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                       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, 2002.



                                       OR

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


     COMMISSION FILE NUMBER:                   0-23336
                                            -------------

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

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

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

                             (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

</TABLE>

Securities  registered pursuant to Section 12(g) of the Act: COMMON STOCK, $0.01
PAR VALUE

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

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

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

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

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

Documents incorporated by reference:                NONE


<PAGE>



                                PRELIMINARY NOTE

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

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


<PAGE>



                                     PART I

ITEM 1.           BUSINESS

GENERAL

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

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

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

     BACKGROUND

         We   began   work   in   1990   on  the   research,   development   and
commercialization  of an advanced  Zinc-Air battery system for powering electric
vehicles,  work that continues to this day.  Beginning in 1998, we also began to
apply our Zinc-Air fuel cell  technology to the defense  industry,  by receiving
and    performing    a   series   of    contracts    from   the   U.S.    Army's
Communications-Electronics  Command  (CECOM) to develop  and  evaluate  advanced
primary Zinc-Air fuel cell packs.  This effort culminated in 2002 in our receipt
of a National Stock Number,  a Department of Defense  catalog number assigned to
products authorized for use by the U.S. military,  and our subsequent receipt of
$2.54  million  and  $1.6  million  delivery  orders  for our  newly  designated
BA-8180/U military batteries.

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

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

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

<PAGE>

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

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

     DEFENSE AND SECURITY PRODUCTS

         Interactive Use-of-Force Training

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

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

         Vehicle Armoring

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

     ELECTRIC FUEL BATTERIES

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

                                       2
<PAGE>

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

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

         Military Batteries

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

         Electric Vehicle

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

         Lifejacket Lights

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



                                       3
<PAGE>

     FACILITIES

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

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

INTERACTIVE USE-OF-FORCE TRAINING

         We conduct our interactive  training  activities through our subsidiary
IES  Interactive  Training,  Inc.  ("IES"),  a  Delaware  corporation  based  in
Littleton, Colorado. IES is a leading provider of interactive, multimedia, fully
digital training simulators for law enforcement, homeland security, military and
similar applications.  With a customer base of over 500 customers in over thirty
countries around the world, IES is a leader in the supply of simulation training
products to military,  law  enforcement  and corporate  client  communities.  We
believe,  based  on our  general  knowledge  of  the  size  of  the  interactive
use-of-force  market,  our specific  knowledge  of the extent of our sales,  and
discussions we have held with customers at trade shows,  etc., that IES provides
more than 40% of the  worldwide  market for  government  and  military  judgment
training simulators.

     INTRODUCTION

         IES offers consumers the following  interactive  training  products and
services:

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

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

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

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



                                       4
<PAGE>

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

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

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

     PRODUCTS

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

         Range 3000 "Use of Force" Simulator

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

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

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

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

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

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



                                       5
<PAGE>

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

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

         A2Z Classroom Trainer

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

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

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

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

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

         Key advantages:

         --       Provides   repeatable   training   to  a  standard   based  on
                  established policy

         --       Quick  dissemination and reinforcement of correct behavior and
                  policies

         --       Reduces liability

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

         --       Realistic scenarios instead of outdated "play-acting"

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

         --       Easy Self-Authoring of interactive training content

         --       PC-Pentium ensures low cost of ownership

         --       Easy to use Windows XP-based software

         --       Easy to deploy in any classroom



                                       6
<PAGE>

         Summit Training International

         Summit Training International (STI) is a wholly-owned subsidiary of IES
Interactive  Training.  STI  provides  relevant,   cost-effective   professional
training  seminars,  consulting  services,  and  interactive  courseware for law
enforcement,  corrections,  and corporate clients. STI's emphasis and goal is to
create a "total  training"  environment  designed to address  the  cutting  edge
issues faced today. STI provides  conferences  throughout the United States, and
develops  courseware  dealing with these important topics.  The incorporation of
IES Interactive Systems creates an intense learning  environment and adds to the
realism of the trainee's experience.

         CONFERENCES

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

         --       Recruiting and Retention of Law  Enforcement  and  Corrections
                  Personnel

         --       Ethics and Integrity

         --       Issues of Hate Crimes

         --       Traffic Stops and Use of Force

         --       Community and Corporate Partnerships for Public Safety

         --       Creating a Safe School Environment

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

         COURSEWARE

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

         IES Studio Productions

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



                                       7
<PAGE>

     MARKETING

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

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

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

         --       Bristlecone Products

         --       Airmunitions Inc.

         --       Taser Inc.

         --       ASP Inc.

         --       H&K Training Centers

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

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

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

     COMPETITION

         IES competes  against a number of  established  companies  that provide
similar  products  and  services,  many  of  which  have  financial,  technical,
marketing, sales, manufacturing,  distribution and other resources significantly
greater  than ours.  There are also  companies  whose  products  do not  compete
directly,  but are sometimes closely related.  Firearms Training Systems,  Inc.,
Advanced  Interactive   Systems,   Inc.,  and  LaserShot  Inc.  are  IES's  main
competitors.



                                       8
<PAGE>

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

VEHICLE ARMORING

     INTRODUCTION

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

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

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

     THE ARMORING PROCESS

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

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


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particular  model.  MDT then  reassembles  the vehicle as close to its  original
appearance as possible.

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

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

     ARMORING MATERIALS

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

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

     PRODUCTS AND SERVICES

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

         In the military market, MDT armors:

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

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

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

         --       specialty vehicles (such as HumVees).

         In the commercial market, MDT armors:

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



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

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

         --       ambulances (such as those made by Chevrolet).

     SALES AND MARKETING

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

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

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

     COMPETITION

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

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

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

ELECTRIC FUEL BATTERIES FOR DEFENSE AND HOMELAND SECURITY

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

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

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

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

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

     ADVANCED ZINC-AIR POWER PACK (AZAPPS)

         BA-8180/U

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

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

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

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



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

         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 placed from September through November 2003.

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

         Other AZAPP Products

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

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

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

         Ancillary products

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

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



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<PAGE>

     UAV/MAV

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

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

         UAVs

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

         MAVs

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

     ZINC-AIR POWER PACKS (ZAPPS)

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

     MARKET/APPLICATIONS

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

         --       Tactical radios
         --       SIGINT systems
         --       Training systems
         --       SATCOM radios
         --       Nightscope power
         --       Guidance systems
         --       Surveillance systems
         --       Sensors



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<PAGE>

     COMPETITION

         The  BA-8180/U is the only  Zinc-Air  battery to hold a US Army battery
designation.   It  does,  however,   compete  with  other  primary  (disposable)
batteries,  and primarily lithium based batteries.  In some cases,  primarily in
training missions, it will also compete with rechargeable batteries.

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

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

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

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

     TECHNOLOGY

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

         Our Zinc-Air battery's superiority over other battery technologies lies
in the  underlying  electrochemical  make-up of a  Zinc-Air  cell.  While  other
battery  cells  must  carry the  cathodic  reagent - the  active  material  that


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<PAGE>

`consumes'  the  electrons  freed at the anode - within the weight and volume of
the  battery,  a  Zinc-Air  cell  consumes  oxygen  that it  extracts  from  the
atmosphere.

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

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

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

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

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

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

     MANUFACTURING

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

ELECTRIC VEHICLES

     INTRODUCTION

         We  believe  that  environmental  concerns  and  current  and  proposed
legislation  create incentives for fleet operators to use zero emission electric
vehicles,  and that the  Electric  Fuel  Zinc-Air  Energy  System  for  electric
vehicles is particularly  suitable for use by such fleet operations.  We believe
the U.S.  government  will  continue  to use us as a  subcontractor  to  develop
electric  vehicles,  and we hope this support will create  incentives  for fleet
operators  (primarily  bus and mass transit  operators)  to  introduce  electric
vehicles into their fleets. We further believe that recent  government  interest
in hydrogen fuel cells is to our benefit,  since we believe that an  examination
of the advantages and disadvantages  offered by both hydrogen fuel cells and the
Electric Fuel Zinc-Air Energy System for electric vehicles demonstrates that our


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system offers a mature  technology  that is ready to be  implemented  in a short
time frame,  unlike hydrogen fuel cells,  which we believe are decades away from
being a practical and economic  alternative to traditional  petroleum-based fuel
sources.  Moreover,  a recent study that we  commissioned  from  consulting firm
Arthur D. Little  projected  significant  life cycle cost  benefits for Zinc-Air
when compared with hydrogen fuel cell technology over a five to ten year period.

     THE ELECTRIC FUEL ZINC-AIR ENERGY SYSTEM FOR ELECTRIC VEHICLES

         The Electric Fuel Zinc-Air Energy System consists of:

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

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

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

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

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

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

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



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<PAGE>

         During 2002, we successfully completed Phase II of our program with the
U.S. Department of Transportation's  Federal Transit  Administration.  Among the
items  successfully  tested  during  Phase II were  ultracapacitors  designed to
improve  and  increase  the  performance  of our bus.  During  this  performance
testing,  our bus was driven a record-breaking  127 miles, more than 100 of them
under the rigorous  stop-and-go  diving  conditions of the Society of Automotive
Engineers'  Central Business District (CBD) cycle with a full passenger load. We
demonstrated our bus in a public  demonstration in Las Vegas, Nevada in November
2001,  and in  Washington,  D.C., on Capitol  Hill,  with the  participation  of
certain members of the United States Senate,  in March 2002. In October 2002, we
received  approval from the FTA to  subcontract  at least half of the $2 million
budget  associated  with the new Phase III of our  Electric  Transit Bus Program
(described  below),  with  remainder of the budget shared by the partners in the
program.

     MAJOR PROGRAMS

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

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

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

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

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


                                       18
<PAGE>

project  partners  included  the  Community  College of Southern  Nevada and the
Desert Research Institute. We successfully completed this phase in July 2000.

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

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

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

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

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

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



                                       19
<PAGE>

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

         We and General  Electric are also jointly  developing an  all-electric,
battery/battery-hybrid   propulsion  system  for  powering  electric  buses  and
heavy-duty  trucks.  In July 1998 the BIRD Foundation  awarded the two companies
funding for the joint development of the electric  propulsion  system. The first
application  for the system will be an  all-electric,  zero-emission,  full-size
transit  bus,  in  the  program  subcontracted  to us  by  the  Federal  Transit
Administration of the U.S.  Department of Transportation  referred to above. Our
portion of the project related to a mobile refueling system for the transit bus.
The refueling system, build in two standard 40" containers, was commissioned and
successfully  demonstrated in the All Electric Bus project.  General  Electric's
portion of the project was to develop the EMS Energy  Management  System,  which
manages and controls all the various energy  suppliers and consumers of the bus.
The EMS was tested  successfully  as part of the  integration  drives  completed
under phase I of the FTA project.

         Germany - Consortium Project

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

     COMPETITION

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

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



                                       20
<PAGE>

         An area of increased  development  has been that of hydrogen  fuel cell
powered  vehicles,  spearheaded  by  the  Ballard  Corporation's  solid  polymer
electrolyte hydrogen-air fuel cell program. Major automobile companies have made
significant  investments  in this  technology.  However,  we  believe  that  our
Zinc-Air fuel cell technology is more likely to be commercially viable, and more
likely to be ready for  commercialization  earlier,  than the hydrogen fuel cell
systems,  with a lower  system  cost  and  with  more  advantageous  performance
characteristics.

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

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

     MARKETING

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

LIFEJACKET LIGHTS

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

     MARKET AND MARKETING STRATEGIES

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

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



                                       21
<PAGE>

     COMPETITION

         Two  of  the  largest  manufacturers  of  aviation  and  marine  safety
products,   including  TSO  and   SOLAS-approved   lifejacket  lights,  are  ACR
Electronics  Inc.  of  Hollywood,  Florida,  and Pains  Wessex  McMurdo  Ltd. of
England.  Other  significant  competitors in the marine market include Daniamant
Aps of Denmark, and SIC of Italy.

BACKLOG

We  generally  sell  our  products  under  standard   purchase  orders.   Orders
constituting  our backlog are subject to changes in delivery  schedules  and are
typically  cancelable  by our  customers  until a  specified  time  prior to the
scheduled delivery date. Accordingly, our backlog is not necessarily an accurate
indication  of future sales.  As of December 31, 2001 and 2002,  our backlog for
the   following   year  was   approximately   $1.0  million  and  $7.2  million,
respectively, divided among our product lines as follows:

              PRODUCT LINE                    2001            2002
              ------------                    ----            ----
Electric vehicle......................... $      381,000 $     420,000
Water-activated batteries................              -       300,000
Security and defense batteries...........        300,000     2,700,000
Car armoring.............................              -     1,040,000
Interactive use-of-force training........              -     2,690,000
Other....................................              -             -
                                                       -             -
     TOTAL:.............................. $      681,000 $   7,150,000
                                          ============== =============

REGULATORY AND ENVIRONMENTAL MATTERS

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

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

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



                                       22
<PAGE>

PATENTS AND TRADE SECRETS

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

         We have been  filing  patents  on our  Zinc-Air  fuel cell  system  for
electric  vehicles  and on other  aspects of our  technology  since 1990.  These
applications  have resulted in 42 unexpired  U.S.  patents and 15  corresponding
European  patents.  These  patents  cover  various  aspects of the Electric Fuel
System technology,  including the overall system, the zinc anode,  including its
physical and mechanical  attributes,  the construction of the air cathode,  cell
structure and arrangements,  connectors,  the automatic  refueling system,  zinc
regeneration, and safety features, as well as our high-power zinc-oxygen battery
for  torpedoes,  the  use of our  zinc  in  other  alkaline  batteries,  and our
water-activated  magnesium-cuprous  chloride  batteries.  These  patents  expire
between 2007 and 2018.

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

RESEARCH AND DEVELOPMENT

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



                                       23
<PAGE>

         Under the terms of the  grants  from the Chief  Scientist  and  current
Chief Scientist regulations, we are obligated to pay royalties at the rate of 3%
of the sales of products  developed from projects  funded by the Chief Scientist
for the  first  three  years of sales,  increasing  thereafter,  up to 3.5%.  We
currently pay royalties at the rates of 3.5% of Electric Vehicle  revenues.  The
obligation to make such royalty  payments  ends when 100% of the amount  granted
(in New Israeli  Shekels (NIS) linked to the U.S.  dollar,  plus interest  (with
respect to grants  after  January 1, 1999,  at the LIBOR  rate)) is repaid.  The
Government  of Israel  does not  acquire  proprietary  rights in the  technology
developed  using its  funding,  but  certain  restrictions  with  respect to the
technology  apply,  including the obligation to obtain the Israeli  Government's
consent to manufacture the product based on such technology outside of Israel or
to transfer the  technology to a third party,  which consent may be  conditioned
upon an  increase  in  royalty  rates or in the  amount  to be  repaid.  Current
regulations  require that, in the case of the approved transfer of manufacturing
rights out of Israel,  the maximum amount to be repaid through royalty  payments
will be increased to between 120% and 300% of the amount  granted,  depending on
the extent of the manufacturing to be conducted  outside of Israel,  and that an
increased  royalty  rate of up to 5%  will be  applied.  Through  2002,  we have
received an aggregate of $9.9 million from grants from the Chief Scientist.

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

EMPLOYEES

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

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

         Israeli law generally  requires  severance  pay upon the  retirement or
death  of  an  employee  or  termination   of  employment   without  due  cause;
additionally,  some of our senior employees have special severance arrangements,


                                       24
<PAGE>

certain  of which  are  described  under  "Item  11.  Executive  Compensation  -
Employment   Contracts,"   below.  We  currently  fund  our  ongoing   severance
obligations by making monthly payments to approved  severance funds or insurance
policies.  In addition,  Israeli  employees  and  employers  are required to pay
specified  sums to the  National  Insurance  Institute,  which is similar to the
United  States  Social  Security  Administration.  Since  January 1, 1995,  such
amounts also include payments for national health insurance. The payments to the
National  Insurance  Institute are  approximately  15.6% of wages,  of which the
employee   contributes   approximately   62%   and  the   employer   contributes
approximately  38%. The majority of the permanent  employees of EFL, and about a
quarter of the permanent employees of MDT, are covered by "managers' insurance,"
which provides life and pension  insurance  coverage with customary  benefits to
employees,  including retirement and severance benefits. We contribute 14.33% to
15.83% (depending on the employee) of base wages to such plans and the permanent
employees contribute 5% of their base wages.

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


                                       25



<PAGE>


                                     PART II

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

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

YEAR ENDED DECEMBER 31, 2002                    HIGH        LOW
                                                ----        ---
    Fourth Quarter..........................  $   1.06    $   0.61
    Third Quarter...........................  $   1.59    $   0.83
    Second Quarter..........................  $   1.68    $   0.73
    First Quarter...........................  $   2.20    $   1.42
YEAR ENDED DECEMBER 31, 2001
    Fourth Quarter..........................  $   2.43    $   1.30
    Third Quarter...........................  $   2.75    $   1.30
    Second Quarter..........................  $   3.95    $   2.30
    First Quarter...........................  $   8.00    $   3.50

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

         Our  stock  price 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 intent to delist our
stock  from the Nasdaq National Market. Should Nasdaq notify us of its intent to
delist  our  stock,  we  would have the opportunity to appeal this notification,
although  there  can  be  no  assurances  that  this  appeal  would  be resolved
favorably.

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



                                       26
<PAGE>

DIVIDENDS

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

RECENT SALES OF UNREGISTERED SECURITIES

         In December 2002, we issued and sold to three  institutional  investors
(i)  an  aggregate   $3,500,000  principal  amount  of  9%  Secured  Convertible
Debentures  due June 30,  2005;  and (ii)  Warrants to purchase an  aggregate of
3,500,100  shares of our common stock. In April 2003, we repriced the conversion
price of the  debentures  and the exercise  price of the warrants in lieu of the
payment of liquidated damages for failing to register the shares of common stock
underlying the debentures and the warrants by March 31, 2003. As a result of the
repricing,  the debentures are  convertible at the option of the holders into an
aggregate of 5,468,750 shares of our common stock at a conversion price of $0.64
per share,  and the warrants are  exercisable  at an exercise price of $0.64 per
share and may be exercised at any time prior to December 31, 2007. If we default
under the  provisions  of the  debentures,  including  (but not  limited to) the
default  of an  interest  payment,  failure  to have an  effective  registration
statement  covering  the  resale  of  common  shares  upon  conversion  declared
effective  by  January  1,  2004,  and  failure  to remain  listed on the Nasdaq
(National Market or SmallCap),  the principal amount of the Debenture may at the
option of the holders thereof become immediately due and payable.

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

ANNUAL SHAREHOLDERS MEETING

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

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

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


                                       27

<PAGE>




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

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

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

CRITICAL ACCOUNTING POLICIES

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

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

     REVENUE RECOGNITION AND BAD DEBT

         We generate revenues primarily from sales of multimedia and interactive
digital training systems and use-of-force  simulators  specifically targeted for
law enforcement and firearms training and from service contracts related to such
sales,  from  providing  lightweight  armoring  services of vehicles,  and, to a
lesser extent,  from sale of zinc-air battery products for defense  applications
and from development  services and long-term  arrangements  subcontracted by the
U.S government.  We recognize  revenues in respect of products when, among other
things,   we  have   delivered   the  goods  being   purchased  and  we  believe
collectibility  to be reasonably  assured.  We do not grant a right of return to
our customers. We perform ongoing credit evaluations of our customers' financial
condition  and we require  collateral  as deemed  necessary.  An  allowance  for


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<PAGE>

doubtful  accounts is  determined  with respect to those  accounts  that we have
determined  to be doubtful of  collection.  If the  financial  condition  of our
customers  were to  deteriorate,  resulting in an impairment of their ability to
make payments,  additional allowances would be required,  and this might cause a
revision of recognized revenues.

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

     INVENTORIES

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

     GOODWILL

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

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

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

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

     IMPAIRMENT OF LONG-LIVED ASSETS AND INTANGIBLES

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


                                       29
<PAGE>

and used is measured by a comparison  of the carrying  amount of an asset to the
future  undiscounted  cash flows expected to be generated by the assets. If such
assets are  considered  to be  impaired,  the  impairment  to be  recognized  is
measured by the amount by which the  carrying  amount of the assets  exceeds the
fair value of the assets.  Assets to be disposed of are reported at the lower of
the carrying  amount or fair value less selling costs.  As of December 31, 2002,
no impairment losses have been identified.

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

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

     BUSINESS COMBINATIONS

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

     RECENT ACCOUNTING PRONOUNCEMENTS

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

RECENT DEVELOPMENTS

     GERMAN POLICE ORDER

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

     CECOM ORDERS

     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.


