<PAGE>


===============================================================================
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                   FORM 10-K/A

     ANNUAL REPORT  PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES  EXCHANGE
     ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001.
                                           ------------------

                                       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)

                DELAWARE                                 95-4302784
-----------------------------------------  -----------------------------------
   (State or other jurisdiction of                   (I.R.S. Employer
   incorporation or organization)                   Identification No.)

          632 BROADWAY, NEW YORK, NEW YORK                      10012
-------------------------------------------------------   ---------------------
       (Address of principal executive offices)               (Zip Code)

                                 (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 [ ]

The  aggregate   market  value  of  the   registrant's   voting  stock  held  by
non-affiliates  of  the  registrant  as of  March  25,  2002  was  approximately
$49,717,247 (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: 30,880,278 AS OF 3/25/02

Documents incorporated by reference:                                        NONE

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.                                [ ]

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

<PAGE>


                                PRELIMINARY NOTE
                                ----------------

         This  amended  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   of  Electric   Fuel
Corporation.     Instant    Power(TM),     Charge    without    electricity(TM),
PowerCartridge(TM)   and   SmartCord(TM)   are   trademarks   of  Electric  Fuel
Corporation.  All company and  product  names  mentioned  may be  trademarks  or
registered trademarks of their respective holders.





<PAGE>




                                     PART II

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

         Since  February 1994, our common stock has been traded under the symbol
EFCX on the Nasdaq  National  Market.  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, 2001                     HIGH           LOW
                                                   ----           ---
    Fourth Quarter..........................  $    2.4300   $    1.3000
    Third Quarter...........................  $    2.7500   $    1.3000
    Second Quarter..........................  $    3.9500   $    2.3000
    First Quarter...........................  $    8.0000   $    3.5000

  YEAR ENDED DECEMBER 31, 2000
    Fourth Quarter..........................  $   11.1875   $    3.7500
    Third Quarter...........................  $   15.0000   $    6.8750
    Second Quarter..........................  $   16.1250   $    4.5000
    First Quarter...........................  $   23.8750   $    3.0625

         As of February 28, 2002 we had  approximately  266 holders of record of
our common stock.

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 May 2001, we issued a total of 125,000  warrants to purchase  shares
of our common stock at a price of $3.22 per share to a financial consultant that
provided  certain  consulting  services to us; these warrants are exercisable by
the holder at any time after December 12, 2001 and will expire on June 12, 2006.
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.

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

<PAGE>

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.

         Electric   Fuel(R)  is  a  registered   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 Electric Fuel and its subsidiaries.

         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 arrangements with extended payment terms, product returns, bad debts,
income  tax  provisions  and  legal  contingencies.  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  recognize   revenues  from  long-term   research  and   development
agreements  subcontracted for the U.S. government when services are rendered. 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.  Our provision for returns is based on our past experience.
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.

     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


                                       -2-
<PAGE>

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.

RECENT DEVELOPMENTS

         On January 18, 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  24,  2002 we issued  and sold to 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., for an aggregate
purchase price of $2,480,000,  an aggregate of 1,600,000 shares of common stock.
Our  total  cash  on  hand   immediately   subsequent  to  these  offerings  was
approximately $15 million.

         In March 2002, we  demonstrated  our zinc-air  electric bus in a public
demonstration  in Washington,  D.C., on Capitol Hill, with the  participation of
certain members of the United States Senate.

     IES ACQUISITION

         On August 2, 2002,  we acquired substantially  all the assets of I.E.S.
Electronics  Industries U.S.A., Inc., a developer,  manufacturer and marketer of
advanced hi-tech  multimedia and interactive  digital  solutions for training of
military,  law  enforcement  and security  personnel.  These systems are sold to
corporations,   government   agencies,   and   military   and  law   enforcement
professionals around the world.

         The  consideration  for the assets 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),  and (ii) the issuance of a total of 3,250,000
shares of our common stock,  which shares are the subject of a voting  agreement
on the part of IES and  certain  of its  affiliated  companies  whereby  IES has
agreed, for a period of the greater of five years or for so long as IES holds at
least 500,000 of our shares,  to vote the shares in favor of (a) the election of
Yehuda  Harats and Robert S.  Ehrlich as  directors,  and (b) all  proposals  of
management  (except for proposals  regarding the nomination of individuals other
than  Yehuda  Harats or Robert  S.  Ehrlich  to our  Board)  that  relate to the
operation or management of our business in the ordinary  course (and not against
our interest), or that relate to acquisitions, financings, stock option plans or
business  development  (that  are not  against  our  interest).  In light of Mr.
Harats's  resignation  from the  Board of  Directors  in 2002 (see  "Changes  in
Management,"  below),  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.

         In December 2002, the terms of IES's  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.


                                      -3-
<PAGE>


     MDT ACQUISITION

     On August 2, 2002, we purchased 51% of the issued and outstanding shares of
M.D.T.  Protective  Industries  Ltd.,  a  privately-held  Israeli  company  that
specializes   in  using   sophisticated   lightweight   materials  and  advanced
engineering processes to armor vehicles.

     The  consideration  for the shares  purchased  consisted of (i) cash in the
aggregate   amount  of  5,814,000  New  Israeli  Shekels  (NIS)   (approximately
$1,240,000),  and (ii) the  issuance of an  aggregate  of 390,638  shares of our
common stock.

     DISCONTINUATION OF RETAIL SALES OF CONSUMER BATTERY PRODUCTS

     In September  2002, we made a decision in principle to  discontinue  retail
sales of our Instant Power consumer  battery  products because of the high costs
associated with consumer  marketing and low volume  manufacturing.  We are using
our inventory to continue to fulfill all our existing  contractual  obligations,
online sales,  and sales to OEMs and the military.  The  discontinuation  of the
consumer retail products resulted in a one-time, pre-tax charge of approximately
$6.9 million in the third quarter of 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.

     CHANGES IN MANAGEMENT

     In October 2002, we announced that Yehuda Harats, our 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 December 2002, we came to an agreement with our former CEO
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 was
approximately  one-half of the amount we had accrued on our financial statements
in connection with such obligations.

     PHASE III OF THE ELECTRIC VEHICLE PROGRAM

     In October  2002,  we received  approval and funding from the United States
Federal  Transit  Administration  (FTA)  to  begin  Phase  III of  our  American
all-electric  transit  bus  demonstration   project,  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.

     SALE OF DEBENTURES

     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;  and (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.  The debentures  are  convertible at the option of the
holder into a total of 4,666,667 shares of common stock at a conversion price of


                                      -4-
<PAGE>

$0.75 per share.  In addition,  we have issued an aggregate of 387,301 shares of
common  stock  in  prepayment  of the  first  nine  months  of  interest  on the
debentures.

         We are required to register the shares of common stock  underlying  the
debentures  and the warrants with the  Securities  and Exchange  Commission in a
registration statement on Form S-3.

         Under the terms of our agreement with the purchasers of our debentures,
we granted the purchasers a security  interest in the assets  connected with our
U.S.  operations,  including our IES subsidiary,  as well as in our stock of IES
and our other  subsidiaries.  We also committed  ourselves to certain  customary
affirmative  and  negative  covenants,  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.
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.

     GERMAN POLICE ORDER

         In January  2003,  IES was  awarded a $2.6  million  contract to supply
simulation  training  systems to the  largest  regional  division  of the German
Police. The contract calls for delivery of approximately 30 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.

     CECOM OREDRS

     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.

     In April 2003, we announced that we had received an additional $1.6 million
order  from  CECOM  for  a  delivery  order  of advanced Zinc-Air batteries with
deliveries  anticipated  to  take  place  from  September through November 2003.

                                      -5-
<PAGE>

         Our line of existing  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.

         During 2001, 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 aspects and various applications of our
zinc-air technology; these patents expire between 2007 and 2018.

         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 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.

         Our Electric Vehicle  Division is continuing its American  all-electric
transit  bus  demonstration  project,   subcontracted  by  the  Federal  Transit
Administration  (FTA). We  successfully  completed phase I of the FTA program in
June 2000,  and are now  engaged in Phase II of the  program,  which  focuses on
conducting  evaluation of the system and vehicle  performance,  including  track
testing  and  limited  on-road   demonstrations,   enhancing  the   all-electric
propulsion system developed in Phase I, including incorporating  ultracapacitors
and associated interface controls,  and testing and evaluating the zinc-air fuel
cell system.
         In August 2001,  we announced  that we had  successfully  completed the
performance testing of our zinc-air electric bus. In the final performance test,
the bus was driven a  record-breaking  total of 110 miles, more than 100 of them
under the rigorous  stop-and-go  driving conditions of the Society of Automotive
Engineers'  Central  Business  District (CBD) cycle,  and with a load simulating
150% of the  passenger  payload  for  which  the bus was  designed.  The bus was
designed to be driven for 95 miles on the CBD cycle with a 50%  passenger  load.
The most recent testing took place at Rome, New York, on a taxiway of the former
Griffiss Air Force Base, and included  evaluation of constant-speed  driving and
acceleration tests. We conducted the first public on-road  demonstration  drives
of our zinc-air electric bus on the streets of Las Vegas, Nevada on November 27,
2001 to conclude the first  milestone  of our Phase 2 agreement  with the FTA to
demonstrate and evaluate the all-electric zinc-air transit bus.

         Our Defense and  Security  Products  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  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.


                                      -6-
<PAGE>

Additionally,  the Defense and Security Products Division is continuing with the
introduction of the new emergency lights for the marine life jackets market.

         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 expenses  have been based upon
meeting the contractual requirements under our agreements with various strategic
partners and, therefore, have also varied according to the timing of activities,
such as the need to provide  prototype  products and to  establish  and engineer
refueling and  regeneration  facilities.  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 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, 2001, 2000 and 1999. While we expect to continue to derive revenues from the
sale of defense and safety  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.  Further,  we
believe that the  operations of EFL's  subsidiaries  are an integral part of the
Israeli  operations.  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.

RESULTS OF OPERATIONS

     FISCAL YEAR 2001 COMPARED TO FISCAL YEAR 2000

         REVENUES.  Revenues  for the year ended  December 31, 2001 totaled $4.0
million, compared to $4.1 million for 2000, a decrease of $21,000.

         During  2001,  we  recognized   revenues  from  the  sale  of  consumer
batteries,  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


                                      -7-
<PAGE>

also received  electric vehicle revenues during 2001 from our German  consortium
(EFRB)  project.  In 2000,  we  derived  revenues  principally  from the sale of
lifejacket  lights and  consumer  batteries.  Additionally,  we also  recognized
revenues from activities related to the DOT program.

         In 2001,  revenues  were $1.9  million for the Instant  Power  Division
(compared to $2.6 million in 2000, a decrease of $625,000, or 27%), $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.

         Revenues in the Instant Power Division  during 2001 decreased  compared
to 2000  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.

         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 LOSS. Cost of revenues  totaled $7.1 million
during 2001,  compared to $4.2 million in 2000, an increase of $2.9 million,  or
69%. This  increase was the result of several  factors (in  descending  order of
importance), as follows:

o             The increase in our Electric  Vehicle  revenues in 2001 - from
              $310,000 to $894,000 - also resulted in an increase in cost of
              goods sold of $721,000;

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 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;



                                      -8-
<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;

         We are continuing to hold for possible sale the inventory that we wrote
off, but we are not  assigning any value to it on our balance  sheet.  If we are
unable to sell it within a reasonable time, we will dispose of it.

         The above  factors were offset to a small extent by higher  revenues in
the Electric Vehicle Division.

         Gross loss was $3.0 million  during 2001,  compared to $135,000  during
2000,  an  increase  of $2.9  million.  This loss was the  direct  result of all
factors  presented  above,  most  notably the  decrease  in sales  prices in the
Instant Power Division.

         RESEARCH  AND  DEVELOPMENT  EXPENSES,  NET.  Research  and  development
expenses less  royalty-bearing  grants for 2001 were $3.5  million,  compared to
$4.6 million in 2000, a decrease of $1.1 million,  or 24%, primarily as a result
of our move from a company  primarily  engaged in research and  development to a
company  engaged in  production,  and  secondarily as a result of the end of our
BIRD  funding  in 2000.  An  additional  factor was the fact that in 2000 we had
classified  some of our  initial  production  start-up  costs  as  research  and
development,  since we were working on  developing  production  capability,  and
these expenses were not repeated in 2001.

         Research and development  expenses were reduced by $705,000 during 2001
as a result of recognition  of grants from the Office of the Chief  Scientist of
the Ministry of Industry and Trade.  Our 2001  research  and  development  grant
applications  have been approved by the Research  Committee of the Office of the
Chief   Scientist  of  the  Ministry  of  Industry  and  Trade.   As  a  result,
royalty-bearing  grants of $705,000  from the Chief  Scientist  were  recognized
during 2001  (compared  to $763,000  in 2000,  a decrease of $58,000,  or 8%) to
offset research and  development  expenses.  In addition,  $0 of royalty bearing
grants  from the BIRD  Foundation  were  recognized  during  2001  (compared  to
$195,000 in 2000).  Research and  development  expenses  and cost of  operations
related to Instant Power and Security  applications  are expected to continue to
increase for 2002, as we intensify our efforts in these new areas.

