as Head
of the Mossad, Israels Intelligence Agency, after having served in that
position for 6 years. In 1981, Major-General Amit initiated Israeli satellite
project Amos, and is the Chairman of the Board of Directors of Spacecom,
the company that owns the satellite. He is currently the Chairman of Board of
Directors of Hallal, Israels space program and of Spark Venture Capital
Fund. Major-General Amit was elected to the Israeli Parliament in 1977, where
he remained a member until 1982. In 1977, he served as the Israeli Minister of
Transportation and Communications. He was appointed Director-General of Koor
Industries, one of Israels largest investment holding companies, in 1968 and
served in that position for nine years. Major-General Amit also serves on the
boards of a number of Israeli companies and corporations.

37

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Israel
Gal is
currently the president and CEO of Espro Information Technologies. From 1993 to
1996, Mr. Gal served as a general director of a subsidiary of the Koor
Industries Group. From 1990 to 1993 Mr. Gal was the Manager of the Bank
Tefachots central branch. From 1970 to 1990, Mr. Gal served in the Israel
Defense Forces (the IDF). His service included, staff and command positions
in IDFs field units and in the General Staff Headquarters, and the
establishment and commanding of an elite field unit which integrated a warfare
system based on especially complex advanced technologies. Mr. Gal completed his
army service with the rank of Colonel. Mr. Gal holds a Bachelors degree in
Economics and Business Administration from BarIlan University and a Masters
degree in Political Science and International Relations from University of
Haifa.

Benny
Yehezkel
currently holds the CEO position at Elron Telesoft Ltd. Prior to his current
position, Mr. Yehezkel held several positions in Elron Electronic Industries
group including, VP of Business Development position at Elbit Ltd, CEO at
Dealigence Inc., and CEO at ICC Ltd. During 1998-2000, Mr. Yehezkel was CEO of
a call/contact center application start-up company, Sintec Call Centers Ltd
(SCC), which became a leading company in the Israeli telecommunication,
newspaper, and outsourced service provider market. From 1994 to 1998 Mr.
Yehezkel co-managed, Limtec Ltd (Limtec), a start-up company, which produced
software for intensive care units. Mr. Yehezkel holds a Bachelor of Science degree
in Computer Science from the Technion and a MBA from Tel-Aviv University.

Shlomo
Alon, father
of Nir Alon, was appointed a Director in the Board of Directors of Elbit Vision
Systems Ltd. on August 2001. Since 1999 Mr. Alon has been the Chairman of the Cell-Tel
Wireless, Israel, which specializes in communications. In 1979 Mr. Alon founded
Altro Vienna GmbH, a company that is active in the field of textiles. From 1961
through 1978, Mr. Alon worked for several different departments in Koor
Maarachot, filling various managerial positions. From 1971 through 1975, Mr.
Alon was the General Manager of Koor Maarachot in Israel and from 1975 until
1978 was General Manager of the Vienna Austria branch of Koor Maarachot. Mr.
Alon holds a BA degree in Economy from Tel-Aviv University.

Naomi Livne
was elected Director by the Companys Board of Directors on November 4, 2001.
Since 1993 Mrs. Livne has been working for the Israeli Securities Authorities.
From 1989 through 1991, Mrs. Livne worked at the Hebrew University in
Jerusalem, filling the position of Associate Dean of the law faculty. From 1977
through 1987, Mrs. Livne worked in the Israeli State Attorneys Office, Ministry
of Justice, in the position of a senior deputy state attorney. Mrs. Livne
graduated in 1977 from the Hebrew University Law School in Jerusalem.

Compensation

During 2002, we paid to all our directors and officers as a group
$656,000in salaries, fees and
bonuses and set aside $102,000in
pension, retirement and similar benefits. 
This does not include amounts we spent for automobiles made available to
our officers, expenses (including business travel, professional and business
association dues and expenses) reimbursed to officers and other fringe benefits
commonly reimbursed or paid by companies in Israel.

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Other than Messrs. Gad Propper and Amotz Weinberg, our former external
directors, Ms. Ida Keidar  (who together
with Messrs. Propper and Weinberg resigned from our board of directors in July
2002), Messrs. Meir Amit and Tsvi Piran, our current external directors, and Mr.
Barath (who we no longer employ), our directors (who are not also officers)
received no compensation in 2002. At our Annual and General Meeting of
Shareholders in December 2001, our shareholders agreed that Messrs. Propper,
Weinberg and Ms. Keidar shall each be paid: (i) an annual compensation of
approximately $2500; and (ii) a one time payment of approximately $150 per
meeting of the Board of Directors or any committee thereof attended, in
consideration for their services as our directors. Messrs. Propper and Weinberg
resigned as our external directors in July 2002 and were replaced by Messrs.
Amit and Piran at our Annual and General Meeting of Shareholders in September
2002. In this meeting, our shareholders agreed that Mr. Barath shall be paid:
(i) an annual compensation of approximately $2,500; and (ii) a one time payment
of approximately $150 per meeting of the Board of Directors or any committee
thereof attended, in consideration for their services as our directors. We paid
approximately $13,000 in aggregate to Messrs. Propper, Barath and Weinberg and
Ms. Keidar in 2002.

Board of Directors

Our articles of association provide for a board of directors of not
less than two and not more than nine members. 
Our articles of association were amended on March 26, 2001 to enable
members of the board to temporarily fill any vacancy on the board until the
next annual general meeting of shareholders. Officers serve at the discretion
of the board of directors.  Pursuant to
the terms of our share purchase agreement with Mr. Alon, he is entitled to
appoint four directors to the board of directors.

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

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

The Israel Companies Law, which took effect on February 1, 2000,
requires Israeli companies with shares that have been offered to the public in
or outside of Israel to appoint two external directors.  No person may be appointed as an external
director if the person or the persons relative, partner, employer or any
entity under the persons control, has or had, on or within the two years
preceding the date of the persons appointment to serve as external director,
any affiliation with the company or any entity controlling, controlled by or
under common control with the company. 
The term affiliation includes:

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

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

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

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

The initial
term of an external director is three years and may be extended for an
additional three years.  External
directors may be removed only by the same percentage of shareholders as is
required for their election, or by a court, and then only if the external
directors cease to meet the statutory qualifications for their appointment or
if they violate their duty of loyalty to the company.  Each committee of a companys board of directors must include at
least one external director.

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

Currently, Messrs. Amit and Piran serve as our external directors.

In addition, pursuant to the listing requirements of the NASDAQ
SmallCap Market, we are required to have at least two external directors on our
board of directors.  Currently, Messrs.
Amit and Piran qualify as external directors under the NASDAQ SmallCap Market
requirements.

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

40

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NASDAQ SmallCap Market also requires us to
establish an audit committee, at least a majority of whose members is
independent of management.  Our two
external directors Messrs. Amit and Piran serve on the audit committee of the
board of directors.

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

Employees

As of May 31, 2003, we employed 57 full-time persons. Out of such
57, 43 were employed in Israel of whom 17 were in research and development, 5
were in marketing and sales, 2 were in customer support, 12 were in operations
and 7 were in administration and management. In addition, as of May 31, 2003,
our U.S. subsidiary employed 9 full-time persons (of whom 2 were in sales
support and product management, 6 were in technical support and 1 was in
administration) and our European subsidiary employed 5 full-time persons (all
of whom were in technical support).

In 2002, we employed 40 full-time persons, of whom 16 were in research
and development, 5 were in marketing and sales, 2 were in customer support, 11
were in operations and 6 were in administration and management. In addition, in
2002, our U.S. subsidiary employed 9 full-time persons (of whom 2 were in sales
support and product management, 6 were in technical support and 1 was in
administration) and our European subsidiary employed 5 full-time persons (all
of whom were in technical support).

In 2001, we employed 51 full-time persons, of whom 16 were in research
and development, 5 were in marketing and sales, 4 were in customer support, 18
were in operations and 8 were in administration and management. Our U.S.
subsidiary employed 14 full-time persons (of whom 3 were in sales support and
product management, 10 were in technical support and 1 was in administration)
and our European subsidiary employed 5 full-time persons (all of whom were in
technical support.

We believe that our success will depend, in large part, on our ability
to attract and retain highly-skilled engineering, managerial and sales and
marketing personnel. Competition for such personnel is intense.

41

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

Israeli law generally requires severance pay, which
may be funded by Managers Insurance described below, upon the retirement or
death of an employee or termination of employment without cause (as
defined in the law). The payments thereto amount to approximately 8.33% of
wages. Furthermore, Israeli employees and employers are required to pay
predetermined sums to the National Insurance Institute, which is similar to the
United States Social Security Administration. Such amounts also include
payments for national health insurance. The payments to the National Insurances
Institute are equal to approximately 14.5% of the wages (up to a specified
amount), of which the employee contributes approximately 66% and the employer
contributes approximately 34%.

Although not legally required, we contribute funds on behalf of most of
our employees to a fund known as Managers Insurance. This fund provides a
combination of savings plan, insurance and severance pay benefits to the
employee, giving the employee a lump sum payment upon retirement and securing
the severance pay, if legally entitled, upon termination of employment. We
decide whether each employee is entitled to participate in the plan, and each
employee who agrees to participate contributes an amount equal to 5% of salary
and the employer contributes between 13.3% and 15.8% of salary.

Share Ownership

Of the persons listed above under the caption Directors, Senior
Management and Employees, only Messrs. Nir and Shlomo Alon and Yossi Barath
beneficially own shares and options exceeding 1% of our outstanding ordinary
shares.  Nir Alon is the controlling shareholder of Altro, which is the beneficial owner of
3,500,000 million of our ordinary shares and therefore Mr. Nir Alon may be deemed to be the beneficial
owner of such shares.  Mr. Barath is the beneficial owner of
410,753 ordinary shares.  Mr. Barath
entered into an agreement with Mr. Alon dated February 6, 2001, whereby
effective March 29, 2001 Alon gave Barath an option to purchase 75,000 ordinary
shares at $1.00 each for a ten year period. 
Elbit owns 2,647,643 of our ordinary shares. Mr. Benny Yehezkel is one
of our directors and an officer of Elron, and therefore may be deemed to
beneficially own the ordinary shares owned by Elbit. Mr. Yehezkel disclaims any
beneficial interest in the ordinary shares owned by Elbit.

Employee Share
Option Plans

We maintain the following share option plans for our employees and the
employees of our subsidiaries.  In
addition to the discussion below, see Note 12 to our consolidated financial
statements.

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In February 1996, the board of directors adopted
a share option plan (the 1996 Share Option Plan) pursuant to which
554,780 ordinary shares were reserved for issuance upon the exercise of options
to be granted to our directors, officers, employees, and consultants. As of May
31, 2003, options to purchase 297,947,of
such ordinary shares were outstanding and options to purchase 256,833 ordinary
shares were available for future grants. Of the outstanding options, options to
purchase 99,447, 110,000and
88,500 ordinary shares are fully vested and are exercisable at an exercise
price of $3.00, $1.68 and $0.2 per share, respectively. All of the outstanding
options terminate ten years following the date of grant if not exercised
earlier or terminated by reason of termination of employment.

The 1996 Share Option Plan is administered by a committee of the Board,
which designates the optionees and dates of grant. The option exercise price is
determined by our board of directors. All recent grants have been made at an
exercise price equal to the fair market value of our shares. The options are
non-assignable except by the laws of descent. The last date on which the
options may be granted is February 2006. The remaining options will be
exercisable for a period up to ten years from the date of grant and will
generally vest as to 50% commencing the beginning of the third year after the
grant and as to an additional 25% in each of the two years thereafter, assuming
continuous employment with us through such periods.

In April 2000, the board of directors adopted a share option plan
pursuant to which 4,500,000 ordinary shares were reserved for issuance upon the
exercise of options to be granted to our directors, officers, employees and
consultants. As of May 31, 2003, options to purchase 2,115,539 of such ordinary
shares were outstanding and options to purchase 2,384,461 ordinary shares were
available for future grants. 561,389 of the outstanding options have an
exercise price of $1.169 per share.  75%
of the options referred to above vested equally on May 24, 2001, May 24, 2002
and May 24, 2003, and the remaining 25% will vest on May 24, 2004, assuming
continuous employment with us through such period.437,750 of the outstanding options have an exercise price of
$0.36 per share.  218,875 of the options
referred to above vested equally on January 21, 2002 and January 21, 2003, and
the remaining 218,875 will vest equally on, January 21, 2004 and January 21,
2005, assuming continuous employment with us through such periods.516,400 of the outstanding options have an
exercise price of $0.48 per share. 
129,100 of the options referred to above vested on March 18, 2003 and
the remaining 387,300 vest equally on March 18, 2004, March 18, 2005 and March
18, 2006, assuming continuous employment with us through such periods. 400,000
of the outstanding options, have an exercise price of $0.15 per share and an
additional 200,000 an exercise price of $1 per share and vesting monthly over
three years through August 2005. All of the outstanding options terminate ten
years following the date of grant if not exercised earlier. The 2000 Share
Option Plan is administered by a committee of the board of directors, which
designates the optionees and dates of grant. The option exercise price is
determined by our board of directors. All recent grants have been made at an
exercise price equal to the fair market value of our shares. The options are
non-assignable except by the laws of descent. The last date on which the
options may be granted is April 2010. The remaining options will be
exercisable for a period up to ten years from the date of grant and will generally
vest as to 25% commencing the beginning of the second year after the grant and
as to an additional 25% in each of the three years thereafter, assuming
continuous employment with us through such periods.