                                       30
<PAGE>

GENERAL

         During 2002, we acquired two new  subsidiaries,  IES and MDT, we closed
our  money-losing  consumer  battery  operations,  and we  reorganized  into two
divisions:  Defense and Security  Products and Electric Fuel Batteries.  We have
previously been organized into Instant Power, Electric Vehicles, and Defense and
Security Products.  Additionally, we focused on increasing our activities in the
defense and security sectors, following the expansion of our battery development
and procurement contracts with the US Army's Communications  Electronics Command
(CECOM)  and  other   defense-related   agencies,   while   searching   for  new
opportunities to market our core Zinc-Air technology for commercial applications
and to OEMs. With an expanded focus on defense and homeland security  technology
and business  opportunities,  we launched new Zinc-Air battery products designed
to meet the requirements of this market. We also concentrated  intensive efforts
on various cost-cutting strategies,  including downsizing staff in areas showing
lower productivity and mandating  participation  among salaried employees in our
options-for-salary plan, whereby employees permanently waived a portion of their
salaries  (generally  between 15% and 25%) in  exchange  for options to purchase
shares of our common  stock at a ratio of options to purchase  2.5 shares of our
stock for each  dollar in salary  waived.  These  options are issued at a market
value  exercise  price,  so that  they are not  recorded  as an  expense  on our
financials.  This  program  ended at the end of 2002.  See "Item  11.  Executive
Compensation - Cash and Other Compensation - Options-for-Salary Program," below.

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

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

         Our Electric Fuel Batteries  Division is continuing with the production
of  Zinc-Air  fuel cell  packs for the U.S.  Army's  Communications  Electronics
Command  (CECOM).  The 12/24 volt,  800 watt-hour  battery pack for  battlefield
power, which is based on our Zinc-Air fuel cell technology, is approximately the
size and weight of a notebook computer. The battery is based on a new generation
of  lightweight,  30  ampere-hours  cells  developed by us for both military and
future commercial products with high energy requirements.

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



                                       31
<PAGE>

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

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

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

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

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

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

         During 2002, we continued to invest in  strengthening  our intellectual
property  position.  We have 42  unexpired  U.S.  patents  and 15  corresponding
European patents issued covering general aspects and various applications of our
Zinc-Air technology; these patents expire between 2007 and 2018.

         We have experienced significant fluctuations in the sources and amounts
of our revenues and expenses,  and we believe that the following  comparisons of
results of operations  for the periods  presented do not  necessarily  provide a
meaningful indication of our development.  Our research and development expenses
have been  offset,  to a limited  extent,  by the  periodic  receipt of research
grants from Israel's Office of the Chief Scientist.  We expect that,  because of


                                       32
<PAGE>

these  and  other  factors,  including  our  acquisitions  of IES and  MDT,  our
discontinuation  of certain of our operations,  and general economic  conditions
and  delays  due to  legislation  and  regulatory  and other  processes  and the
development  of competing  technologies,  future  results of operations  may not
necessarily  be  meaningfully  compared with those of current and prior periods.
Thus,  we  believe  that  period-to-period  comparisons  of its past  results of
operations  should  not  necessarily  be relied  upon as  indications  of future
performance.

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

FUNCTIONAL CURRENCY

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

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

RESULTS OF OPERATIONS

     PRELIMINARY NOTE

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

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

     FISCAL YEAR 2002 COMPARED TO FISCAL YEAR 2001

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



                                       33
<PAGE>

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

         In 2002,  revenues  were $4.7  million  for the  Defense  and  Security
Products Division  (compared to $0 in 2001), due to the inclusion of IES and MDT
in our 2002 results,  and $1.7 million for the Electric Fuel Batteries  Division
(compared  to $2.1  million in the  comparable  period in 2001,  a  decrease  of
$411,000,  or  20%),  due  primarily  to  $471,000  in  revenues  from a  German
consortium  project  relating to our electric vehicle that were included in 2001
but that did not exist in 2002.  Of the $4.7  million  increase  in Defense  and
Security  Products  revenues,  $2.0 million was attributable to the inclusion of
IES in our results in 2002 and $2.7 million was attributable to the inclusion of
MDT in our results in 2002.

         COST OF  REVENUES  AND GROSS  PROFIT.  Cost of  revenues  totaled  $4.4
million  during  2002,  compared  to $2.0  million in 2001,  an increase of $2.4
million, or 122%, due to the inclusion of IES and MDT in our 2002 results.

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

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

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

         Of the $4.4 million  increase in Defense and Security  Products  direct
expenses,  $2.1 million was  attributable to the inclusion of IES in our results
in 2002 and $2.3 million was attributable to the inclusion of MDT in our results
in 2002.

         Gross profit was $2.0 million during 2002,  compared to $101,000 during
2001,  an increase of $1.9  million.  This increase was the direct result of all


                                       34
<PAGE>

factors  presented above,  most notably the inclusion of IES and MDT in our 2002
results.  In 2002,  IES  contributed  $1.3 million to our gross profit,  and MDT
contributed  $1.1  million,  which was offset by a gross loss of $360,000 in our
other divisions.

         RESEARCH AND DEVELOPMENT  EXPENSES.  Research and development  expenses
for 2002 were  $686,000,  compared to $456,000 in 2001, an increase of $230,000,
or 50%. This  increase was  primarily the result of the inclusion of IES,  which
accounted for $130,000 of the increase, in our 2002 results.

         SALES AND MARKETING  EXPENSES.  Sales and  marketing  expenses for 2002
were $1.3 million, compared to $106,000 in 2001, an increase of $1.2 million, or
1,136%. This increase was primarily attributable to the following factors:

         --       We had sales and marketing  expenses in 2002 related to IES of
                  $572,000, which we did not have in 2001;

         --       We had sales and marketing  expenses in 2002 related to MDT of
                  $63,000, which we did not have in 2001; and

         --       We incurred expenses for consultants,  primarily lobbyists, in
                  the amount of $128,000 in connection with our Electric Vehicle
                  program and  $441,000  in  connection  with our CECOM  battery
                  program with the U.S. Army.

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

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

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

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

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



                                       35
<PAGE>

         AMORTIZATION OF INTANGIBLE  ASSETS.  Amortization of intangible  assets
totaled  $649,000 in 2002,  compared to $0 in 2001,  due to the inclusion of IES
and  MDT  in  our  2002  results.  Of  this  $649,000  increase,   $551,000  was
attributable  to the  inclusion  of IES in our  results in 2002 and  $98,000 was
attributable to the inclusion of MDT in our results in 2002.

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

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

         Net  loss  from  discontinued  operations  in 2002 was  $13.6  million,
compared to $13.3 million in 2001, an increase of $306,000, or 2%. This increase
was the result of a  write-off  of fixed  inventory  and assets in the amount of
$7.1 million in connection with our  discontinuation of the operations  relating
to the retail  sales of our  consumer  battery  products at the end of the third
quarter of 2002,  which was not entirely offset by the elimination of the losses
from these discontinued operations beginning with the fourth quarter of 2002.

         NET LOSS.  Due to the factors  cited  above,  we reported a net loss of
$18.5  million in 2002,  compared  to a net loss of $17.3  million  in 2001,  an
increase of $1.2 million, or 7%.

     FISCAL YEAR 2001 COMPARED TO FISCAL YEAR 2000

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

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

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


                                       36
<PAGE>

(EFRB)  project.  In  2000,  we  derived  revenues  from  continuing  operations
principally from the sale of lifejacket lights. Additionally, we also recognized
revenues from activities related to the DOT program.

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

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

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

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

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

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

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

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

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

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

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



                                       37
<PAGE>

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

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

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

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

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

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

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

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

         --       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;

         --       We took an  inventory  write-off  as a result of a decision to
                  discontinue  production  and sale of most  disposable  battery


                                       38
<PAGE>

                  products  in  response  to  low  consumer   demand  for  those
                  products,  accounting  for an  increase in cost of revenues of
                  approximately $440,000;

         --       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;

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

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

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

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

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

LIQUIDITY AND CAPITAL RESOURCES

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

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



                                       39
<PAGE>

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

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

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

         Our  Israeli  subsidiary  EFL  presently  has a line of credit with the
First  International  Bank of Israel Ltd.  (FIBI) of up to $750,000,  secured by
such security as we and the bank shall agree upon from time to time. This credit
facility  imposes  financial  and other  covenants  on  Arotech  and EFL.  As of
December 31,  2002,  the bank had issued  letters of credit and bank  guarantees
totaling approximately $35,000.

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

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

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

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

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

         Approximately 22.9% of the stock of our Israeli-based subsidiary EFL is
deemed to be beneficially owned (indirectly through their ownership of our stock
by application  of certain  attribution  rules) by four United States  citizens:
Leon S. Gross,  Austin W. Marxe and David M. Greenhouse,  and Robert S. Ehrlich.
(Information with respect to the  stockholdings of Messrs.  Marxe and Greenhouse
is based on a Schedule 13G filed with the Securities and Exchange  Commission on
February  11,  2002,  as amended on  February  13,  2003.) If at any time in the
future,  more than 50% of either (i) the voting power of our stock,  or (ii) the
total  value  of our  stock,  is held  or  deemed  to be  held by five or  fewer
individuals  (including,  if applicable,  those individuals who currently own an
aggregate of 22.9% of our stock) who are United  States  citizens or  residents,
EFL would satisfy the foreign  personal  holding  company stock  ownership  test


                                       40
<PAGE>

under the Internal Revenue Code and we could be subject to additional U.S. taxes
on any  undistributed  foreign personal holding company income of EFL. For 2002,
EFL had no income which would qualify as undistributed  foreign personal holding
company income.  However,  no assurance can be given that in the future EFL will
not have income that qualifies as undistributed foreign personal holding company
income.

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

IMPACT OF INFLATION AND CURRENCY FLUCTUATIONS

         Historically,  the majority of our revenues have been in U.S.  dollars.
The United  States  dollar  cost of our  operations  in Israel,  with  regard to
expenses  incurred in NIS, is  influenced  by the extent to which an increase in
the rate of inflation in Israel is not offset by the  devaluation  of the NIS in
relation to the dollar. In the past two years, inflation in Israel has been more
than fully  compensated  by the  devaluation  of the NIS and,  accordingly,  the
dollar  cost of our NIS  expenses  has  decreased.  Even if the recent  trend is
reversed (as was the case in previous years),  we do not believe that continuing
inflation in Israel or delays in the devaluation of the NIS are likely to have a
material adverse effect on us, except to the extent that such circumstances have
an impact on Israel's  economy as a whole. In the years ended December 31, 2000,
2001 and 2002, the annual rates of inflation in Israel were 0.0%, 1.4% and 6.5%,
respectively,  compared to the  devaluation of the NIS against the dollar during
such  periods of (2.7)%,  9.3% and 7.3%,  respectively.  Additionally,  our $2.6
million contract to supply  simulation  training systems to the largest regional
police division in Germany is denominated in Euros.

EFFECTIVE CORPORATE TAX RATE

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

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

         Arotech and EFL have  incurred  net  operating  losses or had  earnings
arising from  tax-exempt  income during the years ended December 31, 2000,  2001
and 2002 and  accordingly  no provision for income taxes was required.  Taxes in


                                       41
<PAGE>

these  entities  paid in 2000,  2001 and 2002 are  primarily  composed of United
States federal alternative minimum taxes.

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

                                  RISK FACTORS

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

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



                                       42
<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 MATERIAL ADVERSE CONSEQUENCES FOR US.

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

     WE  HAVE  PLEDGED  A  SUBSTANTIAL  PORTION  OF OUR  ASSETS  TO  SECURE  OUR
BORROWINGS.

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

     WE NEED SIGNIFICANT AMOUNTS OF CAPITAL TO OPERATE AND GROW OUR BUSINESS.

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



                                       43
<PAGE>

     WE MAY NOT BE SUCCESSFUL IN OPERATING A NEW BUSINESS.

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

     WE CANNOT ASSURE YOU OF MARKET  ACCEPTANCE OF OUR MILITARY ZINC-AIR BATTERY
PRODUCTS AND ELECTRIC VEHICLE TECHNOLOGY.

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


                                       44
<PAGE>

substantial  risks,  including  the risk of improper  valuation  of the acquired
business and the risk of inadequate integration.  There can be no assurance that
suitable  acquisition  candidates  will  be  available,  that we will be able to
acquire  or  manage   profitably  such  additional   companies  or  that  future
acquisitions  will  produce  returns that justify our  investments  therein.  In
addition,  we may compete  for  acquisition  and  expansion  opportunities  with
companies that have  significantly  greater  resources than we do.  Furthermore,
acquisitions  could disrupt our ongoing business,  distract the attention of our
senior  managers,  make it  difficult  to maintain  our  operational  standards,
controls and  procedures  and subject us to contingent and latent risks that are
different, in nature and magnitude, than the risks we currently face.

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

     WE MAY NOT SUCCESSFULLY INTEGRATE OUR NEW ACQUISITIONS.

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


                                       45
<PAGE>

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

     SOME OF THE  COMPONENTS OF OUR  TECHNOLOGY  AND OUR PRODUCTS POSE POTENTIAL
SAFETY RISKS WHICH COULD CREATE POTENTIAL LIABILITY EXPOSURE FOR US.

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

     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.



                                       46
<PAGE>

     OUR FIELDS OF BUSINESS ARE HIGHLY COMPETITIVE.

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

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

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

         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


                                       47
<PAGE>

addition,  we have  patent  applications  pending  in the  United  States and in
foreign countries, including the European Community, Israel and Japan. We intend
to continue  to file  patent  applications  covering  important  features of our
technology.  We cannot assure you, however,  that patents will issue from any of
these pending applications or, if patents issue, that the claims allowed will be
sufficiently broad to protect our technology.  In addition, we cannot assure you
that any of our patents will not be challenged or  invalidated,  that any of our
issued patents will afford protection against a competitor or that third parties
will not make infringement claims against us.

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


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<PAGE>

Board,  Robert S.  Ehrlich,  to be our new  President  and CEO. Our success will
depend to some extent on our ability to quickly and smoothly  execute the change
in leadership as a result of this change of CEO.

     WE ARE DEPENDENT ON KEY PERSONNEL AND OUR BUSINESS  WOULD SUFFER IF WE FAIL
TO RETAIN THEM.

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

     THERE ARE RISKS INVOLVED WITH THE INTERNATIONAL NATURE OF OUR BUSINESS.

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


                                       49
<PAGE>

we  could  be  subject  to  additional  U.S.  taxes  (including  PHC tax) on any
"undistributed FPHC income" of EFL. We believe that EFL has not had any material
undistributed FPHC income.  However, no assurance can be given that EFL will not
become a FPHC and have undistributed FPHC income in the future.

     INVESTORS  SHOULD NOT  PURCHASE OUR COMMON  STOCK WITH THE  EXPECTATION  OF
RECEIVING CASH DIVIDENDS.

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

MARKET-RELATED RISKS

     THE PRICE OF OUR COMMON STOCK IS VOLATILE.

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

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

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

         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


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<PAGE>

such  delisting of our common  stock could have an adverse  effect on the market
price of, and the efficiency of the trading market for, our common stock.  Also,
if in the future we were to  determine  that we need to seek  additional  equity
capital,  it could have an adverse effect on our ability to raise capital in the
public equity markets.

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

     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.



                                       51
<PAGE>

     A  SUBSTANTIAL  NUMBER OF OUR SHARES ARE  AVAILABLE  FOR SALE IN THE PUBLIC
MARKET AND SALES OF THOSE SHARES COULD ADVERSELY AFFECT OUR STOCK PRICE.

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

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

         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:



                                       52
<PAGE>

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

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

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

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

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.



                                       53
<PAGE>

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

     SERVICE OF  PROCESS  AND  ENFORCEMENT  OF CIVIL  LIABILITIES  ON US AND OUR
OFFICERS MAY BE DIFFICULT TO OBTAIN.

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

         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


                                       54
<PAGE>

State of  Israel  to  secure  its  obligations  under  the  approved  enterprise
programs.

     OUR GRANTS FROM THE ISRAELI GOVERNMENT IMPOSE CERTAIN RESTRICTIONS ON US.

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




                                       55
<PAGE>

ITEM 8.           FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

<TABLE>
<CAPTION>
                          INDEX TO FINANCIAL STATEMENTS
                                                                                                      PAGE
                          CONSOLIDATED FINANCIAL STATEMENTS
<S>                                                                                                  <C>
                 Report of Independent Auditors..................................................    F-2
                 Consolidated Balance Sheets.....................................................    F-3
                 Consolidated Statements of Operations...........................................    F-5
                 Statements of Changes in Shareholders' Equity...................................    F-6
                 Consolidated Statements of Cash Flows...........................................    F-9
                 Notes to Consolidated Financial Statements......................................    F-12
                          SUPPLEMENTARY FINANCIAL DATA
                 Quarterly Financial Data (unaudited) for the two years ended December 31, 2002..    F-47
</TABLE>


ITEM 11.          EXECUTIVE COMPENSATION

CASH AND OTHER COMPENSATION

     GENERAL

         Our Chief  Executive  Officer  and the  other  highest  paid  executive
officer  (of which  there was one) who were  compensated  at a rate of more than
$100,000  in  salary  and  bonuses  during  the year  ended  December  31,  2002
(collectively,  the "Named Executive Officers") are Israeli residents,  and thus
certain  elements  of the  compensation  that we pay  them is  structured  as is
customary in Israel.

         During  2002,  2001  and  2000,  compensation  to our  Named  Executive
Officers took several forms:

         --       cash salary;

         --       bonus,  some of which was paid in cash in the year in which it
                  was earned and some of which was  accrued in the year in which
                  it was earned but paid in cash in a subsequent year;

         --       cash  reimbursement  for  taxes  paid by the  Named  Executive
                  Officer and  reimbursed by us in  accordance  with Israeli tax
                  regulations;

         --       accruals  (but not cash  payments)  in respect of  contractual
                  termination  compensation  in excess of the Israeli  statutory
                  minimum;



                                       56
<PAGE>

         --       accruals (but not cash  payments) in respect of pension plans,
                  which consist of a savings plan,  life insurance and statutory
                  severance pay benefits, and a continuing education fund (as is
                  customary in Israel);

         --       stock  options,  including  options  issued in exchange  for a
                  waiver  of  salary  under  the  "options-for-salary"   program
                  discussed in more detail below; and

         --       other  benefits,  primarily  consisting  of  annual  statutory
                  holiday pay.

         The specific  amounts of each form of  compensation  paid to each Named
Executive Officer appear in the summary compensation table and the notes thereto
appearing under "Summary Compensation Table," below.

     TERMINATION COMPENSATION OF AND SETTLEMENT WITH YEHUDA HARATS

         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 us and
our subsidiaries in order to pursue other  interests.  In December 2002, we came
to an agreement  with Mr. Harats  whereby we agreed to pay him $551,499  through
the end of 2005 in  satisfaction  of all our contractual and legal severance and
other  obligations  to him.  See "Item 13.  Certain  Relationships  and  Related
Transactions - Termination  Compensation  of and Settlement with Yehuda Harats,"
below.

         Prior to Mr. Harats's  resignation,  we had accrued a sum of $1,212,939
in  respect  of  these  obligations  on our  books,  consisting  of  contractual
severance,  statutory  severance,  contractually  guaranteed  bonus, and various
benefits,  including unused vacation,  unused sick days, and continuing benefits
over the three years after  termination.  Since we settled with Mr. Harats for a
sum of  $551,499  rather than the  $1,212,939  that we had accrued on our books,
this settlement  effectively  resulted in a gain for us in the fourth quarter of
2002 of $661,440, which is the difference between the amount that we had accrued
on our books in respect of these  obligations  and the amount that we ultimately
agreed to pay.

         We continue to carry on our books a total of  $1,076,740  in loans from
us to Mr.  Harats on which he remains  liable;  however,  we do not carry  these
loans at full value because  recourse  under the loans is only to certain shares
that we hold,  the fair  market  value of which is now less  than the  principal
amount  of  the  loans.  See  "Item  13.  Certain   Relationships   and  Related
Transactions - Officer Loans," below.

     SUMMARY COMPENSATION TABLE

         The  following  table,  which  should be read in  conjunction  with the
explanations  provided above,  shows the compensation that we paid (or accrued),
in  connection  with  services  rendered for 2002,  2001 and 2000,  to our Named
Executive Officers.

