Edgar Filing: ELECTRIC FUEL CORP

SCHEDULE 14A INFORMATION

PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES EXCHANGE ACT OF 1934

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ELECTRIC FUEL CORPORATION
--------------------------------------------------------------------------------
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AROTECH CORPORATION

632 Broadway, Suite 1200
New York, New York 10012
Tel: (646) 654-2107 Fax: (646) 654-2187
HTTP://WWW.AROTECH.COM
Nasdaq National Market: ARTX
WRITER'S DIRECT DIAL: +972-2-990-6612
WRITER'S DIRECT FAX: +972-2-990-6688
WRITER'S E-MAIL: EHRLICH@AROTECH.COM

ROBERT S. EHRLICH
CHAIRMAN, PRESIDENT AND CHIEF EXECUTIVE OFFICER

August 6, 2003

Dear Stockholder:

It is our pleasure to invite you to the 2003 Annual Meeting of
Stockholders of Electric Fuel Corporation (doing business as Arotech
Corporation), a Delaware corporation, to be held on Monday, September 15, 2003
at 10:00 a.m. local time in the Ballroom of the Shelburne Murray Hill Hotel, 303
Lexington Avenue, New York, New York.

Whether or not you plan to attend and regardless of the number of
shares you own, it is important that your shares be represented at the meeting.
You are accordingly urged to carefully review the enclosed proxy materials, and
to mark, date, sign and return the enclosed proxy card as promptly as possible
in the postage-prepaid envelope provided, or vote electronically through the
Internet (at HTTP://WWW.VOTEPROXY.COM) or by telephone if you hold your shares
in your own name, to ensure your representation and the presence of a quorum at
the annual meeting. If you submit your proxy and then decide to attend the
annual meeting to vote your shares in person, you may still do so. Your proxy is
revocable in accordance with the procedures set forth in the Proxy Statement.

Sincerely,

/s/ Robert S. Ehrlich
----------------------------------
Robert S. Ehrlich
Chairman of the Board of Directors

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ELECTRIC FUEL LTD. Western Industrial Zone Beit Shemesh Israel 99000 Tel: 972-2-9906666 Fax: 972-2-9991013

AROTECH

632 BROADWAY, SUITE 1200
NEW YORK, NEW YORK 10012

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NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON SEPTEMBER 15, 2003
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To our Stockholders:

Our Annual Meeting of Stockholders will be held in the Ballroom of the
Shelburne Murray Hill Hotel, 303 Lexington Avenue, New York, New York, on
Monday, September 15, 2003 at 10:00 a.m. local time, and thereafter as it may be
postponed or adjourned from time to time, for the following purposes:

1. To fix the number of Class I directors at two and to elect two
Class I directors for a three-year term ending in 2006 and
continuing until their successors are duly elected and qualified
(beginning on page 3).

2. To consider and act upon a proposal to amend our Amended and
Restated Certificate of Incorporation to change our name from
"Electric Fuel Corporation" to "Arotech Corporation" (beginning on
page 8).

3. To act upon all other business that may properly come before the
meeting or any postponements or adjournments thereof.

Our Board of Directors has fixed the close of business on July 22, 2003
as the record date for determining which stockholders are entitled to notice of
the meeting and to vote at the meeting and any postponements or adjournments
thereof. If you are unable to be present at the meeting personally, please mark,
date, sign and return the enclosed proxy card as promptly as possible in the
postage-prepaid envelope provided, or vote electronically through the Internet
(at HTTP://WWW.VOTEPROXY.COM) or by telephone if you hold your shares in your
own name. Any stockholder who grants a proxy may revoke it at any time prior to
its exercise. Also, whether or not you grant a proxy, you may vote in person if
you attend the meeting.

BY ORDER OF THE BOARD OF DIRECTORS,

/s/ Yaakov Har-OZ
---------------------------------------------
Yaakov Har-Oz
New York, New York Vice President, General Counsel and Secretary
August 6, 2003

================================================================================
YOUR VOTE IS IMPORTANT! PLEASE SIGN, DATE AND RETURN
YOUR PROXY FORM IN THE ENCLOSED STAMPED, SELF-
ADDRESSED ENVELOPE AS SOON AS POSSIBLE.
================================================================================

AROTECH

632 BROADWAY, SUITE 1200
NEW YORK, NEW YORK 10012

ANNUAL MEETING OF THE STOCKHOLDERS
OF ELECTRIC FUEL CORPORATION
TO BE HELD ON SEPTEMBER 15, 2003

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PROXY STATEMENT
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The accompanying proxy is solicited by and on behalf of the Board of
Directors of Electric Fuel Corporation (doing business as Arotech Corporation),
for use at our Annual Meeting of Stockholders and any postponements and
adjournments thereof. The meeting is currently planned to be held in the
Ballroom of the Shelburne Murray Hill Hotel, 303 Lexington Avenue, New York, New
York, on Monday, September 15, 2003 at 10:00 a.m. local time, and thereafter as
it may be postponed or adjourned from time to time, for the purposes described
in the accompanying Notice of Annual Meeting of Stockholders.

Stockholders of record at the close of business on July 22, 2003 will
be entitled to vote at the annual meeting. As of July 22, 2003, there were
40,078,032 shares of our common stock outstanding held of record by 307
stockholders. Each holder of common stock is entitled to one vote per share on
each matter that comes before the annual meeting.

This proxy statement and the enclosed form of proxy to stockholders
will be mailed commencing on or about August 6, 2003. We are also mailing our
annual report for the fiscal year ended December 31, 2002 to our stockholders
along with this proxy statement.

VOTING PROCEDURES AND VOTE REQUIRED

Proxies that are properly marked, dated, and signed, or submitted
electronically via the Internet or by telephone by following the instructions on
the proxy card, and not revoked will be voted at the annual meeting in
accordance with any indicated directions. If no direction is indicated, proxies
will be voted FOR the fixing of the number of Class I directors at two and the
election of the nominees for director set forth below, FOR changing our name to
Arotech Corporation, and IN THE DISCRETION OF THE HOLDERS OF THE PROXIES with
respect to any other business that properly comes before the annual meeting and
all matters relating to the conduct of the annual meeting. If a broker indicates
on the enclosed proxy or its substitute that it does not have discretionary
authority as to certain shares to vote on a particular matter ("broker
non-votes"), those shares will not be considered as voting with respect to that
matter. We believe that the tabulation procedures to be followed by the
Inspector of Elections are consistent with the general requirements of Delaware
law concerning voting of shares and determination of a quorum.

You may revoke your proxy at any time before it is voted by delivering
to the Secretary of our company a written revocation or a duly executed proxy
bearing a later date than

the date of the proxy being revoked (including a proxy voted over the Internet
or by telephone). Any record stockholder attending the annual meeting in person
may revoke his or her proxy and vote his or her shares at the annual meeting.

