<PAGE>





================================================================================

                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                                    FORM 10-K


ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES  EXCHANGE ACT OF
1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002 .



                                       OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 FOR THE TRANSITION PERIOD FROM ______ TO ______.


Commission File Number: 0-23336
                        -------

                            ELECTRIC FUEL CORPORATION
--------------------------------------------------------------------------------
             (Exact name of registrant as specified in its charter)

<TABLE>
<CAPTION>
<S>                                                                                         <C>
                                Delaware                                                    95-4302784
-------------------------------------------------------------------------      --------------------------------------
     (State or other jurisdiction of incorporation or organization)            (I.R.S. Employer Identification No.)

                    632 Broadway, New York, New York                                           10012
-------------------------------------------------------------------------      --------------------------------------
                (Address of principal executive offices)                                    (Zip Code)
</TABLE>

                                 (646) 654-2107
--------------------------------------------------------------------------------
              (Registrant's telephone number, including area code)

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

 Title of each class                 Name of each exchange on which registered
-----------------------           ----------------------------------------------
         None                                    Not applicable

Securities registered pursuant to Section 12(g) of the Act: Common Stock, $0.01
par value

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

Indicate by check mark if disclosure of delinquent  filers  pursuant to Item 405
of Regulation  S-K (ss.  229.405 of this chapter) is not contained  herein,  and
will not be  contained,  to the best of  registrant's  knowledge,  in definitive
proxy or information  statements  incorporated  by reference in Part III of this
Form 10-K or any amendment to this Form 10-K.                        [X]

Indicate  by check mark  whether  the  registrant  is an  accelerated  filer (as
defined in Rule 12b-2 of the Act).                      Yes [ ]   No [X]

The  aggregate   market  value  of  the   registrant's   voting  stock  held  by
non-affiliates  of  the  registrant  as  of  June  30,  2002  was  approximately
$23,078,843 (based on the last sale price of such stock on such date as reported
by The Nasdaq National Market).

(Applicable  only to  corporate  registrants)  Indicate  the  number  of  shares
outstanding  of each of the  registrant's  classes  of common  stock,  as of the
latest practicable date: 35,146,261 as of 3/15/03

Documents incorporated by reference: None

================================================================================

<PAGE>
                                PRELIMINARY NOTE
                                ----------------

     This annual report  contains  historical  information  and  forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995  with  respect  to  our  business,   financial  condition  and  results  of
operations.  The words  "estimate,"  "project,"  "intend,"  "expect" and similar
expressions  are  intended  to  identify   forward-looking   statements.   These
forward-looking  statements  are subject to risks and  uncertainties  that could
cause  actual  results  to differ  materially  from those  contemplated  in such
forward-looking  statements.  Further,  we operate in an industry  sector  where
securities  values may be volatile and may be  influenced  by economic and other
factors beyond our control.  In the context of the  forward-looking  information
provided  in this  annual  report  and in  other  reports,  please  refer to the
discussions  of risk  factors  detailed  in,  as well as the  other  information
contained in, our other filings with the Securities and Exchange Commission.

     Electric  Fuel(R) is a registered  trademark and Arotech(TM) is a trademark
of Electric Fuel  Corporation.  All company and product  names  mentioned may be
trademarks  or  registered  trademarks  of  their  respective  holders.   Unless
otherwise  indicated,  "we," "us," "our" and similar  terms refer to Arotech and
its subsidiaries.


<PAGE>




                                     PART I

ITEM 1. BUSINESS

General

     We are a  world  leader  in  primary  and  refuelable  Zinc-Air  fuel  cell
technology,  engaging  directly  and  through  our  subsidiaries  in the  use of
Zinc-Air battery technology for defense and security products and other military
applications  and for electric  vehicles,  in car armoring,  and in  interactive
multimedia use-of-force  simulators.  We have been doing business since February
2003 under the name "Arotech Corporation." We operate in two business units:

     o    we develop,  manufacture  and market  defense and  security  products,
          including   advanced  hi-tech   multimedia  and  interactive   digital
          solutions  for  training of  military,  law  enforcement  and security
          personnel  and  sophisticated   lightweight   materials  and  advanced
          engineering processes to armor vehicles; and

     o    we pioneer advancements in Zinc-Air battery technology for defense and
          security  products and other  military  applications  and for electric
          vehicles.

Background

     We began work in 1990 on the research, development and commercialization of
an advanced  Zinc-Air battery system for powering electric  vehicles,  work that
continues to this day.  Beginning  in 1998,  we also began to apply our Zinc-Air
fuel cell  technology to the defense  industry,  by receiving  and  performing a
series of  contracts  from the U.S.  Army's  Communications-Electronics  Command
(CECOM) to develop and evaluate  advanced primary Zinc-Air fuel cell packs. This
effort  culminated  in  2002  in our  receipt  of a  National  Stock  Number,  a
Department of Defense catalog number assigned to products  authorized for use by
the U.S. military,  and our subsequent receipt of a $2.54 million delivery order
for our newly designated BA-8180/U military batteries.

     We further  enhanced our  capabilities in the defense  industry through our
purchase in the third quarter of 2002 of two new  subsidiaries:  IES Interactive
Training,  Inc., which provides  specialized "use of force" training for police,
homeland  security  personnel and the military,  and MDT Protective  Industries,
which is engaged in the use of sophisticated  lightweight materials and advanced
engineering processes to armor vehicles.

     Between 1998 and 2002, we were also engaged in the design,  development and
commercialization  of our proprietary Zinc-Air fuel cell technology for portable
consumer electronic devices such as cellular  telephones,  PDAs, digital cameras
and camcorders.  In October 2002, we  discontinued  retail sales of our consumer
battery products  because of the high costs  associated with consumer  marketing
and low volume manufacturing.

     We were  incorporated  in Delaware in 1990, and we have been doing business
under the name "Arotech Corporation" since February 2003. We anticipate changing
our  corporate  name to Arotech  Corporation  at our next  annual  shareholders'
meeting later in 2003. Unless the context requires otherwise,  all references to
us refer  collectively  to Electric  Fuel  Corporation  (Arotech)  and Arotech's
wholly-owned  Israeli  subsidiary,  Electric Fuel (E.F.L.)  Limited  (EFL),  its


<PAGE>

majority-owned   Israeli  subsidiary,   MDT  Protective   Industries,   and  its
wholly-owned Delaware  subsidiaries,  Electric Fuel Transportation Corp. and IES
Interactive Training, Inc.

     For  financial  information  concerning  the business  segments in which we
operate, see Note 16 of the Notes to the Consolidated Financial Statements.  For
financial information about geographic areas in which we engage in business, see
Note 16.c of the Notes to the Consolidated Financial Statements.

Defense and Security Products

     Interactive Use-of-Force Training

     Through our wholly-owned subsidiary,  IES Interactive Training, Inc. (IES),
we provide  specialized  "use of force" training for police,  homeland  security
personnel  and  the  military.   We  offer  products  and  services  that  allow
organizations  to train  their  personnel  in safe,  productive,  and  realistic
environments.  We believe that our training  systems  offer more  functionality,
greater flexibility, unprecedented realism and a wider variety of user interface
options  than  competing  products.   Our  systems  are  sold  to  corporations,
government  agencies,  military  and law  enforcement  professionals  around the
world.  The simulators are currently used by some of the worlds leading training
academies,  including (in the United States) the Secret  Service,  the Bureau of
Alcohol,  Tobacco and  Firearms,  the  Houston  Police  Department,  the Customs
Service,  the Border  Patrol,  the Bureau of Engraving and  Printing,  the Coast
Guard, the Federal Law Enforcement Training Centers,  the California  Department
of Corrections,  the Detroit Police  Department,  the Washington DC Metro Police
and international  users such as the Israeli Defense Forces, the German National
Police,  the Royal  Thailand Army,  the Hong Kong Police,  the Russian  Security
Police, and over 400 other training departments worldwide.

     Our  interactive  training  systems  range  from the  powerful  Range  3000
use-of-force  simulator  system  to the  multi-faceted  A2Z  Classroom  Training
system.  The Range  3000 line of  simulators  addresses  the entire use of force
training  continuum  in law  enforcement,  allowing  the trainee to use posture,
verbalization,  soft hand skills,  impact  weapons,  chemical  spray,  low-light
electronic  weapons and lethal force in a scenario based classroom  environment.
The A2Z  Classroom  Trainer  provides  the  trainer  with real  time  electronic
feedback from every student through wireless handheld  keypads.  The combination
of interactivity  and instant response assures that learning takes place in less
time with higher retention.

     Vehicle Armoring

     Through our majority-owned  MDT Protective  Industries (MDT), we specialize
in using state-of-the-art lightweight ceramic materials, special ballistic glass
and  advanced  engineering  processes  to fully  armor  vans and cars.  MDT is a
leading  supplier to the Israeli  military,  Israeli  special forces and special
services.  MDT's  products are proven in intensive  battlefield  situations  and
under actual terrorist attack conditions, and are designed to meet the demanding
requirements of governmental and private sector customers worldwide.

     Electric Fuel Batteries

     We have been engaged in research and  development  in the field of Zinc-Air
electrochemistry  and battery design for over ten years, as a result of which we
have developed our current


                                     - 2 -
<PAGE>

technology and its applications.  We have successfully applied our technology to
our high-energy  battery packs for military and security  applications.  We have
also applied our  technology to the  development  of a refuelable  Zinc-Air fuel
cell for powering  zero-emission  electric vehicles.  Through these efforts,  we
have  sought to  position  ourselves  as a world  leader in the  application  of
Zinc-Air technology to innovative primary and refuelable power sources.

     We believe that our Zinc-Air batteries provide the highest energy and power
density  combination   available  today  in  the  defense  market,  making  them
particularly  appropriate  where long  missions  are  required and low weight is
important.

     Military Batteries

     Our line of existing  battery products for the military and defense sectors
includes  Advanced  Zinc-Air  Power Packs  (AZAPPs)  utilizing our most advanced
cells (which have specific  energy of 400 watt-hours  per  kilogram),  a line of
super-lightweight  AZAPPs  that  feature the same 400 Wh/kg cell  technology  in
smaller cells, and our new, high-power Zinc-Air Power Packs (ZAPPs), which offer
extended-use  portable power using our commercial Zinc-Air cell technology.  Our
AZAPPs have received a National  Stock Number (a  Department of Defense  catalog
number assigned to products authorized for use by the U.S. military), making our
AZAPPs available for purchase by all units of the U.S. Armed Forces.

     Electric Vehicle

     Our Electric Vehicle effort, conducted through our subsidiary Electric Fuel
Transportation   Corp.,   continues  to  focus  on  obtaining  and  implementing
demonstration  projects in the U.S. and Europe,  and on building  broad industry
partnerships that can lead to eventual  commercialization of the Zinc-Air energy
system.  This approach supports our long-term  strategy of achieving  widespread
implementation of the Electric Fuel Zinc-Air energy system for electric vehicles
in large  commercial and mass transit  vehicle  fleets.  Our  all-electric  bus,
powered by our Zinc-Air fuel cell  technology,  has  demonstrated a world-record
127-mile  range  under  rigorous  urban  conditions,  and we  have  successfully
demonstrated our vehicle in "on-the-road"  programs in Germany,  Sweden,  Italy,
Israel and the United States, most recently in public tests in Las Vegas, Nevada
in  November  2001,  and  in  Washington,   D.C.,  on  Capitol  Hill,  with  the
participation of certain members of the United States Senate,  in March 2002. We
intend to  strengthen  existing  relationships  and to develop  new  networks of
strategic alliances with fleet operators, companies engaged in energy production
and  transportation,  automobile  manufacturers and others in order to establish
the infrastructure  necessary for further development and  commercialization  of
the Electric Fuel Zinc-Air system.

     Lifejacket Lights

     We produce  water-activated  lifejacket lights for commercial  aviation and
marine  applications  based on our  patented  water-activated  magnesium-cuprous
chloride  battery  technology.   We  intend  to  continue  to  work  with  OEMs,
distributors  and end-user  companies to expand our market share in the aviation
and marine  segments.  We presently  sell four  products in the safety  products
group,  two for use with marine life jackets and two for use with  aviation life
vests. All four products are certified under applicable international marine and
aviation safety regulations.



                                     - 3 -
<PAGE>

     Facilities

     Our principal executive offices are located at 632 Broadway,  New York, New
York 10012, and our telephone number at our executive offices is (646) 654-2107.
Our corporate website is www.arotech.com. Our periodic reports to the Securities
Exchange  Commission,  as well as recent filings relating to transactions in our
securities by our executive  officers and  directors,  that have been filed with
the  Securities  and Exchange  Commission in EDGAR format are available  through
hyperlinks  located  on  the  investor   relations  page  of  our  website,   at
http://www.arotech.com/compro/investor.html.  Reference to our websites does not
constitute  incorporation  of any of the  information  thereon or linked thereto
into this annual report.

     The offices and  facilities of our two of our principal  subsidiaries,  EFL
and MDT, are located in Israel (in Beit Shemesh and Lod,  respectively,  both of
which are within Israel's pre-1967 borders). We conduct research and development
activities  through EFL, and most of our senior  management  is located at EFL's
facilities.  We also conduct  development  and  production  activities  at IES's
offices in Littleton,  Colorado,  and at our new production  facility in Auburn,
Alabama, which builds and tests advanced batteries for the defense market.

Interactive Use-of-Force Training

     We conduct our interactive  training  activities through our subsidiary IES
Interactive  Training,  Inc. ("IES"), a Delaware corporation based in Littleton,
Colorado.  IES is a leading provider of interactive,  multimedia,  fully digital
training simulators for law enforcement, homeland security, military and similar
applications.  With a  customer  base  of over  500  customers  in  over  thirty
countries around the world, IES is a leader in the supply of simulation training
products  to  military,   law  enforcement  and  corporate  client  communities,
providing  more than 40% of the  worldwide  market for  government  and military
judgment training simulators.

     Introduction

     IES offers  consumers  the  following  interactive  training  products  and
services:

     o    Range 3000 - providing  use of force  simulation  for military and law
          enforcement.   We   believe   that   the   Range   3000  is  the  most
          technologically advanced judgmental training simulator in the world.

     o    A2Z Classroom  Trainer - a  state-of-the-art  computer  based training
          (CBT)  system  that  allows   students  to  interact  with   realistic
          interactive scenarios projected life-size in the classroom.

     o    Summit  Training  International - providing  relevant,  cost-effective
          professional  training  services and  interactive  courseware  for law
          enforcement, corrections and corporate clients.

     o    IES Studio  Productions  - providing  cutting  edge  multimedia  video
          services  for  law  enforcement,   military  and  security   agencies,
          utilizing  the  newest  equipment  to  create  the  training  services
          required by the most demanding authorities.

                                     - 4 -
<PAGE>

     Our  products   feature  state  of  the  art  all  digital  video  formats,
ultra-advanced  laser-based lane detection for optimal accuracy and performance,
customer-based  authoring  of  training  scenarios,  and  95%  COTS  (commercial
off-the-shelf)-based system.

     In  January  2003,  IES was  awarded  a $2.6  million  contract  to  supply
simulation  training systems to the largest regional police division in Germany.
The  contract  calls for  delivery  of  several  separate  interactive  training
systems,  with delivery  dates ranging from April to September  2003 and payment
dates due following  delivery,  testing and  ascertainment  of  appropriate  run
capability of each system.

     IES's revenues during 2000, 2001 and 2002 were  approximately $3.4 million,
$3.5 million and $5.1 million, respectively.

Products

     Below is a description of each of the core products and services in the IES
line.

     Range 3000 "Use of Force" Simulator

     We believe that the Range 3000,  which IES launched in late 2002,  combines
the most  powerful  operational  hardware and software  available,  and delivers
performance unobtainable by any competing product presently on the market.

     The Range 3000 simulator  allows  training with respect to the full "Use of
Force"  continuum.  Training can be done on an individual  basis,  or as many as
four members of a team can participate simultaneously and be scored and recorded
individually. Topics of training include (but are not limited to):

     o    Officer's   Presence   and  Demeanor  -   Picture-on-picture   digital
          recordings  of the  trainee's  actions  allows  visual  review  of the
          trainee's  reaction,  body  language and weapons  handling  during the
          course of the scenario,  which then can be played back for  debriefing
          of the trainee's actions.

     o    Verbalization  - Correct  phrases,  timing,  manner and sequence of an
          officer's  dialogue is  integrated  within the platform of the system,
          allowing  the  situation  to  escalate  or  de-escalate   through  the
          officer's own words in the context of the scenario and in  conjunction
          with the trainer.

     o    Less-Than-Lethal  Training - Training in the use of non-lethal devices
          such as Taser, OC (pepper spray), batons and other devices can be used
          with the video training scenarios with appropriate reactions of each.

     o    Soft Hand Tactics - Low level physical controlled tactics with the use
          of additional equipment such as take-down dummies can be used.

     o    Firearms  Training and Basic  Marksmanship  - Either  utilizing  laser
          based training weapons or in conjunction with a live-fire screen,  the
          use of "Live Ammunition" training can be employed on the system.

                                     - 5 -
<PAGE>

     The interactive  training  scenarios are projected either through single or
multiple  screens  and  projectors,   allowing  IES  to  immerse  a  trainee  in
-true-to-life training scenarios and incorporating one or all the above training
issues in the "Use of Force" continuum.

     A2Z Classroom Trainer

     The A2Z is a  state-of-the-art  Computer  Based  Training (CBT) system that
allows  students to interact  with  realistic  interactive  scenarios  projected
life-size in the classroom.

     Using individual  hand-held keypads,  the students can answer true/false or
multiple choice questions. Based on the student's performance, the scenario will
branch  and  unfold to a  virtually  unlimited  variety  of  different  possible
outcomes of the student's actions. The system logs and automatically scores each
and every trainee's response and answer. At the end of the scenario,  the system
displays a session results summary from which the trainer can debrief the class.

     The advanced A2Z  Courseware  Authoring  Tools allow the trainer  easily to
create complete interactive courses and scenarios locally.

     The  Authoring  Tools  harness  the latest  advances  in digital  video and
multimedia,  allowing the trainer to capture video and graphics from any source.
The A2Z allows the trainer to combine his or her insight,  experience and skills
to recreate a realistic learning  environment.  The A2Z Training System is based
on  the  well-known  PC-Pentium  technology  and  Windows  XPTM  operated.   The
easy-to-use menu and mouse operation renders to A2Z user-friendly.

     The individual keypads are connected "wirelessly." The system is completely
portable and therefore not location dependent,  allowing a complete setup within
a matter of minutes.

     Key advantages:

     o    Provides repeatable training to a standard based on established policy

     o    Quick dissemination and reinforcement of correct behavior and policies

     o    Reduces liability

     o    More efficient than "traditional and redundant" role-playing methods

     o    Realistic scenarios instead of outdated "play-acting"

     o    Interactive  training  of  up  to  250  students  simultaneously  with
          wireless keypads

     o    Easy Self-Authoring of interactive training content

     o    PC-Pentium ensures low cost of ownership

     o    Easy to use Windows XP-based software

     o    Easy to deploy in any classroom

     Summit Training International

     Summit  Training  International  (STI) is a wholly-owned  subsidiary of IES
Interactive  Training.  STI  provides  relevant,   cost-effective   professional
training  seminars,  consulting  services,


                                     - 6 -
<PAGE>

and  interactive  courseware  for law  enforcement,  corrections,  and corporate
clients.  STI's  emphasis and goal is to create a "total  training"  environment
designed  to  address  the  cutting  edge  issues  faced  today.   STI  provides
conferences  throughout the United States, and develops  courseware dealing with
these important topics. The incorporation of IES Interactive  Systems creates an
intense  learning   environment  and  adds  to  the  realism  of  the  trainee's
experience.

     Conferences
     -----------

     STI has provided  conferences  throughout the United States, on such topics
as:

     o    Recruiting and Retention of Law Enforcement and Corrections Personnel

     o    Ethics and Integrity

     o    Issues of Hate Crimes

     o    Traffic Stops and Use of Force

     o    Community and Corporate Partnerships for Public Safety

     o    Creating a Safe School Environment

     In addition to these  national  and regional  conferences,  STI designs and
produces training to address specific department issues. STI has a distinguished
cadre  of  instructors   that  allows   adaptation  of  programs  to  make  them
specifically focused for a more intense learning  experience.  The A2Z Classroom
Trainer is  incorporated  into the "live"  presentation  creating a  stimulating
interactive training experience.

     Courseware
     ----------

     STI develops  courseware for use exclusively with IES Interactive  Systems.
Courses  are  designed  to  addresses  specific  department  issues,  and can be
customized to fit each agency's needs. These courses are available in boxed sets
that provide the customer with a turn-key  training  session.  The A2Z Classroom
Trainer and the Range 3000 XP-4 are used to deliver the  curriculum and create a
virtual  world that the trainees  respond and react to.  Partnerships  with high
profile  companies  such  as H&K  Firearms,  and  Taser  International,  provide
customers  with  training  that  deals  with  cutting  edge  issues  facing  law
enforcement  today. The  incorporation  of STI's  courseware  library along with
simulation  systems allows training to remain  consistent and effective,  giving
customers more value for their training dollar.

     IES Studio Productions

     IES Studio  Productions a division of IES Interactive  Training,  providing
cutting-edge  multimedia  video  services  for  law  enforcement,  military  and
security  agencies,  and  others.  IES Studio  Productions  creates  interactive
courseware  and  interactive  scenarios  for  the  Range  3000,  Video  Training
Scenarios and all types of video production  services.  With the latest in media
equipment,  IES Studio Productions  provides all media and marketing services to
IES Interactive Training in-house.

                                     - 7 -
<PAGE>

     Marketing

     IES markets its products and  services to domestic  and  international  law
enforcement,  military and other federal agencies and to various  companies that
serve them,  through  attendance and  presentations at conferences,  exhibits at
trade shows,  seminars at law  enforcement  academies and  government  agencies,
through its web pages on the Internet,  and to its compiled database of prospect
and customer  names.  IES's  salespeople are also its marketing team. We believe
that this is effective for several  reasons:  (1) customers  appreciate  talking
directly  with  salespeople  who can answer a wide range of technical  questions
about methods and features,  (2) our  salespeople  benefit from direct  customer
contact through gaining an appreciation  for the environment and problems of the
customer,  and (3) the relationships we build through  peer-to-peer  contact are
needed in the military, police and federal agency market.

     IES  also  uses its web  pages  on the  Internet  for  such  activities  as
providing product information and providing software updates.

     IES markets augmentative and alternative law enforcement products through a
network of employee  representatives and independent  resellers.  These products
include but are not limited to:

     o    Bristlecone Products

     o    Airmunitions Inc.

     o    Taser Inc.

     o    ASP Inc.

     o    H&K Training Centers

     At the  present  time IES has six sales  representatives  based in  Denver,
eight domestic  independent  distributors,  and fifteen independent  resellers /
representatives  overseas.  IES also as three inside  sales/support  persons who
answer  telephone  inquiries  on IES's 800 line and  Internet,  and who can also
provide  technical  support.  Additional  outside sales persons and  independent
dealers and resellers are being actively recruited at this time.

     IES participates in over thirty industry  conferences,  held throughout the
United  States.  and in other  countries,  that are  attended  by our  potential
customers and their  respective  purchasing  and budgeting  decision  makers.  A
significant  percentage  of IES's sales of products,  both software and hardware
are sold through leads developed at these shows.

     IES  and  others  in the  industry  demonstrate  their  products  at  these
conferences and present  technical papers that describe the application of their
technologies  and the  effectiveness  of their products.  IES also advertises in
selected publications of interest to potential customers.

     Competition

     IES competes against a number of established companies that provide similar
products  and  services,  many of which have  financial,  technical,  marketing,
sales,  manufacturing,  distribution and other resources  significantly  greater
than ours. There are also companies whose products


                                     - 8 -
<PAGE>

do not compete directly,  but are sometimes  closely related.  Firearms Training
Systems,  Inc., Advanced Interactive Systems, Inc., and LaserShot Inc. are IES's
main competitors.

     We believe  the key factors in our  competing  successfully  in this field
will be our ability to develop  simulation  software  and related  products  and
services to effectively train law enforcement and military to today's standards,
our  ability to develop  and  maintain a  proprietary  technologically  advanced
hardware, and our ability to develop and maintain relationships with departments
and government agencies.

Vehicle Armoring

     Introduction

     MDT  Protective  Industries  was  established  in  Israel in 1989 as one of
Israel's first car armoring  companies,  and is Israel's  leader in state-of-the
art lightweight  armoring of vehicles,  ranging from light tactical  vehicles to
passenger  vehicles.  With  two  production  lines,  MDT  specializes  in  using
state-of-the-art  lightweight  ceramic  materials,  special  ballistic glass and
advanced  engineering  processes to fully armor vans and cars.  MDT is a leading
supplier to the Israeli  military,  Israeli special forces and special services.
MDT's  products have been proven in intensive  battlefield  situations and under
actual  terrorist  attack  conditions,  and are  designed to meet the  demanding
requirements of governmental and private sector customers worldwide.

     MDT has acquired  many years of  battlefield  experience  in Israel.  MDT's
vehicles have provided  proven  life-saving  protection for their  passengers in
incidents of rock  throwing,  handgun and assault  rifle  attack at  point-blank
range,  roadside  bombings and suicide  bombings.  In fact,  to our knowledge an
MDT-armored  vehicle has never  experienced  bullet  penetration  into a vehicle
cabin under attack.  MDT also uses its  technology to protect  vehicles  against
vandalism.

     MDT's revenues during 2000, 2001 and 2002 were approximately $747,000, $6.5
million and $6.4 million, respectively.

     The Armoring Process

     Armoring a vehicle  involves much more than just adding "armor  plates." It
includes professional and secure installation of a variety of armor components -
inside  doors,  dashboards,   and  all  other  areas  of  passenger  and  engine
compartments.  MDT uses  overlapping  sections  to  ensure  protection  from all
angles,  and installs  armored  glass in the  windshield  and  windows.  MDT has
developed certain unique features,  such as new window operation mechanisms that
can raise windows rapidly despite their increased  weight,  gun ports,  run-flat
tires,  and more.  MDT  developed  the  majority of the  materials  that it uses
in-house,  or in conjunction  with renowned  Israeli  companies  specializing in
protective materials.

     In order to armor a vehicle, MDT first disassembles the vehicle and removes
the interior paneling,  passenger seats, doors, windows, etc. MDT then fortifies
the entire body of the vehicle,  including  the roof,  motor and other  critical
components,  and reinforces the door hinges.  MDT achieves  firewall  protection
from frontal assault with carefully designed overlapping armor. Options, such as
air-conditioning,  seating modifications and run-flat tires, are also available.
MDT  fixes  the  armoring  into the  shell  of the  vehicle,  ensuring  that the
installation and finishing is


                                     - 9 -
<PAGE>

according to the standards set for that particular  model.  MDT then reassembles
the vehicle as close to its original appearance as possible.

     Once MDT has  ensured  full  vehicle  protection,  it places a  premium  on
retaining the original vehicle's look and feel to the extent possible, including
enabling  full  serviceability  of the vehicle,  thereby  rendering the armoring
process   "invisible."   MDT  works  with  its  customers  to  understand  their
requirements,  and  together  with the customer  develops an optimized  armoring
solution.  A flexible  design-to-cost  process helps evaluate  tradeoffs between
heavy and light materials and various levels of protection.

     By working within the vehicle manufacturer's specifications,  MDT maintains
stability,  handling,  center-of-gravity  and overall  integrity.  MDT's methods
minimize impact on payload, and retain the full view from the passenger. In most
cases all the  original  warranties  provided by the  manufacturer  are still in
effect.

     Armoring Materials

     MDT offers a variety of armoring  materials,  optimized  to the  customer's
requirements.   MDT  uses  ballistic  steel,   composite  materials   (including
Kevlar(R),  Dyneema(R)  and composite  armor steel) as well as special  ceramics
developed  by MDT,  together  with  special  armored  glass.  MDT uses  advanced
engineering  techniques  and "light"  composite  materials,  and avoids,  to the
extent  possible,  using  traditional  "heavy"  materials  such as armored steel
because of the added weight,  which impairs the driving performance and handling
of the vehicle.

     All  materials  used by MDT  meet  not  only  all  international  ballistic
standards,  but also the far more stringent requirements set down by the Israeli
military,  the  Israeli  Ministries  of Defense  and  Transport,  and the Israel
Standards  Institute.  MDT's  factory has also been granted the ISO 9002 quality
standards award.

     Products and Services

     MDT armors a variety of vehicles for both commercial and military  markets.
At present,  MDT offers armoring for  approximately  thirty  different models of
motor vehicles.

     In the military market, MDT armors:

     o    troop and personnel  carriers  (such as vehicles in the  Mercedes-Benz
          Vario and Sprinter lines)

     o    front-line  police and military vehicles (such as the Mitsubishi Storm
          4x4)

     o    command vehicles (such as the Land Rover Defender 4x4)

     o    specialty vehicles (such as HumVees).

     In the commercial market, MDT armors:

     o    passenger  vans and sports  utility  vehicles  (such as the  Chevrolet
          Savana, the General Motors Vandura and the Ford Econoline)



                                     - 10 -
<PAGE>

     o    money and valuables carriers (such as the Volkswagen T4 Transporter)

     o    luxury  sedans  (including  a  variety  of  models  made by  Mercedes,
          Cadillac, Volvo, Lincoln, etc.)

     o    ambulances (such as those made by Chevrolet).

     Sales and Marketing

     Most of MDT's business comes from Israel, although MDT has armored vehicles
under contracts from companies in Yugoslavia, Mexico, Colombia, South Africa and
Singapore.  MDT's  principal  customer  at present is the  Israeli  Ministry  of
Defense.  Other customers  include Israeli  government  ministries and agencies,
private companies, medical services and private clients.

     MDT markets its vehicle  armoring through Israeli vehicle  importers,  both
pursuant  to  marketing  agreements  and  otherwise,  and  directly  to  private
customers. Most sales are through vehicle importers.

     MDT holds  exclusive  armoring  contracts with Israel's sole General Motors
and Chevrolet distributors.  This means that these distributors will continue to
honor the original vehicle warranty on armored versions of vehicles sold by them
only if the armoring was done by MDT.

     Competition

     The global  armored car  industry  is highly  fragmented.  Major  suppliers
include both vehicle  manufacturers  and  aftermarket  specialists.  As a highly
labor-intensive process, vehicle armoring is numerically dominated by relatively
small businesses. Industry estimates place the number of companies doing vehicle
armoring in the range of around 500  suppliers  globally.  While  certain  large
companies may armor several  hundred cars annually,  most of these companies are
smaller  operations  that may armor in the range of five to fifty cars per year.
In 2002,  MDT armored  over 130 vehicles  against  weapons and  explosives,  and
another approximately 300 vehicles against vandalism.

     Among vehicle manufacturers, Mercedes-Benz has the largest vehicle-armoring
market share,  estimated at around 7% of the global  market.  Among  aftermarket
specialists,  the  largest  share  of the  vehicle-armoring  market  is  held by
O'Gara-Hess & Eisenhardt.  Other aftermarket  specialists include  International
Armoring Corp. Lasco, Texas Armoring and Chicago Armor (Moloney).  Many of these
companies  have   financial,   technical,   marketing,   sales,   manufacturing,
distribution and other resources significantly greater than ours.

     We believes  the key factors in our  competing  successfully  in this field
will be our ability to penetrate new military and  paramilitary  markets outside
of Israel, particularly in North and South America and in Europe.

Electric Fuel Batteries for Defense and Homeland Security

     We base our strategy in the field of military  batteries on the development
and commercialization of our next-generation  Zinc-Air fuel cell technology,  as
applied in our batteries that we produce for the U.S. Army's  Communications and
Electronics  Command (CECOM).  We will


                                     - 11 -
<PAGE>

continue  to seek new  applications  for our  technology  in  defense  projects,
wherever  synergistic  technology and business  benefits may exist. We intend to
continue to develop our battery products for defense agencies,  and plan to sell
our products either directly to such agencies or through prime contractors.

     Since 1998 we have  received and  performed a series of contracts  from the
U.S. Army's  Communications-Electronics  Command (CECOM) to develop and evaluate
advanced primary Zinc-Air fuel cell packs. The terms of the current extension of
a contract initially issued in 2001 call for us to deliver 500 prototype battery
packs, and procure and install certain production equipment. The 12/24 volt, 800
watt-hour  battery pack for  battlefield  power,  which is based on our Zinc-Air
fuel cell technology,  weighs only about five pounds and has approximately twice
the energy capacity per pound of the U.S. Army's standard lithium-sulfur dioxide
battery packs.

     In the  second  half of 2002,  our  five-year  program  with the US  Army's
Communications  Electronics  Command  (CECOM) to develop a Zinc-Air  battery for
battlefield  power culminated in the assignment of a National Stock Number and a
$2.54 million delivery order for the newly designated BA-8180/U battery.

     The BA-8180/U  battery is our first defense battery product to go into mass
production. We are developing other military batteries and related products that
we hope to get into production in 2003 and 2004.

     Advanced Zinc-Air Power Pack (AZAPPs)

     BA-8180/U

     Advanced  Zinc-Air power packs (AZAPPs) are  lightweight,  low-cost primary
Zinc-Air  batteries  with up to twice the energy  capacity  per pound of primary
lithium (LiSO2) battery packs,  which are the most popular batteries used in the
US  military  today.   Zinc-Air   batteries  are  inherently  safe  in  storage,
transportation, use, and disposal.

     The BA-8180/U is a 12/24 volt, 800 watt-hour battery pack approximately the
size and weight of a notebook computer. The battery is based on a new generation
of  lightweight,  30 ampere-hour  cells developed by us over the last five years
with partial funding by CECOM. Each BA-8180/U battery pack contains 24 cells.

     The battery has specific energy of up to 350 Wh/kg,  which is substantially
higher than that of any competing  disposable  battery  available to the defense
and security  industries.  By way of  comparison,  the BA-5590,  a popular LiSO2
battery pack, has only 175 Wh/kg.  Specific energy,  or energy capacity per unit
of weight, translates into longer operating times for battery-powered electronic
equipment, and greater portability as well. Because of lower cost per watt-hour,
the BA-8180/U can provide substantial cost savings to the Army when deployed for
longer missions, even for applications that are not man-portable.

     During the second  half of 2002,  CECOM  assigned a National  Stock  Number
(NSN) to our Zinc-Air battery, making it possible to order and stock the battery
for use by the Armed  Forces.  During the fourth  quarter,  CECOM  assigned  the
designation  BA-8180/U  to our Zinc-Air  battery,  the first time an official US
Army battery designation was ever assigned to a Zinc-Air battery.

                                     - 12 -
<PAGE>

     Also  during the fourth  quarter of 2002,  CECOM  provided  us with a $2.54
million  letter  contract  for delivery of BA-8180/U  batteries  and  associated
electrical interface adapters.  The contract calls for order releases during the
first  three  calendar  quarters  of  2003,  with a  current  order  ceiling  of
$2,543,250.  Under the terms of the letter contract,  a formal contract is to be
entered into during the first quarter of 2003.

     Based on extensive contacts with the US and foreign military  agencies,  we
believe that we will be able to develop a  significant  market for the BA-8180/U
both in the US Armed Forces and abroad.

     Other AZAPP Products

     The BA-8180/U was the first battery  approved for military use based on our
30Ah Zinc-Air cell. We have also  developed,  with partial funding from CECOM, a
12-cell, 12 volt battery using the same 30Ah Zinc-Air cell. This battery, called
the AZAPP FB, is currently in limited production for field testing purposes.

     We are also working on two  additional  cell sizes.  The first of these,  a
20Ah cell, was developed for the Army's Land Warrior  program,  and some battery
prototypes  incorporating  these cells have already  been  delivered to the Army
under the terms of a Land Warrior  subcontract that we received and completed in
2002.

     We have also completed the  conceptual  design of a 40Ah cell and a 24-cell
battery pack  incorporating  such a cell. We hope to complete the design of this
cell in 2003 and put it into production either in late 2003 or early 2004.

     Ancillary products

     In order to provide  compatibility  between the BA-8180/U and various items
of military  equipment,  we will  supply  three  types of  electrical  interface
adapters  for  the  BA-8180/U,  including  equipment-specific  adapters  for the
AN/PRC-119  SINCGARS  and  SINCGARS  ASIP  tactical  radio  sets,  and a generic
interface for items of equipment  that were designed to interface with a BA-5590
or equivalent battery. Each of the three interfaces was also assigned a national
stock number (NSN) by CECOM. We will continue to develop interface adapters that
for our batteries as the need arises.

     We have also  developed  interface  adapters  for other items of  equipment
which  require  higher  power than the  BA-8180/U  can  provide  by itself.  For
example,  we have  developed  a hybrid  battery  system  comprising  a BA-8180/U
battery pack and two small rechargeable lead-acid packs. Even with the weight of
the lead-acid  batteries,  this hybrid system powers a satellite  communications
terminal for  significantly  longer than an  equivalent  weight of BA-5590 LiSO2
battery packs. We have also developed  experimental hybrid systems incorporating
other   rechargeable   technologies,   such   as   lithium-ion   batteries   and
ultracapacitors.

     UAV/MAV

     We are  currently  under  contract  with the U.S.  military  and an Israeli
security agency,  to demonstrate the feasibility of Zinc-Air  batteries for both
unmanned  aerial  vehicles  (UAV)  and  micro-air   vehicles  (MAV)   platforms,
respectively.

                                     - 13 -
<PAGE>

     Short-term  development  goals include the  optimization and integration of
cell components for performance and manufacturability.  System-level  objectives
include refinement of battery envelope design and vehicle interfaces, and actual
flight testing. We anticipate that the first fieldable batteries can be ready in
2004.

     UAVs

     Man-portable   UAVs  are  considered  to  be  an   increasingly   important
battlefield tool for  reconnaissance  and  surveillance of enemy  positions.  At
present,  power  sources  available  to the  military  provide  only  marginally
adequate  operating  times  for these  UAVs.  For  example,  the  Marine  Corps'
DragonEye system,  operating off primary lithium batteries, can run for 30 to 60
minutes.  We expect  to  achieve  a cruise  time of at least two hours  using an
equivalent weight of Zinc-Air cells.

     MAVs

     Development of electrically propelled MAVs has been hampered by the lack of
a satisfactory  battery  solution.  Achievement of our development  targets will
enable  a  Zinc-Air  battery  to  power a  typical  5-oz.  MAV for as long as 30
minutes.

     Zinc-Air Power Packs (ZAPPs)

     During  2002 we  developed  a family  of 12V  batteries  built  around  our
high-power 4Ah metal cell.  These  batteries are aimed at the Homeland  Security
market and are designed to provide back-up power for portable 12V equipment such
as handheld chemical or biological sensors.  The first battery in this family to
become ready for production is the ZAPP-48,  which is a 14Ah battery  capable of
working at a continuous current of 2.5A.

     Market/Applications

     Being an external  alternative to the popular lithium based BA-5590/U,  the
BA-8180 can be used in many applications operated by the 5590. The BA-8180/U can
be used for a variety of military applications, including:

     o    Tactical radios

     o    SIGINT systems

     o    Training systems

     o    SATCOM radios

     o    Nightscope power

     o    Guidance systems

     o    Surveillance systems

     o    Sensors

     Competition

     The  BA-8180/U  is the  only  Zinc-Air  battery  to hold a US Army  battery
designation.   It  does,  however,   compete  with  other  primary  (disposable)
batteries,  and primarily lithium based


                                     - 14 -
<PAGE>

batteries.  In some cases,  primarily in training missions, it will also compete
with rechargeable batteries.

     Zinc-Air  batteries are inherently safer in storage,  transportation,  use,
and disposal,  and are more cost  effective.  They are  lightweight,  with up to
twice the energy capacity per pound of primary  lithium battery packs.  Zinc-Air
batteries for the military are also under  development  by Rayovac  Corporation.
Rayovac's military Zinc-Air batteries utilize cylindrical cells, rather than the
prismatic cells that we developed.  While  cylindrical  cells may provide higher
specific  power than our prismatic  cells,  we believe they will  generally have
lower energy densities and be more difficult to manufacture.

     The most popular competing primary battery in use by the US Armed Forces is
the  BA-5590,  which uses  lithium-sulfur  dioxide  (LiSO2)  cells.  The largest
suppliers of LiSO2  batteries to the US military are believed to be Saft America
Inc and Eagle Picher  Technologies LLC. The battery compartment of most military
communications  equipment,  as well as other military equipment, is designed for
the x90 family of batteries,  of which the BA-5590  battery is the most commonly
deployed.  Another  primary  battery in this family is the  BA-5390,  which uses
lithium-manganese  dioxide  (LiMnO2) cells.  LiMnO2  batteries are most commonly
supplied by Ultralife Batteries Inc,. Saft and Eagle Picher.

     Rechargeable   batteries  in  the  x90  family  include   lithium-ion   and
nickel-metal  hydride  batteries which may be used in training missions in order
to save the higher costs associated with primary batteries. Because of the short
usage time per charge cycle,  rechargeable batteries are not considered suitable
for use in combat.

     Our BA-8180  does not fit inside the battery  compartment  of any  military
equipment, and therefore is connected externally using an interface adapter that
we also sell to the Army.  Our battery  offers  greatly  extended  mission time,
along with lower total  mission cost,  and these  significant  advantages  often
greatly outweigh the slight inconvenience of fielding an external battery.

     Technology

     All batteries  convert  chemical  energy to electrical  energy  through two
separate electrochemical reactions: one consuming electrons (at the cathode) and
the  other  releasing  them  (at  the  anode).  These  half-cell  reactions  are
physically separated within the battery, allowing ions to flow between them, but
not electrons. It is this separation that allows a battery to produce electrical
power:  The  electrons are made to do work on their journey to the other side of
the battery by passing across an electrical  load, such as a light bulb,  motor,
or other electrically powered component or device.

     Our Zinc-Air battery's  superiority over other battery technologies lies in
the underlying  electrochemical  make-up of a Zinc-Air cell. While other battery
cells must carry the cathodic  reagent - the active material that `consumes' the
electrons  freed at the anode - within the weight and volume of the  battery,  a
Zinc-Air cell consumes oxygen that it extracts from the atmosphere.

                                     - 15 -
<PAGE>

     On the anode side, the reaction in the Zinc-Air cell is the same as that of
the common  alkaline  battery,  wherein  zinc,  the active anodic  material,  is
converted  to   zinc-oxide  by  reaction  with  hydroxyl  ions  present  in  the
electrolyte.

     On the  cathode  side,  the  reaction  in both the  Zinc-Air  and  alkaline
batteries involves the reduction of oxygen to create those hydroxyl ions. In the
case of the alkaline  battery,  an  oxidizing  material  (manganese  dioxide) is
deployed inside the cell to provide the oxygen.  The Zinc-Air cell, on the other
hand, employs an air-permeable,  hydrophobic,  catalytic membrane which extracts
oxygen from the atmosphere.

     Thus,  Zinc-Air has a weight and volume  advantage  over most other battery
technologies,  because one of its two active  reagents,  i.e.,  oxygen,  adds no
weight or volume within the cell.  This frees up a lot of space inside the cell,
which means that the zinc anode, our cell's energy storehouse,  makes up most of
the cell's weight and volume.

     In addition to  outstanding  performance,  Zinc-Air  technology  boasts two
additional features that make it extremely  attractive for military and security
use:

     o    Safety: A Zinc-Air battery is an inherently safe battery,  in storage,
          transportation,  use, and disposal.  The danger of fire,  explosion or
          personnel  exposure to hazardous  materials is lower than in any other
          battery technology.

     o    Environment-friendliness:  Zinc-Air  cells contain no added mercury or
          other  hazardous  elements such as lead or cadmium that are often used
          in batteries,  and in fact Zinc-Air  batteries can be disposed of with
          household trash.