                                       57
<PAGE>

<TABLE>
<CAPTION>

                                            SUMMARY COMPENSATION TABLE(1)

                                                                      LONG TERM                ALL OTHER
                                         ANNUAL COMPENSATION         COMPENSATION             COMPENSATION
                                   -------------------------------- ------------- -----------------------------------------
                                                                                        CHANGES IN
                                                                                      ACCRUALS FOR
                                                                                        SICK DAYS,    PAYMENT TO
                                                                        SECURITIES   VACATION DAYS,  PENSION AND
                                                               TAX      UNDERLYING  AND TERMINATION   EDUCATION
NAME AND PRINCIPAL POSITION YEAR    SALARY      BONUS    REIMBURSEMENT   OPTIONS     COMPENSATION       FUNDS      OTHERS
--------------------------------    ------      -----    -------------   -------     ------------       -----      ------
<S>                          <C>    <C>      <C>         <C>          <C>         <C>         <C>              <C>
Yehuda Harats*               2002   $256,462 $  32,380(2)$   14,687   112,500(3)  $  (661,440)(4)   $  22,735   $      654
President, Chief
  Executive Officer and
  director
                             2001   $248,681 $  99,750   $   19,145   616,000(5)  $   375,375(6)    $  62,617   $  142,919(7)
                             2000   $245,560 $  82,380   $    8,083   400,000     $   128,138(8)    $  41,807   $      859

Robert S. Ehrlich            2002  $ 202,962 $  99,750(2)$   15,232   262,500(9)  $   170,691(10)   $  22,256   $      654
Chairman of the Board,
  President, Chief
  Executive Officer and
  director**
                             2001  $ 211,644 $  84,000   $   17,201   521,000(11) $   229,800(12)   $  52,841   $   87,113(13)
                             2000  $ 245,574 $  82,380   $    7,146   400,000     $   177,658(14)   $  41,806   $      859
</TABLE>

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

  * Mr. Harats's employment with us terminated on October 23, 2002.
 ** Until October 23, 2002,  Mr. Ehrlich served as our Chairman of the Board and
    Chief  Financial  Officer.

 (1) We paid the  amounts  reported for each  named  executive  officer  in U.S.
     dollars and/or New Israeli Shekels(NIS). We have translated amounts paid in
     NIS into U.S.  dollars at the exchange rate of NIS into U.S. dollars at the
     time of payment or accrual.

 (2) We paid each of Messrs.  Ehrlich and Harats  $32,380 during 2002 on account
     of the  2002  bonuses  to  which  they  were  entitled  according  to their
     contracts. Additionally, we accrued $67,370 for Mr. Ehrlich in satisfaction
     of the  remainder  of the bonus to which he was  entitled  according to his
     contract.  The  remainder of the  additional  bonus to which Mr. Harats was
     entitled  according  to the terms of his  contract was included in the sums
     that we are  obligated to pay Mr.  Harats under the terms of our  severance
     agreement with him, which sums are detailed in "Termination Compensation of
     and  Settlement  with Yehuda  Harats,"  above.  During  2002,  we also paid
     $99,750 to Mr.  Harats in full payment of his 2001 bonus and $84,000 to Mr.
     Ehrlich in full payment of his 2001 bonus.

 (3) Of this amount,  112,500 options were in exchange for a total of $45,000 in
     salary  waived by Mr.  Harats  pursuant to the  options-for-salary  program
     instituted by us beginning in May 2001. See  "Options-for-Salary  Program,"
     below.

 (4) This  represents  the savings to us at year end of the amounts  that we had
     accrued on our  financials in connection  with these  obligations  over the
     amount that we  ultimately  agree to pay in the  context of our  settlement
     with Mr. Harats.  See  "Termination  Compensation  of and  Settlement  with
     Yehuda Harats," above.

 (5) Of this amount,  100,000 options were in exchange for a total of $40,000 in
     salary waived by Mr. Harats during 2001 pursuant to the  options-for-salary
     program  instituted  by us beginning in May 2001.  See  "Options-for-Salary
     Program," below.

 (6) Of this amount,  $263,994  represents  our accrual for  severance  pay that
     would be  payable to Mr.  Harats  upon a "change  of  control"  or upon the
     occurrence of certain other events; $67,074 represents our accrual for sick
     leave and vacation  redeemable by Mr.  Harats;  and $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.

 (7) Of this amount,  $142,240 represents benefit imputed to Mr. Harats upon the
     purchase by us of certain of his shares for treasury,  and $679  represents
     other  benefits that we paid to Mr. Harats in 2001.  See "Item 13.  Certain
     Relationships and Related Transactions - Officer Loans," below.

 (8) Of this amount,  $2,911 represents our accrual for severance pay that would
     be payable to Mr. Harats upon a "change of control" or upon the  occurrence
     of certain other events;  $70,500 represents our accrual for sick leave and
     vacation  redeemable by Mr. Harats;  and $54,727 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.



                                       58
<PAGE>

 (9) Of this amount, 262,500 options were in exchange for a total of $105,000 in
     salary waived by Mr. Ehrlich during 2002 pursuant to the options-for-salary
     program  instituted  by us beginning in May 2001.  See  "Options-for-Salary
     Program," below.

 (10)Of this amount,  $109,935  represents  our accrual for  severance  pay that
     would be payable to Mr.  Ehrlich  upon a "change  of  control"  or upon the
     occurrence of certain other events;  $17,571 represents the increase of the
     accrual for sick leave and vacation redeemable by Mr. Ehrlich;  and $43,725
     represents  the  increase of our accrual  for  severance  pay that would be
     payable to Mr.  Ehrlich under the laws of the State of Israel if we were to
     terminate his employment.

 (11)Of this amount,  80,000  options were in exchange for a total of $32,000 in
     salary waived by Mr. Ehrlich during 2001 pursuant to the options-for-salary
     program  instituted  by us beginning in May 2001.  See  "Options-for-Salary
     Program," below.

 (12)Of this amount,  $172,360  represents  our accrual for  severance  pay that
     would be payable to Mr.  Ehrlich  upon a "change  of  control"  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;  and $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.

 (13)Of this amount,  $86,434 represents benefit imputed to Mr. Ehrlich upon the
     purchase by us of certain of his shares for treasury,  and $679  represents
     other  benefits that we paid to Mr.  Ehrlich in 2001. See "Item 13. Certain
     Relationships and Related Transactions - Officer Loans," below.

 (14)Of this amount, $59,363 represents our accrual for severance pay that would
     be payable to Mr. Ehrlich upon a "change of control" or upon the occurrence
     of certain other events; $58,353 represents the increase of the accrual for
     sick leave and vacation  redeemable by Mr. Ehrlich;  and $59,942 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.

     EXECUTIVE LOANS

         During 1999 and 2000, we extended  certain loans to our Named Executive
Officers.  These loans are  summarized in the following  table,  and are further
described  under "Item 13.  Certain  Relationships  and Related  Transactions  -
Officer Loans," below.
<TABLE>
<CAPTION>

                                           ORIGINAL        AMOUNT
                                           PRINCIPAL    OUTSTANDING
    NAME OF BORROWER      DATE OF LOAN  AMOUNT OF LOAN AS OF 12/31/02                TERMS OF LOAN
    ----------------      ------------  -------------- --------------                -------------
<S>                        <C>            <C>             <C>              <C>
Yehuda Harats...........   12/28/99     $    167,975    $    201,570  Ten-year non-recourse loan to purchase our
                                                                        stock, secured by the shares of stock
                                                                        purchased.
Yehuda Harats...........   02/09/00     $    789,991    $    875,170  Twenty-five-year non-recourse loan to
                                                                        purchase our stock, secured by the
                                                                        shares of stock purchased.
Robert S. Ehrlich.......   12/28/99     $    167,975    $    201,570  Ten-year non-recourse loan to purchase our
                                                                        stock, secured by the shares of stock
                                                                        purchased.
Robert S. Ehrlich.......   02/09/00     $    789,991    $    623,579  Twenty-five-year non-recourse loan to
                                                                        purchase our stock, secured by the
                                                                        shares of stock purchased.
</TABLE>

     OPTIONS-FOR-SALARY PROGRAM

         Between May 2001 and December 2002, we conducted an  options-for-salary
program  designed to conserve our cash and to offer  incentives  to employees to
remain with us despite lower cash compensation.  Under this program, most of our
salaried  employees  permanently  waived a portion of their salaries in exchange


                                       59
<PAGE>

for options to  purchase  shares of our common  stock,  at a ratio of options to
purchase  2.5  shares  of our stock for each  dollar  in salary  waived.  Social
benefits (such as pension) and contractual  bonuses for such employees continued
to  be   calculated   based  on  their   salaries   prior  to   reduction.   The
options-for-salary program was ended on December 31, 2002.

         During 2001,  options were accrued  quarterly in advance,  but since no
employees  requested the grant of their options  during the third  quarter,  all
grants were deferred to the beginning of the fourth quarter, during the month of
October.  During 2002,  options were accrued  quarterly in advance for the Named
Executive Officers, and annually in advance for other employees.

         During 2001, in exchange for waiver of $79,739 in salary, our employees
other than the Named  Executive  Officers  received a total of 199,347  options,
which options were granted based on the lowest closing price of our common stock
during the month of October 2001 ($1.30).  Named Executive Officers, in exchange
for  waiver of $72,000 in  salary,  received a total of 180,000  options  during
2001,  which  options were  granted  based on the lowest  closing  prices of our
common stock during the month of October 2001 ($1.30), as set forth in the table
below.

         During  2002,  in  exchange  for  waiver of  $339,200  in  salary,  our
employees  other than the Named Executive  Officers  received a total of 848,000
options,  which  options were granted  based on the lowest  closing price of our
common  stock  during  the  month of  December  2002  ($0.61).  Named  Executive
Officers,  in exchange  for waiver of  $150,000  in salary,  received a total of
375,000  options  during 2002,  which  options were granted  based on the lowest
closing  prices of our common stock during each quarter of 2002, as set forth in
the table below.

         Options for  employees  who were ceased to be employed by us during the
course of the year were priced at the lowest  closing  price of our common stock
through the date of termination.

         Following is a table setting forth the number of options that we issued
to each of our Named  Executive  Officers under the  options-for-salary  program
during each fiscal quarter in which the program was in effect,  and the range of
trading prices for our common stock during each such fiscal quarter:

                                       60
<PAGE>

<TABLE>
<CAPTION>

                                                                                             LOW TRADING                   CLOSING
                            FISCAL      AMOUNT OF      NUMBER OF    NUMBER OF      AVERAGE      PRICE     HIGH TRADING      PRICE
                           QUARTER        SALARY        OPTIONS      OPTIONS      EXERCISE      DURING    PRICE DURING   ON LAST DAY
NAMED EXECUTIVE OFFICER     ENDED         WAIVED        ACCRUED       ISSUED        PRICE      QUARTER       QUARTER     OF QUARTER
------------------------ ---------------------------- -------------------------- --------------------------------------------------
<S>                        <C>          <C>               <C>               <C>         <C>     <C>           <C>           <C>
Yehuda Harats..........    06/30/01     $   10,000        25,000            0           -       $2.18         $4.20         $2.54
                           09/30/01     $   15,000        37,500            0           -       $1.10         $3.05         $1.48
                           12/31/01     $   15,000        37,500      100,000       $1.30       $1.30         $2.48         $1.66
                           03/31/02     $   15,000        37,500       37,500       $1.42       $1.35         $2.41         $1.55
                           06/30/02     $   15,000        37,500       37,500       $0.73       $0.73         $1.79         $0.91
                           09/30/02     $   15,000        37,500       37,500       $0.85       $0.79         $1.70         $1.05

Robert S. Ehrlich......    06/30/01     $    8,000        20,000            0           -       $2.18         $4.20         $2.54
                           09/30/01     $   12,000        30,000            0           -       $1.10         $3.05         $1.48
                           12/31/01     $   12,000        30,000       80,000       $1.30       $1.30         $2.48         $1.66
                           03/31/02     $   26,250        65,625       65,625       $1.42       $1.35         $2.41         $1.55
                           06/30/02     $   26,250        65,625       65,625       $0.73       $0.73         $1.79         $0.91
                           09/30/02     $   26,250        65,625       65,625       $0.85       $0.79         $1.70         $1.05
                           12/31/02     $   26,250        65,625       65,625       $0.61       $0.61         $1.17         $0.64
</TABLE>

STOCK OPTIONS

         The table below sets forth  information  with respect to stock  options
granted to the Named  Executive  Officers for the fiscal year 2002, all of which
were granted under the options-for-salary program described above.
<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      EXERCISE                     OF STOCK PRICE APPRECIATION
                          UNDERLYING     EMPLOYEES         OR BASE                        FOR OPTION TERM(1)
                          OPTIONS        IN FISCAL         PRICE        EXPIRATION    ------------------------------
          NAME            GRANTED          YEAR           ($/SH)          DATE           5% ($)          10% ($)
      ---------------    -----------    -------------    -----------    ----------    -------------    -------------
<S>                           <C>             <C>          <C>           <C> <C>        <C>               <C>
Yehuda Harats..........       37,500(2)       2.3%         $1.42         4/1/12         $ 33,489          $84,887
                              37,500(2)       2.3%         $0.73         7/1/12         $ 17,216          $43,629
                              37,500(2)       2.3%         $0.85         10/1/12        $ 20,046          $50,801
Robert S. Ehrlich......       65,625(2)       4.0%         $1.42         4/1/12         $ 58,605         $148,552
                              65,625(2)       4.0%         $0.73         7/1/12         $ 30,128          $76,350
                              65,625(2)       4.0%         $0.85         10/1/12        $ 35,081          $88,901
                              65,625(2)       4.0%         $0.61         1/1/13         $ 25,175          $63,799

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

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

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



                                       61
<PAGE>

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

<TABLE>
<CAPTION>
          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)
                      CQUIRED ON         VALUE        ------------------------------ ----------------------------------
        NAME         A EXERCISE        REALIZED        EXERCISABLE   UNEXERCISABLE     EXERCISABLE     UNEXERCISABLE
 --------------------------------- ------------------ -------------- --------------- ---------------- -----------------
<S>                      <C>        <C>                  <C>             <C>          <C>              <C>
Yehuda Harats........    50,000     $     10,500.00      1,076,501       116,666      $          0     $          0
Robert S. Ehrlich....    50,000     $     10,500.00        868,401        91,666      $      1,969     $          0
</TABLE>

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

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

EMPLOYMENT CONTRACTS

         In October 2002, we announced that Yehuda Harats, the president and CEO
and a member of our  Board,  had  decided  to  resign  from his  positions  with
Electric Fuel and its subsidiaries in order to pursue other interests. The Board
of Directors  selected  Robert S. Ehrlich,  Chairman of the Board, to be the new
President and CEO. In connection  with the  resignation  of Mr.  Harats,  we are
required to pay him certain amounts due to him by law and under the terms of his
employment agreement.  In December 2002, we came to an agreement with Mr. Harats
whereby we agreed to pay him $729,500 through the end of 2005 in satisfaction of
all our contractual and legal severance and other  obligations to him, which sum
was  approximately  one-half  of the  amount  we had  accrued  on our  financial
statements  in  connection  with  such  obligations.  Our debt to Mr.  Harats is
secured by certain of our assets in Israel. See "Item 11. Executive Compensation
- Cash and Other Compensation - Termination  Compensation of and Settlement with
Yehuda Harats," above.

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

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

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


                                       62
<PAGE>

actually  attain  for the year in  question  are 120% or more of the  amount  we
budgeted at the beginning of the year.

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

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

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

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

         Under the laws of Israel,  an employee  of ours who has been  dismissed
from service,  died in service,  retired from service upon attaining  retirement
age, or left due to poor health, maternity or certain other reasons, is entitled
to severance pay at the rate of one month's salary for each year of service.  We
currently fund this  obligation by making monthly  payments to approved  private


                                       63
<PAGE>

provident  funds  and by  its  accrual  for  severance  pay in the  consolidated
financial  statements.  See Note 2.r of the Notes to the Consolidated  Financial
Statements.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

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

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

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

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

         The  following  table sets forth  information  regarding  the  security
ownership,  as of March 31, 2003, of those persons  owning of record or known by
us to own beneficially more than 5% of our common stock and of each of our Named
Executive Officers and directors,  and the shares of common stock held by all of
our directors and executive officers as a group.

<TABLE>
<CAPTION>
                                                                                           PERCENTAGE OF TOTAL
        NAME AND ADDRESS OF BENEFICIAL OWNER(1)           SHARES BENEFICIALLY OWNED(2)(3) SHARES OUTSTANDING(3)
        ---------------------------------------           ------------------------------- ---------------------
<S>                                                               <C>                            <C>
Leon S. Gross...........................................          4,036,036(4)(11)               11.6%
Austin W. Marxe and David M. Greenhouse(5)..............          2,843,597(5)                    8.0%
IES Electronics, Inc. ..................................          2,188,971(6)                    6.2%
Robert S. Ehrlich.......................................          1,556,567(7)(12)                4.3%
Steven Esses............................................                  0                         *
Avihai Shen.............................................             92,381(8)                      *
Dr. Jay M. Eastman......................................             65,001(9)                      *
Jack E. Rosenfeld.......................................             67,001(10)                     *
Lawrence M. Miller......................................            525,080(11)                   1.5%
All of our directors and executive officers as a group
(7 persons**)...........................................          6,490,736(13)                  17.9%
</TABLE>

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

    *Less than one percent.
  ** Including  Mr.  Gross,  who resigned as a director on March 17, 2003.  Also
     includes  601,835 shares held of record by or on behalf of Yehuda Harats as
     of March 31, 2003 that are subject to the Voting Rights Agreement described
     in footnote 12, below.

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

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



                                       64
<PAGE>

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

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

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

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

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

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

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

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

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

 (12)Messrs.  Gross, Ehrlich and Harats are parties to a Voting Rights Agreement
     pursuant  to which  each of the  parties  agrees to vote the  shares of our
     common  stock  held by that  person  in favor of the  election  of  Messrs.
     Ehrlich,  Harats and Miller  until the earlier of December  28, 2004 or our
     fifth annual  meeting of  stockholders  after December 28, 1999. Mr. Harats
     resigned as a director in 2002;  however,  we believe that Mr.  Harats must
     continue to comply with the terms of this agreement.  As of March 31, 2002,
     5,291,036  shares of our common  stock were  subject to this Voting  Rights
     Agreement  (including  601,835  shares  held of  record  by or on behalf of
     Yehuda Harats as of March 31, 2003).

 (13)Includes  1,163,286  shares  issuable upon exercise of options  exercisable
     within 60 days.



                                       65
<PAGE>

SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS

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

<TABLE>
<CAPTION>
                      EQUITY COMPENSATION PLAN INFORMATION
                                                                                       NUMBER OF SECURITIES
                                                                                       REMAINING AVAILABLE
                                                                                       FOR FUTURE ISSUANCE
                              NUMBER OF SECURITIES                                         UNDER EQUITY
                                TO BE ISSUED UPON            WEIGHTED-AVERAGE           COMPENSATION PLANS
                                   EXERCISE OF              EXERCISE PRICE OF         (EXCLUDING SECURITIES
                              OUTSTANDING OPTIONS,         OUTSTANDING OPTIONS,        REFLECTED IN COLUMN
                               WARRANTS AND RIGHTS         WARRANTS AND RIGHTS                 (A))

       PLAN CATEGORY                   (A)                         (B)                         (C)
---------------------------- ------------------------     -----------------------     -----------------------
<S>                                   <C>                          <C>                        <C>
Equity compensation                   3,554,105                    $2.66                      2,578,463
  plans approved by
  security holders.....
Equity compensation
  plans not approved
  by security
  holders(1)(2)........               2,726,506                    $2.16                      2,070,460

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

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

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

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

VOTING AND REGISTRATION RIGHTS AGREEMENTS

         Pursuant to a securities  purchase  agreement  dated  December 28, 1999
between a group of  purchasers,  including Mr.  Gross,  and us, Mr. Gross agreed
that for a period of five years,  neither he nor his  "affiliates" (as such term
is defined in the Securities Act) directly or indirectly or in conjunction  with
or  through  any  "associate"  (as such  term is  defined  in Rule  12b-2 of the
Exchange  Act),  will (i) solicit  proxies with respect to any capital  stock or
other  voting  securities  of  ours  under  any   circumstances,   or  become  a
"participant"  in  any  "election  contest"  relating  to  the  election  of our


                                       66
<PAGE>

directors  (as such  terms  are used in Rule  14a-11  of  Regulation  14A of the
Exchange Act);  (ii) make an offer for the acquisition of  substantially  all of
our assets or capital stock or induce or assist any other person to make such an
offer; or (iii) form or join any "group" within the meaning of Section  13(d)(3)
of the  Exchange  Act with  respect to any of our capital  stock or other voting
securities for the purpose of  accomplishing  the actions referred to in clauses
(i) and (ii) above, other than pursuant to the voting rights agreement described
below.

