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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED September 30, 2005 .

Commission file number: 0-23336

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

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

354 Industry Drive, Auburn, Alabama 36830
- ---------------------------------------------------- ---------------
(Address of principal executive offices) (Zip Code)

(334) 502-9001
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(Registrant's telephone number, including area code)

------------------------------------------------------------------------
(Former address, if changed since last report)

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

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

Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
Yes |_| No |X|

APPLICABLE ONLY TO CORPORATE ISSUERS:

The number of shares outstanding of the issuer's common stock as of November 14,
2005 was 90,204,708.

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AROTECH CORPORATION

INDEX

PART I - FINANCIAL INFORMATION

Item 1 - Interim Consolidated Financial Statements (Unaudited):
Consolidated Balance Sheets at September 30, 2005 and December 31, 2004........................ 3
Consolidated Statements of Operations for the Nine and Three Months Ended September 30, 2005
and 2004................................................................................... 5
Consolidated Statements of Changes in Stockholders' Equity during the Nine-Month Period Ended
September 30, 2005......................................................................... 6
Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2005 and 2004.... 7
Note to the Interim Consolidated Financial Statements.......................................... 11

Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations. 20

Item 3 - Quantitative and Qualitative Disclosures about Market Risk............................ 47

Item 4 - Controls and Procedures............................................................... 47

PART II - OTHER INFORMATION

Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds........................... 50

Item 6 - Exhibits.............................................................................. 50

SIGNATURES..................................................................................... 52

AROTECH CORPORATION

ITEM 1. INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

CONSOLIDATED BALANCE SHEETS
(U.S. Dollars)

September 30, 2005 December 31, 2004
------------------ -----------------
ASSETS (Unaudited)

CURRENT ASSETS:

Cash and cash equivalents ........................................... $ 11,232,180 $ 6,734,512
Restricted collateral deposits ...................................... 2,328,908 6,962,110
Available-for-sale marketable securities ............................ 35,775 135,568
Trade receivables (net of allowance for doubtful accounts in the
amount of $46,475 and $55,394 as of September 30, 2005 and December
31, 2004, respectively) ........................................... 9,120,855 8,266,880
Unbilled receivables ................................................ 2,052,482 2,881,468
Other accounts receivable and prepaid expenses ...................... 2,527,075 1,339,393
Inventories ......................................................... 8,572,203 7,277,301
------------ ------------

Total current assets ...................................... 35,869,478 33,597,232
------------ ------------

SEVERANCE PAY FUND ...................................................... 2,015,184 1,980,047

PROPERTY AND EQUIPMENT, NET ............................................. 4,172,889 4,600,691

RESTRICTED DEPOSITS ..................................................... 4,021,441 4,000,000

INVESTMENT IN AFFILIATED COMPANY ........................................ 112,500 --

GOODWILL ................................................................ 28,961,782 39,745,516

OTHER INTANGIBLE ASSETS, NET ............................................ 11,695,813 14,368,701
------------ ------------

$ 86,849,087 $ 98,292,187
============ ============

The accompanying notes are an integral part of the Consolidated Financial
Statements.

AROTECH CORPORATION
CONSOLIDATED BALANCE SHEETS
(U.S. Dollars, except share data)

September 30, 2005 December 31, 2004
------------------ -----------------
(Unaudited)
LIABILITIES AND SHAREHOLDERS' EQUITY

CURRENT LIABILITIES:

Trade payables ........................................................ $ 5,112,744 $ 6,177,546
Other accounts payable and accrued expenses ........................... 5,533,640 5,818,188
Current portion of promissory notes due to purchase of subsidiaries ... 1,498,488 13,585,325
Short-term bank loans and current portion of long-term loans .......... 1,211,587 181,352
Deferred revenues ..................................................... 1,271,497 618,229
Liability in connection with issuance of warrants ..................... 422,034 --
Current portion of convertible debentures ............................. 10,061,329 --
Liabilities of discontinued operation (see Note 8) .................... 200,000 --
-------------- --------------

Total current liabilities .................................................. 25,311,319 26,380,640

LONG TERM LIABILITIES
Accrued severance pay ................................................. 3,519,907 3,422,951
Convertible debenture ................................................. 9,962,155 1,754,803
Deferred revenues ..................................................... -- 163,781
Long-term note ........................................................ -- 20,891
Long-term portion of promissory note due to purchase of subsidiaries .. -- 980,296
-------------- --------------

Total long-term liabilities ................................................ 13,482,062 6,342,722

MINORITY INTEREST .......................................................... 114,731 95,842

SHAREHOLDERS' EQUITY:
Share capital -
Common stock - $0.01 par value each;
Authorized: 250,000,000 shares as of September 30, 2005 and December
31, 2004; Issued: 90,760,041 shares as of September 30, 2005 and
80,637,002 shares as of December 31, 2004; Outstanding - 90,204,708
shares as of September 30, 2005 and 80,081,669 shares as of
December 31, 2004 ................................................. 907,602 806,370
Preferred shares - $0.01 par value each;
Authorized: 1,000,000 shares as of September 30, 2005 and December
31, 2004; No shares issued and outstanding as of September 30, 2005
and December 31, 2004 ............................................. --
Additional paid-in capital ............................................ 193,669,329 189,266,103
Deferred stock compensation ........................................... (633,943) (1,258,295)
Accumulated deficit ................................................... (139,741,499) (118,953,553)
Treasury stock, at cost (common stock - 555,333 shares as of September
30, 2005 and December 31, 2004) ..................................... (3,537,106) (3,537,106)
Notes receivable from stockholders .................................... (2,363,243) (1,222,871)
Accumulated other comprehensive income (loss) ......................... (360,165) 372,335
-------------- --------------

Total shareholders' equity ................................................. 47,940,975 65,472,983
-------------- --------------

$ 86,849,087 $ 98,292,187
============== ==============

The accompanying notes are an integral part of the Consolidated Financial
Statements.