         Direct  expenses  for our three  divisions  for the  fiscal  year ended
December  31,  2001 were $13.8  million for the Instant  Power  Division  ($10.2
million in 2000, an increase of $3.6 million, or 35%), $907,000 for the Electric
Vehicle Division  ($473,000 in 2000, an increase of $434,000,  or 92%), 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 and the Instant Power Division was the result of progress that was made
in phase II of the FTA program and the German program,  and an increased  number
of units produced in our Instant Power Division.

         Net costs of fixed assets (net of accumulated depreciation) at December
31,  2001 in the Instant  Power,  Electric  Vehicle  and  Defense  and  Security
Products Divisions were $5.0 million, $666,000 and $322,000, respectively.


                                      -9-
<PAGE>

         SELLING EXPENSES. Selling expenses for the year ended December 31, 2001
were $6.3  million,  compared  to $4.2  million  in 2000,  an  increase  of $2.1
million,  or 50%,  primarily  attributable  to  increased  sales  and  marketing
expenses in the Instant Power Division,  especially in the United States and the
United Kingdom.  We expect further increases in selling  expenses,  particularly
with  respect to  marketing  expenses,  as we continue to market our products to
consumers and expand the applications for our technology.

         GENERAL  AND  ADMINISTRATIVE   EXPENSES.   General  and  administrative
expenses  for 2001  were $4.8  million  compared  to $3.6  million  in 2000,  an
increase of $1.2  million,  or 31%.  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  $400,000 of the increase in
          general and administrative expenses;

     o    Increase in accruals for doubtful debts,  accounting for approximately
          $300,000 of the increase in general and administrative expenses; and

     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  $200,000 of
          the increase in general and administrative expenses.

         The reason we increased  our  accruals for doubtful  debts is because a
greater portion of our accounts receivable was aged over six months.

         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.

         INCOME TAXES. We and our Israeli  subsidiary EFL incurred net operating
losses or had earnings arising from tax-exempt  income during 2001 and 2000 and,
accordingly,  we were not required to make any provision for income taxes. Taxes
in these  entities  incurred in 2001 and 2000 are  primarily  composed of United
States federal alternative minimum taxes.

         NET LOSS.  Due to the factors  cited  above,  we reported a net loss of
$17.3  million in 2001,  compared  to a net loss of $12.0  million  in 2000,  an
increase of $5.3 million, or 44%.


     FISCAL YEAR 2000 COMPARED TO FISCAL YEAR 1999

         Revenues.  Revenues  for the year ended  December 31, 2000 totaled $4.1
million, compared to $2.7 million for 1999, an increase of $1.4 million, or 52%.
This  increase was the result of an increase in revenues  from the Instant Power
Division that resulted from increased  marketing of our Instant Power  batteries


                                      -10-
<PAGE>

for cellular  phones,  an increase that was only partly offset by the completion
of phase I of the FTA  program and the  concomitant  drop-off in revenues in the
Electric Vehicle Division attributable to that program.

         During 2000, we recognized  revenues from the sale of lifejacket lights
and sale of consumer batteries.  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 2001. 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.  In 1999, we derived  revenues  principally from the sale of lifejacket
lights and consumer  batteries.  Additionally,  we also recognized revenues from
activities related to the DOT program.

         In 2000,  revenues  were $2.6  million for the Instant  Power  Division
(compared to $0.3 million in 1999, an increase of $2.3 million,  or 905%),  $0.3
million for the Electric Vehicle  Division  (compared to $1.2 million in 1999, a
decrease of $0.9 million,  or 75%),  and $1.2 million for the Defense and Safety
Division  (compared to $1.0  million in 1999,  an increase of $0.2  million,  or
19%).

         Research and  development  expenses and cost of revenues.  Research and
development  expenses and cost of revenues  totaled  $8.8  million  during 2000,
compared with $6.6 million during 1999 an increase of $2.2 million, or 33%. This
increase was primarily the result of an increase in operations  and  engineering
costs  related to new product  development,  and the ramping up of our automated
production line. In 1999, we believed that,  given our stage of development,  it
was not yet meaningful to distinguish between research and development  expenses
and cost of  revenues.  We did  distinguish  between  research  and  development
expenses  and cost of  revenues  in 2000.  In  addition  to the  increase in the
overall  research and  development  expenses in 2000,  the internal  division of
expenses also changed between 1999 and 2000.  This was principally  attributable
to a reduction of expenses related to Electric Vehicle battery development. This
overall  reduction was partially  offset by  significant  increases in the costs
associated  with consumer  product  development  and the production of increased
quantities of lifejacket lights in the Defense and Safety Division.

         Research and  development  expenses were reduced by $1.0 million during
2000 as a result of recognition of grants from the Office of the Chief Scientist
of the Ministry of Industry and Trade and the BIRD Foundation. Our 2000 research
and development grant  applications have been approved by the Research Committee
of the Office of the Chief Scientist of the Ministry of Industry and Trade. As a
result,  royalty-bearing  grants  of  $763,000  from the  Chief  Scientist  were
recognized during 2000 (compared to $926,000 in 1999, a decrease of $233,000, or
18%) to offset  research and  development  expenses.  In  addition,  $195,000 of
royalty  bearing grants from the BIRD  Foundation  were  recognized  during 2000
(compared  to $277,000 in 1999,  a decrease of $82,000,  or 30%).  Research  and
development expenses and cost of operations related to Instant Power and Defense
and Safety  applications  are expected to continue to increase  for 2001,  as we
intensify our efforts in these new areas.


                                      -11-
<PAGE>

         Direct  expenses for our three divisions for the fiscal year ended 2000
were $10.2  million for the Instant  Power  Division  ($3.0  million in 1999, an
increase  of $7.2  million,  or 240%),  $0.5  million for the  Electric  Vehicle
Division  ($2.7 million in 1999, a decrease of $2.2 million,  or 81%),  and $1.1
million for the Defense and Safety Division ($1.2 million in 1999, a decrease of
$0.1 million,  or 8%). The shift in expenses from the Electric  Vehicle Division
to the Instant Power Division was the result of the completion of phase I of the
FTA program and the  increased  marketing  of our Instant  Power  batteries  for
cellular phones, as discussed above.

         Net costs of fixed assets (net of accumulated depreciation) at December
31, 2000 in the Instant Power, Electric Vehicle and Defense and Safety Divisions
were $4.5 million, $0.9 million and $0.4 million, respectively.

         Selling,  general and  administrative  expenses.  Selling,  general and
administrative  expenses for the year ended December 31, 2000 were $7.8 million,
compared to $3.2 million in 1999,  an increase of $4.6  million,  or 144%.  This
increase was primarily attributable to increased sales and marketing expenses in
the Instant  Power  Division  during  2000.  We expect  additional  increases in
selling,  general and administrative expenses during 2001, particularly relating
to marketing expenses in consumer battery applications, as we continue to expand
the applications for our technology.

         Financial income.  Financial income, net of interest expense,  exchange
differentials,  bank charges, and other fees, totaled approximately  $544,000 in
2000,  compared to $190,000 in 1999,  an  increase  of  $354,000,  or 186%,  due
primarily to higher balances of invested funds as a result of the deposit of the
proceeds of private placements of our securities conducted in 2000.

         Income taxes. We and our Israeli  subsidiary EFL incurred net operating
losses or had earnings  arising from  tax-exempt  income  during the years ended
December  31, 2000 and 1999 and,  accordingly,  we were not required to make any
provision for income taxes.  Taxes in these  entities  incurred in 2000 and 1999
are primarily composed of United States federal alternative minimum taxes.

         Net losses.  Due to the factors cited above,  we reported a net loss of
$12.0  million in 2000,  compared  with a net loss of $6.9  million in 1999,  an
increase of $5.1 million, or 74%.

LIQUIDITY AND CAPITAL RESOURCES

         As  of  December  31,  2001,  we  had  cash  and  cash  equivalents  of
approximately  $12.7  million,  compared  with $11.6  million as of December 31,
2000, an increase of $1.1 million, or 9%. The increase in cash was primarily the
result of the private placements of our securities described below.

         We used available  funds in 2001  primarily for continued  research and
development  expenditures,  and other working  capital  needs.  We increased our
investment  in fixed assets by $1.3 million  during the year ended  December 31,
2001, primarily in the Instant Power Division. Our fixed assets amounted to $6.7
million as at year end.

         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


                                      -12-
<PAGE>

such security as we and the bank shall agree upon from time to time. This credit
facility  imposes  financial and other  covenants on EFC and EFL. As of December
31, 2001,  the bank had issued  letters of credit and bank  guarantees  totaling
approximately $36,000.

         During  2001,  certain of our  employees  exercised  options  under our
registered  employee  stock option plan.  The proceeds to us from the  exercised
options are approximately $206,000.

         On November 21, 2001 we issued and sold to Orsay  Services Inc., for an
aggregate  purchase  price of  $2,000,000,  an aggregate of 1,503,759  shares of
common stock.

         On  December   5,  2001  we  issued  and  sold  to  Vertical   Ventures
International,  for an aggregate  purchase price of $2,000,000,  an aggregate of
1,190,476 shares of common stock.

         We have no long  term  debt  outstanding,  and we are  using  our  cash
reserves and revenues  from  operations  primarily  to continue  development  of
chargers  and  batteries  for  consumer   electronic  devices,  as  well  as  to
participate  in the FTA  Electric  Vehicle  program.  Furthermore,  in the third
quarter  of  2000,  we  established  a  commercial  production  line  and we are
preparing for market  penetration of our new Instant Power zinc-air chargers and
batteries for several models of cellular telephones and PDAs.

         Approximately 25.5% 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 25.5% 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 2001,  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  cash  flows  from
operations will be sufficient to satisfy our estimated cash requirements through
the next year. We are seeking additional funding, including through the issuance
of equity or debt  securities.  However,  there can be no assurance that we will
obtain any such additional  funding.  If additional  funding is not secured,  we
intend to further modify,  reduce, defer or eliminate certain of our anticipated
future commitments and/or programs, in order to continue future operations.

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


                                      -13-
<PAGE>

relation to the dollar. In the past two years, inflation in Israel has been more
than fully  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, 2001,
2000 and 1999, the annual rates of inflation in Israel were 1.3%, 0.0% and 1.3%,
respectively,  compared to the  devaluation of the NIS against the dollar during
such periods of 9.3%, (2.7)% and 0.0%, respectively.

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  EFC,  resulting  in an  overall  effective  corporate  tax  rate  of
approximately  28% for income  arising from EFL's Approved  Enterprises  and 44%
regarding other income.

         EFC and EFL have incurred net operating  losses or had earnings arising
from  tax-exempt  income during the years ended December 31, 2001, 2000 and 1999
and  accordingly  no  provision  for income taxes was  required.  Taxes in these
entities  paid in 2001,  2000 and 1999 are  primarily  composed of United States
federal alternative minimum taxes.

         As of December 31, 2001, we had U.S. net operating  loss carry forwards
of  approximately  $7.0 million  that are  available  to offset  future  taxable
income,  expiring  primarily  in 2015,  and  foreign  net  operating  loss carry
forwards of  approximately  $75.0 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.

                                      -14-
<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


                                      -15-
<PAGE>

     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.

         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 MATERIALLY ADVERSE CONSEQUENCE 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.


                                      -16-
<PAGE>

     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.  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



                                      -17-
<PAGE>

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
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


                                      -18-
<PAGE>

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.

     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.


                                      -19-
<PAGE>

         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.

         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

                                      -20-
<PAGE>

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 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.


                                      -21-
<PAGE>



     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%, 29% 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
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.

                                      -22-
<PAGE>

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;

     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
National  Market  is  the  maintenance of a $1.00 bid price. Our stock price has
generally been trading below $1.00 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.


                                      -23-
<PAGE>

         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.

     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 281, 2003, we had 35,146,261
shares  of common stock issued and outstanding. Of these shares, 27,610,658, are

                                      -24-
<PAGE>
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.

         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 $1.87 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 6,032,721 shares of our common
stock  at a weighted average conversion price of $0.65 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


                                      -25-
<PAGE>

     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.

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,

                                      -26-
<PAGE>

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.

         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.


                                      -27-
<PAGE>

      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 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.