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

         Pursuant to a voting rights  agreement  dated September 30, 1996 and as
amended  December 10, 1997 and December 28, 1999,  between Mr. Gross,  Robert S.
Ehrlich,  Yehuda Harats and us,  Lawrence M. Miller,  Mr.  Gross's  advisor,  is
entitled  to be  nominated  to serve on our  board of  directors  so long as Mr.
Gross, his heirs or assigns retain at least 1,375,000 shares of common stock. In
addition,  under the voting rights agreement,  Mr. Gross and Messrs. Ehrlich and
Harats  agreed to vote and take all  necessary  action so that Messrs.  Ehrlich,
Harats and Miller  shall  serve as members of the board of  directors  until the
earlier of December 28, 2004 or our fifth annual meeting of  stockholders  after
December  28,  1999.  Mr.  Harats  resigned as a director in 2002;  however,  we
believe  that  Mr.  Harats  must  continue  to  comply  with  the  terms of this
agreement.  As of March 31,  2002,  5,291,036  shares of our  common  stock were
subject to this Voting Rights Agreement (including 601,835 shares held of record
by or on behalf of Yehuda Harats as of March 31, 2003).

OFFICER LOANS

         On December 3, 1999, Messrs.  Ehrlich and Harats each purchased 125,000
shares of our  common  stock out of our  treasury  at the  closing  price of the
common stock on December 2, 1999.  Payment was  rendered by Messrs.  Ehrlich and
Harats in the form of non-recourse promissory notes due in 2009 in the amount of
$167,975 each,  secured by the shares of common stock purchased and other shares
of common stock  previously held by them. As of December 31, 2002, the aggregate
amount  outstanding  pursuant  to these  promissory  notes  for each of  Messrs.
Ehrlich and Harats was $201,570 and $201,570, respectively.

         On February 9, 2000, Messrs.  Ehrlich and Harats each exercised 131,665
stock options.  Messrs.  Ehrlich and Harats paid the exercise price of the stock
options and certain taxes that we paid on their behalf by giving us non-recourse
promissory  notes due in 2025 in the  amount of  $789,991  each,  secured by the
shares of our common stock acquired  through the exercise of the options and, in
the case of Mr. Ehrlich, certain compensation due to him upon termination. As of
December 31, 2002, the aggregate amount outstanding pursuant to these promissory
notes  for each of  Messrs.  Ehrlich  and  Harats  was  $623,579  and  $875,170,
respectively.



                                       67
<PAGE>

TERMINATION COMPENSATION OF AND SETTLEMENT WITH YEHUDA HARATS

         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 us and
our subsidiaries in order to pursue other  interests.  In December 2002, we came
to an agreement  with Mr. Harats  whereby we agreed to pay him $551,499  through
the end of 2005 in  satisfaction  of all our contractual and legal severance and
other  obligations  to him.  See "Item 13.  Certain  Relationships  and  Related
Transactions - Termination  Compensation  of and Settlement with Yehuda Harats,"
below.

         Prior to Mr. Harats's  resignation,  we had accrued a sum of $1,212,939
in  respect  of  these  obligations  on our  books,  consisting  of  contractual
severance,  statutory  severance,  contractually  guaranteed  bonus, and various
benefits,  including unused vacation,  unused sick days, and continuing benefits
over the three years after  termination.  Since we settled with Mr. Harats for a
sum of  $551,499  rather than the  $1,212,939  that we had accrued on our books,
this settlement  effectively  resulted in a gain for us in the fourth quarter of
2002 of $661,440, which is the difference between the amount that we had accrued
on our books in respect of these  obligations  and the amount that we ultimately
agreed to pay.

         We continue to carry on our books a total of  $1,076,740  in loans from
us to Mr. Harats on which he remains liable (described  above);  however,  we do
not carry these loans at full value because  recourse under the loans is only to
certain shares that we hold, the fair market value of which is now less than the
principal amount of the loans.




                                       68
<PAGE>




                                     PART IV

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

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

      (1)   Financial Statements - See Index to Financial Statements on page 56
            above.
      (2)   Financial Statements Schedules - All schedules are omitted because
            of the absence of conditions under which they are required or
            because the required information is presented in the financial
            statements or related notes thereto.
      (3)   Exhibits - The following Exhibits are either filed herewith or have
            previously been filed with the Securities and Exchange Commission
            and are referred to and incorporated herein by reference to such
            filings:

      Exhibit No.                              Description
      -----------                              -----------
   (8)3.1.........Amended and Restated Certificate of Incorporation

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

   (2)3.2.........Amended and Restated By-Laws

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

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

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

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

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

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

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

 + (1)10.7.1......Form of Management Employment Agreements

+ *(1)10.7.2......General Employee Agreements

 * (1)10.8........Office of Chief Scientist documents

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

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

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

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

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

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

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



                                       69
<PAGE>
      Exhibit No.                              Description
      -----------                              -----------
   (4)10.15.......Registration  Rights  Agreement  between  us and  Gross  dated
                  September 30, 1996

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

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

   (5)10.18.......Cooperation  Agreement between The Israel Electric Corporation
                  and EFL dated as of October 31, 1996 +  (5)10.19.......Amended
                  and Restated Employment  Agreement dated as of October 1, 1996
                  between us, EFL and Yehuda Harats

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

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

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

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

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

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

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

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

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

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

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

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

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

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

   (9)10.29.......Amendment to our Restated Certificate of Incorporation

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

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

                                       70
<PAGE>
      Exhibit No.                              Description
      -----------                              -----------
  (10)10.32.......Amendment No. 1 to Voting Rights  Agreement dated December 28,
                  1999,  by and between us,  Leon S. Gross,  Robert S.  Ehrlich,
                  Yehuda  Harats and the  Purchasers  listed on Exhibit A to the
                  Securities Purchase Agreement dated December 28, 1999

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

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

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

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

  (12)10.35.2.....Amendment  dated  April 1,  1998,  to  Promissory  Note  dated
                  January 3, 1993 between Robert S. Ehrlich and us

  (12)10.36.......Promissory  Note dated December 3, 1999, from Yehuda Harats to
                  us

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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



                                       71
<PAGE>

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

 +(24)10.68.......Settlement  Agreement and Release between us and Yehuda Harats
                  dated December 31, 2002

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

  (24)10.69.2.....Amendment  to  Commercial  lease  agreement  between  Commerce
                  Square  Associates  L.L.C. and I.E.S.  Electronics  Industries
                  U.S.A., Inc. dated as of May 1, 2000

  (24)10.70.......Agreement of Lease dated December 6, 2000 between Janet Nissim
                  et al. and M.D.T.  Protection  (2000) Ltd. [English summary of
                  Hebrew original]

  (24)10.71.......Agreement  of  Lease  dated  August  22,  2001  between  Aviod
                  Building  and  Earthworks  Company  Ltd.  et  al.  and  M.D.T.
                  Protective   Industries  Ltd.   [English   summary  of  Hebrew
                  original]

  (24)21..........List of Subsidiaries of the Registrant

    **23..........Consent of Kost Forer & Gabbay

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



                                       72
<PAGE>

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

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

  *English translation or summary from original Hebrew
 **Filed herewith
 +Includes management contracts and compensation plans and arrangements

(1)Incorporated  by  reference  to  our  Registration   Statement  on  Form  S-1
   (Registration  No.  33-73256),  which became  effective on February 23, 1994

(2)Incorporated  by  reference  to  our  Registration   Statement  on  Form  S-1
   (Registration No. 33-97944), which became effective on February 5, 1996

(3)Incorporated  by  reference  to our  Annual  Report on Form 10-K for the year
   ended December 31, 1995

(4)Incorporated by reference to our Current  Report on Form 8-K dated October 4,
   1996

(5)Incorporated  by  reference  to our  Annual  Report on Form 10-K for the year
   ended December 31, 1996, as amended

(6)Incorporated  by  reference  to our  Annual  Report on Form 10-K for the year
   ended December 31, 1997, as amended

(7)Incorporated  by  reference  to  our  Registration   Statement  on  Form  S-8
   (Registration No. 333- 74197), which became effective on March 10, 1998

(8)Incorporated  by  reference  to our  Annual  Report on Form 10-K for the year
   ended December 31, 1998

(9)Incorporated  by  reference  to  our  Registration   Statement  on  Form  S-3
   (Registration  No.  333-95361),  which became effective on February 10,
   1999

(10)Incorporated by reference to our Current Report on Form 8-K filed January 7,
    2000

(11)Incorporated by  reference to our Current  Report on Form 8-K filed  January
    24, 2000

(12)Incorporated by  reference  to our  Annual  Report on Form 10-K for the year
    ended December 31, 1999

(13)Incorporated by  reference  to our Current  Report on Form 8-K filed May 23,
    2000

(14)Incorporated by reference to our Current  Report on Form 8-K filed  November
    17, 2000

(15)Incorporated by  reference  to our  Annual  Report on Form 10-K for the year
    ended December 31, 2000

(16)Incorporated by  reference  to our  Current  Report on Form 8-K filed May 7,
    2001 (EDGAR Film No. 1623996)

(17)Incorporated by  reference  to our  Current  Report on Form 8-K filed May 7,
    2001 (EDGAR Film No. 1623989)

(18)Incorporated by reference to our Current  Report on Form 8-K filed  November
    21, 2001

(19)Incorporated by reference to our Current  Report on Form 8-K filed  December
    4, 2001

(20)Incorporated by  reference to our Current  Report on Form 8-K filed  January
    15, 2002

(21)Incorporated by  reference to our Current  Report on Form 8-K filed  January
    23, 2002

(22)Incorporated by reference to our Current Report on Form 8-K filed August 12,
    2002

(23)Incorporated by reference to our Current Report on Form 8-K filed January 6,
    2003

(24)Incorporated by  reference  to our  Annual  Report on Form 10-K for the year
    ended December 31, 2002

(b) Reports on Form 8-K.

      (1)   We filed an amendment to a Current Report on Form 8-K on October 11,
            2002, reporting "Item 7. Financial Statements, Pro Forma Financial
            Information and Exhibits," in connection with our acquisition of the
            assets of I.E.S. Electronics Industries U.S.A., Inc.

      (2)   We filed a Current Report on Form 8-K on October 22, 2002, reporting
            "Item 5. Other Events and Regulation FD Disclosure," in connection
            with our decision to discontinue retail sales of our consumer
            battery products and the resignation of Yehuda Harats as our
            President and Chief Executive Officer.

     (3)    We filed a Current Report on Form 8-K on January 6, 2003, reporting
            "Item 5. Other Events and Regulation FD Disclosure," in connection
            with our sale of $3,500,000 principal amount 9% Secured Convertible
            Debentures due June 30, 2005 and certain other related transactions,
            and in connection with our reaching a settlement with our former
            CEO.




                                       73
<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>
<S>             <C>                                             <C>                                    <C>
               SIGNATURE                                       TITLE                                   DATE
                                         Chairman, President, Chief Executive Officer and
      /S/ ROBERT S. EHRLICH                                   Director
 --------------------------------------
          Robert S. Ehrlich                         (Principal Executive Officer)                 May   8  , 2003
                                                                                                      -----

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

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

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

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

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

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

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

</TABLE>


                                       74


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





<PAGE>


                 ELECTRIC FUEL CORPORATION AND ITS SUBSIDIARIES





                 ELECTRIC FUEL CORPORATION AND ITS SUBSIDIARIES


                        CONSOLIDATED FINANCIAL STATEMENTS


                             AS OF DECEMBER 31, 2002


                                 IN U.S. DOLLARS




                                      INDEX




                                                                      PAGE
                                                                     -------

Report of Independent Auditors                                             2
Consolidated Balance Sheets                                            3 - 4
Consolidated Statements of Operations                                      5
Statements of Changes in Shareholders' Equity                          6 - 8
Consolidated Statements of Cash Flows                                 9 - 11
Notes to Consolidated Financial Statements                           12 - 46



<PAGE>

ERNST & YOUNG LOGO

                         REPORT OF INDEPENDENT AUDITORS

                             TO THE SHAREHOLDERS OF

                            ELECTRIC FUEL CORPORATION




     We have audited the  accompanying  consolidated  balance sheets of Electric
Fuel Corporation (doing business as Arotech Corporation) (the "Company") and its
subsidiaries  as of  December  31, 2002 and 2001,  and the related  consolidated
statements of  operations,  changes in  shareholders'  equity and cash flows for
each of the three years in the period ended December 31, 2002.  These  financial
statements   are  the   responsibility   of  the   Company's   management.   Our
responsibility  is to express an opinion on these financial  statements based on
our audits.


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


     In our  opinion the  consolidated  financial  statements  referred to above
present fairly, in all material respects, the consolidated financial position of
the  Company and its  subsidiaries  as of  December  31, 2002 and 2001,  and the
consolidated  results of their  operations  and cash flows for each of the three
years in the period ended  December  31, 2002,  in  conformity  with  accounting
principles generally accepted in the United States.




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


                                      F-2
<PAGE>


ELECTRIC FUEL CORPORATION AND ITS SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
-------------------------------------------------------------------------------
IN U.S. DOLLARS

<TABLE>
<CAPTION>

                                                                                              DECEMBER 31,
                                                                                -----------------------------------------
                                                                                      2002                   2001
                                                                                ------------------     ------------------
<S>                                                                              <C>                    <C>
         ASSETS

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

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

LOANS TO SHAREHOLDERS                                                                         -                501,288

SEVERANCE PAY FUND                                                                    1,025,071                854,891

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

GOODWILL                                                                              4,954,981                      -

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

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


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

                                       F-3

<PAGE>

ELECTRIC FUEL CORPORATION AND ITS SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
-------------------------------------------------------------------------------
IN U.S. DOLLARS


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

         LIABILITIES AND SHAREHOLDERS' EQUITY

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

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

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

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

COMMITMENTS AND CONTINGENT LIABILITIES

MINORITY INTEREST                                                                       243,172                       -

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

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

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


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

                                       F-4

<PAGE>

ELECTRIC FUEL CORPORATION AND ITS SUBSIDIARIES


CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------------------------------------------------
IN U.S. DOLLARS
<TABLE>
<CAPTION>

                                                                            YEAR ENDED DECEMBER 31,
                                                         ---------------------------------------------------------------
                                                                2002                  2001                  2000
                                                         -------------------   -------------------   -------------------

<S>                                                          <C>                   <C>                   <C>
Revenues:
   Products                                                  $   5,944,370         $   1,670,634         $   1,179,500
   Services                                                        462,369               422,998               310,442
                                                         -------------------   -------------------   -------------------

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

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

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

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

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

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

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

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

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

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

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

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

</TABLE>

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

                                       F-5

<PAGE>


ELECTRIC FUEL CORPORATION AND ITS SUBSIDIARIES

STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
IN U.S. DOLLARS
<TABLE>
<CAPTION>
                                                                                                       ACCUMULATED
                                                          ADDITIONAL                      DEFERRED         OTHER
                                      COMMON STOCK          PAID-IN       ACCUMULATED      STOCK       COMPREHENSIVE     TREASURY
                                   SHARES      AMOUNT       CAPITAL        DEFICIT      COMPENSATION   INCOME (LOSS)       STOCK
                                 --------------------------------------------------------------------------------------------------


<S>                     <C>      <C>           <C>         <C>          <C>                                             <C>
  Balance as of January 1, 2000  15,728,387    $ 157,284   $60,110,815  $(52,901,515)               -                -  $  (37,731)
  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)        $      -  $  (37,731)
                                 =========== ============ ============= ==============  ==============  =============== ===========

</TABLE>


<TABLE>
<CAPTION>

                                                      NOTES
                                       TOTAL        RECEIVABLE         TOTAL
                                   COMPREHENSIVE       FROM        SHAREHOLDERS'
                                       LOSS        SHAREHOLDERS       EQUITY
                                  ---------------------------------------------
<S>                     <C>                       <C>              <C>
  Balance as of January 1, 2000                   $ (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                                           $(4,290,204)   $20,078,369
                                                 ============== ==============

</TABLE>
The  accompanying  notes  are an  integral  part of the  consolidated  financial
statements.

                                       F-6


<PAGE>

ELECTRIC FUEL CORPORATION AND ITS SUBSIDIARIES
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
IN U.S. DOLLARS
<TABLE>
<CAPTION>

                                       COMMON STOCK         ADDITIONAL                     DEFERRED
                                  ------------------------    PAID-IN      ACCUMULATED      STOCK          TREASURY
                                    SHARES      AMOUNT        CAPITAL       DEFICIT      COMPENSATION        STOCK
                                  --------------------------------------------------------------------------------------


<S>                   <C>         <C>           <C>         <C>          <C>               <C>             <C>
Balance as of January 1, 2001     21,422,691    $ 214,227   $89,091,790  $ 64,882,473)     $  (17,240)     $  (37,731)

Repurchase of common shares
  from shareholders and
  repayment of the related
  interest and principal of
  notes from shareholders                  -            -       228,674              -               -     (3,499,375)
Issuance of shares to investors,
  net                              6,740,359       67,405    14,325,941              -               -               -
Retirement of shares                 (3,000)         (30)      (17,970)              -               -               -
Issuance of shares to service
  providers                          346,121        3,461       536,916              -               -               -
Exercise of options                  219,965        2,200       512,089              -               -               -
Exercise of warrants                 333,333        3,333       836,667              -               -               -
Deferred stock compensation                -            -        18,000              -        (18,000)               -
Amortization of deferred stock
  compensation                             -            -       (6,193)              -          17,240               -
Stock compensation related to
  options issued to
  consultants                              -            -       139,291              -               -               -
Stock compensation related to
  options to consultants
  repriced                                 -            -        21,704              -               -               -
Comprehensive loss:
Net loss                                   -            -             -   (17,286,788)               -               -
                                  ----------- ------------  ------------ --------------  --------------  --------------

Total comprehensive loss

Balance as of December 31, 2001    29,059,469    $ 290,596   $105,686,909 $(82,169,261)     $  (18,000)   $ (3,537,106)
                                  =========== ============  ============ ==============  ==============  ==============

</TABLE>


<TABLE>
<CAPTION>

                                      TOTAL      NOTES RECEIVABLE        TOTAL
                                  COMPREHENSIVE        FROM          SHAREHOLDERS'
                                      LOSS         SHAREHOLDERS          EQUITY
                                 ----------------------------------------------------


<S>                   <C>                           <C>                <C>
Balance as of January 1, 2001                       $  (4,290,204)     $  20,078,369

Repurchase of common shares
  from shareholders and
  repayment of the related
  interest and principal of
  notes from shareholders                                3,470,431           199,730
Issuance of shares to investors,
  net                                                            -        14,393,346
Retirement of shares                                        18,000                 -
Issuance of shares to service
  providers                                                      -           540,377
Exercise of options                                       (43,308)           470,981
Exercise of warrants                         -                   -           840,000
Deferred stock compensation                                      -                 -
Amortization of deferred stock
  compensation                                                   -            11,047
Stock compensation related to
  options issued to
  consultants                                                    -           139,291
Stock compensation related to
  options to consultants
  repriced                                                       -            21,704
Comprehensive loss:
Net loss                          (17,286,788)                   -      (17,286,788)
                                 --------------  ------------------ -----------------

Total comprehensive loss         $(17,286,788)
                                 ==============
Balance as of December 31, 2001                      $   (845,081)     $  19,408,057
                                                 ================== =================

</TABLE>

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

                                       F-7


<PAGE>


ELECTRIC FUEL CORPORATION AND ITS SUBSIDIARIES
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
IN U.S. DOLLARS

<TABLE>
<CAPTION>

                                       COMMON STOCK           ADDITIONAL                    DEFERRED
                                  ------------------------      PAID-IN     ACCUMULATED       STOCK          TREASURY
                                    SHARES      AMOUNT          CAPITAL       DEFICIT      COMPENSATION        STOCK
                                  --------------------------------------------------------------------------------------


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


  Balance as of December 31, 2002   35,701,594     $ 357,017   $114,082,584  $(100,673,619)   $  (12,000)  $(3,537,106)
                                  ============= =============  ============= ============== ============== =============
</TABLE>
<TABLE>
<CAPTION>
                                                                    ACCUMULATED
                                      TOTAL      NOTES RECEIVABLE   OTHER COM-       TOTAL
                                  COMPREHENSIVE        FROM         PREHENSIVE   SHAREHOLDERS'
                                      LOSS         SHAREHOLDERS      LOSS           EQUITY
                                 -------------------------------------------------------------

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

  Balance as of December 31, 2002                  $(1,177,589)     $  (1,786)    $ 9,037,501
                                                   ============= ============== ==============

</TABLE>

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

                                       F-8

<PAGE>

ELECTRIC FUEL CORPORATION AND ITS SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------------------------------------------------
IN U.S. DOLLARS
<TABLE>
<CAPTION>

                                                                                 YEAR ENDED DECEMBER 31,
                                                                -----------------------------------------------------------
                                                                      2002                 2001                 2000
                                                                ------------------   ------------------   -----------------


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

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

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


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

                                      F-9
<PAGE>

ELECTRIC FUEL CORPORATION AND ITS SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------------------------------------------------
IN U.S. DOLLARS
<TABLE>
<CAPTION>

                                                                                 YEAR ENDED DECEMBER 31,
                                                                 ---------------------------------------------------------
                                                                       2002                2001                2000
                                                                 -----------------   -----------------   -----------------

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

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

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

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

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

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

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

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

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

</TABLE>

                                      F-10
<PAGE>

ELECTRIC FUEL CORPORATION AND ITS SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (CONT.)
-------------------------------------------------------------------------------
IN U.S. DOLLARS

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

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

                                                          8,298,976
              Issuance of shares                         (3,653,929)
              Issuance of promissory note                (1,686,964)
                                                     -------------------

                                                       $  2,958,083
                                                     ===================


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

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

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

                                       F-11

<PAGE>


ELECTRIC FUEL CORPORATION AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------------------------------------------
IN U.S. DOLLARS
NOTE 1:-          GENERAL

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

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

b. Acquisition of IES:

In August 2, 2002, the Company  entered into an asset purchase  agreement  among
I.E.S.  Electronics  Industries U.S.A., Inc. ("IES"),  its direct and certain of
its  indirect  shareholders,  and  its  wholly-owned  Israeli  subsidiary,  EFL,
pursuant to the terms of which it acquired substantially all the assets, subject
to  substantially  all the  liabilities,  of IES, a developer,  manufacturer and
marketer of advanced hi-tech  multimedia and interactive  digital  solutions for
training of military, law enforcement and security personnel.