AROTECH CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(U.S. Dollars, except share data)

Nine months ended September 30, Three months ended September 30,
----------------------------- -----------------------------
2005 2004 2005 2004
------------ ------------ ------------ ------------

Revenues ......................................... $ 33,814,030 $ 33,383,023 $ 11,189,675 $ 16,272,521

Cost of revenues ................................. 23,414,434 22,680,921 8,433,283 11,548,948
------------ ------------ ------------ ------------

Gross profit ..................................... 10,399,596 10,702,102 2,756,392 4,723,573

Operating expenses:
Research and development .................... 1,245,452 1,302,774 346,948 431,147
Selling and marketing ....................... 3,241,179 3,435,183 1,018,486 1,294,487
General and administrative .................. 10,874,309 7,571,923 4,031,477 2,111,853
Amortization of intangible assets ........... 2,346,083 1,731,425 699,843 739,400
Impairment of goodwill and other intangible
assets .................................... 11,052,606 -- 8,663,478 --
------------ ------------ ------------ ------------
Total operating costs and expenses ............... 28,759,629 14,041,305 14,760,232 4,576,887
------------ ------------ ------------ ------------

Operating income (loss) .......................... (18,360,033) (3,339,203) (12,003,840) 146,686
Other income ..................................... 160,652 -- 38,636 --
Financial income (expenses), net ................. (2,056,518) (2,126,079) (750,052) 1,105,276
------------ ------------ ------------ ------------

Income (loss) before income taxes ................ (20,255,899) (5,465,282) (12,715,256) 1,251,962
Income tax expenses .............................. (314,760) (286,525) (47,542) (116,460)
------------ ------------ ------------ ------------
Income (loss) before minority interest in ........ (20,570,659) (5,751,807) (12,762,798) 1,135,502
earnings of a subsidiary
Minority interest in loss (earnings) of a
subsidiary .................................... (17,287) (35,365) 53,866 (8,657)
------------ ------------ ------------ ------------
Income (loss) from continuing operations ......... (20,587,946) (5,787,172) (12,708,932) 1,126,845
Income (loss) from discontinued operations (see
Note 8) ....................................... (200,000) -- -- --
------------ ------------ ------------ ------------
Net loss ......................................... (20,787,946) (5,787,172) (12,708,932) 1,126,845
Deemed dividend to certain stockholders .......... -- (3,328,952) -- (2,165,952)
------------ ------------ ------------ ------------
Net loss attributable to common stockholders ..... $(20,787,946) $ (9,116,124) $(12,708,932) $ (1,039,107)
============ ============ ============ ============

Basic and diluted net loss per share from
continuing operations .......................... $ (0.25) $ (0.14) $ (0.15) $ (0.01)
============ ============ ============ ============
Basic and diluted net loss per share from
discontinued operation ......................... $ 0.00 $ 0.00 $ 0.00 $ 0.00
============ ============ ============ ============
Basic and diluted net loss per share ............. $ (0.26) $ (0.14) $ (0.15) $ (0.01)
============ ============ ============ ============

Weighted average number of shares used in
computing basic and diluted net loss per share . 81,122,481 67,072,069 82,475,778 76,744,251
============ ============ ============ ============

The accompanying notes are an integral part of the Consolidated Financial
Statements.

AROTECH CORPORATION
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(U.S. Dollars, except share data)

Common Stock Additional Deferred
---------------------- paid-in stock Accumulated
Shares Amount capital compensation deficit
---------- -------- ------------- ----------- -------------

BALANCE AT JANUARY 1,
2005 - NOTE 1 .................. 80,637,001 $806,370 $ 189,266,103 $(1,258,295) $(118,953,553)
CHANGES DURING THE
NINE-MONTH PERIOD ENDED
SEPTEMBER 30, 2005

Issuance of shares, net ...... 9,539,962 95,401 3,892,835 -- --

Shares issued to consultant .. 507,253 5,073 516,200 -- --
Compensation related to
non-recourse loan granted
to shareholder ............. -- -- (28,500) -- --

Employee options exercise .... 15,825 158 17,034 -- --

Shares issued to employees ... 10,000 100 (100) -- --
Deferred stock compensation
related to options and
restricted stock ........... 50,000 500 50,500 (51,000) --
Amortization of deferred
stock compensation ......... -- -- -- 606,152 --
Cancellation of deferred
stock compensation ......... -- -- (69,200) 69,200 --
Interest accrued on notes
receivable from shareholders -- -- 24,457 -- --
Other comprehensive loss -
foreign currency
translation adjustment ..... -- -- -- -- --
Other comprehensive loss -
unrealized gain on
available for sale
marketable securities ...... -- -- -- -- --

Net loss ...................... -- -- -- -- (20,787,946)
---------- -------- ------------- ----------- -------------
Total comprehensive loss ...... -- -- -- -- --

BALANCE AT SEPTEMBER
30, 2005 - UNAUDITED ........... 90,760,041 $907,602 $ 193,669,329 $ (633,943) $(139,741,499)
========== ======== ============= =========== =============

Notes Accumulated
receivable other Total
Treasury from comprehensive comprehensive
stock shareholders income (loss) loss Total
----------- ----------- --------- ------------ ------------
BALANCE AT JANUARY 1,

2005 - NOTE 1 .................. $(3,537,106) $(1,222,871) $ 372,335 $ -- $ 65,472,983
CHANGES DURING THE
NINE-MONTH PERIOD ENDED
SEPTEMBER 30, 2005

Issuance of shares, net ...... -- (1,115,915) -- 2,872,321

Shares issued to consultant .. -- -- -- 521,273
Compensation related to
non-recourse loan granted
to shareholder ............. -- -- -- -- (28,500)

Employee options exercise .... -- -- -- -- 17,192

Shares issued to employees ... -- -- -- -- --
Deferred stock compensation
related to options and
restricted stock ........... -- -- -- -- --
Amortization of deferred
stock compensation ......... -- -- -- -- 606,152
Cancellation of deferred
stock compensation ......... -- -- -- --
Interest accrued on notes
receivable from shareholders -- (24,457) -- -- --
Other comprehensive loss -
foreign currency
translation adjustment ..... -- -- (730,501) (730,501) (730,501)
Other comprehensive loss -
unrealized gain on
available for sale
marketable securities ...... -- -- (1,999) (1,999) (1,999)

Net loss ...................... -- -- -- (20,787,946) (20,787,946)
----------- ----------- --------- ------------ ------------
Total comprehensive loss ...... -- -- -- $(21,520,446) --

BALANCE AT SEPTEMBER
30, 2005 - UNAUDITED ........... $(3,537,106) $(2,363,243) $(360,165) -- $ 47,940,975
=========== =========== ========= ============ ============

The accompanying notes are an integral part of the Consolidated Financial
Statements.