                                      -28-
<PAGE>

<TABLE>
<CAPTION>


ITEM 8.           FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

                          INDEX TO FINANCIAL STATEMENTS

                                                                                                     Page
                                                                                                    ------
<S>               <C>                                                                                <C>

                          CONSOLIDATED FINANCIAL STATEMENTS
                          ---------------------------------

                 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-8
                 Notes to Consolidated Financial Statements......................................    F-10

                          SUPPLEMENTARY FINANCIAL DATA
                          ----------------------------
                 Quarterly Financial Data (unaudited) for the two years ended December 31, 2001..    F-29

</TABLE>



                                      -29-
<PAGE>


                                    PART III

ITEM 11.          EXECUTIVE COMPENSATION

         The Compensation Committee of our Board of Directors for 2001 consisted
of Dr. Eastman,  Mr. Rosenfeld and Mr. Miller. The Committee's  responsibilities
include  recommending  the  annual  compensation   arrangements  for  our  Chief
Executive  Officer  and our Chief  Financial  Officer and  reviewing  the annual
compensation  arrangements for principal officers and significant employees, all
by  reference  to the  parameters  set by any  agreements  we may have with such
persons.  No member of this  Committee was an officer or employee of ours during
2001.  The members of the Committee are familiar with various forms and types of
remuneration  from reports of other public  corporations  and their own business
experience.  All Committee members are  "disinterested  persons" as that term is
used in Rule 16b-3 under the Securities Exchange Act of 1934, as amended.

                      REPORT OF THE COMPENSATION COMMITTEE

     OBJECTIVES AND PHILOSOPHY

              We  maintain  compensation  and  incentive  programs  designed  to
     motivate, retain and attract management and utilize various combinations of
     base salary,  bonuses  payable  upon the  achievement  of specified  goals,
     discretionary  bonuses  and  stock  options.  It is our  current  policy to
     establish,  structure and administer compensation plans and arrangements so
     that the  deductibility  of such  compensation  will not be  limited  under
     Section 162(m) of the Internal  Revenue Code. Our Chief Executive  Officer,
     Yehuda Harats,  and our Chief  Financial  Officer,  Robert S. Ehrlich,  are
     parties  to  employment  agreements  with us.  Our  former  Executive  Vice
     President of Technical  Operations,  Dr. Joshua Degani, who left our employ
     on September 4, 2001, was also party to an employment agreement.

     EXECUTIVE OFFICER COMPENSATION

              Each of the employment  agreements with Messrs. Harats and Ehrlich
     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 to each of Messrs.  Ehrlich and Harats,  on a sliding scale, in
     an amount equal to a minimum of 35% of their annual base  salaries  then in
     effect, up to a maximum of 90% of their annual base salaries 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.  For the year ended
     December 31, 2001, we accrued, but did not pay, a bonus for Messrs. Ehrlich
     and Harats for 2001 at the 35% level.  During 2001, we paid each of Messrs.
     Harats and Ehrlich $50,000 on account of their 2000 bonuses.  The remainder
     of their 2000 bonuses was paid in the beginning of 2002.

              Beginning in May 2001, we instituted a options-for-salary  program
     designed to  conserve  our cash and to offer  incentives  to  employees  to
     remain  with us despite  lowered  cash  compensation.  Under this  program,
     certain of our more senior employees agreed to permanently  waive a portion
     of their salaries in exchange for options to purchase  shares of our common
     stock.  These  options  were granted in October  2001,  based on the lowest
     closing price of our common stock during such month ($1.30),  at a ratio of
     options  to  purchase  2.5  shares of our  stock for each  dollar in salary
     waived.  Thus, in exchange for waiver of $151,739 in salary,  our employees
     received a total of 379,347 options.  Social benefits (such as pension) and
     contractual  bonuses  continued to be  calculated  based on salary prior to
     reduction.


                                      -30-
<PAGE>

              Mr.  Harats  participated  in  this   options-for-salary   program
     throughout 2001 to the extent of  approximately  21% of his monthly salary,
     and hence received 12,500 options per month, or a total of 100,000 options.
     Mr.  Ehrlich  participated  in this  program  to the  extent  of 20% of his
     monthly salary throughout 2001 (which he raised to approximately 37% of his
     monthly salary in 2002),  and hence received 10,000 options per month, or a
     total of 80,000  options.  Dr.  Degani  participated  in this program for a
     period of two months to the extent of 15% of his monthly salary,  and hence
     received 10,000 options per month, or a total of 9,000 options.

              As of December 31, 2001,  Messrs.  Harats's  and  Ehrlich's  total
     options,  including the options  referred to in the  immediately  preceding
     paragraph,  represented  approximately 4.0% and 4.0%, respectively,  of our
     outstanding   stock,   which  the  Compensation   Committee   believes  are
     appropriate  levels of options  for them in view of their  equity  position
     (including  options  exercisable within 60 days) in Electric Fuel which, as
     of  December   31,   2001,   represented   approximately   6.7%  and  4.5%,
     respectively,  of our outstanding stock. As of when Dr. Degani's employment
     with us  terminated  on  September 4, 2001,  Dr.  Degani's  total  options,
     including the options referred to in the immediately  preceding  paragraph,
     represented less than 1% of our fully-diluted  outstanding stock, which the
     Compensation  Committee  believes  was  an  appropriate  level  of  options
     considering his position with us.

              Dr.  Degani  was not  awarded  a cash  bonus  for  2001.  Upon Dr.
     Degani's  leaving our employ in September 2001, we paid him, in addition to
     the severance  pay to which he was entitled  under Israeli law, a severance
     payment of $36,000 that we were obligated to pay him under the terms of his
     employment agreement with us.

     COMPENSATION OF OTHER EMPLOYEES

              With respect to employees other than the Named Executive Officers,
     compensation is determined not by formula,  but based on the achievement of
     qualitative and/or quantitative  objectives  established in advance of each
     year by the Chief Executive Officer and Chief Financial Officer,  who then,
     pursuant to authority  delegated by the Compensation  Committee,  determine
     remuneration of our employees based on such objectives.

              We seek to promote,  including through our compensation  plans, an
     environment that encourages  employees to focus on our continuing long-term
     growth.  Employee  compensation is generally  comprised of a combination of
     cash compensation and grants of options under our stock option plans. Stock
     options  are awarded  annually  in  connection  with  annual  bonuses  and,
     occasionally,  during the year on a discretionary  basis. Stock options are
     intended  to offer an  incentive  for  superior  performance  while  basing
     employee  compensation  on the  achievement  of higher share value,  and to
     foster the  retention of key personnel  through the use of schedules  which
     vest  options over time if the person  remains  employed by us. There is no
     set  formula  for the award of options  to  individual  employees.  Factors
     considered in making  option  awards to the employees  other than the Named
     Executive  Officers in 2001  included  prior grants to the  employees,  the
     importance of retaining the employees services,  the amount of cash bonuses
     received by the  employees,  the  employees  potential to contribute to our
     success and the employees' past contributions to us.  Additionally,  almost
     all of our more senior  employees  participated  in our  options-for-salary
     program  (described  above) of agreeing to  permanently  waive a portion of
     their  salaries  in exchange  for options to purchase  shares of our common
     stock.  Most of these employees  participated in this program to the extent
     of 15% of their monthly salaries, resulting in the grant of 379,347 options
     to senior employees (including executive officers) during 2001.

                                      -31-
<PAGE>

                     SUBMITTED BY THE COMPENSATION COMMITTEE

                               Dr. Jay M. Eastman
                               Lawrence M. Miller
                                Jack E. Rosenfeld

CASH AND OTHER COMPENSATION

         The following table shows the  compensation  that we paid (or accrued),
in  connection  with  services  rendered for 2001,  2000 and 1999,  to our Chief
Executive Officer and the other highest paid executive  officers (of which there
were two) who were  compensated  at a rate of more than  $100,000  in salary and
bonuses  during the year  ended  December  31,  2001  (collectively,  the "Named
Executive Officers").

<TABLE>
<CAPTION>

                          SUMMARY COMPENSATION TABLE(1)

                                                                                         LONG TERM
                                                        ANNUAL COMPENSATION             COMPENSATION
                                            ------------------------------------  ----------------------
                                                                            OTHER         SECURITIES
                                                                            ANNUAL        UNDERLYING     ALL OTHER
    NAME AND PRINCIPAL POSITION      YEAR       SALARY        BONUS       COMPENSATION     OPTIONS     COMPENSATION
---------------------------------- -------- ------------ ---------------- ------------- -------------- --------------
<S>                                   <C>         <C>             <C>            <C>            <C>         <C>

Yehuda Harats                        2001    $   248,681   $    99,750(2)$    19,145(3)     616,000(4)$   580,911(5)
President, Chief Executive           2000    $   245,560   $    82,380   $     8,083        400,000   $   170,804
  Officer and director               1999    $   141,710   $    80,011   $     8,055        100,000   $    78,060



Robert S. Ehrlich                    2001    $   211,644   $    84,000(2)$    17,201(3)     521,000(6)$369,754(7)
Chairman of the Board and Chief      2000    $   245,574   $    82,380   $     7,146        400,000   $   247,185
  Financial Officer                  1999    $   137,466   $    80,011   $     6,094         47,500   $   173,384



Dr. Joshua Degani*                   2001    $    99,183   $         0(2)$     4,400(3)       9,000(8)$    74,050(9)
Executive Vice President and         2000    $   130,417   $    25,000   $     6,120         35,000   $    31,214
  Chief Operating Officer            1999    $   110,259   $    17,500   $     5,063         35,000   $    34,825


</TABLE>



 * Dr. Degani's employment with us terminated on September 4, 2001.

(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 did not pay any cash  bonuses for fiscal year 2001 that were paid out in
     2001.  However,  we accrued  for  Messrs.  Ehrlich  and Harats  $84,000 and
     $99,750, respectively, in satisfaction of the bonuses they were entitled to
     according to their contracts.  During 2001, we paid each of Messrs.  Harats
     and Ehrlich  $50,000 of their  respective  bonuses for 2000 and we paid the
     balance in 2002. Additionally, during 2001 we paid Dr. Degani the remaining
     $12,500 of his bonus for 2000.

(3)  Represents  the costs of taxes  paid by the  Named  Executive  Officer  and
     reimbursed by us in accordance with Israeli tax regulations.

(4)  Of this amount,  100,000 options were in exchange for a total of $40,000 in
     salary  waived by Mr.  Harats  pursuant to the  options-for-salary  program
     instituted by us beginning in May 2001.

                                      -32-
<PAGE>


(5)  Of this amount,  $263,994  represents  our accrual for  severance  pay that
     would be payable to Mr.  Harats  upon a "change of  control" of EFC or upon
     the occurrence of certain other events;  $67,074 represents our accrual for
     sick leave and vacation  redeemable by Mr. Harats;  $44,307  represents the
     increase  of the  accrual  for  severance  pay that would be payable to Mr.
     Harats  under the laws of the State of Israel if we were to  terminate  his
     employment; $62,617 consists of our payments and accruals to a pension fund
     that provides a savings  plan,  insurance and severance pay benefits and an
     education fund (as is customary in Israel); and $142,240 represents benefit
     imputed to Mr. Harats upon the purchase by us of certain  treasury  shares.
     Additionally,  $679 represents other benefits that we paid to Mr. Harats in
     2001.

(6)  Of this amount,  80,000  options were in exchange for a total of $32,000 in
     salary waived by Mr.  Ehrlich  pursuant to the  options-for-salary  program
     instituted by us beginning in May 2001.

(7)  Of this amount,  $172,360  represents  our accrual for  severance  pay that
     would be payable to Mr.  Ehrlich  upon a "change of control" of EFC or upon
     the occurrence of certain other events;  $50,548 represents the increase of
     the accrual for sick leave and vacation  redeemable by Mr. Ehrlich;  $6,892
     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;  $52,841  represents our payments and accruals to
     pension and education funds; and $86,434  represents benefit imputed to Mr.
     Ehrlich upon the purchase by us of certain treasury  shares.  Additionally,
     $679 represents other benefits that we paid to Mr. Ehrlich in 2001.

(8)  All of such options were in exchange for a total of $3,600 in salary waived
     by Dr. Degani pursuant to the  options-for-salary  program instituted by us
     beginning in May 2001.

(9)  Of this  amount,  $11,287  represents  payments  to Dr.  Degani  for unused
     vacation;  $17,155  represents  our  payments  and  accruals to pension and
     education funds; and $8,936 and $36,000 represent statutory and contractual
     severance  amounts,  respectively,  paid to Dr.  Degani  upon Dr.  Degani's
     leaving our employ in September 2001.  Additionally,  $672 represents other
     benefits that we paid to Dr. Degani in 2001.

STOCK OPTIONS

         The table below sets forth  information  with respect to stock  options
granted to the Named Executive Officers for the fiscal year 2001.