Votes cast by proxy or in person at the annual meeting will be
tabulated by the Inspector of Elections, with the assistance of our transfer
agent. The Inspector of Elections will also determine whether or not a quorum is
present at the annual meeting. The presence of a quorum is required to transact
the business proposed to be transacted at the annual meeting. The presence in
person or by proxy of holders of a majority of the outstanding shares of our
common stock entitled to vote will constitute a quorum for the transaction of
business at the annual meeting. Abstentions and broker non-votes (as defined
above) will be counted for purposes of determining the presence or absence of a
quorum.

Directors will be elected by a plurality of the votes cast by the
holders of our common stock voting in person or by proxy at the annual meeting.
Abstentions and broker non-votes will have no effect on the vote for election of
directors.

In order to be adopted, the proposal to amend our Amended and Restated
Certificate of Incorporation to change our name to Arotech Corporation will
require the affirmative vote of a majority of ALL OUTSTANDING SHARES OF OUR
COMMON STOCK ENTITLED TO VOTE ON THIS PROPOSAL. As a result, abstentions and
broker non-votes will have the same practical effect as a negative vote on this
proposal.

The solicitation of proxies will be conducted by mail and we will bear
all attendant costs. These costs will include the expense of preparing and
mailing proxy solicitation materials for the annual meeting and reimbursements
paid to brokerage firms and others for their expenses incurred in forwarding
solicitation materials regarding the annual meeting to beneficial owners of our
common stock. We may conduct further solicitation personally, telephonically or
by facsimile through our officers, directors and employees, none of whom will
receive additional compensation for assisting with the solicitation.

We are not aware of any matters other than those described in this
proxy statement that will be acted upon at the annual meeting. In the event that
any other matters do come before the annual meeting for a stockholder vote, the
persons named as proxies in the form of proxy being delivered to you along with
this proxy statement will vote in accordance with their best judgment on those
matters.

At least ten days before the annual meeting, we will make a complete
list of the stockholders entitled to vote at the meeting open to the examination
of any stockholder for any purpose germane to the annual meeting. The list will
be open for inspection during ordinary business hours at our offices at 632
Broadway, Suite 1200, New York, New York 10012, and will also be made available
to stockholders present at the annual meeting.

PROPOSAL NUMBER 1

ELECTION OF DIRECTORS

The annual meeting will consider the election of two Class I directors
for three-year terms that expire in 2006. Our four other directors have terms
that end in either 2004 or 2005, as indicated below. Unless instructions are
given to the contrary, each of the persons named as proxies will vote the shares
to which each proxy relates FOR the election of each of the nominees listed
below for a term of three years expiring at the annual meeting of stockholders
to be held in 2006, and until the nominee's successor is duly elected and
qualified or until the nominee's earlier death, removal or resignation. The two
nominees named below are presently serving as directors and both of them are
anticipated to be available for election and able to a serve. However, if they
should become unavailable, the proxy will be voted for substitute nominee(s)
designated by the Board. The two nominees who receive the greatest number of
votes properly cast for the election of directors will be elected.

Our by-laws provide for a Board of one or more directors, and the
number of directors currently is fixed at six. Our Board is composed of three
classes of similar size. The members of each class are elected in different
years, so that only one-third of the Board is elected in any single year.

Dr. Eastman and Mr. Esses (who was appointed to fill a vacancy in the
Board) are designated as Class I directors. Their term expires in 2003. Messrs.
Rosenfeld and Miller are designated as Class II directors. Their terms expires
in 2004. Mr. Ehrlich and Mr. Wasserman (who was appointed to fill a vacancy in
the Board) are designated as Class III directors. Their terms expire in 2005.

The following table contains information concerning the nominees for
Class I directors and the other incumbent directors:

NAME AGE POSITION WITH AROTECH CLASS DIRECTOR SINCE
---- --- --------------------- ----- --------------

Dr. Jay M. Eastman(2)(4) ...... 58 Director I October 1993
Steven Esses(3) ............... 39 Executive Vice President, Chief Operating Officer and I July 2002
Director
Jack E. Rosenfeld(1)(2)(4) .... 64 Director II October 1993
Lawrence M. Miller(1)(3)(4).... 58 Director II November 1996
Robert S. Ehrlich (3) ......... 65 Chairman of the Board, President and Chief Executive III May 1991
Officer
Bert W. Wasserman(1)(2) ....... 70 Director III February 2003

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(1) Member of the Audit Committee.
(2) Member of the Compensation Committee.
(3) Member of the Executive Committee.
(4) Member of the Nominating Committee.

NOMINEES FOR ELECTION AS CLASS I DIRECTORS

DR. JAY M. EASTMAN has been one of our directors since October 1993.
Since November 1991, Dr. Eastman has served as President and Chief Executive
Officer of Lucid, Inc., a developer of laser technology applications for medical
diagnosis and treatment. Dr.

Eastman has served as a director of PSC Inc. ("PSCX"), a manufacturer and
marketer of laser diode bar code scanners, since April 1996 and served as Senior
Vice President of Strategic Planning from December 1995 through October 1997.
PSCX filed a voluntary petition for relief under Chapter 11 of the Bankruptcy
Code in November 2002; its pre-negotiated plan of reorganization has been
confirmed by the Bankruptcy Court. Dr. Eastman is also a director of Dimension
Technologies, Inc., a developer and manufacturer of 3D displays for computer and
video displays, and Centennial Technologies Inc., a manufacturer of PCMCIA
cards. From 1981 until January 1983, Dr. Eastman was Director of the University
of Rochester's Laboratory for Laser Energetics, where he was a member of the
staff from September 1975 to 1981. Dr. Eastman holds a B.S. and a Ph.D. in
Optics from the University of Rochester in New York.

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

CLASS II DIRECTORS

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

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

CLASS III DIRECTORS

ROBERT S. EHRLICH has been our Chairman of the Board since January 1993
and our President and Chief Executive Officer since October 2002. From May 1991
until January 1993, Mr. Ehrlich was our Vice Chairman of the Board, and from May
1991 until October 2002 he was our Chief Financial Officer. Mr. Ehrlich has been
a director of Eldat, Ltd., an Israeli manufacturer of electronic shelf labels,
since June 1999. Since 1987, Mr. Ehrlich has served as a director of PSCX, and,
since April 1997, Mr. Ehrlich has been the chairman of the board of PSCX. PSCX
filed a voluntary petition for relief under Chapter 11 of the Bankruptcy Code in
November 2002; its pre-negotiated plan of reorganization has been confirmed by
the Bankruptcy Court. Mr. Ehrlich received a B.S. and J.D. from Columbia
University in New York, New York.