Beginning  in 2002 and even  before,  management  began to weigh  seriously  the
considerable  costs of competing in the retail  consumer  products market and of
continuing  as a company  whose sole  products  consisted  of  various  forms of
batteries,  and began to look to acquire profitable companies with positive cash
flow and strong,  in-place management that would expand in the non-battery field
on the Company's  Zinc-Air  batteries for the defense industry,  which were then
just beginning to become an important part of the Company's business. Management
concentrated  its search almost  exclusively on companies with a strong presence
in the defense and security  products and  services  industry,  in an attempt to
emphasize the Company's growing defense and security battery  business,  and out
of a desire to  re-position  the  Company  away from its  historical  roots as a
battery  company.  In  keeping  with this  decision,  management  found  IES,  a
profitable  company that had substantial  positive cash flow, strong management,
and  accordingly,  management  believed,  a potential for  significant  earnings
growth  in  the  near  term  while  offering  the  Company  the  opportunity  to
re-position  itself away from the consumer  products market and into the defense
and  security  market.  The nature of this  acquisition  necessarily  involved a
company whose  primary  assets were its  trademarks  and name  recognition,  its
intellectual  property,  such  as  technology,  and  its  broad  customer  base,
resulting  in a  significant  allocation  of the  purchase  price to  intangible
assets. The acquisition resulted in a significant  allocation to goodwill due to
the potential for  significant  growth in the earnings of IES resulting from the
potential for a significant increase in IES's international sales.

The Company  intends to continue to use the assets  purchased  in the conduct of
the business  formerly  conducted by IES (the  "Business").  The acquisition has
been accounted under the purchase method of accounting.  Accordingly, all assets
and  liabilities  were  acquired  at the  values on such date,  and the  Company
consolidated IES's results with its own commencing at such date.


                                      F-12
<PAGE>

ELECTRIC FUEL CORPORATION AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------------------------------------------
IN U.S. DOLLARS

NOTE 1:-          GENERAL (CONT.)


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

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


    Cash                                              $       50,988
    Trade receivables                                      2,023,299
    Inventory                                                284,341
    Property and equipment                                   396,776
    Other receivables                                        101,547
     Technology (four year useful life)                    1,515,000
     Existing contracts (one year useful life)                46,000
     Covenants not to compete (five year useful
        life)                                                 99,000
     In process research and development                      26,000
     Customer list (seven year useful life)                  527,000
     Trademarks (indefinite useful life)                     439,000
     Goodwill                                              4,068,726
                                                    ----------------------
Total assets acquired                                      9,577,677
    Accounts payable and accrued expenses                 (1,010,649)
    Lease obligations                                        (15,526)
    Deferred warranty revenues                              (160,609)
                                                    ----------------------
Total liabilities assumed                                 (1,186,784)
Net assets acquired                                     $  8,390,893
                                                    ======================

Intangible  assets in the amount of $2,187,000  have a  weighted-average  useful
life of  approximately  4 years.  The $4,068,726 of goodwill was assigned to the
Defense and Security segment.

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

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


                                      F-13
<PAGE>

ELECTRIC FUEL CORPORATION AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------------------------------------------
IN U.S. DOLLARS

NOTE 1:-          GENERAL (CONT.)


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

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

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

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

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

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


                                      F-14
<PAGE>
ELECTRIC FUEL CORPORATION AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------------------------------------------
IN U.S. DOLLARS

NOTE 1:-          GENERAL (CONT.)


7.       The excess of the cost of IES over the net of the  amounts  assigned to
         assets  acquired and  liabilities  assumed is recognized as goodwill in
         the  amount of  $4,068,726.  An  acquired  workforce  in the  amount of
         $333,000 that does not meet the separability criteria has been included
         in the amount recognized as goodwill.


c.       Acquisition of MDT:

On July 1, 2002, the Company entered into a stock purchase agreement with all of
the shareholders of M.D.T.  Protective Industries Ltd. ("MDT"),  pursuant to the
terms of which the Company purchased 51% of the issued and outstanding shares of
MDT, a privately-held  Israeli company that  specializes in using  sophisticated
lightweight materials and advanced engineering processes to armor vehicles.  The
Company also entered into certain other  ancillary  agreements  with MDT and its
shareholders and other affiliated companies.

Beginning  in 2002 and even  before,  management  began to weigh  seriously  the
considerable  costs of competing in the retail  consumer  products market and of
continuing  as a company  whose sole  products  consisted  of  various  forms of
batteries,  and began to look to acquire profitable companies with positive cash
flow and strong,  in-place management that would expand in the non-battery field
on the Company's  Zinc-Air  batteries for the defense industry,  which were then
just beginning to become an important part of the Company's business. Management
concentrated  its search almost  exclusively on companies with a strong presence
in the defense and security  products and  services  industry,  in an attempt to
emphasize the Company's growing defense and security battery  business,  and out
of a desire to  re-position  the  Company  away from its  historical  roots as a
battery  company.  In  keeping  with this  decision,  management  found  MDT,  a
profitable  company that had substantial  positive cash flow, strong management,
and,  management  believed,  a potential for significant  earnings growth in the
near term while offering the Company the opportunity to re-position  itself away
from the consumer products market and into the defense and security market.  The
nature of this acquisition  necessarily  involved a company whose primary assets
were its intellectual property, such as technology, and its broad customer base,
resulting  in a  significant  allocation  of the  purchase  price to  intangible
assets. The acquisition  resulted in the significant  allocation to the goodwill
due to the following components: the potential for accelerating MDT's efforts to
offer its products internationally,  shortening the time to market for MDT's new
products;  future  versions,  which are expected to be  developed  over the next
years, based upon original MDT concepts and technology.

The  Acquisition  was accounted for under the purchase  method of accounting and
results of MDT's  operations  have been included in the  consolidated  financial
statements since that date. The total consideration of $1,767,877 for the shares
purchased consisted of (i) cash in the aggregate amount of 5,814,000 New Israeli
Shekels  ($1,231,780),  and (ii) the issuance,  with registration  rights, of an
aggregate  of  390,638  shares of our common  stock,  $0.01 par value per share,
having a value of approximately $439,077. The value of 390,638 shares issued was
determined  based on the average  market  price of EFC's  Common  stock over the
period  including  two days before and after the terms of the  acquisition  were
agreed  to and  announced.  The total  consideration  of  $1,767,877  (including
$97,020  of   transaction   costs)  was  determined   based  upon   arm's-length
negotiations between the Company and MDT and MDT's shareholders.


                                      F-15
<PAGE>
ELECTRIC FUEL CORPORATION AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------------------------------------------
IN U.S. DOLLARS

NOTE 1:-          GENERAL (CONT.)

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

<TABLE>
<CAPTION>
<S>                                                                <C>
            Cash and cash equivalents                              $     25,019
            Short-term bank deposits                                    153,427
            Trade receivables                                           808,729
            Inventory                                                   196,411
            Property and equipment                                       71,207
            Other accounts receivable                                    82,254
         Intangible assets
            Technology (five year useful life)                          280,000
            Customer base (five year useful life)                       285,000
            Goodwill                                                    886,255
                                                               ----------------
         Total assets acquired                                        2,788,303
         Liabilities assumed
            Accounts payable and other accrued expenses                (907,011)
            Other current liabilities                                  (113,415)
                                                               ----------------
         Total liabilities assumed                                   (1,020,426)
         Net assets acquired                                       $  1,767,877
                                                               ================
</TABLE>

Intangible assets in the amount of $565,000 have a weighted-average  useful life
of  approximately 5 years.  The $886,255 of goodwill was assigned to the Defense
and Security segment.

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

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

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

2.       The amount of the excess cost  attributable  to  technology  of optimal
         bulletproofing  material and power mechanism for bulletproofed  windows
         is $280,000 and was determined  using the Income  Approach on the basis
         of present value of cash flows  attributable to the current  technology
         over expected future life.

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


                                      F-16
<PAGE>

ELECTRIC FUEL CORPORATION AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------------------------------------------
IN U.S. DOLLARS

NOTE 1:-          GENERAL (CONT.)


4.       The excess of the cost of MDT over the net of the  amounts  assigned to
         assets  acquired and  liabilities  assumed is recognized as goodwill in
         the amount of $886,255. An acquired workforce it the amount of $492,000
         that does not meet the separablility  criteria has been included in the
         amount recognized as goodwill.

d.       Pro forma results:

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

<TABLE>
<CAPTION>
                                                                       YEAR ENDED DECEMBER 31,
                                                                 -----------------------------------
                                                                      2002                2001
                                                                 ---------------    ----------------

<S>                                                                 <C>                <C>
 Revenues                                                           $12,997,289        $12,369,749
                                                                 ===============    ================

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

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

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

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

e. Discontinued operations:

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


                                      F-17
<PAGE>

ELECTRIC FUEL CORPORATION AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------------------------------------------
IN U.S. DOLLARS


NOTE 1:-          GENERAL (CONT.)

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

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

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

As a result of the  discontinuance  of  consumer  battery  segment,  the Company
ceased to use property and equipment related to this segment. In accordance with
Statement  of  Financial   Accounting  Standard  No.  144  "Accounting  for  the
Impairment or Disposal of Long- Lived Assets"  ("SFAS No. 144") such assets were
considered to be impaired.  Since the  long-lived  assets ceased to be used, the
carrying amount of the assets was reduced to its salvage value, which is zero.

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

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

                                                       YEAR ENDED DECEMBER 31,
                                      -------------------------------------------------------------
                                            2002                  2001                  2000
                                      -----------------     -----------------     -----------------

<S>                                    <C>                   <C>                   <C>
Revenues                               $   1,100,442         $   1,939,256         $   2,563,620
Cost of sales (1)                         (5,293,120)           (5,060,966)           (3,073,142)
                                      -----------------     -----------------     -----------------

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

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

                                      F-18

<PAGE>

ELECTRIC FUEL CORPORATION AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------------------------------------------
IN U.S. DOLLARS


NOTE 2:-          SIGNIFICANT ACCOUNTING POLICIES

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

a. Use of estimates:

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

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

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

c. Principles of consolidation:

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

d. Cash equivalents:

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

e. Inventories:

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


                                      F-19
<PAGE>

ELECTRIC FUEL CORPORATION AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------------------------------------------
IN U.S. DOLLARS


NOTE 2:-          SIGNIFICANT ACCOUNTING POLICIES

Cost is determined as follows:
Raw and packaging materials - by the average cost method.

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

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

f. Property and equipment:

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

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

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

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

The Company and its  subsidiaries'  long-lived  assets and certain  identifiable
intangibles  are  reviewed  for  impairment  in  accordance  with  Statement  of
Financial Accounting Standard No. 144 "Accounting for the Impairment or Disposal
of  Long-Lived   Assets"  ("SFAS  No.  144")  whenever   events  or  changes  in
circumstances  indicate  that  the  carrying  amount  of an  asset  may  not  be
recoverable. Recoverability of the carrying amount of assets to be held and used
is measured by a  comparison  of the  carrying  amount of an asset to the future
undiscounted  cash flows expected to be generated by the assets.  If such assets
are  considered to be impaired,  the  impairment to be recognized is measured by
the amount by which the carrying  amount of the assets exceeds the fair value of
the assets.  Assets to be  disposed of by sale are  reported at the lower of the
carrying  amount or fair value less  selling  costs.  As of December 31, 2002 no
impairment losses have been identified.

g. Goodwill:

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


                                      F-20
<PAGE>

ELECTRIC FUEL CORPORATION AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------------------------------------------
IN U.S. DOLLARS

NOTE 2:-          SIGNIFICANT ACCOUNTING POLICIES


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

h. Other intangible assets:

Intangible  assets  acquired  in a  business  combination  that are  subject  to
amortization  should be  amortized  over  their  useful  life  using a method of
amortization  that  reflects the pattern in which the  economic  benefits of the
intangible assets are consumed or otherwise used up, in accordance with SFAS No.
142.  Intangible  assets are amortized  over their useful life (See Note 1b. and
c). The Company  evaluates the remaining useful life of an intangible asset that
is being  amortized  each  reporting  period to  determine  whether  events  and
circumstances warrant a revision to the remaining period of amortization. If the
estimate  of an  intangible  asset's  remaining  useful  life  is  changed,  the
remaining   carrying   amount  of  the   intangible   asset  will  be  amortized
prospectively over that revised remaining useful life.

i. Impairment of indefinite lived intangible asset

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

j. Revenue recognition:

The  Company  generates   revenues   primarily  from  sales  of  multimedia  and
interactive  digital training systems and use-of-force  simulators  specifically
targeted for law  enforcement and firearms  training and from service  contracts
related  to such  sales  (through  IES),  from  providing  lightweight  armoring
services of  vehicles  (through  MDT),  and,  to a lesser  extent,  from sale of
zinc-air battery products for defense applications. To a lesser extent, revenues
are generated from development services and long-term arrangements subcontracted
by the U.S Government.
Revenues  from  products,  training and  simulation  systems are  recognized  in
accordance  with Staff  Accounting  Bulletin No. 101,  "Revenue  Recognition  in
Financial  Statements  ("SAB No.  101")  when the  following  criteria  are met:
persuasive  evidence  of an  arrangement  exists,  delivery  has  occurred,  the
seller's  price to the buyer is fixed or  determinable,  no  further  obligation
remains and collectibility is reasonably assured.
The Company does not grant a right of return to its customers.

                                      F-21
<PAGE>

ELECTRIC FUEL CORPORATION AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------------------------------------------
IN U.S. DOLLARS

NOTE 2:-          SIGNIFICANT ACCOUNTING POLICIES


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

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

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


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

k. Research and development cost:

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

l. Royalty-bearing grants:

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

m. Income taxes:

The Company and its  subsidiaries  account for income taxes in  accordance  with
Statement of Financial  Accounting  Standards  No. 109,  "Accounting  for Income
Taxes"  ("SFAS No. 109").  This  Statement  prescribes  the use of the liability
method,   whereby  deferred  tax  assets  and  liability  account  balances  are
determined  based on differences  between  financial  reporting and tax bases of
assets and  liabilities  and are  measured  using the enacted tax rates and laws
that will be in effect when the differences are expected to reverse. The Company
and its  subsidiaries  provide a valuation  allowance,  if necessary,  to reduce
deferred tax assets to their estimated realizable value.


                                      F-22
<PAGE>

ELECTRIC FUEL CORPORATION AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------------------------------------------
IN U.S. DOLLARS


NOTE 2:-             SIGNIFICANT ACCOUNTING POLICIES

n. Concentrations of credit risk:

Financial  instruments that potentially subject the Company and its subsidiaries
to  concentrations  of  credit  risk  consist   principally  of  cash  and  cash
equivalents,  restricted  collateral  deposit and other  restricted  cash, trade
receivables and long-term loans to  shareholders.  Cash and cash equivalents are
invested in U.S. dollar deposits with major Israeli,  U.S. and U.K. banks.  Such
deposits in the U.S.  may be in excess of insured  limits and are not insured in
other  jurisdictions.  Management believes that the financial  institutions that
hold the Company's investments are financially sound and,  accordingly,  minimal
credit risk exists with respect to these investments.
The trade  receivables  of the Company and its  subsidiaries  are mainly derived
from sales to  customers  located  primarily  in the United  States,  Europe and
Israel.  Management believes that credit risks are moderated by the diversity of
its end customers  and  geographic  sales areas.  The Company  performs  ongoing
credit  evaluations  of its  customers'  financial  condition.  An allowance for
doubtful  accounts is determined with respect to those accounts that the Company
has determined to be doubtful of collection.

The Company has  provided  long-term  loans to its  shareholders,  amounting  to
$733,059  as of  December  31,  2002.  The  long-term  loans are  secured by the
Company's shares and since the value of the Company's shares has decreased,  the
Company incurred a material loss during the years 2002 and 2001.

The Company  and its  subsidiaries  had no  off-balance-sheet  concentration  of
credit  risk such as  foreign  exchange  contracts,  option  contracts  or other
foreign hedging arrangements.

o. Basic and diluted net loss per share:

Basic net loss per share is computed  based on the  weighted  average  number of
shares of common stock outstanding  during each year. Diluted net loss per share
is  computed  based on the  weighted  average  number of shares of common  stock
outstanding  during each year,  plus dilutive  potential  shares of common stock
considered  outstanding  during  the  year,  in  accordance  with  Statement  of
Financial Standards No. 128, "Earnings Per Share" ("SFAS No. 128").

All  outstanding  stock  options  and  warrants  have  been  excluded  from  the
calculation of the diluted net loss per common share because all such securities
are anti-dilutive for all periods  presented.  The total weighted average number
of shares  related to the  outstanding  options and warrants  excluded  from the
calculations  of  diluted  net loss  per  share  was  4,394,803,  3,170,334  and
2,812,725 for the years ended December 31, 2002, 2001 and 2000, respectively.

p. Accounting for stock-based compensation:

The Company has elected to follow  Accounting  Principles  Board  Opinion No. 25
"Accounting for Stock Issued to Employees" ("APB No. 25") and Interpretation No.
44 "Accounting for Certain Transactions  Involving Stock Compensation" ("FIN No.
44") in accounting for its employee  stock option plans.  Under APB No. 25, when
the exercise price of the Company's  share options is less than the market price
of  the  underlying  shares  on the  date  of  grant,  compensation  expense  is
recognized.   Under  Statement  of  Financial   Accounting   Standard  No.  123,
"Accounting  for   Stock-Based   Compensation"   ("SFAS  No.  123"),   pro-forma
information regarding net income and income per share is required,  and has been
determined as if the Company had accounted for its employee  stock options under
the fair value method of SFAS No. 123.

                                      F-23

<PAGE>
ELECTRIC FUEL CORPORATION AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------------------------------------------
IN U.S. DOLLARS



NOTE 2: -         SIGNIFICANT ACCOUNTING POLICIES (CONT.)

The  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.

         The fair value for the options to employees  was  estimated at the date
of grant,  using the  Black-Scholes  Option Valuation Model,  with the following
weighted-average  assumptions:  risk-free interest rates of 3.5%, 3.5-4.5%,  and
6.5% for 2002, 2001 and 2000, respectively; a dividend yield of 0.0% for each of
those  years;  a volatility  factor of the  expected  market price of the Common
Stock of 0.64 for 2002, 0.82 for 2001 and 0.95% for 2000; and a weighted-average
expected life of the option of 10 years for 2002, 2001 and 2000.