<TABLE>
<CAPTION>

                        OPTION GRANTS IN LAST FISCAL YEAR

                             INDIVIDUAL GRANTS
                          ----------------------------

                                         % OF TOTAL                                   POTENTIAL REALIZABLE VALUE
                           NUMBER OF       OPTIONS                                      OF ASSUMED ANNUAL RATES
                          SECURITIES      GRANTED TO                                  OF STOCK PRICE APPRECIATION
                          UNDERLYING      EMPLOYEES      EXERCISE OR                      FOR OPTION TERM(1)
                           OPTIONS         IN FISCAL      BASE PRCE     EXPIRATION    ------------------------------
            NAME           GRANTED          YEAR            ($/SH)         DATE            5% ($)          10% ($)
          -------         -----------    -------------    -----------   ----------    -------------    -------------
<S>         <C>                <C>             <C>            <C>          <C>             <C>            <C>

Yehuda Harats..........      100,000          6.2%         $1.43        08/24/11          89,932         227,905
                              66,000          4.1%         $1.43        08/24/11          59,355         150,417
                             350,000         21.7%         $1.43        10/23/11         314,762         797,668
                             100,000(2)       6.2%         $1.30        10/31/11          81,756         207,187
Robert S. Ehrlich......      100,000          6.2%         $1.43        08/24/11          89,932         227,905
                              66,000          4.1%         $1.43        08/24/11          59,355         150,417
                             275,000         17.0%         $1.43        10/23/11         247,313         626,739
                              80,000(2)       4.9%         $1.30        10/31/11          65,405         165,749
Joshua Degani..........        9,000(2)       0.6%         $2.34        06/30/11          13,245          33,564

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

 (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

                                      -33-
<PAGE>

    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.

 (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 2001 and fiscal 2001
year-end option values.

          AGGREGATED OPTION EXERCISES AND FISCAL YEAR-END OPTION VALUES



                                                          NUMBER OF SECURITIES           VALUE OF UNEXERCISED
                                                         UNDERLYING UNEXERCISED          IN-THE-MONEY OPTIONS
                         SHARES                         OPTIONS AT FISCAL YEAR END       AT FISCAL-YEAR-END(1)
                       ACQUIRED ON         VALUE      ------------------------------ ---------------------------------
         NAME           EXERCISE          REALIZED     EXERCISABLE   UNEXERCISABLE     EXERCISABLE     UNEXERCISABLE
      ----------     ------------- ------------------ -------------- --------------- ---------------- ----------------
 Yehuda Harats........     7,500     $      7,125.00       668,001        462,666      $    105,783.41  $     77,396.59
Robert S. Ehrlich.....     7,500     $      7,125.00       750,651        396,916      $     79,659.66  $     61,407.84
Joshua Degani.........         0            -                9,000              0      $      3,240.00        -

-----------------------------------
</TABLE>

(1)  Options that are "in-the-money" are options for which the fair market value
     of the  underlying  securities  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,  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 was
approximately  one-half of the amount we had accrued on our financial statements
in connection with such obligations.

         Each of Messrs.  Ehrlich and Harats are  parties to similar  employment
agreements  with us effective as of January 1, 2000.  The terms of each of these
employment   agreements   expire  on  December  31,   2002,   but  are  extended
automatically for additional terms of two years each unless either the executive
or we terminate the agreement  sooner.  Additionally,  we have the right,  on at
least 90 days' notice to the executive,  unilaterally to extend the initial term
of the executive's  agreement for a period of one year (i.e., until December 31,
2003); if we exercise this right, the automatic two-year  extensions would begin
from December 31, 2003 instead of December 31, 2002.

         The  employment  agreements  provide  for a base  salary of $20,000 per
month for each of Messrs.  Ehrlich and Harats,  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 the executive's base salary.
As of January 31, 2001, the board raised Mr. Harats's base salary to $23,750 per
month effective January 1, 2001. In January 2002, the board raised Mr. Ehrlich's


                                      -34-
<PAGE>

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.

         Each  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  to each of  Messrs.  Ehrlich  and
Harats,  on a sliding  scale,  in an amount  equal to a minimum  of 35% of their
annual base salaries then in effect, up to a maximum of 90% of their annual base
salaries  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.

         The employment  agreements also contain 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 each of Messrs. Ehrlich and Harats demand and "piggyback"
registration rights covering shares of our common stock held by them.

         We can  terminate  the  employment  agreements 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). Messrs. Ehrlich and Harats each have the right to terminate
their  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,  Messrs.
Ehrlich  and Harats may retire  (after  age 68) or  terminate  their  respective
agreements for any reason upon 150 days' notice. Upon termination of employment,
the  employment  agreements  provide  for  payment  of all  accrued  and  unpaid
compensation,  and (unless we have  terminated  the  agreement  for Cause or the
executive 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 an executive 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.


                                      -35-
<PAGE>

         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 2q of the Notes to the  Consolidated  Financial
Statements.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

         The  Compensation  Committee  of our board of directors  for the 2001
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.

PERFORMANCE GRAPH

         The  following  graph  compares  the  yearly  percentage  change in our
cumulative  total  shareholder  return on our common  stock with the  cumulative
total  return  on  the  Nasdaq   Market  Index  (Broad   Market   Index)  and  a
self-constructed  peer group index over the past five years,  from  December 31,
1996 through December 31, 2001. The cumulative total shareholder return is based
on $100 invested in our common stock and in the  respective  indices on December
31,  1996.  The  stock  prices  on the  performance  graph  are not  necessarily
indicative of future price performance.



                                      -36-
<PAGE>



                CUMULATIVE TOTAL RETURN THROUGH DECEMBER 31, 2001
                        AMONG ELECTRIC FUEL CORPORATION,
                    NASDAQ MARKET INDEX AND PEER GROUP INDEX



                                   [GRAPHIC CHART OMITTED]

<TABLE>
<CAPTION>


                          12/31/96       12/31/97        12/31/98       12/31/99       12/31/00       12/31/01
                          --------       --------        --------       --------       --------       --------
<S>                         <C>              <C>            <C>            <C>            <C>            <C>

 ELECTRIC FUEL              100.00          51.79          39.29           50.00          66.96          23.71
 PEER GROUP(1)              100.00         107.95          88.29          178.74          99.22          44.91
 BROAD MARKET               100.00         121.64         169.84          315.20         191.36         151.07

-------------------------------------
</TABLE>

(1)  The Peer Group Index is comprised of the  following  companies:  AER Energy
     Resources, Inc., Battery Technologies Inc., Electrosource,  Inc., Ultralife
     Batteries,  Inc. and Valence  Technology,  Inc. The returns of each company
     have  been   weighted   according   to  their   respective   stock   market
     capitalization for purposes of arriving at a peer group average.





                                      -37-
<PAGE>

                                     PART IV

ITEM 14.       EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

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

     (1)  Financial  Statements - See Index to Financial  Statements  on page 29
          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 filed herewith: EXHIBIT NUMBER

      DESCRIPTION

          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






                                      -38-
<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 amended report to be
signed on its behalf by the undersigned,  thereunto duly authorized,  on May 8,
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 amended 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>                                      <C>

                                                 Chairman, President, Chief Executive
      /S/ ROBERT S. EHRLICH                         Officer and Director                       May   8  , 2003
 --------------------------------------         (Principal Executive Officer)                      -----
          Robert S. Ehrlich

         /S/ AVIHAI SHEN                           Vice President - Finance                    May   8  , 2003
 --------------------------------------          (Principal Financial Officer)                     -----
             Avihai Shen

        /S/ DANNY WALDNER                     Controller (Principal Accounting Officer)        May   8  , 2003
 --------------------------------------                                                            -----
            Danny Waldner

         /S/ STEVEN ESSES               Executive Vice President, Chief Operating Officer      May   8  , 2003
 --------------------------------------                   and Director                             -----
             Steven Esses

          /S/ JAY M. EASTMAN                                 Director                          May   8  , 2003
 --------------------------------------                                                            -----
          Dr. Jay M. Eastman

       /S/ LAWRENCE M. MILLER                                Director
 ---------------------------------------
           Lawrence M. Miller                                                                  May   8  , 2003
                                                                                                    -----

      /S/ JACK E. ROSENFELD                                  Director                          May   8  , 2003
 --------------------------------------                                                             -----
          Jack E. Rosenfeld

                                                             Director                           May     , 2003
 ---------------------------------------                                                            ----
           Bert W. Wasserman

</TABLE>
                                      -39-
<PAGE>



                                 CERTIFICATIONS

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

I, Robert S. Ehrlich, certify that:

     1. I have  reviewed  this amended  annual report on Form 10-K/A 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: May 5, 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 amended  annual report on Form 10-K/A 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: May 5, 2003
                                                /S/ AVIHAI SHEN
                                        --------------------------------------
                                        Avihai Shen, Vice President - Finance
                                        (Principal Financial Officer)



<PAGE>





                 ELECTRIC FUEL CORPORATION AND ITS SUBSIDIARIES


                 ELECTRIC FUEL CORPORATION AND ITS SUBSIDIARIES


                        CONSOLIDATED FINANCIAL STATEMENTS


                             AS OF DECEMBER 31, 2001


                                 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 - 7

Consolidated Statements of Cash Flows                         8 - 9

Notes to Consolidated Financial Statements                  10 - 34


                                     F-1


<PAGE>





 ERNST & YOUNG              KOST FORER & GABBAY        Phone  972-3-6232525
                            3 Aminadav St.             Fax:    972-3-5622555
                            Tel-Aviv 67067, Israel




                         REPORT OF INDEPENDENT AUDITORS

                             TO THE SHAREHOLDERS OF

                            ELECTRIC FUEL CORPORATION




         We  have  audited  the  accompanying  consolidated  balance  sheets  of
Electric Fuel  Corporation  (the "Company") and its  subsidiaries as of December
31,  2001 and 2000,  and the  related  consolidated  statements  of  operations,
changes in  shareholders'  equity and cash flows for each of the three  years in
the  period  ended  December  31,  2001.  These  financial  statements  are  the
responsibility of the Company's 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, 2001 and 2000,  and the
consolidated  results of their  operations  and cash flows for each of the three
years in the period ended  December  31, 2001,  in  conformity  with  accounting
principles generally accepted in the United States.





                                           /s/ Kost Forer & Gabbay
Tel Aviv,  Israel                          KOST FORER & GABBAY
January 29, 2002                           A Member of Ernst & Young Global
(except  for Note 1 and Note 10d.2,
for which the date is February  20,
2003)

                                    F-2
<PAGE>

<TABLE>
<CAPTION>

ELECTRIC FUEL CORPORATION AND ITS SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS


                                                                                                   DECEMBER 31,
                                                                                     -----------------------------------------
                                                                                           2001                   2000
                                                                                     -----------------      ------------------
                                                                                                   U.S. DOLLARS
                                                                                     -----------------------------------------

<S>                                                                                            <C>               <C>

                  ASSETS

CURRENT ASSETS:
         Cash and cash equivalents                                                        $12,671,754             $11,596,225
         Trade  receivables  (net of  allowance  for  doubtful  accounts  in the
         amounts of $245,934  and  $107,388  as of  December  31, 2001 and 2000,
         respectively and allowance for returns in the amounts of $239,000
         and $0 as of December 31, 2001 and 2000, respectively)                             1,230,259               2,212,434
         Other accounts receivable and prepaid expenses (Note 3)                              714,946               2,418,715
         Inventories (Note 4)                                                               3,472,197               3,208,948
                                                                                     -----------------      ------------------

Total current assets                                                                       18,089,156              19,436,322
                                                                                     -----------------      ------------------

LOANS TO SHAREHOLDERS (Note 5)                                                                501,288                 778,677
                                                                                     -----------------      ------------------

SEVERANCE PAY FUND                                                                          1,078,131                 995,283
                                                                                     -----------------      ------------------

PROPERTY AND EQUIPMENT, NET (Note 6)                                                        6,739,665               6,446,064
                                                                                     -----------------      ------------------

                                                                                          $26,408,240             $27,656,346
                                                                                     =================      ==================





</TABLE>


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


                                      F-3
<PAGE>
<TABLE>
<CAPTION>

ELECTRIC FUEL CORPORATION AND ITS SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS


                                                                                                 DECEMBER 31,
                                                                                  -------------------------------------------
                                                                                         2001                    2000
                                                                                  -------------------     -------------------
                                                                                                 U.S. DOLLARS
                                                                                  -------------------------------------------
<S>                              <C>                                                     <C>                       <C>


                  LIABILITIES AND SHAREHOLDERS' EQUITY

CURRENT LIABILITIES:
       Trade payables                                                                     $1,824,957             $ 3,242,460
       Other accounts payable and accrued expenses (Note 8)                                1,730,799               1,544,975
                                                                                  -------------------     -------------------

Total current liabilities                                                                  3,555,756               4,787,435
                                                                                  -------------------     -------------------