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|ITEM 7. | MAJOR SHAREHOLDERS AND RELATED PARTY
  TRANSACTIONS
|------- | ---------------------------------------------------

Major
Shareholders

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

|Identity of Person or Group                                               |  | Amount Owned |  | Percent of Class
|------------------------------------------------------------------------- |  | ------------ |  | ----------------
|                                                                          |  |              |  |                 
|Altro (1)(2)                                                              |  | 3,500,000    |  |                 
|Elbit Ltd.(3)
  Advanced Technology Center
  P.O. Box 539
  Haifa, Israel |  | 2,647,643    |  |                 
|All directors and officers as a group(4)                                  |  | 6,558,396    |  |                 

| | (1) | Simultaneously
  with its sale of two million of our outstanding ordinary shares to Mr. Nir
  Alon, Elbit Ltd. granted an irrevocable proxy to Alon, according to which he
  was granted the right to vote such Proxy Shares until the expiration of
  eighteen months following the second closing of the purchase agreement
  between them, which was due to take place in March 2002, after which the
  proxy would terminate only with respect to the Proxy Shares which Elbit would
  sell or transfer from time to time. The second closing did not take place. In
  August 2002, Alon transferred all of his shares to Altro, an Austrian company
  controlled Nir Alon. Pursuant to a new plan of
  arrangement with Altro, Altro will purchase 2 million of our ordinary shares
  for a purchase price of $0.35 per share, payable in up to five quarterly
  installments commencing immediately following approval of the plan, following
  which Altro is expected to hold approximately 45.21% of our outstanding
  shares. We are currently in the process of completing negotiations with Altro
  regarding the sums that he will be required to pay in each installment. For
  further discussion of Altros investment obligations, see Item 7  Major
  Shareholders and Related Party Transactions  Plan of Arrangement and Warrant
  Offering.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | (2) | Includes:
  (a) 75,000 ordinary shares which are subject to an option to purchase shares
  granted by Mr. Alon to Mr. Barath on March 29, 2001; The price of the options
  is $1.00 per share.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | (3) | Pursuant to
  the completion of a merger between Elbit and Elron Electronic Industries Ltd.
  (NASDAQ: ELRN) on May 15, 2002, Elbits shares ceased trading on NASDAQ and
  the TASE at the end of trading on May 15. Following the merger, Elbit became
  a wholly owned subsidiary of Elron.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | (4) | Includes
  2,647,643 ordinary shares owned by Elbit. 
  Benny Yehezkel is one of our directors and an officer of Elron, and
  therefore they may be deemed to beneficially own the ordinary shares owned by
  Elbit. Benny Yehezkel disclaims any beneficial interest in the ordinary
  shares owned by Elbit.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      

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Voting
and Right of First Refusal Agreements

In 1993, Elbit and certain of our key executive officers entered into a
formation agreement, which was amended in February 1996 and August 1998, and
which provided for our formation. 
Pursuant to the Formation Agreement, Elbit and Messrs. Yossi Barath and
Hillel Avni have agreed to vote the ordinary shares held by them at all
shareholders meetings at which directors are elected for the appointment of
either Mr. Barath or Mr. Avni to our board of directors. The term of this
voting agreement was for the three years after the date of our initial public
offering in July 1996 but it is automatically extended for one-year periods
until terminated by either party with at least six months notice prior to the
end of the year-long period. In addition, pursuant to the Formation Agreement,
Messrs. Barath and Avni have granted each other mutual rights of first refusal
with respect to the private sale of ordinary shares. These rights of first
refusal do not apply to sales effected through the facilities of the NASDAQ
Market System or other stock exchange or automatic quotation system.

Elbit granted an irrevocable proxy to Alon to vote
such number of shares owned by Elbit that represent 10% of the issued and
outstanding share capital of our company from time to time until the
expiration of eighteen months following the second closing of the share
purchase agreement between Elbit and Alon, which was due to take place in March
2002, after which the proxy would terminate only with respect to shares which
Elbit will transfer to third parties. The second closing did not take place.

In March 2001 Elbit and Nir Alon entered into a Shareholders Agreement
in which Elbit and Nir Alon agreed to vote their shares at meetings of our
shareholders for the appointment of four members of our board nominated by Nir
Alon (including the appointment of Nir Alon as chairman of our board), one
member of our board nominated by Elbit (for as long as Elbit holds at least
7.5% of our outstanding share capital), a second member of the board nominated
by Elbit in the event that the second closing did not take place, and Yossi
Barath for as long as he was entitled to be appointed director pursuant to the
Formation Agreement.

As a result of its holdings in our company and his voting agreement
with Elbit, Altro is in a position to control our activities and policies,
including possessing the voting power to elect a majority of the members of our
board of directors and approve all matters requiring shareholder approval
(except for those matters that must be approved by a disinterested shareholder
vote or a special resolution under Israeli law) and the ability to generally
direct our affairs.

As of May 31, 2003, there were a total of 23holders of record of our ordinary shares, of which 13 were registered
in the United States.  Such United
States shareholders were, as of such date, the holders of record of
approximately 31.7% of our outstanding ordinary shares.

Related Party Transactions

We have entered into a number of material agreements with Nir Alon and
Altro.

On February 7, 2001, Mr. Nir Alon, CEO of Altro purchased 1,500,000 of
our ordinary shares for $1.5 million, constituting the first tranche of an
investment for the purchase of 3 million of our ordinary shares for $3 million.
Concurrent with that investment Mr. Alon purchased 2 million shares from our
former major shareholder Elbit, for a purchase price of $2 million, which was
the first tranche of his investment for the purchase of 3.5 million of our
shares from Elbit.  Mr. Alons commitment
to make his second investment in our company and to purchase the second tranche
of shares from Elbit was subject to the fulfillment of certain conditions,
which were not satisfied. Nevertheless, in March 2002 Altro agreed to complete
the second investment in our company (although no similar commitment was made
to purchase the additional shares from Elbit). In August 2002 Mr. Alon
transferred all 3.5 million of his shares in our company to Altro, which became
our major shareholder.

45

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Pursuant to an amendment to the Share Purchase
Agreement with us, dated March 18, 2002, we agreed to permit Altro, to complete
Mr. Alons commitment to the second stage of the investment for the purchase of
the remaining 1,500,000 ordinary shares from us, which was to be paid in nine
monthly installments commencing March 31, 2002. In May 2002, our audit
committee and board of directors agreed to delay the first four installments,
until no later than June 30, 2002 when these installments were to be paid
together including payment of interest for such delayed payments. This
investment was not completed, but was replaced by the plan of arrangement. See
Item 7, Related Party Transactions -- Plan of Arrangement and Warrant
Distribution. Additionally, in March 2002 we entered into an additional share
purchase agreement with Altro, which was subject to the receipt of shareholder
approval, in which Altro agreed to purchase an additional 1,500,000 of our
ordinary shares in March 2004 at a price per share to be determined upon our
fulfillment of certain financial milestones. This agreement was never approved
by our shareholders and was replaced by the plan of arrangement. See Item 5, Operating and Financial Review and Prospects -- Plan
of Arrangement and Warrant Distribution.

Plan of Arrangement
and Warrant Distribution

Our audit committee and board of directors approved a plan of
arrangement with Altro, whereby Altros prior commitments to invest are to be
cancelled subject to Altros fulfillment of new investment terms and a warrant
distribution to our shareholders. 
According to the plan of arrangement, Altro will purchase 2 million of
our ordinary shares for a purchase price of $0.35 per share, payable in up to
five quarterly installments commencing immediately following approval of the
plan, and to be completed by no later than August 25, 2004 following which
Altro is expected to hold approximately 45.21 % of our outstanding shares. We
are currently negotiating with Altro the amount to be paid to us in each
installment. Once we have completed such negotiations we will be asking our
shareholders to approve the terms.

Pursuant to the plan of arrangement, we will also distribute four-year
warrants to purchase approximately 4 million of our ordinary shares to all of
our shareholders, other than Altro, on a pro rata basis. Each warrant will be
exercisable at a price of $0.35 per share. This plan of arrangement remains
subject to the approval of our shareholders and the Haifa District Court.

As of May 30, 2003, Altro owned 34.42% of our outstanding ordinary
shares and Elbit owned 26.04% of our outstanding ordinary shares. Following
Altros investments, Altro is expected to hold approximately 45.21 %, however
in the event that all the warrants distributed to our shareholders are exercised
pursuant to the plan of arrangement, Altro will hold 34% of our outstanding
ordinary shares.

We maintain a number of material relationships with Elbit.

46

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Formation. We
commenced independent commercial operations on January 1, 1994 pursuant to
the Formation Agreement. Prior to such date, we operated as a division of
Elbit. Pursuant to the Formation Agreement, Elbit retained approximately 78.1%
of the then outstanding ordinary shares and certain key employees and one of
our consultants were issued a number of shares in the aggregate equal to
approximately 21.9% of the then outstanding ordinary shares pursuant to the
1993 Share Purchase Plan.

Technology License.  Until July 2001, Elbit granted us an
exclusive license to exploit Elbits vision interpretation technology for
applications in the textile, food and automotive industries and a non-exclusive
license to exploit applications in other industries, except for military
applications, which remained exclusive to Elbit or its assignee or Elbit Technology.
While the license agreement with Elbit was terminated in May 2002, with effect
from June 30, 2001, such that certain technology is now licensed to us by Dr.
Ilan Tamches. Elbit will continue to indemnify us from all claims, demands, or
actions alleging that the Elbit Technology infringes a third party right in a
validly issued patent, copyright or trade secret and any losses, expenses and
damages resulting directly there from.

Royalty Payments.  Until June 30, 2001, Elbit had an obligation
to pay royalties to Dr. Ilan Tamches, the Chief Scientist of Elbit and the
original developer of certain elements of the Elbit Technology. Through June
30, 1996, these royalties were paid directly by Elbit and were reflected as
royalty expenses in our financial statements. We agreed to pay Elbit all
amounts payable pursuant to Elbits obligations to Dr. Tamches, which
relate to our use of the Elbit Technology. Upon the closing of our initial
public offering, we issued 94,624 ordinary shares for nominal consideration to
Dr. Tamches in connection with his agreement to reduce the royalty rate
payable to him. Elbit agreed that it will not take any action that reduces the
proportion of Dr. Tamches share holdings in us, other than the issuance of
shares to the public, to a strategic partner or for capital raising
transactions. We believe that this agreement does not prohibit us from
consummating a merger or an acquisition of a business, product or technology or
issuing shares to employees or directors other than Messrs. Barath and Avni
pursuant to the 1996 Share Option Plan and the 2000 Share Option Plan. However,
in the event that we issue employee share options to Mr. Avni, we will issue a
number of options to Dr. Tamches such that issuances to Mr. Avni will not
dilute Dr. Tamches holdings in EVS. From the date of our initial public
offering through June 30, 2001, the royalties that we paid for the Elbit
Technology were not less than $300,000 and not more than $500,000 per year
based on the annual amount of cash receipts from sales of products in the
textile, food and automotive industries. This royalty rate was payable for five
years from the date of the consummation of our initial public offering (i.e.
July 12, 2001) and was subject to adjustment after such date.  In May 2002, we entered into an agreement
with Elbit and Dr. Tamches, whereby the license agreement was amended such that
effective as of July 1, 2002, Elbit transferred the Elbit Technology to Dr.
Tamches and the certain other technology to us. See Item 10, Additional
Information -- Material Contracts.

47

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Provision of Services.  Pursuant to the Formation Agreement, Elbit
provided us with a broad range of manufacturing and general and administrative
services for which we were charged a fee by Elbit. Manufacturing services
included assembly, component purchase and product engineering. General and
administrative services included personnel administration, computer
maintenance, fleet management, finance, legal and accounting services, cash
management, customer engineering support in the United States and other
corporate services. Effective upon the closing of our initial public offering,
we entered into a five-year comprehensive agreement with Elbit under which the
parties agreed that Elbit, or its assignee, will continue to provide us with
certain of these services for a fee. Following Elbits reorganization, certain
parts of this services agreement were assigned to Elbit Systems Ltd.  Pursuant to the services agreement, Elbit
and Elbit Systems Ltd. continued to provide services at the following rates:
(i) for manufacturing and engineering services, we will pay for the cost
of materials and other direct charges plus an annual payment of $200,000;
(ii) for labor related to manufacturing and engineering services and for
infrastructure and logistical services, such as security, transportation,
computer management, printing and personnel, we will pay Elbits and Elbit
System Ltd.s hourly time charges based on its internal rate plus 4% of such
amount; and (iii) for general and administrative services, such as legal,
accounting, auditing and public relations services, we will pay no more than 1%
of its annual sales, at a rate equivalent to that which will be charged by
Elbit to its other affiliates. These charges were based on the historical
inter-company charges for such services calculated in a manner substantially
consistent with the parties past practices. In 2000, 2001 and 2002, we did not
pay Elbit and Elbit Systems Ltd. any sum for such services. We believe that the
terms under which Elbit and Elbit Systems Ltd. provided these services were
reasonable and no less favorable to us than those available from unaffiliated
third parties.

|ITEM 8. | FINANCIAL INFORMATION
|------- | ---------------------

Consolidated
Statements and Other Financial Information

Our consolidated financial statements and other financial information
is incorporated herein by reference to pages F1-F30.

Litigation

Other than the claims described below, we are not a party to any
material litigation and are not aware of any pending or threatened litigation
that would have a material adverse effect on us or our business.

Lemelson
Patent Infringement Claim

Between May 2000 and February 2001, we were informed by three of our
customers that they were named as three out of the 76 defendants in a patent
infringement claim brought by the Lemelson Medical, Education & Research
Foundation, Limited Partnership in the United States District Court in Arizona.
The Lemelson Foundation alleged that these defendants are using various imaging
techniques, which infringe on a patent duly assigned to the Lemelson
Foundation.

The customers individually requested that we indemnify them for any
loss suffered as a result of the suit, claiming that we are contractually
obliged to indemnify them. Several of our other customers also named in the
suit have not contacted us.

48

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In light of Elbits obligation to indemnify us
pursuant to our amended License Agreement with Elbit and Dr. Ilan Tamches, we
notified Elbit of these claims and immediately sought full
indemnification from Elbit for any losses, expenses and damages that we may
suffer resulting from these claims. Elbit has informed us by letter that until
such time as we meet all applicable evidentiary, procedural, contractual and
other legal requirements relevant to our claim for indemnification from them,
they make no admission as to matters relating to the lawsuit, nor do they
acknowledge any liability under the License Agreement.  We have informed our customers that because
the complaint was not specific as to which activities of the customers were
infringing the claimants rights, we could not agree to indemnify or defend
these customers.