         The following  table  illustrates the effect on net income and earnings
per share,  assuming  that the Company  had  applied the fair value  recognition
provision of SFAS No. 123 on its stock-based employee compensation:

<TABLE>
<CAPTION>
                                                                     YEAR ENDED DECEMBER 31,
                                                      ---------------------------------------------------
                                                            2002               2001              2000
                                                      --------------- ------------------- ---------------
<S>                                                   <C>                <C>                 <C>
Net income as reported                                $(18,504,358)      $ (18,483,455)      $(11,980,958)
Add: Stock-based compensation expenses included in
   reported net loss                                              -             17,240             20,684
Deduct:  Stock-based compensation expenses
   determined under fair value method for all awards     (2,072,903)        (2,906,386)        (2,045,764)
Pro forma net loss                                    $ (20,577,261)     $ (21,372,601)      $(14,006,038)
Loss per share:
   Basic and diluted, as reported                     $      (0.57)      $       (0.76)      $      (0.62)
   Diluted, pro forma                                 $      (0.64)      $       (0.88)      $      (0.73)

</TABLE>

q. Fair value of financial instruments:

The  following  methods  and  assumptions  were  used  by the  Company  and  its
subsidiaries   in  estimating   their  fair  value   disclosures  for  financial
instruments:

The carrying amounts of cash and cash equivalents  restricted collateral deposit
and other restricted cash, trade receivables,  short-term bank credit, and trade
payables  approximate  their fair value due to the  short-term  maturity of such
instruments.

The  carrying   amount  of  the  Company's   long-term   loans  to  shareholders
approximates  their  fair  value.  The fair value was  estimated  using the fair
market value of the secured Company's shares.

Long-terms  liabilities are estimated by discounting the future cash flows using
current  interest rates for loans or similar terms and maturities.  The carrying
amount of the long-term liabilities approximates their fair value.


                                      F-24
<PAGE>

ELECTRIC FUEL CORPORATION AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------------------------------------------
IN U.S. DOLLARS


NOTE 2: -         SIGNIFICANT ACCOUNTING POLICIES (CONT.)

r. Severance pay:

The Company's  liability  for  severance  pay is calculated  pursuant to Israeli
severance pay law based on the most recent salary of the employees multiplied by
the number of years of employment  as of the balance  sheet date.  Employees are
entitled  to one  month's  salary  for each  year of  employment,  or a  portion
thereof.  The Company's  liability for all of its employees is fully provided by
monthly deposits with severance pay funds, insurance policies and by an accrual.
The value of these  policies is recorded  as an asset in the  Company's  balance
sheet.

In addition  and  according  to certain  employment  agreements,  the Company is
obligated to provide for a special  severance  pay in addition to amounts due to
certain employees  pursuant to Israeli severance pay law. The Company has made a
provision  for this  special  severance  pay in  accordance  with  Statement  of
Financial  Accounting  Standard  No.  106,   "Employer's   Accounting  for  Post
Retirement  Benefits Other than Pensions"  ("SFAS No. 106").  As of December 31,
2002  and  2001,  the  accumulated  severance  pay in that  regard  amounted  to
$1,630,366 and $1,975,535, respectively.

The deposited  funds include  profits  accumulated up to the balance sheet date.
The deposited funds may be withdrawn only upon the fulfillment of the obligation
pursuant  to Israeli  severance  pay law or labor  agreements.  The value of the
deposited  funds is based on the cash  surrendered  value of these  policies and
includes immaterial profits.

Severance  income for the year ended  December 31, 2002  amounted to $338,574 as
compared to severance  expenses for the years ended  December 31, 2001 and 2000,
which amounted to $653,885 and $430,943, respectively.

s. Advertising costs:

The  Company  and  its  subsidiaries  expense  advertising  costs  as  incurred.
Advertising  expense for the years ended  December 31,  2002,  2001 and 2000 was
approximately $294,599, $1,676,280 and $1,453,025, respectively.

t. Impact of recently issued accounting standards:

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


NOTE 3:-          RESTRICTED COLLATERAL DEPOSIT AND OTHER RESTRICTED CASH

The  restricted  collateral  deposit is  invested in a $595,341  certificate  of
deposit that is used to secure a standby letter of credit required in connection
with a sales  contract the Company  signed with the Royal Thai Army on September
28, 2002. The other restricted cash consists of security  deposits in connection
with real property lease arrangements.



                                      F-25
<PAGE>

ELECTRIC FUEL CORPORATION AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------------------------------------------
IN U.S. DOLLARS


NOTE 4:-             OTHER ACCOUNTS RECEIVABLE AND PREPAID EXPENSES


                                               DECEMBER 31,
                                    ------------------------------------
                                         2002                2001
                                    ----------------    ----------------

 Government authorities              $      348,660      $      204,435
 Employees                                   23,959               4,680
 Prepaid expenses                           591,008             198,150
 Other                                       68,684              41,386
                                    ----------------    ----------------

                                     $    1,032,311      $      448,651
                                    ================    ================


NOTE 5:-          INVENTORIES

                                              DECEMBER 31,
                                  --------------------------------------
                                        2002                 2001
                                  -----------------    -----------------

Raw and packaging materials        $      893,666       $      454,086
Work in progress                          296,692               28,995
Finished products                         521,121               40,285
                                  -----------------    -----------------

                                   $    1,711,479       $      523,366
                                  =================    =================


NOTE 6: -         LOANS TO SHAREHOLDERS


In February  and May 2000,  two  officers of the  Company  exercised  options to
purchase a total of 263,330 and 550,000,  respectively,  shares of the Company's
common stock (see Note 12.e.2).  In connection with such exercises,  the Company
granted  loans  secured by the  Company's  shares to those two officers to cover
their  related  tax  liabilities.  The  loans  were in the form of  non-recourse
promissory  notes in the total  amount of $958,156,  bearing  interest at a rate
equal to 4% over the  then-current  percentage  increase in the Israeli Consumer
Price  Index  ("CPI")  between  the date of the loan and the date of the  annual
interest  calculation.  During the years  2000 and 2001 one of the  shareholders
repaid a portion of his non-recourse note at the amount of $225,097 and $38,639,
respectively.  During the years 2002 and 2001,  the Company has  impaired  those
loans and has written off the amounts of $501,288  and  $206,005,  respectively,
due to decline of the fair  market  value of its shares,  which was  recorded as
compensation in general and administrative expenses.



                                      F-26
<PAGE>
ELECTRIC FUEL CORPORATION AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------------------------------------------
IN U.S. DOLLARS


NOTE 7:-          PROPERTY AND EQUIPMENT, NET

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

                                                                           DECEMBER 31,
                                                               -------------------------------------
                                                                     2002                2001
                                                               -----------------   -----------------
<S>                                                              <C>                 <C>
              Cost:
                     Computers and related equipment             $      815,759      $      786,158
                     Motor vehicles                                     335,286             336,216
                     Office furniture and equipment                     519,092             313,760
                     Machinery, equipment and                         4,715,182           4,294,600
                       installations
                     Leasehold improvements                             442,482             355,536
                     Demo inventory                                     154,689                   -
                                                                ----------------    ----------------

                                                                      6,982,490           6,086,270
                                                                ----------------    ----------------
              Accumulated depreciation:
                     Computers and related equipment                    669,258             566,290
                     Motor vehicles                                      39,281              62,523
                     Office furniture and equipment                     255,829             180,498
                     Machinery, equipment and installations           3,106,389           2,797,558
                     Leasehold improvements                             356,484             258,595
                                                                ----------------    ----------------

                                                                      4,427,241           3,865,464
                                                                ----------------    ----------------

              Depreciated cost                                   $    2,555,249      $    2,220,806
                                                                ================    ================
</TABLE>

b.  Depreciation  expense amounted to $473,739,  $530,013 and $514,242,  for the
years ended December 31, 2002, 2001 and 2000, respectively.

As for liens, see Note 11.d.



                                      F-27
<PAGE>

ELECTRIC FUEL CORPORATION AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------------------------------------------
IN U.S. DOLLARS


NOTE 8:-          OTHER INTANGIBLE ASSETS, NET

<TABLE>
<CAPTION>
 a.                                                                       YEAR ENDED DECEMBER 31,
                                                                    -----------------------------------
                                                                          2002               2001
                                                                    ----------------   ----------------
<S>                                                                   <C>                <C>
                     Intangible assets subject to amortization:
                     Cost:
                       Technology                                     $  1,795,000       $          -
                       Existing contracts                                   46,000                  -
                       Covenants not to compete                             99,000                  -
                       Customer list                                       812,000                  -
                                                                    ----------------   ----------------

                                                                         2,752,000                  -
                     Less - accumulated amortization                                                -
                        Technology                                         524,500                  -
                        Existing contracts                                  23,000                  -
                        Covenants not to compete                             9,900                  -
                        Customer list                                       66,143                  -
                                                                    ----------------   ----------------

                                                                           623,543                  -

                     Amortized cost                                      2,128,457                  -
                     Intangible assets not subject to amortization:
                     Trademarks                                            439,000                  -
                                                                    ----------------   ----------------

                                                                         2,567,457                  -
                                                                    ================   ================

b.      Amortization expenses amounted to $623,543 for the year ended December 31, 2002.

c.      Weighted-average amortization period of the intangible assets is 4 years.

d.      Estimated amortization expenses for the years ended:
</TABLE>

                               Year ended December 31,
                        --------------------------------------

                        2003                  $    1,172,000
                        2004                         263,000
                        2005                         233,000
                        2006                         205,843

                        2007 AND FORWARD             254,614
                                             -----------------

                                              $    2,128,457
                                             =================

NOTE 9:-      PROMISSORY NOTES

In  connection  with the  acquisition  discussed in Note 1b, the Company  issued
promissory notes in the face amount of an aggregate of $1,800,000,  one of which
was a note for $400,000 that was convertible into an aggregate of 200,000 shares
of the  Company's  common  stock.  The Company has  accounted for these notes in
accordance  with  Accounting  Principles  Board  Opinion  No. 21,  "Interest  on
Receivables  and  Payables,"  and recorded the notes at its present value in the
amount of $1,686,964. In December 2002, the terms of these promissory notes were
amended to (i)  extinguish  the  $1,000,000  note due at the end of June 2003 in
exchange for prepayment of $750,000, (ii) amend the $400,000 note due at the end
of December 2003 to be a $450,000 note, and (iii) amend the convertible $400,000
note due at the end of June 2004 to be a $450,000 note  convertible  at $0.75 as
to $150,000, at $0.80 as to $150,000, and at $0.85 as to $150,000. In accordance
with EITF 96-19,  "Debtor's  Accounting for a  Modification  or Exchange of Debt
Instruments,"  the terms of the promissory notes are not changed or modified and
the cash flow effect on a present value basis is less than 10% and therefore the
Company did not record any compensation related to these changes.

                                      F-28
<PAGE>

ELECTRIC FUEL CORPORATION AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------------------------------------------
IN U.S. DOLLARS

NOTE 10:-            OTHER ACCOUNTS PAYABLE AND ACCRUED EXPENSES

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

<S>                                                                    <C>                <C>
                                Employees and payroll accruals         $      615,292     $     688,985
                                Accrued vacation pay                          137,179           300,779
                                Accrued expenses                              342,793            74,639
                                Advances from customers                             -            98,070
                                Minority balance                              289,451                 -
                                Government authorities                        497,428                 -
                                Deferred warranty revenues                     95,831                 -
                                Other                                          31,135            60,180
                                                                      ---------------    -----------------

                                                                       $    2,009,109     $   1,122,653
                                                                      ===============    =================
</TABLE>

NOTE 11:-     COMMITMENTS AND CONTINGENT LIABILITIES


a. Royalty commitments:

1. Under EFL's research and development  agreements with the Office of the Chief
Scientist  ("OCS"),  and  pursuant to  applicable  laws,  EFL is required to pay
royalties at the rate of 3%-3.5% of net sales of products  developed  with funds
provided by the OCS, up to an amount equal to 100% of research  and  development
grants received from the OCS (linked to the U.S. dollars. Amounts due in respect
of projects approved after year 1999 also bear interest of the Libor rate).

              EFL is  obligated  to pay  royalties  only on sales of products in
respect of which OCS participated in their development. Should the project fail,
EFL will not be obligated to pay any royalties.

              Royalties  paid or accrued for the years ended  December 31, 2002,
2001  and  2000,   to  the  OCS  amounted  to  $32,801,   $75,791  and  $70,637,
respectively.

              As of December 31, 2002, total contingent  liability to pay to OCS
(at 100%) was outstanding at the amount of approximately $9,882,000.

2. EFL, in cooperation with a U.S.  participant,  has received approval from the
BIRD-F for 50% funding of a project for the  development of a hybrid  propulsion
system  for  transit  buses.  The  maximum  approved  cost  of  the  project  is
approximately  $1.8  million,  and the  Company's  share in the project costs is
anticipated to amount to approximately $1.1 million, which will be reimbursed by
BIRD-F at the aforementioned rate of 50%.

Royalties  at rates of 2.5%-5%  of sales are  payable up to a maximum of 150% of
the  grant  received,  linked  to the U.S.  Consumer  Price  Index.  Accelerated
royalties are due under certain circumstances.

              EFL is  obligated  to pay  royalties  only on sales of products in
respect of which BIRD-F  participated in their  development.  Should the project
fail, EFL will not be obligated to pay any royalties.



                                      F-29
<PAGE>
ELECTRIC FUEL CORPORATION AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------------------------------------------
IN U.S. DOLLARS

NOTE 11:-     COMMITMENTS AND CONTINGENT LIABILITIES (cont.)


              Royalties paid or accrued to the BIRD-F amounted at $0 for each of
the three years ended December 31, 2002.

              As of December 31, 2002, total contingent  liability to pay BIRD-F
(at 150%) was approximately $772,000.

b. Lease commitments:

The Company and its subsidiaries  rent their facilities under various  operating
lease agreements, which expire on various dates, the latest of which is in 2005.
The  minimum  rental  payments  under  non-cancelable  operating  leases  are as
follows:

                              YEAR ENDED DECEMBER 31,
                         -----------------------------------

                         2003              $      439,947
                         2004                     147,444
                         2005                      86,775
                                          ------------------

                                           $      674,166
                                          ==================

Total rent expenses for the years ended December 31, 2002,  2001 and 2000,  were
approximately $629,101, $456,701 and $261,000, respectively.

Rental payments are primarily payable in Israeli currency, linked to the Israeli
Consumer Price Index ("CPI").

c. Guarantees:

The Company obtained bank guarantees in the amount of $34,893, mainly in respect
of a letter of credit to the supplier of one of its subsidiaries.

d. Liens:

As security for compliance with the terms related to the investment  grants from
the state of Israel, EFL has registered  floating liens on all of its assets, in
favor of the State of Israel.

NOTE 12:-     SHAREHOLDERS' EQUITY

a. Shareholders' rights:

The  Company's  shares  confer upon the  holders the right to receive  notice to
participate and vote in the general meetings of the Company and right to receive
dividends, if and when declared.

b. Issuance of common stock to investors:

1. On  January  5,  2000,  the  Company  entered  into a Common  Stock  Purchase
Agreement  with a group of private  investors.  Pursuant to this  agreement,  on
January 10,  2000,  the Company  issued  385,000  shares of common  stock to the
investors for a total purchase price of $962,500.


                                      F-30
<PAGE>

ELECTRIC FUEL CORPORATION AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------------------------------------------
IN U.S. DOLLARS

NOTE 12:-     SHAREHOLDERS' EQUITY (CONT.)


2. On May 17, 2000,  the Company  entered  into an  agreement  with an investor,
pursuant to which the Company  issued  1,000,000  shares of common  stock to the
investor,  at a price  of  $10.00  per  share,  for a total  purchase  price  of
$10,000,000.  In addition, on November 16, 2000, the Company subsequently issued
an  additional  92,952  shares of common  stock  pursuant  to the  anti-dilution
calculation stated in the share purchase agreement with the investor.

3. On November 17, 2000,  the Company  entered into an agreement  with a venture
capital fund,  pursuant to which the Company issued  1,000,000  shares of common
stock to the  investor,  at a price of $8.375  per share,  for a total  purchase
price of $8,375,000.
(See also Note 12.f.2.)

4. In May 2001,  the Company  issued a total of  4,045,454  shares of its common
stock to a group of institutional  investors at a price of $2.75 per share, or a
total purchase price of $11,125,000. (See also Note 12.f.2 and 12.f.3.)

5. On November 21, 2001, the Company  issued a total of 1,503,759  shares of its
common stock at a purchase  price of $1.33 per share,  or a total purchase price
of $2,000,000, to a single institutional investor.

6. On December 5, 2001,  the Company  issued a total of 1,190,476  shares of its
common stock at a purchase  price of $1.68 per share,  or a total purchase price
of $2,000,000, to a single institutional investor.

7. On January  18,  2002,  the Company  issued a total of 441,176  shares of its
common stock at a purchase  price of $1.70 per share,  or a total purchase price
of $750,000, to an investor (see also Note 12.f.4).

8. On January 24, 2002,  the Company  issued a total of 1,600,000  shares of its
common stock at a purchase  price of $1.55 per share,  or a total purchase price
of $2,480,000, to a group of investors.

c. Issuance of common stock to service providers and employees:

1. In June 2000,  35,000 shares of common stock were issued at par consideration
to a consultant for providing business development and marketing services in the
United  Kingdom.  At the  issuance  date,  the fair  value of these  shares  was
determined  both by the value of the shares  issued as  reflected by fair market
price  at the  issuance  date  and by the  value of the  services  provided  and
amounted to $525,000 in  accordance  with EITF 96-18.  In  accordance  with EITF
00-18,   "Accounting  Recognition  for  Certain  Transactions  Involving  Equity
Instruments  Granted  to Other  Than  Employees"  ("EITF  00-18"),  the  Company
recorded  this  compensation  expenses  of  $405,000  during  the year  2000 and
$120,000 during the year 2001 and included these amounts in marketing expenses.

2. On June 17, 2001 the Company  issued a  consultant a total of 8,550 shares of
its common stock in  compensation  for services  rendered by such consultant for
the  Company  for  preparation  of  certain  video  point-of-purchase  and sales
demonstration materials. At the issuance date the fair value of these shares was
determined  both by the value of the shares  issued as  reflected by fair market
price  at the  issuance  date  and by the  value of the  services  provided  and
amounted to $15,488 in  accordance  with EITF  96-18.  In  accordance  with EITF
00-18, the Company recorded this compensation  expense as marketing  expenses in
the amount of $15,488.

                                      F-31
<PAGE>
ELECTRIC FUEL CORPORATION AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------------------------------------------
IN U.S. DOLLARS

NOTE 12:-     SHAREHOLDERS' EQUITY (CONT.)

3. On September 17, 2001 the Company issued to selling and marketing consultants
a total of 337,571 shares of its common stock in compensation  for  distribution
services  rendered by such  consultant.  At the issuance  date the fair value of
these shares was determined  both by the value of the shares issued as reflected
by fair  market  price at the  issuance  date and by the  value of the  services
provided  and  amounted  to  $524,889  in  accordance  with  EITF  96-18  and in
accordance with EITF 00-18.  The Company recorded this  compensation  expense as
marketing expenses in the amount of $524,889.

4. On February  15, 2002 and  September  10,  2002,  318,468 and 50,000  shares,
respectively,  of common stock were issued at par  consideration to a consultant
for providing business development and marketing services in the United Kingdom.
At the issuance date, the fair value of these shares was determined  both by the
value of the shares  issued as  reflected  by fair market  price at the issuance
date and by the value of the  services  provided  and  amounted to $394,698  and
$63,000,  respectively,  in accordance  with EITF 96-18. In accordance with EITF
00-18, the Company recorded this  compensation  expense of $394,698 and $63,000,
respectively,  during  the year  2002 and  included  this  amount  in  marketing
expenses.

5. On  September  10, 2002,  an aggregate of 13,000  shares of common stock were
issued at par  consideration  to two of our employees as stock  bonuses.  At the
issuance  date, the fair value of these shares was determined by the fair market
value of the shares  issued as  reflected  by fair market  price at the issuance
date in accordance  with APB No. 25. In accordance  with APB No. 25, the Company
recorded this compensation  expense of $13,000 during the year 2002 and included
this amount in general and administrative expenses.

d. Issuance of shares to lenders

As part of the securities purchase agreement on December 31, 2002 (see Note 17),
the Company issued 387,301 shares at par  consideration to lenders for the first
nine months of interest expenses.  At the issuance date, the fair value of these
shares was  determined  both by the value of the shares  issued as  reflected by
fair market  price at the  issuance  date and by the value of the  interest  and
amounted to $236,250 in accordance with APB 14.

e. Issuance of notes receivable:

1.  Non-recourse  notes receivable from  employee-shareholders  arising from the
purchase of 1,500,000 of the Company's  shares,  matured in 1998. The notes were
renewed as recourse notes, due on December 31, 2007,  bearing interest at a rate
of 1% over the then-current  federal funds rate of 5.5% or linked to the Israeli
CPI,  whichever is higher.  In April 1998,  the terms of the recourse notes were
amended such that the Company would have  recourse  only to certain  termination
compensation  due  to  the  employee-shareholders  (which  exceeds  the  amounts
outstanding    under   the   notes),   or   if   terminated   for   cause,   the
employee-shareholders would continue to be personally liable.