     Manufacturing

     We have  established  a battery  factory  at our new  location  in  Auburn,
Alabama,  where we have leased 15,000 square feet of light industrial space from
the city of  Auburn.  We also  have  production  capabilities  for some  battery
components  at the facility of EFL,  our Israeli  subsidiary,  in Beit  Shemesh,
Israel.

Electric Vehicles

     Introduction

     We believe that environmental concerns and current and proposed legislation
create  incentives for fleet operators to use zero emission  electric  vehicles,
and that the Electric  Fuel  Zinc-Air  Energy  System for  electric  vehicles is
particularly  suitable  for use by such fleet  operations.  We believe  the U.S.
government  will  continue  to use us as a  subcontractor  to  develop  electric
vehicles,  and we hope this support will create  incentives for fleet  operators
(primarily bus and mass transit  operators) to introduce  electric vehicles into
their fleets.  We further  believe that recent  government  interest in hydrogen
fuel  cells is to our  benefit,  since we  believe  that an  examination  of the
advantages  and  disadvantages  offered  by both  hydrogen  fuel  cells  and the
Electric Fuel Zinc-Air Energy System for electric vehicles demonstrates that our
system offers a mature  technology  that is ready to be  implemented  in a short
time frame,  unlike hydrogen fuel cells,  which we believe are decades away from
being a practical and economic  alternative to traditional


                                     - 16 -
<PAGE>

petroleum-based fuel sources. Moreover, a recent study that we commissioned from
consulting firm Arthur D. Little projected  significant life cycle cost benefits
for Zinc-Air when compared with hydrogen fuel cell technology over a five to ten
year period.

The Electric Fuel Zinc-Air Energy System for Electric Vehicles

     The Electric Fuel Zinc-Air Energy System consists of:

     o    an  in-vehicle,  Zinc-Air  fuel  cell unit  consisting  of a series of
          Zinc-Air cells and refuelable zinc-fuel anode cassettes;

     o    a  battery  exchange  unit  for  fast  vehicle   turn-around  that  is
          equivalent to the time needed to refuel a diesel-based bus refueling;

     o    an  automated  battery  refueling  system for  mechanically  replacing
          depleted zinc-fuel cassettes with charged cassettes; and

     o    a  regeneration  system for  electrochemical  recycling and mechanical
          repacking of the discharged fuel cassettes.

     With its  proprietary  high-power air cathode and zinc anode  technologies,
our Zinc-Air fuel cell delivers a unique combination of high-energy  density and
high-power   density,   which  together  power  electric  vehicles  with  speed,
acceleration,   driving  range  and  driver  convenience   similar  to  that  of
conventionally powered vehicles.

     We  believe  that our  Zinc-Air  fuel cell  system  for  powering  electric
vehicles offers numerous  advantages over other electric vehicle  batteries that
make it ideal for fleet and mass transit  operators.  Fleet operators  require a
long operating range, large payload capacity, operating flexibility, all-weather
performance,  fast vehicle turnaround and competitive life-cycle costs. Electric
Fuel-powered full-size vehicles, capable of long-range, high-speed travel, could
fulfill the needs of transit  operators  in all weather  conditions,  with fast,
cost-effective refueling. An all-electric, full-size bus powered by the Electric
Fuel system can provide to transit  authorities a full day's operating range for
both heavy duty city and suburban routes in all weather conditions.

     In field trials with major  European  entities,  we have  demonstrated  the
commercial viability of our battery system by regularly driving 300 to 400 km in
actual drive cycles. In 1996, a Mercedes-Benz  MB410 van powered by our Zinc-Air
fuel cell crossed the Alps,  traveled from Chambray,  France over the Moncenisio
Pass,  and  continued to the Zinc-Air  regeneration  plant  operated by Electric
Fuel's Italian licensee,  Edison  Termoelettrica,  SpA, in Turin, Italy. The 152
mile  (244  km)  drive  included  a 93  mile  (150  km)  continuous  climb  over
mountainous  terrain in which the vehicle climbed over 4,950 feet (1,500 meters)
to reach  the  summit  at  6,874  feet  (2,083  meters),  using  only 65% of the
battery's capacity. In November 1997, an electric  Mercedes-Benz MB410 van drove
from  central  London to Central  Paris on a single  charge - a distance  of 272
miles (439 km), not including  the rail  transport  through the English  Channel
Tunnel.

     During 2002,  we  successfully  completed  Phase II of our program with the
U.S. Department of Transportation's  Federal Transit  Administration.  Among the
items  successfully  tested  during  Phase II were  ultracapacitors  designed to
improve  and  increase  the  performance  of our bus.  During  this  performance
testing,  our bus was driven a record-breaking  127 miles, more than


                                     - 17 -
<PAGE>

100 of them under the rigorous  stop-and-go  diving conditions of the Society of
Automotive  Engineers'  Central  Business  District  (CBD)  cycle  with  a  full
passenger load. We demonstrated our bus in a public  demonstration in Las Vegas,
Nevada in November  2001,  and in  Washington,  D.C., on Capitol Hill,  with the
participation of certain members of the United States Senate,  in March 2002. In
October 2002, we received  approval from the FTA to subcontract at least half of
the $2 million budget  associated with the new Phase III of our Electric Transit
Bus  Program  (described  below),  with  remainder  of the budget  shared by the
partners in the program.

     Major Programs

     We  have  formed  several   strategic   partnerships  and  are  engaged  in
demonstration  programs  involving the Electric Fuel Zinc-Air  Energy System for
electric vehicles in various locations in the U.S. and Europe.

     The Department of  Transportation-Federal  Transit Administration  Zinc-Air
     All Electric Transit Bus Program

     In the United  States,  our Zinc-Air  technology is the focus of a Zinc-Air
All Electric Bus  demonstration  program the costs and expenditures of which are
50%   offset   by   subcontracting   fees  paid  by  the  U.S.   Department   of
Transportation's  Federal  Transit Administration. Phase I of the project, which
was  for  $4 million, was completed in July 2000. Phase II of the project, which
was  for  $2.7 million, was completed in July 2002, and subcontracting for Phase
III  was  approved  in  October  2002.

     The  program  provides  that the bus  will  utilize  the new  all-electric,
battery/battery/ultracapacitor-hybrid  propulsion  system  that  we are  jointly
developing with General Electric's research and development center, with funding
from the Israeli-U.S.  Bi-National  Industrial  Research and Development  (BIRD)
Foundation  (described below). The bus used in the program is a standard 40-foot
(12.2 meter) transit bus manufactured by NovaBus Corporation.  It has a capacity
of 40 seated and 37 standing  passengers  and a gross  vehicle  weight of 39,500
lbs. (17,955 kg.). The  all-electric  hybrid system consists of an Electric Fuel
Zinc-Air fuel cell as the primary energy source, an auxiliary battery to provide
supplementary  power and  recuperation  of energy when braking.  Ultracapacitors
enhance this supplementary power, providing faster throughput and higher current
in both directions than the auxiliary battery can supply on its own. The vehicle
draws cruising energy from the Zinc-Air fuel cell, and  supplementary  power for
acceleration, merging into traffic and hill climbing, from the auxiliary battery
and ultracapacitors.

     The   program,   which   includes   General   Electric   and  the  Regional
Transportation Commission of Southern Nevada (RTC) as project partners, seeks to
demonstrate  the  ability  of the  Electric  Fuel  battery  system  to  power  a
full-size, all-electric transit bus, providing a full day's range for heavy duty
city and suburban  routes,  under all weather  conditions.  In November  1998, a
consortium  consisting of Electric Fuel, the Center for Sustainable  Technology,
L.L.C. and RTC received approval for $2 million in federal  subcontracting  fees
for the $4 million Zinc-Air  Electric Transit Bus Program (Phase I).  Additional
project  partners  included  the  Community  College of Southern  Nevada and the
Desert Research Institute. We successfully completed this phase in July 2000.

                                     - 18 -
<PAGE>

     Phase II  focused  on  conducting  evaluation  of the  system  and  vehicle
performance,  including  track testing and limited on-road  demonstrations,  and
enhancing the all-electric propulsion system developed in Phase I. Phase II also
included  testing  and  comparing  the  incorporation  of  ultracapacitors   and
associated  interface  controls in the Zinc-Air  fuel cell system.  Phase II was
completed in July 2002, after successfully  meeting all the original performance
designed  requirements  (as  per the  American  Public  Transport  Association's
standard  for  transit  buses)  without  addition  of the  ultracapacitors,  and
exceeding them in tests with the introduction of ultracapacitors.

     The new Phase III effort,  which was announced in October 2002,  focuses on
installation,   testing   and   commissioning   of   new   generation   advanced
ultracapacitors and associated  interface controls.  Advanced techniques will be
used to implement  control of the bus  auxiliaries to optimize their  efficiency
and minimize energy  consumption.  The entire system will be analyzed,  assessed
and compared to previous  configurations.  Further evaluations of the system and
vehicle performance, including track testing and limited on-road demonstrations,
will also be carried out.

     We  are  the principal participant in Phase III, with overall technical and
administrative  responsibility.  The responsibilities of General Electric relate
to  the  auxiliary  control  system  and  the  ultracapacitor configuration. The
Regional  Transportation Commission of Southern Nevada, which was also a project
participant in Phase II, continues its role in leading the project's peer review
committee.

     A performance  evaluation  test is  anticipated  to take place in Rome, New
York in late 2003, where improvements over the previous configurations,  if any,
will be measured.

     We believe that electric buses  represent a particularly  important  market
for electric  vehicles in the United  States.  Transit  buses  powered by diesel
engines  operate in large  urban areas  where  congestion  is a fact of life and
traffic is largely stop-and-go. As a result, they are the leading contributor to
inner city toxic  emissions,  and are a major factor for those U.S.  cities that
have  been  designated  as in  "non-attainment"  with  respect  to  air  quality
standards.  Moreover,  the U.S.  Environmental  Protection Agency has identified
particulate emissions from diesel engine emissions as a carcinogen.

     Our Zinc-Air  energy  system is  particularly  suitable  for transit  buses
because  transit buses must operate for up to 12 hours a day on a single battery
charge.  Furthermore,  transit buses require a large energy  storage  battery to
power the vehicle while  attending to passenger  needs such as  air-conditioning
and  handicapped  access.  The  test  program  is  designed  to  prove  that  an
all-electric bus can meet these and all other Los Angeles and New York Municipal
Transit Authority mass transit requirements  including  requirements relating to
performance, speed, acceleration and hill climbing.

     All-Electric  Hybrid  Propulsion  System for  Transit  Buses and Heavy Duty
     Vehicles - the BIRD Program

     We and  General  Electric  are also  jointly  developing  an  all-electric,
battery/battery-hybrid   propulsion  system  for  powering  electric  buses  and
heavy-duty  trucks.  In July 1998 the BIRD Foundation  awarded the two companies
funding for the joint development of the electric  propulsion  system. The first
application  for the system will be an  all-electric,  zero-emission,  full-size

                                     - 19 -
<PAGE>

transit  bus,  in  the  program  subcontracted  to us  by  the  Federal  Transit
Administration of the U.S.  Department of Transportation  referred to above. Our
portion of the project related to a mobile refueling system for the transit bus.
The refueling system, build in two standard 40" containers, was commissioned and
successfully  demonstrated in the All Electric Bus project.  General  Electric's
portion of the project was to develop the EMS Energy  Management  System,  which
manages and controls all the various energy  suppliers and consumers of the bus.
The EMS was tested  successfully  as part of the  integration  drives  completed
under phase I of the FTA project.

     Germany - Consortium Project

     In  January  2000,  we  agreed  to  participate   in  a  new   cooperative,
all-electric hybrid vehicle development and demonstration  program in Germany. A
consortium  consisting of major German industrial firms such as  DaimlerChrysler
AG, EPCOS and Varta  Batterie AG will  implement  the program.  The German Post,
which  sponsored  an extensive  field test of our Zinc-Air  fuel cell system for
electric  vehicles from 1995 through 1998,  has also joined the consortium as an
Advisory Partner.  In January 2001, we received a DM 1 million  ($469,000) order
for Zinc-Air  fuel-cells  and zinc anodes that we delivered  during 2001, and we
completed this project with a successful  on-road  demonstration of our Zinc-Air
van in December 2002.

     Competition

     We  believe  that  our  products  must  be  available  at a  price  that is
competitive with alternative  technologies,  particularly those intended for use
in zero or  low-emission  vehicles.  Besides other battery  technologies,  these
include  hydrogen  fuel  cells,   "hybrid  systems"  that  combine  an  internal
combustion engine and battery technologies,  and use of regular or low-pollution
fuels such as gasoline,  diesel,  compressed natural gas, liquefied natural gas,
ethanol  and  methanol.  Other  alternative  technologies  presently  use costly
components,  including  use of flywheels and  catalytic  removal of  pollutants.
These various technologies are at differing stages of development and any one of
them, or a new  technology,  may prove to be more cost  effective,  or otherwise
more readily  acceptable  by consumers,  than the Electric Fuel Zinc-Air  Energy
System for electric vehicles. In addition, the California Air Resource Board has
expressed  to  us  concerns  about  the  costs   associated  with  the  Zinc-Air
regeneration  infrastructure  as  compared  to  battery  technologies  that  use
electrical recharging.

     The  competition to develop  electric  vehicle battery systems and hydrogen
fuel cells and to obtain funding for the development of electric vehicle battery
systems is, and is expected to remain,  intense.  Our  technology  competes with
other battery technologies as well as with different Zinc-Air batteries and with
advanced vehicle  propulsion  systems.  The competition  consists of development
stage companies as well as major international companies and consortia including
such companies, including automobile manufacturers,  battery manufacturers,  and
energy production and  transportation  companies,  many of which have financial,
technical,  marketing,  sales,  manufacturing,  distribution and other resources
significantly greater than ours.

     An area of  increased  development  has been  that of  hydrogen  fuel  cell
powered  vehicles,  spearheaded  by  the  Ballard  Corporation's  solid  polymer
electrolyte hydrogen-air fuel cell program. Major automobile companies have made
significant  investments  in this  technology.  However,  we  believe  that  our
Zinc-Air fuel cell technology is more likely to be commercially viable,


                                     - 20 -
<PAGE>

and more likely to be ready for  commercialization  earlier,  than the  hydrogen
fuel  cell  systems,  with a  lower  system  cost  and  with  more  advantageous
performance characteristics.

     We believe that  vehicles  based on hydrogen fuel cells are many years away
from  commercialization,  with  significant  issues of hydrogen  production  and
storage.  We feel that storing  hydrogen in containers on board  vehicles may be
risky and involves major  investments in infrastructure  for  highly-pressurized
hydrogen,  and that using  methanol  for making  hydrogen  on board  vehicles is
highly complex, costly and risky.

     We believe that competing Zinc-Air  technologies,  such as those offered by
Metallic Power (Carlsbad,  California) and Powerzinc Electric (City of Industry,
California),  are at a much earlier stage of  development,  not just in terms of
size and number of cells,  modules and demonstrations in electric vehicles,  but
also in  terms  of the  scale  of  development  effort.  We are not  aware  of a
competing  Zinc-Air  development  effort  that  could  yield a  product  that is
superior to ours in terms of vehicle performance or life-cycle cost.

     Marketing

     We plan to seek to expand our existing  strategic  alliances in Europe, the
United States and the Far East,  benefiting from experience gained in connection
with the DOT/FTA and our alliances  with General  Electric and other key players
in this market. We also intend to seek support of government agencies,  electric
utilities and zinc manufacturers.

Lifejacket Lights

     In 1996,  we began to produce and market  lifejacket  lights built with our
patented  magnesium-cuprous chloride batteries, which are activated by immersion
in water  (water-activated  batteries),  for the aviation and marine  safety and
emergency  markets.  At  present  we  have a  product  line  consisting  of four
lifejacket light models, all of which work in both freshwater and seawater. Each
of our lifejacket lights is certified for use by relevant  governmental agencies
under various U.S. and international regulations.  We manufacture,  assemble and
package all our lifejacket lights in our factory in Beit Shemesh, Israel.

  Market and Marketing Strategies

     The market for aviation  lifejacket  lights has been  declining  because of
extended  maintenance  cycles in the  industry,  and the events of September 11,
2001,  exacerbated  this trend. We market our lights to the commercial  aviation
industry  in the  United  States  exclusively  through  The  Burkett  Company of
Houston, Texas, which receives a commission on sales.

     The annual market for marine  lifejacket  lights is estimated at one to two
million units worldwide, of which about 50% is in Europe and less than 25% is in
the United States.  We market our marine safety products through our own network
of distributors in Europe, the United States, Asia and Oceania.

  Competition

     Two of the largest  manufacturers  of aviation and marine safety  products,
including TSO and SOLAS-approved  lifejacket lights, are ACR Electronics Inc. of
Hollywood,  Florida, and


                                     - 21 -
<PAGE>

Pains  Wessex  McMurdo Ltd. of England.  Other  significant  competitors  in the
marine market include Daniamant Aps of Denmark, and SIC of Italy.

Backlog

     We generally  sell our products  under  standard  purchase  orders.  Orders
constituting  our backlog are subject to changes in delivery  schedules  and are
typically  cancelable  by our  customers  until a  specified  time  prior to the
scheduled delivery date. Accordingly, our backlog is not necessarily an accurate
indication  of future sales.  As of December 31, 2001 and 2002,  our backlog for
the   following   year  was   approximately   $1.0  million  and  $6.2  million,
respectively.

Regulatory and Environmental Matters

     We  believe  that our  Zinc-Air  batteries  as  currently  produced  are in
compliance with applicable Israeli,  European,  and United States federal, state
and local standards that govern the manufacture,  storage,  use and transport of
the various chemicals used, and waste materials produced, in the manufacture and
use of our Zinc-Air fuel cell, including zinc and potassium  hydroxide.  We have
obtained  the  necessary  permits  under the Israel  Dangerous  Substances  Law,
5753-1993,  required for the use of zinc metal,  potassium hydroxide and certain
other substances in our facilities in Israel.

     The  presence of  potassium  hydroxide  as an  electrolyte  in our electric
vehicle   batteries   may  subject  its  disposal  to   regulation   under  some
circumstances.  This  electrolyte is the same as the electrolyte used in primary
alkaline  batteries and rechargeable  nickel-cadmium  and  nickel-metal  hydride
batteries. Our electric vehicle battery technology uses relatively small amounts
of spillable potassium hydroxide. The United States Department of Transportation
regulates  the  transport  of  potassium  hydroxide,  and it is likely  that any
over-the-road  transport of spillable  potassium  hydroxide in the United States
would require manifesting and placarding.

     The EPA,  the  Occupational  Safety  and  Health  Administration  and other
federal,  state and local  governmental  agencies would have  jurisdiction  over
operations of our  production  facilities  were they to be located in the United
States.  Based  upon  risks  associated  with  potassium  hydroxide,  government
agencies  may impose  additional  restrictions  on the  manufacture,  transport,
handling, use and sale of our products.

Patents and Trade Secrets

     We rely on certain proprietary technology and seek to protect our interests
through a  combination  of  patents,  trademarks,  copyrights,  know-how,  trade
secrets and security measures,  including confidentiality agreements. Our policy
generally is to secure  protection  for  significant  innovations to the fullest
extent  practicable.  Further,  we  continuously  seek to expand and improve the
technological  base and  individual  features of our  products  through  ongoing
research and development programs.

     We have been filing  patents on our Zinc-Air  fuel cell system for electric
vehicles and on other aspects of our technology since 1990.  These  applications
have  resulted  in 42  unexpired  U.S.  patents  and 15  corresponding  European
patents.  These  patents  cover  various  aspects of the  Electric  Fuel  System
technology, including the overall system, the zinc anode, including its physical
and mechanical  attributes,  the construction of the air cathode, cell structure

                                     - 22 -
<PAGE>

and arrangements, connectors, the automatic refueling system, zinc regeneration,
and  safety  features,  as  well  as  our  high-power  zinc-oxygen  battery  for
torpedoes,   the  use  of  our  zinc  in  other  alkaline  batteries,   and  our
water-activated  magnesium-cuprous  chloride  batteries.  These  patents  expire
between 2007 and 2018.

     In addition to patent protection, we rely on the laws of unfair competition
and trade secrets to protect our proprietary  rights.  We attempt to protect our
trade secrets and other  proprietary  information  through  confidentiality  and
non-disclosure agreements with customers,  suppliers, employees and consultants,
and through other  security  measures.  However,  we may be unable to detect the
unauthorized  use of, or take  appropriate  steps to  enforce  our  intellectual
property  rights.  Effective  patent,  trademark,  copyright  and  trade  secret
protection  may not be available in every country in which we offer or intend to
offer our  products  and  services to the same  extent as in the United  States.
Failure to  adequately  protect  our  intellectual  property  could harm or even
destroy  our  brands and impair  our  ability to compete  effectively.  Further,
enforcing our  intellectual  property  rights could result in the expenditure of
significant  financial and  managerial  resources and may not prove  successful.
Although we intend to protect our rights  vigorously,  there can be no assurance
that these measures will be successful.

Research and Development

     During the years ended December 31, 2000, 2001 and 2002, our gross research
and product  development  expenditures  were  approximately  $5.5 million,  $4.2
million and 2.2 million,  respectively,  including  research and  development in
discontinued operations. During these periods, the Office of the Chief Scientist
of  the  Israel   Ministry  of  Industry  and  Trade  (the  "Chief   Scientist")
participated  in our research and development  efforts  relating to our consumer
battery  business,  thereby reducing our gross research and product  development
expenditures in the amounts of approximately $763,000, $705,000 and $49,000, for
the  years  2000,  2001 and  2002,  respectively.  During  1998 the  Israel-U.S.
Binational  Industrial  Research and  Development  Foundation  (BIRD) also began
participating  in our research  and  development  efforts by  sponsoring a joint
project to develop a hybrid  propulsion  system for transit  buses with  General
Electric  Corporate  Research  and  Development.  We  received  grants from BIRD
totaling  approximately  $195,000, $0 and $0 during the years ended December 31,
2000, 2001 and 2002, respectively.

     Under the terms of the grants from the Chief  Scientist  and current  Chief
Scientist  regulations,  we are  obligated to pay royalties at the rate of 3% of
the sales of products  developed from projects funded by the Chief Scientist for
the first three years of sales, increasing thereafter,  up to 3.5%. We currently
pay royalties at the rates of 3.5% of Electric Vehicle revenues.  The obligation
to make such  royalty  payments  ends when 100% of the  amount  granted  (in New
Israeli Shekels (NIS) linked to the U.S. dollar,  plus interest (with respect to
grants after January 1, 1999, at the LIBOR rate)) is repaid.  The  Government of
Israel does not acquire proprietary rights in the technology developed using its
funding,  but  certain  restrictions  with  respect  to  the  technology  apply,
including  the  obligation  to  obtain  the  Israeli   Government's  consent  to
manufacture  the  product  based on such  technology  outside  of  Israel  or to
transfer the technology to a third party,  which consent may be conditioned upon
an increase in royalty rates or in the amount to be repaid.  Current regulations
require that, in the case of the approved  transfer of manufacturing  rights out
of Israel,  the maximum  amount to be repaid  through  royalty  payments will be
increased  to between  120% and 300% of the  amount  granted,  depending  on the
extent of the  manufacturing


                                     - 23 -
<PAGE>

to be conducted  outside of Israel,  and that an increased royalty rate of up to
5% will be applied.  Through 2002, we have received an aggregate of $9.9 million
from grants from the Chief Scientist.

     Under the terms of the grants from BIRD,  we are obligated to pay royalties
at the rate of 2-1/2% of the first year's gross sales and, in succeeding  years,
at the rate of 5% of gross  sales  until 100% of the grant has been  repaid,  at
which point the  repayment  rate  decreases to 2-1/2% of gross sales.  The total
amount to be repaid  reaches  a  maximum  of 150% of the grant if it takes  five
years or longer  for the grant to be repaid.  Should we sell any  portion of the
technology developed outright to a third party,  one-half of all proceeds of the
sale are applied as received on account of royalties.  The repayment  obligation
is in U.S.  dollars linked in value to the U.S.  Consumer  Price Index.  Through
2002, we have received an aggregate of $772,000 from grants from BIRD.

Employees

     As of February 28, 2003, we had 152 full-time employees worldwide. Of these
employees,  3 hold doctoral degrees and 20 hold other advanced  degrees.  Of the
total, 18 employees were engaged in product research and  development,  110 were
engaged  in  production  and  operations,  and  the  remainder  in  general  and
administrative  functions.  Our success will depend in large part on our ability
to attract and retain skilled and experienced employees.

     We  and  the  employees  are  not  parties  to  any  collective  bargaining
agreements. However, as many of our employees are located in Israel and employed
by EFL or  MDT,  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  Manufacturers'
Association of Israel) are applicable to EFL's and MDT's employees by order (the
"Extension  Order")  of  the  Israeli  Ministry  of  Labor  and  Welfare.  These
provisions  principally  concern  the  length of the work day and the work week,
minimum  wages for  workers,  contributions  to a pension  fund,  insurance  for
work-related  accidents,  procedures for dismissing employees,  determination of
severance pay and other conditions of employment,  including  certain  automatic
salary adjustments based on changes in the Israeli CPI.

     Israeli law generally  requires  severance pay upon the retirement or death
of an employee or  termination  of employment  without due cause;  additionally,
some of our senior  employees have special  severance  arrangements,  certain of
which  are  described  under  "Item  11.  Executive  Compensation  -  Employment
Contracts," below. We currently fund our ongoing severance obligations by making
monthly payments to approved severance funds or insurance policies. In addition,
Israeli  employees  and  employers  are  required to pay  specified  sums to the
National  Insurance  Institute,  which is similar to the  United  States  Social
Security  Administration.  Since  January 1, 1995,  such  amounts  also  include
payments for national health insurance.  The payments to the National  Insurance
Institute are  approximately  15.6% of wages, of which the employee  contributes
approximately 62% and the employer  contributes  approximately 38%. The majority
of the  permanent  employees  of EFL,  and  about  a  quarter  of the  permanent
employees of MDT, are covered by "managers'  insurance," which provides life and
pension  insurance  coverage with  customary  benefits to  employees,  including
retirement and severance benefits.  We contribute 14.33% to 15.83% (depending on
the employee) of base wages to such plans and the permanent employees contribute
5% of their base wages.


                                     - 24 -
<PAGE>

     In 1993,  an Israeli  court  held that  companies  that are  subject to the
Extension Order are required to make pension  contributions  exclusively through
contributions  to Mivtachim  Social  Institute of Employees Ltd., a pension fund
managed by the Histadrut.  We  subsequently  reached an agreement with Mivtachim
with respect to providing coverage to certain production  employees and bringing
ourselves  into  conformity  with the court  decision.  The  agreement  does not
materially increase our pension costs or otherwise  materially  adversely affect
its  operations.  Mivtachim  has agreed not to assert any claim  against us with
respect to any of our past  practices  relating  to this  matter.  Although  the
arrangement does not bind employees with respect to instituting  claims relating
to any  nonconformity  by us, we believe that the likelihood of the assertion of
claims by employees is low and that any  potential  claims by employees  against
us, if successful, would not result in any material liability to us.

ITEM 2. PROPERTIES

     Our New York headquarters,  constituting  approximately  4,000 square feet,
are  located  in New York City and  subleased  on a  month-to-month  basis.  The
Auburn, Alabama research and manufacturing facility,  constituting approximately
15,000 square feet, is leased from the City of Auburn through July 2004, with an
option to extend  the lease for an  additional  1-1/2 years at the same rent and
for  another  three years  thereafter  at a 10% rent  increase.  We also have an
option to expand to 30,000 square feet, and we have free use of this  additional
space  through  mid-2004.  Our  management  and  administrative  facilities  and
research, development and production facilities for the manufacture and assembly
of our Survivor Locator Lights,  constituting  approximately 43,000 square feet,
are located in Beit  Shemesh,  Israel,  located  between  Jerusalem and Tel-Aviv
(within  Israel's  pre-1967  borders).  The lease for these facilities in Israel
expires on December 31, 2007;  we have the ability to terminate  the lease every
two years upon three  months'  written  notice.  Moreover,  we may terminate the
lease at any time upon twelve months written notice.

     Our IES  subsidiary  rents  approximately  8,900  square feet of office and
warehouse  space in  Littleton,  Colorado,  approximately  ten miles  outside of
Denver, pursuant to a lease expiring in September 2005, with an option to extend
the lease for an additional  five years, or until September 2010. IES also holds
an option under certain  circumstances  to rent an addition 3,200 square feet of
contiguous space.

     Our MDT subsidiary rents  approximately  20,000 square feet of office space
in Lod, Israel, near Ben-Gurion  International airport (within Israel's pre-1967
borders) pursuant to a lease renewable on an annual basis.

     We believe  that our existing  facilities  are adequate to meet our current
and foreseeable future needs.

ITEM 3. LEGAL PROCEEDINGS

     As of the  date of  this  filing,  there  were no  material  pending  legal
proceedings against us.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

     None.


                                     - 25 -
<PAGE>

                                     PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

         Since February 1994, our common stock has been traded on the Nasdaq
National Market. Our Nasdaq ticker symbol is currently "ARTX"; prior to February
2003, our Nasdaq ticker symbol was "EFCX." The following table sets forth, for
the periods indicated, the range of high and low closing prices of our common
stock on the Nasdaq National Market System:

Year Ended December 31, 2002                    High        Low
                                                ----        ---
    Fourth Quarter..........................  $   1.06    $   0.61
    Third Quarter...........................  $   1.59    $   0.83
    Second Quarter..........................  $   1.68    $   0.73
    First Quarter...........................  $   2.20    $   1.42
Year Ended December 31, 2001
    Fourth Quarter..........................  $   2.43    $   1.30
    Third Quarter...........................  $   2.75    $   1.30
    Second Quarter..........................  $   3.95    $   2.30
    First Quarter...........................  $   8.00    $   3.50

     As of February 28, 2003 we had  approximately  300 holders of record of our
common stock.

     Our stock  price is  currently  trading  below  $1.00,  and has been  since
October 18, 2002. On December 6, 2002, Nasdaq notified us of our failure to meet
the continued  listing  standards,  and informed us that unless our stock closes
for ten  consecutive  trading  days with a bid price in excess of $1.00 prior to
March 6, 2003  (subsequently  extended,  as a result of an amendment to Nasdaq's
listing  regulations,  to June 4,  2003),  Nasdaq  would  notify us of intent to
delist our stock from the Nasdaq National Market. Should Nasdaq notify us of its
intent to  delist  our  stock,  we would  have the  opportunity  to appeal  this
notification,  although  there can be no  assurances  that this appeal  would be
resolved favorably.

     There  can  be no assurance that our common stock will remain listed on the
Nasdaq  National Market. If our common stock were to be delisted from the Nasdaq
National  Market,  we  might  apply  to be listed on the Nasdaq SmallCap market;
however,  there can be no assurance that we would be approved for listing on the
Nasdaq  SmallCap  market, which has the same $1.00 minimum bid and other similar
requirements  as  the  Nasdaq  National Market. If we were to move to the Nasdaq
SmallCap  market,  current  Nasdaq  regulations would give us the opportunity to
obtain  an additional 180-day grace period and an additional 90-day grace period
after  that  if  we  meet  certain  net  income,  shareholders' equity or market
capitalization  criteria.  While  our  stock  would  continue  to  trade  on the
over-the-counter  bulletin  board  following  any delisting from the Nasdaq, any
such  delisting  of  our common stock could have an adverse effect on the market
price  of, and the efficiency of the trading market for, our common stock. Also,
if  in  the  future  we were to determine that we need to seek additional equity
capital,  it could have an adverse effect on our ability to raise capital in the
public  equity  markets.  See  "Item  7. Management's Discussion and Analysis of
Financial  Condition  and  Results  of  Operations  -  If  our shares were to be
delisted,  our stock price might decline further and we might be unable to raise
additional  capital,"  below.

                                     - 26 -
<PAGE>

Dividends

     We have never paid any cash  dividends  on our common  stock.  The Board of
Directors presently intends to retain all earnings for use in our business.  Any
future  determination  as to payment of dividends will depend upon our financial
condition  and  results of  operations  and such  other  factors as the Board of
Directors deems relevant.

Recent Sales of Unregistered Securities

     In December 2002, we issued and sold to three  institutional  investors (i)
an aggregate  $3,500,000  principal amount of 9% Secured Convertible  Debentures
due June 30, 2005;  (ii) Series A Warrants to purchase an aggregate of 1,166,700
shares of our common  stock at any time prior to December 31, 2007 at a price of
$0.84 per share;  (iii)  Series B Warrants to purchase an aggregate of 1,166,700
shares of our common  stock at any time prior to December 31, 2007 at a price of
$0.89 per share;  (iv) Series C Warrants to purchase an  aggregate  of 1,166,700
shares of our common  stock at any time prior to December 31, 2007 at a price of
$0.93  per  share,  and  (v)  an  aggregate of 387,301 shares of common stock in
prepayment of the first nine months of interest on the debentures. If we default
under  the  provisions  of  the  debentures,  including (but not limited to) the
default  of  an  interest  payment,  failure  to  have an effective registration
statement  covering  the  resale  of  common  shares  upon  conversion  declared
effective  by  January  1,  2004,  and  failure  to  remain listed on the Nasdaq
(National  Market or SmallCap), the principal amount of the Debenture may at the
option  of  the  holders  thereof  become  immediately  due  and  payable.

     We issued these  securities in reliance on the exemption from  registration
provided by Section 4(2) of the Securities Act as  transactions by an issuer not
involving a public offering.

Annual Shareholders Meeting

     We held our 2002 annual meeting of  shareholders on June 12, 2002. Our 2003
Annual  Meeting of  Stockholders  will be held on  Monday,  September  15,  2003
commencing at 10:00 a.m.,  local time,  in the Ballroom of the Shelburne  Murray
Hill Hotel, 303 Lexington Avenue, New York, New York.

     In light  of the  foregoing  and in  accordance  with  Rules  14a-5(f)  and
14a-8(e)(2)  under the  Securities  Exchange  Act of 1934,  as amended,  we will
consider  stockholder  proposals  submitted in  connection  with our 2003 Annual
Meeting  to have  been  submitted  in a timely  fashion  if such  proposals  are
received  by us at our  principal  offices no later  than  April 8,  2003.  If a
proposal is received after April 8, 2003, the proxies designated by the Board of
Directors  of the  Company  will  have  discretionary  authority  to vote on the
proposal under  circumstances  consistent with the proxy rules of the Securities
and Exchange Commission.

     We expect to mail our  Annual  Report to  Shareholders  for the year  ended
December  31, 2002 along with the Notice and Proxy  Statement of the 2003 Annual
Meeting on or about August 6, 2003.

ITEM 6. SELECTED FINANCIAL DATA

     The  selected  financial  information  set forth below with  respect to the
consolidated  financial  statements  for  each  of  the four fiscal years in the
period  ended  December  31, 2002, and with respect to the balance sheets at the
end  of  each  such fiscal year has been derived from our consolidated financial


                                     - 27 -
<PAGE>

statements  audited  by  Kost  Forer  &  Gabbay,  independent  certified  public
accountants in Israel and a member firm of Ernst & Young Global.

     The results of  operations,  including  revenue,  operating  expenses,  and
financial  income of the consumer  battery  segment for the years ended December
31, 2002, 2001,  2000, 1999 and 1998 have been  reclassified in the accompanying
statements of  operations  as  discontinued  operations.  Our balance  sheets at
December  31, 2002,  2001,  2000,  1999 and 1998 give  effect  the assets of the
consumer battery business as discontinued  operations  within current assets and
liabilities.  Thus, the financial  information  presented  herein  includes only
continuing operations.

     The  selected  financial  information  set forth below with  respect to the
consolidated  financial  statements  for the fiscal year ended December 31, 1998
and  with  respect  to the balance sheet at the end of such fiscal year has been
derived  from  our  financial  statements  audited  by  Kesselman  &  Kesselman,
independent  certified  public  accountants  in  Israel  and  a  member  firm of
PriceWaterhouseCoopers  International  Limited.

     The  financial  information  set forth below is  qualified by and should be
read in conjunction with the Consolidated Financial Statements contained in Item
8 of this Report and the notes thereto and "Item 7. Management's  Discussion and
Analysis of Financial Condition and Results of Operations," below.

<TABLE>
<CAPTION>
                                                                             Year Ended December 31,
                                                    -------------------------------------------------------------------------
                                                       1998            1999           2000            2001            2002
                                                    ----------      ----------      ----------     -----------     ----------
                                                                  (dollars in thousands, except per share data)
Statement of Operations Data:
<S>                                                 <C>             <C>             <C>            <C>             <C>
Revenues........................................    $    4,013      $    2,422      $    1,490     $    2,094      $    6,407
                                                    ----------      ----------      ----------     -----------     ----------
Research and development expenses and costs of
  revenues......................................         6,622           3,867           1,985          2,448           5,108
Selling, general and administrative expenses
  and amortization of intangible assets.........         3,561           2,754           3,434          3,934           5,982
                                                    ----------    ------------      ----------     ----------      ----------
Operating (loss)................................        (6,210)         (4,198)         (3,929)        (4,288)         (4,683)
Financial income, net...........................           652             190             544            263             100
                                                    ----------      ----------      ----------     ----------      ----------
Loss before taxes on income.....................        (5,558)         (4,008)         (3,385)        (4,026)         (4,583)
Taxes on income.................................           (43)              6               -              -               -
                                                    -----------     ----------      ----------     ----------      ----------
Net loss before minority interest in profit of
  subsidiary....................................        (5,515)         (4,014)         (3,385)        (4,026)         (4,583)
Minority interest in profit of subsidiary.......             -               -               -              -            (355)
                                                    ----------      ----------      ----------     ----------      -----------
Net loss from continuing operations.............        (5,515)         (4,014)         (3,385)        (4,026)         (4,938)
Net loss from discontinued operations...........        (3,018)         (2,902)         (8,596)       (13,261)        (13,566)
                                                    -----------     -----------     -----------    -----------     -----------
Net loss for the period.........................        (8,533)         (6,916)        (11,981)       (17,287)        (18,504)
Deemed dividend to certain shareholders of
  common stock..................................             -               -               -         (1,197)              -
                                                    ----------      ----------      ----------     -----------     ----------
Net loss attributable to shareholders of
  common stock .................................    $   (8,533)     $   (6,916)     $  (11,981)    $  (18,483)     $  (18,504)
                                                    ===========     ===========     ===========    ===========     ===========
Net loss per share for combined operations......    $    (0.61)     $    (0.48)     $    (0.62)    $    (0.76)     $    (0.57)
                                                    ===========     ===========     ===========    ===========     ===========
Weighted average number of common shares used
  in computing basic and diluted net loss per
  share (in thousands)..........................        14,013          14,334          19,243         24,200          32,382
</TABLE>


                                     - 28 -
<PAGE>


<TABLE>
<CAPTION>
                                                                               As At December 31,
                                                    -------------------------------------------------------------------------
                                                       1998            1999           2000            2001            2002
                                                    ----------      ----------      ----------     ----------      ----------
Balance Sheet Data:
Cash, cash equivalents, investments in
  marketable debt securities and restricted
<S>                                                 <C>             <C>             <C>            <C>             <C>
  collateral deposits...........................    $    8,943      $    2,556      $   11,596     $   12,672      $    2,091
Receivables and other assets*...................         4,300           5,215          13,771         11,515           7,895
Property and equipment, net of depreciation.....         2,156           2,258           2,289          2,221           2,555
Goodwill and other intangible assets, net.......             -               -               -              -           7,522
                                                    ----------      ----------      ----------     ----------      ----------
Total assets....................................    $   15,399      $   10,029      $   27,656     $   26,408      $   20,063
                                                    ==========      ==========      ==========     ==========      ==========
Liabilities*....................................    $    4,818      $    5,787      $    7,578     $    7,000      $   11,025
Stockholders' equity............................        10,581           4,242          20,078         19,408           9,038
                                                    ----------      ----------      ----------     ----------      ----------
Total liabilities and stockholders equity*......    $   15,399      $   10,029      $   27,656     $   26,408      $   20,063
                                                    ==========      ==========      ==========     ==========      ==========
</TABLE>

------------------------------------
 * Includes assets and liabilities from discontinued operations.



                                     - 29 -
<PAGE>

ITEM 7. MANAGEMENT'S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS

     The following  Management's  Discussion and Analysis of Financial Condition
and Results of  Operations  contains  forward-looking  statements  that  involve
inherent  risks  and  uncertainties.  When  used in this  discussion,  the words
"believes,"  "anticipated,"  "expects,"  "estimates" and similar expressions are
intended  to identify  such  forward-looking  statements.  Such  statements  are
subject to certain risks and  uncertainties  that could cause actual  results to
differ materially from those projected. Readers are cautioned not to place undue
reliance on these  forward-looking  statements,  which speak only as of the date
hereof.  We  undertake  no  obligation  to  publicly  release  the result of any
revisions to these forward-looking statements that may be made to reflect events
or  circumstances  after  the  date  hereof  or to  reflect  the  occurrence  of
unanticipated  events.  Our actual  results could differ  materially  from those
anticipated in these  forward-looking  statements as a result of certain factors
including,  but not limited to, those set forth elsewhere in this report. Please
see "Risk  Factors,"  below,  and in our other filings with the  Securities  and
Exchange Commission.

     The following  discussion and analysis  should be read in conjunction  with
the Consolidated  Financial  Statements  contained in Item 8 of this report, and
the  notes  thereto.  We have  rounded  amounts  reported  here  to the  nearest
thousand,  unless such amounts are more than 1.0 million, in which event we have
rounded such amounts to the nearest hundred thousand.

Critical Accounting Policies

     The preparation of financial  statements  requires us to make estimates and
assumptions  that affect the reported  amounts of assets and liabilities and the
disclosure of contingent liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period. On an
ongoing  basis, we evaluate our estimates and judgments, including those related
to  revenue  recognition,  allowance  for bad debts and impairment of intangible
assets.  We  base  our  estimates  and judgments on historical experience and on
various  other factors that we believe to be reasonable under the circumstances,
the  results  of  which  form  the basis for making judgments about the carrying
values  of  assets  and  liabilities  that  are  not readily apparent from other
sources.  Under  different  assumptions or conditions, actual results may differ
from  these  estimates.

     We believe the following critical accounting policies, among others, affect
our more  significant  judgments and estimates  used in the  preparation  of our
consolidated financial statements.

     Revenue Recognition and Bad Debt

     We generate  revenues  primarily from sales of multimedia  and  interactive
digital training systems and use-of-force  simulators  specifically targeted for
law enforcement and firearms training


                                     - 30 -
<PAGE>

and from service  contracts  related to such sales,  from providing  lightweight
armoring  services of vehicles,  and, to a lesser extent,  from sale of zinc-air
battery  products for defense  applications  and from  development  services and
long-term  arrangements  subcontracted  by  the  U.S  government.  We  recognize
revenues in respect of products when, among other things,  we have delivered the
goods being purchased and we believe collectibility to be reasonably assured. We
do not grant a right of return  to our  customers.  We  perform  ongoing  credit
evaluations of our customers'  financial  condition and we require collateral as
deemed necessary.  An allowance for doubtful accounts is determined with respect
to those accounts that we have  determined to be doubtful of collection.  If the
financial  condition  of our  customers  were to  deteriorate,  resulting  in an
impairment of their ability to make  payments,  additional  allowances  would be
required, and this might cause a revision of recognized revenues.

     Revenues from development services are recognized using contract accounting
on a  percentage  of  completion  method,  based on  completion  of  agreed-upon
milestones and in accordance  with the "Output  Method" or based on the time and
material  basis.  Provisions for estimated  losses on uncompleted  contracts are
recognized in the period in which the likelihood of such losses is determined.