To the extent that we are required to indemnify our customers in
connection with the suit, a failure by Elbit to indemnify us, would have a
material adverse affect on our business, results of operations and financial
conditions, the extent of which cannot be calculated.

Panoptes
Litigation

In November 2002, we filed an application for a permanent injunction
against Panoptes Ltd. with the Haifa District Court, in Israel, requiring it to
cease all production and marketing of its current products. We also claimed
damages from Panoptes in the sum of at least approximately $500,000. The claim
which was also brought against Mr. Hillel Avni, the CEO of Panoptes and our
former founder, is based on the fact that Panoptes, which was established by
Mr. Hillel Avni, is marketing products which unlawfully incorporate our
technology and has recruited several of our former employees who were engaged
in the development and marketing of these products. Panoptes filed a
counter-claim in December 2002, claiming that we had conducted negotiations
with Panoptes in bad-faith and had failed to execute an agreement with Panoptes
for the purchase of $4 million of Panoptes products. The claim was for a
minimum of $500,000.

Dividend Distributions

We have never paid any cash dividends on our ordinary shares and we do
not intend to pay cash dividends on our ordinary shares in the foreseeable
future. Our current policy is to retain earnings for reinvestment in our
business.

In the event that we decide to pay a cash dividend from income that is
tax exempt under our approved enterprise status, we would be liable for corporate
tax on the amount distributed at the rate of up to 25%.  Income not derived from an approved
enterprise is taxable at regular rates of 36%. 
See Note 17 to our Consolidated Financial Statements and Item 10,
Additional Information -- Taxation.

Significant Changes

Other than the investment by Altro described above, no significant
changes have occurred since the date of the consolidated financial statements
included in this annual report.

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|ITEM 9. | THE OFFER AND LISTING
|------- | ---------------------

Market
and Share Price History

In July 1996, we consummated an initial public offering of 2,000,000
ordinary shares.  At such time, our
ordinary shares were quoted on the NASDAQ National Market.  Our ordinary shares were quoted on the
NASDAQ National Market from July 1996. 
Effective December 29, 2000 our ordinary shares were delisted from the
NASDAQ National Market.  From that time
until June 21, 2001 our shares traded on the NASDAQ over-the-counter bulletin
board.  Our ordinary shares currently
trade on the NASDAQ SmallCap Market. 
From July 1996 to May 4, 1999 our ordinary shares were quoted under the
symbol EVSNF.  Since May 4, 1999, they
have been quoted under the symbol EVSN. 
Our ordinary shares are not listed on any other stock exchange and have
not been publicly traded outside the United States.

The table below sets forth the high and low bid prices of the ordinary
shares, as reported by the NASDAQ National Market or the NASDAQ
over-the-counter bulletin board as applicable, during the indicated fiscal
periods as reported by such exchange:

|Period                    |  | High |        | Low |  
|------------------------- |  | ---- | ------ | --- | -
|                          |  |      |        |     |  
|May 2003                  |  |      | 0.26   |     |  
|April 2003                |  |      | 0.25   |     |  
|March 2003                |  |      | 0.23   |     |  
|February
  2003           |  |      | 0.18   |     |  
|January 2003              |  |      | 0.17   |     |  
|December
  2002           |  |      | 0.25   |     |  
|First
  quarter 2003      |  |      | 0.23   |     |  
|Fourth
  quarter 2002     |  |      | 0.25   |     |  
|Third
  quarter 2002      |  |      | 0.36   |     |  
|Second
  quarter 2002     |  |      | 0.52   |     |  
|First
  quarter 2002      |  |      | 0.77   |     |  
|Fourth
  quarter 2001     |  |      | 0.63   |     |  
|Third
  quarter 2001      |  |      | 0.80   |     |  
|Second
  quarter 2001 (3) |  |      | 0.67   |     |  
|First quarter
  2001 (2)  |  |      | 0.88   |     |  
|Year ended
  2002         |  |      | 0.77   |     |  
|Year ended
  2001 (3)     |  |      | 0.88   |     |  
|Year ended
  2000 (1)     |  |      | 3.56   |     |  
|Year ended
  1999         |  | $    | 2.63   |     | $
|Year ended
  1998         |  | $    | 11.125 |     | $

(1) Traded on the NASDAQ
over-the-counter bulletin board from December 29, 2000.

(2)
Traded on the NASDAQ over-the-counter bulletin board throughout the period.

(3)
Traded on the NASDAQ over-the-counter bulletin board until June 21, 2001.

50

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|ITEM 10. | ADDITIONAL INFORMATION
|-------- | ----------------------

Memorandum
and Articles of Association

Articles of
Association

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

Our shareholders approved our Articles of Association on September 2,
1992. Our objectives as stated in our Memorandum of Association are as follows:

| |  | to engage in
  all types of vision systems and optical systems;                                                                                                                               
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | to engage in
  all types of computers, software, hardware, in the sphere of automation and
  computerization;                                                                                 
| |  | to import,
  export, develop and manufacture all types of instrument software in all the
  optic, electronic and computer spheres, to engage in all types of electronic products
  whatsoever;
| |  | to manage
  service and maintenance stations for the repair of optical systems, computer
  software and electrical products;                                                                  
| |  | to engage in
  software and to market all types of software; and                                                                                                                              
| |  | to do any
  action within the scope of these objectives.                                                                                                                                      

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Currently we have one class of outstanding securities,
our ordinary shares, par value NIS 1.00 per share. No preferred shares are
currently authorized.

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

Our articles require that we hold our annual general meeting of
shareholders each year no later than 15 months from the last annual meeting, at
a time and place determined by the board of directors, upon at least 7 days
prior notice to our shareholders or 21 days prior notice in the event that a
special item is to be discussed.  No
business may be commenced until a quorum of two or more shareholders holding at
least one-third of the voting rights are present in person or by proxy.  Shareholders may vote in person or by proxy,
and will be required to prove title to their shares as required by the Israel
Companies Law pursuant to procedures established by the board of
directors.  Resolutions regarding the
following matters must be passed at a general meeting of shareholders:

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

A special
meeting of our shareholders shall be convened by the board, at the request of
any two directors or one quarter of the officiating directors, or by request of
one or more shareholders holding at least 10% of our issued share capital.  Shareholders requesting a special meeting
must submit their proposed resolution with their request.  Within 21 days of receipt of the request,
the board must convene a special meeting and send out notices setting forth the
date, time and place of the meeting.

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

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The Israel
Companies Law

The Israel Companies Law codifies the
fiduciary duties that office holders, including directors and executive
officers, owe to a company.  An office
holder, is defined in the Israel Companies Law, as a (i) director, (ii) general
manager, (iii) chief business manager, (iv) deputy general manager, (v) vice
general manager, (vi) executive vice president, (vii) vice president, (viii)
another manager directly subordinate to the managing director or (ix) any other
person assuming the responsibilities of any of the forgoing positions without
regard to such persons title.

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

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

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

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

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

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

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

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

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

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

Material Contracts

Share Purchase Agreement with Nir Alon.  On March 29, 2001, we entered into a Share
Purchase Agreement with Nir Alon.  This
agreement and the amendments thereto are incorporated herein by reference to
the discussion under the caption Related Party Transactions in Item 7, to
Exhibits 4.4 and 4.5 of this annual report and to Note 11 to our consolidated
financial statements included in this annual report.

54

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Registration Rights Agreement.  Concurrent with the Share Purchase Agreement
described above, we entered into a Registration Rights Agreement with Nir Alon
on March 29, 2001.  Pursuant to this
agreement, we granted Alon certain registration rights with respect to the
ordinary shares of our company that he owned. 
Pursuant to the agreement Alon was granted one demand registration right
pursuant to which he may demand that we file a registration under the
Securities Act of 1933, as amended for an amount of securities having an
aggregate price to the public of at least $1,000,000, subject to certain
specified limitations.  We also granted
Alon certain piggy-back registration rights in the event that we file any
registration statement under the Securities Act for purposes of effecting an
initial public or secondary offering of our securities to the public.  According to the agreement, in the event
that we file a registration on Form F-3, Alon will be notified of such
registration and will be able to participate in such registration subject to certain
limitations.  Discussions of this
agreement are incorporated by reference to Exhibit 4.7 to this annual report.

Additional Investment Agreement with Altro.Discussions
of this agreement are incorporated herein by reference to the discussion under
the caption Related Party Transactions -- Plan of Arrangement and Warrant
Distribution in Item 7 of this Annual Report.

Amendment to the License Agreement.   In May 2002, we entered into an agreement
with our former principal shareholder Elbit Ltd. and Dr. Ilan Tamches, which
amended the license agreement existing between us and Elbit and dated June 12,
1996, whereby the license agreement was amended such that effective as of July
1, 2002, Elbit transferred the Elbit Technology to Dr. Tamches and the Elbit
Modified Technology to us. As a result of this amendment, Dr. Tamches has
granted us a non-exclusive rights to the Elbit Technology with respect to the
development, production, distribution, modification, use and repair of any of
the I-TEX systems, for as long as we continue to produce, distribute, modify,
use and repair any I-TEX systems. In consideration for the royalties that we
have agreed to pay Dr. Tamches, he has agreed not to license such elements of
our technology to any third party, which competes with I-TEX systems. Pursuant
to the amendment we have agreed to pay Dr. Tamches a biannual royalty equal to
the lesser of (i) 0.9375% of all amounts actually received by us in the
immediately preceding six months plus Value Added Tax; or (ii) 1.5% of such
part of the amounts actually received by us generated from the sales of the
I-TEX systems in the immediately preceding six months plus Value Added Tax.
Discussions of this agreement are incorporated herein by reference to Exhibit
4.3 to this annual report.

Exchange Controls

The Government of Israel recently replaced the general permit under the
Israel Currency Control Law. Pursuant to the new general permit, most
transactions in foreign currency are permitted. Any dividends or other
distributions paid in respect of ordinary shares and any amounts payable upon
the dissolution, liquidation or winding up of our affairs, as well as the
proceeds of any sale in Israel of our securities to an Israeli resident are
freely repatriable into non-Israeli currencies at the rate of exchange
prevailing at the time of conversion, provided that Israeli income tax has been
paid on (or withheld from) such payments. 
Because exchange rates between the NIS and the U.S. dollar fluctuate
continuously, U.S. shareholders will be subject to any such currency
fluctuation during the period from when such dividend is declared through the
date that the payment is made in U.S. dollars. For further discussion with
respect to such currency fluctuation, see Item 5, Operating And Financial Review And Prospects --Impact of Inflation
and Devaluation on Results of Operations, Liabilities, and Assets.

55

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Taxation

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

General Corporate
Tax Structure

In general, Israeli companies are currently subject to company tax at
the rate of 36% of taxable income. However, as is in our case, the rate is
effectively reduced for income derived from an Approved Enterprise, as set
forth below.

Law for the
Encouragement of Capital Investments, 1959

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

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

Taxable income of a company derived from an Approved Enterprise is
subject to Company Tax exempt for a period of ten years (rather than 36% as
stated above) for the Benefit Period. The Benefit Period is a period of seven
years commencing with the year in which the Approved Enterprise first generated
taxable income (limited to twelve years from commencement of production or
fourteen years from the date of approval, whichever is earlier) and, under
certain circumstances (as further detailed below), extending to a maximum of
ten years from the commencement date. In the event a company is operating under
more than one approval or that its capital investments are only partly approved
(a Mixed Enterprise), its effective Company Tax rate is the result of a
weighted combination of the various applicable rates.

56

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

For a company with foreign investment of:

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

Should our
foreign shareholdings exceed 25%, future Approved Enterprises would qualify for
reduced tax rates for an additional three years, after the seven years
mentioned above. However, there can be no assurance that we will attain
approval for additional Approved Enterprises or that the provisions of this Law
will not change or that the above-mentioned shareholding proportion will be
reached for each subsequent year.

Grants and certain other incentives received by a company in accordance
with the Investment Law remain subject to final ratification by the Israel
Investment Center and final determination by the Israel Tax Authority. Such
ratification and determination are conditional upon fulfillment of all of the
terms set forth in the applicable certificate of approval. These conditions
include the filing of periodic reports and the requirement that the minimum
proportion of our paid-up capital to our fixed assets be 30%. In the event that
we do not fulfill these conditions in whole or in part, the benefits can be
cancelled and we may be required to refund the amount of the benefits with the
addition of linkage differences and interest. We believe that our Approved
Enterprises currently operate in compliance with all applicable conditions and
criteria, but there can be no assurance that they will continue to do so in the
future.

57

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Law for the
Encouragement of Industrial Research and Development, 1984

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

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

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

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

Tax Benefits and Grants for Research and
Development

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

Law for the
Encouragement of Industry (Taxes), 1969

The following preferred corporate tax benefits are available to
Industrial Corporations as defined under the Law for the Encouragement of
Industry (Taxes), 1969. We believe that we qualify as an Industrial
Corporation.

58

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| | (a)
  Deduction of purchases of know-how and patents over eight years for tax
  purposes.                                             
| | --------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                       
| | (b)
  Deduction for tax purposes of expenses incurred in connection with certain
  public securities issuances                        
| |                                                                                                                                       
| | (c)
  Accelerated depreciation rates on equipment and buildings.                                                                      
| |                                                                                                                                       
| | (d) Under
  specified conditions, an election to file consolidated tax returns with
  additional related Israeli Industrial Companies.

Taxation under Inflationary Conditions

Under the Income Tax Law (Inflationary Adjustments), 1985 (the
Inflationary Adjustments Law), results for tax purposes are measured in real
terms, in accordance with the changes in the Israeli consumer price index. The
law also provides for the full taxation of gains from the sale of certain
traded securities, which would otherwise be taxed at a reduced rate when
derived by certain categories of corporate taxpayers. We are taxed under the
Inflationary Adjustments Law.