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

INFORMATION CONCERNING THE BOARD AND ITS COMMITTEES

In the fiscal year ending December 31, 2002, the Board held eight
meetings and acted by unanimous written consent on one occasion. All directors
attended at least 75% of the aggregate number of meetings of the Board and
meetings of the committees of the Board on which he serves except for Mr. Leon
Gross. Mr. Gross, who had been elected as a Class I director, resigned from the
Board of Directors in view of his age (95) on March 17, 2003. Mr. Yehuda Harats,
who had also been elected as a Class I director, resigned from the Board of
Directors in November 2002.

Our board of directors has an Audit Committee, a Compensation
Committee, a Nominating Committee and an Executive Committee. The composition of
the various committees of the board of directors is as follows (the name of the
chairman of each committee appears in italics):

AUDIT COMMITTEE COMPENSATION COMMITTEE NOMINATING COMMITTEE EXECUTIVE COMMITTEE
--------------- ---------------------- -------------------- -------------------

BERT W. WASSERMAN JAY M. EASTMAN JACK E. ROSENFELD ROBERT S. EHRLICH
Lawrence M. Miller Jack E. Rosenfeld Lawrence M. Miller Steven Esses
Jack E. Rosenfeld Bert W. Wasserman Jay M. Eastman Lawrence M. Miller

AUDIT COMMITTEE

Created in December 1993, the Audit Committee is empowered by the Board
of Directors to, among other things: serve as an independent and objective party
to monitor the

Company's financial reporting process, internal control system and disclosure
control system; review and appraise the audit efforts of the Company's
independent accountants; assume direct responsibility for the appointment,
compensation, retention and oversight of the work of the outside auditors and
for the resolution of disputes between the outside auditors and the Company's
management regarding financial reporting issues; and provide an open avenue of
communication among the independent accountants, financial and senior
management, and the Board.

The Audit Committee consists of Messrs. Wasserman (Chairman), Miller
and Rosenfeld. We have determined that Mr. Wasserman qualifies as an "audit
committee financial expert" under applicable SEC and Nasdaq regulations. Mr.
Wasserman, as well as all the other members of the Audit Committee, is
"independent," as independence is defined in Rule 4200(a)(15) of the National
Association of Securities Dealers' listing standards and under Item 7(d)(3)(iv)
of Schedule 14A of the proxy rules under the Exchange Act.

The Audit Committee has selected Kost Forer & Gabbay, a member of Ernst
& Young Global, to serve as the Company's independent accountants during the
current fiscal year. Kost Forer & Gabbay served as the Company's independent
accountants during the fiscal year ended December 31, 2002. Kost Forer &
Gabbay's report on the financial statements for the years ended December 31,
2002 and 2001 did not contain an adverse opinion or disclaimer of opinion, and
were not qualified or modified as to uncertainty, auditing scope or accounting
principles.

A representative of Kost Forer & Gabbay is expected to be present at
the Annual Meeting to make such statements as Kost Forer & Gabbay may desire and
will be available to answer appropriate questions from shareholders.

The Audit Committee performed its duties during fiscal 2002 under a
written charter approved by the Board of Directors. The Audit Committee has
reviewed the relevant requirements of the Sarbanes-Oxley Act of 2002, the
proposed rules of the SEC and the proposed new listing standards of the Nasdaq
Stock Market regarding audit committee policies. Although some of these rules
and standards have not been finalized, the Board of Directors has adopted an
amended charter to voluntarily implement certain of the proposed rules and
standards. A copy of the Audit Committee Charter is attached as Exhibit A
hereto. The Board of Directors and the Audit Committee intend to further amend
this charter, if necessary, as rules and standards are finalized by the SEC and
the Nasdaq Stock Market to reflect changes in the proposals or additional
requirements.

The Audit Committee held three meetings during the fiscal year ending
December 31, 2002.

COMPENSATION COMMITTEE

The Compensation Committee was established in December 1993. The duties
of the Compensation Committee are to recommend compensation arrangements for our
executive officers and review annual compensation arrangements for all other
officers and significant employees.

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

The Compensation Committee held five meetings during the fiscal year
ending December 31, 2002.

NOMINATING COMMITTEE

The Nominating Committee, created in February 2003, identifies and
proposes candidates to serve as members of the Board of Directors. Proposed
nominees for membership on the Board of Directors submitted in writing by
stockholders to the Secretary of the Company will be brought to the attention of
the Nominating Committee.

The Nominating Committee consists of Mr. Rosenfeld (Chair), Mr. Miller
and Dr. Eastman, all of whom are "disinterested persons" as that term is used in
Rule 16b-3 under the Exchange Act.

The Nominating Committee did not exist during the fiscal year ending
December 31, 2002.

EXECUTIVE COMMITTEE

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

The Executive Committee consists of Messrs. Ehrlich (Chair), Miller and
Esses.

The Executive Committee held two meetings and acted by unanimous
written consent once during the fiscal year ending December 31, 2002.

DIRECTOR COMPENSATION

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

THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR FIXING THE
NUMBER OF CLASS I DIRECTORS AT TWO AND FOR ELECTION
OF THE CLASS I NOMINEES DESCRIBED ABOVE

PROPOSAL NUMBER 2

APPROVAL OF AN AMENDMENT TO OUR AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION TO CHANGE OUR NAME
FROM "ELECTRIC FUEL CORPORATION"
TO "AROTECH CORPORATION"

GENERAL

During 2002, we made a strategic corporate shift to the field of
defense and homeland security, including the manufacturing and distribution of
zinc-air batteries for military applications, by acquiring two new subsidiaries
(IES Interactive Training, Inc. and MDT Protective Industries Ltd.), by closing
our money-losing consumer battery operations, and by reorganizing into two
divisions: Defense and Security Products and Electric Fuel Batteries.

We believed that continuing to use the "Electric Fuel" name for our
entire business would de-emphasize what had become an important part of our new
and reorganized business, namely, defense and homeland security. Accordingly, in
February 2003, the Board of Directors unanimously approved a proposed amendment
to Article One of our Amended and Restated Certificate of Incorporation to
change our name from "Electric Fuel Corporation" to "Arotech Corporation," and
we filed the appropriate documents in the states of Delaware and New York to
begin doing business immediately under the new name. The Board also directed
that the proposed amendment be submitted to a vote of our stockholders at this
annual meeting.

TEXT OF THE AMENDMENT

If this proposal is adopted, Article One of our Amended and Restated
Certificate of Incorporation will read as follows:

"ONE: The name of this corporation is Arotech Corporation."
---

VOTE REQUIRED

The affirmative vote of the holders of a majority of the outstanding
shares of our common stock entitled to vote on this proposal will be required
for approval of this proposal. As a result, abstentions and broker non-votes
will have the effect of votes against the proposal.

THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR APPROVAL OF THE AMENDMENT
TO OUR AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
TO CHANGE OUR NAME FROM "ELECTRIC FUEL CORPORATION"
TO "AROTECH CORPORATION"

EXECUTIVE OFFICER COMPENSATION AND OTHER MATTERS

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;

>> 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 "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 "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.

SUMMARY COMPENSATION TABLE(1)

ANNUAL COMPENSATION
--------------------------------------------------

TAX
NAME AND PRINCIPAL POSITI0N YEAR SALARY BONUS REIMBURSEMENT
---------------------------- ----- --------- --------- ----------------

Yehuda Harats* 2002 $256,462 $ 32,380(2) $ 14,687
President, Chief
Executive Officer and
director
2001 $ 248,681 $ 99,750 $ 19,145
2000 $ 245,560 $ 82,380 $ 8,083

Robert S. Ehrlich 2002 $ 202,962 $ 99,750(2) $ 15,232
Chairman of the Board,
President, Chief
Executive Officer and
director** 2001 $ 211,644 $ 84,000 $ 17,201
2000 $ 245,574 $ 82,380 $ 7,146

LONG TERM ALL OTHER
COMPENSATION COMPENSATION
------------ ------------------------------------------------
CHANGES IN
ACCRUALS FOR
SICK DAYS, PAYMENT TO
SECURITIES VACATION DAYS, PENSION AND
UDERLYING AND TERMINATION EDUCATION
NAME AND PRINCIPAL POSITI0N OPTIONS COMPENSATION FUNDS OTHERS
---------------------------- ----------- ---------------- ----------- ----------

Yehuda Harats* 112,500(3) $ (661,440)(4) $ 22,735 $ 654
President, Chief
Executive Officer and
director
616,000(5) $ 375,375 (6) $ 62,617 $ 142,919(7)
400,000 $ 128,138 (8) $ 41,807 $ 859

Robert S. Ehrlich 262,500(9) $ 170,691(10) $ 22,256 $ 654
Chairman of the Board,
President, Chief
Executive Officer and
director** 521,000(11) $ 229,800(12) $ 52,841 $ 87,113(13)
400,000 $ 177,658(14) $ 41,806 $ 859

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

* 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
"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.

(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
"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 "Certain Relationships and Related Transactions - Officer
Loans," below.

ORIGINAL AMOUNT
PRINCIPAL OUTSTANDING
NAME OF BORROWER DATE OF LOAN AMOUNT OF LOAN AS OF 12/31/02 TERMS OF LOAN
---------------- ------------ -------------- -------------- ----------------------------------------------

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.

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
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:

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

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

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.

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% ($)
--------------- ----------- ----------- ------- -------- -------- ---------

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

-----------

(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.

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

AGGREGATED OPTION EXERCISES AND FISCAL YEAR-END OPTION VALUES

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

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

-----------

(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 us and
our 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 $551,499 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 "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,
furthermore, the agreement has already been extended by agreement of the parties
through December 31, 2005.

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

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

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

We can terminate Mr. Ehrlich's employment agreement in the event of
death or disability or for "Cause" (defined as conviction of certain crimes,
willful failure to carry out directives of our board of directors or gross
negligence or willful misconduct). Mr. Ehrlich has the right to terminate his
employment upon a change in our control or for "Good Reason," which is defined
to include adverse changes in employment status or compensation, our insolvency,
material breaches and certain other events. Additionally, Mr. Ehrlich may retire
(after age 68) or terminate his agreement for any reason upon 150 days' notice.
Upon termination of employment, the employment agreement provides for payment of
all accrued and unpaid

compensation, and (unless we have terminated the agreement for Cause or Mr.
Ehrlich has terminated the agreement without Good Reason and without giving us
150 days' notice of termination) bonuses due for the year in which employment is
terminated and severance pay in the amount of three years' base salary (or, in
the case of termination by Mr. Ehrlich on 150 days' notice, a lump sum payment
of $520,000). Furthermore, certain benefits will continue and all outstanding
options will be fully vested.

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

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

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

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 has 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.

REPORT OF THE COMPENSATION COMMITTEE

NOTWITHSTANDING ANYTHING TO THE CONTRARY SET FORTH IN ANY OF OUR PREVIOUS
FILINGS UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR
THE EXCHANGE ACT WHICH MIGHT INCORPORATE FUTURE FILINGS, INCLUDING THIS PROXY
STATEMENT, IN WHOLE OR IN PART, THE FOLLOWING REPORT AND THE PERFORMANCE GRAPH
ON PAGE 19 SHALL NOT BE INCORPORATED BY REFERENCE INTO ANY SUCH FILINGS.

OBJECTIVES AND PHILOSOPHY
We maintain compensation and incentive programs designed to motivate,
retain and attract management and utilize various combinations of base
salary, bonuses payable upon the achievement of specified goals,
discretionary bonuses and stock options. It is our current policy to
establish, structure and administer compensation plans and arrangements so
that the deductibility of such compensation will not be limited under
Section 162(m) of the Internal Revenue Code. Our Chief Executive Officer,
Robert S. Ehrlich, is party to an employment agreement with us. Our former
Chief Executive Officer, Yehuda Harats, who left our employ in October
2002, was also party to an employment agreement.

EXECUTIVE OFFICER COMPENSATION
The employment agreement with Mr. Harats provide, and the employment
agreement with Mr. Ehrlich provides, that if the results we actually attain
in a given year are at least 80% of the amount we budgeted at the beginning
of the year, we will pay a bonus to each of Messrs. Ehrlich and Harats, on
a sliding scale, in an amount equal to a minimum of 35% of their annual
base salaries then in effect, up to a maximum of 90% of their annual base
salaries then in effect if the results we actually attain for the year in
question are 120% or more of the amount we budgeted at the beginning of the
year. 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.

Beginning in May 2001, we instituted an options-for-salary program
designed to conserve our cash and to offer incentives to employees to
remain with us despite lowered cash compensation. Under this program,
certain of our more senior employees agreed to permanently waive a portion
of their salaries in exchange for options to purchase shares of our common
stock. During 2002, in exchange for waiver of $105,000 in salary, Mr.
Ehrlich received a total of 262,500 options during 2002, which options were
granted based on the lowest closing prices of our common stock during each
quarter of 2002. During 2002, in exchange for waiver of $45,000 in salary,
Mr. Harats received a total of 112,500 options during 2002, which options
were granted based on the lowest closing prices of our common stock during
each of the first three quarters of 2002. All of these options were granted
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
continued to be calculated based on salary prior to reduction. The
options-for-salary program was ended on December 31, 2002.