Additionally,  the Company  agreed to  purchase  the  Company's  shares from the
employee-shareholders,  at  prevailing  market  prices,  up to the  full  amount
outstanding under the notes and to grant new options at exercise prices equal to
prevailing  market  prices,  in the  amount  that the  shares  were  sold by the
employee-shareholders.

                                      F-32
<PAGE>

ELECTRIC FUEL CORPORATION AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------------------------------------------
IN U.S. DOLLARS

NOTE 12:-     SHAREHOLDERS' EQUITY (CONT.)

In March 2000, the  employee-shareholders  exercised  certain stock options (see
Note 12.g).  The proceeds in the amount of $605,052  from the sale of the shares
were  allocated to the repayment of the loan  referred to above.  As of December
31, 2002, there was no outstanding balance on this loan.

2. In February 2000 and in May 2000,  certain officers of the Company  exercised
options to purchase a total of 263,330 and 550,000, respectively,  shares of the
Company's  common  stock,   paying  the  exercise  price  in  form  of  ten-year
non-recourse promissory notes in an aggregate amount of $658,326 and $3,040,250,
respectively.  The notes are secured by the shares  issued upon exercise of such
options,  bearing non-recourse interest at a rate equal to the federal fund rate
+ 1%. (See Note 6)

The Company has accounted for these  promissory  notes as a variable stock award
pursuant  to  the  provisions  of  Emerging   Issues  Task  Force  issue  95-16,
"Accounting  for Stock  Compensation  Arrangements  with  Employer Loan Features
under  APB  Opinion  25"  ("EITF  95-16").   The  Company  did  not  record  any
compensation  due to the  decrease in the market value of the  Company's  shares
during the years 2001 and 2000.

In February 2001, the Board of Directors of the Company, upon the recommendation
of its Compensation  Committee and with the agreement of the officers  involved,
purchased a total of 550,000 of the shares,  which had already been  issued,  in
exchange for repayment of the non-recourse notes from the officers in the amount
of $3,470,431.  $3,183,530 out of this amount relates to 550,000 shares from May
2000.  The  remaining  amount of $248,262  represents  repayment of other notes,
including  $38,639 of loans to shareholders  described in Note 6. As a result of
this  transaction,  the  Company  recorded  treasury  stock  in  the  amount  of
$3,499,375. An amount of $228,674 was recorded as additional  paid-in-capital as
it reflected a compensation expense related to this re-purchase.

f. Warrants:

1. As part of an  investment  agreement  in December  1999,  the Company  issued
warrants  to  purchase up to an  additional  950,000  and 475,000  shares of the
Company's common stock to the investors at the exercise price of $1.25 and $4.50
per share,  respectively.  Pursuant to the terms of these  warrants,  a total of
251,196 shares of common stock were issued to such warrant  holders in 2000 on a
cashless  exercise basis. As of December 31, 2000,  1,050,000  warrants had been
exercised, in addition to the warrants issued on a cashless basis.

2. As part of the investment  agreement in November 2000 (see Note 12.b.3),  the
Company  issued  warrants to purchase an additional  1,000,000  shares of common
stock to the  investor,  with  exercise  prices of $11.31  for  333,333 of these
warrants and $12.56 per share for 666,667 of these  warrants.  In addition,  the
Company  issued  warrants  to  purchase  150,000  shares of common  stock,  with
exercise  prices of $9.63 for 50,000 of these  warrants and $12.56 per share for
100,000 of these warrants to an investment  banker  involved in this  agreement.
Out of these  warrants  issued  to the  investor,  666,667  warrants  expire  on
November 17, 2005 and 333,333 warrants were to expire on August 17, 2001.

As part of the  transaction in May 2001 (see Note 12 b.4), the Company  repriced
these warrants in the following manner:


                                      F-33
<PAGE>

ELECTRIC FUEL CORPORATION AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------------------------------------------
IN U.S. DOLLARS

NOTE 12:-     SHAREHOLDERS' EQUITY (CONT.)

         --       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  12.b.4),  the
Company issued to the investors a total of 2,696,971 warrants to purchase shares
of common stock at a price of $3.22 per share; these warrants are exercisable by
the holder at any time after  November  8, 2001 and will  expire on May 8, 2006.
The Company  also  issued to a financial  consultant  that  provided  investment
banking services  concurrently with this transaction a total of 125,000 warrants
to purchase shares of common stock at a price of $3.22 per share; these warrants
are  exercisable  by the holder at any time and will expire on June 12, 2006. In
addition the Company paid approximately  $562,000 in cash, which was recorded as
deduction from additional paid in capital.

4. As part of the  investment  agreement in January 2002 (see Note 12.b.7),  the
Company,  in  January  2002,  issued to a  financial  consultant  that  provided
investment  banking  services  concurrently  with this transaction a warrants to
acquire (i)  150,000  shares of common  stock at an exercise  price of $1.68 per
share, and (ii) 119,000 shares of common stock at an exercise price of $2.25 per
share;  these warrants are exercisable by the holder at any time and will expire
on January 4, 2007.


                                      F-34
<PAGE>

ELECTRIC FUEL CORPORATION AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------------------------------------------
IN U.S. DOLLARS

NOTE 12:-     SHAREHOLDERS' EQUITY (CONT.)


5. As part of the securities  purchase  agreement on December 31, 2002 (see Note
17),  the  Company  issued  to the  purchasers  of its  9%  secured  convertible
debentures  warrants as follows:  (i) Series A Warrants to purchase an aggregate
of 1,166,700  shares of common stock at any time prior to December 31, 2007 at a
price of $0.84 per share;  (ii) Series B Warrants to  purchase an  aggregate  of
1,166,700  shares of common  stock at any time prior to  December  31, 2007 at a
price of $0.89 per share;  and (iii)  Series C Warrants to purchase an aggregate
of 1,166,700  shares of common stock at any time prior to December 31, 2007 at a
price of $0.93 per share.

In connection with these warrants, the Company will record financial expenses of
$1,096,698,  which will be amortized  ratably  over the life of the  convertible
debentures (3 years).  This  transaction  was accounted  according to APB No. 14
"Accounting for Convertible  debt and Debt Issued with Stock Purchase  Warrants"
and  Emerging  Issue  Task Force No.  00-27  "Application  of Issue No.  98-5 to
Certain  Convertible  Instruments"  ("EITF  00-27").  The  fair  value  of these
warrants was determined using Black-Scholes  pricing model, assuming a risk-free
interest  rate of 3.5%, a  volatility  factor 64%,  dividend  yields of 0% and a
contractual life of 5 years.

g. Stock option plans:

1. Options to employees and others (except consultants)
a. The Company has adopted the following stock option plans, whereby options may
be granted for purchase of shares of the Company's common stock. Under the terms
of the employee plans, the Board of Directors or the designated committee grants
options and determines the vesting period and the exercise terms.
1) 1991 Employee Option Plan - 2,115,600 shares reserved for issuance,  of which
33,692 are available for future grants to employees as of December 31, 2002.

2) 1993  Employee  Option  Plan - as  amended,  4,200,000  shares  reserved  for
issuance,  of which 1,904,781are  available for future grants to employees as of
December 31, 2002.

3) 1998  Employee  Option  Plan - as  amended,  4,750,000  shares  reserved  for
issuance,  of which  2,070,460  are available for future grants to employees and
consultants as of December 31, 2001.

4) 1995 Non-Employee  Director Plan - 1,000,000 shares reserved for issuance, of
which  640,000 are  available  for future grants to directors as of December 31,
2002.

b. Under these plans,  options  generally expire no later than 10 years from the
date of grant.  Each option can be exercised  to purchase one share,  conferring
the same  rights as the other  common  shares.  Options  that are  cancelled  or
forfeited  before  expiration  become  available for future grants.  The options
generally vest over a three-year period (33.3% per annum).


                                      F-35
<PAGE>

ELECTRIC FUEL CORPORATION AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------------------------------------------
IN U.S. DOLLARS

NOTE 12:-     SHAREHOLDERS' EQUITY (CONT.)

c. A summary  of the  status of the  Company's  plans  and other  share  options
(except for options  granted to  consultants)  granted as of December  31, 2002,
2001 and 2000, and changes  during the years ended on those dates,  is presented
below:

<TABLE>
<CAPTION>
                                              2002                        2001                        2000
                                    --------------------------  --------------------------  -------------------------
                                                   WEIGHTED                    WEIGHTED                    WEIGHTED
                                                    AVERAGE                     AVERAGE                    AVERAGE
                                                   EXERCISE                    EXERCISE                    EXERCISE
                                      AMOUNT         PRICE        AMOUNT         PRICE        AMOUNT        PRICE
                                    ------------  ------------  ------------  ------------  -------------  ----------
                                                       $                           $                           $
                                                  ------------                ------------                 ----------
<S>                                   <C>            <C>          <C>            <C>          <C>            <C>
Options outstanding at beginning      4,240,228      $ 2.74       2,624,225      $ 3.82       2,820,679      $  3.44
  of year
Changes during year:
Granted (1) (3)                       1,634,567      $ 0.87       2,172,314      $ 1.55       1,598,233      $  4.58
Exercised (4) (2)                      (191,542)     $ 1.29        (159,965)     $ 1.31       (1,715,628)    $  3.84
Forfeited or cancelled                 (422,887)     $ 1.92        (396,346)     $ 4.11         (79,059)     $  4.93
Repriced (2):
Old exercise price                            -         -                 -         -          (310,000)     $  4.95
New exercise price                            -         -                 -         -           310,000      $  4.95
                                    ------------  ------------  ------------  ------------  -------------  ----------

Options outstanding at end of year    5,260,366      $ 2.26       4,240,228      $ 2.74       2,624,225      $  3.82
                                    ============  ============  ============  ============  =============  ==========

Options exercisable at end of year    4,675,443      $ 2.26       2,643,987      $ 2.75       1,078,332      $  3.81
                                    ============  ============  ============  ============  =============  ==========

</TABLE>
     (1) Includes  481,435,  1,189,749  and 870,000  options  granted to related
     parties in 2002, 2001 and 2000, respectively.

     (2) On May 25, 2000, the Company  repriced  downwards  150,000 options from
     $6.60 per share to $4.95.  The Company also repriced upward 160,000 options
     held by the same options holder from $3.375 per share to $4.95. The options
     holder immediately  exercised those options.  In accordance with FIN 44 the
     downward repricing resulted in a variable plan accounting,  however, due to
     the immediate  exercise the Company recorded a compensation  expense in the
     amount of $26,250 at that date only.

     (3) The Company  recorded  deferred stock  compensation  for options issued
     with an  exercise  price  below the fair value of the  common  stock in the
     amount of $0,  $18,000 and $37,924 as of December 31, 2002,  2001 and 2000,
     respectively.  Deferred  stock  compensation  is amortized  and recorded as
     compensation  expenses  ratably over the vesting period of the option.  The
     stock  compensation  expense  that has  been  charged  in the  consolidated
     statements of  operations in respect of options to employees in 2002,  2001
     and 2000, was $6,000, $17,240 and $20,684, respectively.

     (4) In September 2002 and December 2001,  the employees  exercised  100,000
     and 33,314, respectively, options for which the exercise price was not paid
     at the exercise date.  The Company  recorded the owed amount of $73,000 and
     $43,308,  respectively,  as  "Note  receivable  from  shareholders"  in the
     statement of shareholders' equity. In accordance with EITF 95-16, since the
     original  option grant did not permit the  exercise of the options  through
     loans,  and due to the Company's  history of granting  non-recourse  loans,
     this  postponement in payments of the exercise price resulted in a variable
     plan accounting.  However,  the Company did not record any compensation due
     to the decrease in the market value of the Company's shares during 2001 and
     2002. During the year 2002 the notes in the amount of $43,308 were entirely
     repaid and note at the  amount of  $36,500  was  forgiven  and  appropriate
     compensation was recorded.


                                      F-36
<PAGE>

ELECTRIC FUEL CORPORATION AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------------------------------------------
IN U.S. DOLLARS

NOTE 12:-     SHAREHOLDERS' EQUITY (CONT.)


d.   The options  outstanding  as of December 31, 2002 have been  separated into
ranges of exercise price, as follows:

<TABLE>
<CAPTION>
                          TOTAL OPTIONS OUTSTANDING                EXERCISABLE OPTIONS OUTSTANDING
              --------------------------------------------------- ----------------------------------
                                   WEIGHTED
                 AMOUNT            AVERAGE                           AMOUNT
 RANGE OF     OUTSTANDING AT      REMAINING         WEIGHTED      EXERCISABLE AT       WEIGHTED
 EXERCISE      DECEMBER 31,      CONTRACTUAL         AVERAGE       DECEMBER 31,         AVERAGE
  PRICES           2002             LIFE         EXERCISE PRICE        2002         EXERCISE PRICE
------------  --------------   ----------------  ---------------- ---------------  ----------------
     $                              YEARS               $                                  $
------------                   ----------------  ----------------                   ----------------
<S>               <C>                 <C>                <C>             <C>               <C>
0.30-2.00         3,422,797           6.91              1.15          3,011,530            1.12
3.00-4.00           421,069           3.84              3.00            419,669            3.00
4.00-6.00         1,356,500           7.45              4.60          1,189,244            4.64
6.00-8.00            50,000           2.43              7.49             45,000            7.56
8.00                 10,000           4.75              9.06             10,000            9.06
              ---------------- ----------------  ---------------- ----------------  ----------------

                  5,260,366           6.75              2.26          4,675,443            2.26
              ================ ================  ================ ================  ================
</TABLE>

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

                             EQUALS MARKET PRICE             EXCEEDS MARKET PRICE            LESS THAN MARKET PRICE
                         -----------------------------   ------------------------------   ------------------------------
                           YEAR ENDED DECEMBER 31,          YEAR ENDED DECEMBER 31,          YEAR ENDED DECEMBER 31,
                         -----------------------------   ------------------------------   ------------------------------
                          2002       2001       2000      2002       2001        2000      2002      2001         2000
                         --------   --------  --------   --------  ----------  --------   --------  --------   ---------
<S>                      <C>          <C>       <C>      <C>         <C>       <C>        <C>         <C>        <C>
 Weighted average        $ 1.265      $ 1.579   $ 4.580  $ -         $ 1.466   $  7.125   $ 0.755     $ 1.300    $  5.270
   exercise prices
 Weighted average fair                                0                                                     0           0
   value on grant date   $ 0.560      $ 0.50    $  4.12  $ -         $ 0.560   $  3.760   $ 0.250     $  0.79    $   6.60
</TABLE>

2. Options issued to consultants:

a. The Company's outstanding options to consultants as of December 31, 2002, are
as follows:
<TABLE>
<CAPTION>
                                         2002                         2001                         2000
                              ---------------------------  ---------------------------  ---------------------------
                                              WEIGHTED                     WEIGHTED                     WEIGHTED
                                               AVERAGE                      AVERAGE                      AVERAGE
                                              EXERCISE                     EXERCISE                     EXERCISE
                                AMOUNT         PRICE          AMOUNT        PRICE          AMOUNT         PRICE
                              ------------  -------------  ------------  -------------  ------------- -------------
                                                  $                            $                            $
                                            -------------                -------------                -------------
<S>                               <C>          <C>             <C>          <C>              <C>         <C>
 Options outstanding at           245,786      $   5.55        175,786      $   6.57         141,814     $   3.09
   beginning of year
 Changes during year:
   Granted (1)                          -            -         130,000      $   6.02         198,500     $   5.86
   Exercised                            -            -         (60,000)     $   5.13        (164,528)    $   2.72

 Repriced (2):
   Old exercise price                   -            -         (56,821)     $   9.44               -           -
   New exercise price                   -            -          56,821      $   4.78               -           -
                              ------------                 ------------                 -------------

 Options outstanding at
   end of year                    245,786      $   5.55        245,786      $   5.55         175,786     $   6.56
                              ============  =============  ============  =============  ============= =============

 Options exercisable at
   end of year                    125,786      $   6.42        125,786      $   6.42         149,044     $   6.80
                              ============  =============  ============  =============  ============= =============
</TABLE>

                                      F-37
<PAGE>
ELECTRIC FUEL CORPORATION AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------------------------------------------
IN U.S. DOLLARS

NOTE 12:-     SHAREHOLDERS' EQUITY (CONT.)

(1) 120,000  options  out of 130,000  options  granted in 2001 to the  Company's
selling and marketing  consultants are subject to the achievement of the targets
specified in the agreements with these  consultants.  The  measurement  date for
these  options  has not yet  occurred,  as these  targets  have not been met, in
accordance with EITF 96-18. When the targets is achieved the Company will record
appropriate  compensation  upon the fair  value  at the same  date at which  the
targets is achieved.

(2) During the year 2001 the  Company  repriced  56,821  options to its  service
providers.  The fair value of repriced  warrants was  calculated as a difference
measured  between  (1) the fair value of the  modified  warrants  determined  in
accordance with the provisions of SFAS 123, and (2) the value of the old warrant
immediately  before its terms were modified,  determined based on the shorter of
(a) its remaining expected life or (b) the expected life of the modified option.
As  a  result  of  the  repricing,   the  Company  has  recorded  an  additional
compensation  at the amount of $21,704,  and  included  this amount in marketing
expenses.

b. The Company  accounted  for its options to  consultants  under the fair value
method of SFAS No.  123 and EITF  96-18.  The fair value for these  options  was
estimated  using  a  Black-Scholes   option-pricing  model  with  the  following
weighted-average assumptions:
<TABLE>
<CAPTION>
                                                  2002              2001             2000
                                             ----------------  ---------------  ---------------
<S>                                               <C>                 <C>              <C>
              Dividend yield                           -               0%               0%
              Expected volatility                      -              82%              95%
              Risk-free interest                       -         3.5-4.5%             6.5%
              Contractual life of up to                -         10 years          5 years

</TABLE>
c. In  connection  with the grant of stock options to  consultants,  the Company
recorded stock compensation  expenses totaling $0, $139,291 and $796,128 for the
years ended December 31, 2002, 2001 and 2000,  respectively,  and included these
amounts in marketing expenses.

3. Dividends:

In the event that cash dividends are declared in the future, such dividends will
be paid in U.S.  dollars.  The Company does not intend to pay cash  dividends in
the foreseeable future.

4. Treasury Stock:

Treasury  stock  is  the  Company's  common  stock  that  has  been  issued  and
subsequently reacquired.  The acquisition of common stock is accounted for under
the cost method, and presented as reduction of stockholders' equity.

                                      F-38
<PAGE>


ELECTRIC FUEL CORPORATION AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------------------------------------------
IN U.S. DOLLARS

NOTE 13:-     INCOME TAXES

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

As of December 31, 2002, EFC has operating loss  carryforwards  for U.S. federal
income tax purposes of approximately $15 million,  which are available to offset
future taxable  income,  if any,  expiring in 2010-2015.  Utilization of U.S net
operating  losses may be subject to substantial  annual  limitations  due to the
"change  in  ownership"  provisions  of the  Internal  Revenue  Code of 1986 and
similar state provisions.  The annual limitation may result in the expiration of
net operating loses before utilization.

b. Israeli subsidiary (EFL):

1. Tax benefits under the Law for the Encouragement of Capital Investments, 1959
(the "Investments Law"):

EFL's manufacturing facility has been granted "Approved Enterprise" status under
the  Investments  Law,  and is entitled to  investment  grants from the State of
Israel  of 38% on  property  and  equipment  located  in  Jerusalem,  and 10% on
property and equipment located in its plant in Beit Shemesh,  and to reduced tax
rates on income arising from the "Approved Enterprise," as detailed below.

The approved investment program is in the amount of approximately  $500,000. EFL
effectively  operated  the  program  during  1993,  and is  entitled  to the tax
benefits  available under the Investments Law. EFL is entitled to additional tax
benefits as a "foreign  investment  company," as defined by the Investments Law.
In 1995, EFL received  approval for a second "Approved  Enterprise"  program for
investment in property and equipment, in the amount of approximately $6,000,000,
and approval for grants at the abovementioned rates, for these approved property
and equipment.