Israeli Capital
Gains Tax

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

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

59

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Pursuant to the U.S.--Israel Tax Treaty, the sale,
exchange or disposition of ordinary shares by a person who qualifies as a
resident of the United States within the meaning of the U.S.--Israel Tax Treaty
and who is entitled to claim the benefits afforded to such resident
under the U.S.--Israel Tax Treaty (Treaty U.S. Resident) will, in general,
not be subject to the Israeli capital gains tax, unless such Treaty U.S.
Resident holds, directly or indirectly, shares representing 10% or more of the
voting power of the company during any part of the 12-month period preceding
such sale, exchange or disposition. A sale, exchange or disposition of ordinary
shares by a Treaty U.S. Resident who holds, directly or indirectly, shares
representing 10% or more of the voting power of the company at any time during
such preceding 12-month period would be subject to Israeli tax if not otherwise
exempt; however, under the U.S.--Israel Tax Treaty, such Treaty U.S. Resident
would be permitted to claim a credit for such taxes against the U.S. income tax
imposed with respect to such sale, exchange or disposition, subject to the
limitations applicable to foreign tax credits.

Taxation of
Non-Residents

Non-residents of Israel are subject to income tax on income derived
from sources in Israel. On distributions of dividends other than bonus shares
(stock dividends), income tax at the rate of 25% (15% for dividends generated
by an Approved Enterprise) is withheld at source, unless a different rate is
provided in a treaty between Israel and the shareholders country of residence.
The U.S.-Israel Tax Treaty provides for a maximum tax of 25% on dividends paid
to a Treaty U.S. Resident. However, under the Investment Law, dividends
generated by an Approved Enterprise are taxed at the rate of 15% and such rate
is to be withheld at source.

Residents of the United States will generally have taxes in Israel
withheld at source.  Such persons
generally would be entitled to a credit or deduction for United States Federal
income tax purposes for the amount of such taxes withheld, subject to
limitations applicable to foreign tax credits.

Effective Corporate Tax Rate

Our effective tax rate in Israel was 0% in 1999, 2000, 2001 and 2002
(the regular rate of corporate tax being 36%). Four of our investment programs
have received Approved Enterprise status under the Investment Law, pursuant to
which we have elected to forego certain Israeli government grants in return for
an alternate package of tax benefits. All of our income has been generated
through our Approved Enterprise programs. The Benefit Period for our first
investment program ends in 2003.  The
Benefit Period for our second investment program ends in 2004.  The Benefit Period for our third investment
program ends in 2006. The Benefit Period for our forth investment program will
commence in the year in which we first generate taxable income and will
continue for a period of ten years. Our first three investment programs have
been ratified by the Israeli Investment Center. The tax incentives that we
receive from the fourth program or that we receive from future investment
programs in accordance with the Investment Law remain subject to final
ratification by the Israel Investment Center, such ratification being
conditional upon fulfillment of all terms of the approved program.  The tax incentives that we receive from the
third and fourth programs or that we receive from future investment programs in
accordance with the Investment Law remain subject to final determination by the
Israel Tax Authority, such determination being conditional upon fulfillment of
all terms of the approved program. In the event we distribute to our
shareholders a cash dividend from tax-exempt income attributable to one or more
of our Approved Enterprises, we would incur a company tax liability of 25% of
the earnings so distributed (the amount of the distribution being deemed to
include the tax thereon).  Such a
dividend would be liable to 15% withholding tax.

60

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Our taxes outside Israel are dependent on
operations in each jurisdiction as well as relevant laws and treaties. We
incurred tax expenses in the aggregate amount of approximately $6,000, $6,000,
$38,000, and $67,000 outside of Israel in 2002, 2001, 2000, and 1999,
respectively. There can be no assurance that changes in our operations or
applicable tax treaties or laws will not subject us to taxation. We received final tax assessments for the years since our incorporation
ending and including December 31, 1999. 
Our subsidiaries have not received final tax assessments since their
respective incorporations.

Documents on Display

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

You may review a copy of our filings with the SEC, including any
exhibits and schedules, at the SECs public reference facilities in Room 1024,
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 and at the
regional offices of the SEC located at 7 World Trade Center, 13th Floor, New York,
New York 10048 and at the Northwestern Atrium Center, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661. You may also obtain copies of such
materials from the Public Reference Section of the SEC, Room 1024, Judiciary
Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. You
may call the SEC at 1-800-SEC-0330 for further information on the public
reference rooms.    While as a foreign
private issuer we are now required to file our annual report through the SECs
EDGAR system, we are still exempt from filing our periodic reports through the
SECs EDGAR system, consequently they are not available on the SECs Web site.
You may read and copy any reports, statements or other information that we file
with the SEC at the SEC facilities listed above. These SEC filings are also
available to the public from commercial document retrieval services.

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

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|ITEM 11. | QUANTITATIVE AND QUALITATIVE DISCLOSURES
  ABOUT MARKET RISK.
|-------- | -------------------------------------------------------------

Foreign Currency Exchange Risk

Most of our sales are made in U.S. Dollars.  However, we occasionally agree to make sales in other currencies,
usually the Japanese Yen and the Euro. During 2002, less than 10% of our sales
were made in non-U.S. Dollar currencies. This exposes us to market risk from
changes in foreign exchange rates vis-a-vis the U.S. dollar.

The cost of our Israel operations, as expressed in U.S. dollars, is
influenced by the extent to which any increase in the rate of inflation in
Israel is not offset (or is offset on a lagging basis) by a devaluation of the
NIS in relation to the U.S. dollar. The inflation rate in Israel was 6.5%, in
2002.

As a result of the differential between the rate of inflation and the
rate of devaluation of the NIS, we experienced decreases in the costs of our
Israel operations, as expressed in U.S. dollars, in 2002.

A significant portion of our expenditures is employee
compensation-related. Salaries are paid in NIS and are partially adjusted for
changes in the CPI. The devaluation of the NIS against the U.S. dollar
decreased employee compensation expenditures as expressed in dollars. Some of
our other NIS-based expenses, such as payments of rent for our facilities, are
either currently adjusted to U.S. dollars or are adjusted to the CPI.

Nevertheless, the devaluation of the NIS has not materially affected
our results of operations in such periods. For further discussion with respect
to the devaluation of the NIS, see the discussion under the caption Impact of
Inflation and Devaluation on Results of Operations, Liabilities, and Assets in
Item 5.

We generally utilize foreign currency exchange contracts to mitigate
these risks.  Under these contracts,
increases or decreases in our foreign currency transactions are partially
offset by gains and losses on the forward contracts, so as to mitigate the
possibility of foreign currency transaction gains and losses. We do not use
forward contracts for trading purposes. 
All outstanding forward contracts at the end of a period are
marked-to-market with unrealized gains and losses included in other income,
net, and thus are recognized in income in advance of the actual foreign
currency cash flows.  As these forward
contracts mature, the realized gains and losses are recorded and are included
in net income as a component of other income, net.  Our ultimate realized gain or loss with respect to currency
fluctuations will depend on the currency exchange rates and other factors in
effect as the contracts mature.

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|ITEM 12. | DESCRIPTION OF SECURITIES OTHER THAN EQUITYSECURITIES.
|-------- | ------------------------------------------------------

Not
applicable.

PART II

|ITEM 13. | DEFAULTS, DIVIDEND ARREARAGES ANDDELINQUENCIES.
|-------- | -----------------------------------------------

None.

|ITEM 14. | MATERIAL MODIFICATIONS TO THE RIGHTS OF
  SECURITY HOLDERS AND USE OF PROCEEDS.
|-------- | -------------------------------------------------------------------------------

None.

|ITEM 15. | CONTROLS AND PROCEDURES
|-------- | -----------------------

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

|ITEM 16. | [RESERVED]
|-------- | ----------

PART
III

|ITEM 17. | FINANCIAL STATEMENTS.
|-------- | ---------------------

Not
applicable.

|ITEM 18. | FINANCIAL STATEMENTS.
|-------- | ---------------------

See
pages F-1 to F-30.

|ITEM 19. | EXHIBITS.
|-------- | ---------

|1.1 | Articles of
  Association, as amended of the Registrant(1)
|--- | ----------------------------------------------------------
|    |                                                           
|1.2 | Memorandum
  of Association of the Registrant(1)          

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|4.1  | Formation
  Agreement dated July 4, 1993, among Elbit Ltd., Yossi Barath and Hillel Avni(1)(2)                                                                      
|---- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------
|     |                                                                                                                                                                     
|4.2  | Amendment
  Agreement dated October 26, 1998, among Elbit Ltd., Yossi Barath and Hillel
  Avni(3)                                                                   
|     |                                                                                                                                                                     
|4.3  | Amendment
  No.1 to License Agreement of June 12, 1996 between Elbit Ltd., Elbit Vision
  Systems Ltd., and Dr. Ilan Tamches, dated May 12, 2002.(4)                
|     |                                                                                                                                                                     
|4.4  | Share
  Purchase Agreement dated February 7, 2001, among Elbit Vision Systems Ltd.,
  Nir Alon and Altro Warenhandels GmbH(3)                                       
|     |                                                                                                                                                                     
|4.5  | Amendment to
  the Share Purchase Agreement of February 7, 2001, among Elbit Vision Systems
  Ltd., Nir Alon and Altro Warenhandelsges GmbH, dated March 18, 2002(4)
|     |                                                                                                                                                                     
|4.6  | Share
  Purchase Agreement dated March 18, 2002, between Elbit Vision Systems Ltd.
  and Altro Warenhandels GmbH.(4)                                                
|     |                                                                                                                                                                     
|4.7  | Registration
  Rights Agreement dated February 7, 2001, between Elbit Vision Systems Ltd.
  and Nir Alon(3)                                                         
|     |                                                                                                                                                                     
|8.1  | List of
  subsidiaries                                                                                                                                              
|     |                                                                                                                                                                     
|12.1 | Certification
  by Co-Chief Executive Officers pursuant to section 906 of the Sarbanes-Oxley
  Act of 2002                                                          
|     |                                                                                                                                                                     
|12.2 | Certification
  by Chief Financial Officer pursuant to section 906 of the Sarbanes-Oxley Act
  of 2002                                                              
|     |                                                                                                                                                                     
|12.3 | Consent of Luboshitz
  Kasierer.                                                                                                                                    

---

|(1) | Incorporated
  by reference from our Registration Statement on Form F-1, File No. 333-03080,
  as amended, filed with the Commission on April 2, 1996.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------
|(2) | English
  translation or summary from Hebrew original.                                                                                                
|(3) | Incorporated
  by reference from our Annual Report on Form 20-F for the year ended December
  31, 2000.                                               
|(4) | Incorporated
  by reference from our Annual Report on Form 20-F for the year ended December
  31, 2001.                                               

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SIGNATURES

Pursuant to the requirements of Section 12 of the Securities Exchange
Act of 1934, the registrant certifies that it meets all the requirements for
filing on Form 20-F and has duly caused and authorized the undersigned to sign
this annual report on its behalf in the City of Yoqneam, State of Israel, on
this 29th day of June 2003.

ELBIT VISION SYSTEMS LTD.

| | By:                                    | /S/ ZAMI
  ABERMAN | 
| | -------------------------------------- | ------------------ | 
| |                                        |                    | 
| |                                        |                    | 
| | Zami Aberman
  Chief Executive Officer

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CERTIFICATIONS

I, Zami Aberman, certify that:

|1. | I have
  reviewed this annual report on Form 20-F of Elbit Vision Systems Ltd.;                                                                                                                                                                                                                                                                                                                 
|-- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                                                 
|2. | Based on my
  knowledge, this annual report does not contain any untrue statement of a
  material fact or omit to state a material fact necessary to make the
  statements made, in light of the circumstances under which such statements
  were made, not misleading with respect to the period covered by this annual
  report;                                                              
|   |                                                                                                                                                                                                                                                                                                                                                                                                 
|3. | Based on my
  knowledge, the financial statements, and other financial information included
  in this annual report, fairly present in all material respects the financial
  condition, results of operations and cash flows of the registrant as of, and
  for, the periods presented in this annual report;                                                                                   
|   |                                                                                                                                                                                                                                                                                                                                                                                                 
|4. | The
  registrants other certifying officers and I are responsible for establishing
  and maintaining disclosure controls and procedures (as defined in Exchange
  Act Rules 13a-14 and 15d-14) for the registrant and have:                                                                                                                                                                    
|   |                                                                                                                                                                                                                                                                                                                                                                                                 
|   | a)                                                                                                                                                                                                                                                                                                                                                                                              
|   |                                                                                                                                                                                                                                                                                                                                                                                                 
|   | b)                                                                                                                                                                                                                                                                                                                                                                                              
|   |                                                                                                                                                                                                                                                                                                                                                                                                 
|   | c)                                                                                                                                                                                                                                                                                                                                                                                              
|   |                                                                                                                                                                                                                                                                                                                                                                                                 
|5. | The
  registrants other certifying officers and I have disclosed, based on our
  most recent evaluation, to the registrants auditors and the audit committee
  of registrants board of directors (or persons performing the equivalent
  function):                                                                                                                                          
|   |                                                                                                                                                                                                                                                                                                                                                                                                 
|   | a)                                                                                                                                                                                                                                                                                                                                                                                              
|   |                                                                                                                                                                                                                                                                                                                                                                                                 
|   | b)                                                                                                                                                                                                                                                                                                                                                                                              
|   |                                                                                                                                                                                                                                                                                                                                                                                                 
|6. | The
  registrants other certifying officers and I have indicated in this annual
  report whether or not there were significant changes in internal controls or
  in other factors that could significantly affect internal controls subsequent
  to the date of our most recent evaluation, including any corrective actions
  with regard to significant deficiencies and material weaknesses.