As of December 31, 2002, Mr. Ehrlich's total options, including the
options referred to in the immediately preceding paragraph, represented
approximately 2.7% of our outstanding

stock, which the Compensation Committee believes is an appropriate level of
options for him in view of his equity position (including options
exercisable within 60 days) in our company which, as of December 31, 2002,
represented approximately 4.3% of our outstanding stock. As of when Mr.
Harats's employment with us terminated in October 2002, Mr. Harats's total
options, including the options referred to in the immediately preceding
paragraph, represented approximately 3.4% of our fully-diluted outstanding
stock, which the Compensation Committee believes was an appropriate level
of options for him in view of his equity position (including options
exercisable within 60 days) in our company which, as of October 2002,
represented approximately 7.1% of our outstanding stock.

For information with respect to Mr. Harats's severance arrangements
with us, see "Termination Compensation of and Settlement with Yehuda
Harats," above.

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

We seek to promote, including through our compensation plans, an
environment that encourages employees to focus on our continuing long-term
growth. Employee compensation is generally comprised of a combination of
cash compensation and grants of options under our stock option plans. Stock
options are awarded annually in connection with annual bonuses and,
occasionally, during the year on a discretionary basis. Stock options are
intended to offer an incentive for superior performance while basing
employee compensation on the achievement of higher share value, and to
foster the retention of key personnel through the use of schedules which
vest options over time if the person remains employed by us. There is no
set formula for the award of options to individual employees. Factors
considered in making option awards to the employees other than the Named
Executive Officers in 2002 included prior grants to the employees, the
importance of retaining the employees services, the amount of cash bonuses
received by the employees, the employees potential to contribute to our
success and the employees' past contributions to us. Additionally, almost
all of our more senior employees participated in our options-for-salary
program (described above) of agreeing to permanently waive a portion of
their salaries in exchange for options to purchase shares of our common
stock. Most of these employees participated in this program to the extent
of 15% of their monthly salaries.

SUBMITTED BY THE COMPENSATION COMMITTEE

Dr. Jay M. Eastman
Jack E. Rosenfeld
Bert W. Wasserman

PERFORMANCE GRAPH

The following graph compares the yearly percentage change in our
cumulative total shareholder return on our common stock with the cumulative
total return on the Nasdaq Market Index (Broad Market Index) a self-constructed
peer group index (the "Old Index"), and a self-constructed new peer group index
(the "New Index") over the past five years, from December 31, 1997 through
December 31, 2002. We have chosen to replace the Old Index with the New Index
due to the strategic steps that we took during 2002, including the manufacturing

and distribution of zinc-air batteries for military applications, the
acquisition of two new subsidiaries (IES Interactive Training, Inc. and MDT
Protective Industries Ltd.) and the termination of our consumer battery
operations. We believe that the New Index is more reflective of our current
business segments and our shift in emphasis to defense and homeland security.

The cumulative total shareholder return is based on $100 invested in
our common stock and in the respective indices on December 31, 1997. The stock
prices on the performance graph are not necessarily indicative of future price
performance.

CUMULATIVE TOTAL RETURN THROUGH DECEMBER 31, 2002 AMONG
AROTECH CORPORATION, NASDAQ MARKET INDEX,
OLD PEER GROUP INDEX AND NEW PEER GROUP INDEX
[OBJECT OMITTED]

12/31/97 12/31/98 12/31/99 12/31/00 12/31/01 12/31/02
-------- -------- -------- -------- -------- --------

AROTECH 100.00 75.86 96.55 129.31 45.79 17.66
OLD PEER GROUP(1) 100.00 77.77 170.81 94.10 43.43 21.36
NEW PEER GROUP(2) 100.00 36.55 16.91 12.64 20.24 27.21
BROAD MARKET 100.00 139.63 259.13 157.32 124.20 85.05

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

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

(2) The New Peer Group Index is comprised of the following companies: Bio-Key
International, Inc., Command Security Corporation, Firearms Training
Systems, Inc., Guardian International, Inc. and ICTS International N.V. The
returns of each company have been weighted according to their respective
stock market capitalization for purposes of arriving at a peer group
average.

REPORT OF THE AUDIT COMMITTEE

The audit committee of the board of directors during 2002 (the
"Audit Committee") consisted of three non-employee directors, Dr. Jay
Eastman, Lawrence M. Miller, and Jack E. Rosenfeld, each of whom has been
determined to be independent as defined by the Nasdaq Marketplace Rules.
The Audit Committee operates under a written charter adopted by the board
of directors.

Management is responsible for the Company's internal controls and
the financial reporting process. The independent accountants are
responsible for performing an independent audit of the Company's
consolidated financial statements in accordance with generally accepted
accounting principles and to issue a report thereon. The Audit Committee's
responsibility is to monitor and oversee these processes.

In this context the Audit Committee has met and held discussions
with management and the independent accountants. Management represented to
the Audit Committee that the Company's consolidated financial statements
were prepared in accordance with generally accepted accounting principles,
and the Audit Committee has reviewed and discussed the consolidated
financial statements with management and the independent accountants. The
Audit Committee discussed with the independent accountants matters required
to be discussed by Statement on Auditing Standards No. 61.

The Company's independent accountants also provided to the Audit
Committee the written disclosure required by Independence Standards Board
Standard No. 1, "Independence Discussions with Audit Committees." The
Committee discussed with the independent accountants that firm's
independence and considered whether the non-audit services provided by the
independent accountants are compatible with maintaining its independence.

Based on the Audit Committee's discussion with management and the
independent accountants, and the Audit Committee's review of the
representation of management and the report of the independent accountants
to the Audit Committee, the Audit Committee recommended that the board of
directors include the audited consolidated financial statements in the
Company's Annual Report on Form 10-K for the year ended December 31, 2002
filed with the Securities and Exchange Commission.

SUBMITTED BY THE AUDIT COMMITTEE

Bert W. Wasserman
Lawrence M. Miller
Jack E. Rosenfeld

FEES BILLED FOR SERVICES RENDERED BY PRINCIPAL ACCOUNTANT

For the fiscal year ended December 31, 2002, Kost Forer & Gabbay, our
independent auditor and principal accountant, billed the approximate fees set
forth below:

Audit Fees.......................................................... $ 93,693
Financial Information Systems Design and Implementation Fees........ $ 0
All Other Fees...................................................... $ 6,308

The Audit Committee of the Board of Directors has considered whether
the provision of information technology services and other non-audit services is
compatible with maintaining the independence of our principal accountant.

Of the time expended by our principal accountant to audit our financial
statements for the year ended December 31, 2002, none of the work was performed
by persons other than the principal accountant's full-time, permanent employees.