     Inventories

     We state our  inventories  at the lower of cost or market value.  Inventory
write-offs  and  write-down  provisions are provided to cover risks arising from
slow-moving  items or  technological  obsolescence.  Our reserves for excess and
obsolete  inventory are primarily based upon forecasted demand for our products,
and any  change  to the  reserves  arising  from  forecast  revisions  would  be
reflected in cost of sales in the period the revision is made.

     Goodwill

     Goodwill  represents  the  excess  of cost  over the fair  value of the net
assets of businesses acquired.

     As required by applicable accounting rules, we test goodwill for impairment
at  least  annually  and  between  annual tests in certain circumstances, and we
write  down  goodwill  when  impaired,  rather  than  amortizing  it as previous
accounting  standards  required.  Goodwill is tested for impairment by comparing
the  fair  value  with  its  carrying  value.  Fair  value  is  determined using
discounted  cash  flows, market multiples and market capitalization. Significant
estimates  used  in  the  methodologies  include estimates of future cash flows,
future  short-term  and long-term growth rates, weighted average cost of capital
and  estimates  of  market  multiples  for  the  reportable  units.

     The  determination  of  the  value  of goodwill requires management to make
assumptions regarding estimated future cash flows and other factors to determine
the  fair  value  of  the  respective assets.  If these estimates or the related
assumptions  change  in  the  future,  we could be required to record impairment
charges.  Any  material  change in our valuation of assets in the future and any
consequent adjustment for impairment could have a material adverse impact on our
future  reported  financial  results.

     As a result of MDT and IES acquisitions, we recorded goodwill in the amount
of $4,954,981 as of December 31, 2002.

     Impairment of long-lived assets and intangibles

     Long-lived  assets and certain  identifiable  intangibles  are reviewed for
impairment in accordance with Statement of Financial Accounting Standard No. 144
"Accounting for the Impairment or Disposal of Long-Lived Assets" whenever events
or changes in  circumstances  indicate that the carrying  amount of an asset may
not be recoverable.  Recoverability  of the


                                     - 31 -
<PAGE>

carrying amount 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 assets.  If such assets are  considered  to be  impaired,  the
impairment  to be  recognized  is measured  by the amount by which the  carrying
amount of the assets exceeds the fair value of the assets. Assets to be disposed
of are reported at the lower of the  carrying  amount or fair value less selling
costs. As of December 31, 2002, no impairment losses have been identified.

     The  determination  of  the  value of such long-lived and intangible assets
requires  management  to  make assumptions regarding estimated future cash flows
and other factors to determine the fair value of the respective assets. If these
estimates  or the related assumptions change in the future, we could be required
to  record impairment charges. Any material change in our valuation of assets in
the  future  and  any consequent adjustment for impairment could have a material
adverse  impact  on  our  future  reported  financial  results.

     As  a  result of MDT and IES acquisitions, we recorded intangible assets in
the  amount  of  $2.6  million  as  of  December  31,  2002.

     Business Combinations

     We have  accounted  for the  combination  with  IES and MDT  utilizing  the
purchase  method  of accounting. The combination required management to estimate
the  fair  value of the assets acquired and liabilities assumed. These estimates
have been based on our business plans for the entity acquired. Should the actual
use  of assets or resolution of obligations differ from our estimates, revisions
to  the  estimated fair values would be required. If a change in estimate occurs
after  one  year  following the acquisition, the change would be recorded in our
statement  of  operations.

     Recent Accounting Pronouncements

     In June  2002,  the  FASB  issued  SFAS  No.  146,  "Accounting  for  Costs
Associated with Exit or Disposal Activities," which addresses significant issues
regarding the recognition,  measurement,  and reporting of costs associated with
exit and disposal activities,  including restructuring activities.  SFAS No. 146
requires that costs  associated  with exit or disposal  activities be recognized
when they are  incurred  rather than at the date of a  commitment  to an exit or
disposal  plan.  SFAS No. 146 is effective  for all exit or disposal  activities
initiated after December 31, 2002. We do not expect the adoption of SFAS No. 146
to have a material impact on our results of operations or financial position.

                                     - 32 -
<PAGE>

Recent Developments

     German Police Order

     In  January  2003,  IES was  awarded  a $2.6  million  contract  to  supply
simulation  training systems to the largest regional police division in Germany.
The  contract  calls for  delivery  of  several  separate  interactive  training
systems,  with delivery  dates ranging from April to September  2003 and payment
dates due following  delivery,  testing and  ascertainment  of  appropriate  run
capability of each system.

General

     During 2002, we acquired two new  subsidiaries,  IES and MDT, we closed our
money-losing consumer battery operations, and we reorganized into two divisions:
Defense and Security  Products and Electric Fuel  Batteries.  We have previously
been organized into Instant Power,  Electric Vehicles,  and Defense and Security
Products.  Additionally,  we focused on increasing our activities in the defense
and security  sectors,  following the expansion of our battery  development  and
procurement  contracts  with the US Army's  Communications  Electronics  Command
(CECOM)  and  other   defense-related   agencies,   while   searching   for  new
opportunities to market our core Zinc-Air technology for commercial applications
and to OEMs. With an expanded focus on defense and homeland security  technology
and business  opportunities,  we launched new Zinc-Air battery products designed
to meet the requirements of this market. We also concentrated  intensive efforts
on various cost-cutting strategies,  including downsizing staff in areas showing
lower productivity and mandating  participation  among salaried employees in our
options-for-salary plan, whereby employees permanently waived a portion of their
salaries  (generally  between 15% and 25%) in  exchange  for options to purchase
shares of our common  stock at a ratio of options to purchase  2.5 shares of our
stock for each  dollar in salary  waived.  These  options are issued at a market
value  exercise  price,  so that  they are not  recorded  as an  expense  on our
financials. This program ended at the end of 2002.

     In conjunction with these cost-cutting efforts and with the movement of our
activities away from consumer sales and in the direction of defense and security
products  and  services,  we  decided  during  the  third  quarter  of  2002  to
discontinue retail sales of our consumer battery products,  effective in October
2002.  As a result of this decision, more than 60 employees were terminated. The
discontinuation  of the consumer retail products resulted in a one-time, pre-tax
charge  of  approximately  $7.1  million during 2002, reflecting a write-down of
inventory and net fixed assets as well as costs associated with the reduction in
our  workforce.  Almost  all  these  charges  were  non-cash  impacting  items.

     Our line of existing  battery products for the military and defense sectors
includes 12/24V,  30/60Ah Advanced  Zinc-Air Power Packs (AZAPPs)  utilizing our
most  advanced  cells  (which  have  specific  energy of 400  Wh/kg),  a line of
super-lightweight  AZAPPs that feature the same 400 Wh/kg cell technology in new
16Ah cells,  and our new,  high-power 12V Zinc-Air  Power Packs  (ZAPPs),  which
offer  extended-use 12V portable power and current ratings up to 3.5A, using our
commercial Zinc-Air cell technology.

     Our Electric Fuel Batteries  Division is continuing  with the production of
Zinc-Air fuel cell packs for the U.S. Army's Communications  Electronics Command
(CECOM). The 12/24 volt, 800 watt-hour battery pack for battlefield power, which
is based on our Zinc-Air fuel cell


                                     - 33 -
<PAGE>

technology,  is approximately  the size and weight of a notebook  computer.  The
battery is based on a new  generation  of  lightweight,  30  ampere-hours  cells
developed  by us for both  military  and future  commercial  products  with high
energy requirements.

     In  December   2002,   we  entered  into  a  contract   with  the  US  Army
Communications  Electronic  Command (CECOM)  pursuant to 10 U.S.C. ss. 2304c(2),
"Unusual and  Compelling  Urgency,"  for a delivery  order of advanced  Zinc-Air
batteries.

     The  contract  calls for order  releases  during the first  three  calendar
quarters of 2003, with a current order ceiling of $2,543,250.

     Under the terms of the  contract,  we will produce and supply the BA-8180/U
Zinc-Air  Nonrechargeable  Battery.  BA-8180/U is the new Army  designation  for
Electric  Fuel's Model FC Advanced  Zinc-Air  Power Pack,  as it was  previously
known during its development  phase. In addition,  we will supply three types of
electrical  interface adapters for the BA-8180/U,  including  equipment-specific
adapters for the AN/PRC-119  SINCGARS and SINCGARS ASIP tactical radio sets, and
a generic  interface for items of equipment that were designed to interface with
a BA-5590 or equivalent battery.  Each of the three interfaces was also assigned
a national  stock number (NSN) by CECOM.  The  BA-8180/U  was assigned an NSN in
August 2002.

     The BA-8180/U is a 12/24 volt, 800 watt-hour battery pack approximately the
size and weight of a notebook computer. The battery is based on a new generation
of lightweight, 30 ampere-hours cells that we developed over the last five years
with partial funding by CECOM. In extensive field testing, the BA-8180/U battery
typically  provided  4 to 6 times the run time of a BA-5590,  a primary  lithium
battery pack widely used in the military.

     Additionally,  the Electric Fuel Batteries  Division is continuing with the
introduction of the new emergency lights for the marine life jackets market.

     In July 2002, our existing research and development contract with CECOM was
modified to provide us with additional  funding of ten thousand dollars in order
to develop prototype zinc air batteries for battlefield  drones. As a result, we
developed  and plan to produce  advanced  zinc-air  batteries  for  unmanned air
vehicles  (UAVs) and micro air vehicles  (MAVs).  The new batteries will provide
the military's man-portable battlefield drones with longer range and flying time
than  existing  battery  alternatives.  Our  solutions  for  UAVs  and  MAVs are
high-power, lightweight versions of our most advanced zinc-air cells, which have
specific energy of 400 Wh/kg.

     Our  Electric  Fuel  Batteries  Division is also  continuing  its  American
all-electric  transit bus  demonstration  project,  subcontracted by the Federal
Transit Administration (FTA). We successfully completed Phase I in June 2000 and
Phase II of the FTA program in July 2002, and have recently received approval of
subcontracting  fees  from the FTA to begin Phase III of the program, which will
focus on an evaluation of the performance of Zinc-Air battery propulsion systems
for  transit  buses;  the installation of new advanced ultra capacitors; and the
implementation  of  an  advanced  control  system  for  auxiliaries.

     During  2002,  we  continued to invest in  strengthening  our  intellectual
property  position.  We have 42  unexpired  U.S.  patents  and 15  corresponding
European patents issued covering general


                                     - 34 -
<PAGE>

aspects and various  applications  of our  Zinc-Air  technology;  these  patents
expire between 2007 and 2018.

     We have experienced significant  fluctuations in the sources and amounts of
our revenues and  expenses,  and we believe that the  following  comparisons  of
results of operations  for the periods  presented do not  necessarily  provide a
meaningful indication of our development.  Our research and development expenses
have been  offset,  to a limited  extent,  by the  periodic  receipt of research
grants from Israel's Office of the Chief Scientist.  We expect that,  because of
these  and  other  factors,  including  our  acquisitions  of IES and  MDT,  our
discontinuation  of certain of our operations,  and general economic  conditions
and  delays  due to  legislation  and  regulatory  and other  processes  and the
development  of competing  technologies,  future  results of operations  may not
necessarily  be  meaningfully  compared with those of current and prior periods.
Thus,  we  believe  that  period-to-period  comparisons  of its past  results of
operations  should  not  necessarily  be relied  upon as  indications  of future
performance.

     We incurred  significant  operating losses for the years ended December 31,
2000,  2001 and 2002.  While we expect to continue to derive  revenues  from the
sale of defense and security products that we manufacture  (directly and through
our  subsidiaries)  and from  components of the Electric  Fuel Electric  Vehicle
System,  there can be no  assurance  that we will ever derive  such  revenues or
achieve profitability.

Functional Currency

     We  consider  the  United  States  dollar to be the currency of the primary
economic  environment  in  which  we  and  our Israeli subsidiary Electric Fuel
(E.F.L)  Ltd.  ("EFL")  operate and, therefore, both we and EFL have adopted and
are  using the United States dollar as our functional currency. Transactions and
balances  originally  denominated  in U.S. dollars are presented at the original
amounts.  Gains and losses arising from non-dollar transactions and balances are
included  in  net  income.

     The  majority  of  financial  transactions  of MDT is in New Israel Shekels
("NIS")  and a substantial portion of MDT's costs is incurred in NIS. Management
believes  that  the  NIS  is  the  functional  currency of MDT. Accordingly, the
financial  statements of MDT have been translated into U.S. dollars. All balance
sheet  accounts  have  been translated using the exchange rates in effect at the
balance  sheet  date.  Statement of operations amounts has been translated using
the  average exchange rate for the period. The resulting translation adjustments
are  reported  as  a  component  of  accumulated  other  comprehensive  loss  in
shareholders'  equity.


Results of Operations

     Preliminary Note

     Results for the year ended December 31, 2002 include the results of IES and
MDT for such period as a result of our  acquisitions of these companies early in
the third  quarter of 2002.  The results of IES and MDT were not included in our
operating  results  for the year  ended  December  31,  2001.  Accordingly,  the
following  year-to-year  comparisons  should not  necessarily  be relied upon as
indications of future performance.

     In  addition,  results  are net of the  operations  of the retail  consumer
battery  products,  which  operations were  discontinued in the third quarter of
2002.

     Fiscal Year 2002 compared to Fiscal Year 2001

     Revenues.  Revenues  from continuing operations for the year ended December
31, 2002 totaled $6.4 million, compared to $2.1 million for 2001, an increase of
$4.3  million,  or 206%. This increase was primarily the result of the inclusion
of  IES  and  MDT  in  our  results  in  2002.


                                     - 35 -
<PAGE>

     During  2002,  we  recognized   revenues  from  the  sale  of   interactive
use-of-force training systems (through our IES subsidiary),  from payments under
vehicle armoring  contracts  (through our MDT subsidiary),  and from the sale of
lifejacket  lights,  as well as under  contracts with the U.S.  Army's CECOM for
deliveries of batteries and for design and procurement of production tooling and
equipment.  We also  recognized  revenues from  subcontracting  fees received in
connection with Phase II of the United States Department of Transportation (DOT)
program,  which began in the fourth  quarter of 2001 and was  completed  in July
2002,  and  Phase  III of the DOT  program,  which  began in  October  2002.  We
participate  in this program as a member of a consortium  seeking to demonstrate
the  ability  of  the  Electric  Fuel  battery  system  to  power  a  full-size,
all-electric  transit bus. The total  program cost of Phase II was $2.7 million,
50% of which was covered by the DOT  subcontracting  fees.  Subcontracting  fees
cover  less  than  all of the  expenses  and  expenditures  associated  with our
participation in the program. In 2001, we derived revenues  principally from the
sale of  lifejacket  lights,  under  contracts  with the U.S.  Army's  CECOM for
deliveries of batteries and for design and procurement of production tooling and
equipment  and from  subcontracting  fees  received in  connection  with the DOT
program.

     In 2002,  revenues were $4.7 million for the Defense and Security  Products
Division  (compared to $0 in 2001),  due to the  inclusion of IES and MDT in our
2002  results,  and  $1.7  million  for the  Electric  Fuel  Batteries  Division
(compared  to $2.1  million in the  comparable  period in 2001,  a  decrease  of
$411,000,  or 20%), due primarily to revenues from a German  consortium  project
relating to our  electric  vehicle  that were  included in 2001 but that did not
exist in 2002.

     Cost of revenues and gross  profit.  Cost of revenues  totaled $4.4 million
during 2002,  compared to $2.0 million in 2001, an increase of $2.4 million,  or
122%, due to the inclusion of IES and MDT in our 2002 results.

     Direct expenses for our two divisions during 2002 were $4.4 million for the
Defense and Security  Products  Division  (compared  to $0 in 2001),  due to the
inclusion of IES and MDT in our 2002 results,  and $3.1 million for the Electric
Fuel Batteries  Division  (compared to $2.3 million in the comparable  period in
2001, an increase of $767,000, or 33%), due primarily to the following factors:

     o    We began to ramp up  production  at our CECOM  facility  in Alabama in
          anticipation of the CECOM order that we received in December 2002; and

     o    We wrote off certain  disqualified  CECOM  inventory  in the amount of
          $116,000.

     Gross profit was $2.0  million  during  2002,  compared to $101,000  during
2001,  an increase of $1.9  million.  This increase was the direct result of all
factors  presented above,  most notably the inclusion of IES and MDT in our 2002
results.

     Research and development  expenses.  Research and development  expenses for
2002 were  $686,000,  compared to $456,000 in 2001, an increase of $230,000,  or
50%.  This increase was primarily the result of the inclusion of IES in our 2002
results.

                                     - 36 -
<PAGE>

     Sales and marketing  expenses.  Sales and marketing  expenses for 2002 were
$1.3  million,  compared to $106,000 in 2001,  an increase of $1.2  million,  or
1,136%,  primarily  attributable  to the increase in marketing  consultants  and
other expenses,  such as travel,  for our Electric Fuel Battery Division as well
as due to the inclusion of IES and MDT in our 2002 results.

     General and administrative  expenses.  General and administrative  expenses
for 2002 were $4.0  million  compared  to $3.8  million in 2001,  an increase of
$196,000,  or 5%. This increase was primarily  attributable  to the inclusion of
IES and MDT in our results  beginning  with the third quarter,  which  increased
general and administrative expenses by approximately $839,000. This increase was
offset by decrease in general and expenses of $643,000, resulting from:

     o    the dismissal of our litigation with Electrofuel Inc., which resulted
          in a decrease in litigation-related legal expenses; and

     o    the  settlement  of our dispute  with a former  employee on terms that
          resulted  in a savings to us over the amount  that we had set aside on
          our books.

     Financial income.  Financial income,  net of interest expenses and exchange
differentials,  totaled  approximately  $100,000 in 2002 compared to $263,000 in
2001, a decrease of $163,000,  or 62%.  This decrease was due primarily to lower
interest  rates and lower  balances of invested  funds as a result of our use of
the proceeds of private placements of our securities.

     Income  taxes.  We  and  our  Israeli subsidiary EFL incurred net operating
losses  during  2002 and 2001 and, accordingly, we were not required to make any
provision  for income taxes. MDT had taxable income, but we may use EFL's losses
to  offset  MDT's  income,  and accordingly MDT has made no provision for income
taxes.

     Amortization  of  intangible  assets.  Amortization  of  intangible  assets
totaled  $643,000 in 2002,  compared to $0 in 2001,  due to the inclusion of IES
and MDT in our 2002 results.

     Net loss from  continuing  operations.  Due to the factors cited above,  we
reported a net loss from continuing operations of $4.9 million in 2002, compared
to a net loss of $4.0 million in 2001, an increase of $913,000, or 22%.

     Net loss from  discontinued  operations.  In the third  quarter of 2002, we
decided to discontinue  operations  relating to the retail sales of our consumer
battery products. Accordingly, all revenues and expenses related to this segment
have been  presented in our  consolidated  statements of operations for the year
ended December 31, 2002 in an item entitled "Loss from discontinued operations."

     Net loss from discontinued  operations in 2002 was $13.6 million,  compared
to $13.3 million in 2001, an increase of $306,000,  or 2%. This increase was the
result of a  write-off  of fixed  inventory  and  assets  in the  amount of $7.1
million in connection with our discontinuation of the operations relating to the
retail sales of our consumer battery products at the end of the third quarter of
2002,


                                     - 37 -
<PAGE>

which was not  entirely  offset by the  elimination  of the  losses  from  these
discontinued operations beginning with the fourth quarter of 2002.

     Net loss.  Due to the factors cited above,  we reported a net loss of $18.5
million in 2002, compared to a net loss of $18.5 million in 2001.

     Fiscal Year 2001 compared to Fiscal Year 2000

     Preliminary  Note.  We have  broken  down the  results  for the years ended
December  31,  2001  and  2000 in  accordance  with  the  continuing  operations
divisions  that we maintained  at the time:  Electric  Vehicle,  and Defense and
Security  Products  (which at the time consisted of only our CECOM batteries and
our water-activated batteries).  Beginning in 2002, both of these divisions were
combined into a single division called Electric Fuel Batteries.  It is therefore
appropriate to compare our overall  results from  continuing  operations in 2001
and 2000 with the results of our Electric Fuel Battery Division in 2002.

     Revenues.  Revenues  from continuing operations for the year ended December
31, 2001 totaled $2.1 million, compared to $1.5 million for 2000, an increase of
$604,000,  or  40%.

     During 2001, we recognized  revenues from  continuing  operations  from the
sale of lifejacket lights and portable  high-power  zinc-air fuel cell packs for
military use. We also recognized  revenues from  subcontracting fees received in
connection  with the United States  Department of  Transportation  (DOT) program
which  began in 1998  and,  after  we  completed  Phase I in July of  2000,  was
extended in the fourth  quarter of 2000.  We  participate  in this  program as a
member of a consortium  seeking to demonstrate  the ability of the Electric Fuel
battery system to power a full-size, all-electric transit bus. The total program
cost of Phase II is approximately $2.7 million,  50% of which will be covered by
the DOT  subcontracting  fees.  Subcontracting  fees  cover less than all of the
expenses and expenditures  associated with our participation in the program.  We
also received  electric vehicle revenues during 2001 from our German  consortium
(EFRB)  project.  In  2000,  we  derived  revenues  from  continuing  operations
principally from the sale of lifejacket lights. Additionally, we also recognized
revenues from activities related to the DOT program.

     In 2001, revenues were $894,000 for the Electric Vehicle Division (compared
to $310,000 in 2000, an increase of $584,000,  or 188%) and $1.2 million for the
Defense and Security Products Division (formerly known as the Defense and Safety
Products Division) (compared to $1.2 million in 2000, unchanged).

     The increase in revenues from the Electric Vehicle Division in 2001 was the
result of our having received the German  consortium  (EFRB) project,  described
above. This project generated revenues of $471,000 in 2001.

     Cost of revenues and gross  profit.  Cost of revenues  totaled $2.0 million
during 2001, compared to $1.5 million in 2000, an increase of $506,000,  or 34%.
This increase was  primarily the result of the increase in our Electric  Vehicle
revenues in 2001, as described above, which also resulted in an increase in cost
of goods sold.

                                     - 38 -
<PAGE>

     Gross profit was $101,000  during 2001,  compared to $4,000 during 2000, an
increase  of  $97,000.  This  increase  was the  direct  result  of all  factors
presented  above,  most notably the increased  electric  vehicle revenues during
2001 from our German consortium (EFRB) project.

     Research and development  expenses,  net. Research and development expenses
less  royalty-bearing  grants for 2001 were  $456,000,  compared  to $499,000 in
2000, a decrease of $43,000, or 9%.

     Research and  development  expenses  were reduced by $0 of royalty  bearing
grants from the BIRD Foundation during 2001 (compared to $195,000 in 2000).

     Direct  expenses for our two divisions  for the fiscal year ended  December
31, 2001 were $907,000 for the Electric Vehicle  Division  ($634,000 in 2000, an
increase of  $273,000,  or 43%),  and $1.4  million for the Defense and Security
Products  Division ($1.1 million in 2000, an increase of $268,000,  or 24%). The
increase of expenses in the Electric Vehicle Division was the result of progress
that was made in phase II of the FTA program and the German program.

     Net costs of fixed assets (net of accumulated depreciation) at December 31,
2001 in the Electric  Vehicle and Defense and Security  Products  Divisions were
$666,000 and $853,000, respectively.

     Selling  expenses.  Selling  expenses for the year ended  December 31, 2001
were $106,000, compared to $127,000 in 2000, a decrease of $21,000, or 16%.

     General and administrative  expenses.  General and administrative  expenses
for 2001 were $3.8  million  compared  to $3.3  million in 2000,  an increase of
$521,000,  or 16%.  This  increase in expenses  was the result of the  following
factors (in descending order of importance):

     o    Increases in management salaries and in accruals related to our senior
          employees,  accounting for  approximately  $150,000 of the increase in
          general and administrative expenses;

     o    Non-cash  write-down  of notes  receivable  from certain  stockholders
          reflecting   a   diminution   in  the  market   value  of   securities
          collateralizing such notes,  accounting for approximately  $100,000 of
          the increase in general and administrative expenses; and

     o    An increase in expenses related to travel, consultants,  and directors
          and  officers  liability   insurance,   accounting  for  approximately
          $200,000 of the increase in general and administrative expenses.

     Financial income.  Financial income,  net of interest expenses and exchange
differentials,  totaled  approximately  $263,000 in 2001 compared to $544,000 in
2000, a decrease of $281,000,  or 52%, due primarily to lower interest rates and
lower  balances  of  invested  funds as a result of our use of the  proceeds  of
private  placements of our securities  conducted in May and November 2000, which
was only partially  offset by income from the proceeds of private  placements of
our  securities  conducted  in May,  November and  December  2001,  as well as a
decrease in interest income from certain shareholder loans.

                                     - 39 -
<PAGE>

     Income  taxes.  We  and  our  Israeli subsidiary EFL incurred net operating
losses  during  2001 and 2000 and, accordingly, we were not required to make any
provision  for  income  taxes.

     Net loss  from  continuing  operations.  Due to the  factors  cited  above,
particularly  the  increase  in  general  and  administrative  expenses  and the
decrease in  financial  income,  we reported a net loss of $4.0 million in 2001,
compared to a net loss of $3.4 million in 2000, an increase of $641,000, or 19%.

     Net  loss  from  discontinued   operations.   Net  loss  from  discontinued
operations  was $13.3  million in 2001,  compared  to $8.6  million in 2000,  an
increase of $4.7  million,  or 55%.  This increase was primary the result of the
following factors (in descending order of importance):

     o    Our sales and  marketing  expenses increased  in 2001  compared to
          2000,  primarily because of increased sales and marketing  expenses in
          the United States and the United  Kingdom,  accounting for an increase
          in sales and marketing of approximately $2.1 million;

     o    Our revenues  derived from  discontinued  operations  were lower by an
          amount of  $620,000,  primarily  because a single  large order that we
          received from one customer  (Wal-Mart) during 2000 was not repeated in
          2001,  thereby  resulting in fewer products sold. An additional factor
          in the decrease in revenues was our reduction in the price at which we
          sold our products  during 2001,  which resulted in lower revenues from
          the products we did sell;

     o    Products that we had sold that were still  subject to possible  return
          continued  to be  carried as  inventory.  Once it was clear that these
          products would not be returned, we decreased the inventory,  resulting
          in an increase in cost of revenues of approximately $615,000;

     o    We  took  an  inventory  write-off  as  a  result  of  a  decision  to
          discontinue production and sale of most disposable battery products in
          response to low consumer demand for those products,  accounting for an
          increase in cost of revenues of approximately $440,000;

     o    When we  lowered  the retail  prices of our  products,  we  recognized
          losses on those of our products  that we carried in  inventory  due to
          the principle of  presenting  inventory at the lower of cost or market
          value, accounting for an increase in cost of revenues of approximately
          $400,000;

     o    We increased our accruals for doubtful debts because a greater portion
          of our accounts  receivable  was aged over six months,  accounting for
          approximately  $300,000 of the increase in general and  administrative
          expenses;

     o    We  concentrated  on production  of chargers,  which were more popular
          than disposable  batteries but which have higher  production costs and
          hence a higher  gross loss than do the  disposable  batteries  that we
          emphasized in 2000,  accounting for an increase in cost of revenues of
          approximately $300,000; and

                                     - 40 -
<PAGE>

     o    Some of our equipment began to be depreciable  beginning in the second
          half of 2001,  which  resulted  in an increase in our cost of revenues
          during 2001 of the amount of the depreciation, which was approximately
          $200,000.

     The above  factors  were offset to some extent by reduction in research and
development  expenses related to our discontinued  operation in 2001 compared to
2000,  primarily  as a result of our move from a company  primarily  engaged  in
research and development to a company engaged in production.

     Net loss.  Due to the factors cited above,  we reported a net loss of $17.3
million  in 2001  (without  taking  into  account a deemed  dividend  to certain
shareholders  as a result of the  repricing  of warrants  held by certain of our
investors,  as  described  in  Note  12.g.2  of the  Notes  to the  Consolidated
Financial  Statements),  compared  to a net loss of $12.0  million in 2000,  and
increase of $5.3 million, or 44%.

Liquidity and Capital Resources

     As of December 31, 2002, we had cash and cash  equivalents of approximately
$1.5  million,  and  certificates  of deposit due within one year  amounting  to
$633,000,  compared  with $12.7  million as of December  31, 2001, a decrease of
$11.2  million,  or 88%. The decrease in cash was primarily the result of losses
incurred  in our  consumer  battery  division,  which we shut  down in the third
quarter of 2002, and the costs of the acquisitions of IES and MDT.

     We used available  funds in 2002  primarily for the  acquisition of IES and
MDT, and other  working  capital  needs.  We increased  our  investment in fixed
assets by $667,000  (including  fixed  assets used in  discontinued  operations)
during  the year  ended  December  31,  2002,  primarily  in the  Electric  Fuel
Batteries  Division.  Our fixed  assets  amounted to $2.6 million as at year end
after the  write-off  of net fixed  assets in the amount of $4.5  million due to
discontinuation of our consumer battery business.

     Net cash used in operating  activities from continuing  operations for 2002
and 2001 was $3.5 million and $2.5  million,  respectively,  an increase of $1.0
million,  or 40%.  This  increase was  primarily  the result of an increased net
loss,  an  increase  in  inventory  and a decrease  in  accounts  payable and in
accruals in comparison to 2001.

     Net cash used in  investing  activities  for 2002 and 2001 was $5.4 million
and $1.3  million,  respectively,  an increase of $4.1  million,  or 319%.  This
increase was primarily the result of our  investment in the  acquisition  of IES
and MDT.

     Net  cash  provided  by  financing  activities  for  2002 and 2001 was $3.1
million and $15.7 million,  respectively,  a decrease of $12.6 million,  or 80%.
This decrease was primarily the result of lower amounts of funds raised  through
sales of our common stock in 2002 compared to 2001.

     Our Israeli  subsidiary  EFL  presently has a line of credit with the First
International  Bank of Israel  Ltd.  (FIBI) of up to  $750,000,  secured by such
security  as we and the bank  shall  agree


                                     - 41 -
<PAGE>

upon  from  time to time.  This  credit  facility  imposes  financial  and other
covenants  on Arotech  and EFL.  As of December  31,  2002,  the bank had issued
letters of credit and bank guarantees totaling approximately $35,000.

     During  2002,  certain  of  our  employees   exercised  options  under  our
registered  employee  stock option plan.  The proceeds to us from the  exercised
options were approximately $113,000.

     On January 15, 2002 we issued and sold to Grenville  Finance  Ltd.,  for an
aggregate  purchase price of $750,000,  an aggregate of 441,176 shares of common
stock.

     On January 23, 2002 we issued and sold to various  institutional  investors
affiliated with the Special Situation funds, for an aggregate  purchase price of
$2,480,000, an aggregate of 1,600,000 shares of common stock.

     On December 31, 2002 we issued and sold to various institutional  investors
we issued and sold to three  institutional  investors  an  aggregate  $3,500,000
principal amount of 9% Secured Convertible Debentures due June 30, 2005, as more
fully described under "Item 5. Market For Registrant's Common Equity and Related
Stockholder Matters - Recent Sales of Unregistered Securities," above.

     We have  approximately  $4.0  million  in long term debt  outstanding,  and
approximately  $1.3 million in  short-term  debt.

     Approximately  22.9% of the stock of our  Israeli-based  subsidiary  EFL is
deemed to be  beneficially  owned  (directly,  indirectly or by  application  of
certain attribution rules) by four United States citizens: Leon S. Gross, Austin
W. Marxe and David M.  Greenhouse,  and  Robert S.  Ehrlich.  (Information  with
respect to the  stockholdings  of  Messrs.  Marxe and  Greenhouse  is based on a
Schedule 13G filed with the Securities  and Exchange  Commission on February 11,
2002, as amended on February 13, 2003.) If at any time in the future,  more than
50% of either (i) the voting power of our stock,  or (ii) the total value of our
stock, is held or deemed to be held by five or fewer individuals (including,  if
applicable,  those  individuals  who  currently own an aggregate of 22.9% of our
stock) who are United  States  citizens  or  residents,  EFL would  satisfy  the
foreign personal holding company stock ownership test under the Internal Revenue
Code and we could be  subject  to  additional  U.S.  taxes on any  undistributed
foreign  personal  holding  company  income of EFL. For 2002,  EFL had no income
which would qualify as  undistributed  foreign  personal holding company income.
However,  no assurance  can be given that in the future EFL will not have income
that qualifies as undistributed foreign personal holding company income.

     We believe that our present cash position and  anticipated  cash flows from
operations  should be  sufficient  to satisfy our  estimated  cash  requirements
through the next year.

Impact of Inflation and Currency Fluctuations

     Historically,  the majority of our revenues have been in U.S. dollars.  The
United States dollar cost of our  operations in Israel,  with regard to expenses
incurred in NIS, is influenced by the extent to which an increase in the rate of
inflation in Israel is not offset by the  devaluation  of the NIS in relation to
the dollar. In the past two years,  inflation in Israel has been more than fully

                                     - 42 -
<PAGE>

compensated by the devaluation of the NIS and,  accordingly,  the dollar cost of
our NIS expenses has decreased. Even if the recent trend is reversed (as was the
case in previous years),  we do not believe that continuing  inflation in Israel
or delays in the  devaluation  of the NIS are likely to have a material  adverse
effect on us,  except to the extent  that such  circumstances  have an impact on
Israel's  economy as a whole.  In the years ended  December 31,  2000,  2001 and
2002,  the  annual  rates of  inflation  in  Israel  were  0.0%,  1.4% and 6.5%,
respectively,  compared to the  devaluation of the NIS against the dollar during
such  periods of (2.7)%,  9.3% and 7.3%,  respectively.  Additionally,  our $2.6
million contract to supply  simulation  training systems to the largest regional
police division in Germany is denominated in Euros.

Effective Corporate Tax Rate

     Our production facilities in Israel have been granted "Approved Enterprise"
status under the Israel Law for Encouragement of Capital Investments, 5719-1959,
and  consequently  are  eligible for certain tax benefits for seven to ten years
after they  first  generate  taxable  income  (provided  the  maximum  period as
prescribed by law has not elapsed).  Under this law, a company may either accept
government  grants and receive a reduced tax rate, or forego  government  grants
and  receive an  alternate  package  of tax  benefits  that  includes a complete
exemption  from  certain  taxes.  We have  elected  to  receive a grant of funds
together with a reduced tax rate for the aforementioned period.

     EFL's effective corporate tax rate may be affected by the classification of
certain items of income as being "approved  income" for purposes of the Approved
Enterprise law, and hence subject to a lower tax rate (25% to 10%,  depending on
the extent of foreign ownership of EFL - presently 15%) than is imposed on other
forms of income under Israeli law (presently 36%). The effective tax upon income
we  distribute  to our  stockholders  would  be  increased  as a  result  of the
withholding tax imposed upon dividends distributed by EFL to Arotech,  resulting
in an  overall  effective  corporate  tax rate of  approximately  28% for income
arising from EFL's Approved Enterprises and 44% regarding other income.

     Arotech and EFL have incurred net operating  losses or had earnings arising
from  tax-exempt  income during the years ended December 31, 2000, 2001 and 2002
and  accordingly  no  provision  for income taxes was  required.  Taxes in these
entities  paid in 2000,  2001 and 2002 are  primarily  composed of United States
federal alternative minimum taxes.

     As of December 31, 2002, we had U.S. net operating  loss carry  forwards of
approximately  $15 million that are available to offset future  taxable  income,
expiring  primarily in 2015,  and foreign net operating  loss carry  forwards of
approximately  $93 million,  which are available  indefinitely  to offset future
taxable income.

                                  RISK FACTORS

     The following factors,  among others,  could cause actual results to differ
materially  from those  contained  in  forward-looking  statements  made in this
Report and presented elsewhere by management from time to time.

                                     - 43 -
<PAGE>

Business-Related Risks

     We have had a history of losses and may incur future losses.

     We were  incorporated  in 1990 and began our  operations  in 1991.  We have
funded  our  operations  principally  from funds  raised in each of the  initial
public offering of our common stock in February 1994;  through subsequent public
and  private  offerings  of our  common  stock and  equity  and debt  securities
convertible  into  shares of our common  stock;  research  contracts  and supply
contracts;  funds  received  under  research  and  development  grants  from the
Government  of  Israel;  and  sales  of  products  that we and our  subsidiaries
manufacture.  We incurred  significant  operating  losses  since our  inception.
Additionally,  as of  December  31,  2002,  we had  an  accumulated  deficit  of
approximately  $100.7  million.  There  can be no  assurance  that we will  ever
achieve profitability or that our business will continue to exist. Additionally,
because  we do not  presently  meet  the  transaction  requirements  for  filing
registration  statements for primary  offerings of our securities on the simpler
Form S-3 registration statement, raising capital through sales of our securities
may be more difficult in the future than it has been in the past.

     Our  existing  indebtedness  may  adversely  affect  our  ability to obtain
additional  funds and may  increase  our  vulnerability  to economic or business
downturns.

     Our  indebtedness,   including  the  aggregate   principal  amount  of  the
debentures sold by us in December 2002, aggregated approximately $5.3 million as
of December 31, 2002.  Accordingly,  we are subject to the risks associated with
indebtedness, including:

     o    we must  dedicate a portion of our cash flows from  operations  to pay
          debt service costs and, as a result,  we have less funds available for
          operations, future acquisitions of consumer receivable portfolios, and
          other purposes;

     o    it may be more  difficult  and  expensive to obtain  additional  funds
          through financings, if available at all;

     o    we are more  vulnerable  to economic  downturns  and  fluctuations  in
          interest rates, less able to withstand  competitive pressures and less
          flexible in reacting to changes in our industry  and general  economic
          conditions; and

     o    if we default  under any of our existing  debt  instruments  or if our
          creditors demand payment of a portion or all of our  indebtedness,  we
          may not have sufficient funds to make such payments.

     The occurrence of any of these events could materially adversely affect our
results of  operations  and financial  condition and adversely  affect our stock
price.


                                     - 44 -
<PAGE>


     The  agreements  governing  the terms of our  debentures  contain  numerous
affirmative  and negative  covenants that limit the discretion of our management
with respect to certain business matters and place restrictions on us, including
obligations on our part to preserve and maintain our assets and  restrictions on
our  ability  to incur or  guarantee  debt,  to merge with or sell our assets to
another  company,  and to make  significant  capital  expenditures  without  the
consent of the  debenture  holders.  Our  ability to comply with these and other
provisions of such agreements may be affected by changes in economic or business
conditions  or other  events  beyond our  control.

     Failure  to  comply  with  the  terms  of  our debentures could result in a
default  that  could  have  material  adverse  consequences for us.

     A  failure  to  comply  with  the  obligations  contained  in our debenture
agreements,  including  a failure to have our registration statement registering
the  shares  underlying  our  debentures  and the warrants issued as part of the
debenture  financing declared effective by the SEC on or before January 1, 2004,
could  result in an event of default under such agreements which could result in
an  acceleration  of  the  debentures  and  the acceleration of debt under other
instruments  evidencing  indebtedness  that  may  contain  cross-acceleration or
cross-default  provisions.  If  the  indebtedness  under the debentures or other
indebtedness  were  to be accelerated, there can be no assurance that our assets
would  be  sufficient  to  repay  in  full  such  indebtedness.  The  foregoing
description  of  our  agreement  with  our debenture holders is qualified in its
entirety  by  reference  to  the  agreements with our debenture holders filed as
exhibits to our Current Report on Form 8-K that we filed with the SEC on January
6,  2003.

     We  have  pledged  a  substantial  portion  of our  assets  to  secure  our
borrowings.

     The  debentures are secured by a substantial  portion of our assets.  If we
default  under the  indebtedness  secured by our assets,  those  assets would be
available  to the secured  creditor to satisfy  our  obligations  to the secured
creditor,  which could materially adversely affect our results of operations and
financial condition and adversely affect our stock price.

     We need significant amounts of capital to operate and grow our business.

     We require substantial funds to conduct the necessary research, development
and  testing  of our  products;  to  establish  commercial  scale  manufacturing
facilities;  and to market our products. We continue to seek additional funding,
including through the issuance of equity or debt securities.  However, there can
be no assurance  that we will obtain any such  additional  financing in a timely
manner or on acceptable  terms. If additional funds are raised by issuing equity
securities,  stockholders may incur further dilution.  If additional  funding is
not secured,  we will have to modify,  reduce,  defer or eliminate  parts of our
anticipated future commitments and/or programs.

     We may not be successful in operating a new business.

     Prior  to the  IES and  MDT  acquisitions,  our  primary  business  was the
marketing  and sale of products  based on primary and  refuelable  Zinc-Air fuel
cell technology and advancements in battery  technology for defense and security
products  and  other  military  applications,  electric  vehicles  and  consumer
electronics.  As a  result  of the  IES  and  MDT  acquisitions,  a  substantial
component of our business will be the  marketing and sale of hi-tech  multimedia
and interactive  digital  solutions for training  military,  law enforcement and
security  personnel  and  sophisticated   lightweight   materials  and  advanced
engineering  processes used to armor  vehicles.  These are new businesses for us
and our  management  group  has  limited  experience  operating  these  types of
businesses.  Although we have retained the management  personnel at IES and MDT,
we cannot  assure that such  personnel  will  continue to work for us or that we
will  be  successful  in  managing  this  new  business.  If we  are  unable  to
successfully  operate these new businesses,  especially the business of IES, our
business,  financial  condition  and results of  operations  could be materially
impaired.

     We cannot assure you of market  acceptance of our military Zinc-Air battery
products and electric vehicle technology.

     Our  batteries  for the  defense  industry  and a signal  light  powered by
water-activated batteries for use in life jackets and other rescue apparatus are
the only commercial  Zinc-Air  battery  products we currently have available for
sale.  Significant  resources will be required to develop and produce additional
consumer products  utilizing this technology on a commercial  scale.


                                     - 45 -
<PAGE>

Additional   development  will  be  necessary  in  order  to  commercialize  our
technology  and each of the  components of the Electric Fuel System for electric
vehicles  and  defense  products.  We cannot  assure you that we will be able to
successfully  develop,  engineer or commercialize our Zinc-Air energy system, or
that we will  be able to  develop  products  for  commercial  sale or  that,  if
developed,  they can be produced in commercial quantities or at acceptable costs
or be  successfully  marketed.  The  likelihood  of our future  success  must be
considered in light of the risks,  expenses,  difficulties and delays frequently
encountered  in connection  with the operation and  development  of a relatively
early stage business and with development activities generally.

     We believe that public  pressure and government  initiatives  are important
factors  in  creating  an  electric  vehicle  market.  However,  there can be no
assurance  that  there  will be  sufficient  public  pressure  or  that  further
legislation or other governmental  initiatives will be enacted,  or that current
legislation will not be repealed,  amended, or have its implementation  delayed.
In  addition,  we are subject to the risk that even if an electric  fuel vehicle
market develops,  a different form of zero emission or low emission vehicle will
dominate the market.  In addition,  we cannot assure you that other solutions to
the problem of containing  emissions created by internal combustion engines will
not be invented,  developed  and  produced.  Any other  solution  could  achieve
greater market acceptance than electric  vehicles.  The failure of a significant
market for electric  vehicles to develop would have a material adverse effect on
our  ability  to  commercialize  this  aspect  of  our  technology.  Even  if  a
significant  market for electric  vehicles  develops,  there can be no assurance
that our technology will be commercially competitive within that market.

     Our acquisition strategy involves various risks.