66

---

---

June 29, 2003

| | /S/    ZAMI
  ABERMAN     | 
| | ------------------------- | 
| |                           | 
| | Zami Aberman             
| | Chief
  Executive Officer

67

---

---

CERTIFICATIONS

I, Yaky Yanay, certify that:

|1. | I have
  reviewed this annual report on Form 20-F of Elbit Vision Systems Ltd.;                                                                                                                                                                                                                                                                                                                 
|-- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                                                 
|2. | Based on my
  knowledge, this annual report does not contain any untrue statement of a
  material fact or omit to state a material fact necessary to make the
  statements made, in light of the circumstances under which such statements
  were made, not misleading with respect to the period covered by this annual
  report;                                                              
|   |                                                                                                                                                                                                                                                                                                                                                                                                 
|3. | Based on my
  knowledge, the financial statements, and other financial information included
  in this annual report, fairly present in all material respects the financial
  condition, results of operations and cash flows of the registrant as of, and
  for, the periods presented in this annual report;                                                                                   
|   |                                                                                                                                                                                                                                                                                                                                                                                                 
|4. | The
  registrants other certifying officers and I are responsible for establishing
  and maintaining disclosure controls and procedures (as defined in Exchange
  Act Rules 13a-14 and 15d-14) for the registrant and have:                                                                                                                                                                    
|   |                                                                                                                                                                                                                                                                                                                                                                                                 
|   | a)                                                                                                                                                                                                                                                                                                                                                                                              
|   |                                                                                                                                                                                                                                                                                                                                                                                                 
|   | b)                                                                                                                                                                                                                                                                                                                                                                                              
|   |                                                                                                                                                                                                                                                                                                                                                                                                 
|   | c)                                                                                                                                                                                                                                                                                                                                                                                              
|   |                                                                                                                                                                                                                                                                                                                                                                                                 
|5. | The
  registrants other certifying officers and I have disclosed, based on our
  most recent evaluation, to the registrants auditors and the audit committee
  of registrants board of directors (or persons performing the equivalent
  function):                                                                                                                                          
|   |                                                                                                                                                                                                                                                                                                                                                                                                 
|   | a)                                                                                                                                                                                                                                                                                                                                                                                              
|   |                                                                                                                                                                                                                                                                                                                                                                                                 
|   | b)                                                                                                                                                                                                                                                                                                                                                                                              
|   |                                                                                                                                                                                                                                                                                                                                                                                                 
|6. | The
  registrants other certifying officers and I have indicated in this annual
  report whether or not there were significant changes in internal controls or
  in other factors that could significantly affect internal controls subsequent
  to the date of our most recent evaluation, including any corrective actions
  with regard to significant deficiencies and material weaknesses.

68

---

---

June 29, 2003

| | /S/    YAKY
  YANAY       | 
| | ------------------------- | 
| |                           | 
| | Yaky Yanay               
| | Chief
  Financial Officer

69

---

---

EXHIBIT 8.1

The following table sets forth a list of our subsidiaries.

|Name of subsidiary              |  | Jurisdiction of incorporation
|------------------------------- |  | -----------------------------
|                                |  |                              
|Elbit Vision
  Systems US, Inc. |  | Delaware                     
|Elbit Vision
  Systems B.V.     |  | Holland                      

70

---

---

EXHIBIT 12.1

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

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

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

|                | /S/ ZAMI
  ABERMAN       
|--------------- | -------------------------
|                | Zami Aberman             
|June 29,
  2003 | Chief
  Executive Officer

A signed
original of this written statement required by Section 906 has been provided to
the Company and will be retained by the Company and furnished to the Securities
and Exchange Commission or its staff upon request.

71

---

---

EXHIBIT 12.2

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

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

| | 3. | the Report
  fully complies with the requirements of section 13(a) of the Securities
  Exchange Act of 1934; and                                        
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                         
| | 4. | the
  information contained in the Report fairly presents, in all material
  respects, the financial condition and results of operations of the Company.

|                | /S/ YAKY
  YANAY         
|--------------- | -------------------------
|                | Yaky Yanay               
|June 29,
  2003 | Chief
  Financial Officer

A signed
original of this written statement required by Section 906 has been provided to
the Company and will be retained by the Company and furnished to the Securities
and Exchange Commission or its staff upon request.

72

---

---

ELBIT VISION SYSTEMS LTD. AND ITS SUBSIDIARIES

CONSOLIDATED FINANCIAL STATEMENTSas of December 31, 2002
(In thousands of U.S. dollars)

---

---

ELBIT VISION SYSTEMS LTD. AND ITS SUBSIDIARIES

CONTENTS

|                                    |                                                  | Page  
|----------------------------------- | ------------------------------------------------ | ------
|                                    |                                                  |       
|                                    |                                                  |       
|REPORT OF
  INDEPENDENT AUDITORS    | 2-2A                                            
|                                    |                                                  |       
|CONSOLIDATED
  FINANCIAL STATEMENTS |                                                 
|                                    |                                                  |       
|                                    | Consolidated
  Balance Sheets                    | 3     
|                                    |                                                  |       
|                                    | Consolidated
  Statements of Operations          | 4     
|                                    |                                                  |       
|                                    | Statements
  of Changes in Shareholders Equity  | 5     
|                                    |                                                  |       
|                                    | Consolidated
  Statements of Cash Flows          | 6     
|                                    |                                                  |       
|                                    | Notes to the
  Consolidated Financial Statements | 7 - 30

#   #   #   #   #  
#   #

---

---

REPORT OF INDEPENDENT AUDITORS

To the Shareholders ofElbit Vision Systems Ltd.

We have audited the accompanying consolidated balance sheet of Elbit
Vision Systems Ltd. (the Company) and its subsidiaries as of December 31,
2002, and the related consolidated statements of operations, changes in
shareholders equity and cash flows for the year then ended. These financial
statements are the responsibility of the Companys management. Our
responsibility is to express an opinion on these financial statements based on
our audit. The financial statements as of December 31, 2001 and for the years
ended December 31, 2001 and 2000 were audited by other auditors who have ceased
operations as a foreign associated firm of the Securities and Exchange
Commission Practice Section of the American Institute of Certified Public
Accountants and whose report dated March 18, 2002, expressed an unqualified
opinion on those statements.

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

In our opinion, the consolidated financial statements referred to
above, present fairly, in all material respects, the consolidated financial
position of the Company and its subsidiaries as of December 31, 2002, and the
consolidated results of their operations, and cash flows for the year then
ended, in conformity with accounting principles generally accepted in the
United States.

| | Luboshitz Kasierer                                  
| | ----------------------------------------------------
| | An affiliate member of Ernst & Young
  International

Haifa, Israel
June 25, 2002

- 2 -

---

---

This is a copy of the
previously issued Independent Public Accountants report of Arthur Andersen.
The report has not been reissued by Arthur Andersen.

REPORT OF
INDEPENDENT PUBLIC ACCOUNTANTS

To the Shareholders of

ELBIT VISION SYSTEMS
LTD.

We have audited the accompanying consolidated balance sheets of Elbit
Vision Systems Ltd. (the Company) as of December 31, 2001 and 2000, and the
related consolidated statements of operations, changes in shareholders equity
and cash flows for each of the three years in the period ended December 31,
2001.  These financial statements are
the responsibility of the Companys Board of Directors and management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

We conducted our audits in accordance with generally accepted auditing
standards in the United States and in Israel, including those prescribed under
the Auditors Regulations (Auditors Mode of Performance), 1973. Those
standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement.  An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements.  An audit also
includes assessing the accounting principles used and significant estimates
made by the Board of Directors and management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of the Company as of December 31, 2001 and 2000, and the consolidated results
of operations, changes in shareholders equity and cash flows for each of the
three years in the period ended December 31, 2001, in conformity with
accounting principles generally accepted in the United States.

| | LUBOSHITZ KASIERER
| | ------------------
| | Arthur Andersen   

Haifa, Israel
March 18, 2002

- 2 -

---

---

ELBIT VISION SYSTEMS LTD. AND ITS SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS(In thousands of U.S. Dollars, except share data)

|                                         |                                                                                                                                                                             |      |      | December 31, |    
|---------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ---- | ---- | ------------ | ---
|                                         |                                                                                                                                                                             |      |      |              |    
|                                         |                                                                                                                                                                             | Note |      | 2002         |    
|                                         |                                                                                                                                                                             |      |      |              |    
|ASSETS                                   |                                                                                                                                                                             |      |      |              |    
|CURRENT ASSETS                           |                                                                                                                                                                             |      |      |              |    
|                                         | Cash and cash equivalents                                                                                                                                                   |      |      |              | $  
|                                         | Marketable securities                                                                                                                                                       |      | (3)  |              |    
|                                         | Trade receivables, net of
  allowance for doubtful accounts of $1,225 and
    $618 as of December 31, 2002 and December 31, 2001, respectively                              |      |      |              |    
|                                         | Other receivables and
  prepaid expenses                                                                                                                                    |      | (4)  |              |    
|                                         | Inventories                                                                                                                                                                 |      | (5)  |              |    
|                                         |                                                                                                                                                                             |      |      |              |    
|                                         | Total current assets                                                                                                                                                        |      |      |              |    
|                                         |                                                                                                                                                                             |      |      |              |    
|LONG-TERM INVESTMENTS                    |                                                                                                                                                                             |      |      |              |    
|                                         | Long-term trade
  receivables, net of allowance for doubtful
    accounts of $302 and $280 as of December 31, 2002 and
    December 31, 2001, respectively                  |      | (6)  |              |    
|                                         | Deposits and loans                                                                                                                                                          |      | (7)  |              |    
|                                         | Severance pay funds                                                                                                                                                         |      | (10) |              |    
|                                         |                                                                                                                                                                             |      |      |              |    
|                                         | Total long-term
  investments                                                                                                                                               |      |      |              |    
|                                         |                                                                                                                                                                             |      |      |              |    
|PROPERTY AND EQUIPMENT,
  NET            |                                                                                                                                                                             | (8)  |      |              | 533
|                                         |                                                                                                                                                                             |      |      |              |    
|                                         | Total assets                                                                                                                                                                |      |      |              | $  
|                                         |                                                                                                                                                                             |      |      |              |    
|LIABILITIES
  AND SHAREHOLDERS EQUITY   |                                                                                                                                                                             |      |      |              |    
|CURRENT LIABILITIES                      |                                                                                                                                                                             |      |      |              |    
|                                         | Related party                                                                                                                                                               |      | (18) |              | $  
|                                         | Trade payables                                                                                                                                                              |      |      |              |    
|                                         | Other payables and accrued
  expenses                                                                                                                                       |      | (9)  |              |    
|                                         | Advances from customers                                                                                                                                                     |      |      |              |    
|                                         |                                                                                                                                                                             |      |      |              |    
|                                         | Total current liabilities                                                                                                                                                   |      |      |              |    
|                                         |                                                                                                                                                                             |      |      |              |    
|LONG-TERM LIABILITIES                    |                                                                                                                                                                             |      |      |              |    
|                                         | Related party                                                                                                                                                               |      | (18) |              |    
|                                         | Accrued severance pay                                                                                                                                                       |      | (10) |              |    
|                                         |                                                                                                                                                                             |      |      |              |    
|                                         | Total long-term
  liabilities                                                                                                                                               |      |      |              |    
|                                         |                                                                                                                                                                             |      |      |              |    
|CONTINGENT LIABILITIES AND
  COMMITMENTS |                                                                                                                                                                             | (11) |      |              |    
|                                         |                                                                                                                                                                             |      |      |              |    
|SHAREHOLDERS EQUITY                     |                                                                                                                                                                             |      |      |              |    
|                                         | Share capital                                                                                                                                                               |      | (12) |              |    
|                                         | Ordinary shares, NIS 1 par
  value; Authorized - 20,000,000 as of
  December 31, 2002 and 2001; 
  issued and outstanding - 10,166,667 as
    of December 31, 2002 and 2001 |      |      |              |    
|                                         | Additional
  paid in capital                                                                                                                                                |      |      |              |    
|                                         | Accumulated
  deficit                                                                                                                                                       |      |      |              |    
|                                         |                                                                                                                                                                             |      |      |              |    
|                                         | Total shareholders equity                                                                                                                                                  |      |      |              |    
|                                         |                                                                                                                                                                             |      |      |              |    
|                                         | Total liabilities and
  shareholders equity                                                                                                                                |      |      |              | $  
|                                         |                                                                                                                                                                             |      |      |              |    
|                                         |                                                                                                                                                                             |      |      |              |    

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

- 3 -

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ELBIT VISION SYSTEMS LTD. AND ITS SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS(In thousands of U.S. Dollars, except per share data)

|                                                                                                                        |                                   |      |  |  | Year ended December 31, |       
|----------------------------------------------------------------------------------------------------------------------- | --------------------------------- | ---- |  |  | ----------------------- | ------
|                                                                                                                        |                                   |      |  |  |                         |       
|                                                                                                                        |                                   | Note |  |  | 2002                    |       
|                                                                                                                        |                                   |      |  |  |                         |       
|Revenues                                                                                                                |                                   | (13) |  |  | $                       | 7,178 
|                                                                                                                        |                                   |      |  |  |                         |       
|Cost of
  revenues                                                                                                      |                                   | (14) |  |  |                         | 4,668 
|                                                                                                                        |                                   |      |  |  |                         |       
|                                                                                                                        |                                   |      |  |  |                         |       
|                                                                                                                        | Gross profit
  (loss)             |      |  |  |                         |       
|                                                                                                                        |                                   |      |  |  |                         |       
|                                                                                                                        |                                   |      |  |  |                         |       
|Research and
  development costs, net                                                                                   |                                   | (15) |  |  |                         | 1,340 
|                                                                                                                        |                                   |      |  |  |                         |       
|Marketing
  and selling expenses                                                                                        |                                   |      |  |  |                         | 1,487 
|                                                                                                                        |                                   |      |  |  |                         |       
|General and
  administrative expenses                                                                                   |                                   |      |  |  |                         | 1,404 
|                                                                                                                        |                                   |      |  |  |                         |       
|                                                                                                                        |                                   |      |  |  |                         | 4,231 
|                                                                                                                        |                                   |      |  |  |                         |       
|                                                                                                                        |                                   |      |  |  |                         |       
|                                                                                                                        | Operating
  loss                  |      |  |  |                         |       
|                                                                                                                        |                                   |      |  |  |                         |       
|Financing
  income, net                                                                                                 |                                   | (16) |  |  |                         | 34    
|                                                                                                                        |                                   |      |  |  |                         |       
|Other income
  (expenses), net                                                                                          |                                   |      |  |  |                         | 9     
|                                                                                                                        |                                   |      |  |  |                         |       
|                                                                                                                        |                                   |      |  |  |                         |       
|                                                                                                                        | Loss before
  taxes on income     |      |  |  |                         |       
|                                                                                                                        |                                   |      |  |  |                         |       
|Taxes on
  income                                                                                                       |                                   | (17) |  |  |                         | 6     
|                                                                                                                        |                                   |      |  |  |                         |       
|                                                                                                                        |                                   |      |  |  |                         |       
|                                                                                                                        | Loss from
  continuing operations |      |  |  |                         |       
|                                                                                                                        |                                   |      |  |  |                         |       
|Cumulative
  effect of change in accounting principle,
    net                                                          |                                   | (2U) |  |  |                         | -     
|                                                                                                                        |                                   |      |  |  |                         |       
|                                                                                                                        |                                   |      |  |  |                         |       
|                                                                                                                        | Net loss                          |      |  |  |                         | $     
|                                                                                                                        |                                   |      |  |  |                         |       
|                                                                                                                        |                                   |      |  |  |                         |       
|BASIC AND
  DILUTED NET LOSS PER SHARE:                                                                                 |                                   |      |  |  |                         |       
|Loss
  from continuing operations                                                                                       |                                   |      |  |  | $                       | (0.17 
|Cumulative
  effect of change in accounting principle                                                                   |                                   |      |  |  |                         | -     
|                                                                                                                        |                                   |      |  |  |                         |       
|Basic
  and diluted net loss per share                                                                                  |                                   |      |  |  | $                       | (0.17 
|                                                                                                                        |                                   |      |  |  |                         |       
|Weighted
  average number of shares used in
       computing basic and diluted net loss per share
       (in thousands) |                                   |      |  |  |                         | 10,167
|                                                                                                                        |                                   |      |  |  |                         |       