ACCRUED SEVERANCE PAY                                                                      3,444,427               2,790,542
                                                                                  -------------------     -------------------

COMMITMENTS AND CONTINGENT LIABILITIES (Note 9)

SHAREHOLDERS' EQUITY (Note 10):
       Share capital -
       Common stock - $0.01 par value each;
         Authorized: 100,000,000 shares as of December 31, 2001 and 2000;
         Issued: 29,059,469 shares and 21,422,691 shares as of December 31,
         2001 and 2000, respectively; Outstanding - 28,504,136 shares and
         21,417,358 shares as of December 31, 2001 and 2000, respectively                    290,596                 214,227
       Preferred shares - $ 0.01 par value each;
         Authorized: 1,000,000 shares as of December 31, 2001 and 2000; No
         shares issued and outstanding as of December 31, 2001 and 2000                            -                       -
       Additional paid-in capital                                                        105,686,909              89,091,790
       Accumulated deficit                                                               (82,169,261            (64,882,473)
       Deferred stock compensation                                                          (18,000)                (17,240)
       Treasury stock, at cost (common stock - 555,333 shares and 5,333 shares
         as of December 31, 2001 and 2000, respectively)                                 (3,537,106)                (37,731)
       Notes receivable from shareholders                                                  (845,081)             (4,290,204)
                                                                                  -------------------     -------------------

Total shareholders' equity                                                                19,408,057              20,078,369
                                                                                  -------------------     -------------------

                                                                                         $26,408,240             $27,656,346
                                                                                  ===================     ===================



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


</TABLE>
                                      F-4
<PAGE>
<TABLE>
<CAPTION>

ELECTRIC FUEL CORPORATION AND ITS SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS



                                                                               YEAR ENDED DECEMBER 31,
                                                            ---------------------------------------------------------------
                                                                   2001                  2000                  1999
                                                            -------------------   -------------------    ------------------
                                                                                     U.S. DOLLARS
                                                            ---------------------------------------------------------------
<S>     <C>                                                            <C>                <C>                 <C>


Revenues from products                                             $ 3,138,843           $ 3,743,121           $ 1,464,227
Revenues from services                                                 894,045               310,441             1,229,771
                                                            -------------------   -------------------    ------------------

Total revenues                                                       4,032,888             4,053,562             2,693,998
                                                            -------------------   -------------------    ------------------

Operating  costs and expenses Cost of revenues
(including  $441,875,  $0 and $0
write-off of inventory for the year 2001, 2000 and
1999, respectively)                                                  7,053,602             4,188,442                   **)

Research and development, net (Note 12a)                             3,512,084             4,588,137             6,631,075
Selling and marketing expenses                                       6,255,703             4,160,902               760,359
General and administrative expenses                                  4,760,866             3,641,220             2,402,284
                                                            -------------------   -------------------    ------------------

Total operating costs and expenses                                  21,528,555            16,578,701             9,793,718
                                                            -------------------   -------------------    ------------------

Operating loss                                                    (17,549,367)          (12,525,139)           (7,099,720)
Financial income, net (Note 12b)                                       262,579               544,181               190,049
                                                            -------------------   -------------------    ------------------

Loss before taxes on income                                       (17,286,788)          (11,980,958)           (6,909,671)
Taxes on income (Note 11)                                                    -                     -                 6,017
                                                            -------------------   -------------------    ------------------

Net loss                                                        $ (17,286,788)        $ (11,980,958)         $ (6,915,688)
                                                            ===================   ===================    ==================

Deemed dividend to certain shareholders of common stock     *)  $ (1,196,667)                     -                     -
                                                            ===================   ===================    ==================

Net loss attributable to shareholders of  common stock      *)  $ (18,483,455)        $ (11,980,958)         $ (6,915,688)
                                                            ===================   ===================    ==================

Basic and diluted net loss per share                        *)  $       (0.76)        $       (0.62)         $      (0.48)
                                                            ===================   ===================    ==================

Weighted average number of shares used in computing
  basic and diluted net loss per share                             24,200,184            19,243,446            14,334,277
                                                            ===================   ===================    ==================


*) As restated. See Note 1.
**) See Note 2.h.



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

                                      F-5
</TABLE>
<PAGE>

<TABLE>
<CAPTION>
ELECTRIC FUEL CORPORATION AND ITS SUBSIDIARIES
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
                                                                                                         ACCUMULATED
                                                            ADDITIONAL                     DEFERRED         OTHER
                                       COMMON SHARES          PAID-IN     ACCUMULATED        STOCK      COMPREHENSIVE
                                    SHARES       AMOUNT       CAPITAL       DEFICIT      COMPENSATION   INCOME (LOSS)
                                  -----------  -----------  ------------ --------------- -------------- ---------------
                                                                                               U.S. dollars
                                               ------------------------------------------------------------------------
<S>                                  <C>           <C>          <C>           <C>             <C>               <C>

  Balance as of January 1, 1999   14,303,387    $ 143,034   $57,398,814   $(44,553,027)               -       $ (1,943)
  Comprehensive loss:
    Net realized losses on
      available-for-sale
      securities                           -            -             -               -               -           1,943
    Net loss                               -            -             -     (6,915,688)               -               -

  Issuance of shares to
  investors, net                   1,425,000       14,250     2,712,001               -               -               -

  Purchase of treasury stock
                                           -            -             -   *)(1,432,800)               -               -
  Accrued interest on notes
    receivable from shareholders           -            -             -               -               -               -
                                  -----------  -----------  ------------  -------------- --------------- ---------------
  Total comprehensive loss

  Balance as of December 31,
    1999                          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)           $   -
                                  ===========  ===========  ============  ============== =============== ===============
*) As revised. See Note 10.d.2.
                                                                      NOTES
                                                     TOTAL          RECEIVABLE      TOTAL
                                    TREASURY      COMPREHENSIVE        FROM       SHAREHOLDERS'
                                     STOCK           LOSS         SHAREHOLDERS      EQUITY
                                  ----------- ----------------  -------------- --------------
 Balance as of January 1, 1999   $ (1,806,481)                       $(598,885)    $10,581,512
 Comprehensive loss:
   Net realized losses on
     available-for-sale
     securities                              -         $   1,943              -          1,943
   Net loss                                  -       (6,915,688)              -    (6,915,688)
                                                 ----------------
 Issuance of shares to
 investors, net                              -                 -    (2,100,000)        626,251
                                                 ----------------
 Purchase of treasury stock
                                 *)  1,768,750                 -      (335,950)
 Accrued interest on notes
   receivable from shareholders              -                         (51,659)       (51,659)
                                 --------------                   -------------- --------------
 Total comprehensive loss                          $ (6,913,745)
================================                 ================

 Balance as of December 31,
   1999                               (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
                                 ==============                   ============== ==============
*) As revised. See Note 10.d.2.

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

                                      F-6
</TABLE>
<PAGE>



<TABLE>
<CAPTION>

ELECTRIC FUEL CORPORATION AND ITS SUBSIDIARIES
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY

                                       COMMON STOCK          ADDITIONAL
                                  ------------------------    PAID-IN     ACCUMULATED
                                    SHARES      AMOUNT        CAPITAL       DEFICIT
                                  ----------- ------------  ------------ --------------
<S>                                 <C>           <C>           <C>            <C>

Balance as of January 1, 2001      21,422,691    $ 214,227   $89,091,790   $64,882,473)

Repurchase of common shares
  form 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        2,900       511,389              -
Exercise of warrants                 333,333        3,333       836,667              -
Deferred stock compensation                -            -        18,000              -
Amortization of deferred stock
  compensation                             -            -       (6,193)              -
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)
                                  =========== ============  ============ ==============
                                                                                          NOTES
                                       DEFERRED                        TOTAL           RECEIVABLE           TOTAL
                                        STOCK        TREASURY     COMPREHENSIVE           FROM          SHAREHOLDERS'
                                     COMPENSATION       STOCK           LOSS          SHAREHOLDERS         EQUITY
                                   -------------- -------------- ---------------  ----------------- ------------------


Balance as of January 1, 2001       $  (17,240)     $  (37,731)                      $ (4,290,204)      $ 20,078,369

Repurchase of common shares
  form 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              18,000               -                                  -                 -
Amortization of deferred stock
  compensation                           17,240               -                                  -            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    $ (18,000)   $ (3,537,106)                       $  (845,081)       $19,408,057
                                  ==============  ==============                  ================== =================
</TABLE>
               The accompanying notes are an integral part of the
                       consolidated financial statements.
                                      F7
<PAGE>


<TABLE>
<CAPTION>

ELECTRIC FUEL CORPORATION AND ITS SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS


                                                                                   YEAR ENDED DECEMBER 31,
                                                                  -----------------------------------------------------------
                                                                        2001                 2000                1999
                                                                  -----------------    -----------------   ------------------
                                                                                         U.S. DOLLARS
                                                                  -----------------------------------------------------------
<S>                                                                   <C>                   <C>                  <C>


Cash flows from operating activities:
        Net loss                                                    $ (17,286,788)       $ (11,980,958)        $ (6,915,688)
        Adjustments required to reconcile net loss to net cash
         used in operating activities:
        Depreciation                                                       980,008              753,910              710,759
        Net realized losses on available-for-sale marketable
         securities                                                              -                    -                1,943
        Accrued severance pay, net                                         571,037              249,195            (298,056)
        Amortization of deferred stock compensation                         17,240               20,684                    -
       Impairment of loans to shareholders                                 206,005                    -                    -
       Compensation expenses related to repurchase of treasury
         stock                                                             228,674                    -                    -
       Write-off of inventories                                            441,875                    -                    -
       Amortization of compensation related to options issued
         to consultants and repriced options issued to
         employees and consultants                                         160,995              765,378                    -
       Compensation expenses related to shares issued to
         service providers                                                 660,377              405,000                    -
       Accrued interest on notes receivable from shareholders               36,940            (230,924)             (51,659)
       Decrease (increase) in trade receivables                            982,175          (1,714,357)              115,390
        Decrease (increase) in other accounts receivable and
         prepaid expenses                                                1,583,769          (1,348,325)              348,666
        Increase in inventories                                          (705,124)          (2,163,468)            (670,937)
       Increase (decrease) in trade payables                           (1,229,609)              989,055              803,074
        Increase (decrease) in other accounts payable and
         accrued expenses                                                  185,824              267,961              397,241
        Decrease in deferred revenues                                            -                    -            (136,549)
        Other                                                                  120              (6,330)              (4,704)
                                                                  -----------------    -----------------   ------------------

Net cash used in operating activities                                 (13,166,482)         (13,963,179)          (5,700,520)
                                                                  -----------------    -----------------   ------------------

</TABLE>

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

                                      F-8
<PAGE>

<TABLE>
<CAPTION>

ELECTRIC FUEL CORPORATION AND ITS SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS

                                                                                  YEAR ENDED DECEMBER 31,
                                                                  ---------------------------------------------------------
                                                                        2001                2000                1999
                                                                  -----------------   -----------------   -----------------
                                                                                        U.S. DOLLARS
                                                                  ---------------------------------------------------------
<S>                                                                        <C>                <C>              <C>

Cash flows from investing activities:
         Purchase of property and equipment                            (1,275,303)         (2,858,512)         (1,473,444)
         Payment to suppliers for purchase of property and
           equipment from previous year                                  (227,230)                   -                   -
         Loans granted to shareholders                                           -           (958,156)                   -
         Repayment of loans granted to shareholders                              -             225,097                   -
         Proceeds from sale of property and equipment                       40,217              57,867              34,643
         Proceeds from sale of available-for-sale marketable
           securities                                                            -                   -           3,702,411
                                                                  -----------------   -----------------   -----------------

Net cash provided by (used in) investing activities                    (1,462,316)         (3,533,704)           2,263,610
                                                                  -----------------   -----------------   -----------------

Cash flows from financing activities:
         Proceeds from issuance of shares, net                          14,393,346          18,150,404             750,000
         Proceeds from exercise of options                                 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                                                     -           2,705,052                   -
                                                                  -----------------   -----------------   -----------------

Net cash provided by financing activities                               15,704,327          26,537,463             750,000
                                                                  -----------------   -----------------   -----------------

Increase (decrease) in cash and cash equivalents                         1,075,529           9,040,580         (2,686,910)
Cash and cash equivalents at the beginning of the year                  11,596,225           2,555,645           5,242,555
                                                                  -----------------   -----------------   -----------------

Cash and cash equivalents at the end of the year                      $ 12,671,754        $ 11,596,225         $ 2,555,645
                                                                  =================   =================   =================

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             $     -             $     -
                                                                  =================   =================   =================
Issuance of shares (including additional paid-in capital)
  against notes receivable.                                                $     -             $     -          $2,435,950
                                                                  =================   =================   =================
Retirement of shares issued under notes receivables                      $  18,000             $     -             $     -
                                                                  =================   =================   =================
Issuance of shares to consultants in respect of prepaid
   expenses                                                                $     -          $  120,000             $     -
                                                                  =================   =================   =================

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

Liabilities in respect of share issuance expenses                         $      -             $     -           $ 123,749
                                                                  =================   =================   =================

Supplemental disclosure of cash flows activities: Cash paid during the year for:
                Interest                                                 $  19,106           $  25,537            $ 38,202
                                                                  =================   =================   =================

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

</TABLE>
                                      F-9

<PAGE>



ELECTRIC FUEL CORPORATION AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------


NOTE 1:-      GENERAL

a.