     Part of our strategy is to grow through the  acquisition  of companies that
will complement our existing operations or provide us with an entry into markets
we do not currently  serve.  Growth through  acquisitions  involves  substantial
risks, including the risk of improper valuation of the acquired business and the
risk  of  inadequate  integration.  There  can  be no  assurance  that  suitable
acquisition  candidates  will be  available,  that we will be able to acquire or
manage  profitably such additional  companies or that future  acquisitions  will
produce  returns  that justify our  investments  therein.  In  addition,  we may
compete for  acquisition  and expansion  opportunities  with companies that have
significantly  greater  resources than we do.  Furthermore,  acquisitions  could
disrupt our ongoing  business,  distract the  attention of our senior  managers,
make it difficult to maintain our operational standards, controls and procedures
and subject us to contingent and latent risks that are different,  in nature and
magnitude, than the risks we currently face.

     We may finance future  acquisitions with cash from operations or additional
debt or equity  financings.  There can be no  assurance  that we will be able to
generate  internal cash or obtain  financing  from external  sources or that, if
available,  such  financing  will be on terms  acceptable to us. The issuance of
additional  common  stock to  finance  acquisitions  may  result in  substantial
dilution to our stockholders.  Any debt financing may significantly increase our
leverage and may involve  restrictive  covenants which limit our operations.

     We may not successfully integrate our new acquisitions.

     In light of our recent acquisitions of IES and MDT, our success will depend
in part on our ability to manage the combined  operations of these companies and
to integrate  the  operations  and personnel of these  companies  along with our
other subsidiaries and divisions into a single organizational


                                     - 46 -
<PAGE>

structure.  There  can be no  assurance  that we  will  be  able to  effectively
integrate   the   operations   of  our   subsidiaries   and  divisions  and  our
newly-acquired businesses into a single organizational structure. Integration of
these operations could also place additional pressures on our management as well
as on our key  technical  resources.  The  failure to  successfully  manage this
integration could have an adverse material effect on us.

     If we are successful in acquiring additional businesses,  we may experience
a period of rapid growth that could place significant additional demands on, and
require us to expand,  our  management,  resources  and  management  information
systems.  Our failure to manage any such rapid growth  effectively  could have a
material  adverse effect on our financial  condition,  results of operations and
cash flows.

     If we are unable to manage our growth, our operating results will be
impaired.

     We are currently  experiencing a period of growth and development  activity
which could place a  significant  strain on our  personnel  and  resources.  Our
activity has resulted in increased  levels of  responsibility  for both existing
and new management personnel.  Many of our management personnel have had limited
or no experience  in managing  growing  companies.  We have sought to manage our
current and anticipated growth through the recruitment of additional  management
and technical personnel and the implementation of internal systems and controls.
However,  our failure to manage growth  effectively  could adversely  affect our
results of operations.

     We will need to  develop  the  experience  to  manufacture  certain  of our
products in commercial quantities and at competitive prices.

     We  currently  have  limited  experience  in  manufacturing  in  commercial
quantities  and have,  to date,  produced  only limited  quantities  of military
batteries and components of the batteries for electric vehicles. In order for us
to be successful in the commercial  market,  these products must be manufactured
to meet high quality standards in commercial  quantities at competitive  prices.
The  development  of the necessary  manufacturing  technology and processes will
require  extensive  lead  times and the  commitment  of  significant  amounts of
financial and engineering resources, which may not be available to us. We cannot
assure you that we will successfully develop this technology or these processes.
Moreover,  we cannot assure you that we will be able to  successfully  implement
the quality control measures necessary for commercial manufacturing.

     Some of the  components of our  technology  and our products pose potential
safety risks which could create potential liability exposure for us.

     Some of the components of our technology and our products  contain elements
that are known to pose potential  safety risks.  Also,  because electric vehicle
batteries contain large amounts of electrical energy, they may cause injuries if
not handled  properly.  In addition to these risks,  and although we incorporate
safety  procedures in our research,  development  and  manufacturing  processes,
there can be no assurance that accidents in our facilities  will not occur.  Any
accident,  whether  occasioned  by the use of all or any part of our products or
technology or by our manufacturing operations, could adversely affect commercial
acceptance of our products and could result in significant  production delays or
claims for damages  resulting  from  injuries.  Any of these  occurrences  would
materially adversely affect our operations and financial condition.

                                     - 47 -
<PAGE>

     We may face product liability claims.

     To date, there have been no material claims or threatened claims against us
by users of our products, including the products manufactured by MDT, based on a
failure of our  products to perform as  specified.  In the event that any claims
for  substantial  amounts  were to be  asserted  against  us,  they could have a
materially adverse effect on our financial  condition and results of operations.
We maintain general product liability insurance.  However, there is no assurance
that the amount of our insurance will be sufficient to cover potential claims or
that the present  amount of insurance  can be maintained at the present level of
cost, or at all.

     Some of our business is dependent on government contracts.

     Most of IES's customers to date have been in the public sector of the U.S.,
including the federal, state and local governments, and in the public sectors of
a number of other countries, and most of MDT's customers have been in the public
sector in Israel.  A significant  decrease in the overall level or allocation of
defense  spending or law enforcement in the U.S. or other countries could have a
material  adverse  effect on our future  results  of  operations  and  financial
condition.

     Sales to public sector  customers are subject to a multiplicity of detailed
regulatory  requirements  and public  policies as well as to changes in training
and  purchasing  priorities.  Contracts  with  public  sector  customers  may be
conditioned  upon the  continuing  availability  of public funds,  which in turn
depends upon  lengthy and complex  budgetary  procedures,  and may be subject to
certain pricing  constraints.  Moreover,  U.S. government contracts and those of
many  international  government  customers  may  generally be  terminated  for a
variety  of  factors  when it is in the best  interests  of the  government  and
contractors may be suspended or debarred for misconduct at the discretion of the
government.  There can be no assurance  that these  factors or others  unique to
government  contracts or the loss or suspension of necessary regulatory licenses
will not have a material  adverse effect on our future results of operations and
financial condition.

     Our fields of business are highly competitive.

     The  competition  to develop  defense and  security  products  and electric
vehicle  battery  systems,  and to obtain  funding for the  development of these
products, is, and is expected to remain, intense.

     Our defense and  security  products  compete  with other  manufacturers  of
specialized  training systems,  including  Firearms  Training  Systems,  Inc., a
producer of interactive  simulation  systems designed to provide training in the
handling and use of small and  supporting  arms.  In  addition,  we compete with
manufacturers and developers of armor for cars and vans, including O'Gara-Hess &
Eisenhardt, a division of Armor Holdings, Inc.

     Our battery technology competes with other battery technologies, as well as
other  Zinc-Air  technologies.  The  competition  in this  area of our  business
consists of  development  stage  companies,  major  international  companies and
consortia  of  such  companies,  including  battery  manufacturers,   automobile
manufacturers,  energy production and transportation  companies,  consumer goods
companies  and defense  contractors.  Many of our  competitors  have  financial,
technical,  marketing,  sales,  manufacturing,  distribution and other resources
significantly greater than ours.

                                     - 48 -
<PAGE>

     Various  battery  technologies  are being  considered  for use in  electric
vehicles and defense and safety products by other  manufacturers and developers,
including the following: lead-acid,  nickel-cadmium,  nickel-iron,  nickel-zinc,
nickel-metal  hydride,  sodium-sulfur,   sodium-nickel  chloride,  zinc-bromine,
lithium-ion,    lithium-polymer,    lithium-iron   sulfide,   primary   lithium,
rechargeable alkaline and Zinc-Air.

     If we are unable to compete  successfully  in each of our operating  areas,
especially  in the defense  and  security  products  area of our  business,  our
business and results of operations could be materially adversely affected.

     Failure to receive  required  regulatory  permits or to comply with various
regulations to which we are subject could adversely affect our business.

     Regulations in Europe, Israel, the United States and other countries impose
various  controls  and  requirements  relating  to  various  components  of  our
business.  While we believe that our current and contemplated operations conform
to those  regulations,  we cannot  assure you that we will not be found to be in
non-compliance.  We have applied for, and received,  the necessary permits under
the  Israel  Dangerous  Substances  Law,  5753-1993,  required  for  the  use of
potassium  hydroxide  and zinc metal.  However,  there can be no assurance  that
changes in these  regulations or the adoption of new regulations will not impose
costly  compliance  requirements  on us,  subject us to future  liabilities,  or
restrict our ability to operate our business.

     Our business is dependent on patents and other proprietary  rights that may
be difficult to protect and could affect our ability to compete effectively.

     Our ability to compete  effectively  will depend on our ability to maintain
the proprietary  nature of our technology and manufacturing  processes through a
combination of patent and trade secret protection, non-disclosure agreements and
licensing  arrangements.  We hold  patents,  or  patent  applications,  covering
elements of our technology in the United States and in Europe.  In addition,  we
have patent applications  pending in the United States and in foreign countries,
including  the European  Community,  Israel and Japan.  We intend to continue to
file patent  applications  covering  important  features of our  technology.  We
cannot  assure you,  however,  that patents will issue from any of these pending
applications or, if patents issue,  that the claims allowed will be sufficiently
broad to protect our technology.  In addition,  we cannot assure you that any of
our  patents  will not be  challenged  or  invalidated,  that any of our  issued
patents will afford  protection  against a competitor or that third parties will
not make infringement claims against us.

     Litigation,  or  participation  in  administrative   proceedings,   may  be
necessary to protect our  proprietary  rights.  This type of  litigation  can be
costly and time  consuming and could divert  company  resources  and  management
attention  to defend  our  rights,  and this could harm us even if we were to be
successful in the litigation.  The  invalidation of patents owned by or licensed
to us could have a material adverse effect on our business. In addition,  patent
applications  filed  in  foreign  countries  are  subject  to  laws,  rules  and
procedures that differ from those of the United States. Therefore,  there can be
no assurance that foreign patent  applications  related to patents issued in the
United States will be granted.  Furthermore,  even if these patent  applications
are granted, some foreign countries provide significantly less patent protection
than the United  States.  In the absence of patent  protection,  and despite our
reliance upon our proprietary confidential  information,  our competitors may be
able to use  innovations  similar to those used by us


                                     - 49 -
<PAGE>

to design and manufacture  products directly  competitive with our products.  In
addition,  no assurance can be given that others will not obtain patents that we
will need to license or design  around.  To the extent any of our  products  are
covered by third-party patents, we could require a license under such patents to
develop and market our patents.

     Despite our efforts to safeguard and maintain our  proprietary  rights,  we
may not be  successful  in doing so. In addition,  competition  is intense,  and
there can be no assurance that our competitors will not independently develop or
patent  technologies  that  are  substantially  equivalent  or  superior  to our
technology.  Moreover,  in the event of patent litigation,  we cannot assure you
that a court  would  determine  that we were the  first  creator  of  inventions
covered by our issued patents or pending patent applications or that we were the
first to file patent  applications for those  inventions.  If existing or future
third-party  patents  containing broad claims were upheld by the courts or if we
were found to  infringe  third party  patents,  we may not be able to obtain the
required  licenses from the holders of such patents on acceptable  terms,  if at
all.  Failure to obtain these licenses could cause delays in the introduction of
our products or necessitate  costly  attempts to design around such patents,  or
could foreclose the development,  manufacture or sale of our products.  We could
also incur substantial costs in defending ourselves in patent infringement suits
brought  by  others  and  in  prosecuting  patent   infringement  suits  against
infringers.

     We also rely on trade  secrets  and  proprietary  know-how  that we seek to
protect, in part, through non-disclosure and confidentiality agreements with our
customers,  employees,  consultants,  strategic partners and potential strategic
partners. We cannot assure you that these agreements will not be breached,  that
we would have  adequate  remedies for any breach or that our trade  secrets will
not otherwise become known or be independently developed by competitors.

     We have undergone recent management changes.

     In October 2002, Yehuda Harats, who had been our CEO since the inception of
our  company,  resigned  from his  positions  with us in order to  pursue  other
interests.  Our Board of Directors selected our long-time Chairman of the Board,
Robert S.  Ehrlich,  to be our new President and CEO. Our success will depend to
some  extent on our  ability  to  quickly  and  smoothly  execute  the change in
leadership as a result of this change of CEO.

     We are dependent on key personnel and our business  would suffer if we fail
to retain them.

     We  are  highly   dependent  on  certain  members  of  our  management  and
engineering  staff, and the loss of the services of one or more of these persons
could  adversely  affect us. We are especially  dependent on the services of our
Chairman,  President and Chief Executive Officer, Robert S. Ehrlich. The loss of
Mr.  Ehrlich  could  have a  material  adverse  effect on us. We are party to an
employment  agreement with Mr. Ehrlich,  which  agreement  expires at the end of
2003. We do not have key-man life insurance on Mr. Ehrlich.

     There are risks involved with the international nature of our business.

     A significant  portion of our sales are made to customers  located  outside
the U.S.,  primarily in Europe and Asia. In 2000, 2001 and 2002,  without taking
account of revenues  derived from  discontinued  operations,  45%, 49%, and 56%,
respectively,  of our  revenues,  including the revenues of IES and MDT on a pro
forma basis,  were derived from sales to customers  located  outside the U.S. We
expect  that  our  international  customers  will  continue  to  account  for  a

                                     - 50 -
<PAGE>

substantial  portion of our revenues in the near future.  Sales to international
customers may be subject to political and economic  risks,  including  political
instability,  currency  controls,  exchange rate  fluctuations,  foreign  taxes,
longer payment cycles and changes in import/export regulations and tariff rates.
In addition,  various forms of protectionist  trade legislation have been and in
the  future  may be  proposed  in the U.S.  and  certain  other  countries.  Any
resulting  changes in current  tariff  structures  or other  trade and  monetary
policies could adversely affect our sales to international customers.

     We may be subject to increased United States taxation.

     We believe that Electric Fuel and our wholly-owned  Israeli  subsidiary EFL
will be treated as personal  holding  companies  for  purposes  of the  personal
holding company (PHC) rules of the Internal  Revenue Code of 1986. Under the PHC
rules,  a PHC is  subject  to a  special  39.6%  tax on its  "undistributed  PHC
income",  in addition to regular  income tax. We believe that  Electric Fuel and
EFL have not had any material  undistributed PHC income.  However,  no assurance
can be given that Electric Fuel and EFL will not have  undistributed  PHC income
in the future.

     Approximately 22.9% of the stock of EFL was deemed to be beneficially owned
(directly or  indirectly  by  application  of certain  attribution  rules) as of
December 31, 2002 by four United States citizens: Leon S. Gross, Austin W. Marxe
and David M. Greenhouse, and Robert S. Ehrlich (see "Item 12. Security Ownership
of Certain  Beneficial Owners and Management")  (information with respect to the
stockholdings  of Messrs.  Marxe and Greenhouse is based on a Schedule 13G filed
with the Securities and Exchange  Commission on February 11, 2002, as amended on
February  13,  2003).  If more than 50% of either  (i) the  voting  power of our
stock,  or (ii) the total value of our stock,  is ever  acquired or deemed to be
acquired  by  five  or  fewer  individuals  (including,  if  applicable,   those
individuals  who  currently  own an  aggregate  of 22.9% of our  shares) who are
United  States  citizens or residents,  EFL would  satisfy the foreign  personal
holding company (FPHC) stock ownership test under the Internal Revenue Code, and
we  could  be  subject  to  additional  U.S.  taxes  (including  PHC tax) on any
"undistributed FPHC income" of EFL. We believe that EFL has not had any material
undistributed FPHC income.  However, no assurance can be given that EFL will not
become a FPHC and have undistributed FPHC income in the future.

     Investors  should not  purchase our common  stock with the  expectation  of
receiving cash dividends.

     We currently  intend to retain any future  earnings for funding growth and,
as a result, do not expect to pay any cash dividends in the foreseeable future.

Market-Related Risks

     The price of our common stock is volatile.

     The market price of our common stock has been  volatile in the past and may
change rapidly in the future.  The following  factors,  among others,  may cause
significant   volatility  in  our  stock  price:  o  Announcements  by  us,  our
competitors or our customers;

     o    The introduction of new or enhanced products and services by us or our
          competitors;

     o    Changes in the  perceived  ability  to  commercialize  our  technology
          compared to that of our competitors;

                                     - 51 -
<PAGE>

     o    Rumors relating to our competitors or us;

     o    Actual or anticipated fluctuations in our operating results; and

     o    General market or economic conditions.

     If our shares were to be delisted,  our stock price might  decline  further
and we might be unable to raise additional capital.

     One of the continued listing standards for our stock on the Nasdaq SmallCap
Market is the  maintenance  of a $1.00 bid price.  Our stock price is  currently
trading  below $1.00,  and has been since October 18, 2002. On December 6, 2002,
Nasdaq notified us of our failure to meet the continued listing  standards,  and
informed us that unless our stock closes for ten consecutive trading days with a
bid price in excess of $1.00 prior to March 6, 2003 (subsequently extended, as a
result of an amendment to Nasdaq's listing regulations, to June 4, 2003), Nasdaq
would  notify us of its  intent to delist  our stock  from the  Nasdaq  National
Market. Should Nasdaq notify us of its intent to delist our stock, we would have
the opportunity to appeal this notification, although there can be no assurances
that this appeal would be resolved favorably.

     There  can  be no assurance that our common stock will remain listed on the
Nasdaq  National Market. If our common stock were to be delisted from the Nasdaq
National  Market,  we  might  apply  to be listed on the Nasdaq SmallCap market;
however,  there can be no assurance that we would be approved for listing on the
Nasdaq  SmallCap  market, which has the same $1.00 minimum bid and other similar
requirements  as  the  Nasdaq  National Market. If we were to move to the Nasdaq
SmallCap  market,  current  Nasdaq  regulations would give us the opportunity to
obtain  an additional 180-day grace period and an additional 90-day grace period
after  that  if  we  meet  certain  net  income,  shareholders' equity or market
capitalization  criteria.  While  our  stock  would  continue  to  trade  on the
over-the-counter  bulletin  board  following  any delisting from the Nasdaq, any
such  delisting  of  our common stock could have an adverse effect on the market
price  of, and the efficiency of the trading market for, our common stock. Also,
if  in  the  future  we were to determine that we need to seek additional equity
capital,  it could have an adverse effect on our ability to raise capital in the
public  equity  markets.

     In addition, if we fail to maintain Nasdaq listing for our securities,  and
no other exclusion from the definition of a "penny stock" under the Exchange Act
is available,  then any broker engaging in a transaction in our securities would
be required to provide any customer with a risk disclosure document,  disclosure
of  market   quotations,   if  any,   disclosure  of  the  compensation  of  the
broker-dealer  and  its  salesperson  in the  transaction  and  monthly  account
statements  showing the market values of our  securities  held in the customer's
account.  The bid and  offer  quotation  and  compensation  information  must be
provided  prior  to  effecting  the  transaction  and must be  contained  on the
customer's  confirmation.  If brokers  become subject to the "penny stock" rules
when engaging in transactions in our securities,  they would become less willing
to engage in transactions, thereby making it more difficult for our stockholders
to dispose of their shares.

                                     - 52 -
<PAGE>

     We are subject to significant  influence by some stockholders that may have
the effect of delaying or preventing a change in control.

     As of February 28, 2003,  our directors,  executive  officers and principal
stockholders  and their affiliates  (including Leon S. Gross (11.6%),  Austin W.
Marxe and David M. Greenhouse (8.0%), IES Electronics Industries Ltd. (6.2%) and
Robert  S.  Ehrlich  (4.3%))   collectively  are  deemed   beneficially  to  own
approximately 29.0% of the outstanding shares of our common stock (see "Item 12.
Security  Ownership of Certain  Beneficial  Owners and  Management"),  including
options  and  warrants   exercisable   within  60  days  of  February  28,  2003
(information with respect to the  stockholdings of Messrs.  Marxe and Greenhouse
is based on a Schedule 13G filed with the Securities and Exchange  Commission on
February 11, 2002, as amended on February 13, 2003, and information with respect
to the  stockholdings of IES Electronics  Industries Ltd. is based on a Schedule
13D filed with the  Securities  and Exchange  Commission  on August 12, 2002, as
amended  on  October  28,  2002  and  January  9,  2003).  As  a  result,  these
stockholders are able to exercise  significant  influence over matters requiring
stockholder  approval,  including  the  election of  directors  and  approval of
significant  corporate  transactions.  This  concentration of ownership may also
have the effect of delaying,  preventing or  discouraging a change in control of
Electric Fuel.

     Pursuant to a voting rights agreement dated September 30, 1996, as amended,
between Leon S. Gross,  Robert S.  Ehrlich,  Yehuda  Harats and us,  Lawrence M.
Miller,  Mr. Gross's advisor,  is entitled to be nominated to serve on our board
of  directors  so long as Mr.  Gross,  his heirs or  assigns  retain  beneficial
ownership of at least 1,375,000  shares of common stock. In addition,  under the
voting rights agreement, Mr. Gross and Messrs. Ehrlich and Harats agreed to vote
and take all necessary action so that Messrs.  Ehrlich,  Harats and Miller shall
serve as members of the board of  directors  until the earlier of  December  28,
2004 or our fifth annual  meeting of  stockholders  after December 28, 1999. Mr.
Harats resigned as a director in 2002;  however, we believe that Mr. Harats must
continue to comply with the terms of this agreement.

     A  substantial  number of our shares are  available  for sale in the public
market and sales of those shares could adversely affect our stock price.

     Sales of a  substantial  number of shares of common  stock  into the public
market,  or the perception that those sales could occur,  could adversely affect
our stock  price or could  impair  our  ability  to obtain  capital  through  an
offering of equity securities. As of February 28, 2003, we had 35,146,261 shares
of common stock issued and outstanding.  Of these shares,  27,610,658 are freely
transferable  without restriction under the Securities Act of 1933 and 7,526,478
may be sold subject to the volume  restrictions,  manner-of-sale  provisions and
other conditions of Rule 144 under the Securities Act of 1933.

     In connection  with a stock  purchase  agreement  dated  September 30, 1996
between  Leon S.  Gross  and us,  we also  entered  into a  registration  rights
agreement with Mr. Gross dated  September 30, 1996,  setting forth  registration
rights  with  respect  to the  shares of  common  stock  issued to Mr.  Gross in
connection with the offering. These rights include the right to make two demands
for the  registration  of the shares of our common stock owned by Mr. Gross.  In
addition,  Mr. Gross was granted unlimited rights to "piggyback" on registration
statements  that we file for the sale of our common stock.  Mr. Gross  presently
owns 3,547,870 shares, of which 1,538,462 have never been registered.

                                     - 53 -
<PAGE>

     In addition,  pursuant to the terms of their employment agreements with us,
both Yehuda Harats and Robert S. Ehrlich have a right to demand  registration of
their shares. Of the shares owned by Mr. Harats,  435,404 shares have never been
registered,  and of the 688,166 shares owned by Mr. Ehrlich, 453,933 shares have
never been registered.

     Exercise of our  warrants,  options and  convertible  debt could  adversely
affect our stock price and will be dilutive.

     As of February  28,  2003,  there were  outstanding  warrants to purchase a
total of  9,421,238  shares of our common stock at a weighted  average  exercise
price of $1.86 per share, options to purchase a total of 5,715,955 shares of our
common stock at a weighted  average  exercise price of $2.16 per share, of which
5,131,032 were vested and exercisable within 60 days of such date, at a weighted
average  exercise  price of $2.15 per  share,  and  outstanding  debentures  and
promissory  notes  convertible  into a total of  5,230,638  shares of our common
stock at a weighted average conversion price of $0.76 per share.  Holders of our
options,  warrants and convertible  debt will probably  exercise or convert them
only at a time  when  the  price  of our  common  stock  is  higher  than  their
respective  exercise or conversion  prices.  Accordingly,  we may be required to
issue shares of our common stock at a price  substantially lower than the market
price of our stock. This could adversely affect our stock price. In addition, if
and when these  shares  are  issued,  the  percentage  of our common  stock that
existing stockholders own will be diluted.

     Our  certificate  of  incorporation  and bylaws and  Delaware  law  contain
provisions that could discourage a takeover.

     Provisions of our amended and restated  certificate  of  incorporation  may
have the effect of making it more difficult for a third party to acquire,  or of
discouraging  a third party from  attempting  to acquire,  control of us.  These
provisions could limit the price that certain  investors might be willing to pay
in the future for shares of our common stock. These provisions:

     o    divide our board of directors  into three  classes  serving  staggered
          three-year terms;

     o    only permit  removal of  directors  by  stockholders  "for cause," and
          require the affirmative vote of at least 85% of the outstanding common
          stock to so remove; and

     o    allow us to issue  preferred  stock without any vote or further action
          by the stockholders.

     The  classification  system of electing directors and the removal provision
may tend to  discourage  a  third-party  from making a tender offer or otherwise
attempting to obtain  control of us and may maintain the incumbency of our board
of  directors,  as the  classification  of the board of directors  increases the
difficulty of replacing a majority of the directors.  These  provisions may have
the effect of deferring  hostile  takeovers,  delaying changes in our control or
management,  or may make it more  difficult  for  stockholders  to take  certain
corporate  actions.  The  amendment  of any of these  provisions  would  require
approval by holders of at least 85% of the outstanding common stock.

                                     - 54 -
<PAGE>

Israel-Related Risks

     A significant portion of our operations takes place in Israel, and we could
be adversely affected by the economic, political and military conditions in that
region.

     The offices and  facilities of two of our principal  subsidiaries,  EFL and
MDT, are located in Israel (in Beit Shemesh and Lod, respectively, both of which
are within  Israel's  pre-1967  borders).  We conduct  research and  development
activities  through EFL, and most of our senior  management  is located at EFL's
facilities.  Although we expect that most of our sales will be made to customers
outside Israel, we are nonetheless directly affected by economic,  political and
military  conditions  in  that  country.   Accordingly,  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
operations.  Since the establishment of the State of Israel in 1948, a number of
armed  conflicts  have taken place between  Israel and its Arab  neighbors and a
state of  hostility,  varying in degree and  intensity,  has led to security and
economic problems for Israel.

     Historically,  Arab states have  boycotted any direct trade with Israel and
to varying degrees have imposed a secondary  boycott on any company  carrying on
trade with or doing  business in Israel.  Although in October  1994,  the states
comprising the Gulf Cooperation Council (Saudi Arabia, the United Arab Emirates,
Kuwait,  Dubai,  Bahrain and Oman) announced that they would no longer adhere to
the  secondary  boycott  against  Israel,  and Israel has entered  into  certain
agreements with Egypt,  Jordan,  the Palestine  Liberation  Organization and the
Palestinian  Authority,  Israel has not entered into any peace  arrangement with
Syria or Lebanon.  Moreover,  since September 2000, there has been a significant
deterioration in Israel's  relationship  with the Palestinian  Authority,  and a
significant increase in terror and violence. Efforts to resolve the problem have
failed to result in an agreeable  solution.  Continued  hostilities  between the
Palestinian community and Israel and any failure to settle the conflict may have
a  material  adverse  effect  on our  business  and us.  Moreover,  the  current
political and security situation in the region has already had an adverse effect
on the economy of Israel, which in turn may have an adverse effect on us.

     Many of our  employees are currently  obligated to perform  annual  reserve
duty in the Israel  Defense  Forces and are  subject to being  called for active
military duty at any time. No assessment  can be made of the full impact of such
requirements on us in the future, particularly if emergency circumstances occur,
and no  prediction  can be made as to the effect on us of any expansion of these
obligations.  However, further deterioration of hostilities with the Palestinian
community  into a full-scale  conflict  might require more  widespread  military
reserve  service by some of our employees,  which could have a material  adverse
effect on our business.

     Service of  process  and  enforcement  of civil  liabilities  on us and our
officers may be difficult to obtain.

     We are  organized  under  the  laws of the  State of  Delaware  and will be
subject to service of process in the United States.  However,  approximately 49%
of our assets are located  outside the United  States.  In addition,  two of our
directors and all of our executive officers are residents of Israel and all or a
substantial  portion of the assets of such directors and executive  officers are
located outside the United States.

                                     - 55 -
<PAGE>

     There is doubt as to the  enforceability  of civil  liabilities  under  the
Securities Act of 1933, as amended,  and the Securities Exchange Act of 1934, as
amended, in original actions instituted in Israel.  However,  subject to certain
time  limitations  and  other  conditions,  Israeli  courts  may  enforce  final
judgments  of United  States  courts for  liquidated  amounts in civil  matters,
including judgments based upon the civil liability  provisions of the Securities
Act and the Exchange  Act. As a result,  it may not be possible for investors to
enforce or effect service of process upon these directors and executive officers
or to judgments of U.S. courts predicated upon the civil liability provisions of
U.S.  laws  against our  assets,  as well as the assets of these  directors  and
executive officers.  In addition,  awards of punitive damages in actions brought
in the U.S. or elsewhere may be unenforceable in Israel.

     Any  failure to obtain the tax  benefits  from the State of Israel  that we
expect to receive could negatively impact our plans and prospects.

     We  benefit  from  various  Israeli  government  programs,  grants  and tax
benefits,  particularly  as a result of the  "approved  enterprise"  status of a
substantial  portion of our existing  facilities  and the receipt of grants from
the Office of the Chief Scientist of the Israeli Ministry of Industry and Trade.
To be eligible  for some of these  programs,  grants and tax  benefits,  we must
continue to meet certain  conditions,  including  producing in Israel and making
specified investments in fixed assets. If we fail to meet such conditions in the
future,  we could be required to refund grants  already  received,  adjusted for
inflation  and  interest.  From  time to time,  the  government  of  Israel  has
discussed   reducing  or  eliminating  the  benefits  available  under  approved
enterprise  programs.  We cannot assure you that these programs and tax benefits
will be  continued  in the  future  at  their  current  levels  or at  all.  The
Government of Israel has announced that programs receiving  approved  enterprise
status in 1996 and  thereafter  will be entitled to a lower level of  government
grants than was previously  available.  The  termination or reduction of certain
programs and tax benefits  (particularly benefits available to us as a result of
the  approved  enterprise  status  of a  substantial  portion  of  our  existing
facilities and approved programs and as a recipient of grants from the office of
the Chief  Scientist)  could have a  material  adverse  effect on our  business,
results of operations and financial  condition.  In addition,  EFL has granted a
floating lien (that is, a lien that applies not only to assets owned at the time
but also to after-acquired assets) over all of EFL's assets as a security to the
State of  Israel  to  secure  its  obligations  under  the  approved  enterprise
programs.

     Our grants from the Israeli government impose certain restrictions on us.

     Since 1992,  our Israeli  subsidiary,  EFL, has  received  funding from the
Office of the Chief  Scientist  of the Israel  Ministry  of  Industry  and Trade
relating  to the  development  of our  Zinc-Air  battery  products,  such as our
electric vehicle and our batteries and chargers for consumer  products.  Between
1998 and 2000, we have also  received  funds from the  Israeli-U.S.  Bi-National
Industrial Research and Development (BIRD) Foundation.  Through the end of 2002,
we have  received  an  aggregate  of $9.9  million  from  grants  from the Chief
Scientist and $772,000 from grants from BIRD,  and we may receive future grants,
the amounts of which would be determined at the time of application. The funding
from the Chief  Scientist  prohibits the transfer or license of know-how and the
manufacture  of resulting  products  outside of Israel without the permission of
the Chief  Scientist.  Although  we believe  that the Chief  Scientist  does not
unreasonably  withhold this permission if the request is based upon commercially
justified  circumstances and any royalty  obligations to the Chief Scientist are
sufficiently  assured,  the matter is


                                     - 56 -
<PAGE>

solely within the discretion of the Chief Scientist,  and we cannot be sure that
such consent,  if requested,  would be granted upon terms  satisfactory to us or
granted at all.  Without such  consent,  we would be unable to  manufacture  any
products developed by this research outside of Israel,  even if it would be less
expensive for us to do so.  Additionally,  current  regulations require that, in
the case of the approved  transfer of  manufacturing  rights out of Israel,  the
maximum  amount to be repaid  through  royalty  payments  would be  increased to
between  120% and 300% of the  amount  granted,  depending  on the extent of the
manufacturing to be conducted  outside of Israel,  and that an increased royalty
rate of up to 5% would be applied. These restrictions could adversely affect our
potential revenues and net income from the sale of such products.

     Exchange rate fluctuations  between the U.S. dollar and the Israeli NIS may
negatively affect our earnings.

     Although a substantial  majority of our revenues and a substantial  portion
of our expenses are denominated in U.S.  dollars,  a significant  portion of our
costs, including personnel and  facilities-related  expenses, is incurred in New
Israeli  Shekels  (NIS).  Inflation in Israel will have the effect of increasing
the dollar  cost of our  operations  in Israel,  unless it is offset on a timely
basis by a devaluation of the NIS relative to the dollar.

     Some of our agreements are governed by Israeli law.

     Israeli law governs both our agreement with IES and our agreement with MDT,
as  well as  certain  other  agreements,  such as our  lease  agreements  on our
subsidiaries'  premises in Israel. While Israeli law differs in certain respects
from American law, we do not believe that these differences materially adversely
affect our rights or remedies under these agreements.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     We are exposed to the impact of interest rate changes and foreign  currency
fluctuations   due  to  our   international   sales,   production   and  funding
requirements.

     Our research,  development and production  activities are primarily carried
out by our  Israeli  subsidiary,  EFL,  at its  facility  in Beit  Shemesh,  and
accordingly we have sales and expenses in New Israeli Shekels. Additionally, our
MDT subsidiary operates primarily in New Israeli Shekels.  However, the majority
of our sales are made outside Israel in U.S. dollars,  and a substantial portion
of our costs are incurred in U.S. dollars. Therefore, our functional currency is
the U.S.  dollar.  Please see "Impact of Inflation  and Currency  Fluctuations,"
above and Note 2.b to the Notes to the Consolidated Financial Statements.

     Although we have a line of credit  that may be  affected  by interest  rate
changes,  given our level of  borrowing,  we do not believe the market risk from
interest rate changes is material.


                                     - 57 -
<PAGE>

<TABLE>
<CAPTION>
ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

                          Index to Financial Statements
                                                                                             Page
                                                                                             ----
          Consolidated Financial Statements
<S>                                                                                             <C>
          Report of Independent Auditors..................................................    F-2
          Consolidated Balance Sheets.....................................................    F-3
          Consolidated Statements of Operations...........................................    F-5
          Statements of Changes in Shareholders' Equity...................................    F-6
          Consolidated Statements of Cash Flows...........................................    F-9
          Notes to Consolidated Financial Statements......................................    F-12
                   Supplementary Financial Data
          Quarterly Financial Data (unaudited) for the two years ended December 31, 2002..    F-45

ITEM 9.  CHANGES  IN  AND  DISAGREEMENTS  WITH  ACCOUNTANTS  ON  ACCOUNTING  AND
         FINANCIAL DISCLOSURE

         None.
</TABLE>


                                     - 58 -

<PAGE>

                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Executive Officers, Directors and Significant Employees

     Executive Officers and Directors

     Our executive officers and directors and their ages as of February 28, 2003
were as follows:

<TABLE>
<CAPTION>
               Name               Age                                    Position
               ----               ---                                    --------
<S>                                <C>
   Robert S. Ehrlich...........    64  Chairman of the Board, President and Chief Executive Officer
   Steven Esses..................  39  Executive Vice President, Chief Operating Officer and Director
   Avihai Shen.................    35  Vice President - Finance and Chief Financial Officer
   Dr. Jay M. Eastman..........    56  Director
   Jack E. Rosenfeld...........    63  Director
   Lawrence M. Miller..........    56  Director
   Leon S. Gross*..............    96  Director
   Bert W. Wasserman...........    70  Director
</TABLE>

-----------------------------------
*    On March 17, 2003, Mr. Gross resigned from the board in view of his age.

     Our by-laws  provide  for a board of  directors  of one or more  directors.
There  are  currently  six  directors.  Under the  terms of our  certificate  of
incorporation,  the board of directors  is composed of three  classes of similar
size,  each elected in a different  year, so that only one-third of the board of
directors is elected in any single  year.  Dr.  Eastman is  designated a Class I
director  and has  been  elected  for a term  expiring  in 2004  and  until  his
successor is elected and qualified;  Messrs. Rosenfeld and Miller are designated
Class  II  directors  elected  for a term  expiring  in  2005  and  until  their
successors  are elected and qualified;  and Mr. Ehrlich is designated  Class III
directors  elected for a term which  expires in 2003 and until his  successor is
elected  and  qualified.  Mr.  Jeff  Kahn,  who had been  elected as a Class III
director  along  with Mr.  Ehrlich,  resigned  from the Board of  Directors  for
personal  reasons,  effective  December 31, 2001. The Board replaced him in July
2002 with Mr. Steven Esses,  who will be proposed for election to the Board as a
Class III director at the next annual  meeting of the  shareholders.  Mr. Yehuda
Harats, our former President and Chief Executive Officer, resigned as a director
in November  2002.  The Board  replaced  him in  February  2003 with Mr. Bert W.
Wasserman,  who will be proposed for election to the Board as a Class I director
at the next annual  meeting of the  shareholders.  Mr. Leon Gross,  who had been
elected as a Class I director along with Mr. Eastman, resigned from the Board of
Directors in view of his age in March 2003. His position has not been filled.

     Robert S. Ehrlich has been our Chairman of the Board since January 1993 and
our President  and Chief  Executive  Officer  since October 2002.  From May 1991
until January 1993, Mr. Ehrlich was our Vice Chairman of the Board, and from May
1991 until October 2002 he was our Chief Financial Officer. Mr. Ehrlich has been
a director of Eldat,  Ltd., an Israeli  manufacturer of electronic shelf labels,
since June 1999.  Since 1987,  Mr.  Ehrlich has served as a director


                                     - 59 -
<PAGE>

of PSC Inc.  ("PSCX"),  a  manufacturer  and  marketer  of laser  diode bar code
scanners,  and, since April 1997, Mr. Ehrlich has been the chairman of the board
of PSCX.  PSCX filed a voluntary  petition  for relief  under  Chapter 11 of the
Bankruptcy Code in November 2002; its  pre-negotiated  plan of reorganization is
awaiting  confirmation by the Bankruptcy  Court. Mr. Ehrlich received a B.S. and
J.D. from Columbia University in New York, New York.

     Steven  Esses has been a director  since July 2002 and our  Executive  Vice
President  since January 2003 and Chief  Operating  Officer since February 2003.
From 2000 till 2002, Mr. Esses was a principal with Stillwater Capital Partners,
Inc., a New  York-based  investment  research and advisory  company (hedge fund)
specializing in alternative investment  strategies.  During this time, Mr. Esses
also acted as an  independent  consultant to new and existing  businesses in the
areas of finance and business development.  From 1995 to 2000, Mr. Esses founded
Dunkin'  Donuts in Israel and held the  position of Managing  Director  and CEO.
Prior  thereto,  he was  Director of Retail  Jewelry  Franchises  with  Hamilton
Jewelry,  and before that he served as Executive  Director of Operations for the
Conway Organization, a major off-price retailer with 17 locations.

     Avihai Shen has been our Vice President - Finance since  September 1999 and
our Chief  Financial  Officer since  October  2002,  and served as our corporate
Secretary  from  September  1999  to  December  2000.  Mr.  Shen  was the CFO of
Commtouch  Software Ltd., an internet  company based in California that develops
e-mail  solutions,  from 1996 to early 1999, and worked  previously at Ernst and
Young in Israel.  Mr. Shen is a Certified  Public  Accountant  and has a B.A. in
Economics  from  Bar-Ilan  University  in Israel  and an M.B.A.  from the Hebrew
University of Jerusalem.

     Dr. Jay M. Eastman has been one of our directors since October 1993.  Since
November 1991, Dr. Eastman has served as President and Chief  Executive  Officer
of Lucid,  Inc., which is developing  laser technology  applications for medical
diagnosis  and  treatment.  Dr.  Eastman  has served as a director of PSCX since
April  1996 and served as Senior  Vice  President  of  Strategic  Planning  from
December 1995 through October 1997.  PSCX filed a voluntary  petition for relief
under Chapter 11 of the Bankruptcy  Code in November  2002;  its  pre-negotiated
plan of  reorganization  is awaiting  confirmation by the Bankruptcy  Court. Dr.
Eastman is also a director of  Dimension  Technologies,  Inc.,  a developer  and
manufacturer  of 3D displays  for computer and video  displays,  and  Centennial
Technologies Inc., a manufacturer of PCMCIA cards. From 1981 until January 1983,
Dr. Eastman was Director of the  University of Rochester's  Laboratory for Laser
Energetics,  where he was a member of the staff from September 1975 to 1981. Dr.
Eastman holds a B.S. and a Ph.D.  in Optics from the  University of Rochester in
New York.

     Jack E.  Rosenfeld  has been one of our directors  since October 1993.  Mr.
Rosenfeld is also a director of Maurice Corporation and a director of PSCX. PSCX
filed a voluntary petition for relief under Chapter 11 of the Bankruptcy Code in
November  2002;  its   pre-negotiated   plan  of   reorganization   is  awaiting
confirmation by the Bankruptcy  Court.  Since April 1998, Mr. Rosenfeld has been
President and Chief Executive Officer of Potpourri  Collection Inc., a specialty
catalog direct marketer. Mr. Rosenfeld was President and Chief Executive Officer
of Hanover  Direct,  Inc.,  formerly Horn & Hardart Co., which operates a direct
mail marketing  business,  from September 1990 until December 1995, and had been
President and Chief Executive Officer of its direct marketing subsidiary,  since
May 1988. Mr. Rosenfeld holds a B.A. from Cornell University in Ithaca, New York
and an LL.B. from Harvard University in Cambridge, Massachusetts.

                                     - 60 -
<PAGE>

     Lawrence M. Miller was elected to the board of directors in November  1996.
Mr.  Miller  has  been a  senior  partner  in the  Washington  D.C.  law firm of
Schwartz,  Woods and Miller  since 1990.  He served from August 1993 through May
1996 as a member of the board of  directors of The Phoenix  Resource  Companies,
Inc., a publicly  traded energy  exploration  and production  company,  and as a
member of the Audit and Compensation  Committee of that board.  That company was
merged  into  Apache  Corporation  in May 1996.  Mr.  Miller  holds a B.A.  from
Dickinson  College in Carlisle,  Pennsylvania and a J.D. with honors from George
Washington  University  in  Washington,  D.C. He is a member of the  District of
Columbia bar.

     Leon S. Gross was elected to the board in March 1997 and resigned  from the
board in March 2003. Mr. Gross' principal occupation for the past five years has
been as a private  investor  in various  publicly-held  corporations,  including
Electric Fuel.

     Bert W. Wasserman was added to the board in February  2003.  Mr.  Wasserman
served as Executive Vice President and Chief  Financial  Officer of Time Warner,
Inc. from 1990 until his retirement in 1995 and served on the Board of Directors
of Time Warner, Inc. and its predecessor company,  Warner  Communications,  Inc.
from 1981 to 1995. He joined Warner Communications, Inc. in 1966 and had been an
officer of that  company  since 1970.  Mr.  Wasserman  is  director  off several
investment  companies in the Dreyfus  Family of Funds.  He is also a director of
Malibu Entertainment,  Inc., Lillian Vernon Corporation,  and PSCX. PSCX filed a
voluntary  petition  for  relief  under  Chapter  11 of the  Bankruptcy  Code in
November  2002;  its   pre-negotiated   plan  of   reorganization   is  awaiting
confirmation by the Bankruptcy Court.

     Committees of the Board of Directors

     Our board of directors has an Audit Committee. a Compensation  Committee, a
Nominating Committee and an Executive Committee.