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

- 4 -

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ELBIT VISION SYSTEMS LTD. AND ITS SUBSIDIARIES

STATEMENTS OF CHANGES
IN SHAREHOLDERS EQUITY(In thousands of U.S. Dollars, except share data)

|                                     |  | Number
  of shares |  | Share
  capital |       | Additional
  paid in
  capital |  | Accumulated
  deficit |        | Total
  Shareholders
  equity | 
|------------------------------------ |  | ------------------ |  | --------------- | ----- | ------------------------------ |  | --------------------- | ------ | ------------------------------ | 
|                                     |  |                    |  |                 |       |                                |  |                       |        |                                | 
|Balance as
  of
   January 1, 2000   |  | 8,666,667          |  | $               | 852   |                                |  | $                     | 16,728 |                                | 
|                                     |  |                    |  |                 |       |                                |  |                       |        |                                | 
|Net loss                             |  | -                  |  |                 | -     |                                |  |                       | -      |                                | 
|                                     |  |                    |  |                 |       |                                |  |                       |        |                                | 
|                                     |  |                    |  |                 |       |                                |  |                       |        |                                | 
|Balance as
  of
   December 31, 2000 |  | 8,666,667          |  |                 | 852   |                                |  |                       | 16,728 |                                | 
|                                     |  |                    |  |                 |       |                                |  |                       |        |                                | 
|Shares
  issued (1) (2)              |  | 1,500,000          |  |                 | 356   |                                |  |                       | 1,057  |                                | 
|                                     |  |                    |  |                 |       |                                |  |                       |        |                                | 
|Net loss                             |  | -                  |  |                 | -     |                                |  |                       | -      |                                | 
|                                     |  |                    |  |                 |       |                                |  |                       |        |                                | 
|                                     |  |                    |  |                 |       |                                |  |                       |        |                                | 
|Balance as
  of
   December 31, 2001 |  | 10,166,667         |  |                 | 1,208 |                                |  |                       | 17,785 |                                | 
|                                     |  |                    |  |                 |       |                                |  |                       |        |                                | 
|Net loss                             |  | -                  |  |                 | -     |                                |  |                       | -      |                                | 
|                                     |  |                    |  |                 |       |                                |  |                       |        |                                | 
|                                     |  |                    |  |                 |       |                                |  |                       |        |                                | 
|Balance as
  of
   December 31, 2002 |  | 10,166,667         |  | $               | 1,208 |                                |  | $                     | 17,785 |                                | 
|                                     |  |                    |  |                 |       |                                |  |                       |        |                                | 

(1)
Net of issuance expenses of $87.

(2)
See note 12A.

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

- 5 -

---

---

ELBIT VISION SYSTEMS LTD. AND ITS SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS(In thousands of U.S. Dollars)

|                                                                                                   |                                                                                                         | Year ended December 31, |      
|-------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------- | ----------------------- | -----
|                                                                                                   |                                                                                                         |                         |      
|                                                                                                   |                                                                                                         | 2002                    |      
|                                                                                                   |                                                                                                         |                         |      
|CASH FLOWS FROM OPERATING
  ACTIVITIES                                                             |                                                                                                         |                         |      
|                                                                                                   | Net loss                                                                                                |                         | $    
|                                                                                                   | Adjustments required to
  reconcile net loss to net cash
   provided by (used in) operating activities: |                         |      
|                                                                                                   | Depreciation                                                                                            |                         |      
|                                                                                                   | Currency exchange
  differences on deposits                                                             |                         |      
|                                                                                                   | Impairment of assets                                                                                    |                         |      
|                                                                                                   | Accrued interest on
  liability                                                                         |                         |      
|                                                                                                   | Loss (gain) from sale of
  property and equipment                                                       |                         |      
|                                                                                                   | Decrease
  (increase) in marketable securities                                                          |                         |      
|                                                                                                   | Accrued severance pay, net                                                                              |                         |      
|                                                                                                   | Decrease in trade and
  other receivables                                                               |                         |      
|                                                                                                   | Decrease (increase) in
  inventories                                                                    |                         |      
|                                                                                                   | Increase (decrease) in
  advances from customers                                                        |                         |      
|                                                                                                   | Increase (decrease) in
  trade and other payables                                                       |                         |      
|                                                                                                   |                                                                                                         |                         |      
|                                                                                                   | Net cash provided by (used
  in) operating activities                                                   |                         |      
|                                                                                                   |                                                                                                         |                         |      
|                                                                                                   |                                                                                                         |                         |      
|CASH FLOWS FROM INVESTING
  ACTIVITIES                                                             |                                                                                                         |                         |      
|                                                                                                   | Purchase of equipment                                                                                   |                         |      
|                                                                                                   | Proceeds from sale of
  equipment                                                                       |                         |      
|                                                                                                   | Investment in long-term
  deposits                                                                      |                         |      
|                                                                                                   | Collection of long-term
  deposits                                                                      |                         |      
|                                                                                                   |                                                                                                         |                         |      
|                                                                                                   | Net cash used in investing
  activities                                                                 |                         |      
|                                                                                                   |                                                                                                         |                         |      
|                                                                                                   |                                                                                                         |                         |      
|CASH FLOWS FROM FINANCING
  ACTIVITIES                                                             |                                                                                                         |                         |      
|                                                                                                   | Proceeds from issuance of
  shares, net of issuance expenses                                            |                         |      
|                                                                                                   | Short-term bank credit,
  net                                                                           |                         |      
|                                                                                                   | Increase (decrease) in
  related party                                                                  |                         |      
|                                                                                                   |                                                                                                         |                         |      
|Net cash provided by (used
  in) financing activities                                              |                                                                                                         |                         | -    
|                                                                                                   |                                                                                                         |                         |      
|                                                                                                   |                                                                                                         |                         |      
|DECREASE IN CASH AND CASH
  EQUIVALENTS                                                            |                                                                                                         |                         | (129 
|                                                                                                   |                                                                                                         |                         |      
|CASH AND CASH EQUIVALENTS
  AT THE
   BEGINNING OF THE YEAR                                        |                                                                                                         |                         | 1,614
|                                                                                                   |                                                                                                         |                         |      
|CASH AND CASH EQUIVALENTS
  AT THE END OF THE YEAR                                                 |                                                                                                         | $                       | 1,485
|                                                                                                   |                                                                                                         |                         |      
|                                                                                                   |                                                                                                         |                         |      
|SUPPLEMANTAL CASH FLOW
  ACTIVITIES:                                                               |                                                                                                         |                         |      
|                                                                                                   |                                                                                                         |                         |      
|Cash paid during the year
  for:  Interest                                                         |                                                                                                         | $                       | -    
|                                                                                                   |                                                                                                         |                         |      
|                                                                                                   |                                                                                                         |                         |      
|Income taxes                                                                                       |                                                                                                         | $                       | 15   
|                                                                                                   |                                                                                                         |                         |      
|NON - CASH TRASACTION:
   Short-term liability to related party converted to long-term
  liability |                                                                                                         | $                       | -    
|                                                                                                   |                                                                                                         |                         |      
|                                                                                                   |                                                                                                         |                         |      

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

- 6 -

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---

ELBIT VISION SYSTEMS LTD. AND ITS SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

|Note
  1  - | GENERAL                                                                                                                                                   
|----------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------
|            |                                                                                                                                                           
|            | A.                                                                                                                                                        
|            |                                                                                                                                                           
|            |                                                                                                                                                           
|            |                                                                                                                                                           
|            |                                                                                                                                                           
|            |                                                                                                                                                           
|            | B.                                                                                                                                                        
|            |                                                                                                                                                           
|            |                                                                                                                                                           
|            |                                                                                                                                                           
|            |                                                                                                                                                           
|            |                                                                                                                                                           
|Note 2  -   | SIGNIFICANT ACCOUNTING POLICIES                                                                                                                           
|            |                                                                                                                                                           
|            | The
  consolidated financial statements have been prepared in accordance with
  accounting principles generally accepted in the United States (US GAAP).
|            |                                                                                                                                                           
|            | A.                                                                                                                                                        
|            |                                                                                                                                                           
|            |                                                                                                                                                           

- 7 -

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---

ELBIT VISION SYSTEMS LTD. AND ITS SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Cont.)

|Note 2  - | SIGNIFICANT ACCOUNTING POLICIES
  (CONT.)
|--------- | -----------------------------------------
|          |                                          
|          | B.                                       
|          |                                          
|          |                                          
|          |                                          
|          |                                          
|          |                                          
|          |                                          
|          |                                          
|          |                                          
|          |                                          
|          |                                          
|          |                                          
|          | C.                                       
|          |                                          
|          |                                          
|          |                                          
|          | D.                                       
|          |                                          
|          |                                          

- 8 -

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---

ELBIT VISION SYSTEMS LTD. AND ITS SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Cont.)

|Note 2  - | SIGNIFICANT ACCOUNTING POLICIES
  (CONT.)
|--------- | -----------------------------------------
|          |                                          
|          | E.                                       
|          |                                          
|          |                                          
|          |                                          
|          |                                          
|          |                                          
|          | F.                                       
|          |                                          
|          |                                          
|          |                                          
|          | G.                                       
|          |                                          
|          |                                          
|          |                                          
|          | H.                                       
|          |                                          
|          |                                          

- 9 -

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---

ELBIT VISION SYSTEMS LTD. AND ITS SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Cont.)

|Note 2  - | SIGNIFICANT ACCOUNTING POLICIES
  (CONT.)
|--------- | -----------------------------------------
|          |                                          
|          | I.                                       
|          |                                          
|          |                                          

| | Principal annual rates of depreciation: |                                  |  |      
| | --------------------------------------- | -------------------------------- |  | -----
| |                                         | Computers
  and equipment        |  | 10-33
| |                                         | Office
  furniture and equipment |  | 6-10 
| |                                         | Leasehold
  improvements         |  | 10   
| |                                         | Vehicles                         |  | 15   

| | J. | IMPAIRMENT
  OF LONG-LIVED ASSETS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |    | The
  Companys long-lived assets are reviewed for impairment in accordance with
  Statements of Financial Accounting Standard No. 144 Accounting for the
  Impairment or Disposal of Long-Lived Assets(SFAS No. 144) whenever events
  or changes in circumstances indicate that the carrying amount of an asset may
  not be recoverable. Recoverability of assets to be held and used is measured
  by a comparison of the carrying 
  amount of an asset to the future undiscounted cash flows expected to
  be generated by the asset. If such an asset is considered to be impaired, the
  impairment to be recognized is measured by the amount by which the carrying
  amount of the asset exceeds its fair value.
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | K. | REVENUE
  RECOGNITION                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |    | The Company
  and its subsidiaries generate revenues from product sales, including systems,
  and from sales of spare parts, customer services and technical support.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |    | Revenues
  from the sale of products and services are recognized in accordance with
  Staff Accounting Bulletin No. 101 Revenue Recognition in Financial
  Statements (SAB No. 101), when delivery has occurred or services have been
  rendered, persuasive evidence of an arrangement exists, the fee is fixed or
  determinable, no further obligation exists and collectability is probable.                                                                                                                                                                                                                                                                                                                           

- 10 -

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---

ELBIT VISION SYSTEMS LTD. AND ITS SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Cont.)(In thousands of U.S.
dollars)

|Note 2  - | SIGNIFICANT ACCOUNTING POLICIES
  (CONT.)
|--------- | -----------------------------------------
|          |                                          
|          | K.                                       
|          |                                          
|          |                                          
|          |                                          
|          |                                          
|          |                                          
|          |                                          
|          |                                          
|          | L.                                       
|          |                                          
|          |                                          
|          |                                          
|          | M.                                       
|          |                                          
|          |                                          

- 11 -

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---

ELBIT VISION SYSTEMS LTD. AND ITS SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Cont.)

|Note 2  - | SIGNIFICANT ACCOUNTING POLICIES
  (CONT.)
|--------- | -----------------------------------------
|          |                                          
|          | N.                                       
|          |                                          
|          |                                          
|          |                                          
|          | O.                                       
|          |                                          
|          |                                          
|          |                                          
|          |                                          
|          |                                          
|          |                                          