INFORMATION REGARDING BENEFICIAL OWNERSHIP OF COMMON STOCK

The following table sets forth information regarding the security
ownership, as of July 22, 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.

PERCENTAGE OF TOTAL
NAME AND ADDRESS OF BENEFICIAL OWNER(1) SHARES BENEFICIALLY OWNED(2)(3) SHARES OUTSTANDING(3)
--------------------------------------- ------------------------------- ---------------------

Leon S. Gross........................................... 4,036,036(4)(12) 10.1%
Austin W. Marxe and David M. Greenhouse(5).............. 2,843,597(5) 7.0%
Robert S. Ehrlich....................................... 2,056,567(6)(12) 5.0%
Steven Esses............................................ 208,334(7) *
Avihai Shen............................................. 135,382(8) *
Dr. Jay M. Eastman...................................... 65,001(9) *
Jack E. Rosenfeld....................................... 67,001(10) *
Lawrence M. Miller...................................... 525,080(11) 1.3%
All of our directors and executive officers as a group
(7 persons**)......................................... 7,192,071(13) 17.1%

---------

* Less than one percent.

** Including Mr. Gross, who resigned as a director on March 17, 2003.
Also includes 551,835 shares held of record by or on behalf of Yehuda
Harats as of July 22, 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.

(3) Based on 40,078,032 shares of common stock outstanding as of July 22,
2003. 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 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 1,368,401 shares issuable
upon exercise of options exercisable within 60 days.

(7) Consists of 208,334 shares issuable upon exercise of options
exercisable within 60 days.

(8) Includes 124,882 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 July 22, 2003, 5,241,036 shares of our common
stock were subject to this Voting Rights Agreement (including 551,835
shares held of record by or on behalf of Yehuda Harats as of July 22,
2003).

(13) Includes 1,891,620 shares issuable upon exercise of options
exercisable within 60 days.

SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

Under the securities laws of the United States, our directors, certain
of our officers and any persons holding more than ten percent of our common
stock are required to report their ownership of our common stock and any changes
in that ownership to the Securities and Exchange Commission. Specific due dates
for these reports have been established and we are required to report any
failure to file by these dates during 2002. We are not aware of any instances
during 2002 where such "reporting persons" failed to file the required reports
on or before the specified dates, except that a Form 5 that Mr. Yehuda Harats,
who resigned as a director in November 2002, was required to file on or before
February 14, 2003 was to the best of our knowledge never filed by him.

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
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 July 22, 2003, 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 July 22, 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.

TERMINATION COMPENSATION OF AND SETTLEMENT WITH YEHUDA HARATS

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.

STOCKHOLDER PROPOSALS

Pursuant to the rules of the Securities and Exchange Commission,
stockholder proposals made in accordance with Rule 14a-8 under the Exchange Act
intended to be included in our proxy material for the next annual meeting must
be received by us on or before April 6, 2004. If you desire to bring a proposal
before the next annual meeting and such proposal is not timely submitted for
inclusion in our proxy statement, you can still submit the proposal if it is
received by us no later than June 1, 2004. Any proposals must be received at our
principal

executive offices, 632 Broadway, Suite 1200, New York, New York 10012,
Attention: Corporate Secretary by the applicable date.

ANNUAL REPORT

Copies of our Annual Report on Form 10-K (including audited financial
statements) filed with the Securities and Exchange Commission may be obtained
without charge by writing to Stockholder Relations, Arotech Corporation, 632
Broadway, Suite 1200, New York, New York 10012. A request for a copy of our
Annual Report on Form 10-K must set forth a good-faith representation that the
requesting party was either a holder of record or a beneficial owner of our
common stock on July 22, 2003. Exhibits to the Form 10-K will be mailed upon
similar request and payment of specified fees to cover the costs of copying and
mailing such materials.

Our audited financial statements for the fiscal year ended December 31,
2002 and certain other related financial and business information are contained
in our 2002 Annual Report to Stockholders, which is being furnished to our
stockholders along with this proxy statement, but which is not deemed a part of
the proxy soliciting material.

OTHER MATTERS

We are not aware of any other matter that may come before the annual
meeting of stockholders and we do not currently intend to present any such other
matter. However, if any such other matters properly come before the meeting or
any adjournment thereof, the persons named as proxies will have discretionary
authority to vote the shares represented by the accompanying proxy in accordance
with their own judgment.

BY ORDER OF THE BOARD OF DIRECTORS,

/s/ Yaakov Har-Oz
-------------------------------------------------
Yaakov Har-Oz
Vice President, General Counsel and Secretary

New York, New York
August 6, 2003

EXHIBIT A

AROTECH CORPORATION
AUDIT COMMITTEE CHARTER

I. STATEMENT OF POLICY

The Audit Committee shall assist the Board of Directors (the "Board")
of Arotech Corporation ("Arotech") in fulfilling its oversight responsibility by
reviewing the accounting and financial reporting processes of Arotech and its
subsidiaries (collectively, the "Company"), the Company's system of internal
controls regarding finance, accounting, legal compliance and ethics, and the
audits of the Company's financial statements. In so doing, it is the
responsibility of the Audit Committee to maintain free and open means of
communications among the Company's Board of Directors, outside auditors and
senior management. The Audit Committee's primary responsibilities and duties
are:

o Serve as an independent and objective party to monitor the Company's
financial reporting process, internal control system and disclosure
control system.

o Review and appraise the audit efforts of the Company's independent
accountants.

o Assume direct responsibility for the appointment, compensation,
retention and oversight of the work of the outside auditors and for
the resolution of disputes between the outside auditors and the
Company's management regarding financial reporting issues.

o Provide an open avenue of communication among the independent
accountants, financial and senior management and the Board.

The Audit Committee will primarily fulfill these responsibilities by
carrying out the activities identified in Section IV of this Charter.

The Company shall be responsible for the providing the Audit Committee
with appropriate funding, as determined by the Audit Committee, in order to
compensate the outside auditors and advisors engaged by or employed by the Audit
Committee.

II. COMPOSITION OF THE AUDIT COMMITTEE

The Audit Committee shall consist of at least three "independent"
Directors of Arotech and shall serve at the pleasure of the Board. An
"independent" Director is defined as an individual who (a) is not an officer or
salaried employee or an affiliate of the Company, (b) does not have any
relationship that, in the opinion of the Board, would interfere with his or her
exercise of independent judgment as an Audit Committee member, (c) meets the
independence requirements of the Securities and Exchange Commission (the "SEC")
and the Nasdaq Stock Market or such

A-1

other securities exchange or market on which Arotech's securities are traded and
(d) except as permitted by the SEC and the Nasdaq Stock Market or such other
securities exchange or market on which Arotech's securities are traded, does not
accept any consulting, advisory or other compensatory fee from the Company.