AROTECH CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED) (U.S. Dollars)

Nine months ended September 30,
-----------------------------
2005 2004
------------ ------------

CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss for the period before deemed dividend to certain stockholders of common stock . $(20,787,946) $ (5,787,172)
Less loss for the period from discontinued operations (see Note 8) ..................... 200,000 --
Adjustments required to reconcile net loss to net cash used in operating activities:
Depreciation .......................................................................... 940,529 834,637
Amortization of intangible assets ..................................................... 2,346,083 1,703,936
Impairment of goodwill and other intangible assets .................................... 11,052,606 --
Amortization of subsidiary purchase price allocated to inventory ...................... -- 586,325
Amortization of compensation related to warrants issued to the holders of convertible
debentures and beneficial conversion feature ........................................ 1,190,715 3,454,676
Amortization of deferred expenses related to convertible debenture issuance ........... 36,384 176,771
Amortization of capitalized research and development projects ......................... 94,419 27,489
Adjustment of liability in connection to warrants granted ............................. -- (1,829,025)
Stock based compensation due to options granted to employees and directors ............ 219,966 481,494
Amortization of deferred stock based compensation due to shares issued employees ...... 386,186 108,654
Stock based compensation related to non-recourse note granted to stockholder .......... (28,500) (13,500)
Stock based compensation related to shares granted and to be granted to consultants and
shares granted as a donation ........................................................ 533,501 --
Write-off and write-down of inventories ............................................... 647,614 67,951
Write-off of fixed assets ............................................................. 32,367
Earnings to minority .................................................................. 17,288 35,363
Markdown (Markup) of loans to stockholders ............................................ -- (32,397)
Interest expenses accrued on promissory notes issued to purchase of subsidiary ........ 517,923 36,385
Interest accrued on restricted securities and certificates of deposit due within one
year ................................................................................ -- (184,374)
Capital (gain) loss from sale of marketable securities ................................ 2,694 (4,114)
Amortization of premium related to restricted securities .............................. 42,234 146,105
Capital gain from sale of property and equipment ...................................... 4,517 (5,744)
Accrued severance pay, net ............................................................ (60,693) (474,575)
Decrease (increase) in deferred tax assets ............................................ 75,078 (16,499)
Changes in operating asset and liability items:
Decrease in trade receivables ......................................................... (1,026,422) 725,593
Decrease (increase) in unbilled receivables ........................................... 828,986 (1,259,720)
Decrease in notes receivable .......................................................... 46,527 283,078
Increase in other accounts receivable and prepaid expenses ............................ (52,558) (447,270)
Increase in inventories ............................................................... (1,908,500) (2,895,083)
Increase (decrease) in trade payables ................................................. (944,996) 955,347
Increase in deferred revenues ......................................................... 489,488 2,092,736

The accompanying notes are an integral part of the Consolidated Financial
Statements.

AROTECH CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED) (U.S. Dollars)

Nine months ended September 30,
-----------------------------
2005 2004
------------ ------------

Increase (decrease) in accounts payable and accruals .................................. (51,983) 202,891
------------ ------------
Net cash used in operating activities from continuing operations (reconciled from ...... (5,156,493) (1,030,042)
continuing operations)
------------ ------------
Net cash used in operating activities from discontinued operations (reconciled from
discontinued operations) ............................................................. -- (211,628)
------------ ------------
Net cash used in operating activities .................................................. (5,156,493) (1,241,670)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Repayment of promissory note related to purchase of subsidiary ........................ (14,120,602) (1,150,000)
Proceeds from sale of marketable securities ........................................... 92,036 812
Investment in subsidiary(1) ........................................................... -- (7,190,777)
Investment in subsidiary(2) ........................................................... -- (12,129,103)
Investment in subsidiary(3) ........................................................... -- (17,302,167)
Payment of transactions expenses in related to previous year investment in subsidiary . (12,945) --
Investment in affiliated company ...................................................... (112,500) --
Purchase of property and equipment .................................................... (761,003) (1,121,991)
Increase in capitalized research and development projects ............................. (181,342) (304,108)
Proceeds from sale of property and equipment .......................................... 13,000 93,786
Decrease in demo inventories, net ..................................................... -- (26,970)
Repayment of loan granted to stockholder .............................................. -- 32,397
Decrease (increase) in restricted securities and deposits, net ........................ 4,278,671 (13,111,519)
------------ ------------
Net cash used in investing activities .................................................. (10,804,685) (52,209,640)
------------ ------------
FORWARD .................................................................................. $(15,961,178) $(53,451,310)
------------ ------------

The accompanying notes are an integral part of the Consolidated Financial
Statements.

AROTECH CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED) (U.S. Dollars)

Nine months ended September 30,
-----------------------------
2005 2004
------------ ------------

FORWARD ................................................................ $(15,961,178) $(53,451,310)
------------ ------------

CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (decrease) in short-term credit from banks ............... 1,079,583 (419,085)
Proceeds from issuance of convertible debentures, net ............. 16,511,372 --
Proceeds from issuance of share capital, net ...................... 2,872,321 24,319,890
Proceeds from exercise of options ................................. 17,192 1,094,156
Proceeds from exercise of warrants ................................ -- 19,387,651
Payment on capital lease obligation ............................... -- (2,888)
Repayment of long-term loans ...................................... (61,460) (42,529)
------------ ------------

Net cash provided by financing activities .............................. 20,419,008 44,337,195
------------ ------------

DECREASE IN CASH AND CASH EQUIVALENTS .................................. 4,457,830 (9,114,115)