- 12 -

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---

ELBIT VISION SYSTEMS LTD. AND ITS SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Cont.)(In thousands of U.S.
dollars, except per share data)

|Note 2  - | SIGNIFICANT ACCOUNTING POLICIES
  (CONT.)
|--------- | -----------------------------------------
|          |                                          
|          | P.                                       
|          |                                          
|          |                                          
|          |                                          
|          |                                          
|          |                                          
|          |                                          

| |                                                        |  | Year ended December 31, |       
| | ------------------------------------------------------ |  | ----------------------- | ------
| |                                                        |  |                         |       
| |                                                        |  | 2002                    |       
| |                                                        |  |                         |       
| | Net loss as
  reported                                 |  | $                       | (1,684
| | Stock based
  compensation cost as
    reported        |  |                         | -     
| | Stock based
  compensation cost under
    SFAS 123     |  |                         | (270  
| |                                                        |  |                         |       
| | Net loss pro
  forma                                   |  | $                       | (1,954
| |                                                        |  |                         |       
| |                                                        |  |                         |       
| | Basic and
  diluted
    net loss per share as reported |  | $                       | (0.17 
| |                                                        |  |                         |       
| | Pro forma
  basic and diluted net
    loss per share   |  | $                       | (0.19 
| |                                                        |  |                         |       

- 13 -

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---

ELBIT VISION SYSTEMS LTD. AND ITS SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Cont.)

|Note 2  - | SIGNIFICANT ACCOUNTING POLICIES
  (CONT.)
|--------- | -----------------------------------------
|          |                                          
|          | Q.                                       
|          |                                          
|          |                                          
|          |                                          
|          | R.                                       
|          |                                          
|          |                                          
|          |                                          
|          | S.                                       
|          |                                          
|          |                                          
|          |                                          
|          |                                          
|          |                                          
|          |                                          

- 14 -

---

---

ELBIT VISION SYSTEMS LTD. AND ITS SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Cont.)(In thousands of U.S.
dollars)

|Note 2  - | SIGNIFICANT ACCOUNTING POLICIES
  (CONT.)
|--------- | -----------------------------------------
|          |                                          
|          | T.                                       
|          |                                          
|          |                                          
|          |                                          
|          |                                          
|          |                                          
|          | U.                                       
|          |                                          
|          |                                          
|          |                                          
|          |                                          

- 15 -

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---

ELBIT VISION SYSTEMS LTD. AND ITS SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Cont.)

|Note 2  - | SIGNIFICANT ACCOUNTING POLICIES
  (CONT.)
|--------- | -----------------------------------------
|          |                                          
|          | V.                                       
|          |                                          
|          |                                          
|          |                                          
|          |                                          
|          |                                          
|          |                                          

- 16 -

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---

ELBIT VISION SYSTEMS LTD. AND ITS SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Cont.)(In thousand of U.S.
dollars)

|Note 3  - | MARKETABLE SECURITIES                                                                                                                                                                                                                                                                                                                                                                                 
|--------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|          |                                                                                                                                                                                                                                                                                                                                                                                                       
|          | Marketable
  securities, classified as trading securities comprised debentures bearing
  annual interest rate of 7.125%. The fair value as of December 31, 2001
  amounted to $812. In September 2002, the Company sold the marketable
  debentures for a total consideration of $810. As a result, the Company
  recorded a realized loss of $2 in financing income in the statement of
  operations.
|          |                                                                                                                                                                                                                                                                                                                                                                                                       
|Note 4  - | OTHER RECEIVABLES                                                                                                                                                                                                                                                                                                                                                                                     

| |                       |  | December 31,
| | --------------------- |  | ------------
| |                       |  |             
| |                       |  | 2002        
| |                       |  |             
| | Government
  agencies |  | $           
| | Prepaid
  expenses    |  |             
| | Other                 |  |             
| |                       |  |             
| |                       |  | $           
| |                       |  |             

|Note 5  - | INVENTORIES
|--------- | -----------

| |                  |  | December 31,
| | ---------------- |  | ------------
| |                  |  |             
| |                  |  | 2002        
| |                  |  |             
| | Raw
  materials  |  | $           
| | Spare parts      |  |             
| | Work-in-process  |  |             
| | Finished
  goods |  |             
| |                  |  |             
| |                  |  | $           
| |                  |  |             

|          | The Group
  periodically assesses its inventory valuation in accordance with its revenues
  forecasts, technological obsolescence, and the market conditions.
|--------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------
|          |                                                                                                                                                              
|          | For the
  years ended December 31, 2002, 2001 and 2000 inventory write-offs amounted to
  approximately $0, $220 and $900, respectively.                     
|          |                                                                                                                                                              
|Note 6  - | LONG-TERM TRADE RECEIVABLES                                                                                                                                  
|          |                                                                                                                                                              
|          | The Company
  extends long-term credit to certain customers. These receivebles mature over
  periods ranging primarily through the year 2004.                

- 17 -

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---

ELBIT VISION SYSTEMS LTD. AND ITS SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Cont.)(In thousand of U.S.
dollars)

|Note 7  - | DEPOSITS AND LOANS
|--------- | ------------------

| |                              |  | December 31,
| | ---------------------------- |  | ------------
| |                              |  |             
| |                              |  | 2002        
| |                              |  |             
| | Deposits on
  leased vehicle |  | $           
| | Loans to
  employees (*)     |  |             
| |                              |  |             
| |                              |  | $           
| |                              |  |             

| | (*) | Loans to
  employees are linked to the Israeli Consumer Price Index and are repayable
  over five years through 2005.
| | --- | ---------------------------------------------------------------------------------------------------------------------

|Note 8  - | PROPERTY AND EQUIPMENT, NET
|--------- | ---------------------------

| |                                   |  | December 31,
| | --------------------------------- |  | ------------
| |                                   |  |             
| |                                   |  | 2002        
| |                                   |  |             
| | Computers
  and equipment         |  | $           
| | Office
  furniture and equipment  |  |             
| | Leasehold
  improvements          |  |             
| | Vehicles                          |  |             
| |                                   |  |             
| |                                   |  |             
| | Less -
  accumulated depreciation |  |             
| |                                   |  |             
| |                                   |  | $           
| |                                   |  |             

|          | Depreciation
  expenses amounted to $256, $312 and $381 for the years ended 2002, 2001 and
  2000, respectively.                    
|--------- | ------------------------------------------------------------------------------------------------------------------------------------
|          |                                                                                                                                     
|          | In 2000, the
  Company recognized an impairment loss of $308 in respect of leasehold
  improvements which the Company ceased to use.
|          |                                                                                                                                     
|Note 9  - | OTHER PAYABLES AND ACCRUED EXPENSES                                                                                                 

| |                                |  | December 31,
| | ------------------------------ |  | ------------
| |                                |  |             
| |                                |  | 2002        
| |                                |  |             
| | Payroll and
  related expenses |  | $           
| | Government
  agencies          |  |             
| | Accrued
  warranty obligation  |  |             
| | Commissions
  to agents        |  |             
| | Accrued
  expenses and others  |  |             
| |                                |  |             
| |                                |  | $           
| |                                |  |             

|Note 10 - | ACCRUED SEVERANCE PAY                                                                          
|--------- | -----------------------------------------------------------------------------------------------
|          |                                                                                                
|          | Severance
  pay expense amounted to $176, $195 and $284 in 2002, 2001 and 2000,
  respectively.

- 18 -

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---

ELBIT VISION SYSTEMS LTD. AND ITS SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Cont.)(In thousand of U.S.
dollars)

|Note 11 - | CONTINGENT LIABILITIES AND
  COMMITMENTS
|--------- | ----------------------------------------

| | A. | In
  connection with its research and development activities, the Company has
  received royalty bearing grants from the OCS of the State of Israel in the
  aggregate amount of $5,950.  In return for the Governments grants, the
  Company is committed to pay royalties at a rate of 3%-5% of sales of the
  developed products of approved projects, up to the amount of the grants
  received plus interest at a Libor. The obligation to pay these royalties is
  contingent on actual sales of the products and in the absence of such sales
  no payment is required. At December 31, 2002 the aggregate contingent
  liability to the OCS, amounted to approximately $669. Total
  royalties accrued or paid amounted to $108, $264, and $316 in 2002, 2001 and
  2000, respectively and were recorded in cost of revenues.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | B. | The
  Companys principal facilities are located in a building in Yoqneam, Israel
  under an operating lease agreement which expires on December 31, 2005. The
  Companys future minimum annual rental payments, which are in NIS linked to
  the Israeli Consumer Price Index are as follows:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       

|     |  | U.S.$
|---- |  | -----
|     |  |      
|2003 |  | 119  
|2004 |  | 119  
|2005 |  | 119  
|     |  |      
|     |  | 357  
|     |  |      

| |  | EVS Inc.
  leases office space in Greenville, South Carolina under an operating lease
  agreement which expires on October 1, 2005. The future minimum annual rental
  payments are as follows:
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|     |  | U.S.$
|---- |  | -----
|     |  |      
|2003 |  | 27   
|2004 |  | 27   
|2005 |  | 20   
|     |  |      
|     |  | 74   
|     |  |      

| |  | Rental
  expense for the years 2002, 2001 and 2000 amounted to $247, $248, and $305,
  respectively.
| |  | ----------------------------------------------------------------------------------------------------

- 19 -

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---

ELBIT VISION SYSTEMS LTD. AND ITS SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Cont.)(In thousand of U.S.
dollars)

|Note 11 - | CONTINGENT LIABILITIES AND
  COMMITMENTS (CONT.)
|--------- | ------------------------------------------------

| | C. | The Company
  leases motor vehicles under long-term operating lease agreements. The lease
  agreements expire on various dates ending in 2003 - 2005 (with prior notice
  of cancellation clauses).
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                    
| |    | The
  following is a schedule of future minimum lease payments under these
  agreements which are linked to the U.S. dollars :                                                                     

|     |  | U.S. $
|---- |  | ------
|     |  |       
|2003 |  | 226   
|2004 |  | 73    
|2005 |  | 31    
|     |  |       
|     |  | 330   
|     |  |       

| | D. | Effective
  upon its initial public offering on July 3, 1997, the Company agreed to pay
  Elbit Ltd. (Elbit) royalties in an amount dependent upon the sales of the
  Companys vision system products in the textile, automotive and food
  industries. The royalties will in turn be paid in full by Elbit to the
  original developer of certain elements of the technology licensed by the
  Company from Elbit. Such royalties will be in an amount not less than $300
  and not more than $500 per year. In addition, the Company is to pay Elbit
  royalties of up to 4.5% with respect to sales of products by the Company not
  in the textile, food and automotive industries if Elbit is required to pay
  such amounts to the developer.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |    | In 2002, the
  Company and Elbit amended the abovementioned agreement, effective as of July
  1, 2001, pursuant to which the royalties will be paid directly to the
  developer, twice a year, at a rate of 1.5% of sales of I-TEX products in the
  immediately preceding six months.                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |    | As a result
  of the amendment of the agreement, the Company recorded net royalty income of
  $64 in the year ended December 31, 2002. The royalty expense was $300 for the
  years ended December 31, 2001 and 2000, and was recorded as cost of revenues
  in the statements of operations.                                                                                                                                                                                                                                                                                                                                                                                                                                                         

- 20 -

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---

ELBIT VISION SYSTEMS LTD. AND ITS SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Cont.)(In thousand of U.S.
dollars)

|Note 11 - | CONTINGENT LIABILITIES AND
  COMMITMENTS (Cont.)
|--------- | ------------------------------------------------

| | E. | LEGAL
  PROCEEDINGS                                                                                                                                                                  
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                      
| |    | 1.                                                                                                                                                                                   
| |    |                                                                                                                                                                                      
| |    |                                                                                                                                                                                      
| |    |                                                                                                                                                                                      
| |    |                                                                                                                                                                                      
| |    |                                                                                                                                                                                      
| |    |                                                                                                                                                                                      
| |    |                                                                                                                                                                                      
| |    | 2.                                                                                                                                                                                   
| |    |                                                                                                                                                                                      
| |    |                                                                                                                                                                                      
| |    |                                                                                                                                                                                      
| |    | Management
  is presently unable to predict the ultimate outcome of the above legal
  proceedings, including whether they will eventually result in a law suit
  against the Company.

- 21 -

---

---

ELBIT VISION SYSTEMS LTD. AND ITS SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Cont.)(In thousand of U.S.
dollars except for per share data)

|Note 11 - | CONTINGENT LIABILITIES AND
  COMMITMENTS (Cont.)
|--------- | ------------------------------------------------

|          | F.                   | In November
  2002, the Company filed in the Haifa District Court an application for a
  permanent injunction against Panoptes Ltd. (Panoptes) to cease all
  production and marketing of its current products. The Company also claimed
  damages from Panoptes in the amount of at least NIS 2,600 ($550). The claim
  was also brought against the CEO of Panoptes and former founder of EVS. The
  claim states that Panoptes, which was established by the CEO of Panoptes and
  former founder of EVS recruited several former EVS employees, and currently
  markets products which are unlawfully based on EVS technology.                                
|--------- | -------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|          |                      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|          |                      | Panoptes
  filed a counter claim in December 2002, alleging that EVS had conducted
  negotiations with Panoptes in bad-faith and had failed to execute an
  agreement regarding Panoptes products as a result of bad faith. The claim was
  for a minimum of NIS 3,000 ($600). Panoptes also filed a defence to the
  statement of claim of EVS.                                                                                                                                                                                                                                                                                                                    
|          |                      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|Note 12 - | SHAREHOLDERS EQUITY
|          |                      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|          | A.                   | ORDINARY
  SHARES                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|          |                      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|          |                      | Ordinary
  shares confer upon their holders voting rights, the right to receive cash
  dividends and the right to share in excess assets upon liquidation of the
  Company.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|          |                      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|          |                      | In March
  2001, Mr. Nir Alon, the Companys chairman, purchased 1.5 million Ordinary
  shares of the Company at a price of $1.00 per share. At that time, Mr. Alon
  also agreed to complete a second investment to purchase by no later than
  March 15, 2002, an additional 1.5 million shares of the Company at a price of
  $1.00 per share; provided that the Companys financial results for 2001 met
  certain minimum thresholds.                                                                                                                                                                                                                          
|          |                      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|          |                      | The
  Companys Board of Directors has agreed to enter into an agreement with
  Altro, whereby the previous commitment to purchase additional shares of the
  Company would be canceled upon the consummation of new investment terms and a
  warrant distribution (collectively, the Arrangement). Pursuant to the
  Arrangement, Altro has agreed to purchase 2 million Ordinary shares of the
  Company at a price of $0.35 per share, payable in quarterly installments
  commencing immediately following the approval of the Arrangement by the
  Companys shareholders and the Haifa District Court, pursuant to Section 350
  of the Companies Law, 1999.