     Created in December 1993,  the purpose of the Audit  Committee is to review
with management and our independent auditors the scope and results of the annual
audit,  the nature of any other services  provided by the independent  auditors,
changes  in  the  accounting  principles  applied  to  the  presentation  of our
financial  statements,  and any  comments  by the  independent  auditors  on our
policies  and  procedures  with  respect to internal  accounting,  auditing  and
financial  controls.  In  addition,  the Audit  Committee  is  charged  with the
responsibility  for making decisions on the engagement of independent  auditors.
As required by law,  the Audit  Committee  operates  pursuant to a charter.  The
Audit Committee consists of Messrs.  Wasserman (Chair), Miller and Rosenfeld. We
have determined that Mr. Wasserman  qualifies as an "audit  committee  financial
expert" under applicable SEC and Nasdaq regulations.  Mr. Wasserman,  as well as
all the other members of the Audit Committee,  is "independent," as independence
is  defined  in Rule  4200(a)(15)  of the  National  Association  of  Securities
Dealers'  listing  standards and under Item  7(d)(3)(iv)  of Schedule 14A of the
proxy rules under the Exchange Act.

     The  Compensation  Committee,  also  created in December  1993,  recommends
annual  compensation  arrangements  for the Chief  Executive  Officer  and Chief
Financial Officer and reviews annual compensation  arrangements for all officers
and significant employees.  All Committee


                                     - 61 -
<PAGE>

members are "disinterested persons" as that term is used in Rule 16b-3 under the
Securities Exchange Act of 1934, as amended. The Compensation Committee consists
of Dr. Eastman (Chair) and Messrs. Wasserman and Rosenfeld.

     The Executive Committee,  created in July 2001, exercises the powers of the
Board during the intervals  between  meetings of the Board, in the management of
the  property,  business  and affairs of the  Company  (except  with  respect to
certain extraordinary transactions). The Executive Committee consists of Messrs.
Ehrlich (Chair), Miller and Esses.

     The Nominating  Committee,  created in March 2003,  identifies and proposes
candidates to serve as members of the Board of Directors.  Proposed nominees for
membership on the Board of Directors submitted in writing by stockholders to the
Secretary  of the Company  will be brought to the  attention  of the  Nominating
Committee.  The Nominating Committee consists of Mr. Miller (Chair), Dr. Eastman
and Mr. Rosenfeld, all of whom are independent non-employee directors.

     Voting Agreements

     Messrs.  Gross, Ehrlich and Harats are parties to a Voting Rights Agreement
dated  September  30,  1996,  as amended,  pursuant to which each of the parties
agrees to vote the  shares of our common  stock held by that  person in favor of
the election of Messrs. Ehrlich, Harats and Miller until the earlier of December
28, 2004 or our fifth annual  meeting of  stockholders  after December 28, 1999.
Mr. Harats resigned as a director in 2002;  however,  we believe that Mr. Harats
must continue to comply with the terms of this agreement.

     Pursuant  to the  terms of the  Asset  Purchase  Agreement  under  which we
purchased the assets of IES, the seller  agreed,  for a period of the greater of
five (5) years from  August 2, 2002 or all times that the seller  holds at least
500,000  of our  shares,  to vote such  shares in favor of: (i)  Messrs.  Yehuda
Harats and Robert S. Ehrlich,  and (ii) all proposals of management  (except for
proposals  regarding the nomination of  individuals  other than Yehuda Harats or
Robert S.  Ehrlich  to the  Board of Buyer)  that  relate  to (i)  operation  or
management of the business in the ordinary  course and not against our interest,
or (ii) acquisitions, financings, stock option plans or business development and
not against our interest. In light of Mr. Harats's resignation from the Board of
Directors in 2002,  we do not believe that IES continues to be bound to vote for
Mr. Harats, but will continue to be bound to vote for Mr. Ehrlich.

     Director Compensation

     Non-employee  members  of our  board of  directors  are paid  $1,000  (plus
expenses) for each board of directors  meeting attended and $500 (plus expenses)
for each meeting of a committee of the board of directors attended. In addition,
we have adopted a  Non-Employee  Director  Stock  Option Plan  pursuant to which
non-employee  directors  receive an initial grant of options to purchase  25,000
shares of our common stock upon the effective date of such plan or upon the date
of his or her election as a director.  Thereafter,  non-employee  directors will
receive  options to purchase  10,000 shares of our common stock for each year of
service on the board. All such options are granted at fair market value and vest
ratably over three years from the date of the grant.

                                     - 62 -
<PAGE>

     Significant Employees

     Our  significant  employees as of February  28, 2003,  and their ages as of
December 31, 2002, are as follows:

<TABLE>
<CAPTION>
                       Name                  Age                            Position
                       ----                  ---                            --------
<S>                                          <C>
        Jonathan Whartman.................   48  Senior Vice President
        Dr. Neal Naimer...................   44  Vice President and Chief Technology Officer
        Yoel Gilon........................   50  Vice President - Electric Vehicle Technologies
        Yaakov Har-Oz.....................   45  Vice President, General Counsel and Secretary
        Danny Waldner.....................   31  Controller
        Ron Putt..........................   55  Director of Technology, New Products
        Conrad F. Mir.....................   34  Director of Investor Relations
        Greg Otte.........................   43  President, IES Interactive Training, Inc.
        Yosef Bar.........................   60  General Manager, MDT Protective Industries
</TABLE>


     Jonathan  Whartman has been Senior Vice President  since December 2000, and
Vice President of Marketing  from 1994 to December  2000.  From 1991 until 1994,
Mr.  Whartman  was our  Director  of Special  Projects.  Mr.  Whartman  was also
Director of Marketing of Amtec from its  inception in 1989 through the merger of
Amtec into Arotech.  Before joining Amtec,  Mr.  Whartman was Manager of Program
Management at Luz,  Program  Manager for desk-top  publishing at ITT Qume in San
Jose,  California  from 1986 to 1987,  and Marketing  Director at Kidron Digital
Systems, an Israeli computer developer,  from 1982 to 1986. Mr. Whartman holds a
B.A. in Economics and an M.B.A. from the Hebrew University, Jerusalem, Israel.

     Dr.  Neal  Naimer has been a Vice  President  since June 1997 and our Chief
Technology  Officer since December  2002. Dr. Naimer was previously  Director of
Electrode  Engineering of our Air Electrode  development  program.  From 1987 to
1989, he was the Manager of the Chemical Vapor  Deposition (Thin Films) Group at
Intel Electronics in Jerusalem,  and was Project Manager of the photo voltaic IR
detector development program at Tadiran  Semiconductor Devices in Jerusalem from
1984 to 1987. Dr. Naimer was educated at University College of London,  England,
where he received  his B.Sc.  in Chemical  Engineering  and a Ph.D.  in Chemical
Engineering.

     Yoel  Gilon has been our Vice  President  - Electric  Vehicle  Technologies
since  2001;   prior  to  that,  he  served  as  Director  of  Electric  Vehicle
Technologies at our Beit Shemesh facility since joining us in 1994. From 1991 to
1994, Mr. Gilon was Project Development Manager at Ormat Industries. Previously,
Mr.  Gilon  was  Vice  President  of  System  Engineering   Development  at  Luz
Industries.  Mr. Gilon holds a B.Sc. in  Mathematics  and Physics and a M.Sc. in
Mathematics  from the Hebrew  University of  Jerusalem.  He also holds a B.A. in
Fine Arts from the Bezalel Academy in Jerusalem.

     Yaakov Har-Oz has served as our Vice  President  and General  Counsel since
October 2000 and as our corporate Secretary since December 2000. From 1994 until
October  2000,  Mr. Har-Oz was a partner in the Jerusalem law firm of Ben-Ze'ev,
Hacohen & Co. Prior to moving to


                                     - 63 -
<PAGE>

Israel in 1993, he was an  administrative  law judge and in private law practice
in New York.  Mr.  Har-Oz  holds a B.A.  from  Brandeis  University  in Waltham,
Massachusetts  and a J.D. from  Vanderbilt Law School (where he was an editor of
the law review) in Nashville,  Tennessee. He is a member of the New York bar and
the Israel Chamber of Advocates.

     Danny  Waldner  has served as our  Controller  since  March 2000 and as our
chief accounting  officer since October 2002. Prior thereto,  Mr. Waldner was an
accountant  at KPMG in Israel  from 1996 to 2000.  Mr.  Waldner  is a  Certified
Public Accountant and holds a B.A. in Accounting and Business Administration and
an M.B.A. from the Rishon Lezion College of Administration in Israel.

     Ron Putt has been  Director  of  Technology,  New  Products  at our  Auburn
research  and  development  facility  since April 1997.  From October 1995 until
April  1997,  Mr.  Putt  worked  as  a  consultant  for  Auburn  University  and
Electro-Energy Inc. From April 1990 to October 1995, Mr. Putt was Vice President
at MATSI,  Inc.  Mr.  Putt holds  bachelor's  and  master's  degrees in Chemical
Engineering  from the  University  of Delaware and  University  of California at
Berkeley.

     Conrad F. Mir was hired as the Company's  Director of Investor Relations in
February  2002.  From April 1999 until  February 2002, Mr. Mir was a Senior Vice
President of the Anne McBride Company, an investor  communications firm based in
New York. From February 1997 until March 1999, Mr. Mir was the Director of Small
Cap and a corporate strategist with D.F. King & Co., a shareholder relations and
proxy  solicitation  firm based in New York. Prior to that, Mr. Mir was a Senior
Partner of the Mirad Group, a strategic consulting firm based in New Jersey. Mr.
Mir holds a bachelor's degree in Economics and English from New York University.

     Greg Otte has served as IES's  President  since January 2001.  From 1994 to
2001, Mr. Otte was in charge of IES's North American marketing efforts. Prior to
this, he was responsible  for sales,  product  placement and national  contracts
with  Tuxall  Uniform  &  Equipment,  a  national  supplier  of law  enforcement
equipment.  Mr. Otte holds a bachelor's  degree in Marketing from the University
of Colorado.

     Yosef Bar established MDT Protective Industries in 1989 as one of the first
bulletproofing  companies in Israel.  Under the  direction of Mr. Bar, MDT moved
from its initial  emphasis on vandalism  protection to  bulletproofing  not just
windshields  but the entire  vehicle,  as a result of which MDT became  Israel's
leader in the  state-of-the art lightweight  armoring of vehicles,  ranging from
light  tactical  vehicles to  passenger  vehicles.  Mr. Bar served in the Israel
Defense  Forces,  reaching  the  rank of  Lieutenant  Colonel  of the  paratroop
regiment with over 1,000 jumps to his credit.  He also  participated  in several
anti-terrorism courses.

     Section 16(a) Beneficial Ownership Reporting Compliance

     Under the securities laws of the United States,  our directors,  certain of
our officers  and any persons  holding more than ten percent of our common stock
are  required to report  their  ownership of our common stock and any changes in
that ownership to the Securities and Exchange Commission. Specific due dates for
these reports have been established and we are required to report any failure to
file by these dates during 2002. We are not aware of any instances  during 2002,
not previously  disclosed by us, where such  "reporting  persons" failed to file
the required reports on or before the specified dates.


                                     - 64 -
<PAGE>

ITEM 11. EXECUTIVE COMPENSATION

Cash and Other Compensation

     The following table shows the  compensation  that we paid (or accrued),  in
connection  with  services  rendered  for  2002,  2001 and  2000,  to our  Chief
Executive  Officer and the other highest paid executive  officer (of which there
was one) who were  compensated  at a rate of more than  $100,000  in salary  and
bonuses  during the year  ended  December  31,  2002  (collectively,  the "Named
Executive Officers").

<TABLE>
<CAPTION>
                                    SUMMARY COMPENSATION TABLE(1)

                                                                                         Long Term
                                                        Annual Compensation             Compensation
                                            ----------------------------------------------------------
    Name and Principal Position      Year       Salary        Bonus          Other       Securities      All Other
                                                                            Annual       Underlying
                                                                         Compensation     Options      Compensation
                                                                         ------------     -------      ------------
<S>                                  <C>     <C>           <C>           <C>         <C>         <C>  <C>
Yehuda Harats*                       2002    $   219,962   $    32,380(2)$    14,687 (3)    112,500(4)$    (602,129)(5)
President, Chief Executive
  Officer and director               2001    $   248,681   $    99,750   $    19,145        616,000   $     580,911
                                     2000    $   245,560   $    82,380   $     8,083        400,000   $     170,804

Robert S. Ehrlich
Chairman of the Board,
  President, Chief Executive
  Officer and director**             2002    $   202,962   $    99,750(2)$    15,232(3)     262,500(6)$     194,142(7)
                                     2001    $   211,644   $    84,000   $    17,201        521,000   $     369,754
                                     2000    $   245,574   $    82,380   $     7,146        400,000   $     247,185
</TABLE>


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

*    Mr. Harats's employment with us terminated on October 23, 2002.
**   Until October 23, 2002, Mr. Ehrlich served as our Chairman of the Board and
     Chief Financial Officer.
(1)  We paid the  amounts  reported  for each  named  executive  officer in U.S.
     dollars and/or New Israeli Shekels (NIS).  We have translated  amounts paid
     in NIS into U.S.  dollars at the exchange rate of NIS into U.S.  dollars at
     the time of payment or accrual.
(2)  We paid each of Messrs.  Ehrlich and Harats  $32,380 during 2002 on account
     of the  2002  bonuses  to  which  they  were  entitled  according  to their
     contracts. Additionally, we accrued $67,370 for Mr. Ehrlich in satisfaction
     of the  remainder  of the bonus to which he was  entitled  according to his
     contract.  The additional bonus to which Mr. Harats was entitled  according
     to the terms of his contract was included in the sums that we are obligated
     to pay Mr.  Harats  under the terms of our  severance  agreement  with him,
     which sums are  detailed in footnote (5) below.  During 2002,  we also paid
     $99,750 to Mr.  Harats in full payment of his 2001 bonus and $84,000 to Mr.
     Ehrlich in full payment of his 2001 bonus.
(3)  Represents  the costs of taxes  paid by the  Named  Executive  Officer  and
     reimbursed by us in accordance with Israeli tax regulations.
(4)  Of these  amounts,  112,500  options  issued in 2002 were in exchange for a
     total  of  $45,000  in  salary  waived  by  Mr.  Harats   pursuant  to  the
     options-for-salary  program  instituted  by us beginning  in May 2001,  and
     100,000  options  issued in 2001 were in exchange for a total of $40,000 in
     salary waived by Mr. Harats during 2001 pursuant to the same program.

                                     - 65 -
<PAGE>

(5)  Of this amount,  $22,735  consists of our payments during 2002 to a pension
     fund that provides a savings plan, insurance and severance pay benefits and
     an  education  fund  (as  is  customary  in  Israel).  Additionally,   $654
     represents  other  benefits that we paid to Mr. Harats in 2002, and $36,500
     represents a loan forgiveness  during 2002 in the context of our settlement
     with Mr. Harats. The remainder represents the benefit we accrued due to the
     difference  between  the sum we had accrued on our books for amounts due to
     Mr.  Harats upon his leaving our employ  ($1,212,939)  and the sums that we
     agreed  to pay to or on  behalf  of  Mr.  Harats  under  the  terms  of our
     severance  agreement with him ($550,920).  Under the terms of our severance
     agreement with Mr. Harats, we will pay this sum of $550,920 to or on behalf
     of Mr. Harats, plus an additional $178,579 representing repayment of a loan
     from Mr. Harats,  in accordance  with the following  schedule:  $238,833 in
     2003, $245,333 in 2004, and $245,333 in 2005.
(6)  Of these  amounts,  262,500  options  issued in 2002 were in exchange for a
     total of $105,000 in salary waived by Mr.  Ehrlich  during 2002 pursuant to
     the options-for-salary  program instituted by us beginning in May 2001, and
     80,000  options  issued in 2001 were in exchange  for a total of $32,000 in
     salary waived by Mr. Ehrlich during 2001 pursuant to the same program.
(7)  Of this amount,  $109,935  represents  our accrual for  severance  pay that
     would be payable to Mr.  Ehrlich  upon a "change of  control" of Arotech or
     upon the  occurrence  of  certain  other  events;  $17,571  represents  the
     increase  of the  accrual  for sick leave and  vacation  redeemable  by Mr.
     Ehrlich;  $43,725  represents the increase of our accrual for severance pay
     that would be payable to Mr.  Ehrlich under the laws of the State of Israel
     if we were to terminate his employment; and $22,256 represents our payments
     and accruals to pension and education funds. Additionally,  $654 represents
     other benefits that we paid to Mr. Ehrlich in 2002.

Stock Options

         The table below sets forth information with respect to stock options
granted to the Named Executive Officers for the fiscal year 2002.

                        Option Grants in Last Fiscal Year

<TABLE>
<CAPTION>
                              Individual Grants
                         ----------------------------
                         Number of  % of Total Options                                Potential Realizable Value
                         Securities      granted to     Exercise                        of Assumed Annual Rates
                         Underlying      Employees      or Base                       of Stock Price Appreciation
                         Options         in Fiscal      Price          Expiration         for Option Term(1)
            Name          Granted           Year          ($/Sh)         Date           5% ($)          10% ($)
      ---------------    -----------    -------------    -----------    ----------    -------------    -------------
<S>                        <C>                <C>          <C>           <C>            <C>               <C>
Yehuda Harats..........    37,500(2)          2.3%         $1.42         4/1/12         $ 33,489          $84,887
                           37,500(2)          2.3%         $0.73         7/1/12         $ 17,216          $43,629
                           37,500(2)          2.3%         $0.85         10/1/12        $ 20,046          $50,801
Robert S. Ehrlich......    65,625(2)          4.0%         $1.42         4/1/12         $ 58,605         $148,552
                           65,625(2)          4.0%         $0.73         7/1/12         $ 30,128          $76,350
                           65,625(2)          4.0%         $0.85         10/1/12        $ 35,081          $88,901
                           65,625(2)          4.0%         $0.61         1/1/13         $ 25,175          $63,799
</TABLE>


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

(1)  The potential  realizable  value  illustrates  value that might be realized
     upon exercise of the options  immediately  prior to the expiration of their
     terms,  assuming the  specified  compounded  rates of  appreciation  of the
     market  price  per  share  from the date of grant to the end of the  option
     term.  Actual gains,  if any, on stock option exercise are dependent upon a
     number of factors, including the future performance of the common stock and
     the  timing  of  option  exercises,  as  well  as the  executive  officer's
     continued employment through the vesting period. The gains shown are net of
     the option  exercise  price,  but do not include  deductions  for taxes and
     other  expenses  payable  upon the  exercise  of the  option or for sale of
     underlying shares of common stock. The 5% and 10% rates of appreciation are
     mandated by the rules of the Securities and Exchange  Commission and do not
     represent our estimate or  projection  of future  increases in the price of
     our stock.  There can be no  assurance  that the amounts  reflected in this
     table will be  achieved,  and unless the market  price of our common  stock
     appreciates over the option term, no value will be realized from the option
     grants made to the executive officers.

                                     - 66 -
<PAGE>

(2)  Granted in  exchange  for a waiver of salary  under our  options-for-salary
     program.

     The table below sets forth  information  for the Named  Executive  Officers
with respect to aggregated  option  exercises during fiscal 2002 and fiscal 2002
year-end option values.

          Aggregated Option Exercises and Fiscal Year-End Option Values


<TABLE>
<CAPTION>
                                                          Number of Securities             Value of Unexercised
                        Shares                           Underlying Unexercised            In-the-Money Options
                      cquired on         Value         Options at Fiscal Year End          at Fiscal-Year-End(1)
        Name         A Exercise        Realized        Exercisable   Unexercisable     Exercisable     Unexercisable
 --------------------------------- ------------------ -------------- --------------- ---------------- -----------------
<S>                      <C>        <C>                  <C>             <C>          <C>              <C>
Yehuda Harats........    50,000     $     10,500.00      1,076,501       116,666      $          0     $          0
Robert S. Ehrlich....    50,000     $     10,500.00        868,401        91,666      $      1,969     $          0
</TABLE>

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

(1)  Options that are "in-the-money" are options for which the fair market value
     of the  underlying  securities on December 31, 2002 exceeds the exercise or
     base price of the option.

Employment Contracts

     In October 2002, we announced that Yehuda Harats, the president and CEO and
a member of our Board,  had decided to resign from his  positions  with Electric
Fuel and its  subsidiaries  in order to  pursue  other  interests.  The Board of
Directors  selected  Robert S.  Ehrlich,  Chairman  of the Board,  to be the new
President and CEO. In connection  with the  resignation  of Mr.  Harats,  we are
required to pay him certain amounts due to him by law and under the terms of his
employment agreement.  In December 2002, we came to an agreement with Mr. Harats
whereby we agreed to pay him $729,500 through the end of 2005 in satisfaction of
all our contractual and legal severance and other  obligations to him, which sum
was  approximately  one-half  of the  amount  we had  accrued  on our  financial
statements  in  connection  with  such  obligations.  Our debt to Mr.  Harats is
secured by certain of our assets in Israel.

     Mr.  Ehrlich is party to an  employment  agreement  with us effective as of
January 1, 2000. The term of this employment  agreement  expires on December 31,
2002,  but is  extended  automatically  for  additional  terms of two years each
unless either Mr. Ehrlich or we terminate the agreement sooner. Additionally, we
have the right,  on at least 90 days'  notice to Mr.  Ehrlich,  unilaterally  to
extend the initial term of his agreement  for a period of one year (i.e.,  until
December 31, 2003). We have exercised this right,  and accordingly the automatic
two-year  extensions  will begin from  December 31, 2003 instead of December 31,
2002.

     The employment  agreement  provides for a base salary of $20,000 per month,
as adjusted annually for Israeli inflation and devaluation of the Israeli shekel
against the U.S. dollar, if any.  Additionally,  the board may at its discretion
raise Mr. Ehrlich's base salary. In January 2002, the board raised Mr. Ehrlich's
base  salary to $23,750 per month  effective  January 1, 2002;  Mr.  Ehrlich has
elected to waive this  increase  in his salary and to receive  options  instead,
under our salary for options program.

     The employment agreement provides that if the results we actually attain in
a given year are at least 80% of the amount we budgeted at the  beginning of the
year, we will pay a bonus,  on a sliding scale,  in an amount equal to a minimum
of 35% of Mr.  Ehrlich's  annual base salary then in effect,  up to a maximum of
90% of his annual base  salary then in effect if the results we actually  attain
for the year in  question  are 120% or more of the  amount  we  budgeted  at the
beginning of the year.

                                     - 67 -
<PAGE>

     The employment agreement also contains various benefits customary in Israel
for senior executives  (please see "Item 1. Business - Employees,"  above),  tax
and financial planning expenses and an automobile,  and contain  confidentiality
and non-competition covenants. Pursuant to the employment agreements, we granted
Mr. Ehrlich demand and  "piggyback"  registration  rights covering shares of our
common stock held by him.

     We can terminate Mr. Ehrlich's  employment  agreement in the event of death
or disability or for "Cause"  (defined as conviction of certain crimes,  willful
failure to carry out directives of our board of directors or gross negligence or
willful misconduct).  Mr. Ehrlich has the right to terminate his employment upon
a change in our  control  or for "Good  Reason,"  which is  defined  to  include
adverse changes in employment status or compensation,  our insolvency,  material
breaches and certain other events.  Additionally,  Mr. Ehrlich may retire (after
age 68) or terminate his  agreement  for any reason upon 150 days' notice.  Upon
termination of employment,  the employment agreement provides for payment of all
accrued and unpaid  compensation,  and (unless we have  terminated the agreement
for Cause or Mr. Ehrlich has  terminated  the agreement  without Good Reason and
without giving us 150 days' notice of  termination)  bonuses due for the year in
which  employment is terminated  and severance pay in the amount of three years'
base salary (or, in the case of  termination by Mr. Ehrlich on 150 days' notice,
a lump sum payment of $520,000). Furthermore, certain benefits will continue and
all outstanding options will be fully vested.

     Other employees have entered into individual employment agreements with us.
These agreements govern the basic terms of the individual's employment,  such as
salary,  vacation,  overtime  pay,  severance  arrangements  and pension  plans.
Subject to Israeli  law,  which  restricts  a  company's  right to  relocate  an
employee to a work site  farther than sixty  kilometers  from his or her regular
work site,  we have  retained the right to transfer  certain  employees to other
locations  and/or  positions  provided  that such  transfers  do not result in a
decrease in salary or benefits.  All of these agreements also contain provisions
governing the  confidentiality  of  information  and  ownership of  intellectual
property learned or created during the course of the employee's  tenure with us.
Under the  terms of these  provisions,  employees  must  keep  confidential  all
information  regarding our operations  (other than information  which is already
publicly  available)  received or learned by the  employee  during the course of
employment.  This  provision  remains in force for five years after the employee
has left our service.  Further,  intellectual property created during the course
of the employment relationship belongs to us.

     A number of the  individual  employment  agreements,  but not all,  contain
non-competition  provisions  which  restrict  the  employee's  rights to compete
against us or work for an enterprise  which competes against us. Such provisions
remain  in force  for a period of two  years  after  the  employee  has left our
service.

     Under the laws of Israel,  an employee of ours who has been  dismissed from
service, died in service, retired from service upon attaining retirement age, or
left due to poor health,  maternity  or certain  other  reasons,  is entitled to
severance  pay at the rate of one month's  salary for each year of  service.  We
currently fund this  obligation by making monthly  payments to approved  private
provident  funds  and by  its  accrual  for  severance  pay in the  consolidated
financial  statements.  See Note 2.q of the Notes to the Consolidated  Financial
Statements.

                                     - 68 -
<PAGE>

Compensation Committee Interlocks and Insider Participation

     The  Compensation  Committee of our board of directors  for the 2002 fiscal
year consisted of Dr. Jay M. Eastman,  Jack E. Rosenfeld and Lawrence M. Miller.
None of the members have served as our officers or employees.

     Robert S.  Ehrlich,  our Chairman and Chief  Financial  Officer,  serves as
Chairman and a director of PSCX,  for which Dr.  Eastman  serves as director and
member of the Executive  and Strategic  Planning  Committees  and Mr.  Rosenfeld
serves as director and member of the Executive Compensation Committees.


ITEM 12.  SECURITY  OWNERSHIP OF CERTAIN  BENEFICIAL  OWNERS AND  MANAGEMENT AND
          RELATED STOCKHOLDER MATTERS

Security Ownership of Certain Beneficial Owners and Management

     The  following  table  sets  forth   information   regarding  the  security
ownership,  as of February 28, 2003, of those persons  owning of record or known
by us to own  beneficially  more than 5% of our common  stock and of each of our
Named Executive  Officers and directors,  and the shares of common stock held by
all of our directors and executive officers as a group.

<TABLE>
<CAPTION>
                                                                                           Percentage of Total
        Name and Address of Beneficial Owner(1)           Shares Beneficially Owned(2)(3) Shares Outstanding(3)
        ---------------------------------------           ------------------------------- ---------------------
<S>                                                               <C>                            <C>
Leon S. Gross...........................................          4,036,036(4)(11)               11.6%
Austin W. Marxe and David M. Greenhouse(5)..............          2,843,597(5)                    8.0%
IES Electronics, Inc. ..................................          2,188,971(6)                    6.2%
Robert S. Ehrlich.......................................          1,556,567(7)(12)                4.3%
Steven Esses............................................                  0                         *
Avihai Shen.............................................             92,381(8)                      *
Dr. Jay M. Eastman......................................             65,001(9)                      *
Jack E. Rosenfeld.......................................             67,001(10)                     *
Lawrence M. Miller......................................            525,080(11)                   1.5%
All of our directors and executive officers as a group
(7 persons**)...........................................          6,342,066(13)                  17.5%
</TABLE>


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

  *  Less than one percent.

  ** Including Mr. Gross, who resigned as a director on March 17, 2003.

(1)  Unless  otherwise noted, the address of each beneficial owner is in care of
     Arotech Corporation, 632 Broadway, New York, New York 10012.

(2)  Unless  otherwise  indicated  in these  footnotes,  each of the  persons or
     entities named in the table has sole voting and sole investment  power with
     respect to all shares shown as beneficially  owned by that person,  subject
     to applicable community property laws.

(3)  For  purposes of  determining  beneficial  ownership  of our common  stock,
     owners of options  exercisable  within sixty days are  considered to be the
     beneficial  owners of the shares of common stock for which such  securities
     are exercisable.  The percentage  ownership of the outstanding common stock
     reported  herein  is based on the  assumption  (expressly  required  by the
     applicable  rules of the Securities and Exchange  Commission) that only the
     person whose  ownership is being  reported has  converted  his options into
     shares of common stock.


                                     - 69 -
<PAGE>


(4)  Includes  453,165  shares  held by Leon S. Gross and  Lawrence M. Miller as
     co-trustees  of the Rose Gross  Charitable  Foundation,  and 35,001  shares
     issuable upon exercise of options exercisable within 60 days.

(5)  Consists  of  2,055,718  shares and  787,879  warrants.  Of these  amounts,
     916,027 shares and 315,151  warrants are owned by Special  Situations  Fund
     III, L.P., a Delaware  limited  partnership  ("Special Fund III"),  437,273
     shares and 218,182 warrants are owned by Special  Situations Private Equity
     Fund, L.P., a Delaware  limited  partnership  ("SSPE"),  331,336 shares and
     109,091  warrants  are owned by Special  Situations  Cayman  Fund,  L.P., a
     Cayman Islands limited  partnership  ("Special  Cayman Fund"),  and 371,082
     shares and  145,455  warrants  are owned by Special  Situations  Technology
     Fund, L.P., a Delaware  limited  partnership  ("SST").  Austin W. Marxe and
     David M.  Greenhouse  are the  principal  owners  of MGP  Advisers  Limited
     Partnership, a Delaware limited partnership ("MGP"), MG Advisers, L.L.C., a
     New York limited liability company ("MG"), AWM Investment Company,  Inc., a
     Delaware corporation ("AWM"), and SST Advisers,  L.L.C., a Delaware limited
     liability company ("SSTA"). MGP is the general partner of Special Fund III.
     AWM is the general partner of MGP and the general partner of and investment
     adviser to the Cayman  Fund.  MG is the general  partner of and  investment
     adviser to SSPE. SSTA is the general  partner of and investment  adviser to
     SST.  Messrs.  Marxe and Greenhouse  share voting and investment power over
     the shares held by all of Special Fund III,  SSPE,  Special Cayman Fund and
     SST and are  principally  responsible  for the selection,  acquisition  and
     disposition  of the  portfolio  securities  by the  investment  advisers on
     behalf of their funds.  The address of Messrs.  Marxe and Greenhouse is 153
     East 53rd  Street,  New  York,  New York  10022.  All  information  in this
     footnote  and in the  text to which  this  footnote  relates  is based on a
     Schedule 13G filed with the Securities and Exchange  Commission on February
     11, 2002, as amended on February 13, 2003.

(6)  Includes 563,971 shares issuable upon conversion of a convertible note. IES
     Technologies   Inc.  is  a   wholly-owned   Delaware   subsidiary   of  IES
     Technologies,  Ltd.,  which is a  wholly-owned  Israeli  subsidiary  of IES
     Electronics   Industries,   Ltd.,  which  is  a   publicly-traded   Israeli
     corporation.  The  address of all of the above  entities  is 32  Ben-Gurion
     Street,  Ramat-Gan 52573,  Israel.  All information in this footnote and in
     the text to which this  footnote  relates is based on a Schedule  13D filed
     with the Securities and Exchange  Commission on August 12, 2002, as amended
     on October 28, 2002 and January 9, 2003.

(7)  Includes  52,568 shares held by an affiliated  corporation,  242,313 shares
     held in Mr. Ehrlich's  pension plan, 22,000 shares held by children sharing
     the same  household,  and 868,401 shares  issuable upon exercise of options
     exercisable within 60 days.

(8)  Includes 81,881 shares issuable upon exercise of options exercisable within
     60 days.

(9)  Consists of 65,001 shares  issuable  upon  exercise of options  exercisable
     within 60 days.

(10) Includes 65,001 shares issuable upon exercise of options exercisable within
     60 days.

(11) Includes  453,165  shares  held by Leon S. Gross and  Lawrence M. Miller as
     co-trustees  of the Rose Gross  Charitable  Foundation,  and 60,001  shares
     issuable upon exercise of options exercisable within 60 days.

(12) Messrs.  Gross, Ehrlich and Harats are parties to a Voting Rights Agreement
     pursuant  to which  each of the  parties  agrees to vote the  shares of our
     common  stock  held by that  person  in favor of the  election  of  Messrs.
     Ehrlich,  Harats and Miller  until the earlier of December  28, 2004 or our
     fifth annual  meeting of  stockholders  after December 28, 1999. Mr. Harats
     resigned as a director in 2002;  however,  we believe that Mr.  Harats must
     continue to comply with the terms of this agreement.  (13Includes 1,163,286
     shares issuable upon exercise of options exercisable within 60 days.

Securities Authorized for Issuance Under Equity Compensation Plans

     The  following  table sets forth  certain  information,  as of February 28,
2003, with respect to our 1991,  1993, 1995 and 1998 stock option plans, as well
as any other  stock  options and  warrants  previously  issued by us  (including
individual compensation arrangements) as compensation for goods and services:



                                     - 70 -
<PAGE>

                      Equity Compensation Plan Information

<TABLE>
<CAPTION>

                                                                                       Number of securities
                                                                                       remaining available
                                                                                       for future issuance
                              Number of securities                                         under equity
                                to be issued upon            Weighted-average           compensation plans
                                   exercise of              exercise price of         (excluding securities
                              outstanding options,         outstanding options,           reflected in
                               warrants and rights         warrants and rights              column (a))
       Plan Category                   (a)                         (b)                         (c)
---------------------------- ------------------------     -----------------------     -----------------------
<S>                                   <C>                          <C>                        <C>
Equity compensation                   3,554,105                    $2.66                      2,578,463
  plans approved by
  security holders.....
Equity compensation
  plans not approved
  by security
  holders(1)(2)........               2,726,506                    $2.16                      2,070,460
</TABLE>


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

(1)  In October  1998,  the Board of  Directors  adopted the 1998  Non-Executive
     Stock Option and Restricted  Stock Purchase Plan,  which under Delaware law
     did not require shareholder approval since directors and executive officers
     were  ineligible to  participate in it.  Participation  in the 1998 Plan is
     limited to those of our employees and consultants who are neither executive
     officers nor otherwise subject to Section 16 of the Securities Exchange Act
     of 1934,  as amended,  or Section  162(m) of the  Internal  Revenue Code of
     1986,  as  amended.  The  1998  Plan is  administered  by the  Compensation
     Committee of our Board of Directors,  which  determined  the  conditions of
     grant. Options issued under the 1998 Plan generally expire no more than ten
     years from the date of grant,  and incentive  options issued under the 1998
     Plan may be granted only at exercise  prices equal to the fair market value
     of our common stock on the date the option is granted. A total of 4,750,000
     shares of our common  stock were  originally  subject to the 1998 Plan,  of
     which  1,936,720  options  are  outstanding,   742,820  options  have  been
     exercised, and 2,070,460 remain available for grant.

(2)  For a  description  of the  material  features  of  grants of  options  and
     warrants other than options  granted under our employee stock option plans,
     please see Notes  12.g.2,  12.g.3,  12.g.4,  and 12.h.2 of the Notes to the
     Consolidated Financial Statements

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     Pursuant to a securities purchase agreement dated December 28, 1999 between
a group of purchasers,  including Mr. Gross, and us, Mr. Gross agreed that for a
period of five years,  neither he nor his  "affiliates" (as such term is defined
in the Securities Act) directly or indirectly or in conjunction  with or through
any  "associate"  (as such term is defined in Rule 12b-2 of the  Exchange  Act),
will (i)  solicit  proxies  with  respect to any capital  stock or other  voting
securities of ours under any  circumstances,  or become a  "participant"  in any
"election  contest" relating to the election of our directors (as such terms are
used in Rule 14a-11 of Regulation 14A of the Exchange  Act);  (ii) make an offer
for the  acquisition  of  substantially  all of our assets or  capital  stock or
induce or assist any other  person to make such an offer;  or (iii) form or join
any "group"  within the meaning of Section  13(d)(3)  of the  Exchange  Act with
respect to any of our capital stock or other voting  securities  for the purpose
of accomplishing  the actions  referred to in clauses (i) and (ii) above,  other
than pursuant to the voting rights agreement described below.


                                     - 71 -
<PAGE>

     In connection  with a stock  purchase  agreement  dated  September 30, 1996
between  Leon S.  Gross  and us,  we also  entered  into a  registration  rights
agreement with Mr. Gross dated  September 30, 1996,  setting forth  registration
rights  with  respect  to the  shares of  common  stock  issued to Mr.  Gross in
connection with the offering. These rights include the right to make two demands
for a shelf registration  statement on Form S-3 for the sale of the common stock
that  may,  subject  to  certain  customary  limitations  and  requirements,  be
underwritten.  In addition,  Mr. Gross was granted the right to  "piggyback"  on
registrations  of  common  stock in an  unlimited  number of  registrations.  In
addition,  under the  registration  rights  agreement,  Mr.  Gross is subject to
customary  underwriting lock-up requirements with respect to public offerings of
our securities.

     Pursuant  to a voting  rights  agreement  dated  September  30, 1996 and as
amended  December 10, 1997 and December 28, 1999,  between Mr. Gross,  Robert S.
Ehrlich,  Yehuda Harats and us,  Lawrence M. Miller,  Mr.  Gross's  advisor,  is
entitled  to be  nominated  to serve on our  board of  directors  so long as Mr.
Gross, his heirs or assigns retain at least 1,375,000 shares of common stock. In
addition,  under the voting rights agreement,  Mr. Gross and Messrs. Ehrlich and
Harats  agreed to vote and take all  necessary  action so that Messrs.  Ehrlich,
Harats and Miller  shall  serve as members of the board of  directors  until the
earlier of December 28, 2004 or our fifth annual meeting of  stockholders  after
December  28,  1999.  Mr.  Harats  resigned as a director in 2002;  however,  we
believe  that  Mr.  Harats  must  continue  to  comply  with  the  terms of this
agreement.

ITEM 14. CONTROLS AND PROCEDURES

     Within 90 days prior to the date of this annual report,  an evaluation (the
"Evaluation")  was performed under the supervision and with the participation of
our management,  including the CEO and CFO, of the  effectiveness  of the design
and operation of our disclosure  controls and procedures pursuant to Rule 13a-14
promulgated under the Securities  Exchange Act of 1934. Based on the Evaluation,
our  management,  including  the CEO and  CFO,  concluded  that  our  disclosure
controls  and  procedures  were  effective in timely  alerting  them to material
information  relating  to  us  (including  our  consolidated  subsidiaries)  and
required to be included in our periodic SEC filings.

     There have been no significant changes in our internal controls or in other
factors  since  the  date of the  Evaluation  that  could  significantly  affect
internal  controls  subsequent  to the  date of our  evaluation,  including  any
corrective  actions  with  regard  to  significant   deficiencies  and  material
weaknesses.


                                     - 72 -
<PAGE>


                                     PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

(a) The following documents are filed as part of this report:

     (1)  Financial  Statements - See Index to Financial  Statements  on page 58
          above.

     (2)  Financial  Statements Schedules - All schedules are omitted because of
          the absence of conditions under which they are required or because the
          required  information  is presented  in the  financial  statements  or
          related notes thereto.

     (3)  Exhibits - The  following  Exhibits are either filed  herewith or have
          previously been filed with the Securities and Exchange  Commission and
          are referred to and incorporated herein by reference to such filings:

Exhibit No.                              Description
-----------                              -----------

(8)3.1         Amended and Restated Certificate of Incorporation

(15)3.1.1      Amendment   to  our   Amended   and   Restated   Certificate   of
               Incorporation

(2)3.2         Amended and Restated By-Laws

(1)4           Specimen Certificate for shares of common stock, $.01 par value

(1)10.1        Option  Agreement  dated  October 29, 1992 between  Electric Fuel
               B.V.  ("EFBV") and Electric  Storage  Advanced  Technologies,  Sr
               ("ESAT")

(1)10.2        Sublicense Agreement dated May 20, 1993 between EFBV and ESAT

(1)10.3        Letter Agreement dated May 20, 1993 between EFBV and ESAT

(1)10.4        Notice of Edison's  assumption  of ESAT's  obligations  under the
               Sublicense Agreement with EFBV

(1)10.5        Letter of Intent  between us and Deutsche Post AG dated  November
               18, 1993

+(6)10.6       Amended  and  Restated  1993 Stock  Option and  Restricted  Stock
               Purchase Plan dated November 11, 1996

+(1)10.7.1     Form of Management Employment Agreements

+*(1)10.7.2    General Employee Agreements


*(1)10.8       Office of Chief Scientist documents

(2)10.8.1      Letter from the Office of Chief  Scientist to us dated January 4,
               1995

*(1)10.9       Lease Agreement dated December 2, 1992 between us and Har Hotzvim
               Properties Ltd.

*(1)10.10      Letter of Approval by the  Investment  Center of the  Ministry of
               Trade

*(2)10.11      Summary of the terms of the Lease Agreements dated as of November
               11,  1994,  November  11, 1994 and April 3, 1995  between EFL and
               Industries Building Company, Ltd.

+(3)10.12      Amended and Restated 1995 Non-Employee Director Stock Option Plan

(3)10.13       Letters of Approval  of Lines of Credit from First  International
               Bank of Israel Ltd. dated March 14, 1996 and March 18, 1996

(4)10.14       Stock Purchase  Agreement  between us and Leon S. Gross ("Gross")
               dated September 30, 1996



                                     - 73 -
<PAGE>


Exhibit No.                              Description
-----------                              -----------
(4)10.15       Registration   Rights  Agreement   between  us  and  Gross  dated
               September 30, 1996

(4)10.16       Voting Rights Agreement between us, Gross,  Robert S. Ehrlich and
               Yehuda Harats dated September 30, 1996

(5)10.17       Agreement between us and Walter Trux dated December 18, 1996

(5)10.18       Cooperation Agreement between The Israel Electric Corporation and
               EFL dated as of October 31, 1996

+(5)10.19      Amended and Restated Employment  Agreement dated as of October 1,
               1996 between us, EFL and Yehuda Harats

+(15)10.19.1   Second Amended and Restated Employment Agreement, effective as of
               January 1, 2000 between us, EFL and Yehuda Harats

+(15)10.19.2   Letter dated  January 12, 2001  amending  the Second  Amended and
               Restated  Employment  Agreement,  effective as of January 1, 2000
               between us, EFL and Yehuda Harats

+(5)10.20      Amended and Restated Employment  Agreement dated as of October 1,
               1996 between us, EFL and Robert S. Ehrlich

+(15)10.20.1   Second Amended and Restated Employment Agreement, effective as of
               January 1, 2000 between us, EFL and Robert S. Ehrlich

+(15)10.20.2   Letter dated  January 12, 2001  amending  the Second  Amended and
               Restated  Employment  Agreement,  effective as of January 1, 2000
               between us, EFL and Robert S. Ehrlich

(5)10.21       Agreement  dated  February 20, 1997 between STN ATLAS  Elektronik
               GmbH and EFL

+(6)10.22      Employment  Agreement  dated May 13, 1997  between  us, EFL,  and
               Joshua Degani

+(15)10.22.1   Amendment  dated January 12, 2001 to Employment  Agreement  dated
               May 13, 1997 between us, EFL, and Joshua Degani

+(6)10.23      Termination  Agreement  dated March 12, 1998  between us, EFL and
               Menachem Korall

(6)10.24       Consulting  Agreement  dated March 12, 1998  between us, EFL, and
               Shampi Ltd.

(6)10.25       Amendment No. 1 to the Voting Rights Agreement between us, Gross,
               Robert S. Ehrlich, and Yehuda Harats dated December 10, 1997

(6)10.26       Amendment No. 2 to the Registration  Rights Agreement between us,
               Gross,  Robert S. Ehrlich and Yehuda  Harats  dated  December 10,
               1997

(7)10.27       1998  Non-Executive  Stock Option and  Restricted  Stock Purchase
               Plan

(8)10.28       Distribution  Agreement  dated  December  31, 1998 between us and
               TESSCO Technologies Inc.