CASH EROSION DUE TO EXCHANGE RATE DIFFERENCES .......................... 39,838 2,865

BALANCE OF CASH AND CASH EQUIVALENTS AT THE BEGINNING OF THE PERIOD .... 6,734,512 13,685,125
------------ ------------

BALANCE OF CASH AND CASH EQUIVALENTS AT THE END OF THE PERIOD .......... $ 11,232,180 $ 4,573,875
============ ============

SUPPLEMENTARY INFORMATION ON NON-CASH TRANSACTIONS:
Investment in subsidiary against promissory note ....................... $ -- $ 2,940,985
============ ============
Issuance of shares and warrants against accrued expenses ............... $ 56,577 $ 1,310,394
============ ============
Exercise of convertible debentures against shares ...................... $ -- $ 3,112,500
============ ============
Exercise of options and warrants against notes receivables ............. $ 1,115,915 $ 6,100
============ ============
Issuance expenses against accounts payable ............................. $ 70,181 $ 155,002
============ ============
Purchase of property and equipment against accounts payable ............ $ -- $ 32,841
============ ============
Liability in connection to warrants granted ............................ $ 422,034 $ 10,841,020
============ ============
Accrual for earnout in respect of subsidiary acquisition ............... $ 535,546 $ --
============ ============

SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION - CASH PAID DURING THE
PERIOD FOR:
Interest ........................................................... $ (813,976) $ (404,503)
============ ============

The accompanying notes are an integral part of the Consolidated Financial
Statements.

AROTECH CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED) (U.S. Dollars)

(1) In January 2004, the Company acquired substantially all of the outstanding
ordinary shares of Epsilor Electronic Industries, Ltd. ("Epsilor"). The net
fair value of the assets acquired and the liabilities assumed, at the date
of acquisition, was as follows:

Working capital, excluding cash and cash equivalents ........ $ (849,992)
(unaudited)
Property and equipment (unaudited) .......................... 709,847
Intangible assets and goodwill (unaudited) .................. 10,284,407
------------
10,144,262
Issuance of promissory note (unaudited) ..................... (2,940,985)
Issuance of shares in respect to transaction costs .......... (12,500)
------------
$ 7,190,777
============

(2) In January 2004, the Company acquired all of the outstanding common stock
of FAAC Incorporated ("FAAC"). The net fair value of the assets acquired
was as follows:

Working capital, excluding cash and cash equivalents ........ $ 1,796,791
(unaudited)
Property and equipment (unaudited) .......................... 263,669
Intangible assets and goodwill (unaudited) .................. 25,507,646
------------
27,568,106
Accrual for earn out payment ................................ (13,435,325)
Issuance of shares, net (unaudited) ......................... (2,003,678)
------------
$ 12,129,103
============

(3) In August 2004, the Company acquired all of the outstanding common stock
of Armour of America, Incorporated ("AoA"). The net fair value of the
assets acquired was as follows:

Working capital, excluding cash and cash equivalents ......... $ 3,219,728
(unaudited)
Property and equipment (unaudited) ........................... 997,148
Intangible assets and goodwill (unaudited) ................... 13,085,291
-----------
$17,302,167
===========

The accompanying notes are an integral part of the Consolidated Financial
Statements.

AROTECH CORPORATION
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 1: BASIS OF PRESENTATION

a. Company:

Arotech Corporation ("Arotech" or the "Company"), and its subsidiaries provide
defense and security products for the military, law enforcement and homeland
security markets, including advanced zinc-air and lithium batteries and
chargers, multimedia interactive simulators/trainers and lightweight vehicle
armoring. The Company is primarily operating through IES Interactive Training,
Inc. ("IES"), a wholly-owned subsidiary based in Littleton, Colorado; FAAC
Corporation, a wholly-owned subsidiary based in Ann Arbor, Michigan, and FAAC's
80%-owned United Kingdom subsidiary FAAC Limited; Electric Fuel Battery
Corporation, a wholly-owned subsidiary based in Auburn, Alabama; Electric Fuel
Ltd. ("EFL") a wholly-owned subsidiary based in Beit Shemesh, Israel; Epsilor
Electronic Industries, Ltd., a wholly-owned subsidiary located in Dimona,
Israel; MDT Protective Industries, Ltd. ("MDT"), a majority-owned subsidiary
based in Lod, Israel; MDT Armor Corporation, a majority-owned subsidiary based
in Auburn, Alabama; and Armour of America, Incorporated, a wholly-owned
subsidiary based in Los Angeles, California.

b. Basis of presentation:

The accompanying interim consolidated financial statements have been prepared by
Arotech Corporation in accordance with generally accepted accounting principles
for interim financial information, with the instructions to Form 10-Q and with
Article 10 of Regulation S-X, and include the accounts of Arotech Corporation
and its subsidiaries. Certain information and footnote disclosures, normally
included in complete financial statements prepared in accordance with generally
accepted accounting principles, have been condensed or omitted. In the opinion
of the Company, the unaudited financial statements reflect all adjustments
(consisting only of normal recurring adjustments) necessary for a fair
presentation of its financial position at September 30, 2005, its operating
results for the nine- and three-month periods ended September 30, 2005 and 2004
and its cash flow for the nine month periods ended September 30, 2005 and 2004.

The results of operations for the nine months ended September 30, 2005 are not
necessarily indicative of results that may be expected for any other interim
period or for the full fiscal year ending December 31, 2005.

The balance sheet at December 31, 2004 has been derived from the audited
financial statements at that date but does not include all the information and
footnotes required by generally accepted accounting principles for complete
financial statements. These consolidated financial statements should be read in
conjunction with the audited financial statements included in the Company's
Annual Report on Form 10-K for the year ended December 31, 2004.

c. Accounting for stock-based compensation:

The Company has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" and FASB Interpretation No. 44,
"Accounting for Certain Transactions Involving Stock Compensation" in accounting
for its employee stock option plans. Under APB No. 25, when the exercise price
of the Company's stock options is less than the market price of the underlying
shares on the date of grant, compensation expense is recognized.

AROTECH CORPORATION

The Company adopted the disclosure provisions of Statement of Financial
Accounting Standard No. 148, "Accounting for Stock-Based Compensation -
Transition and Disclosure," which amended certain provisions of Statement of
Financial Accounting Standard No. 123, "Accounting for Stock-Based
Compensation." The Company continues to apply the provisions of APB No. 25 in
accounting for stock-based compensation.