At least one member of the Audit Committee shall be a "financial
expert" as defined by the SEC and the Nasdaq Stock Market or such other
securities exchange or market on which Arotech's securities are traded. Each
Audit Committee member must be able to read and understand financial statements,
including a balance sheet, income statement, and cash flow statement.

The members of the Audit Committee shall be designated by the full
Board from time to time. The Board shall designate one member of the Audit
Committee to serve as chairperson of the committee.

III. MEETINGS AND MINUTES

The Audit Committee shall meet at least quarterly, with additional
meetings if circumstances require, for the purpose of satisfying its
responsibilities. The Audit Committee shall maintain minutes of each meeting of
the Audit Committee and shall report the actions of the Audit Committee to the
Board, with such recommendations as the Audit Committee deems appropriate.

IV. RESPONSIBILITIES AND DUTIES OF THE AUDIT COMMITTEE

The Audit Committee shall oversee and monitor the Company's accounting
and financial reporting process, internal control system and disclosure control
system, review the audits of the Company's financial statements and review and
evaluate the performance of the Company's outside auditors. In fulfilling these
duties and responsibilities, the Audit Committee shall take the following
actions, in addition to performing such functions as may be assigned by law, the
Company's certificate of incorporation, the Company's bylaws or the Board.

1. The Audit Committee shall assume direct responsibility for the
appointment, retention and oversight of the work of the outside
auditors and, when appropriate, the replacement of the outside
auditors. As part of the audit process, the Audit Committee shall meet
with the outside auditors to discuss and decide the audit's scope. The
Audit Committee shall determine that the outside audit team engaged to
perform the external audit consists of competent, experienced,
auditing professionals. The Audit Committee shall also review and
approve the compensation to be paid to the outside auditors and shall
be authorized to compensate the outside auditors.

2. The Audit Committee shall take, or recommend that the full Board take,
appropriate action to ensure the independence of the outside auditors.
The Audit Committee shall require the outside auditors to advise the
Company of any fact or circumstances that might adversely affect the
outside auditors' independence or judgment with respect to the Company
under applicable auditing standards. The Audit Committee shall require
the outside auditors to submit, on an annual basis, a formal written
statement setting forth all relationships between the outside auditors
and the Company that may affect the objectivity and independence of
the outside auditors. Such statement shall confirm

A-2

that the outside auditors are not aware of any conflict of interest
prohibited by Section 10A(l) of the Securities Exchange Act of 1934
(the "Exchange Act"). The Audit Committee shall actively engage in a
dialogue with the outside auditors with respect to any disclosed
relationships or services that may impact the objectivity and
independence of the outside auditors.

3. The Audit Committee shall require the outside auditors to advise the
Audit Committee in advance in the event that the outside auditors
intend to provide any professional services to the Company other than
services provided in connection with an audit or a review of the
Company's financial statements ("non-audit services"); provided that
such non-audit services are not listed in Section 10A(g) of the
Exchange Act ("prohibited services"). The Audit Committee shall
approve, in advance, any non-audit services to be provided to the
Company by the Company's outside auditing firm.

4. The Audit Committee shall obtain confirmations from time to time from
the Company's outside auditing firm that such firm is not providing to
the Company (i) any prohibited services, or (ii) any other non-audit
service or any auditing service that has not been approved in advance
by the Audit Committee. The Audit Committee shall have the authority
to approve the provision of non-audit services that have not been
pre-approved by the Audit Committee, but only to the extent that such
non-audit services qualify under the DE MINIMUS exception set forth in
Section 10A(i)(1)(B) of the Exchange Act. The Audit Committee shall
record in its minutes and report to the Board all approvals of
non-audit services granted by the Audit Committee.

5. The Audit Committee shall meet with the outside auditors, with no
management in attendance, to openly discuss the quality of the
Company's accounting principles as applied in its financial reporting,
including issues such as (a) the appropriateness, not just the
acceptability, of the accounting principles and financial disclosure
practices used or proposed to be used by the Company, (b) the clarity
of the Company's financial disclosures and (c) the degree of
aggressiveness or conservatism that exists in the Company's accounting
principles and underlying estimates and other significant decisions
made by the Company's management in preparing the Company's financial
disclosures. The Audit Committee shall then meet, without operating
management or the outside auditors being present, to discuss the
information presented to it.

6. The Audit Committee shall meet with the outside auditors and
management to review the Company's quarterly reports on Form 10-Q and
annual report on Form 10-K and discuss any significant adjustments,
management judgments and accounting estimates and any significant new
accounting policies before such forms are filed with the SEC. The
Audit Committee shall require the outside auditors to report to the
Audit Committee all critical accounting policies and practices to be
used, all alternative treatments of financial information within
generally accepted accounting principles that have been discussed with
the Company's management, ramifications of the use of such alternative
disclosures and treatments, the treatments preferred by the outside
auditors and other material written communications between the outside
auditors and the Company's management, including management's letters
and schedules of unadjusted differences.

A-3

7. Upon the completion of the annual audit, the Audit Committee shall
review the audit findings reported to it by the outside auditors,
including any comments or recommendations of the outside auditors,
with the entire Board.

8. The Audit Committee shall review all reports received from the federal
and state regulatory authorities and assure that the Board is aware of
the findings and results. In addition, it will meet with the
appropriate members of senior management designated by the Audit
Committee to review the responses to the respective regulatory
reports.

9. The Audit Committee shall consider and review with management: (a)
significant findings during the year and management's responses
thereto, including the status of previous audit recommendations and
(b) any difficulties encountered in the course of their audits,
including any restrictions on the scope of activities or access to
required information.

10. The Audit Committee shall consider and approve, if appropriate,
changes to the Company's auditing and accounting principles and
practices, as suggested by the outside auditors or management, and the
Audit Committee shall review with the outside auditors and management
the extent to which such changes have been implemented (to be done at
an appropriate amount of time prior to the implementation of such
changes as decided by the Audit Committee).

11. The Audit Committee shall prepare a letter for inclusion in the
Company's proxy statement describing the discharge of the Audit
Committee's responsibilities.

12. The Audit Committee will review and update this Charter periodically,
at least annually, and as conditions may dictate. The Audit Committee
Charter shall be presented to the full Board for its approval of any
changes.

13. Commencing on such date as Section 102(a) of the Sarbanes-Oxley Act of
2002 (the "Act") becomes effective, the Audit Committee shall obtain
confirmation from the outside auditors at the commencement of each
audit that such firm is a "registered public accounting firm" as such
term is defined under the Act.

14. The Audit Committee shall have the authority to engage independent
counsel and other advisers as it determines necessary to perform its
duties.