(9)10.29       Amendment to our Restated Certificate of Incorporation

(10)10.30      Securities  Purchase  Agreement  dated  December  28,  1999,  and
               exhibits  thereto,  by and among us and the Purchasers  listed on
               Exhibit A thereto

(10)10.31      Form of Warrant dated December 28, 1999



                                     - 74 -
<PAGE>

Exhibit No.                              Description
-----------                              -----------
(10)10.32      Amendment No. 1 to Voting  Rights  Agreement  dated  December 28,
               1999, by and between us, Leon S. Gross, Robert S. Ehrlich, Yehuda
               Harats and the  Purchasers  listed on Exhibit A to the Securities
               Purchase Agreement dated December 28, 1999

(11)10.33      Common  Stock  Purchase  Agreement  dated  January 5,  2000,  and
               exhibits  thereto,  by and among us and the Purchasers  listed on
               Exhibit A thereto

(12)10.34.1    Promissory Note dated January 3, 1998, from Yehuda Harats to us

(12)10.34.2    Amendment  dated April 1, 1998, to Promissory  Note dated January
               3, 1998 between Yehuda Harats and us

(12)10.35.1    Promissory  Note dated January 3, 1993, from Robert S. Ehrlich to
               us

(12)10.35.2    Amendment  dated April 1, 1998, to Promissory  Note dated January
               3, 1993 between  Robert S.  Ehrlich and us  (12)10.36  Promissory
               Note dated December 3, 1999, from Yehuda Harats to us

(12)10.37      Promissory Note dated December 3, 1999, from Robert S. Ehrlich to
               us

(12)10.38      Promissory Note dated February 9, 2000, from Yehuda Harats to us

(12)10.39      Promissory Note dated February 9, 2000, from Robert S. Ehrlich to
               us

(15)10.40      Share and Assets  Purchase  Agreement  dated March 15, 2000 among
               us,  Tadiran  Limited,  Tadiran  Batteries  Limited  and  Tadiran
               Electric Industries

(15)10.41      Stock Purchase Agreement dated March 15, 2000 between us and Koor
               Industries Ltd.

(15)10.42      Registration  Rights  Agreement  dated March 15, 2000 between us,
               Tadiran Limited and Koor Industries Ltd.

(15)10.43      Voting  Rights  Agreement  dated  March 15, 2000 among made as of
               March 15,  2000 by and among us,  Robert S.  Ehrlich  and  Yehuda
               Harats, Koor Industries Ltd. and Tadiran Limited

(13)10.44      Termination  and Release  Agreement  dated May 17, 2000 among us,
               Tadiran  Limited,  Tadiran  Batteries  Limited,  Tadiran Electric
               Industries  Corporation,  Koor Industries Ltd., Robert S. Ehrlich
               and Yehuda Harats

(13)10.45      Common Stock Purchase Agreement dated May 17, 2000 between us and
               Koor Industries Ltd.

(13)10.46      Registration  Rights  Agreement dated May 17, 2000 between us and
               Koor Industries Ltd.

(14)10.47      Securities  Purchase  Agreement  dated as of  November  17,  2000
               between us and Capital Ventures International

(14)10.48      Series  A Stock  Purchase  Warrant  issued  to  Capital  Ventures
               International dated November 17, 2000

(14)10.49      Series  B Stock  Purchase  Warrant  issued  to  Capital  Ventures
               International dated November 17, 2000

(14)10.50      Stock  Purchase  Warrant  issued to Josephthal & Co., Inc.  dated
               November 17, 2000

(15)10.51      Promissory Note dated January 12, 2001, from Yehuda Harats to us

(15)10.52      Promissory Note dated January 12, 2001, from Robert S. Ehrlich to
               us



                                     - 75 -
<PAGE>

Exhibit No.                              Description
-----------                              -----------
(15)10.53      Promissory Note dated January 12, 2001, from Joshua Degani to us

(15)10.54      Agreement  of Lease dated  December 5, 2000  between us as tenant
               and Renaissance 632 Broadway LLC as landlord

(16)10.55      Series  C Stock  Purchase  Warrant  issued  to  Capital  Ventures
               International dated May 3, 2001

(17)10.56      Form of Common Stock Purchase Warrant dated May 8, 2001

(18)10.57      Securities  Purchase  Agreement  dated  as of  October  25,  2001
               between us and Orsay Services Inc.

(19)10.58      Securities  Purchase  Agreement  dated  as of  December  4,  2001
               between us and Vertical International Limited

(20)10.59      Stock Purchase  Agreement dated as of January 11, 2002 between us
               and Grenville Finance Ltd.

(21)10.60      Stock Purchase  Agreement dated as of January 18, 2002 between us
               and  Special   Situations  Private  Equity  Fund,  L.P.,  Special
               Situations Fund III, L.P.,  Special  Situations  Technology Fund,
               L.P. and Special Situations Cayman Fund, L.P.

(22)10.61      Asset  Purchase  Agreement  dated  August 2, 2002  between us and
               I.E.S.  Electronics  Industries  U.S.A.,  Inc. and its direct and
               certain of its indirect shareholders

(22)10.62      Share  Purchase  Agreement  dated  August 2, 2002  between us and
               H.R.T.  Ltd.  And A.G.A.  Protection  Methods and  Commerce  Ltd.
               [English summary of Hebrew original]

(23)10.63      Securities  Purchase Agreement dated December 31, 2002 between us
               and the Investors

(23)10.64      Form of 9% Secured Convertible Debenture due June 30, 2005

(23)10.65      Form of Warrant dated December 31, 2002

(23)10.66      Form of Security Agreement dated December 31, 2002

(23)10.67      Form of Intellectual  Property Security  Agreement dated December
               31, 2002

+**10.68       Settlement  Agreement  and Release  between us and Yehuda  Harats
               dated December 31, 2002

**10.69.1      Commercial  lease agreement  between  Commerce Square  Associates
               L.L.C.  and I.E.S.  Electronics  Industries  U.S.A.,  Inc.  dated
               September 24, 1997

**10.69.2      Amendment to Commercial  lease agreement  between Commerce Square
               Associates L.L.C. and I.E.S.  Electronics Industries U.S.A., Inc.
               dated as of May 1, 2000

**10.70        Agreement of Lease dated December 6, 2000 between Janet Nissim et
               al. and M.D.T.  Protection (2000) Ltd. [English summary of Hebrew
               original]

**10.71        Agreement of Lease dated August 22, 2001 between  Aviod  Building
               and  Earthworks  Company  Ltd.  et  al.  and  M.D.T.   Protective
               Industries Ltd. [English summary of Hebrew original]

**21           List of Subsidiaries of the Registrant

**23           Consent of Kost Forer & Gabbay

**99.1         Written  Statement of Chief Executive Officer pursuant to Section
               906 of the Sarbanes-Oxley Act of 2002

**99.2         Written  Statement of Chief Financial Officer pursuant to Section
               906 of the Sarbanes-Oxley Act of 2002


                                     - 76 -
<PAGE>

-------------------------------------
*    English translation or summary from original Hebrew
**   Filed herewith
+    Includes management contracts and compensation plans and arrangements
(1)  Incorporated  by  reference  to our  Registration  Statement  on  Form  S-1
     (Registration No. 33-73256), which became effective on February 23, 1994
(2)  Incorporated  by  reference  to our  Registration  Statement  on  Form  S-1
     (Registration No. 33-97944), which became effective on February 5, 1996
(3)  Incorporated  by reference  to our Annual  Report on Form 10-K for the year
     ended December 31, 1995
(4)  Incorporated  by reference to our Current  Report on Form 8-K dated October
     4, 1996
(5)  Incorporated  by reference  to our Annual  Report on Form 10-K for the year
     ended December 31, 1996, as amended
(6)  Incorporated  by reference  to our Annual  Report on Form 10-K for the year
     ended December 31, 1997, as amended
(7)  Incorporated  by  reference  to our  Registration  Statement  on  Form  S-8
     (Registration No. 333- 74197), which became effective on March 10, 1998
(8)  Incorporated  by reference  to our Annual  Report on Form 10-K for the year
     ended December 31, 1998
(9)  Incorporated  by  reference  to our  Registration  Statement  on  Form  S-3
     (Registration No. 333-95361), which became effective on February 10, 1999
(10) Incorporated  by reference to our Current  Report on Form 8-K filed January
     7, 2000
(11) Incorporated  by reference to our Current  Report on Form 8-K filed January
     24, 2000
(12) Incorporated  by reference  to our Annual  Report on Form 10-K for the year
     ended December 31, 1999
(13) Incorporated  by reference to our Current  Report on Form 8-K filed May 23,
     2000
(14) Incorporated  by reference to our Current Report on Form 8-K filed November
     17, 2000
(15) Incorporated  by reference  to our Annual  Report on Form 10-K for the year
     ended December 31, 2000
(16) Incorporated  by reference  to our Current  Report on Form 8-K filed May 7,
     2001 (EDGAR Film No. 1623996)
(17) Incorporated  by reference  to our Current  Report on Form 8-K filed May 7,
     2001 (EDGAR Film No. 1623989)
(18) Incorporated  by reference to our Current Report on Form 8-K filed November
     21, 2001
(19) Incorporated  by reference to our Current Report on Form 8-K filed December
     4, 2001
(20) Incorporated  by reference to our Current  Report on Form 8-K filed January
     15, 2002
(21) Incorporated  by reference to our Current  Report on Form 8-K filed January
     23, 2002
(22) Incorporated  by reference  to our Current  Report on Form 8-K filed August
     12, 2002
(23) Incorporated  by reference to our Current  Report on Form 8-K filed January
     6, 2003

(b)  Reports on Form 8-K.

     (1)  We filed an amendment  to a Current  Report on Form 8-K on October 11,
          2002,  reporting  "Item 7. Financial  Statements,  Pro Forma Financial
          Information  and Exhibits," in connection  with our acquisition of the
          assets of I.E.S. Electronics Industries U.S.A., Inc.
     (2)  We filed a Current  Report on Form 8-K on October 22, 2002,  reporting
          "Item 5. Other Events and  Regulation  FD  Disclosure,"  in connection
          with our decision to discontinue  retail sales of our consumer battery
          products and the  resignation  of Yehuda  Harats as our  President and
          Chief Executive Officer.
     (3)  We filed a Current  Report on Form 8-K on January  6, 2003,  reporting
          "Item 5. Other Events and  Regulation  FD  Disclosure,"  in connection
          with our sale of $3,500,000  principal  amount 9% Secured  Convertible
          Debentures  due June 30, 2005 and certain other related  transactions,
          and in connection with our reaching a settlement with our former CEO.


                                     - 77 -
<PAGE>

                                   SIGNATURES

     Pursuant  to the  requirements  of  Section  13 or 15(d) of the  Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on March 31, 2003.

                                          ELECTRIC FUEL CORPORATION


                                          By:/s/  Robert S. Ehrlich
                                             -----------------------------------
                                             Name: Robert S. Ehrlich
                                             Title:Chairman, President and Chief
                                                    Executive Officer

     Pursuant to the  requirements of the Securities  Exchange Act of 1934, this
report  has  been  signed  below  by the  following  persons  on  behalf  of the
registrant and in the capacities and on the dates indicated.

<TABLE>
<CAPTION>
               Signature                                       Title                                 Date
               ---------                                       -----                                 ----
<S>                                        <C>                                                  <C>
                                           Chairman, President, Chief Executive Officer and     March 31, 2003
      /s/ Robert S. Ehrlich                Director (Principal Executive Officer)
 --------------------------------------
          Robert S. Ehrlich


      /s/ Avihai Shen                      Vice President - Finance                             March 31, 2003
 -------------------------------------     (Principal Financial Officer)
          Avihai Shen

      /s/ Danny Waldner                    Controller                                           March 31, 2003
 -------------------------------------     (Principal Accounting Officer)
          Danny Waldner

      /s/ Steven Esses                     Executive Vice President, Chief Operating Officer    March 31, 2003
 -------------------------------------     and Director
          Steven Esses

      /s/ Jay M. Eastman                   Director                                             March 31, 2003
 -------------------------------------
          Dr. Jay M. Eastman

      /s/ Lawrence M. Miller               Director                                             March 31, 2003
 ---------------------------------------
          Lawrence M. Miller

      /s/ Jack E. Rosenfeld                Director                                             March 31, 2003
 --------------------------------------
          Jack E. Rosenfeld

                                           Director                                             March __, 2003
 --------------------------------------
          Bert W. Wasserman
</TABLE>


                                     - 78 -
<PAGE>
                                 CERTIFICATIONS
--------------------------------------------------------------------------------

I, Robert S. Ehrlich, certify that:

     1.   I have  reviewed  this  annual  report on Form 10-K of  Electric  Fuel
          Corporation;

     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 we have:

          (a)  designed such  disclosure  controls and procedures to ensure that
               material  information  relating to the registrant,  including its
               consolidated  subsidiaries,  is made known to us by others within
               those  entities,  particularly  during  the  period in which this
               annual report is being prepared;

          (b)  evaluated  the  effectiveness  of  the  registrant's   disclosure
               controls and  procedures as of a date within 90 days prior to the
               filing date of this annual report (the "Evaluation Date"); and

          (c)  presented  in  this  annual  report  our  conclusions  about  the
               effectiveness of the disclosure  controls and procedures based on
               our evaluation as of the Evaluation Date;

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

          (a)  all  significant  deficiencies  in the  design  or  operation  of
               internal  controls which could adversely  affect the registrant's
               ability to record,  process,  summarize and report financial data
               and have  identified for the  registrant's  auditors any material
               weaknesses in internal controls; and

          (b)  any fraud,  whether or not material,  that involves management or
               other employees who have a significant  role in the  registrant's
               internal controls; and

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

Date: March 31, 2003
                                                /s/ Robert S. Ehrlich
                                                -------------------------------
                                                Robert S. Ehrlich, Chairman,
                                                President and CEO
                                                (Principal Executive Officer)

<PAGE>

                                 CERTIFICATIONS
--------------------------------------------------------------------------------

I, Avihai Shen, certify that:

     1.   I have  reviewed  this  annual  report on Form 10-K of  Electric  Fuel
          Corporation;

     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 we have:

          (a)  designed such  disclosure  controls and procedures to ensure that
               material  information  relating to the registrant,  including its
               consolidated  subsidiaries,  is made known to us by others within
               those  entities,  particularly  during  the  period in which this
               annual report is being prepared;

          (b)  evaluated  the  effectiveness  of  the  registrant's   disclosure
               controls and  procedures as of a date within 90 days prior to the
               filing date of this annual report (the "Evaluation Date"); and

          (c)  presented  in  this  annual  report  our  conclusions  about  the
               effectiveness of the disclosure  controls and procedures based on
               our evaluation as of the Evaluation Date;

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

          (a)  all  significant  deficiencies  in the  design  or  operation  of
               internal  controls which could adversely  affect the registrant's
               ability to record,  process,  summarize and report financial data
               and have  identified for the  registrant's  auditors any material
               weaknesses in internal controls; and

          (b)  any fraud,  whether or not material,  that involves management or
               other employees who have a significant  role in the  registrant's
               internal controls; and

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


Date: March 31, 2003
                                         /s/ Avihai Shen
                                         ---------------------------------------
                                         Avihai Shen, Vice President -
                                         Finance and CFO
                                         (Principal Financial Officer)


<PAGE>



                 ELECTRIC FUEL CORPORATION AND ITS SUBSIDIARIES


                        CONSOLIDATED FINANCIAL STATEMENTS


                             AS OF DECEMBER 31, 2002


                                 IN U.S. DOLLARS




                                      INDEX




                                                                 Page
                                                            -------------

Report of Independent Auditors                                       2

Consolidated Balance Sheets                                      3 - 4

Consolidated Statements of Operations                                5

Statements of Changes in Shareholders' Equity                    6 - 8

Consolidated Statements of Cash Flows                           9 - 11

Notes to Consolidated Financial Statements                     12 - 46



<PAGE>


                              [LOGO] Ernst & Young


                         REPORT OF INDEPENDENT AUDITORS

                             To the Shareholders of

                            ELECTRIC FUEL CORPORATION




     We have audited the  accompanying  consolidated  balance sheets of Electric
Fuel Corporation (doing business as Arotech Corporation) (the "Company") and its
subsidiaries  as of  December  31, 2002 and 2001,  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, 2002.  These  financial
statements   are  the   responsibility   of  the   Company's   management.   Our
responsibility  is to express an opinion on these financial  statements based on
our audits.


     We conducted our audits in accordance  with  auditing  standards  generally
accepted 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 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 and its  subsidiaries  as of  December  31, 2002 and 2001,  and the
consolidated  results of their  operations  and cash flows for each of the three
years in the period ended  December  31, 2002,  in  conformity  with  accounting
principles generally accepted in the United States.




                                               /s/ Kost, Forer & Gabbay
Tel Aviv, Israel                               KOST FORER & GABBAY
February 27, 2003                              A Member of Ernst & Young Global



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



                                      F-2
<PAGE>

ELECTRIC FUEL CORPORATION AND ITS SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
--------------------------------------------------------------------------------
In U.S. dollars


<TABLE>
<CAPTION>
                                                                                      December 31,
                                                                              ----------------------------
                                                                                 2002             2001
                                                                              -----------      -----------
         ASSETS

CURRENT ASSETS:
<S>                                                                           <C>              <C>
     Cash and cash equivalents                                                $ 1,457,526      $12,671,754
      Restricted collateral deposit and other restricted cash                     633,339               --
      Trade receivables (net of allowance for doubtful accounts in the
        amounts of $40,636 and $39,153 as of December 31, 2002 and 2001,
        respectively)                                                           3,776,195          765,402
     Other accounts receivable and prepaid expenses                             1,032,311          448,651
     Inventories                                                                1,711,479          523,366
     Assets of discontinued operations                                            349,774        8,422,082
                                                                              -----------      -----------

Total current assets                                                            8,960,624       22,831,255
                                                                              -----------      -----------

LOANS TO SHAREHOLDERS                                                                  --          501,288

SEVERANCE PAY FUND                                                              1,025,071          854,891

PROPERTY AND EQUIPMENT, NET                                                     2,555,249        2,220,806

GOODWILL                                                                        4,954,981               --

OTHER Intangible Assets, NET                                                    2,567,457               --
                                                                              -----------      -----------

                                                                              $20,063,382      $26,408,240
                                                                              ===========      ===========
</TABLE>

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



                                      F-3
<PAGE>

ELECTRIC FUEL CORPORATION AND ITS SUBSIDIARIES

--------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
In U.S. dollars

<TABLE>
<CAPTION>
                                                                                              December 31,
                                                                                    ---------------------------------
                                                                                        2002                2001
                                                                                    -------------       -------------

         LIABILITIES AND SHAREHOLDERS' EQUITY

CURRENT LIABILITIES:
<S>                                                                                 <C>                 <C>
     Short term bank loans                                                          $     108,659       $          --
     Trade payables                                                                     2,900,117             791,576
     Other accounts payable and accrued expenses                                        2,009,109           1,222,653
     Current portion of promissory note due to purchase of a subsidiary                 1,200,000                  --
     Liabilities of discontinued operations                                             1,053,798           1,860,107
                                                                                    -------------       -------------

Total current liabilities                                                               7,271,683           3,874,336

LONG TERM LIABILITIES
     Accrued severance pay                                                              2,994,233           3,125,848
     Promissory note due to acquisition of a subsidiary                                   516,793                  --
                                                                                    -------------       -------------

Total long-term liabilities                                                             3,511,026           3,125,848

COMMITMENTS AND CONTINGENT LIABILITIES

MINORITY INTEREST                                                                         243,172                  --

SHAREHOLDERS' EQUITY:
     Share capital -
     Common stock - $0.01 par value each;
         Authorized: 100,000,000 shares as of December 31, 2002 and 2001;
           Issued: 35,701,594 shares and 29,059,469 shares as of December 31,
           2002 and 2001, respectively; Outstanding - 35,146,261 shares and
           28,504,136 shares as of December 31, 2002 and 2001, respectively               357,017             290,596
     Preferred shares - $0.01 par value each;
         Authorized: 1,000,000 shares as of December 31, 2002 and 2001; No
           shares issued and outstanding as of December 31, 2002 and 2001                      --                  --
     Additional paid-in capital                                                       114,082,584         105,686,909
     Accumulated deficit                                                             (100,673,619)        (82,169,261)
     Deferred stock compensation                                                          (12,000)            (18,000)
     Treasury stock, at cost (Common stock - 555,333 shares as of December 31,
       2002 and 2001)                                                                  (3,537,106)         (3,537,106)
     Notes receivable from shareholders                                                (1,177,589)           (845,081)
     Accumulated other comprehensive loss                                                  (1,786)                 --
                                                                                    -------------       -------------

Total shareholders' equity                                                              9,037,501          19,408,057
                                                                                    -------------       -------------

                                                                                    $  20,063,382       $  26,408,241
                                                                                    =============       =============
</TABLE>

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

                                      F-4
<PAGE>


ELECTRIC FUEL CORPORATION AND ITS SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS
--------------------------------------------------------------------------------
In U.S. dollars

<TABLE>
<CAPTION>
                                                                           Year ended December 31,
                                                             --------------------------------------------------
                                                                 2002               2001               2000
                                                             ------------       ------------       ------------
Revenues:
<S>                                                          <C>                <C>                <C>
   Products                                                  $  5,944,370       $  1,670,634       $  1,179,500
   Services                                                       462,369            422,998            310,442
                                                             ------------       ------------       ------------

Total revenues                                                  6,406,739          2,093,632          1,489,942

Cost of revenues                                                4,421,748          1,992,636          1,486,300
                                                             ------------       ------------       ------------

Gross profit                                                    1,984,991            100,996              3,642
                                                             ------------       ------------       ------------

Operating expenses:
   Research and development, net                                  685,919            455,845            498,895
   Selling and marketing expenses                               1,309,669            105,977            126,893
   General and administrative expenses                          4,023,103          3,827,544          3,306,716
   Amortization of intangible assets                              623,543                 --                 --
   In-process research and development write-off                   26,000                 --                 --
                                                             ------------       ------------       ------------

Total operating costs and expenses                              6,668,234          4,389,366          3,932,504
                                                             ------------       ------------       ------------

Operating loss                                                 (4,683,243)        (4,288,370)        (3,928,862)
Financial income, net                                             100,451            262,581            544,181
                                                             ------------       ------------       ------------

Loss before minority interest in earnings of a
   subsidiary                                                  (4,582,792)        (4,025,789)        (3,384,681)
Minority interest in earnings of a subsidiary                    (355,360)                --                 --
                                                             ------------       ------------       ------------

Net loss from continuing operations                            (4,938,152)        (4,025,789)        (3,384,681)
Net loss from discontinued operations (including loss
   on disposal of $4,446,684)                                 (13,566,206)       (13,260,999)        (8,596,277)
                                                             ------------       ------------       ------------
Net loss                                                     $(18,504,358)      $(17,286,788)      $(11,980,958)
                                                             ============       ============       ============

Deemed dividend to certain shareholders of Common stock      $         --       $ (1,196,667)      $         --
                                                             ------------       ------------       ------------

Net loss attributable to shareholders of Common stock        $(18,504,358)      $(18,483,455)      $(11,980,958)
                                                             ============       ============       ============

Basic and diluted net loss per share from continuing
  operations                                                 $      (0.15)      $      (0.21)      $      (0.17)
                                                             ============       ============       ============
Basic and diluted net loss per share from discontinued
  operations                                                 $      (0.42)      $      (0.55)      $      (0.45)
                                                             ============       ============       ============
Basic and diluted net loss per share                         $      (0.57)      $      (0.76)      $      (0.62)
                                                             ============       ============       ============

Weighted average number of shares used in computing
  basic and diluted net loss per share                         32,381,502         24,200,184         19,243,446
                                                             ============       ============       ============
</TABLE>

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


                                      F-5
<PAGE>


ELECTRIC FUEL CORPORATION AND ITS SUBSIDIARIES

STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
--------------------------------------------------------------------------------
In U.S. dollars

<TABLE>
<CAPTION>
                                                                                                                     Accumulated
                                                                       Additional                     Deferred          other
                                                   Common stock          paid-in     Accumulated        stock       comprehensive
                                               Shares       Amount       capital       deficit      compensation    income (loss)
                                             ------------------------- ------------------------------------------------------------
<S>                                          <C>              <C>          <C>            <C>        <C>           <C>
Balance as of January 1, 2000                15,728,387     $ 157,284  $60,110,815   $(52,901,515)               -               -

  Payment of interest and principal on
    notes receivable from shareholders                -             -            -               -               -               -
  Issuance of shares to investors, net        2,477,952        24,780   18,249,373               -               -               -
  Issuance of shares to service providers        35,000           350      524,650               -               -               -
  Exercise of options                         1,880,156        18,802    6,936,355               -               -               -
  Exercise of warrants                        1,301,196        13,011    2,437,295               -               -               -
  Deferred stock compensation                         -             -       37,924               -         (37,924)              -
  Stock compensation related to options
    repriced                                          -             -       26,250               -                               -
  Amortization of deferred stock
    compensation                                      -             -            -               -          20,684               -
  Stock compensation related to options
    issued to consultants                             -             -      769,128               -               -               -
  Accrued interest on notes receivable from
    shareholders                                      -             -            -               -               -               -
  Comprehensive loss :
  Net loss                                            -             -            -     (11,980,958)              -               -
                                             -----------  ------------ ------------  -------------- --------------- ---------------
  Total comprehensive loss

  Balance as of December 31, 2000            21,422,691   $   214,227  $89,091,790   $ (64,882,473) $      (17,240) $            -
                                             ===========  ============ ============  ============== =============== ===============


                                                                                  Notes
                                                                 Total         receivable        Total
                                               Treasury      comprehensive        from       shareholders'
                                                 stock            loss        shareholders      equity
                                             --------------------------------------------------------------
  Balance as of January 1, 2000                $  (37,731)                    $ (3,086,494)    $ 4,242,359

  Payment of interest and principal on
    notes receivable from shareholders                   -                        2,705,052      2,705,052
  Issuance of shares to investors, net                   -                                -     18,274,153
  Issuance of shares to service providers                -                 -              -        525,000
  Exercise of options                                    -                 -     (3,723,456)     3,231,701
  Exercise of warrants                                   -                 -                     2,450,306
  Deferred stock compensation                            -                                -              -
  Stock compensation related to options
    repriced                                             -                                -         26,250
  Amortization of deferred stock
    compensation                                         -                                -         20,684
  Stock compensation related to options
    issued to consultants                                -                                -        769,128
  Accrued interest on notes receivable from
    shareholders                                         -                         (185,306)      (185,306)
  Comprehensive loss :
  Net loss                                               -       (11,980,958)             -    (11,980,958)
                                              -------------  ---------------- --------------  -------------
  Total comprehensive loss                                   $   (11,980,958)
                                                             ================
  Balance as of December 31, 2000             $    (37,731)                   $  (4,290,204)  $ 20,078,369
                                              =============                   ==============  =============
</TABLE>


                                      F-6

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

<PAGE>

ELECTRIC FUEL CORPORATION AND ITS SUBSIDIARIES

STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
--------------------------------------------------------------------------------
In U.S. dollars


<TABLE>
<CAPTION>
                                                          Common stock         Additional                      Deferred
                                                     ------------------------    paid-in      Accumulated       stock
                                                       Shares       Amount       capital        deficit      compensation
                                                     ----------------------------------------------------------------------
<S>                                                  <C>          <C>          <C>           <C>            <C>
Balance as of January 1, 2001                        21,422,691   $  214,227   $89,091,790   $ 64,882,473)  $     (17,240)

Repurchase of common shares from shareholders
  and repayment of the related interest and
  principal of notes from shareholders                        -            -       228,674               -               -
Issuance of shares to investors, net                  6,740,359       67,405    14,325,941               -               -
Retirement of shares                                    (3,000)         (30)      (17,970)               -               -
Issuance of shares to service providers                 346,121        3,461       536,916               -               -
Exercise of options                                     219,965        2,200       512,089               -               -
Exercise of warrants                                    333,333        3,333       836,667               -               -
Deferred stock compensation                                   -            -        18,000               -        (18,000)
Amortization of deferred stock compensation                   -            -       (6,193)               -          17,240
Stock compensation related to options issued to
  consultants                                                 -            -       139,291               -               -
Stock compensation related to options to
  consultants repriced                                        -            -        21,704               -               -
Comprehensive loss:
Net loss                                                      -            -             -    (17,286,788)               -
                                                     -----------  -----------  ------------  -------------- ---------------
Total comprehensive loss

Balance as of December 31, 2001                      29,059,469   $  290,596   $105,686,909  $(82,169,261)  $     (18,000)
                                                     ===========  ===========  ============  ============== ===============


                                                                          Total      Notes receivable        Total
                                                        Treasury      comprehensive        from          shareholders'
                                                          stock           loss         shareholders          equity
                                                     --------------------------------------------------------------------
Balance as of January 1, 2001                         $    (37,731)                  $     (4,290,204)  $     20,078,369

Repurchase of common shares from shareholders
  and repayment of the related interest and
  principal of notes from shareholders                  (3,499,375)                          3,470,431           199,730
Issuance of shares to investors, net                              -                                  -        14,393,346
Retirement of shares                                              -                             18,000                 -
Issuance of shares to service providers                           -                                  -           540,377
Exercise of options                                               -                           (43,308)           470,981
Exercise of warrants                                              -              -                   -           840,000
Deferred stock compensation                                       -                                  -                 -
Amortization of deferred stock compensation                       -                                  -            11,047
Stock compensation related to options issued to
  consultants                                                     -                                  -           139,291
Stock compensation related to options to
  consultants repriced                                            -                                  -            21,704
Comprehensive loss:
Net loss                                                          -   (17,286,788)                   -      (17,286,788)
                                                      -------------- --------------  ------------------ -----------------
Total comprehensive loss                                             $(17,286,788)
                                                                     ==============
Balance as of December 31, 2001                       $ (3,537,106)                  $       (845,081)  $     19,408,057
                                                      ==============                 ================== =================
</TABLE>

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


                                      F-7
<PAGE>


<TABLE>
<CAPTION>

                                         Common stock           Additional                    Deferred
                                  ---------------------------    paid-in      Accumulated       stock        Treasury
                                     Shares        Amount        capital        deficit     compensation      stock
                                  ---------------------------------------------------------------------------------------
<S>                               <C>           <C>            <C>           <C>            <C>            <C>
Balance as of January 1, 2002       29,059,469  $    290,596   $105,686,909  $(82,169,261)  $    (18,000)  $(3,537,106)
  Adjustment of notes from
    shareholders
  Repayment of notes from
    employees                                -             -              -              -              -             -
  Issuance of shares to investors    2,041,176        20,412      3,209,588
  Issuance of shares to service
    providers                          368,468         3,685        539,068
  Issuance of shares to lender
    in respect of prepaid
    interest expenses                  387,301         3,873        232,377              -              -             -
  Exercise of options by
    employees                          191,542         1,915        184,435
  Amortization of deferred stock
    compensation                                                                                    6,000
  Stock compensation related to
    options issued to employees         13,000           130         12,870
  Issuance of shares in respect
    of acquisition                   3,640,638        36,406      4,056,600
  Accrued interest on notes
    receivable                                                      160,737
  Other comprehensive loss
    Foreign currency translation
    adjustment
  Net loss                                                                    (18,504,358)
                                  ------------- -------------  ------------- -------------- -------------- -------------
  Total comprehensive loss

  Balance as of December 31, 2002   35,701,594  $    357,017   $114,082,584  $(100,673,619) $    (12,000)  $ (3,537,106)
                                  ============= =============  ============= ============== ============== =============

                                                      Notes       Accumulated
                                       Total        receivable       other          Total
                                   comprehensive       from      comprehensive  shareholders'
                                        loss       shareholders      loss          equity
                                  ------------------------------------------------------------
Balance as of January 1, 2002                      $  (845,081)              -  $  19,408,057
  Adjustment of notes from
    shareholders                                      (178,579)                     (178,579)
  Repayment of notes from
    employees                                            43,308                        43,308
  Issuance of shares to investors                                                   3,230,000
  Issuance of shares to service
    providers                                                                         542,753
  Issuance of shares to lender
    in respect of prepaid
    interest expenses                                         -                       236,250
  Exercise of options by
    employees                                          (36,500)                       149,850
  Amortization of deferred stock
    compensation                                                                        6,000
  Stock compensation related to
    options issued to employees                                                        13,000
  Issuance of shares in respect
    of acquisition                                                                  4,093,006
  Accrued interest on notes
    receivable                                        (160,737)                             -
  Other comprehensive loss
    Foreign currency translation
    adjustment                            (1,786)                      (1,786)        (1,786)
  Net loss                           (18,504,358)                                (18,504,358)
                                   --------------- ------------- -------------- --------------
  Total comprehensive loss         $ (18,506,144)
                                   ===============
  Balance as of December 31, 2002                  $ (1,177,589) $      (1,786) $   9,037,501
                                                   ============= ============== ==============
</TABLE>

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

                                      F-8
<PAGE>



ELECTRIC FUEL CORPORATION AND ITS SUBSIDIARIES

--------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
In U.S. dollars

<TABLE>
<CAPTION>
                                                                                             Year ended December 31,
                                                                                 -------------------------------------------
                                                                                    2002            2001            2000
                                                                                 -----------     -----------     -----------

Cash flows from operating activities:
<S>                                                                              <C>             <C>             <C>
     Net loss                                                                    (18,504,358)    (17,286,788)    (11,980,958)
       Less loss for the period from discontinued operations                      13,566,206      13,260,999       8,596,277

     Adjustments required to reconcile net loss to net cash used in operating
       activities:
     Minority interest in earnings of subsidiary                                     355,360              --              --
     Depreciation                                                                    473,739         530,013         514,242
     Amortization of intangible assets                                               623,543              --              --
     In-process research and development write-off                                    26,000              --              --
     Accrued severance pay, net                                                     (357,808)        530,777         209,999
     Amortization of deferred stock compensation                                       6,000          17,240           9,010
     Impairment and write-off of loans to shareholders                               542,317         206,005              --
     Compensation expenses related to repurchase of treasury
       stock                                                                              --         228,674              --
     Write-off of inventories                                                        116,008              --              --
     Amortization of compensation related to options issued to
       consultants and repriced options issued to employees
       and consultants                                                                    --              --         233,636
     Compensation expenses related to shares issued to
       employees                                                                      13,000              --              --
     Accrued interest on notes receivable from shareholders                               --          36,940        (230,922)
     Interest accrued on promissory notes due to acquisition                          29,829              --              --
     Interest accrued on restricted collateral deposit                                (3,213)             --              --
     Capital (gain) loss from sale of property and equipment                          (4,444)            815          (6,330)
     Decrease (increase) in trade receivables                                        389,516        (452,425)         35,741
     Decrease (increase) in other accounts receivable and
       prepaid expenses                                                              257,218         616,040        (595,744)
     Increase in inventories                                                        (520,408)       (128,897)        (98,092)
     Increase (decrease) in trade payables                                           (62,536)       (301,075)        (85,996)
     Increase (decrease) in other accounts payable and accrued
       expenses                                                                     (423,664)        286,511         (40,191)
                                                                                 -----------     -----------     -----------
     Net cash used in operating activities from continuing                        (3,477,695)     (2,455,171)     (3,439,328)
       operations (reconciled from continuing operations)

     Net cash used in operating activities from discontinued
        operations (reconciled from discontinued operations)                      (5,456,912)    (10,894,660)    (10,523,852)
                                                                                 -----------     -----------     -----------


Net cash used in operating activities                                             (8,934,607)    (13,349,831)    (13,963,180)
                                                                                 -----------     -----------     -----------
</TABLE>

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

                                      F-9
<PAGE>

ELECTRIC FUEL CORPORATION AND ITS SUBSIDIARIES

--------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
In U.S. dollars

<TABLE>
<CAPTION>
                                                                              Year ended December 31,
                                                                   ----------------------------------------------
                                                                       2002             2001             2000
                                                                   ------------     ------------     ------------
Cash flows from investing activities:
<S>                                                                    <C>              <C>              <C>
     Purchase of property and equipment                                (275,540)        (513,746)        (552,044)
     Payment to suppliers for purchase of property and
       equipment from previous year                                     (39,336)         (43,883)              --
     Loans granted to shareholders                                       (4,529)              --         (958,156)
     Repayment of loans granted to shareholders                              --               --          225,097
     Proceeds from sale of property and equipment                         8,199           40,217           57,867
     Acquisition of IES (1)                                          (2,958,083)              --               --
     Acquisition of MDT (2)                                          (1,201,843)              --               --
     Increase in restricted cash                                       (595,341)              --               --
     Net cash used in discontinued operations (purchase of
       property and equipment)                                         (290,650)        (761,555)      (2,306,467)
                                                                   ------------     ------------     ------------

Net cash used in investing activities                                (5,357,123)      (1,278,967)      (3,533,703)
                                                                   ------------     ------------     ------------

Cash flows from financing activities:
     Proceeds from issuance of shares, net                            3,230,000       14,393,346       18,150,404
     Proceeds from exercise of options                                  113,350          470,981        3,231,701
     Proceeds from exercise of warrants                                      --          840,000        2,450,306
     Payment of interest and principal on notes receivable from
       shareholders                                                      43,308               --        2,705,052
     Profit distribution to minority                                   (412,231)              --               --
     Increase in short term bank credit                                 108,659               --               --
     Payment on capital lease obligation                                 (5,584)              --               --
                                                                   ------------     ------------     ------------

Net cash provided by financing activities                             3,077,502       15,704,327       26,537,463
                                                                   ------------     ------------     ------------

Increase (decrease) in cash and cash equivalents                    (11,214,228)       1,075,529        9,040,580
Cash and cash equivalents at the beginning of the year               12,671,754       11,596,225        2,555,645
                                                                   ------------     ------------     ------------

Cash and cash equivalents at the end of the year                   $  1,457,526     $ 12,671,754     $ 11,596,225
                                                                   ============     ============     ============

Supplementary information on non-cash transactions:
Purchase of property and equipment against trade payables          $         --     $     39,336     $    227,230
                                                                   ============     ============     ============
Purchase of treasury stock in respect of notes receivable from
  shareholders                                                     $         --     $  3,499,375     $         --
                                                                   ============     ============     ============
Retirement of shares issued under notes receivables                $         --     $     18,000     $         --
                                                                   ============     ============     ============
Issuance of shares to consultants in respect of prepaid
   interest expenses                                               $    236,250     $         --     $    120,000
                                                                   ============     ============     ============

Exercise of options against notes receivable                       $     36,500     $     43,308     $  3,723,456
                                                                   ============     ============     ============

Supplemental disclosure of cash flows activities:
         Cash paid during the year for:
         Interest                                                  $     10,640     $     19,106     $     25,537
                                                                   ============     ============     ============
</TABLE>


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

                                      F-10
<PAGE>

ELECTRIC FUEL CORPORATION AND ITS SUBSIDIARIES

--------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS (Cont.)
In U.S. dollars

(1)  In July  2002,  the  Company  acquired  substantially  all of the assets of
     I.E.S.  Electronics  Industries U.S.A., Inc. ("IES"). The net fair value of
     the  assets  acquired  and  the  liabilities   assumed,   at  the  date  of
     acquisition, was as follows:

Working capital, excluding cash and     $ 1,197,000
   cash equivalents
 Property and equipment, net                396,776
 Capital lease obligation                   (15,526)
 Technology                               1,515,000
 Existing contracts                          46,000
 Covenants not to compete                    99,000
 In process research and development         26,000
 Customer list                              527,000
 Trademarks                                 439,000
 Goodwill                                 4,068,726
                                        -----------

                                          8,298,976
Issuance of shares                       (3,653,929)
Issuance of promissory note              (1,686,964)
                                        -----------
                                        $ 2,958,083
                                        ===========


(2)  In July 2002, the Company  acquired 51% of the outstanding  ordinary shares
     of MDT Protective  Industries  Ltd.  ("MDT").  The fair value of the assets
     acquired and liabilities assumed was as follows:

Working capital, excluding cash and    $   350,085
   cash and cash equivalents
Property, and equipment, net               139,623
Minority rights                           (300,043)
Technology                                 280,000
Customer base                              285,000
Goodwill                                   886,255
                                       -----------
                                         1,640,920
Issuance of shares                        (439,077)
                                       -----------
                                       $ 1,201,843
                                       ===========

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



                                      F-11
<PAGE>

ELECTRIC FUEL CORPORATION AND ITS SUBSIDIARIES

--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In U.S. dollars

NOTE 1: - GENERAL

a. Electric Fuel Corporation d/b/a Arotech  Corporation ("EFC," "Electric Fuel,"
or  the  "Company")  and  its  subsidiaries  are  engaged  in  the  development,
manufacture and marketing of defense and security  products,  including advanced
hi-tech  multimedia and interactive  digital solutions for training of military,
law enforcement and security personnel and sophisticated  lightweight  materials
and  advanced  engineering  processes  to  armor  vehicles,  and in the  design,
development and commercialization of its proprietary zinc-air battery technology
for  electric  vehicles  and  defense  applications.  The  Company is  primarily
operating  through  Electric  Fuel Ltd.  ("EFL") a  wholly-owned  Israeli  based
subsidiary,   IES  Interactive  Training,  Inc.  ("IES"),  a  wholly-owned  U.S.
subsidiary,  and MDT  Protective  Industries,  an  Israeli  concern in which the
Company  has  a  51%  interest.   The  Company's  production  and  research  and
development operations are primarily located in Israel and in the United States.

In addition to EFL and MDT,  the  Company has three  wholly-owned  non-operating
foreign  subsidiaries,  in the U.K ("EFL U.K."),  in Germany ("GmbH") and in the
Netherlands ("BV"). The Company also has three subsidiaries in the United States
in addition to IES: Electric Fuel Transportation Corp. (Delaware), Instant Power
Corporation (Delaware), and I.E.S. Defense Services, Inc. (Delaware).

b. Acquisition of IES:

In August 2, 2002, the Company  entered into an asset purchase  agreement  among
I.E.S.  Electronics  Industries U.S.A., Inc. ("IES"),  its direct and certain of
its  indirect  shareholders,  and  its  wholly-owned  Israeli  subsidiary,  EFL,
pursuant to the terms of which it acquired substantially all the assets, subject
to  substantially  all the  liabilities,  of IES, a developer,  manufacturer and
marketer of advanced hi-tech  multimedia and interactive  digital  solutions for
training of  military,  law  enforcement  and  security  personnel.  The Company
intends to continue to use the assets  purchased  in the conduct of the business
formerly  conducted by IES (the "Business").  The acquisition has been accounted
under the purchase method of accounting. Accordingly, all assets and liabilities
were acquired as at the values on such date, and the Company  consolidated IES's
results with its own commencing at such date.

The assets  purchased  consisted of the current assets,  property and equipment,
and other  intangible  assets  used by IES in the conduct of the  Business.  The
consideration for the assets and liabilities purchased consisted of (i) cash and
promissory  notes in an aggregate  amount of $4,800,000  ($3,000,000 in cash and
$1,800,000  in  promissory  notes,  which was  recorded at its fair value in the
amount of $1,686,964)  (see Note 9), and (ii) the issuance,  with  registration
rights,  of a total of 3,250,000 shares of our common stock,  $.01 par value per
share, having a value of approximately $3,653,929,  which shares are the subject
of a  voting  agreement  on  the  part  of IES  and  certain  of its  affiliated
companies.  The value of 3,250,000  shares  issued was  determined  based on the
average  market price of EFC's Common stock over the period  including  two days
before and after the terms of the acquisition were agreed to and announced.  The
total  consideration of $8,390,893  (including $50,000 of transaction costs) was
determined based upon arm's-length  negotiations between the Company and IES and
IES's shareholders.