Under Statement of Financial Accounting Standard No. 123, pro forma information
regarding net loss and net loss per share is required, and has been determined
as if the Company had accounted for its employee stock options under the fair
value method of SFAS No. 123. The fair value for these options is amortized over
their vesting period and estimated at the date of grant using a Black-Scholes
Option Valuation Model with the following weighted-average assumptions for the
nine and three months ended September 30, 2005 and 2004:

Nine months ended September Three months ended September
30, 30,
------------------------------ ------------------------------
2005 2004 2005 2004
------------- -------------- -------------- -------------
(Unaudited)

Risk free interest 3.70 3.38 -- 3.38
Dividend yields 0.0% 0.0% -- 0.0%
Volatility 0.76 0.817 -- 0.817
Expected life 3 years 5 years -- 5 years

Pro forma information under SFAS No. 123:

Nine months ended September 30, Three months ended September 30,
--------------------------------- ---------------------------------
2005 2004 2005 2004
-------------- -------------- -------------- --------------
Unaudited
(U.S. Dollars, except per share data)

Net loss as reported .................... $ (20,787,946) $ (9,116,124) $ (12,708,932) $ (1,039,107)
============== ============== ============== ==============
Add - stock-based compensation expense .. 606,152 536,958 157,781 174,787
determined under APB 25
Deduct - stock based compensation expense
determined under fair value method for
all awards ........................... (1,464,734) (1,605,146) (613,343) (745,546)
============== ============== ============== ==============
Pro forma net loss ...................... $ (21,646,528) $ (10,184,312) $ (13,164,494) $ (1,609,866)
============== ============== ============== ==============
Loss per share as reported .............. $ (0.26) $ (0.14) $ (0.15) $ (0.01)
============== ============== ============== ==============
Pro forma loss per share ................ $ (0.27) $ (0.15) $ (0.16) $ (0.02)
============== ============== ============== ==============

NOTE 2: INVENTORIES

Inventories are stated at the lower of cost or market value. Cost is determined
using the average cost method. The Company periodically evaluates the quantities
on hand relative to current and historical selling prices and historical and
projected sales volume. Based on these evaluations, provisions are made in each
period to write down inventory to its net realizable value. Inventory write-offs
are provided to cover risks arising from slow-moving items, technological
obsolescence, excess inventories, and for market prices lower than cost. In the
nine months ended September 30, 2005 wrote off and wrote down inventory in the
amount of $647,614. Inventories are composed of the following:

AROTECH CORPORATION

September 30, 2005 December 31, 2004
------------------ -----------------
(Unaudited)
Raw materials ........... $ 3,962,580 $ 4,087,650
Work-in-progress ........ 3,217,213 1,877,889
Finished goods .......... 1,392,410 1,311,762
------------ ------------
$ 8,572,203 $ 7,277,301
============ ============

NOTE 3: IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS

In December 2004, the FASB issued SFAS No. 123 (revised 2004), "Share-Based
Payments" ("SFAS 123(R)"), which is a revision of FASB No. 123, "Accounting for
Stock-Based Compensation" ("SFAS 123"). Generally, the approach in SFAS 123(R)
is similar to the approach described in Statement 123. However, SFAS 123
permitted, but not required, share-based payments to employees to be recognized
based on their fair values while SFAS 123(R) requires all share-based payments
to employees to be recognized based on their fair values. SFAS 123(R) also
revises, clarifies and expands guidance in several areas, including measuring
fair value, classifying an award as equity or as a liability and attributing
compensation cost to reporting periods. The new standard will be effective for
the Company in the first interim period beginning after December 15, 2005.

Statement 123(R) permits public companies to adopt its requirements using one of
two methods:

1. A "modified prospective" method in which compensation cost is recognized
beginning with the effective date (a) based on the requirements of Statement
123(R) for all share-based payments granted after the effective date and (b)
based on the requirements of Statement 123 for all awards granted to employees
prior to the effective date of Statement 123(R) that remain unvested on the
effective date.

2. A "modified retrospective" method which includes the requirements of the
modified prospective method described above, but also permits entities to
restate based on the amounts previously recognized under Statement 123 for
purposes of pro forma disclosures either (a) all prior periods presented or (b)
prior interim periods of the year of adoption.

The Company is still in the process of evaluating the method it will use.

As permitted by Statement 123, the Company currently accounts for share-based
payments to employees using Opinion 25's intrinsic value method and, as such,
generally recognizes no compensation cost for employee stock options.
Accordingly, the adoption of Statement 123(R)'s fair value method will have a
significant impact on our result of operations, although it will have no impact
on our overall financial position. The impact of adoption of Statement 123(R)
cannot be predicted at this time because it will depend on levels of share-based
payments granted in the future. However, had the Company adopted Statement
123(R) in prior periods, the impact of that standard would have approximated the
impact of Statement 123 as described in the disclosure of pro forma net income
and earnings per share in Note 1.c. above to the Company's consolidated
financial statements. Statement 123(R) also requires the benefits of tax
deductions in excess of recognized compensation cost to be reported as a
financing cash flow, rather than as an operating cash flow as required under
current literature.

AROTECH CORPORATION

In March 2005, the SEC staff issued Staff Accounting Bulletin No. 107 (SAB 107)
to give guidance on implementation of SFAS 123(R), which the Company plans to
consider in implementing SFAS 123(R).

In May 2005, the FASB issued Statement of Financial Accounting Standard No. 154
("FAS 154"), "Accounting Changes and Error Corrections," a replacement of APB
No. 20,"Accounting Changes" and FAS No. 3, "Reporting Accounting Changes in
Interim Financial Statements." FAS 154 provides guidance on the accounting for
and reporting of accounting changes and error corrections. APB Opinion 20
previously required that most voluntary changes in accounting principle be
recognized by including in net income of the period of the change the cumulative
effect of changing to the new accounting principle. FAS 154 requires
retrospective application to prior periods' financial statements of a voluntary
change in accounting principle unless it is impracticable. FAS 154 is effective
for accounting changes and corrections of errors made in fiscal years beginning
after December 15, 2005. The Company is currently assessing the impact of FAS
154 on its results of operations, financial condition and liquidity.