Electric Fuel  Corporation  ("EFC,"  "Electric  Fuel," or the "Company") and its
subsidiaries are engaged in the design, development and commercialization of its
proprietary zinc-air battery technology for portable consumer electronic devices
such as cellular  telephones  products,  as well as for  electric  vehicles  and
defense  applications.  The Company is primarily operating through Electric Fuel
Ltd. ("EFL") a wholly-owned  Israeli based subsidiary.  The Company's production
and research and development operations are primarily located in Israel.

In November 2000, the Company  established a wholly-owned  subsidiary in the U.K
("EFL U.K."). The Company has two wholly-owned  non-operating  subsidiaries,  in
Germany ("GmbH") and in the Netherlands  ("BV"),  as well as two subsidiaries in
the United States:  Electric Fuel  Transportation  Corp.  (Delaware) and Instant
Power Corporation (Delaware).

The Company  conducted a  comprehensive  review on the  re-pricing  of warrants
granted during 2000 to its investors and investment  banker. As a result of that
review,  the Company  reconsidered  the calculation and the related  assumptions
related  to the  deemed  dividend  derived  from  this  transaction,  which  was
immaterial  initially and should have resulted and currently recorded the deemed
dividend in the amount of  $1,196,667  (see Note 10e.2),  a non-cash  item.  The
accompanying  consolidated  financial statements for the year ended December 31,
2001 were  restated to record this deemed  dividend,  which  increased  the loss
applicable to common  shareholders  to $18,483,455  and the calculation of basic
and diluted net loss per share to $0.76 for the year ended  December  31,  2001.
This restatement does not affect the balance sheet, the changes in shareholders'
equity or the cash flow statements.


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 its  subsidiaries  is generated in
U.S.  dollars.  In addition,  a  substantial  portion of the  Company's  and its
subsidiaries costs are incurred in U.S. dollars ("dollar"). Company's management
believes, that the dollar is the primary currency of the economic environment in
which the  Company  and its  subsidiaries  operate.  Thus,  the  functional  and
reporting   currency  of  the  Company  and  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.

                                      F-10



<PAGE>
ELECTRIC FUEL CORPORATION AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
Note 2:- SIGNIFICANT ACCOUNTING POLICIES (CONT.)

c. Principles of consolidation:

The consolidated  financial  statements  include the accounts of the Company and
its wholly-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 original maturities of three months or less.

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 in each period to write inventory
down  to its  market  prices.  In  2001,  the  Company  wrote  off  $441,875  of
slow-moving and obsolete inventory, which has been included in cost of revenues.

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 granted  during  2001,  2000 and
1999).

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  periodically  assess the recoverability of the
carrying  amount  of  property  and  equipment  and  provide  for  any  possible
impairment  loss based upon the difference  between the carrying amount and fair
value of such  assets in  accordance  with  Statement  of  Financial  Accounting
Standard No. 121  "Accounting  for the  Impairment of Long-Lived  Assets and for
Long-Lived  Assets to Be Disposed  Of" ("SFAS No.  121").  For each of the three
years ended December 31, 2001 the Company did not record any  impairment  losses
on long-lived assets.


                                      F-11
<PAGE>
ELECTRIC FUEL CORPORATION AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
Note 2:- SIGNIFICANT ACCOUNTING POLICIES (CONT.)

g. Revenue recognition:

The Company and its subsidiaries  generate revenues mainly from sale of zinc-air
battery  products  for  portable  consumer  electronic  devices such as cellular
telephones products,  as well as for defense  applications.  To a lesser extent,
revenues are generated  from  development  services and  long-term  arrangements
subcontracted  by the U.S  Government.  The Company  sells its products to large
retail companies as well as through resellers.

Revenues  from  products 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.  In  situations  where the Company  sells its  products to large retail
companies,  where returns are expected to be accepted revenues are recognized on
cash basis.

The Company  generally does not grant a right of return to its  customers.  When
returns are  expected  and  estimated,  the  Company  defers  revenue  until the
probability  of such  returns  expires,  at which  time  revenue  is  recognized
provided  that all other  revenue  recognition  criteria  are met.  The  Company
maintains  provision for product returns,  based on its experience in accordance
with Statement of Financial  Accounting  Standard No. 48,  "Revenue  Recognition
When Right of Return  Exists"  ("SFAS No. 48").  The provision has been deducted
from revenues and amounted to $239,000,  $0, and $0 for the years ended December
31, 2001, 2000 and 1999, respectively.

The Company  maintains  consigned  inventory at customer  locations  for certain
products. For these products, revenue is recognized at the time the products are
sold to a final customer and all other SAB No. 101 criteria are met.

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  on the related  agreements.  Provision  on estimated
losses are  recognized  in the period in which the  likelihood of such losses is
determined. As of December 31, 2001, no such estimated losses were identified..

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

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."  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, 2001, no such  estimated  losses
were identified.

h. Cost of revenues:

In  1999,  the  Company's  cost  of  revenues  were  included  in  research  and
development  costs,  since the  Company's  production  was  integrated  with the
product development process, it was impossible to segregate the cost of revenues
from  the  research  and  development   expenses,   since  these  expenses  were
interrelated by their nature.

i. Research and development cost:

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

j. Royalty-bearing grants:


                                      F-12
<PAGE>

ELECTRIC FUEL CORPORATION AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
Note 2:- SIGNIFICANT ACCOUNTING POLICIES (CONT.)

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.

k. 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.

l. 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,  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.

The trade  receivables  of the Company and its  subsidiaries  are mainly derived
from sales to  customers  located  primarily  in the United  States and  Europe.
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
$501,288  and  $778,677 as of  December  31,  2001 and 2000,  respectively.  The
long-term  loans are  secured  by the  Company's  shares and if the value of the
Company's shares decreases, the Company would incur material losses.

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.

m. 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  3,170,334,  2,812,725  and
2,820,679 for the years ended December 31, 2001, 2000 and 1999, respectively.


                                      F-13
<PAGE>

ELECTRIC FUEL CORPORATION AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
Note 2:- SIGNIFICANT ACCOUNTING POLICIES (CONT.)

n. 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.  The pro  forma  disclosures  required  by  Statement  of  Financial
Accounting  Standards No. 123 "Accounting for Stock-Based  Compensation"  ("SFAS
No. 123"), are provided in Note 10.f.

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.

o. 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,  trade receivable and trade
payable  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.

p. 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.

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,
2001  and  2000,  the  accumulated  severance  pay in that  regard  amounted  to
$1,975,535 and $1,586,372, 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  expenses  for the  years  ended  December  31,  2001,  2000 and 1999,
amounted to approximately $653,885, $430,943 and $203,690, respectively.


                                      F-14
<PAGE>

ELECTRIC FUEL CORPORATION AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
Note 2:- SIGNIFICANT ACCOUNTING POLICIES (CONT.)

q. Advertising costs:

The  Company  and  its  subsidiaries  expense  advertising  costs  as  incurred.
Advertising  expense for the years ended  December 31, 2001,  2000 and 1999, was
approximately $1,676,280, $1,453,025 and $364,957, respectively.

r. Impact of recently issued accounting standards:

In July  2001,  the  Financial  Accounting  Standards  Board,  or  FASB,  issued
Statement  of Financial  Accounting  Standard  No. 141  "Business  Combinations"
("SFAS  No.  141") and  Statement  of  Financial  Accounting  Standard  No.  142
"Goodwill and Other Intangible  Assets" ("SFAS No. 142").  SFAS No. 141 requires
all business  combinations  initiated  after June 30, 2001 to be  accounted  for
using the purchase method.  Under SFAS No. 142,  goodwill and intangible  assets
with indefinite lives are no longer amortized but are reviewed annually (or more
frequently if impairment indicators arise) for impairment.  Separable intangible
assets  that  are not  deemed  to have  indefinite  lives  will  continue  to be
amortized over their useful lives (but with no maximum life).  The  amortization
provisions  of SFAS No. 142 apply to goodwill  and  intangible  assets  acquired
after June 30, 2001.  The Company does not expect any effect of this standard on
the earnings or financial position of the Company.

In August 2001, the Financial  Accounting  Standards  Board issued  Statement of
Financial  Accounting  Standards  No. 144,  "Accounting  for the  Impairment  or
Disposal  of  Long-Lived   Assets,"  ("SFAS  144"),  which  addresses  financial
accounting and reporting for the impairment or disposal of long-lived assets and
superseded SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and
for  Long-Lived  Assets to be Disposed  Of," and the  accounting  and  reporting
provisions of APB Opinion No. 30,  "Reporting  the Results of  Operations  for a
Disposal of a Segment of a Business." SFAS No. 144 is effective for fiscal years
beginning after December 15, 2001, with earlier application encouraged.

The provisions of SFAS No. 144 are not expected to have a material effect on the
Company's financial position or operating results.

s. Reclassification:

Certain  reclassifications  have  been  made in the  prior  years'  consolidated
financial  statements to conform to the presentation used in 2001 (see also Note
10.d.2).

NOTE 3:-      OTHER ACCOUNTS RECEIVABLE AND PREPAID EXPENSES

                                        December 31,
                             ------------------------------------
                                   2001                2000
                             -----------------   -----------------
                                          U.S. dollars
                             ------------------------------------

Government authorities              $ 425,593         $ 1,726,282
U.S. government                             -              45,749
Employees                             16, 862             162,518
Prepaid expenses                      241,150             299,082
Other                                  31,341             185,084
                             -----------------   -----------------

                                     $714,946         $ 2,418,715
                             =================   =================


                                      F-15
<PAGE>


ELECTRIC FUEL CORPORATION AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 4:-      INVENTORIES

Raw and packaging materials                 $1,097,492        $ 1,581,048
Work in progress                               356,152            457,319
Finished products                            2,018,553          1,170,581
                                     ------------------ ------------------

                                            $3,472,197        $ 3,208,948
                                     ================== ==================


NOTE 5:-      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 10.d.3).  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  note 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 year  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  (see Note 10.d.3).  During the year 2001, the Company has impaired
those loans and has  written  off the amount of  $206,005  due to decline of the
fair market value of its shares.


NOTE 6:-      PROPERTY AND EQUIPMENT, NET

a. Composition of property and equipment is as follows:
<TABLE>
<CAPTION>

                                                                              December 31,
                                                                   ------------------------------------
                                                                         2001               2000
                                                                   -----------------   ----------------
                                                                                U.S. dollars
                                                                    -----------------------------------
<S>                                                                           <C>            <C>

Cost:
         Computers and related equipment                                   $786,158          $ 636,997
         Motor vehicles                                                     336,216            389,019
         Office furniture and equipment                                     313,760            311,885
         Machinery, equipment and installations                           9,396,636          8,502,762
         Leasehold improvements                                             888,841            732,291
                                                                    ----------------    ---------------

                                                                         11,721,611         10,572,954
                                                                    ----------------    ---------------
Accumulated depreciation:
         Computers and related equipment                                    566,290            445,209
         Motor vehicles                                                      62,523            139,024
         Office furniture and equipment                                     180,498            162,530
         Machinery, equipment and installations                           3,526,145          2,826,656
         Leasehold improvements                                             646,490            553,471
                                                                    ----------------    ---------------

                                                                          4,981,946          4,126,890
                                                                    ----------------    ---------------

Depreciated cost                                                        $ 6,739,665        $ 6,446,064
                                                                    ================    ===============
</TABLE>
b.  Depreciation  expense amounted to $980,008,  $753,910 and $710,759,  for the
years ended December 31, 2001, 2000 and 1999, respectively.

As for liens, see Note 9d.



                                      F-16
<PAGE>



ELECTRIC FUEL CORPORATION AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 7:-      SHORT-TERM BANK CREDIT

The  Company  has an unused  line of credit of up to  $750,000,  secured by such
security as the Company and the bank shall agree upon from time to time.