                                      F-12
<PAGE>

ELECTRIC FUEL CORPORATION AND ITS SUBSIDIARIES

--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In U.S. dollars


NOTE 1: - GENERAL (Cont.)


Based upon an independent  valuation of tangible and intangible assets acquired,
Electric Fuel has allocated the total cost of the acquisition to I.E.S.'s assets
as follows:


Tangible assets acquired                           $ 2,856,951

Intangible assets
     Technology (four year useful life)              1,515,000
     Existing contracts (one year useful life)          46,000
     Covenants not to compete (five year useful
       life)                                            99,000
     In process research and development                26,000
     Customer list (seven year useful life)            527,000
     Trademarks (indefinite useful life)               439,000
     Goodwill                                        4,068,726
Liabilities assumed                                 (1,186,784)
                                                   -----------

Total consideration                                $ 8,390,893
                                                   ===========

In  accordance  with  SFAS No.  142,  "Goodwill  and Other  Intangible  Assets,"
goodwill  arising  from  acquisitions   will  not  be  amortized.   In  lieu  of
amortization,  EFC is required to perform an annual  impairment  review.  If EFC
determines,  through the  impairment  review  process,  that  goodwill  has been
impaired,  it will record the impairment  charge in its statement of operations.
EFC will also assess the  impairment of goodwill  whenever  events or changes in
circumstances indicate that the carrying value may not be recoverable.

The value  assigned to the  tangible,  intangibles  assets and  liabilities  was
determined as follows:

     1.   To determine the value of the Company's net current  assets,  property
          and equipment, and net liabilities;  the Cost Approach was used, which
          requires  that the assets and  liabilities  in question be restated to
          their market values. Per estimation made by the independent  appraisal
          the book values for the current assets and liabilities were reasonable
          proxies for their market values.

     2.   The amount of the excess  cost  attributable  to  technology  of Range
          2000, 3000 and A2Z Systems is $1,515,000 and was determined  using the
          Income Approach.


                                      F-13
<PAGE>

ELECTRIC FUEL CORPORATION AND ITS SUBSIDIARIES

--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In U.S. dollars

NOTE 1: - GENERAL (Cont.)


     3.   The value assigned to purchased  in-process  technology relates to two
          projects "Black Box" and A2Z trainer.  The estimated fair value of the
          acquired  in-process  research and development  platforms that had not
          yet reached  technological  feasibility and had no alternative  future
          use  amounted  to $26,000.  Technological  feasibility  or  commercial
          viability of these projects was established at the  acquisition  date.
          These products were considered to have no alternative future use other
          than the technological indications for which they were in development.
          Accordingly,   these   amounts  were   immediately   expensed  in  the
          consolidated  statement  of  operations  on the  acquisition  date  in
          accordance  with FASB  Interpretation  No. 4,  "Applicability  of FASB
          Statement No. 2 to Business Combinations Accounted for by the Purchase
          Method." The estimated fair values of these  platforms were determined
          using  discounted  cash flow models.  Projects were estimated to be 4%
          complete;  estimated  costs  to  completion  of these  platforms  were
          approximately $200,000 and $25,000, respectively, and discount rate of
          25% was used.

     4.   The value  assigned to the  customer  list is  amounted  to  $527,000.
          Management states that its customers have generally been very loyal to
          the Company's  products;  most present customers will purchase add-ons
          or up-grades to their IES  simulator  systems in the future,  and some
          will  purchase  additional  warranties  for the systems they  possess.
          Independent appraisal has therefore valued the Company's customer list
          using the Income Approach.

     5.   The value  assigned to the  trademarks is amounted to $439,000 and was
          determined based on the Cost Approach. In doing so, it is assumed that
          historical expenditures for advertising are a reasonable proxy for the
          future benefits expected from the Trademarks and Trade names.

     6.   Value of IES's  Covenant Not to Compete (CNC) was valued at the amount
          of $99,000.  One of IES's  intangible  assets is its  covenant  not to
          compete. Asset Purchase Agreement precludes the former parent company,
          and its  principals and key employees from competing with IES for five
          years from the  Valuation  Date.  According to  management,  among the
          individuals  covered  by the CNC are the  original  developers  of the
          Range 2000 and A2Z systems. Estimated CNC's value was determined using
          the Income Approach.  The estimated value of the CNC is the sum of the
          present  value of the cash flows that would be lost if the CNC was not
          in  place.  Specifically,  the value of the CNC is  calculated  as the
          difference  between  the  projected  cash flows if the  former  parent
          company or its principals were to start competing  immediately and the
          projected  cash  flows if those  parties  start  competing  after five
          years, when the CNC expires.


                                      F-14
<PAGE>

ELECTRIC FUEL CORPORATION AND ITS SUBSIDIARIES

--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In U.S. dollars


NOTE 1: - GENERAL (Cont.)


c. Acquisition of MDT:

On July 1, 2002, the Company entered into a stock purchase agreement with all of
the shareholders of M.D.T.  Protective Industries Ltd. ("MDT"),  pursuant to the
terms of which the Company purchased 51% of the issued and outstanding shares of
MDT, a privately-held  Israeli company that  specializes in using  sophisticated
lightweight materials and advanced engineering processes to armor vehicles.  The
Company also entered into certain other  ancillary  agreements  with MDT and its
shareholders and other affiliated companies. The Acquisition was accounted under
the  purchase  method  accounting  and  results  of MDT's  operations  have been
included in the  consolidated  financial  statements  since that date. The total
consideration  of $1,767,877 for the shares  purchased  consisted of (i) cash in
the aggregate amount of 5,814,000 New Israeli Shekels ($1,231,780), and (ii) the
issuance,  with  registration  rights,  of an aggregate of 390,638 shares of our
common  stock,  $0.01  par  value  per  share,  having a value of  approximately
$439,077. The value of 390,638 shares issued was determined based on the average
market price of EFC's Common stock over the period including two days before and
after the terms of the acquisition were agreed to and announced.

Based upon an independent  valuation of tangible and intangible assets acquired,
Electric Fuel has allocated the total cost of the acquisition to MDT's assets as
follows:


          Tangible assets acquired     $ 1,337,048

          Intangible assets
             Technology (five year         280,000
              weighted average
              useful life)
             Customer base (five           285,000
              year weighted average
              useful life)
             Goodwill                      886,255
          Liabilities assumed           (1,020,426)
                                       -----------

          Total consideration          $ 1,767,877
                                       ===========

In  accordance  with  SFAS No.  142,  "Goodwill  and Other  Intangible  Assets,"
goodwill  arising  from  acquisitions   will  not  be  amortized.   In  lieu  of
amortization,  EFC is required to perform an annual  impairment  review.  If EFC
determines,  through the  impairment  review  process,  that  goodwill  has been
impaired,  it will record the impairment  charge in its statement of operations.
EFC will also assess the  impairment of goodwill  whenever  events or changes in
circumstances indicate that the carrying value may not be recoverable.


                                      F-15
<PAGE>

ELECTRIC FUEL CORPORATION AND ITS SUBSIDIARIES

--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In U.S. dollars

NOTE 1: - GENERAL (Cont.)

The value assigned to the tangible, intangibles assets and liabilities was
determined as following:

     1.   To  determine  the value of the  Company's  net  current  assets,  net
          property,  and  equipment and net  liabilities;  the Cost Approach was
          used,  which  requires that the assets and  liabilities in question be
          restated  to  their  market  values.   Per  estimation   made  by  the
          independent  appraisal  the book  values  for the  current  assets and
          liabilities were reasonable proxies for their market values.

     2.   The amount of the excess cost  attributable  to  technology of optimal
          bulletproofing  material and power mechanism for bulletproofed windows
          is $280,000 and was determined using the Income Approach.

     3.   The value  assigned to the  customer  base is  amounted  to  $285,000.
          Independent appraisal has valued the Company's customer base using the
          Income  Approach.  The valuation of the customers' base derives mostly
          from relations with customers with no contracts. Most of the customers
          of  MDT  are  from  defense  sector  and  usually  have   longstanding
          relationships and tend to reorder from the Company.

     d.   Pro forma results:

The following unaudited proforma  information does not purport to represent what
the  Company's  results  of  operations  would  have  been had the  acquisitions
occurred  on January 1, 2001 and 2002,  nor does it  purport  to  represent  the
results of operations of the Company for any future period.


<TABLE>
<CAPTION>
                                                                              Year ended December 31,
                                                                            ---------------------------
                                                                               2002            2001
                                                                            -----------    ------------
<S>                                                                         <C>            <C>
          Revenues                                                          $12,997,289    $ 12,369,749
                                                                            ===========    ============

          Net loss from continuing operations                               $(6,103,771)   $ (5,757,675)
                                                                            ===========    ============

          Basic and diluted net loss per share for continuing operations    $     (0.18)   $      (0.21)
                                                                            ===========    ============


          Weighted average number of shares of common stock in
            computation of basic and diluted net loss per share              34,495,185      27,840,822
                                                                            ===========    ============
</TABLE>


The  amount  of  the  excess  cost  attributable  to  in-process   research  and
development of IES and MDT in the amount of $26,000 has not been included in the
pro forma information, as it does not represent a continuing expense.



                                      F-16
<PAGE>

ELECTRIC FUEL CORPORATION AND ITS SUBSIDIARIES

--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In U.S. dollars

NOTE 1: - GENERAL (Cont.)


e. Discontinued operations:

In September 2002, the Company committed to a plan to discontinue the operations
of its  retail  sales of  consumer  battery  products.  The  Company  ceased the
operation and disposed of all assets related to this segment by an  abandonment.
The operations and cash flows of consumer  battery business have been eliminated
from the operations of the entity as a result of the disposal transactions.  The
Company  has no  intent of  continuing  its  activity  in the  consumer  battery
business.  The Company's plan of discontinuance  involved (i) termination of all
employees whose time was substantially  devoted to the consumer battery line and
who could not be used elsewhere in the Company's  operations,  including payment
of all  statutory  and  contractual  severance  sums,  by the end of the  fourth
quarter of 2002, and (ii) disposal of the raw materials, equipment and inventory
used  exclusively  in the consumer  battery  business,  since the Company has no
reasonable  expectation of being able to sell such raw  materials,  equipment or
inventory  for any sum  substantially  greater  than  the  cost of  disposal  or
shipping,  by the end of the first quarter of 2003.  The Company had  previously
reported  its  consumer  battery  business  as  a  separate  segment   (Consumer
Batteries)  as  called  for  by  Statement  of  Financial   Standards  No.  131,
"Disclosures About Segments of an Enterprise and Related Information" ("SFAS No.
131").

The results of operations  including revenue,  operating expenses,  other income
and expense of the retail sales of consumer battery  products  business unit for
2002,  2001 and 2000 have been  reclassified in the  accompanying  statements of
operations as a discontinued operation. The Company's balance sheets at December
31, 2002 and 2001  reflect the net  liabilities  of the retail sales of consumer
battery  products  business as net  liabilities  and net assets of  discontinued
operation within current liabilities and current assets.

At December 31, 2002, the estimated net losses  associated  with the disposition
of the retail sales of consumer  battery  products  business were  approximately
$13,566,206 for 2002. These losses included  approximately  $6,508,222 in losses
from operations for the period from January 1, 2002 through the measurement date
of December 31, 2002 and  $7,057,684,  reflecting a write-down  of inventory and
net property and  equipment  of the retail  sales of consumer  battery  products
business, as follows:

                                                      December 31, 2002
                                                      -----------------
          Write-off of inventories                       $2,611,000
          Impairment of property and equipment            4,446,684
                                                         ----------
                                                         $7,057,684
                                                         ==========


As a result of the  discontinuance  of  consumer  battery  segment,  the Company
ceased to use property and equipment related to this segment. In accordance with
Statement  of  Financial   Accounting  Standard  No.  144  "Accounting  for  the
Impairment or Disposal of Long- Lived  Assets"  ("SFAS No. 144") such assets was
considered to be impaired,  the  impairment to be recognized was measured by the
amount by which the carrying  amount of the assets exceeds the fair value of the
assets.


                                      F-17
<PAGE>

ELECTRIC FUEL CORPORATION AND ITS SUBSIDIARIES

--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In U.S. dollars


NOTE 1: - GENERAL (Cont.)

Obligations  to employees for severance and other  benefits  resulting  from the
discontinuation  have been  reflected in the financial  statements on an accrual
basis.

Summary  operating  results from the discontinued  operation for the years ended
December 31, 2002, 2001 and 2000 are as follows:

<TABLE>
<CAPTION>
                                                     Year Ended December 31,
                                        ----------------------------------------------
                                            2002             2001             2000
                                        ------------     ------------     ------------
<S>                                     <C>              <C>              <C>
          Revenues                      $  1,100,442     $  1,939,256     $  2,563,620
          Cost of sales (1)               (5,293,120)      (5,060,966)      (3,073,142)
                                        ------------     ------------     ------------

          Gross loss                       4,192,678        3,121,710          509,522
          Operating expenses               4,926,844       10,139,289        8,086,755
          Impairment of fixed assets       4,446,684               --               --
                                        ------------     ------------     ------------
          Operating loss                $ 13,566,206     $ 13,260,999     $  8,596,277
                                        ============     ============     ============
</TABLE>

----------------------
(1) Including write-off of inventory in the amount of $2,611,000, $441,000 and
$0 for the years ended December 31, 2002, 2001 and 2000.



                                      F-18
<PAGE>


ELECTRIC FUEL CORPORATION AND ITS SUBSIDIARIES

--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In U.S. dollars


NOTE 2: - SIGNIFICANT ACCOUNTING POLICIES

The  consolidated  financial  statements  have been prepared in accordance  with
generally accepted accounting principles in the United States ("U.S. GAAP").

a. Use of estimates:

The preparation of financial  statements in conformity  with generally  accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial  statements and accompanying notes.
Actual results could differ from those estimates.

b. Financial statements in U.S. dollars:

A majority  of the  revenues  of the  Company  and most of its  subsidiaries  is
generated in U.S. dollars.  In addition,  a substantial portion of the Company's
and most of its  subsidiaries  costs are  incurred in U.S.  dollars  ("dollar").
Management  believes  that the dollar is the primary  currency  of the  economic
environment in which the Company and most of its subsidiaries operate. Thus, the
functional and reporting currency of the Company and most of its subsidiaries is
the dollar.  Accordingly,  monetary accounts maintained in currencies other than
the U.S. dollar are remeasured into U.S. dollars in accordance with Statement of
Financial Accounting Standards No. 52 "Foreign Currency  Translation" ("SFAS No.
52"). All  transaction,  gains and losses from the remeasured  monetary  balance
sheet items are  reflected  in the  consolidated  statements  of  operations  as
financial income or expenses, as appropriate.

The majority of financial  transactions  of MDT is in New Israel Shekel  ("NIS")
and a substantial portion of MDT's costs is incurred in NIS. Management believes
that the NIS is the  functional  currency  of MDT.  Accordingly,  the  financial
statements  of MDT have been  translated  into U.S.  dollars.  All balance sheet
accounts have been translated  using the exchange rates in effect at the balance
sheet  date.  Statement  of  operations  amounts has been  translated  using the
average exchange rate for the period. The resulting translation  adjustments are
reported as a component of accumulated other comprehensive loss in shareholders'
equity

c. Principles of consolidation:

The consolidated  financial  statements  include the accounts of the Company and
its  wholly  and  majority  owned   subsidiaries.   Intercompany   balances  and
transactions have been eliminated upon consolidation.

d. Cash equivalents:

Cash  equivalents  are  short-term  highly liquid  investments  that are readily
convertible to cash with maturities of three months or less when acquired.

e. Inventories:

Inventories  are  stated  at the  lower  of  cost  or  market  value.  Inventory
write-offs  and  write-down  provisions are provided to cover risks arising from
slow-moving items or technological obsolescence and for market prices lower than
cost.  The Company  periodically  evaluates  the  quantities on hand relative to
current and historical selling prices and historical and projected sales volume.
Based on this  evaluation,  provisions  are made to write  inventory down to its
market value.  In 2002,  the Company  wrote off $116,008 of obsolete  inventory,
which has been included in the cost of revenues.


                                      F-19
<PAGE>

ELECTRIC FUEL CORPORATION AND ITS SUBSIDIARIES

--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In U.S. dollars


NOTE 2: - SIGNIFICANT ACCOUNTING POLICIES


Cost is determined as follows:

Raw and packaging materials - by the average cost method.

Work in progress -  represents  the cost of  manufacturing  with the addition of
allocable indirect manufacturing cost.

Finished products - on the basis of direct manufacturing costs with the addition
of allocable indirect manufacturing costs.

f. Property and equipment:

Property and equipment are stated at cost net of  accumulated  depreciation  and
investment  grants (no  investment  grants were received  during 2002,  2001 and
2000).

Depreciation is calculated by the straight-line method over the estimated useful
lives of the assets, at the following annual rates:

                                                                  %
                                                     ---------------------------

      Computers and related equipment                            33
      Motor vehicles                                             15
      Office furniture and equipment                           6 - 10
      Machinery, equipment and installation              10 - 25 (mainly 10)
      Leasehold improvements                         Over the term of the lease

The Company and its  subsidiaries'  long-lived  assets and certain  identifiable
intangibles  are  reviewed  for  impairment  in  accordance  with  Statement  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 the carrying amount 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 assets.  If such assets
are  considered to be impaired,  the  impairment to be recognized is measured by
the amount by which the carrying  amount of the assets exceeds the fair value of
the assets.  Assets to be  disposed of by sale are  reported at the lower of the
carrying  amount or fair value less  selling  costs.  As of December 31, 2002 no
impairment losses have been identified.

g. Goodwill:

Goodwill  represents the excess of cost over the fair value of the net assets of
businesses  acquired.  Under Statement of Financial Accounting Standard No. 142,
"Goodwill and Other Intangible  Assets" ("SFAS No, 142") goodwill  acquired in a
business combination on or after July 1, 2001, is not amortized.


                                      F-20
<PAGE>


NOTE 2: - SIGNIFICANT ACCOUNTING POLICIES


SFAS No. 142 requires  goodwill to be tested for  impairment  on adoption of the
Statement and at least  annually  thereafter or between  annual tests in certain
circumstances,  and written down when impaired,  rather than being  amortized as
previous  accounting  standards  required.  Goodwill is tested for impairment by
comparing the fair value of the Company's  reportable  units with their carrying
value.  Fair value is determined using  discounted cash flows,  market multiples
and  market  capitalization.  Significant  estimates  used in the  methodologies
include  estimates of future cash flows,  future short-term and long-term growth
rates,  weighted  average cost of capital and estimates of market  multiples for
the reportable units.

h. Other intangible assets:

Intangible  assets  acquired  in a  business  combination  that are  subject  to
amortization  should be  amortized  over  their  useful  life  using a method of
amortization  that  reflects the pattern in which the  economic  benefits of the
intangible assets are consumed or otherwise used up, in accordance with SFAS No.
142.  Intangible  assets are amortized  over their useful life (See Note 1b. and
c).

i. Impairment of indefinite lived intangible asset

The acquired trademark is deemed to have an indefinite useful life because it is
expected to contribute to cash flows indefinitely. Therefore, the trademark will
not be amortized  until its useful life is no longer  indefinite  The  trademark
will be tested for impairment in accordance FAS 142.

j. Revenue recognition:

The  Company  generates   revenues   primarily  from  sales  of  multimedia  and
interactive  digital training systems and use-of-force  simulators  specifically
targeted for law  enforcement and firearms  training and from service  contracts
related  to such  sales  (through  IES),  from  providing  lightweight  armoring
services of  vehicles  (through  MDT),  and,  to a lesser  extent,  from sale of
zinc-air battery products for defense applications. To a lesser extent, revenues
are generated from development services and long-term arrangements subcontracted
by the U.S Government.

Revenues  from  products,  training and  simulation  systems are  recognized  in
accordance  with Staff  Accounting  Bulletin No. 101,  "Revenue  Recognition  in
Financial  Statements  ("SAB No.  101")  when the  following  criteria  are met:
persuasive  evidence  of an  arrangement  exists,  delivery  has  occurred,  the
seller's  price to the buyer is fixed or  determinable,  no  further  obligation
remains and collectibility is reasonably assured.

The Company does not grant a right of return to its customers.

Revenues from long-term  agreements,  subcontracted by the U.S. government,  are
recorded on a  cost-sharing  basis,  when  services  are  rendered  and products
delivered,  as prescribed in the related  agreements.  Provisions  for estimated
losses are  recognized  in the period in which the  likelihood of such losses is
determined. As of December 31, 2002, no such estimated losses were identified.

Deferred  revenues  includes  unearned amounts received from customers,  but not
recognized as revenues.


                                      F-21
<PAGE>

ELECTRIC FUEL CORPORATION AND ITS SUBSIDIARIES

--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In U.S. dollars

NOTE 2: - SIGNIFICANT ACCOUNTING POLICIES


Revenues from development services are recognized based on Statement of Position
No.  81-1  "Accounting  for  Performance  of  Construction  - Type  and  Certain
Production - Type  Contracts"  ("SOP  81-1"),  using  contract  accounting  on a
percentage of completion method,  based on completion of agreed-upon  milestones
and in  accordance  with the "Output  Method" or based on the time and  material
basis.  Provisions for estimated losses on uncompleted  contracts are recognized
in the  period in which the  likelihood  of such  losses  is  determined.  As of
December 31, 2002, no such estimated losses were identified.


Revenues  from  lightweight  armoring  services of vehicles  are  recorded  when
services are rendered and vehicle is  delivered  and no  additional  obligations
exists.

k. Research and development cost:

Research  and  development  costs,  net of grants  received,  are charged to the
statements of operations as incurred.

l. Royalty-bearing grants:

Royalty-bearing  grants  from the Office of the Chief  Scientist  ("OCS") of the
Israeli  Ministry of  Industry  and Trade and from the  Israel-U.S.  Bi-national
Industrial Research and Development  Foundation  ("BIRD-F") for funding approved
research  and  development  projects are  recognized  at the time the Company is
entitled to such grants on the basis of the costs  incurred,  and  included as a
deduction of research and development costs.

m. Income taxes:

The Company and its  subsidiaries  account for income taxes in  accordance  with
Statement of Financial  Accounting  Standards  No. 109,  "Accounting  for Income
Taxes"  ("SFAS No. 109").  This  Statement  prescribes  the use of the liability
method,   whereby  deferred  tax  assets  and  liability  account  balances  are
determined  based on differences  between  financial  reporting and tax bases of
assets and  liabilities  and are  measured  using the enacted tax rates and laws
that will be in effect when the differences are expected to reverse. The Company
and its  subsidiaries  provide a valuation  allowance,  if necessary,  to reduce
deferred tax assets to their estimated realizable value.

n. Concentrations of credit risk:

Financial  instruments that potentially subject the Company and its subsidiaries
to  concentrations  of  credit  risk  consist   principally  of  cash  and  cash
equivalents,  restricted  collateral  deposit and other  restricted  cash, trade
receivables and long-term loans to  shareholders.  Cash and cash equivalents are
invested in U.S. dollar deposits with major Israeli,  U.S. and U.K. banks.  Such
deposits in the U.S.  may be in excess of insured  limits and are not insured in
other  jurisdictions.  Management believes that the financial  institutions that
hold the Company's investments are financially sound and,  accordingly,  minimal
credit risk exists with respect to these investments.


                                      F-22
<PAGE>

ELECTRIC FUEL CORPORATION AND ITS SUBSIDIARIES

--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In U.S. dollars

NOTE 2: - SIGNIFICANT ACCOUNTING POLICIES

The trade  receivables  of the Company and its  subsidiaries  are mainly derived
from sales to  customers  located  primarily  in the United  States,  Europe and
Israel.  Management believes that credit risks are moderated by the diversity of
its end customers  and  geographic  sales areas.  The Company  performs  ongoing
credit  evaluations  of its  customers'  financial  condition.  An allowance for
doubtful  accounts is determined with respect to those accounts that the Company
has determined to be doubtful of collection.

The Company has  provided  long-term  loans to its  shareholders,  amounting  to
$733,059  as of  December  31,  2002.  The  long-term  loans are  secured by the
Company's shares and since the value of the Company's shares has decreased,  the
Company incurred a material loss during the years 2002 and 2001.

The Company  and its  subsidiaries  had no  off-balance-sheet  concentration  of
credit  risk such as  foreign  exchange  contracts,  option  contracts  or other
foreign hedging arrangements.

o. Basic and diluted net loss per share:

Basic net loss per share is computed  based on the  weighted  average  number of
shares of common stock outstanding  during each year. Diluted net loss per share
is  computed  based on the  weighted  average  number of shares of common  stock
outstanding  during each year,  plus dilutive  potential  shares of common stock
considered  outstanding  during  the  year,  in  accordance  with  Statement  of
Financial Standards No. 128, "Earnings Per Share" ("SFAS No. 128").

All  outstanding  stock  options  and  warrants  have  been  excluded  from  the
calculation of the diluted net loss per common share because all such securities
are anti-dilutive for all periods  presented.  The total weighted average number
of shares  related to the  outstanding  options and warrants  excluded  from the
calculations  of  diluted  net loss  per  share  was  4,394,803,  3,170,334  and
2,812,725 for the years ended December 31, 2002, 2001 and 2000, respectively.

p. Accounting for stock-based compensation:

The Company has elected to follow  Accounting  Principles  Board  Opinion No. 25
"Accounting for Stock Issued to Employees" ("APB No. 25") and Interpretation No.
44 "Accounting for Certain Transactions  Involving Stock Compensation" ("FIN No.
44") in accounting for its employee  stock option plans.  Under APB No. 25, when
the exercise price of the Company's  share options is less than the market price
of  the  underlying  shares  on the  date  of  grant,  compensation  expense  is
recognized.   Under  Statement  of  Financial   Accounting   Standard  No.  123,
"Accounting  for   Stock-Based   Compensation"   ("SFAS  No.  123"),   pro-forma
information regarding net income and income per share is required,  and has been
determined as if the Company had accounted for its employee  stock options under
the fair value method of SFAS No. 123.

The  Company  applies  SFAS No. 123 and  Emerging  Issue  Task  Force No.  96-18
"Accounting for Equity  Instruments  that are Issued to Other than Employees for
Acquiring,  or in Conjunction  with Selling,  Goods or Services"  ("EITF 96-18")
with respect to options issued to non-employees. SFAS No. 123 requires use of an
option  valuation  model to measure  the fair value of the  options at the grant
date.


                                      F-23
<PAGE>

ELECTRIC FUEL CORPORATION AND ITS SUBSIDIARIES

--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In U.S. dollars

NOTE 2: - SIGNIFICANT ACCOUNTING POLICIES (Cont.)

     The fair value for the options to  employees  was  estimated at the date of
grant,  using the  Black-Scholes  Option  Valuation  Model,  with the  following
weighted-average  assumptions:  risk-free interest rates of 3.5%, 3.5-4.5%,  and
6.5% for 2002, 2001 and 2000, respectively; a dividend yield of 0.0% for each of
those  years;  a volatility  factor of the  expected  market price of the Common
Stock of 0.64 for 2002, 0.82 for 2001 and 0.95% for 2000; and a weighted-average
expected life of the option of 10 years for 2002, 2001 and 2000.

          The following table  illustrates the effect on net income and earnings
     per share, assuming that the Company had applied the fair value recognition
     provision of SFAS No. 123 on its stock-based employee compensation:

<TABLE>
<CAPTION>
                                                                           Year ended December 31,
                                                             ----------------------------------------------
                                                                 2002             2001             2000
                                                             ------------     ------------     ------------
<S>                                                          <C>              <C>              <C>
     Net income as reported                                  $(18,504,358)    $(18,483,455)    $(11,980,958)
     Add: Stock-based compensation expenses included in
        reported net loss                                              --           17,240           20,684
                                                             ------------     ------------     ------------
     Deduct:  Stock-based compensation expenses
        determined under fair value method for all awards      (2,072,903)      (2,906,386)      (2,045,764)
                                                             ------------     ------------     ------------
     Pro forma net loss                                      $(20,577,261)    $(21,372,601)    $(14,006,038)
                                                             ============     ============     ============
     Loss per share:
        Basic and diluted, as reported                       $      (0.57)    $      (0.76)    $      (0.62)
                                                             ============     ============     ============
        Diluted, pro forma                                   $      (0.64)    $      (0.88)    $      (0.73)
                                                             ============     ============     ============
</TABLE>

q. Fair value of financial instruments:

The  following  methods  and  assumptions  were  used  by the  Company  and  its
subsidiaries   in  estimating   their  fair  value   disclosures  for  financial
instruments:

The carrying amounts of cash and cash equivalents  restricted collateral deposit
and other restricted cash, trade receivables,  short-term bank credit, and trade
payables  approximate  their fair value due to the  short-term  maturity of such
instruments.

The  carrying   amount  of  the  Company's   long-term   loans  to  shareholders
approximates  their  fair  value.  The fair value was  estimated  using the fair
market value of the secured Company's shares.

Long-terms  liabilities are estimated by discounting the future cash flows using
current  interest rates for loans or similar terms and maturities.  The carrying
amount of the long-term liabilities approximates their fair value.

r. Severance pay:

The Company's  liability  for  severance  pay is calculated  pursuant to Israeli
severance pay law based on the most recent salary of the employees multiplied by
the number of years of employment  as of the balance  sheet date.  Employees are
entitled  to one  month's  salary  for each  year of  employment,  or a  portion
thereof.  The Company's  liability for all of its employees is fully provided by
monthly deposits with severance pay funds, insurance policies and by an accrual.
The value of these  policies is recorded  as an asset in the  Company's  balance
sheet.


                                      F-24
<PAGE>

ELECTRIC FUEL CORPORATION AND ITS SUBSIDIARIES

--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In U.S. dollars


NOTE 2: - SIGNIFICANT ACCOUNTING POLICIES (Cont.)

In addition  and  according  to certain  employment  agreements,  the Company is
obligated to provide for a special  severance  pay in addition to amounts due to
certain employees  pursuant to Israeli severance pay law. The Company has made a
provision  for this  special  severance  pay in  accordance  with  Statement  of
Financial  Accounting  Standard  No.  106,   "Employer's   Accounting  for  Post
Retirement  Benefits Other than Pensions"  ("SFAS No. 106").  As of December 31,
2002  and  2001,  the  accumulated  severance  pay in that  regard  amounted  to
$1,630,366 and $1,975,535, respectively.


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

Severance  income for the year ended  December 31, 2002  amounted to $338,574 as
compared to severance  expenses for the years ended  December 31, 2001 and 2000,
which amounted to $653,885 and $430,943, respectively.

s. Advertising costs:

The  Company  and  its  subsidiaries  expense  advertising  costs  as  incurred.
Advertising  expense for the years ended  December 31,  2002,  2001 and 2000 was
approximately $294,599, $1,676,280 and $1,453,025, respectively.

t. Impact of recently issued accounting standards:

In June 2002, the FASB issued SFAS No. 146 "Accounting for Costs Associated with
Exit or Disposal  Activities" which addresses  significant  issues regarding the
recognition,  measurement,  and  reporting  of costs  associated  with  exit and
disposal activities,  including restructuring activities.  SFAS No. 146 requires
that costs  associated with exit or disposal  activities be recognized when they
are  incurred  rather  than at the date of a  commitment  to an exit or disposal
plan.  SFAS No. 146 is effective for all exit or disposal  activities  initiated
after  December 31,  2002.  The Company does not expect the adoption of SFAS No.
146 to  have a  material  impact  on its  results  of  operations  or  financial
position.


NOTE 3: - RESTRICTED COLLATERAL DEPOSIT AND OTHER RESTRICTED CASH

The  restricted  collateral  deposit is  invested in a $595,341  certificate  of
deposit that is used to secure a standby letter of credit required in connection
with a sales  contract the Company  signed with the Royal Thai Army on September
28, 2002. The other restricted cash consists of security  deposits in connection
with real property lease arrangements.


                                      F-25
<PAGE>


ELECTRIC FUEL CORPORATION AND ITS SUBSIDIARIES

--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In U.S. dollars


NOTE 4: - OTHER ACCOUNTS RECEIVABLE AND PREPAID EXPENSES


                                      December 31,
                               ------------------------
                                  2002          2001
                               ----------    ----------

     Government authorities    $  348,660    $  204,435
     Employees                     23,959         4,680
     Prepaid expenses             591,008       198,150
     Other                         68,684        41,386
                               ----------    ----------
                               $1,032,311    $  448,651
                               ==========    ==========


NOTE 5: - INVENTORIES

                                         December 31,
                                    ------------------------
                                       2002         2001
                                    ----------    ----------

     Raw and packaging materials    $  893,666    $  454,086
     Work in progress                  296,692        28,995
     Finished products                 521,121        40,285
                                    ----------    ----------
                                    $1,711,479    $  523,366
                                    ==========    ==========


NOTE 6: - LOANS TO SHAREHOLDERS


In February  and May 2000,  two  officers of the  Company  exercised  options to
purchase a total of 263,330 and 550,000,  respectively,  shares of the Company's
common stock (see Note 12.e.2).  In connection with such exercises,  the Company
granted  loans  secured by the  Company's  shares to those two officers to cover
their  related  tax  liabilities.  The  loans  were in the form of  non-recourse
promissory  notes in the total  amount of $958,156,  bearing  interest at a rate
equal to 4% over the  then-current  percentage  increase in the Israeli Consumer
Price  Index  ("CPI")  between  the date of the loan and the date of the  annual
interest  calculation.  During the years  2000 and 2001 one of the  shareholders
repaid a portion of his non-recourse note at the amount of $225,097 and $38,639,
respectively.  During the years 2002 and 2001,  the Company has  impaired  those
loans and has written off the amounts of $501,288  and  $206,005,  respectively,
due to decline of the fair  market  value of its shares,  which was  recorded in
general and administrative expenses.



                                      F-26
<PAGE>

ELECTRIC FUEL CORPORATION AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

--------------------------------------------------------------------------------
IN U.S. DOLLARS


NOTE 7: - PROPERTY AND EQUIPMENT, NET

a. Composition of property and equipment is as follows:

<TABLE>
<CAPTION>
                                                              December 31,
                                                       ------------------------
                                                          2002          2001
                                                       ----------    ----------
     Cost:
<S>                                                    <C>           <C>
              Computers and related equipment          $  815,759    $  786,158
              Motor vehicles                              335,286       336,216
              Office furniture and equipment              519,092       313,760
              Machinery, equipment and                  4,715,182     4,294,600
                installations
              Leasehold improvements                      442,482       355,536
              Demo inventory                              154,689            --
                                                       ----------    ----------

                                                        6,982,490     6,086,270
                                                       ----------    ----------
     Accumulated depreciation:
              Computers and related equipment             669,258       566,290
              Motor vehicles                               39,281        62,523
              Office furniture and equipment              255,829       180,498
              Machinery, equipment and installations    3,106,389     2,797,558
              Leasehold improvements                      356,484       258,595
                                                       ----------    ----------

                                                        4,427,241     3,865,464
                                                       ----------    ----------

     Depreciated cost                                  $2,555,249    $2,220,806
                                                       ==========    ==========
</TABLE>


b.  Depreciation  expense amounted to $473,739,  $530,013 and $514,242,  for the
years ended December 31, 2002, 2001 and 2000, respectively.

As for liens, see Note 11.d.


                                      F-27
<PAGE>

ELECTRIC FUEL CORPORATION AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

--------------------------------------------------------------------------------
IN U.S. DOLLARS

NOTE 8: - OTHER INTANGIBLE ASSETS, NET

a.
                                               Year ended December 31,
                                               ----------    ------------
                                                  2002            2001
                                               ----------    ------------
     Cost:
       Technology                              $1,795,000    $         --
       Existing contracts                          46,000              --
       Covenants not to compete                    99,000              --
       Customer list                              812,000              --
                                               ----------    ------------

                                                2,752,000              --
     Less - accumulated amortization              623,543              --
                                               ----------    ------------

     Amortized cost                             2,128,457              --
     Trademarks                                   439,000              --
                                               ----------    ------------

                                                2,567,457              --
                                               ==========    ============


b.   Amortization  expenses amounted to $623,543 for the year ended December 31,
     2002.

c.   Estimated amortization expenses for the years ended:

                      Year ended December 31,
                      -----------------------


                 2003                 $1,172,000
                 2004                    263,000
                 2005                    233,000
                 2006                    205,843

     2007 and forward                    254,614
                                      ----------
                                      $2,128,457
                                      ==========

NOTE 9: - PROMISSORY NOTES

In  connection  with the  acquisition  discussed in Note 1b, the Company  issued
promissory notes in the face amount of an aggregate of $1,800,000,  one of which
was a note for $400,000 that was convertible into an aggregate of 200,000 shares
of the  Company's  common  stock.  The Company has  accounted for these notes in
accordance  with  Accounting  Principles  Board  Opinion  No. 21,  "Interest  on
Receivables  and  Payables,"  and recorded the notes at its present value in the
amount of $1,686,964. In December 2002, the terms of these promissory notes were
amended to (i)  extinguish  the  $1,000,000  note due at the end of June 2003 in
exchange for prepayment of $750,000, (ii) amend the $400,000 note due at the end
of December 2003 to be a $450,000 note, and (iii) amend the convertible $400,000
note due at the end of June 2004 to be a $450,000 note  convertible  at $0.75 as
to $150,000, at $0.80 as to $150,000, and at $0.85 as to $150,000. In accordance
with EITF 96-19,  "Debtor's  Accounting for a  Modification  or Exchange of Debt
Instruments,"  the terms of the promissory notes are not changed or modified and
the cash flow effect on a present  value  basis is less than 10 % and  therefore
the Company did not record any compensation related to these changes.



                                      F-28
<PAGE>

ELECTRIC FUEL CORPORATION AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

--------------------------------------------------------------------------------
IN U.S. DOLLARS

NOTE 10: - OTHER ACCOUNTS PAYABLE AND ACCRUED EXPENSES


                                              December 31,
                                       ------------------------
                                          2002          2001
                                       ----------    ----------

     Employees and payroll accruals    $  615,292    $  688,985
     Accrued vacation pay                 137,179       300,779
     Accrued expenses                     342,793        74,639
     Advances from customers                   --        98,070
     Minority balance                     289,451            --
     Government authorities               497,428            --
     Deferred warranty revenues            95,831            --
     Other                                 31,135        60,180
                                       ----------    ----------
                                       $2,009,109    $1,122,653
                                       ==========    ==========



NOTE 11: - COMMITMENTS AND CONTINGENT LIABILITIES


a. Royalty commitments:

1. Under EFL's research and development  agreements with the Office of the Chief
Scientist  ("OCS"),  and  pursuant to  applicable  laws,  EFL is required to pay
royalties at the rate of 3%-3.5% of net sales of products  developed  with funds
provided by the OCS, up to an amount equal to 100% of research  and  development
grants received from the OCS (linked to the U.S. dollars. Amounts due in respect
of projects approved after year 1999 also bear interest of the Libor rate).

     EFL is obligated to pay  royalties  only on sales of products in respect of
which OCS participated in their  development.  Should the project fail, EFL will
not be obligated to pay any royalties.

     Royalties paid or accrued for the years ended  December 31, 2002,  2001 and
2000, to the OCS amounted to $32,801, $75,791 and $70,637, respectively.

     As of December 31, 2002, total contingent liability to pay to OCS (at 100%)
was outstanding at the amount of approximately $9,882,000.

2. EFL, in cooperation with a U.S.  participant,  has received approval from the
BIRD-F for 50% funding of a project for the  development of a hybrid  propulsion
system  for  transit  buses.  The  maximum  approved  cost  of  the  project  is
approximately  $1.8  million,  and the  Company's  share in the project costs is
anticipated to amount to approximately $1.1 million, which will be reimbursed by
BIRD-F at the aforementioned rate of 50%.

Royalties  at rates of 2.5%-5%  of sales are  payable up to a maximum of 150% of
the  grant  received,  linked  to the U.S.  Consumer  Price  Index.  Accelerated
royalties are due under certain circumstances.

     EFL is obligated to pay  royalties  only on sales of products in respect of
which BIRD-F  participated  in their  development.  Should the project fail, EFL
will not be obligated to pay any royalties.


                                      F-29
<PAGE>

ELECTRIC FUEL CORPORATION AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

--------------------------------------------------------------------------------
IN U.S. DOLLARS

NOTE 11: - COMMITMENTS AND CONTINGENT LIABILITIES (Cont.)


     Royalties  paid or  accrued to the  BIRD-F  amounted  at $0 for each of the
three years ended December 31, 2002.

     As of December 31, 2002, total contingent liability to pay BIRD-F (at 150%)
was approximately $772,000.

b. Lease commitments:

The Company and its subsidiaries  rent their facilities under various  operating
lease agreements, which expire on various dates, the latest of which is in 2005.
The  minimum  rental  payments  under  non-cancelable  operating  leases  are as
follows:

             Year ended December 31,
     ---------------------------------
     2003                     $439,947
     2004                      147,444
     2005                       86,775
                              --------

                              $674,166
                              ========

Total rent expenses for the years ended December 31, 2002,  2001 and 2000,  were
approximately $629,101, $456,701 and $261,000, respectively.

Rental payments are primarily payable in Israeli currency, linked to the Israeli
Consumer Price Index ("CPI").

c. Guarantees:

The Company obtained bank guarantees in the amount of $34,893, mainly in respect
of a letter of credit to the supplier of one of its subsidiaries.

d. Liens:

As security for compliance with the terms related to the investment  grants from
the state of Israel, EFL has registered  floating liens on all of its assets, in
favor of the State of Israel.

NOTE 12: - SHAREHOLDERS' EQUITY

a. Shareholders' rights:

The  Company's  shares  confer upon the  holders the right to receive  notice to
participate and vote in the general meetings of the Company and right to receive
dividends, if and when declared.

b. Issuance of common stock to investors:

1. On  January  5,  2000,  the  Company  entered  into a Common  Stock  Purchase
Agreement  with a group of private  investors.  Pursuant to this  agreement,  on
January 10,  2000,  the Company  issued  385,000  shares of common  stock to the
investors for a total purchase price of $962,500.


                                      F-30
<PAGE>


ELECTRIC FUEL CORPORATION AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

--------------------------------------------------------------------------------
IN U.S. DOLLARS

NOTE 12: - SHAREHOLDERS' EQUITY (Cont.)

2. On May 17, 2000,  the Company  entered  into an  agreement  with an investor,
pursuant to which the Company  issued  1,000,000  shares of common  stock to the
investor,  at a price  of  $10.00  per  share,  for a total  purchase  price  of
$10,000,000.  In addition, on November 16, 2000, the Company subsequently issued
an  additional  92,952  shares of common  stock  pursuant  to the  anti-dilution
calculation stated in the share purchase agreement with the investor.

3. On November 17, 2000,  the Company  entered into an agreement  with a venture
capital fund,  pursuant to which the Company issued  1,000,000  shares of common
stock to the  investor,  at a price of $8.375  per share,  for a total  purchase
price of $8,375,000. (See also Note 12.f.2.)

4. In May 2001,  the Company  issued a total of  4,045,454  shares of its common
stock to a group of institutional  investors at a price of $2.75 per share, or a
total purchase price of $11,125,000. (See also Note 12.f.2 and 12.f.3.)

5. On November 21, 2001, the Company  issued a total of 1,503,759  shares of its
common stock at a purchase  price of $1.33 per share,  or a total purchase price
of $2,000,000, to a single institutional investor.

6. On December 5, 2001,  the Company  issued a total of 1,190,476  shares of its
common stock at a purchase  price of $1.68 per share,  or a total purchase price
of $2,000,000, to a single institutional investor.

7. On January  18,  2002,  the Company  issued a total of 441,176  shares of its
common stock at a purchase  price of $1.70 per share,  or a total purchase price
of $750,000, to an investor (see also Note 12.f.4).