NOTE 4: SEGMENT INFORMATION

a. General:

The Company and its subsidiaries operate primarily in three business segments
and follow the requirements of SFAS No. 131.

The Company's reportable operating segments have been determined in accordance
with the Company's internal management structure, which is organized based on
operating activities. The accounting policies of the operating segments are the
same as those used by the Company in the preparation of its annual financial
statement. The Company evaluates performance based upon two primary factors, one
is the segment's operating income and the other is the segment's contribution to
the Company's future strategic growth.

b. The following is information about reported segment revenues, income (losses)
and assets for the nine and three months ended September 30, 2005 and 2004:

Simulation and Battery and
Security Power Systems Armor All Others Total
------------ ------------ ------------ ------------ ------------
Nine months ended September 30, 2005

Revenues from outside customers .......... $ 16,794,959 $ 7,600,090 $ 9,418,981 $ -- $ 33,814,030
Depreciation , amortization and impairment
expenses (1) ............................. (1,203,691) (690,604) (12,429,841) (109,500) (14,433,636)
Direct expenses (2) ...................... (14,485,473) (7,441,305) (10,645,962) (5,337,448) (37,910,188)
------------ ------------ ------------ ------------ ------------
Segment income (loss) .................... $ 1,105,795 $ (531,819) $(13,656,822) $ (5,446,948) (18,529,794)
============ ============ ============ ============
Financial income (after deduction of .. (2,058,152)
minority interest) ------------

Loss from continuing operations .......... $(20,587,946)
============
Segment assets (3), (4) .................. $ 32,458,316 $ 14,898,075 $ 5,326,840 $ 719,456 $ 53,402,687
============ ============ ============ ============ ============

AROTECH CORPORATION

Simulation and Battery and
Security Power Systems Armor All Others Total
------------ ------------ ------------ ------------ ------------
Nine months ended September 30, 2004

Revenues from outside customers .......... $ 13,258,943 $ 8,046,095 $ 12,077,985 $ -- $ 33,383,023
Depreciation expenses and amortization (1) (1,225,248) (855,797) (941,342) (130,000) (3,152,387)
Direct expenses (2) ...................... (11,947,426) (7,476,476) (10,650,363) (3,818,306) (33,892,571)
------------ ------------ ------------ ------------ ------------
Segment gross profit (loss) .............. $ 86,269 $ (286,178) $ 486,280 $ (3,948,306) (3,661,935)
============ ============ ============ ============
Financial expenses (after deduction of .. (2,125,237)
minority interest) ------------

Net loss from continuing operations ...... $ (5,787,172)
============
Segment assets (3) ....................... $ 18,393,997 $ 12,914,008 $ 20,367,854 $ 698,516 $ 52,374,375
============ ============ ============ ============ ============

Three months ended September 30, 2005
Revenues from outside customers .......... $ 7,155,887 $ 2,539,120 $ 1,494,668 $ -- $ 11,189,675
Depreciation , amortization and impairment
expenses (1) ............................. (397,341) (235,764) (9,051,210) (36,500) (9,720,815)
Direct expenses (2) ...................... (5,993,882) (2,378,728) (2,895,703) (2,159,420) (13,427,733)
------------ ------------ ------------ ------------ ------------
Segment income (loss) .................... $ 764,664 $ (75,372) $(10,452,245) $ (2,195,920) (11,958,873)
============ ============ ============ ============
Financial income (after deduction of .. (750,059)
minority interest) ------------

Loss from continuing operations .......... $(12,708,932)
============

Three months ended September 30, 2004
Revenues from outside customers .......... $ 6,034,299 $ 2,913,705 $ 7,324,517 $ -- $ 16,272,521
Depreciation expenses and amortization (1) (417,005) (291,806) (882,219) (51,000) (1,642,030)
Direct expenses (1) ...................... (5,010,108) (2,398,561) (6,245,370) (957,319) (14,611,358)
------------ ------------ ------------ ------------ ------------
Segment gross profit (loss) .............. $ 607,186 $ 223,338 $ 196,928 $ (1,008,319) 19,133
============ ============ ============ ============
Financial income (after deduction of .. 1,107,712
minority interest) ------------
Net income from continuing operations .... $ 1,126,845
============

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

1) Includes depreciation of property and equipment, amortization expenses of
intangible assets and impairment of goodwill and other intangible assets.

(2) Including, inter alia, sales and marketing, general and administrative and
tax expenses.

(3) Consisting of property and equipment, inventory and intangible assets.

(4) Out of those amounts, goodwill in our Simulation and Security, Battery and
Power Systems and Armor Divisions stood at $23,001,305, $4,974,078 and
$986,399 as of September 30, 2005, respectively, and $8,559,016,
$4,974,517 and $11,445,232 as of September 30, 2004, respectively.

NOTE 5: CONVERTIBLE DEBENTURES AND DETACHABLE WARRANTS

a. 8% Secured Convertible Debentures due September 30, 2006 and issued in
September 2003

Pursuant to the terms of a Securities Purchase Agreement dated September 30,
2003, the Company, in September 2003, issued and sold to a group of
institutional investors an aggregate principal amount of 8% secured convertible
debentures in the amount of $5.0 million due September 30, 2006. These
debentures are convertible at any time prior to September 30, 2006 at a
conversion price of $1.15 per share.

As part of the Securities Purchase Agreement dated September 30, 2003, the
Company issued to the purchasers of its 8% secured convertible debentures due
September 30, 2006, warrants to purchase an aggregate of 1,250,000 shares of
common stock at any time prior to September 30, 2006 at a price of $1.4375 per
share.

AROTECH CORPORATION

As of September 30, 2005, principal amount of $150,000 remained outstanding
under these convertible debentures.

This transaction was accounted according to APB No. 14 "Accounting for
Convertible Debt and Debt Issued with Stock Purchase Warrants" and Emerging
Issue Task Force No. 00-27 "Application of Issue No. 98-5 to Certain Convertible
Instruments" ("EITF 00-27"). The fair value of these warrants was determined
using Black-Scholes pricing model, assuming a risk-free interest rate of 1.95%,
a volatility factor 98%, dividend yields of 0% and a contractual life of three
years.