15. The Audit Committee shall establish procedures for (i) the receipt,
retention and treatment of complaints received by the Company
regarding accounting, internal accounting controls or auditing matters
and (ii) the confidential, anonymous submission by employees of the
Company of concerns regarding questionable accounting or auditing
matters.

16. The Audit Committee shall investigate or consider such other matters
within the scope of its responsibilities and duties as the Audit
Committee may, in its discretion, determine to be advisable.

A-4

ANNUAL MEETING OF SHAREHOLDERS OF

ELECTRIC FUEL CORPORATION DOING BUSINESS AS
AROTECH CORPORATION
SEPTEMBER 15, 2003

Please date, sign and mail
your proxy card in the
envelope provided as soon
as possible

Please detach along perforated line and mail in the envelope provided.

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

THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE ELECTION OF DIRECTORS AND "FOR" PROPOSAL 2.
PLEASE SIGN, DATE AND RETURN PROMPTLY IN THE ENCLOSED ENVELOPE. PLEASE MARK YOUR VOTE IN BLUE OR BLACK INK AS SHOWN HERE
----------------------------------------------------------------------------------------------------------------------------------

1. To fix the number of Class I directors at two and to 2. To amend our Amended and Restated Certificate of
elect two Class I directors for a three-year term Incorporation to change our name from "Electric Fuel
ending in 2006 and continuing until their successors Corporation" to "Arotech Corporation"
are duly elected and qualified:
FOR AGAINST ABSTAIN
[ ] [ ] [ ]

[ ] FOR ALL NOMINEES NOMINEES: PLEASE SIGN, DATE AND RETURN THIS PROXY FORM PROMPTLY USING
o Dr. Jay M. Eastman THE ENCLOSED ENVELOPE.
o Steven Esses

[ ] WITHHOLDING AUTHORITY FOR The undersigned acknowledges receipt of the Notice of Annual
ALL NOMINEES Meeting of Stockholders and Proxy Statement of Arotech
Corporation dated August 6, 2003 and of Arotech
[ ] FOR ALL EXCEPT Corporation's (See instructions Annual below) Report for the
(See instructions below) fiscal year ended December 31, 2002.

INSTRUCTION: To withhold authority to vote for any
individual nominee(s), mark "FOR ALL EXCEPT"
and fill in the circle next to each nominee
you wish to withhold, as shown here: o
-------------------------------------------------------------------------------

-------------------------------------------------------------------------------
Mark here if you plan to attend the meeting. [ ]
To change the address on your account, please check the box at right and
indicate your new address in the address space above. Please note that [ ]
changes to the registered name(s) on the account may not be submitted via
this method. [ ]
---------------------------------------------------------

------------------------------- -------------- -------------------------------- -------------
Signature of Date: Signature of Date:
Shareholder Shareholder
------------------------------- -------------- -------------------------------- -------------

NOTE: Please sign exactly as name appears on this Proxy. When shares are held by
joint tenants, both should sign. If signing as attorney, executor,
administrator, trustee or guardian, please give full title as such. If you
are signing for a corporation, please sign in the full corporate name by
President or other authorized officer. If you are signing for a
partnership, please sign in the partnership name by authorized person.

AROTECH CORPORATION

PROXY SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF AROTECH CORPORATION
FOR ANNUAL MEETING OF STOCKHOLDERS TO BE HELD SEPTEMBER 15, 2003

The undersigned, having received the Notice of the Annual Meeting of
Stockholders and the Proxy Statement on behalf of the Board of Directors of
Electric Fuel Corporation, doing business as Arotech Corporation (the
"Company"), hereby appoint(s) Robert S. Ehrlich and Yaakov Har-Oz, and each of
them, proxies of the undersigned (with full power of substitution) to attend the
Annual Meeting of the Company to be held on Monday, September 15, 2003 at 10:00
a.m. local time in the Ballroom of the Shelburne Murray Hill Hotel, 303
Lexington Avenue, New York, New York, and all postponements and adjournments
thereof (the "Meeting"), and there to vote all shares of common stock of the
Company that the undersigned would be entitled to vote, if personally present,
in regard to all matters that may come before the Meeting, and without limiting
the general authorization hereby given, the undersigned directs that his or her
vote be cast as specified in this Proxy.

THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED IN THE MANNER SPECIFIED
HEREIN. IF NO SPECIFICATION IS MADE, THE PROXIES INTEND TO VOTE FOR THE NOMINEES
AND FOR THE OTHER PROPOSALS SET FORTH HEREIN AND DESCRIBED IN THE BOARD OF
DIRECTORS' PROXY STATEMENT. IF ANY OF THE NOMINEES IS NOT AVAILABLE TO SERVE,
THIS PROXY MAY BE VOTED FOR A SUBSTITUTE. THIS PROXY DELEGATES DISCRETIONARY
AUTHORITY WITH RESPECT TO MATTERS NOT KNOWN OR DETERMINED AT THE TIME OF
SOLICITATION OF THIS PROXY. THE UNDERSIGNED HEREBY REVOKES ANY OTHER PROXY
PREVIOUSLY GRANTED TO VOTE THE SAME SHARES OF STOCK FOR SAID MEETING.

SEE REVERSE SIDE. If you wish to vote in accordance with the recommendations of
the Board of Directors, just sign on the reverse side. You need not mark any
boxes.

(CONTINUED AND TO BE SIGNED ON THE REVERSE SIDE)

ANNUAL MEETING OF SHAREHOLDERS OF

ELECTRIC FUEL CORPORATION DOING BUSINESS AS
AROTECH CORPORATION
SEPTEMBER 15, 2003

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PROXY VOTING INSTRUCTIONS
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MAIL-Date, sign and mail your proxy card in the -------------------------------------
envelope provided as soon as possible. COMPANY NUMBER
-------------------------------------
-OR- ACCOUNT NUMBER
-------------------------------------
TELEPHONE-Call toll-free 1-800-PROXIES from any CONTROL NUMBER
touch-tone telephone and follow the instructions. -------------------------------------
Have your control number and proxy card available
when you call.

-OR-

INTERNET-Access "www.voteproxy.com" and follow
the on-screen instructions. Have your control
number available when you access the web page.

Please detach along perforated line and mail in the envelope provided.

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THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE ELECTION OF DIRECTORS AND "FOR" PROPOSAL 2.
PLEASE SIGN, DATE AND RETURN PROMPTLY IN THE ENCLOSED ENVELOPE. PLEASE MARK YOUR VOTE IN BLUE OR BLACK INK AS SHOWN HERE
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[ ] FOR ALL NOMINEES NOMINEES: PLEASE SIGN, DATE AND RETURN THIS PROXY FORM PROMPTLY USING
o Dr. Jay M. Eastman THE ENCLOSED ENVELOPE.
o Steven Esses