NOTE 8:-      OTHER ACCOUNTS PAYABLE AND ACCRUED EXPENSES

                                                      December 31,
                                            -----------------------------------
                                                2001                2000
                                            ---------------   -----------------

U.S. dollars
                                            -----------------------------------

Employees and payroll accruals                   $ 884,262        $(*  591,992
Accrued vacation pay                               419,679             388,350
Accrued expenses                                   221,653         (*  220,282
Advances from customers                             98,070                   -
Royalties to Office of the Chief Scientist          46,955              62,000
Other                                               60,180             282,351
                                            ---------------    ----------------

                                                $1,730,799         $ 1,544,975
                                            ===============    ================

*) Reclassified




                                      F-17
<PAGE>



ELECTRIC FUEL CORPORATION AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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


NOTE 9:-      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, 2001,
2000  and  1999,  to the OCS  amounted  to $  75,791,  $  70,637  and $  69,169,
respectively.

              As of December 31, 2001, total contingent  liability to pay to OCS
(at 100%) was outstanding at the amount of approximately $ 9,764,000.

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.

              Royalties  paid or accrued to the BIRD-F  amounted at $0 for each
of the three  years ended  December 31, 2001.

              As of December  31,  2001,  total  contingent  liability to pay to
BIRD-F (at 150%) was outstanding at the amount of 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,
                         --------------------
                            U.S. dollars
                         --------------------

2002                                 438,761
2003                                 396,388
2004                                 214,199
2005                                 174,612
                         --------------------
                                   1,223,960
                         ====================


                                      F-18
<PAGE>


ELECTRIC FUEL CORPORATION AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 9:-      COMMITMENTS AND CONTINGENT LIABILITIES (CONT.)


Total rent expenses for the years ended December 31, 2001,  2000 and 1999,  were
approximately $456,701, $261,000 and $345,000, 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 $36,076, mainly in respect
of lease agreements.







                                      F-19
<PAGE>


ELECTRIC FUEL CORPORATION AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

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 10:-     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 December 28, 1999,  the Company  entered into an agreement with a group of
private  investors,  including  Mr. Leon S. Gross,  a director of Electric  Fuel
Corporation and one of the existing shareholders. Pursuant to the agreement, the
Company  issued  1,425,000  shares of common stock for total purchase price of $
2,850,000,  of which an amount of  $2,100,000  was paid  through an  exchange of
non-recourse  promissory notes.  These non-recourse notes were repaid during the
year 2000. (See also Note 10e.1)

2. 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.

3. 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.

4. 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 10.e.2.)

5. 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 Notes 10.e.2 and 10.e.3.)

6. 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.

7. 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.



                                      F-20
<PAGE>



ELECTRIC FUEL CORPORATION AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

-------------------------------------------------------------------------------
NOTE 10:-     SHAREHOLDERS' EQUITY (CONT.)


c. Issuance of common stock to service providers:

1. In June 2000,  35,000 shares of common stock were issued at no  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.

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.

d. 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   Company  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.

In March 2000, the  employee-shareholders  exercised  certain stock options (see
Note 10.f).  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, 2001, there was no outstanding  balance on this loan. As for additional note
repayment at that date, see Note 10.b.1.

2. On December 3, 1999, two officers of the Company  purchased 250,000 shares of
common stock, which had already been issued, out of the Company's treasury stock




                                      F-21
<PAGE>



ELECTRIC FUEL CORPORATION AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

-------------------------------------------------------------------------------
NOTE 10:-     SHAREHOLDERS' EQUITY (CONT.)

at the closing price of the common stock on December 2, 1999. The total purchase
price of $335,950 was financed by the Company by a non-recourse  note secured by
the  purchased  shares  bearing  interest at 2%, with  interest  calculated  and
charged in advance based on a term of ten years.

The Company has  accounted for the  re-purchase  of these shares out of treasury
stock in accordance  with Accounting  Principles  Board Opinion No. 6 "Status of
Accounting  Research Bulletins" ("APB 6"). The shares re-purchased were included
in  treasury  stock at their cost price of  $1,768,750.  The  Company  initially
recorded the excess of purchase price over stated value against  additional paid
in capital.  As a result of the  financial  statements  review  performed by the
United States Securities and Exchange  Commission,  the Company reconsidered the
classification  of the loss generated  from this  re-issuance of such shares and
the excess of purchase  price over stated value at the amount of $1,432,800  has
been reclassified in its entirety to accumulated deficit.

3. 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 5)

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 5. 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.

e. Warrants:

1. As part of the investment  agreement in December 1999 (see Note 10.b.1),  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 10.b.4),  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 expire on August 17, 2001.



                                      F-22
<PAGE>


ELECTRIC FUEL CORPORATION AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

-------------------------------------------------------------------------------
NOTE 10:-     SHAREHOLDERS' EQUITY (CONT.)


As part of the  transaction in May 2001 (see Note 10 b.5), the Company  repriced
these warrants in the following manner:

          -    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.

          -    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.

          -    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  10.b.5),  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.

f. 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, 2001.



                                      F-23
<PAGE>

ELECTRIC FUEL CORPORATION AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

-------------------------------------------------------------------------------
NOTE 10:-     SHAREHOLDERS' EQUITY (CONT.)


2) 1993  Employee  Option  Plan - as  amended,  4,200,000  shares  reserved  for
issuance,  of which  300,526 are  available for future grants to employees as of
December 31, 2001.

3) 1998  Employee  Option  Plan - as  amended,  4,750,000  shares  reserved  for
issuance,  of which  2,846,388  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  680,000 are  available  for future grants to directors as of December 31,
2001.

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).

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, 2001,
2000 and 1999, and changes  during the years ended on those dates,  is presented
below:
<TABLE>
<CAPTION>

                                           2001                         2000                       1999
                                 --------------------------  --------------------------- --------------------------
                                                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
    beginning of year              2,624,225        $ 3.82       2,820,679       $ 3.44     2,964,255       $ 3.70
Changes during year:
Granted (1) (3)                    2,172,314        $ 1.55       1,598,233       $ 4.58       496,475       $ 1.56
Exercised(4) (2)                   (159,965)        $ 1.31     (1,715,628)       $ 3.84             -            -
Forfeited or cancelled             (396,346)        $ 4.11        (79,059)       $ 4.93     (640,051)       $ 3.25
Repriced (2):
Old exercise price                        -              -       (310,000)       $ 4.95             -            -
New exercise price                        -              -         310,000       $ 4.95             -            -
                                 ------------  ------------  -------------- ------------ ------------- ------------

Options outstanding at
         end of year               4,240,228        $ 2.74       2,624,225       $ 3.82     2,820,679       $ 3.44
                                 ============  ============  ============== ============ ============= ============

Options exercisable at
         end of year               2,643,987        $ 2.75       1,078,332       $ 3.81     2,082,390       $ 3.91
                                 ============  ============  ============== ============ ============= ============

</TABLE>

(1) Includes  1,189,749,  870,000 and 182,500 options granted to related parties
in 2001, 2000 and 1999, 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 $18,000
and  $37,924 as of  December  31, 2001 and 2000,  respectively.  Deferred  stock


                                      F-24
<PAGE>

ELECTRIC FUEL CORPORATION AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

-------------------------------------------------------------------------------
NOTE 10:-     SHAREHOLDERS' EQUITY (CONT.)


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 2001, 2000 and 1999, was $17,240, $20,684 and $0, respectively.

(4) In  December  2001,  the  Company  exercised  33,314  options  for which the
exercise price was not paid at the exercise date. The Company  recorded the owed
amount of $43,308 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.

d.             The options  outstanding as of December 31, 2001 have been
separated into ranges of exercise  price, as follows:
<TABLE>
<CAPTION>


                                  OPTIONS OUTSTANDING                                          OPTIONS OUTSTANDING
                      ---------------------------------------------  --------------------------------------------------------------
                        AMOUNT OUTSTANDING          WEIGHTED              WEIGHTED         AMOUNT EXERCISABLE
     RANGE OF           AT DECEMBER 31,        AVERAGE REMAINING      AVERAGE EXERCISE     AT DECEMBER 31,       WEIGHTED AVERAGE
 EXERCISE PRICES              2001              CONTRACTUAL LIFE            PRICE                2001             EXERCISE PRICE
-------------------   ---------------------   ---------------------  --------------------  -------------------  -------------------
        $                                            YEARS                    $                                         $
-------------------                           ---------------------  --------------------                       -------------------
<S>                               <C>                   <C>                <C>                       <C>               <C>


0.3-2                            2,268,819                    9.01                  1.38            1,389,764                  1.35
3-4                                463,909                    4.79                  2.99              406,961                  2.99
4-6                              1,437,500                    8.40                  4.58              787,262                  4.68
6-8                                 60,000                    3.02                  7.43               50,000                  7.53
8-                                  10,000                    5.75                  9.06               10,000                  9.06
                      ---------------------   ---------------------  --------------------  -------------------  -------------------

                                 4,240,228                    8.25                  2.74            2,643,987                  2.75
                      =====================   =====================  ====================  =================== ====================

</TABLE>

e. Pro forma information under SFAS No. 123:

Pro forma  information  regarding net loss and net loss per share is required by
SFAS No. 123 (for grants issued after December 1994), and has been determined as
if the Company had accounted for its employee stock options under the fair value
method of that Statement.  The fair value for these options was estimated at the
date of  grant,  using  the  Black-Scholes  Option  Valuation  Model,  with  the
following weighted-average assumptions

                                 2001             2000             1999
                            ---------------  ---------------  ----------------

Dividend yield                          0%               0%                0%
Expected volatility                    82%              95%              120%
Risk-free interest                3.5-4.5%             6.5%              5.5%
Expected life of up to             3 years         10 years          10 years

Weighted-average  fair values and  exercise  prices of options on dates of grant
are as follows:


                                      F-25
<PAGE>

ELECTRIC FUEL CORPORATION AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

-------------------------------------------------------------------------------
NOTE 10:-     SHAREHOLDERS' EQUITY (CONT.)
<TABLE>
<CAPTION>

                               EQUALS MARKET PRICE                EXCEEDS MARKET PRICE              LESS THAN MARKET PRICE
                         --------------------------------   ---------------------------------  ---------------------------------
                             YEAR ENDED DECEMBER 31,             YEAR ENDED DECEMBER 31,            YEAR ENDED DECEMBER 31,
                         --------------------------------   ---------------------------------  ---------------------------------
                           2001        2000       1999        2001        2000        1999        2001       2000        1999
                         ---------  ----------  ---------   ---------   ---------  ----------  ----------  ---------   ---------
<S>                          <C>          <C>      <C>         <C>         <C>           <C>       <C>       <C>          <C>

 Weighted average          $ 1.579    $ 4.580     $ 1.560     $ 1.466     $ 7.125    -           $ 1.30      $ 5.270     -
   exercise prices
 Weighted average
   fair value on
   grant date              $ 0.50     $ 4.120     $ 1.320     $ 0.56      $ 3.760    -           $ 0.79      $ 6.600     -

              Pro forma results:

                                    2001                          2000                          1999
                        ----------------------------- ----------------------------- -----------------------------
                             AS            PRO-            AS            PRO-            AS             PRO-
                          REPORTED         FORMA        REPORTED         FORMA        REPORTED         FORMA
                        -------------  -------------- -------------- -------------- --------------  -------------
                                                              U.S. DOLLARS
                        -----------------------------------------------------------------------------------------

 Net loss
 attributable to
 shareholders of
 common stock           $(18,4823,455) $ (21,372,601) $ (11,980,958) $ (14,006,038) $  (6,915,688)  $ (8,367,584)
                        =============  ============== ============== ============== ==============  =============
 Basic and diluted                                                                                               )
   net loss per share     $     (0.76)   $     (0.88)   $     (0.62)   $     (0.73)   $     (0.48)    $     (0.58
                        =============  ============== ============== ============== ==============  =============

2. Options issued to consultants:

a.            The Company's outstanding options to consultants as of December 31, 2001, are as follows:

                                                    2001                        2000                         1999
                                         --------------------------  ---------------------------  --------------------------
                                                         WEIGHTED                     WEIGHTED                    WEIGHTED
                                                         AVERAGE                      AVERAGE                     AVERAGE
                                                         EXERCISE                     EXERCISE                    EXERCISE
                                            AMOUNT        PRICE          AMOUNT        PRICE         AMOUNT        PRICE
                                         ------------- -----------   -------------- -----------  ------------  --------------
                                                            $                            $                           $
                                                       ------------                 ------------                ------------
               Options outstanding at      175,786       $  6.57       141,814        $     3.09    27,286        $      6.26
                 beginning of year
               Changes during year:
                 Granted (1)               130,000       $  6.02       198,500        $     5.86    114,528       $      2.33
                 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                                                                                       9
                 end of year               245,786       $  5.55       175,786        $     6.56    141,814       $       3.0
                                         ============= ============  ============== ============  ============  =============

               Options exercisable at                                                                                       9
                 end of year               125,786       $  6.42        149,044        $     6.80   141,814       $       3.0
                                         ============= ============  ============== ============  ============  =============

</TABLE>

(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 will be achieved the Company would
record  appropriate  compensation  upon the fair value at the same date at which
the targets will be 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


                                      F-26
<PAGE>


ELECTRIC FUEL CORPORATION AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

--------------------------------------------------------------------------------
NOTE 10:-     SHAREHOLDERS' EQUITY (CONT.)