In connection with these convertible debentures, the Company will recognize
financial expenses of $2,963,043 with respect to the beneficial conversion
feature, which is being amortized from the date of issuance to the stated
redemption date - September 30, 2006 - as financial expenses.

During the nine months ended September 30, 2005, the Company recorded an expense
of $22,142, which was attributable to amortization of debt discount and
beneficial conversion feature related to the convertible debenture over its
term. These expenses were included in the financial expenses.

b. 8% Secured Convertible Debentures due September 30, 2006 and issued in
December 2003

Pursuant to the terms of a Securities Purchase Agreement dated September 30,
2003, the Company, in December 2003, issued and sold to a group of institutional
investors an aggregate principal amount of 8% secured convertible debentures in
the amount of $6.0 million due September 30, 2006. These debentures are
convertible at any time prior to September 30, 2006 at a conversion price of
$1.45 per share.

As of September 30, 2005, principal amount of $4,387,500 remained outstanding
under these convertible debentures.

As a further part of the Securities Purchase Agreement dated September 30, 2003,
the Company issued to the purchasers of its 8% secured convertible debentures
due September 30, 2006, warrants to purchase an aggregate of 1,500,000 shares of
common stock at any time prior to December 31, 2006 at a price of $1.8125 per
share. Additionally, the Company issued to the investors supplemental warrants
to purchase an aggregate of 1,038,000 shares of common stock at any time prior
to June 18, 2009 at a price of $2.20 per share.

This transaction was accounted according to APB No. 14, "Accounting for
Convertible Debt and Debt Issued with Stock Purchase Warrants" and Emerging
Issue Task Force No. 00-27, "Application of Issue No. 98-5 to Certain
Convertible Instruments" ("EITF 00-27"). The fair value of the warrants granted
in respect of convertible debentures was determined using Black-Scholes pricing
model, assuming a risk-free interest rate of 2.45%, a volatility factor 98%,
dividend yields of 0% and a contractual life of three years.

In connection with these convertible debentures, the Company will recognize
financial expenses of $6,000,000 with respect to the beneficial conversion
feature, which is being amortized from the date of issuance to the stated
redemption date - September 30, 2006 - as financial expenses.

AROTECH CORPORATION

During the nine months ended September 30, 2005, the Company recorded an expense
of $1,168,573, which was attributable to amortization of the beneficial
conversion feature of the convertible debenture over its term. These expenses
were included in the financial expenses.

NOTE 6: CONVERTIBLE NOTES AND DETACHABLE WARRANTS

Pursuant to the terms of a Securities Purchase Agreement dated September 29,
2005 (the "Purchase Agreement") by and between the Company and certain
institutional investors, the Company issued and sold to the investors an
aggregate of $17.5 million principal amount of senior secured notes having a
final maturity date of March 31, 2008.

Under the terms of the Purchase Agreement, the Company granted the investors (i)
a second position security interest in the stock of MDT Armor Corporation, IES
Interactive Training, Inc. and M.D.T. Protective Industries, Ltd. (junior to the
security interest of the holders of the Company's 8% secured convertible
debentures due September 30, 2006)and in the assets of FAAC Incorporated (junior
to a bank that extends to FAAC Incorporated a $5 million line of credit) and and
in any stock that the Company acquires in future acquisitions, and (ii) a first
position security interest in the assets of all of the Company's other active
United States subsidiaries. The Company's active United States subsidiaries are
also acting as guarantors of the Company's obligations under the Notes.

As of September 30, 2005, principal amount of $17.5 million remained outstanding
under these convertible notes.

The Notes are convertible at the investors' option at a fixed conversion price
of $1.00. The Notes bear interest at a rate equal to six month LIBOR plus 6% per
annum, subject to a floor of 10% and a cap of 12.5%. The Company will repay the
principal amount of the Notes over a period of two and one-half years, with the
principal amount being amortized in twelve payments payable at the Company's
option in cash and/or stock, provided certain conditions are met. In the event
the Company elects to make such payments in stock, the price used to determine
the number of shares to be issued will be calculated using an 8% discount to the
average trading price of our common stock during 17 of the 20 consecutive
trading days ending two days before the payment date. The Company is obligated
under Nasdaq rules, to solicit the approval of its stockholders to such stock
payments at a special meeting of its stockholders to be held on or before
December 14, 2005.

As a further part of the Securities Purchase Agreement dated September 29, 2005,
the Company issued warrants, which are not exercisable for the six month period
following closing, to purchase up to 5,250,000 shares of common stock (30%
warrant coverage) at an exercise price of $1.10 per share. These warrants are
exercisable until the one-year anniversary of the effective date of the
registration statement registering the shares of common stock underlying the
warrants.

This transaction was accounted according to APB No. 14, "Accounting for
Convertible Debt and Debt Issued with Stock Purchase Warrants" and Emerging
Issue Task Force No. 00-27, "Application of Issue No. 98-5 to Certain
Convertible Instruments" ("EITF 00-27"). The fair value of the warrants granted
in respect of convertible debentures was determined using Black-Scholes pricing
model, assuming a risk-free interest rate of 3.87%, a volatility factor 53%,
dividend yields of 0% and a contractual life of one year.

AROTECH CORPORATION

In connection with these convertible notes, the Company will recognize financial
expenses of $422,034 with respect to the beneficial compensation related to the
warrants issued to the holders of the convertible debenture, which is being
amortized from the date of issuance to the stated redemption date - March 31,
2008 - as financial expenses.

During the nine months ended September 30, 2005, the Company did not record any
expense in connection with the foregoing issuance.