8. On January 24, 2002,  the Company  issued a total of 1,600,000  shares of its
common stock at a purchase  price of $1.55 per share,  or a total purchase price
of $2,480,000, to a group of investors.

c. Issuance of common stock to service providers and employees:

1. In June 2000,  35,000 shares of common stock were issued at par consideration
to a consultant for providing business development and marketing services in the
United  Kingdom.  At the  issuance  date,  the fair  value of these  shares  was
determined  both by the value of the shares  issued as  reflected by fair market
price  at the  issuance  date  and by the  value of the  services  provided  and
amounted to $525,000 in  accordance  with EITF 96-18.  In  accordance  with EITF
00-18,   "Accounting  Recognition  for  Certain  Transactions  Involving  Equity
Instruments  Granted  to Other  Than  Employees"  ("EITF  00-18"),  the  Company
recorded  this  compensation  expenses  of  $405,000  during  the year  2000 and
$120,000 during the year 2001 and included these amounts in marketing expenses.

2. On June 17, 2001 the Company  issued a  consultant a total of 8,550 shares of
its common stock in  compensation  for services  rendered by such consultant for
the  Company  for  preparation  of  certain  video  point-of-purchase  and sales
demonstration materials. At the issuance date the fair value of these shares was
determined  both by the value of the shares  issued as  reflected by fair market
price  at the  issuance  date  and by the  value of the  services  provided  and
amounted to $15,488 in  accordance  with EITF  96-18.  In  accordance  with EITF
00-18, the Company recorded this compensation  expense as marketing  expenses in
the amount of $15,488.


                                      F-31
<PAGE>

ELECTRIC FUEL CORPORATION AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

--------------------------------------------------------------------------------
IN U.S. DOLLARS

NOTE 12: - SHAREHOLDERS' EQUITY (Cont.)

3. On September 17, 2001 the Company issued to selling and marketing consultants
a total of 337,571 shares of its common stock in compensation  for  distribution
services  rendered by such  consultant.  At the issuance  date the fair value of
these shares was determined  both by the value of the shares issued as reflected
by fair  market  price at the  issuance  date and by the  value of the  services
provided  and  amounted  to  $524,889  in  accordance  with  EITF  96-18  and in
accordance with EITF 00-18.  The Company recorded this  compensation  expense as
marketing expenses in the amount of $524,889.

4. On February  15, 2002 and  September  10,  2002,  318,468 and 50,000  shares,
respectively,  of common stock were issued at par  consideration to a consultant
for providing business development and marketing services in the United Kingdom.
At the issuance date, the fair value of these shares was determined  both by the
value of the shares  issued as  reflected  by fair market  price at the issuance
date and by the value of the  services  provided  and  amounted to $394,698  and
$63,000,  respectively,  in accordance  with EITF 96-18. In accordance with EITF
00-18, the Company recorded this  compensation  expense of $394,698 and $63,000,
respectively,  during  the year  2002 and  included  this  amount  in  marketing
expenses.

5. On  September  10, 2002,  an aggregate of 13,000  shares of common stock were
issued at par  consideration  to two of our employees as stock  bonuses.  At the
issuance  date, the fair value of these shares was determined by the fair market
value of the shares  issued as  reflected  by fair market  price at the issuance
date in accordance  with APB No. 25. In accordance  with APB No. 25, the Company
recorded this compensation  expense of $13,000 during the year 2002 and included
this amount in general and administrative expenses.

d. Issuance of shares to lenders

As part of the securities purchase agreement on December 31, 2002 (see Note 17),
the Company issued 387,301 shares at par  consideration to lenders for the first
nine months of interest expenses.  At the issuance date, the fair value of these
shares was  determined  both by the value of the shares  issued as  reflected by
fair market  price at the  issuance  date and by the value of the  interest  and
amounted to $236,250 in accordance with APB 14.

e. Issuance of notes receivable:

1.  Non-recourse  notes receivable from  employee-shareholders  arising from the
purchase of 1,500,000 of the Company's  shares,  matured in 1998. The notes were
renewed as recourse notes, due on December 31, 2007,  bearing interest at a rate
of 1% over the then-current  federal funds rate of 5.5% or linked to the Israeli
CPI,  whichever is higher.  In April 1998,  the terms of the recourse notes were
amended such that the Company would have  recourse  only to certain  termination
compensation  due  to  the  employee-shareholders  (which  exceeds  the  amounts
outstanding    under   the   notes),   or   if   terminated   for   cause,   the
employee-shareholders would continue to be personally liable.

Additionally,  the Company  agreed to  purchase  the  Company's  shares from the
employee-shareholders,  at  prevailing  market  prices,  up to the  full  amount
outstanding under the notes and to grant new options at exercise prices equal to
prevailing  market  prices,  in the  amount  that the  shares  were  sold by the
employee-shareholders.


                                      F-32
<PAGE>

ELECTRIC FUEL CORPORATION AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

--------------------------------------------------------------------------------
IN U.S. DOLLARS

NOTE 12: - SHAREHOLDERS' EQUITY (Cont.)

In March 2000, the  employee-shareholders  exercised  certain stock options (see
Note 12.g).  The proceeds in the amount of $605,052  from the sale of the shares
were  allocated to the repayment of the loan  referred to above.  As of December
31, 2002, there was no outstanding balance on this loan.

2. In February 2000 and in May 2000,  certain officers of the Company  exercised
options to purchase a total of 263,330 and 550,000, respectively,  shares of the
Company's  common  stock,   paying  the  exercise  price  in  form  of  ten-year
non-recourse promissory notes in an aggregate amount of $658,326 and $3,040,250,
respectively.  The notes are secured by the shares  issued upon exercise of such
options,  bearing non-recourse interest at a rate equal to the federal fund rate
+ 1%. (See Note 6)

The Company has accounted for these  promissory  notes as a variable stock award
pursuant  to  the  provisions  of  Emerging   Issues  Task  Force  issue  95-16,
"Accounting  for Stock  Compensation  Arrangements  with  Employer Loan Features
under  APB  Opinion  25"  ("EITF  95-16").   The  Company  did  not  record  any
compensation  due to the  decrease in the market value of the  Company's  shares
during the years 2001 and 2000.

In February 2001, the Board of Directors of the Company, upon the recommendation
of its Compensation  Committee and with the agreement of the officers  involved,
purchased a total of 550,000 of the shares,  which had already been  issued,  in
exchange for repayment of the non-recourse notes from the officers in the amount
of $3,470,431.  $3,183,530 out of this amount relates to 550,000 shares from May
2000.  The  remaining  amount of $248,262  represents  repayment of other notes,
including  $38,639 of loans to shareholders  described in Note 6. As a result of
this  transaction,  the  Company  recorded  treasury  stock  in  the  amount  of
$3,499,375. An amount of $228,674 was recorded as additional  paid-in-capital as
it reflected a compensation expense related to this re-purchase.

f. Warrants:

1. As part of an  investment  agreement  in December  1999,  the Company  issued
warrants  to  purchase up to an  additional  950,000  and 475,000  shares of the
Company's common stock to the investors at the exercise price of $1.25 and $4.50
per share,  respectively.  Pursuant to the terms of these  warrants,  a total of
251,196 shares of common stock were issued to such warrant  holders in 2000 on a
cashless  exercise basis. As of December 31, 2000,  1,050,000  warrants had been
exercised, in addition to the warrants issued on a cashless basis.

2. As part of the investment  agreement in November 2000 (see Note 12.b.3),  the
Company  issued  warrants to purchase an additional  1,000,000  shares of common
stock to the  investor,  with  exercise  prices of $11.31  for  333,333 of these
warrants and $12.56 per share for 666,667 of these  warrants.  In addition,  the
Company  issued  warrants  to  purchase  150,000  shares of common  stock,  with
exercise  prices of $9.63 for 50,000 of these  warrants and $12.56 per share for
100,000 of these warrants to an investment  banker  involved in this  agreement.
Out of these  warrants  issued  to the  investor,  666,667  warrants  expire  on
November 17, 2005 and 333,333 warrants were to expire on August 17, 2001.

As part of the  transaction in May 2001 (see Note 12 b.4), the Company  repriced
these warrants in the following manner:


                                      F-33
<PAGE>

ELECTRIC FUEL CORPORATION AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

--------------------------------------------------------------------------------
IN U.S. DOLLARS

NOTE 12: - SHAREHOLDERS' EQUITY (Cont.)



     o    Of the 1,000,000 warrants granted to the investor,  the exercise price
          of 666,667  warrants  was reduced  from $12.56 to $3.50 and of 333,333
          warrants  was reduced from $11.31 to $2.52.  In addition,  the 333,333
          warrants  that were to expire on August  17,  2001,  were  immediately
          exercised for a total consideration of $840,000.

     o    Moreover, the Company issued to this investor an additional warrant to
          purchase  250,000 shares of common stock at an exercise price of $3.08
          per share, to expire on May 3, 2006.

     o    Of the 150,000 warrants granted to the investment  banker the exercise
          price of 100,000  warrants  was  reduced  from  $12.56 to $3.08 and of
          50,000  warrants  was reduced from $9.63 to $3.08.  In  addition,  the
          50,000  warrants  that were to expire on August 17, 2001 were extended
          to November 17, 2005.

As a result of the  aforesaid  modifications,  including  the  repricing  of the
warrants to the investors and to the investment  banker and the additional grant
of warrants to the investor,  the Company has recorded a deemed  dividend in the
amount of  $1,196,667,  to reflect  the  additional  benefit  created  for these
certain  investors.  The fair value of the repriced warrants was calculated as a
difference  measured  between  (1)  the  fair  value  of  the  modified  warrant
determined in accordance  with the provisions of SFAS No. 123, and (2) the value
of the old warrant  immediately before its terms are modified,  determined based
on the shorter of (a) its  remaining  expected  life or (b) the expected life of
the modified option. The deemed dividend increased the loss applicable to common
stockholders  in the calculation of basic and diluted net loss per share for the
year ended December 31, 2001, without any effect on total shareholder's equity.

3. As part of the  investment  agreement  in May 2001  (see  Note  12.b.4),  the
Company issued to the investors a total of 2,696,971 warrants to purchase shares
of common stock at a price of $3.22 per share; these warrants are exercisable by
the holder at any time after  November  8, 2001 and will  expire on May 8, 2006.
The Company  also  issued to a financial  consultant  that  provided  investment
banking services  concurrently with this transaction a total of 125,000 warrants
to purchase shares of common stock at a price of $3.22 per share; these warrants
are  exercisable  by the holder at any time and will expire on June 12, 2006. In
addition the Company paid approximately  $562,000 in cash, which was recorded as
deduction from additional paid in capital.

4. As part of the  investment  agreement in January 2002 (see Note 12.b.7),  the
Company,  in  January  2002,  issued to a  financial  consultant  that  provided
investment  banking  services  concurrently  with this transaction a warrants to
acquire (i)  150,000  shares of common  stock at an exercise  price of $1.68 per
share, and (ii) 119,000 shares of common stock at an exercise price of $2.25 per
share;  these warrants are exercisable by the holder at any time and will expire
on January 4, 2007.


                                      F-34
<PAGE>

ELECTRIC FUEL CORPORATION AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

--------------------------------------------------------------------------------
IN U.S. DOLLARS

NOTE 12: - SHAREHOLDERS' EQUITY (Cont.)

5. As part of the securities  purchase  agreement on December 31, 2002 (see Note
17),  the  Company  issued  to the  purchasers  of its  9%  secured  convertible
debentures  warrants as follows:  (i) Series A Warrants to purchase an aggregate
of 1,166,700  shares of common stock at any time prior to December 31, 2007 at a
price of $0.84 per share;  (ii) Series B Warrants to  purchase an  aggregate  of
1,166,700  shares of common  stock at any time prior to  December  31, 2007 at a
price of $0.89 per share;  and (iii)  Series C Warrants to purchase an aggregate
of 1,166,700  shares of common stock at any time prior to December 31, 2007 at a
price of $0.93 per share.

In connection with these warrants, the Company will record financial expenses of
$1,096,698,  which will be amortized  ratably  over the life of the  convertible
debentures (3 years).  This  transaction  was accounted  according to APB No. 14
"Accounting  for Convertible  debt and Debt Issued with Stock Purchase  Warrants
and  EITF  00-27   "Application  of  Issue  No.  98-5  to  Certain   Convertible
Instruments".   The  fair  value  of  these   warrants  was   determined   using
Black-Scholes  pricing  model,  assuming a risk-free  interest  rate of 3.5%,  a
volatility factor 64%, dividend yields of 0% and an contractual life of 5 years.

g. Stock option plans:

1. Options to employees and others (except consultants)

a. The Company has adopted the following stock option plans, whereby options may
be granted for purchase of shares of the Company's common stock. Under the terms
of the employee plans, the Board of Directors or the designated committee grants
options and determines the vesting period and the exercise terms.

1) 1991 Employee Option Plan - 2,115,600 shares reserved for issuance,  of which
33,692 are available for future grants to employees as of December 31, 2002.

2) 1993  Employee  Option  Plan - as  amended,  4,200,000  shares  reserved  for
issuance,  of which 1,904,781are  available for future grants to employees as of
December 31, 2002.

3) 1998  Employee  Option  Plan - as  amended,  4,750,000  shares  reserved  for
issuance,  of which  2,070,460  are available for future grants to employees and
consultants as of December 31, 2001.

4) 1995 Non-Employee  Director Plan - 1,000,000 shares reserved for issuance, of
which  640,000 are  available  for future grants to directors as of December 31,
2002.


b. Under these plans, options generally expire no later than 10 years from the
date of grant. Each option can be exercised to purchase one share, conferring
the same rights as the other common shares. Options that are cancelled or
forfeited before expiration become available for future grants. The options
generally vest over a three-year period (33.3% per annum).


                                      F-35
<PAGE>


ELECTRIC FUEL CORPORATION AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

--------------------------------------------------------------------------------
IN U.S. DOLLARS

NOTE 12: - SHAREHOLDERS' EQUITY (Cont.)

c. A summary  of the  status of the  Company's  plans  and other  share  options
(except for options  granted to  consultants)  granted as of December  31, 2002,
2001 and 2000, and changes  during the years ended on those dates,  is presented
below:

<TABLE>
<CAPTION>
                                              2002                     2001                    2000
                                      --------------------------------------------------------------------
                                                   Weighted                Weighted                Weighted
                                                    average                 average                 average
                                                   exercise                exercise                 exercise
                                      Amount         price      Amount       price      Amount       price
                                      ----------     -----    ----------     -----    ----------     -----
                                                       $                       $                      $
                                                     -----                   -----                   -----
Options outstanding at beginning
<S>                                    <C>           <C>       <C>           <C>       <C>           <C>
  of year                              4,240,228     $2.74     2,624,225     $3.82     2,820,679     $3.44
Changes during year:
Granted (1) (3)                        1,634,567     $0.87     2,172,314     $1.55     1,598,233     $4.58
Exercised (4) (2)                       (191,542)    $1.29      (159,965)    $1.31    (1,715,628)    $3.84
Forfeited or cancelled                  (422,887)    $1.92      (396,346)    $4.11       (79,059)    $4.93
Repriced (2):
Old exercise price                            --        --            --        --      (310,000)    $4.95
New exercise price                            --        --            --        --       310,000     $4.95
                                      ----------     -----    ----------     -----    ----------     -----

Options outstanding at end of year     5,260,366     $2.26     4,240,228     $2.74     2,624,225     $3.82
                                      ==========     =====    ==========     =====    ==========     =====

Options exercisable at end of year     4,675,443     $2.26     2,643,987     $2.75     1,078,332     $3.81
                                      ==========     =====    ==========     =====    ==========     =====
</TABLE>


(1) Includes  481,435,  1,189,749 and 870,000 options granted to related parties
in 2002, 2001 and 2000, respectively.

(2) On May 25, 2000, the Company repriced  downwards  150,000 options from $6.60
per share to $4.95. The Company also repriced upward 160,000 options held by the
same  options  holder  from  $3.375  per  share to  $4.95.  The  options  holder
immediately  exercised  those  options.  In accordance  with FIN 44 the downward
repricing resulted in a variable plan accounting,  however, due to the immediate
exercise the Company recorded a compensation expense in the amount of $26,250 at
that date only.

(3) The Company recorded deferred stock  compensation for options issued with an
exercise  price  below the fair value of the  common  stock in the amount of $0,
$18,000  and  $37,924 as of  December  31,  2002,  2001 and 2000,  respectively.
Deferred stock  compensation is amortized and recorded as compensation  expenses
ratably over the vesting period of the option.  The stock  compensation  expense
that has been charged in the consolidated statements of operations in respect of
options to employees in 2002,  2001 and 2000,  was $6,000,  $17,240 and $20,684,
respectively.

(4) In September  2002 and December 2001,  the employees  exercised  100,000 and
33,314,  respectively,  options for which the exercise price was not paid at the
exercise  date.  The Company  recorded  the owed amount of $73,000 and  $43,308,
respectively,  as  "Note  receivable  from  shareholders"  in the  statement  of
shareholders'  equity. In accordance with EITF 95-16,  since the original option
grant did not permit the exercise of the options  through loans,  and due to the
Company's history of granting  non-recourse loans, this postponement in payments
of the exercise  price  resulted in a variable  plan  accounting.  However,  the
Company did not record any  compensation due to the decrease in the market value
of the Company's shares during 2001 and 2002.  During the year 2002 the notes in
the amount of $43,308 were entirely repaid and note at the amount of $36,500 was
forgiven and appropriate compensation was recorded.


                                      F-36
<PAGE>


ELECTRIC FUEL CORPORATION AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

--------------------------------------------------------------------------------
IN U.S. DOLLARS

NOTE 12: - SHAREHOLDERS' EQUITY (Cont.)


d. The options  outstanding  as of December  31, 2002 have been  separated  into
ranges of exercise price, as follows:


<TABLE>
<CAPTION>
                          Total options outstanding                Exercisable options outstanding
              --------------------------------------------------- ----------------------------------
                  Amount          Weighted
                  Amount           average                           Amount
 Range of     outstanding at      remaining         Weighted     exercisable at       Weighted
 exercise      December 31,      contractual         average       December 31,         average
  prices           2002             life         exercise price        2002         exercise price
------------  ---------------- ----------------  ---------------- ----------------  ----------------
     $                              Years               $                                  $
------------                   ----------------  ----------------                   ----------------
<S>               <C>                 <C>               <C>           <C>                  <C>
0.30-2.00         3,422,797           6.91              1.15          3,011,530            1.12
3.00-4.00           421,069           3.84              3.00            419,669            3.00
4.00-6.00         1,356,500           7.45              4.60          1,189,244            4.64
6.00-8.00            50,000           2.43              7.49             45,000            7.56
8.00                 10,000           4.75              9.06             10,000            9.06
              ---------------- ----------------  ---------------- ----------------  ----------------
                  5,260,366           6.75              2.26          4,675,443            2.26
              ================ ================  ================ ================  ================
</TABLE>


Weighted-average  fair values and  exercise  prices of options on dates of grant
are as follows:


<TABLE>
<CAPTION>
                             Equals market price             Exceeds market price            Less than market price
                         -----------------------------   ------------------------------   ------------------------------
                           Year ended December 31,          Year ended December 31,          Year ended December 31,
                         -----------------------------   ------------------------------   ------------------------------
                          2002       2001       2000      2002       2001        2000      2002      2001         2000
                         --------   --------  --------   --------  ----------  --------   --------  --------   ---------
<S>                      <C>          <C>       <C>      <C>         <C>       <C>        <C>       <C>        <C>
 Weighted average        $ 1.265    $   1.579 $   4.580  $    --   $   1.466   $  7.125   $ 0.755   $   1.300  $   5.270
   exercise prices
 Weighted average fair                               0                                                     0           0
   value on grant date   $ 0.560    $   0.50  $   4.12   $    --   $   0.560   $  3.760   $ 0.250   $   0.79   $    6.60
</TABLE>



2.   Options issued to consultants:

a.   The Company's  outstanding  options to consultants as of December 31, 2002,
     are as follows:

<TABLE>
<CAPTION>
                                         2002                         2001                         2000
                              ---------------------------  ---------------------------  ---------------------------
                                             Weighted                     Weighted                     Weighted
                                              average                      average                      average
                                             exercise                     exercise                      exercise
                               Amount         price         Amount          price         Amount          price
                               -------        -----         -------         -----         -------         -----
                                                $                             $                             $
                                              -----                         -----                         -----
<S>                            <C>            <C>           <C>             <C>           <C>             <C>
Options outstanding at         245,786        $5.55         175,786         $6.57         141,814         $3.09
  beginning of year
Changes during year:
  Granted (1)                       --           --         130,000         $6.02         198,500         $5.86
  Exercised                         --           --         (60,000)        $5.13        (164,528)        $2.72

Repriced (2):
  Old exercise price                --           --         (56,821)        $9.44              --            --
  New exercise price                --           --          56,821         $4.78              --            --
                               -------        -----         -------         -----         -------         -----

Options outstanding at
  end of year                  245,786        $5.55         245,786         $5.55         175,786         $6.56
                               =======        =====         =======         =====         =======         =====

Options exercisable at
  end of year                  125,786        $6.42         125,786         $6.42         149,044         $6.80
                               =======        =====         =======         =====         =======         =====
</TABLE>

                                      F-37

<PAGE>

ELECTRIC FUEL CORPORATION AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

--------------------------------------------------------------------------------
IN U.S. DOLLARS

NOTE 12: - SHAREHOLDERS' EQUITY (Cont.)

(1) 120,000  options  out of 130,000  options  granted in 2001 to the  Company's
selling and marketing  consultants are subject to the achievement of the targets
specified in the agreements with these  consultants.  The  measurement  date for
these  options  has not yet  occurred,  as these  targets  have not been met, in
accordance with EITF 96-18. When the targets is achieved the Company will record
appropriate  compensation  upon the fair  value  at the same  date at which  the
targets is achieved.

     (2) During the year 2001 the Company repriced 56,821 options to its service
     providers.  The  fair  value  of  repriced  warrants  was  calculated  as a
     difference  measured  between (1) the fair value of the  modified  warrants
     determined in accordance with the provisions of SFAS 123, and (2) the value
     of the old warrant  immediately before its terms were modified,  determined
     based on the shorter of (a) its remaining expected life or (b) the expected
     life of the modified option. As a result of the repricing,  the Company has
     recorded an additional  compensation at the amount of $21,704, and included
     this amount in marketing expenses.

b. The Company  accounted  for its options to  consultants  under the fair value
method of SFAS No.  123 and EITF  96-18.  The fair value for these  options  was
estimated  using  a  Black-Scholes   option-pricing  model  with  the  following
weighted-average assumptions:

                                 2002      2001       2000
                                 ----      ----       ----
Dividend yield                     --         0%         0%
Expected volatility                --        82%        95%
Risk-free interest                 --   3.5-4.5%       6.5%
Contractual life of up to          --   10 years    5 years


c. In  connection  with the grant of stock options to  consultants,  the Company
recorded stock compensation  expenses totaling $0, $139,291 and $796,128 for the
years ended December 31, 2002, 2001 and 2000,  respectively,  and included these
amounts in marketing expenses.

3. Dividends:

In the event that cash dividends are declared in the future, such dividends will
be paid in U.S.  dollars.  The Company does not intend to pay cash  dividends in
the foreseeable future.

4. Treasury Stock:

Treasury  stock  is  the  Company's  common  stock  that  has  been  issued  and
subsequently reacquired.  The acquisition of common stock is accounted for under
the cost method, and presented as reduction of stockholders' equity.



                                      F-38
<PAGE>

ELECTRIC FUEL CORPORATION AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

--------------------------------------------------------------------------------
IN U.S. DOLLARS

NOTE 13: - INCOME TAXES

a. Taxation of U.S. parent company (EFC):

As of December 31, 2002, EFC has operating loss  carryforwards  for U.S. federal
income tax purposes of approximately $15 million,  which are available to offset
future taxable  income,  if any,  expiring in 2010-2015.  Utilization of U.S net
operating  losses may be subject to substantial  annual  limitations  due to the
"change  in  ownership"  provisions  of the  Internal  Revenue  Code of 1986 and
similar state provisions.  The annual limitation may result in the expiration of
net operating loses before utilization.

b. Israeli subsidiary (EFL):

1. Tax benefits under the Law for the Encouragement of Capital Investments, 1959
(the "Investments Law"):

EFL's manufacturing facility has been granted "Approved Enterprise" status under
the  Investments  Law,  and is entitled to  investment  grants from the State of
Israel  of 38% on  property  and  equipment  located  in  Jerusalem,  and 10% on
property and equipment located in its plant in Beit Shemesh,  and to reduced tax
rates on income arising from the "Approved Enterprise," as detailed below.

The approved investment program is in the amount of approximately  $500,000. EFL
effectively  operated  the  program  during  1993,  and is  entitled  to the tax
benefits  available under the Investments Law. EFL is entitled to additional tax
benefits as a "foreign  investment  company," as defined by the Investments Law.
In 1995, EFL received  approval for a second "Approved  Enterprise"  program for
investment in property and equipment, in the amount of approximately $6,000,000,
and approval for grants at the abovementioned rates, for these approved property
and equipment.


The  entitlement  to the  above  benefits  is  conditional  upon  the  Company's
fulfilling  the  conditions  stipulated  by  the  Investments  Law,  regulations
published   thereunder  and  the   instruments  of  approval  for  the  specific
investments  in "approved  enterprises."  In the event of failure to comply with
these  conditions,  the benefits may be canceled and the Company may be required
to refund the amount of the benefits,  in whole or in part,  including interest.
As of December 31, 2002, according to the Company's management,  the Company has
fulfilled all conditions.

The main tax benefits available to EFL are:

a) Reduced tax rates:

During the period of benefits (seven to ten years), commencing in the first year
in which EFL earns  taxable  income from the  "Approved  Enterprise,"  a reduced
corporate  tax rate of  between  10% and 25%  (depending  on the  percentage  of
foreign  ownership,  based on present ownership  percentages of 15%) will apply,
instead of the regular tax rates.


                                      F-39
<PAGE>

ELECTRIC FUEL CORPORATION AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

--------------------------------------------------------------------------------
IN U.S. DOLLARS

NOTE 13: - INCOME TAXES (Cont.)

The period of tax  benefits,  detailed  above,  is subject to limits of 12 years
from the  commencement  of  production,  or 14 years  from  the  approval  date,
whichever is earlier.  Hence, the first program will expire in the year 2004 and
the second in the year 2008.  The  commencement  of production  according to the
third program has not been determined yet by the investment  center and so there
is no ability to  determine  the period of the tax  benefits  according  to this
program.  The  benefits  have not yet been  utilized  since the  Company  has no
taxable income, since its incorporation.

b) Accelerated depreciation:

EFL is entitled to claim  accelerated  depreciation  in respect of machinery and
equipment  used  by the  "Approved  Enterprise"  for the  first  five  years  of
operation of these assets.

2.   Measurement   of  results  for  tax  purposes  under  the  Income  Tax  Law
(Inflationary Adjustments), 1985

Results  for tax  purposes  are  measured in real terms of earnings in NIS after
certain  adjustments  for increases in the Consumer Price Index. As explained in
Note 2b, the financial  statements are presented in U.S. dollars. The difference
between  the  annual  change  in the  Israeli  consumer  price  index and in the
NIS/dollar  exchange  rate causes a difference  between  taxable  income and the
income  before  taxes shown in the  financial  statements.  In  accordance  with
paragraph  9(f) of SFAS No. 109, EFL has not provided  deferred  income taxes on
this difference  between the reporting  currency and the tax bases of assets and
liabilities.

3. Tax  benefits  under the Law for the  Encouragement  of Industry  (Taxation),
1969:

EFL is an "industrial company," as defined by this law and, as such, is entitled
to certain tax  benefits,  mainly  accelerated  depreciation,  as  prescribed by
regulations published under the inflationary adjustments law, the right to claim
public issuance expenses and amortization of know-how, patents and certain other
intangible property rights as deductions for tax purposes.

4. Tax rates applicable to income from other sources:

Income  from  sources  other  than the  "Approved  Enterprise,"  is taxed at the
regular rate of 36%.

5. Tax rates applicable to income distributed as dividends by EFL:

The effective  taxes on income  distributed by EFL to its parent  company,  EFC,
would  increase as a result of the  Israeli  withholding  tax imposed  upon such
dividend  distributions.  The overall  effective  tax rate on such  distribution
would be 28%, in respect of income arising from EFL's "Approved Enterprise," and
44% in respect of other  income.  EFL does not have any earnings  available  for
distribution as dividend,  nor does it intend to distribute any dividends in the
foreseeable future.

6. Tax loss carryforwards:

As of December 31, 2002,  EFL has operating loss  carryforwards  for Israeli tax
purposes of approximately  $93 million,  which are available,  indefinitely,  to
offset future taxable income.


                                      F-40
<PAGE>

ELECTRIC FUEL CORPORATION AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

--------------------------------------------------------------------------------
IN U.S. DOLLARS

NOTE 13: - INCOME TAXES (Cont.)


c. European subsidiaries:

Income  of  the  European  subsidiaries,  which  is  derived  from  intercompany
transactions, is based on the tax laws in their countries of domicile.

d. Deferred income taxes:

Deferred  income  taxes  reflect  the net tax effects of  temporary  differences
between the carrying  amounts of assets and liabilities for financial  reporting
purposes and amounts used for income tax purposes. Significant components of the
Company's  deferred  tax  assets  resulting  from tax loss  carryforward  are as
follows:


<TABLE>
<CAPTION>
                                                                      December 31,
                                                           ---------------------------------
                                                               2002                 2001
                                                           ------------         ------------
                                                                     U.S. dollars
                                                           ---------------------------------
<S>                                                        <C>                  <C>
  Operating loss carryforward                              $ 29,257,118         $ 12,162,581
  Reserve and allowance                                         303,204              477,522
                                                           ------------         ------------

  Net deferred tax asset before valuation allowance          29,560,322           12,640,103
  Valuation allowance                                       (29,560,322)         (12,640,103)
                                                           ------------         ------------
                                                           $         --         $         --
                                                           ============         ============
</TABLE>


The Company and its  subsidiaries  provided  valuation  allowances in respect of
deferred tax assets  resulting from tax loss  carryforwards  and other temporary
differences.  Management currently believes that it is more likely than not that
the  deferred  tax  regarding  the  loss   carryforwards   and  other  temporary
differences  will not be realized.  The change in the valuation  allowance as of
December 31, 2002 was $16,920,219.

e. Loss before taxes on income:


<TABLE>
<CAPTION>
                                       Year ended December 31
                     ------------------------------------------------------
                         2002                 2001                 2000
                     ------------         ------------         ------------
                                          U.S. dollars
                     ------------------------------------------------------
<S>                  <C>                  <C>                  <C>
Domestic             $ (5,250,633)        $ (5,828,828)        $ (2,021,661)
Foreign               (13,254,195)         (11,457,960)          (9,959,297)
                     ------------         ------------         ------------

                     $(18,504,358)        $(17,286,788)        $(11,980,958)
                     ============         ============         ============
</TABLE>


                                      F-41
<PAGE>


ELECTRIC FUEL CORPORATION AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

--------------------------------------------------------------------------------
IN U.S. DOLLARS

NOTE 14: - SELECTED STATEMENTS OF OPERATIONS DATA

a. Research and development expenses, net:


                                               Year ended December 31
                                  ----------------------------------------------
                                     2002              2001              2000
                                  ----------        ----------        ----------
                                                    U.S. dollars
                                  ----------------------------------------------

Research and development costs    $  685,919        $  455,845        $1,065,065
Less royalty-bearing grants               --                --           195,170
                                  ----------        ----------        ----------

                                  $  685,919        $  455,845        $  869,895
                                  ==========        ==========        ==========


b. Financial income, net:


<TABLE>
<CAPTION>
                                                             Year ended December 31,
                                                ---------------------------------------------
                                                   2002              2001              2000
                                                ---------         ---------         ---------
                                                                  U.S. dollars
                                                ---------------------------------------------
Financial expenses:
<S>                                             <C>               <C>               <C>
Interest, bank charges and fees                 $ (89,271)        $ (49,246)        $ (67,480)
Foreign currency translation differences           15,202           (16,003)         (219,043)
                                                ---------         ---------         ---------

                                                  (74,069)          (65,249)         (286,523)
                                                ---------         ---------         ---------
Financial income:
   Interest                                       174,520           327,830           830,704
                                                ---------         ---------         ---------

Total                                           $ 100,451         $ 262,581         $ 544,181
                                                =========         =========         =========
</TABLE>

NOTE 15: - RELATED PARTY DISCLOSURES

<TABLE>
<CAPTION>
                                                                       Year ended December 31,
                                                              ------------------------------------------
                                                                2002             2001             2000
                                                              --------         --------         --------
                                                                            U.S. dollars
                                                              ------------------------------------------
Transactions:
<S>                                                           <C>              <C>              <C>
Reimbursement of general and administrative expenses          $ 36,000         $ 23,850         $ 28,880
                                                              ========         ========         ========

Financial income (expenses), net from notes receivable
  and loan holders (see Notes 6 and 12.e.2)                   $ (7,309)        $(36,940)        $230,924
                                                              ========         ========         ========
</TABLE>



                                      F-42
<PAGE>

ELECTRIC FUEL CORPORATION AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

--------------------------------------------------------------------------------
IN U.S. DOLLARS

NOTE 16: - SEGMENT INFORMATION


a. General:

The Company and its subsidiaries operate primarily in two business segments (see
Note 1a for a brief  description  of the  Company's  business)  and  follow  the
requirements of SFAS No. 131.

The  Company  previously  managed  its  business  in three  reportable  segments
organized on the basis of differences in its related products and services. With
the  discontinuance  of Consumer  Batteries  segment (see Note  1.e-Discontinued
Operation) and acquiring two subsidiaries (see Notes 1.b.and c.), two reportable
segments remain: Electric Fuel Batteries,  and Defense and Security Products. As
a result the Company  reclassified  information  previously reported in order to
comply with new segment reporting.

The Company's  reportable  operating segments have been determined in accordance
with the Company's internal  management  structure,  which is organized based on
operating activities.  The accounting policies of the operating segments are the
same as those described in the summary of significant  accounting policies.  The
Company  evaluates  performance  based  upon  two  primary  factors,  one is the
segment's operating income and the other is based on the segment's  contribution
to the Company's future strategic growth.

b. The following is information about reported segment gains, losses and assets:

<TABLE>
<CAPTION>
                                               Electric            Defense and
                                                 Fuel               Security
                                              Batteries             Products            All Other              Total
                                             ------------         ------------         ------------         ------------
2002
<S>                                             <C>               <C>                  <C>                  <C>
Revenues from outside customers                 1,682,296         $  4,724,444         $         --         $  6,406,739
Depreciation expense and amortization            (252,514)            (676,754)            (194,013)          (1,123,281)
Direct expenses (1)                            (3,062,548)          (4,353,770)          (2,905,743)         (10,322,061)
                                             ------------         ------------         ------------         ------------
Segment gross loss                           $ (1,632,766)        $   (306,080)        $ (3,099,756)          (5,038,602)
                                             ============         ============         ============         ============
Financial income                                                                                                 100,451
                                                                                                            ------------
Net loss from continuing operation                                                                          $  4,938,151
                                                                                                            ============

Segment assets (2)                           $  2,007,291         $  1,683,825         $    575,612         $  4,266,728
                                             ============         ============         ============         ============
Expenditures for segment assets              $    246,664         $     58,954         $     70,486         $    376,104
                                             ============         ============         ============         ============

2001
Revenues from outside customers              $  2,093,632         $         --         $         --         $  2,093,632
Depreciation expense                             (304,438)                  --             (225,575)            (530,013)
Direct expenses (1)                            (2,295,501)                  --           (3,556,486)          (5,851,987)
                                             ------------         ------------         ------------         ------------
Segment gross loss                           $   (506,307)        $         --         $ (3,782,061)          (4,288,368)
                                             ============         ============         ============         ============
Financial income net                                                                                             262,581
                                                                                                            ------------
Net loss from continuing operations                                                                         $ (4,025,787)
                                                                                                            ============

Segment assets (2)                           $  2,041,257         $         --         $    702,915         $  2,744,172
                                             ============         ============         ============         ============
Expenditures for segment assets              $    229,099         $         --         $    323,985         $    553,084
                                             ============         ============         ============         ============
</TABLE>



                                      F-43
<PAGE>

ELECTRIC FUEL CORPORATION AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

--------------------------------------------------------------------------------
IN U.S. DOLLARS

NOTE 16: - SEGMENT INFORMATION (Cont.)

<TABLE>
<CAPTION>
                                        Electric        Defense and
                                          Fuel            Security
                                        Batteries         Products        All Other         Total
                                       -----------     --------------    -----------     -----------
2000
<S>                                    <C>             <C>               <C>             <C>
Revenues from outside customers        $ 1,478,495     $           --    $    11,446     $ 1,489,941
Depreciation expense                      (310,408)                --       (203,834)       (514,242)
Direct expenses (1)                     (1,754,003)                --     (3,150,558)     (4,904,561)
                                       -----------     --------------    -----------     -----------
Segment gross loss                     $  (585,916)    $           --    $(3,342,946)     (3,928,862)
                                       ===========     ==============    ===========     ===========
Financial income net                                                                         544,181
                                                                                         -----------
Net loss from continuing operations                                                      $(3,384,681)
                                                                                         ===========

Segment assets (2)                     $ 2,020,771     $           --    $   662,575     $ 2,683,346
                                       ===========     ==============    ===========     ===========
Expenditures for segment assets        $   284,939     $           --    $   310,988     $   595,927
                                       ===========     ==============    ===========     ===========
</TABLE>


(1)  Including sales and marketing, general and administrative expenses.

(2)  Including property and equipment and inventory.

c. Summary information about geographic areas:

The following  presents total revenues  according to end customers  location for
the years ended December 31, 2002,  2001 and 2000,  and long-lived  assets as of
December 31, 2002, 2001 and 2000:

<TABLE>
<CAPTION>
                               2002                            2001                            2000
                   ------------------------------  ------------------------------  ------------------------------
                       Total        Long-lived         Total        Long-lived         Total        Long-lived
                     revenues         assets         revenues         assets         revenues         assets
                   --------------  --------------  --------------  --------------  -------------- ---------------
                                                           U.S. dollars
                   ----------------------------------------------------------------------------------------------
<S>                 <C>             <C>             <C>             <C>             <C>            <C>
U.S.A.              $  2,787,250    $  6,710,367    $  1,057,939    $     60,531    $    813,658   $     26,412
Germany                   38,160               -         526,766               -          44,117              -
England                   47,696               -          36,648               -          30,885              -
Thailand                 291,200               -               -               -               -              -
Israel                 2,799,365       3,367,320          13,773       2,160,275          19,279      2,262,465
Other                    443,068               -         458,506               -         582,003              -
                   --------------  --------------  --------------  --------------  -------------- ---------------

                    $  6,406,739    $ 10,077,687    $  2,093,632    $  2,220,806    $  1,489,942   $  2,288,877
                   ==============  ==============  ==============  ==============  ============== ===============
</TABLE>

*    Reclassified

d. Revenues from major customers:

<TABLE>
<CAPTION>
                                                            Year ended December 31,
                                              ----------------------------------------------------
                                                  2002               2001               2000
                                                                      %
                                              ----------------------------------------------------
     Electric Fuel Batteries:
<S>                                                   <C>               <C>                <C>
              Customer A                              -                 22%                 -
              Customer B                              7%                20%                17%
              Customer C                              2%                13%                20%
              Customer D                              8%                12%                 -
     Deference and security: Products                43%                 -                  -
</TABLE>


                                      F-44
<PAGE>

ELECTRIC FUEL CORPORATION AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

--------------------------------------------------------------------------------
IN U.S. DOLLARS

NOTE 16: - SEGMENT INFORMATION (Cont.)

e. Revenues from major products:

                                           Year ended December 31,
                                     -----------------------------------
                                       2002         2001         2000
                                     ---------    ---------    ---------


EV                                     460,562      894,045      310,441
WAB                                    647,896      951,598    1,168,055
Security and defense                   573,839      247,989           --
Car armoring                         2,744,382           --           --
Interactive use-of-force training    1,980,060           --           --
Other                                       --           --       11,446
                                     ---------    ---------    ---------

Total                                6,406,749    2,093,632    1,489,942
                                     =========    =========    =========


NOTE 17: - CONVERTIBLE DEBENTURES

Pursuant to the terms of a  Securities  Purchase  Agreement  dated  December 31,
2002,  the  Company  issued and sold to a group of  institutional  investors  an
aggregate principal amount of 9% secured convertible debentures in the amount of
$3.5 million due June 30, 2005.  These  debentures  are  convertible at any time
prior to June 30, 2005 at a  conversion  price of $0.75 per share,  or a maximum
aggregate of 4,666,667 shares of common stock (see also Note 12.f.5).

In  connection  with these  convertible  debentures,  the  Company  will  record
financial  expenses of $585,365,  which will be amortized  ratably over the life
period of the convertible  debentures.  This transaction was accounted according
to EITF 00-27.


                                      F-45
<PAGE>

ELECTRIC FUEL CORPORATION AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

--------------------------------------------------------------------------------
IN U.S. DOLLARS


NOTE 18: - PROFIT DISTRIBUTION

On September 30, 2002, MDT distributed in cash to its shareholders profit in the
amount of NIS 4,000,000 (approximately $841,288), out of which $412,231 was paid
to the minority interest.

                                 - - - - - - - -




                                      F-46

<PAGE>






                          SUPPLEMENTARY FINANCIAL DATA

 Quarterly Financial Data (unaudited) for the two years ended December 31, 2002


<TABLE>
<CAPTION>
                                                                       Quarter Ended
                                            --------------------------------------------------------------------
                    2002                        March 31         June 30        September 30     December 31
                    ----                    --------------------------------------------------------------------
<S>                                          <C>              <C>              <C>              <C>
Net revenue................................. $      570,545   $      425,053   $    3,262,711   $    2,148,430
Gross profit................................ $      186,917   $       48,807   $    1,593,770   $      155,497
Net loss from continuing operations......... $     (990,097)  $   (1,005,877)  $     (923,122)  $   (2,019,054)
Net loss from discontinued operations....... $   (2,324,109)  $   (1,654,108)  $   (8,716,422)  $     (871,567)
Net loss for the period..................... $   (3,314,208)  $   (2,659,985)  $   (9,369,544)  $   (2,890,621)
Net loss per share - basic and diluted...... $       (0.11)   $        (0.09)  $        (0.29)  $        (0.08)
Shares used in per share calculation........     30,149,210       30,963,919       33,441,137       34,758,048

                    2001
                    ----
Net revenue................................. $      503,619   $      400,879   $      632,344   $      556,790
Gross profit (loss)......................... $      121,633   $       (3,117)  $       43,326   $      (60,896)
Net loss from continuing operations......... $     (531,866)  $   (1,107,576)  $     (771,238)  $   (1,615,109)
Net loss from discontinued operations....... $   (2,893,088)  $   (3,483,264)  $   (3,639,318)  $   (3,245,329)
Net loss for the period..................... $   (3,424,954)  $   (4,590,840)  $   (4,410,556)  $   (4,860,438)
Deemed dividend to certain shareholders of
  common stock.............................. $            -   $   (1,196,667)  $            -   $            -
Net loss attributable to shareholders of
  common stock.............................. $   (3,424,954)  $   (5,787,507)  $   (4,410,556)  $   (4,860,438)
Net loss per share - basic and diluted...... $        (0.16)  $        (0.25)  $        (0.19)  $        (0.18)
Shares used in per share calculation........     21,802,499       23,562,099       23,612,097       26,648,319
</TABLE>


                                      F-47

<PAGE>