- 22 -

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---

ELBIT VISION SYSTEMS LTD. AND ITS SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Cont.)(In thousand of U.S.
dollars except for per share data)

|Note 12 - | SHAREHOLDERS EQUITY (CONT.)
|--------- | ----------------------------

| | A. | ORDINARY
  SHARES (Cont.)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |    | The final
  installment will be paid not later than August 25, 2004. The shares are to be
  held by a trustee and will be released, pro rata, as the payments are
  received by the Company. Following the payment of all of the installments,
  Altro is expected to hold approximately 45.21% of the outstanding share
  capital of the Company. The parties are currently negotiating the exact
  amount of each installment to be paid.                                                                                                                                                                                                                                                          
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |    | As of the
  date of issuance of the financial statements the Companys shareholders and
  the Haifa District Court have not yet approved the Arrangement.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |    | Pursuant to
  the Arrangement, the Company will also, for no consideration, distribute
  warrants to purchase approximately 4 million of its Ordinary shares to all of
  its shareholders (other than Altro) on an agreed distribution date, on a pro
  rata basis. Each warrant will be exercisable for a period of four years
  following the grant date, at a price of $0.35 per share.                                                                                                                                                                                                                                                                                                           
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | B. | SHARE
  OPTIONS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |    | In February
  1996, the Board of Directors of the Company adopted a share option plan (the
  1996 Share Option Plan) pursuant to which 554,780 options can be granted to
  directors, officers, employees and consultants of the Company and its
  subsidiaries. The last date on which the options may be granted is February
  2006. As of December 31, 2002, 256,833 options were available for future
  grants under the above plan. Most of the options vest over a period of four
  years. All of the outstanding options expire no later than ten years
  following the date of grant. The grantee is responsible for all personal tax
  consequences of the grant and the exercise thereof.
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |    | In April
  2000, the board of directors of the Company adopted a new option plan. The
  total number of ordinary shares available to be issued under the plan
  amounted to 4,500,000 shares and the last date on which the options may be
  granted is April 2010. As of December 31, 2002, 2,384,461 options were
  available for future grants under the above plan. Most of the options vest
  over a period of four years from the date of grant and expire no later than
  ten years following the date of grant.                                                                                                                                                                              

- 23 -

---

---

ELBIT VISION SYSTEMS LTD. AND ITS SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Cont.)(In thousand of U.S.
dollars except for per share data)

|Note 12 - | SHAREHOLDERS EQUITY (CONT.)
|--------- | ----------------------------

| | B. | SHARE
  OPTIONS (Cont.)                                                                                                                                      
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                              
| |    | The option
  exercise price is determined by the Board of Directors of the Company and
  equals the market price of the Companys share at the date of grant.
| |    |                                                                                                                                                              
| |    | Any options
  which are canceled or forfeited before expiration, become available for
  future grants.                                                       
| |    |                                                                                                                                                              
| |    | Transactions
  regarding employee share options during the three years in the period ended
  December 31, 2002 are summarized as follows:                    

| |                                    |  | Number
  of shares |   | Weighted average
  exercise price
| | ---------------------------------- |  | ------------------ | - | ---------------------------------
| |                                    |  |                    |   |                                  
| | Outstanding
  at January 1, 2000   |  | 455,280            |   |                                  
| | Granted                            |  | 721,139            |   |                                  
| | Forfeited                          |  | (197,334           | ) |                                  
| |                                    |  |                    |   |                                  
| | Outstanding
  at December 31, 2000 |  | 979,085            |   |                                  
| | Granted                            |  | 708,000            |   |                                  
| | Forfeited                          |  | (239,250           | ) |                                  
| |                                    |  |                    |   |                                  
| | Outstanding
  at December 31, 2001 |  | 1,447,835          |   |                                  
| | Granted                            |  | 1,291,400          |   |                                  
| | Forfeited                          |  | (325,749           | ) |                                  
| |                                    |  |                    |   |                                  
| | Outstanding
  at December 31, 2002 |  | 2,413,486          |   |                                  
| |                                    |  |                    |   |                                  

| |  | The weighted
  average fair value of options granted in 2002, 2001 and 2000 was $0.22, $0.32
  and $1.11, respectively.          
| |  | ---------------------------------------------------------------------------------------------------------------------------------
| |  |                                                                                                                                  
| |  | 1,050,074,
  577,494 and 150,447 of the outstanding options were exercisable at December
  31, 2002, 2001, and 2000 respectively.
| |  |                                                                                                                                  
| |  | The weighted
  average exercise price of the exercisable options in 2002, 2001 and 2000 was
  $1.03, $1.54 and $3 respectively.  

- 24 -

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---

ELBIT VISION SYSTEMS LTD. AND ITS SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Cont.)(In thousand of U.S.
dollars except for per share data)

|Note 12 - | SHAREHOLDERS EQUITY (CONT.)
|--------- | ----------------------------

| | B. | SHARE
  OPTIONS (Cont.)                                                                                          
| | -- | -----------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                  
| |    | The
  following table summarizes information about options outstanding and
  exercisable as of December 31, 2002:

| |                   |      | Options outstanding                           |  | Options exercisable                                        
| | ----------------- | ---- | --------------------------------------------- |  | -----------------------------------------------------------
| |                   |      |                                               |  |                                                            
| | Exercise
  prices |      | Number
  Outstanding at
  December 31,
  2002 |  | Weighted
  average
  remaining
  contractual
  life (years)
| |                   |      |                                               |  |                                                            
| | $                 | 3.00 |                                               |  | 99,447                                                     
| | $                 | 1.68 |                                               |  | 110,000                                                    
| | $                 | 1.17 |                                               |  | 561,389                                                    
| | $                 | 1.00 |                                               |  | 200,000                                                    
| | $                 | 0.48 |                                               |  | 516,400                                                    
| | $                 | 0.36 |                                               |  | 437,750                                                    
| | $                 | 0.20 |                                               |  | 88,500                                                     
| | $                 | 0.15 |                                               |  | 400,000                                                    
| |                   |      |                                               |  |                                                            
| |                   |      |                                               |  | 2,413,486                                                  
| |                   |      |                                               |  |                                                            

| |    | No
  compensation cost was recorded for the years ended December 31, 2002, 2001
  and 2000.                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | C. | DIVIDENDS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |    | The Company
  has never paid cash dividends to shareholders. The Company intends to retain
  future earnings for use in its business and does not anticipate paying cash
  dividends on its ordinary shares in the foreseeable future. Any future
  dividend policy will be determined by the Board of Directors and will be
  based upon conditions then existing, including results of operations,
  financial condition, current and anticipated cash needs, contractual
  restrictions and other conditions as the Board of Directors may deem
  relevant.

- 25 -

---

---

ELBIT VISION SYSTEMS LTD. AND ITS SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Cont.)(In thousand of U.S.
dollars)

|Note 13 - | REVENUES
|--------- | --------

| | A. | Composition:
| | -- | ------------

| |          |  | Year ended December 31,
| | -------- |  | -----------------------
| |          |  |                        
| |          |  | 2002                   
| |          |  |                        
| | Products |  | $                      
| | Services |  |                        
| |          |  |                        
| |          |  | $                      
| |          |  |                        

| | B. | The
  Companys revenues by geographic areas are as follows:
| | -- | ------------------------------------------------------------

| |          |  | Year ended December 31,
| | -------- |  | -----------------------
| |          |  |                        
| |          |  | 2002                   
| |          |  |                        
| | U.S.A.   |  | $                      
| | Europe   |  |                        
| | Far East |  |                        
| |          |  |                        
| |          |  | $                      
| |          |  |                        

| | C. | The
  following customers accounted for 10% or more of the Companys sales:
| | -- | ---------------------------------------------------------------------------

| |            |  | Year ended December 31,
| | ---------- |  | -----------------------
| |            |  |                        
| |            |  | 2002                   
| |            |  |                        
| | Customer A |  | -                      

|Note 14 - | COST OF REVENUES
|--------- | ----------------

| |                                                                                |  | Year ended December 31,
| | ------------------------------------------------------------------------------ |  | -----------------------
| |                                                                                |  |                        
| |                                                                                |  | 2002                   
| |                                                                                |  |                        
| | Materials                                                                      |  | $                      
| | Labor and
  related expenses                                                   |  |                        
| | Subcontractors                                                                 |  |                        
| | Royalties to
  OCS                                                             |  |                        
| | Royalties
  paid through Elbit (*)                                             |  |                        
| | Other
  expenses                                                               |  |                        
| |                                                                                |  |                        
| |                                                                                |  |                        
| | Decrease
  (increase) in work-
   in-process and finished goods
   inventories |  |                        
| |                                                                                |  |                        
| |                                                                                |  | $                      
| |                                                                                |  |                        

| | (*)  See Note
  11D.
| | --------------------

- 26 -

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---

ELBIT VISION SYSTEMS LTD. AND ITS SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Cont.)(In thousand of U.S.
dollars)

|Note 15 - | RESEARCH AND DEVELOPMENT EXPENSES,
  NET
|--------- | ----------------------------------------

| |             |                        | Year ended December 31,
| | ----------- | ---------------------- | -----------------------
| |             |                        |                        
| |             |                        | 2002                   
| |             |                        |                        
| | Total costs |                        | $                      
| | Less -      | grants from
  the      |                        
| |             | Government
  of Israel |                        
| |             |                        |                        
| |             |                        | $                      
| |             |                        |                        

|Note 16 - | FINANCING INCOME, NET
|--------- | ---------------------

| |          |                                                     | Year ended December 31,
| | -------- | --------------------------------------------------- | -----------------------
| |          |                                                     |                        
| |          |                                                     | 2002                   
| |          |                                                     |                        
| | Income   |                                                     |                        
| |          | Foreign
  currency exchange
   differences          |                        
| |          | Interest on
  deposits                              |                        
| |          | Interest and
  gain on marketable
   securities (*) |                        
| |          | Other                                               |                        
| |          |                                                     |                        
| |          |                                                     |                        
| |          |                                                     |                        
| | Expenses |                                                     |                        
| |          | Foreign
  currency exchange
   differences          |                        
| |          | Interest on
  liability to related
   party         |                        
| |          | Other                                               |                        
| |          |                                                     |                        
| |          |                                                     |                        
| |          |                                                     |                        
| |          |                                                     | $                      
| |          |                                                     |                        

| | (*)  Includes realized loss amounting to $2 (2001-unrealized
  gain of $2)
| | --------------------------------------------------------------------------

- 27 -

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---

ELBIT VISION SYSTEMS LTD. AND ITS SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Cont.)

|Note 17 - | TAXES ON INCOME
|--------- | ---------------
|          |                
|          | A.             
|          |                
|          |                
|          |                
|          | B.             
|          |                
|          |                
|          |                
|          | C.             
|          |                
|          |                
|          |                
|          |                
|          |                
|          |                

- 28 -

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---

ELBIT VISION SYSTEMS LTD. AND ITS SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Cont.)

|Note 17 - | TAXES ON INCOME (CONT.)
|--------- | -----------------------
|          |                        
|          | C.                     
|          |                        
|          |                        
|          |                        
|          |                        
|          |                        
|          |                        
|          |                        
|          |                        

- 29 -

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---

ELBIT VISION SYSTEMS LTD. AND ITS SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Cont.)(In thousands of U.S.
dollars)

|Note 18 - | RELATED PARTY
|--------- | -------------
|          |              
|          | A.           
|          |              
|          |              
|          |              
|          | B.           

| |                                          |                                        | For the year ended
  December 31
| | ---------------------------------------- | -------------------------------------- | --------------------------------
| |                                          |                                        |                                 
| |                                          |                                        | 2002                            
| |                                          |                                        |                                 
| | Transactions
  with Elbit (see Note 1B): |                                        |                                 
| |                                          |                                        |                                 
| | Expenses                                 |                                        |                                 
| |                                          |                                        |                                 
| |                                          | Production
  and installation services |                                 
| |                                          |                                        |                                 
| |                                          | Royalties
  (*)                        |                                 
| |                                          |                                        |                                 
| |                                          | Marketing
  and selling expenses       |                                 
| |                                          |                                        |                                 
| |                                          | General and
  administrative expenses  |                                 
| |                                          |                                        |                                 
| |                                          | Financing
  expenses                   |                                 

| | (*)  See note
  11D.
| | --------------------

|Note 19 - | ALLOWANCE FOR DOUBTFUL ACCOUNTS
|--------- | -------------------------------

| |                                                     |  | For the year ended
  December 31
| | --------------------------------------------------- |  | --------------------------------
| |                                                     |  |                                 
| |                                                     |  | 2002                            
| |                                                     |  |                                 
| | Balance at
  beginning of year                      |  | 898                             
| |                                                     |  |                                 
| | Charged to
  general and administrative
   expenses |  | 629                             
| |                                                     |  |                                 
| | Reductions
  in respect of bad debts                |  | -                               
| |                                                     |  |                                 
| | Balance at
  the end of the year                    |  | 1,527                           
| |                                                     |  |                                 

#   #   #   #   #  
#

- 30 -

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---

ERNST
&YOUNG
              
Luboshitz Kasierer

Haifa, Israel, June 29, 2003

# CONSENT OF INDEPENDENT
AUDITORS

We hereby consent to the
incorporation by reference in the Registration Statement of Elbit Vision Systems Ltd. on
Form S-8 (File No. 333-12456) of our report dated June 25, 2003, on our audit of the
consolidated financial statements of Elbit Vision Systems Ltd. and subsidiaries as of
December 31, 2002, and for the year then ended, which are included in the Elbit Vision
Systems Ltd. Annual Report on Form 20-F for the year ended December 31, 2002.

| | Luboshitz Kasierer                                
| | --------------------------------------------------
| | An affiliate member of Ernst & Young International



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