The  entitlement  to the  above  benefits  is  conditional  upon  the  Company's
fulfilling  the  conditions  stipulated  by  the  Investments  Law,  regulations
published   thereunder  and  the   instruments  of  approval  for  the  specific
investments  in "approved  enterprises."  In the event of failure to comply with
these  conditions,  the benefits may be canceled and the Company may be required
to refund the amount of the benefits,  in whole or in part,  including interest.
As of December 31, 2002, according to the Company's management,  the Company has
fulfilled all conditions.

The main tax benefits available to EFL are:

a) Reduced tax rates:

During the period of benefits (seven to ten years), commencing in the first year
in which EFL earns  taxable  income from the  "Approved  Enterprise,"  a reduced
corporate  tax rate of  between  10% and 25%  (depending  on the  percentage  of
foreign  ownership,  based on present ownership  percentages of 15%) will apply,
instead of the regular tax rates.

                                      F-39

<PAGE>

ELECTRIC FUEL CORPORATION AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------------------------------------------
IN U.S. DOLLARS

NOTE 13:-     INCOME TAXES (CONT.)

The period of tax  benefits,  detailed  above,  is subject to limits of 12 years
from the  commencement  of  production,  or 14 years  from  the  approval  date,
whichever is earlier.  Hence, the first program will expire in the year 2004 and
the second in the year 2008.  The  commencement  of production  according to the
third program has not been determined yet by the investment  center and so there
is no ability to  determine  the period of the tax  benefits  according  to this
program.  The  benefits  have not yet been  utilized  since the  Company  has no
taxable income, since its incorporation.

b) Accelerated depreciation:

EFL is entitled to claim  accelerated  depreciation  in respect of machinery and
equipment  used  by the  "Approved  Enterprise"  for the  first  five  years  of
operation of these assets.

2.   Measurement   of  results  for  tax  purposes  under  the  Income  Tax  Law
(Inflationary Adjustments), 1985

Results  for tax  purposes  are  measured in real terms of earnings in NIS after
certain  adjustments  for increases in the Consumer Price Index. As explained in
Note 2b, the financial  statements are presented in U.S. dollars. The difference
between  the  annual  change  in the  Israeli  consumer  price  index and in the
NIS/dollar  exchange  rate causes a difference  between  taxable  income and the
income  before  taxes shown in the  financial  statements.  In  accordance  with
paragraph  9(f) of SFAS No. 109, EFL has not provided  deferred  income taxes on
this difference  between the reporting  currency and the tax bases of assets and
liabilities.

3. Tax  benefits  under the Law for the  Encouragement  of Industry  (Taxation),
1969:

EFL is an "industrial company," as defined by this law and, as such, is entitled
to certain tax  benefits,  mainly  accelerated  depreciation,  as  prescribed by
regulations published under the inflationary adjustments law, the right to claim
public issuance expenses and amortization of know-how, patents and certain other
intangible property rights as deductions for tax purposes.

4. Tax rates applicable to income from other sources:

Income  from  sources  other  than the  "Approved  Enterprise,"  is taxed at the
regular rate of 36%.

5. Tax rates applicable to income distributed as dividends by EFL:

The effective  taxes on income  distributed by EFL to its parent  company,  EFC,
would  increase as a result of the  Israeli  withholding  tax imposed  upon such
dividend  distributions.  The overall  effective  tax rate on such  distribution
would be 28%, in respect of income arising from EFL's "Approved Enterprise," and
44% in respect of other  income.  EFL does not have any earnings  available  for
distribution as dividend,  nor does it intend to distribute any dividends in the
foreseeable future.

6. Tax loss carryforwards:

As of December 31, 2002,  EFL has operating loss  carryforwards  for Israeli tax
purposes of approximately  $93 million,  which are available,  indefinitely,  to
offset future taxable income.

                                      F-40
<PAGE>
ELECTRIC FUEL CORPORATION AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------------------------------------------
IN U.S. DOLLARS

NOTE 13:-     INCOME TAXES (CONT.)

c. European subsidiaries:

Income  of  the  European  subsidiaries,  which  is  derived  from  intercompany
transactions, is based on the tax laws in their countries of domicile.

d. Deferred income taxes:

Deferred  income  taxes  reflect  the net tax effects of  temporary  differences
between the carrying  amounts of assets and liabilities for financial  reporting
purposes and amounts used for income tax purposes. Significant components of the
Company's  deferred  tax  assets  resulting  from tax loss  carryforward  are as
follows:

<TABLE>
<CAPTION>

                                                                              DECEMBER 31,
                                                                   -----------------------------------
                                                                        2002                2001
                                                                   ---------------    ----------------
                                                                              U.S. dollars
                                                                   -----------------------------------

<S>                                                                 <C>                <C>
               Operating loss carryforward                          $  29,257,118      $   12,162,581
               Reserve and allowance                                      303,204             477,522
                                                                   ---------------    ----------------

               Net deferred tax asset before valuation allowance       29,560,322          12,640,103
               Valuation allowance                                    (29,560,322)        (12,640,103)
                                                                   ---------------    ----------------

                                                                    $           -      $            -
                                                                   ===============    ================
</TABLE>

The Company and its  subsidiaries  provided  valuation  allowances in respect of
deferred tax assets  resulting from tax loss  carryforwards  and other temporary
differences.  Management currently believes that it is more likely than not that
the  deferred  tax  regarding  the  loss   carryforwards   and  other  temporary
differences  will not be realized.  The change in the valuation  allowance as of
December 31, 2002 was $16,920,219.

e. Loss before taxes on income:
<TABLE>
<CAPTION>

                                                       YEAR ENDED DECEMBER 31
                                     ---------------------------------------------------------------
                                            2002                  2001                  2000
                                     -------------------   -------------------   -------------------
                                                              U.S. dollars
                                     ---------------------------------------------------------------

<S>                                   <C>                   <C>                   <C>
         Domestic                     $    (5,250,633)      $    (5,828,828)      $    (2,021,661)
         Foreign                          (13,254,195)          (11,457,960)           (9,959,297)
                                     -------------------   -------------------   -------------------

                                      $   (18,504,358)      $   (17,286,788)      $   (11,980,958)
                                     ===================   ===================   ===================
</TABLE>

                                      F-41
<PAGE>


ELECTRIC FUEL CORPORATION AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------------------------------------------
IN U.S. DOLLARS


NOTE 14:-     SELECTED STATEMENTS OF OPERATIONS DATA

a. Research and development expenses, net:

<TABLE>
<CAPTION>
                                                       YEAR ENDED DECEMBER 31
                                        ---------------------------------------------------
                                             2002              2001              2000
                                        ---------------   ---------------   ---------------
                                                           U.S. dollars
                                        ---------------------------------------------------

<S>                                       <C>               <C>               <C>
 Research and development costs           $    685,919      $    455,845      $  1,065,065
 Less royalty-bearing grants              -                 -                 195,170
                                        ---------------   ---------------   ---------------

                                          $    685,919      $    455,845      $    869,895
                                        ===============   ===============   ===============
</TABLE>

b. Financial income, net:

<TABLE>
<CAPTION>
                                                        YEAR ENDED DECEMBER 31,
                                            -----------------------------------------------
                                                2002             2001             2000
                                            -------------    -------------    -------------
                                                             U.S. dollars
                                            ------------- -- ------------- -- -------------

<S>                                          <C>              <C>              <C>
Financial expenses:
Interest, bank charges and fees              $  (89,271)      $  (49,246)      $  (67,480)
Foreign currency translation differences         15,202          (16,003)        (219,043)
                                            -------------    -------------    -------------

                                                (74,069)         (65,249)        (286,523)
                                            -------------    -------------    -------------
Financial income:
   Interest                                     174,520          327,830          830,704
                                            -------------    -------------    -------------

Total                                        $  100,451       $  262,581       $  544,181
                                            =============    =============    =============
</TABLE>


NOTE 15:-         RELATED PARTY DISCLOSURES

<TABLE>
<CAPTION>
                                                                            YEAR ENDED DECEMBER 31,
                                                           ----------------------------------------------------------
                                                                 2002                2001                 2000
                                                           -----------------   -----------------    -----------------
                                                                                 U.S. dollars
                                                           ----------------------------------------------------------
Transactions:

<S>                                                         <C>                 <C>                  <C>
Reimbursement of general and administrative expenses        $     36,000        $     23,850         $     28,880
                                                           =================   =================    =================

Financial income (expenses), net from notes receivable
  and loan holders (see Notes 6 and 12.e.2)                 $     (7,309)       $    (36,940)        $    230,924
                                                           =================   =================    =================
</TABLE>

                                      F-42
<PAGE>
ELECTRIC FUEL CORPORATION AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------------------------------------------
IN U.S. DOLLARS


NOTE 16:-         SEGMENT INFORMATION


a. General:

The Company and its subsidiaries operate primarily in two business segments (see
Note 1a for a brief  description  of the  Company's  business)  and  follow  the
requirements of SFAS No. 131.

The  Company  previously  managed  its  business  in three  reportable  segments
organized on the basis of differences in its related products and services. With
the  discontinuance  of Consumer  Batteries  segment (see Note  1.e-Discontinued
Operation) and acquiring two subsidiaries (see Notes 1.b.and c.), two reportable
segments remain: Electric Fuel Batteries,  and Defense and Security Products. As
a result the Company  reclassified  information  previously reported in order to
comply with new segment reporting.

The Company's  reportable  operating segments have been determined in accordance
with the Company's internal  management  structure,  which is organized based on
operating activities.  The accounting policies of the operating segments are the
same as those described in the summary of significant  accounting policies.  The
Company  evaluates  performance  based  upon  two  primary  factors,  one is the
segment's operating income and the other is based on the segment's  contribution
to the Company's future strategic growth.

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

<TABLE>
<CAPTION>
                                             ELECTRIC            DEFENSE AND
                                               FUEL               SECURITY
                                            BATTERIES             PRODUCTS            ALL OTHER              TOTAL
                                         -----------------    ----------------    -----------------    -----------------
<S>                                        <C>                 <C>                 <C>                  <C>
2002
Revenues from outside customers            1,662,296           $    4,724,443      $            -       $    6,406,739
Depreciation expense and amortization      (252,514)                 (676,753)           (194,013)          (1,123,280)
Direct expenses (1)                        (3,062,548)             (4,353,770)         (2,905,743)         (10,322,061)
                                         -----------------    ----------------    -----------------    -----------------
Segment gross loss                       $   (1,652,766)        $    (306,080)      $  (3,099,756)          (5,038,602)
                                         =================    ================    =================
Financial income                                                                                               100,451
                                                                                                       -----------------
Net loss from continuing operation                                                                      $    4,938,151
                                                                                                       =================

Segment assets (2)                       $ 2,007,291           $    1,683,825      $      575,612       $    4,266,728
                                         =================    ================    =================    =================
Expenditures for segment assets          $ 246,664             $       58,954      $       70,486       $      376,104
                                         =================    ================    =================    =================

2001
Revenues from outside customers          $ 2,093,632           $            -      $            -           $2,093,632
Depreciation expense                           (304,438)                    -            (225,575)            (530,013)
Direct expenses (1)                          (2,295,501)                    -          (3,556,486)          (5,851,987)
                                         -----------------    ----------------    -----------------    -----------------
Segment gross loss                       $ (506,307)            $           -       $  (3,782,061)          (4,288,368)
                                         =================    ================    =================
Financial income net                                                                                           262,581
                                                                                                       -----------------
Net loss from continuing operations                                                                     $   (4,025,787)
                                                                                                       =================

Segment assets (2)                       $ 2,044,257           $    1,175,521      $      702,915       $    2,744,172
                                         =================    ================    =================    =================
Expenditures for segment assets          $ 229,099             $      229,099      $      323,985       $      553,084
                                         =================    ================    =================    =================
</TABLE>


                                      F-43
<PAGE>

ELECTRIC FUEL CORPORATION AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------------------------------------------
IN U.S. DOLLARS

NOTE 16:-         SEGMENT INFORMATION (CONT.)

<TABLE>
<CAPTION>
                                             ELECTRIC            DEFENSE AND
                                               FUEL               SECURITY
                                            BATTERIES             PRODUCTS           ALL OTHER              TOTAL
                                         -----------------    ----------------    -----------------    -----------------

<S>                                      <C>                   <C>                 <C>                      <C>
2000
Revenues from outside customers          $    1,478,495        $            -      $       11,446           $1,489,941
Depreciation expense                           (310,408)                    -            (203,834)            (514,242)
Direct expenses (1)                          (1,754,003)                    -          (3,150,558)          (4,904,561)
                                         -----------------    ----------------    -----------------    -----------------
Segment gross loss                       $     (585,916)       $            -      $   (3,342,946)          (3,928,862)
                                         =================    ================    =================
Financial income net                                                                                           544,181
                                                                                                       -----------------
Net loss from continuing operations                                                                     $   (3,384,681)
                                                                                                       =================

Segment assets (2)                       $    2,020,771        $            -      $      662,575       $    2,683,346
                                         =================    ================    =================    =================
Expenditures for segment assets          $      284,939        $      284,939      $      310,988       $      595,927
                                         =================    ================    =================    =================
</TABLE>

     (1) Including sales and marketing, general and administrative expenses.

     (2) Including property and equipment and inventory.

c. Summary information about geographic areas:

The following  presents total revenues  according to end customers  location for
the years ended December 31, 2002,  2001 and 2000,  and long-lived  assets as of
December 31, 2002, 2001 and 2000:

<TABLE>
<CAPTION>

                               2002                            2001                            2000
                   ------------------------------  ------------------------------  ------------------------------
                       TOTAL        LONG-LIVED         TOTAL        LONG-LIVED         TOTAL        LONG-LIVED
                     REVENUES         ASSETS         REVENUES         ASSETS         REVENUES         ASSETS
                   --------------  --------------  --------------  --------------  -------------- ---------------
                                                           U.S. dollars
                   ----------------------------------------------------------------------------------------------

<S>                 <C>             <C>             <C>             <C>             <C>            <C>
U.S.A.              $  2,787,250    $  6,710,367    $  1,057,939    $     60,531    $    813,658   $     26,412
Germany                   38,160               -         526,766               -          44,117              -
England                   47,696               -          36,648               -          30,885              -
Thailand                 291,200               -               -               -               -              -
Israel                 2,799,365       3,367,320          13,773       2,160,275          19,279      2,262,465
Other                    443,068               -         458,506               -         582,003              -
                   --------------  --------------  --------------  --------------  -------------- ---------------

                    $  6,406,739    $ 10,077,687    $  2,093,632    $  2,220,806    $  1,489,942   $  2,288,877
                   ==============  ==============  ==============  ==============  ============== ===============
</TABLE>

     *        Reclassified

d. Revenues from major customers:
<TABLE>
<CAPTION>

                                                            YEAR ENDED DECEMBER 31,
                                              ----------------------------------------------------
                                                  2002               2001               2000
                                              --------------     --------------     --------------
                                                                       %
                                              ----------------------------------------------------
<S>                                                   <C>               <C>                <C>
     Electric Fuel Batteries:
              Customer A                              -                 22%                 -
              Customer B                              7%                20%                17%
              Customer C                              2%                13%                20%
              Customer D                              8%                12%                 -
     Deference and security: Products                43%                 -                  -

</TABLE>


                                      F-44
<PAGE>

ELECTRIC FUEL CORPORATION AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------------------------------------------
IN U.S. DOLLARS



NOTE 16:-         SEGMENT INFORMATION (CONT.)

e. Revenues from major products:

<TABLE>
<CAPTION>
                                                                                    YEAR ENDED DECEMBER 31,
                                                                         -----------------------------------------------
            MAJOR PRODUCT                          SEGMENT                   2002             2001             2000
            -------------                          -------               -------------    -------------    -------------

<S>                                                                        <C>              <C>              <C>
    EV                                 Electric Fuel Batteries               460,562          894,045          310,441
    WAB                                Electric Fuel Batteries               647,896          951,598        1,168,055
    Security and defense               Electric Fuel Batteries               573,838          247,989                -
                                                                         -------------    -------------    -------------
Total Electric Fuel Batteries                                              1,662,296        2,093,632        1,478,495
    Car armoring                       Defense and Security Products       2,744,382                -                -
    Interactive use-of-force training  Defense and Security Products       1,980,061                -                -
                                                                         -------------    -------------    -------------
Total Defense and Security                                                 4,724,443                -                -
Other                                  Other                                       -                -           11,446
                                                                         -------------    -------------    -------------

Total                                                                      6,406,749        2,093,632        1,489,942
                                                                         =============    =============    =============
</TABLE>



NOTE 17:-     CONVERTIBLE DEBENTURES

Pursuant to the terms of a  Securities  Purchase  Agreement  dated  December 31,
2002,  the  Company  issued and sold to a group of  institutional  investors  an
aggregate principal amount of 9% secured convertible debentures in the amount of
$3.5 million due June 30, 2005.  These  debentures  are  convertible at any time
prior to June 30, 2005 at a  conversion  price of $0.75 per share,  or a maximum
aggregate of 4,666,667 shares of common stock (see also Note 12.f.5).

In  determining   whether  the  convertible   debentures  include  a  beneficial
conversion  option in  accordance  with EITF 98-5  "Accounting  for  Convertible
Securities  with  Beneficial  Conversion  Features  or  Continently   Adjustable
Conversion  Ratios" and EITF 00-27,  the total  proceeds  were  allocated to the
convertible  debentures and the detachable  warrants based on their related fair
values. In connection with these convertible debentures, the Company will record
financial  expenses of $585,365.  The $585,365 will be accreted from the date of
issuance to the stated redemption date - June 30, 2005 - as financial expenses.


                                      F-45
<PAGE>
ELECTRIC FUEL CORPORATION AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------------------------------------------
IN U.S. DOLLARS



NOTE 18:-     PROFIT DISTRIBUTION

On September 30, 2002, MDT distributed in cash to its shareholders profit in the
amount of NIS 4,000,000 (approximately $841,288), out of which $412,231 was paid
to the minority interest.

                                 - - - - - - - -



                                      F-46
<PAGE>

                          SUPPLEMENTARY FINANCIAL DATA

 QUARTERLY FINANCIAL DATA (UNAUDITED) FOR THE TWO YEARS ENDED DECEMBER 31, 2002

<TABLE>
<CAPTION>

                                                                       QUARTER ENDED
                                            --------------------------------------------------------------------
                    2002                        MARCH 31         JUNE 30        SEPTEMBER 30     DECEMBER 31
        ------------------------------      --------------------------------------------------------------------
<S>                                          <C>              <C>              <C>              <C>
Net revenue................................. $      570,545   $      425,053   $    3,262,711   $    2,148,430
Gross profit................................ $      186,917   $       48,807   $    1,593,770   $      155,497
Net loss from continuing operations......... $     (990,097)  $   (1,005,877)  $     (923,122)  $   (2,019,054)
Net loss from discontinued operations....... $   (2,324,109)  $   (1,654,108)  $   (8,716,422)  $     (871,567)
Net loss for the period..................... $   (3,314,208)  $   (2,659,985)  $   (9,369,544)  $   (2,890,621)
Net loss per share - basic and diluted...... $       (0.11)   $       (0.09)   $       (0.29)   $       (0.08)
Shares used in per share calculation........     30,149,210       30,963,919       33,441,137       34,758,048

                    2001
        ------------------------------
Net revenue................................. $      503,619   $      400,879   $      632,344   $      556,790
Gross profit (loss)......................... $      121,633   $       (3,117)  $       43,326   $      (60,896)
Net loss from continuing operations......... $     (531,866)  $   (1,107,576)  $     (771,238)  $   (1,615,109)
Net loss from discontinued operations....... $   (2,893,088)  $   (3,483,264)  $   (3,639,318)  $   (3,245,329)
Net loss for the period..................... $   (3,424,954)  $   (4,590,840)  $   (4,410,556)  $   (4,860,438)
Deemed dividend to certain shareholders of
  common stock.............................. $            -   $   (1,196,667)  $            -   $            -
Net loss attributable to shareholders of
  common stock.............................. $   (3,424,954)  $   (5,787,507)  $   (4,410,556)  $   (4,860,438)
Net loss per share - basic and diluted...... $        (0.16)  $        (0.25)  $        (0.19)  $        (0.18)
Shares used in per share calculation........     21,802,499       23,562,099       23,612,097       26,648,319

</TABLE>



                                      F-47
<PAGE>