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 had 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:

                                  2001             2000             1999
                             ---------------  ---------------  ----------------
Dividend yield                           0%               0%                0%
Expected volatility                     82%              95%              120%
Risk-free interest                 3.5-4.5%             6.5%              5.5%
Contractual life of up to          10 years          5 years          10 years

c. In  connection  with the grant of stock options to  consultants,  the Company
recorded  stock  compensation  expenses  totaling  $139,291 and $796,128 for the
years ended December 31, 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.

NOTE 11:-     INCOME TAXES

a. Taxation of U.S. parent company (EFC):

As of December 31, 2001, EFC has operating loss  carryforwards  for U.S. federal
income tax purposes of approximately  $7 million,  which are available to offset
future  taxable  income,  if  any,  expiring  in  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.


                                      F-27
<PAGE>
ELECTRIC FUEL CORPORATION AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 11:-     INCOME TAXES (CONT.)

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.

In 2000, EFL received  approval for a third  "Approved  Enterprise"  program for
investment in property and equipment, in the amount of approximately $4,500,000,
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,  2001,  according to the  Company's  management,  the Company
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 (see 4, below).

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.


                                      F-28
<PAGE>
ELECTRIC FUEL CORPORATION AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

-------------------------------------------------------------------------------
NOTE 11:-     INCOME TAXES (CONT.)



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 to 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, 2001,  EFL has operating loss  carryforwards  for Israeli tax
purposes of approximately  $75 million,  which are available,  indefinitely,  to
offset future taxable income.

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,
                                                                    -----------------------------------
                                                                         2001               2000
                                                                    ----------------    ---------------
                                                                             U.S. DOLLARS
                                                                    -----------------------------------
<S>                                                                       <C>                <C>
 Operating loss carryforward                                       $  12,162,581       $  8,261,110
 Reserve and allowance                                                   477,522            726,640
                                                                    ----------------    ---------------

 Net deferred tax asset before valuation allowance                    12,640,103          8,987,750
 Valuation allowance                                                 (12,640,103)        (8,987,750)
                                                                    ----------------    ---------------

                                                                      $        -       $          -
                                                                    ================    ===============

</TABLE>


                                      F-29
<PAGE>
ELECTRIC FUEL CORPORATION AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

-------------------------------------------------------------------------------
NOTE 11:-     INCOME TAXES (CONT.)

              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, 2001 was $3,652,353.

e. Loss before taxes on income:

                                     Year ended December 31
                 ---------------------------------------------------------------
                        2001                  2000                  1999
                 -------------------   -------------------   -------------------
                                          U.S. dollars
                 ---------------------------------------------------------------

Domestic              $ (5,828,828)          $(2,021,661)           $ (232,205)
Foreign                (11,457,960)           (9,959,297)           (6,677,466)
                 -------------------   -------------------   -------------------

                      $(17,286,788)        $ (11,980,958)         $ (6,909,671)
                 ===================   ===================   ===================


NOTE 12:-  SELECTED STATEMENTS OF OPERATIONS DATA

a.         Research and development expenses, net (in 1999 included also COGS):

                                               YEAR ENDED DECEMBER 31
                                 ----------------------------------------------
                                      2001             2000           1999
                                 --------------- --------------- --------------
                                                  U.S. DOLLARS
                                 ----------------------------------------------

 Research and development costs    $  4,199,891    $  5,546,519    $ 7,834,051
 Less royalty-bearing grants            687,807         958,382      1,202,976
                                 --------------- --------------- --------------

                                   $  3,512,084    $  4,588,137    $ 6,631,075
                                 =============== =============== ==============

b. Financial income, net:

Financial expenses:
Interest, bank charges and fees    $ (49,246)      $ (67,480)       $ (71,074)
Foreign currency
   translation differences           (16,003)       (219,043)         (32,661)
                               --------------- ---------------  ---------------

                                     (65,249)       (286,523)        (103,735)
                               --------------- ---------------  ---------------
Financial income:
   Interest                           327,828         830,704          293,784
                               --------------- ---------------  ---------------

Total                                $262,579       $ 544,181        $ 190,049
                               =============== ===============  ===============




                                      F-30
<PAGE>
ELECTRIC FUEL CORPORATION AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

------------------------------------------------------------------------------
<TABLE>
<CAPTION>


NOTE 13:-         RELATED PARTY DISCLOSURES

                                                                    Year ended December 31,
                                                   ----------------------------------------------------------
                                                         2001                 2000                1999
                                                   -----------------    -----------------   -----------------
                                                                         U.S.dollars
                                                   ----------------------------------------------------------
<S>                                                   <C>                    <C>                  <C>

Transactions:

General and administrative expenses                        $ 32,850             $ 28,800             $15,750
                                                   =================    =================   =================

Financial income (expenses), net from notes
   receivable and loan holders (see Notes 5
   and 10.d.3)                                            $(36,940)            $ 230,924             $51,659
                                                   =================    =================   =================

</TABLE>


NOTE 14:-         SEGMENT INFORMATION

a. General:

The Company and its subsidiaries  operate  primarily in three business  segments
(see Note 1 for a brief  description of the Company's  business) and follows the
requirements  of Statement of Financial  Standards No. 131,  "Disclosures  About
Segments of an Enterprise and Related Information" ("SFAS No. 131").

The Company currently  operates in three business  segments:  Electric Vehicles,
Consumer Batteries and Defense and Safety Products.

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.


                                      F-31

<PAGE>

ELECTRIC FUEL CORPORATION AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

------------------------------------------------------------------------------
NOTE 14:-     SEGMENT INFORMATION (CONT.)

<TABLE>
<CAPTION>

b. The following is information about reported segment gains, losses and assets:

                                                         DEFENSE
                                        ELECTRIC        AND SAFETY        CONSUMER             ALL
                                        VEHICLES         PRODUCTS         BATTERIES           OTHER           TOTAL
                                        --------         --------         ---------           -----           -----
                                                                        U.S. DOLLARS
                                      -----------------------------------------------------------------------------------
<S>                                        <C>               <C>              <C>               <C>        <C>

2001:
Revenues from outside customers        $   894,045       $ 1,199,587    $   1,939,256     $         -    $   4,032,888
Depreciation expense                      (242,678)          (61,760)         (449,995)        (225,575)       (980,008)
Direct expenses (1)                       (907,286)       (1,388,215)      (13,816,934)      (4,489,812)    (20,602,247)
                                     --------------- ----------------- ----------------- ---------------- ---------------

Segment gross loss                     $  (255,919)      $  (250,388)   $  (12,327,673)   $  (4,715,387)    (17,549,367)
                                     =============== ================= ================= ================
Financial income, net                                                                                            262,579
                                                                                                          ---------------

Net loss                                                                                                   $(17,286,788)
                                                                                                          ===============

Segment assets (2)                     $    665,736       $   645,378   $     8,180,795    $   719,953     $ 10,211,862
                                       ============= ================= ================= ================ ===============

Expenditures for segment assets        $          -       $    21,376   $       969,278    $   323,985     $  1,314,639
                                       ============= ================= ================= ================ ===============

2000:
Revenues from outside customers        $   310,441        $1,168,054    $    2,563,621     $     11,446    $  4,053,562
Depreciation expense                      (249,796)          (60,612)         (239,668)        (203,834)       (753,910)
Direct expenses (1)                       (472,770)       (1,120,020)      (10,246,938)      (3,985,063)    (15,824,791)
                                       ------------- ----------------- ----------------- ---------------- ---------------

Segment gross loss                     $  (412,125)       $  (12,578)   $   (7,922,985)    $ (4,177,451)    (12,525,139)
                                       ============= ================= ================= ================
Financial income, net                                                                                            544,181
                                                                                                          ---------------

Net loss                                                                                                  $ (11,980,958)
                                                                                                          ===============

Segment assets (2)                     $   908,414        $  556,863    $    7,527,160     $    662,575   $   9,655,012
                                       ================ ============== ================= ================ ===============

Expenditures for segment assets        $         -        $    7,671    $    2,767,083     $    310,988   $   3,085,742
                                       ================ ============== ================= ================ ===============

1999:
Revenues from outside customers        $    1,229,854     $  979,123    $      254,991     $    230,030   $   2,693,998
Depreciation expense                         (234,550)       (85,291)         (149,259)        (241,659)       (710,759)
Direct expenses (1)                        (2,659,478)    (1,242,652)       (3,007,398)      (2,173,431)     (9,082,959)
                                       ---------------- -------------- ----------------- ---------------- ---------------

Segment gross loss                     $   (1,664,174)    $ (348,820)   $   (2,901,666)    $ (2,185,060)     (7,099,720)
                                       ================ ============== ================= ================
Taxes on income                                                                                                  (6,017)
Financial income, net                                                                                            190,049
                                                                                                          ---------------

Net loss                                                                                                   $ (6,915,688)
                                                                                                          ===============

Segment assets                          $   1,129,771     $  360,553     $   1,516,519      $ 1,158,926    $  4,165,769
                                       ================ ============== ================= ================ ===============

Expenditures for segment assets         $     221,808     $   80,657     $     942,450      $   228,529    $  1,473,444
                                       ================ ============== ================= ================ ===============
</TABLE>
(1)         Including sales and marketing, general and administrative expenses.

(2)           Including property and equipment and inventory.
                                      F-32

<PAGE>



ELECTRIC FUEL CORPORATION AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

------------------------------------------------------------------------------
NOTE 14:-     SEGMENT INFORMATION (CONT.)


c. Summary information about geographic areas:

The following  presents total revenues  according to end customers  location for
the years ended December 31, 2001,  2000 and 1999,  and long-lived  assets as of
December 31, 2001, 2000 and 1999:
<TABLE>
<CAPTION>

                           2001                             2000                              1999
               -----------------------------  ---------------------------------  -------------------------------
                  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.          $ 2,055,773        $ 99,606       $ 2,664,105        $  62,914     $ 2,282,643         $ 36,038
Germany             602,700               -            51,988                -          71,198                -
England             556,581               -           211,349                -          59,400                -
Other               817,834     $ 6,640,059      (* 1,126,120     (* 6,383,150      (* 280,757     (* 4,129,731
               -------------   -------------  ----------------  ---------------  --------------  ---------------

                $ 4,032,888      $6,739,665       $ 4,053,562      $ 6,446,064     $ 2,693,998      $ 4,165,769
               =============   =============  ================  ===============  ==============  ===============

* Reclassified

d. Revenues from major customers:

                                                  2001                 2000                 1999
                                            -----------------    -----------------    -----------------
                                                                        %
                                            -----------------------------------------------------------
Electric vehicles:
              Customer A                                 12%                    -                    -
              Customer B                                 10%                   6%                  45%

Defense and safety products:
              Customer C                                  7%                   7%                  13%

Consumer batteries
              Customer D                                   -                  36%                    -
</TABLE>


NOTE 15:-     SUBSEQUENT EVENTS

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.

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.




                                                  - - - - - - - -



                                      F-33
<PAGE>


                          SUPPLEMENTARY FINANCIAL DATA

 QUARTERLY FINANCIAL DATA (UNAUDITED) FOR THE TWO YEARS ENDED DECEMBER 31, 2001
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>


                                                                       QUARTER ENDED
                                            --------------------------------------------------------------------
                    2001                        MARCH 31         JUNE 30        SEPTEMBER 30     DECEMBER 31
        ------------------------------      --------------------------------------------------------------------
<S>                  <C>                           <C>              <C>             <C>                  <C>

Net revenue................................. $      725,959   $    1,034,218   $    1,214,115   $    1,058,595
Gross loss.................................. $     (235,826)  $   (1,219,621)  $     (818,719)  $     (761,855)
Net loss.................................... $   (3,424,964)  $   (4,590,840)  $   (4,410,556)  $   (4,860,438)
Net loss per share - basic and diluted...... $       (0.16)   $       (0.19)   $       (0.19)   $       (0.18)
Shares used in per share calculation........     21,802,499       23,562,099       23,612,097       26,648,319

                    2000
        ------------------------------
Net revenue................................. $      652,946   $      632,541   $      566,367   $    2,201,708
Gross loss.................................. $   (1,423,902)  $   (1,230,490)  $   (1,211,023)  $     (857,602)
Net loss.................................... $   (2,473,739)  $   (2,860,494)  $   (2,753,504)  $   (3,893,221)
Net loss per share - basic and diluted...... $       (0.14)   $       (0.15)   $       (0.14)   $       (0.19)
Shares used in per share calculation........     17,166,343       18,935,208       20,231,991       20,843,030


</TABLE>







                                      F-34


<PAGE>