NOTE 7: IMPAIRMENT OF GOODWILL AND OTHER INTANGIBLE ASSETS

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

The Company performed the required annual impairment test of goodwill, based on
management's projections and using expected future discounted operating cash
flows. As of June 30, 2005, the Company identified in AoA (a component of the
Company's Armor Division) an impairment of goodwill in the amount of $2,043,129.
As of September 30, 2005, the Company performed another impairment test in AoA
in response to several factors, including without limitation the reduced sales
in AoA during the third quarter of 2005, the fact that since the last impairment
test AoA received no substantial new orders and therefore failed to meet its
projections, the decision of the General Manager of AoA and his new supervisor
to leave the employ of AoA and the Company, respectively, and general
uncertainty about the market for AoA's products in general and AoA's business in
particular; specifically, the delay or loss of several potential orders,
decisions by customers to utilize methods of armor not produced by AoA (hard
armor instead of soft armor), and the change in U.S. military priorities from
acquiring new armor to funding the ground forces in Iraq and Afghanistan . As a
result of this impairment test, the Company identified an additional impairment
of goodwill in AoA in the amount of $8,510,533.

In connection with the Company's acquisition of AoA, the Company has a
contingent earnout obligation in an amount equal to the revenues realized by the
Company from certain specific programs that were identified by the Company and
the former shareholder of AoA as appropriate targets for revenue increases. The
earnout provides that if AoA receives certain types of orders from certain
specific customers prior to December 31, 2006 ("Additional Orders"), then upon
shipment of goods in connection with such Additional Orders, the former
shareholder of AoA will be paid an earnout based on revenues, up to a maximum of
an additional $6 million. To date, AoA has not accrued any liability in respect
of such earnout obligation.

The Company and its subsidiaries' long-lived assets and certain identifiable
intangibles are reviewed for impairment in accordance with Statement of
Financial Accounting Standard No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets" ("SFAS No. 144"), whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of the carrying amount of assets to be held and used
is measured by a comparison of the carrying amount of the assets to the future
undiscounted cash flows expected to be generated by the assets. If such assets
are considered to be impaired, the impairment to be recognized is measured by
the amount by which the carrying amount of the assets exceeds the fair value of
the assets. As of June 30, 2005 the Company identified an impairment of backlog
previously identified with the AoA acquisition and as a result recorded an
impairment loss in the amount of $346,000. As a result of the additional
impairment test performed in connection with preparation of the third quarter
financial statements, the Company recorded an additional impairment in the
amount of $152,944 as of September 30, 2005 in respect of trademarks and a
covenant not to compete previously identified with respect to the AoA
acquisition.

AROTECH CORPORATION

NOTE 8: CONTINGENT LIABILITIES

In 2000 and 2001, the Company sold consumer cellphone batteries and chargers (an
operation that was discontinued in the third quarter of 2002) to a major
department store chain. Subsequent to these sales, in late 2001, one of the
Company's employees signed an agreement with the department store chain to
price-protect the goods previously sold, with such price protection "to be
debited from current open invoices." The department store chain has claimed to
the Company that the Company owes them approximately $517,000, primarily in
respect of this price protection. The Company contends that employee who signed
the price protection had no authority, actual or apparent, to do so, and that in
any event the clear meaning of the language in the price protection is that the
department store chain may deduct the price protection from sums they owe the
Company, not that the Company is obligated to return sums previously paid.
Settlement discussions have terminated. Although it is difficult at this early
stage to come to any conclusions, the Company estimates that its liability in
this matter will not exceed $200,000. The Company has recorded an appropriate
provision in respect of this amount. These expenses were included in loss from
discontinued operations.

In connection with the Company's acquisition of FAAC, the Company has a
contingent earnout obligation in an amount equal to the net income realized by
the Company from certain specific programs that were identified by the Company
and the former shareholders of FAAC as appropriate targets for revenue increases
in 2005. Through September 30, 2005, the Company had accrued an amount of
$382,572 in respect of such earnout obligation against FAAC's goodwill. Although
one of the former shareholders of FAAC has indicated to the Company his belief
that the specific programs identified include more orders than those with
respect to which the Company has made accrual in respect of this earnout
obligation, the Company believes there is no basis for this claim.

AROTECH CORPORATION

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

This report contains forward-looking statements made pursuant to the safe
harbor provisions of the Private Securities Litigation Reform Act of 1995. These
statements involve inherent risks and uncertainties. When used in this
discussion, the words "believes," "anticipated," "expects," "estimates" and
similar expressions are intended to identify such forward-looking statements.
Such statements are subject to certain risks and uncertainties. Readers are
cautioned not to place undue reliance on these forward-looking statements, which
speak only as of the date hereof. We undertake no obligation to publicly release
the result of any revisions to these forward-looking statements that may be made
to reflect events or circumstances after the date hereof or to reflect the
occurrence of unanticipated events. Our actual results could differ materially
from those anticipated in these forward-looking statements as a result of
certain factors including, but not limited to, those set forth elsewhere in this
report. Please see "Risk Factors," below, and in our other filings with the
Securities and Exchange Commission.

Arotech(TM) is a trademark and Electric Fuel(R) is a registered trademark
of Arotech Corporation. All company and product names mentioned may be
trademarks or registered trademarks of their respective holders. Unless the
context requires otherwise, all references to us refer collectively to Arotech
Corporation and its subsidiaries.

We make available through our internet website free of charge our annual
report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form
8-K, amendments to such reports and other filings made by us with the SEC, as
soon as practicable after we electronically files such reports and filings with
the SEC. Our website address is www.arotech.com. The information contained in
this website is not incorporated by reference in this report.

The following discussion and analysis should be read in conjunction with
the interim financial statements and notes thereto appearing elsewhere in this
Quarterly Report. We have rounded amounts reported here to the nearest thousand,
unless such amounts are more than 1.0 million, in which event we have rounded
such amounts to the nearest hundred thousand.

Executive Summary

Divisions and Subsidiaries

We operate primarily as a holding company, through our various
subsidiaries, which we have organized into three divisions. Our divisions and
subsidiaries (all 100% owned, unless otherwise noted) are as follows:

>> Our Simulation and Security Division, consisting of:

o FAAC Incorporated, located in Ann Arbor, Michigan, which
provides simulators, systems engineering and software products
to the United States military, government and private industry
("FAAC"); and

AROTECH CORPORATION

o IES Interactive Training, Inc., located in Littleton,
Colorado, which provides specialized "use of force" training
for police, security personnel and the military ("IES").

>> Our Armor Division, consisting of:

o Armour of America, located in Los Angeles, California, which
manufacturers ballistic and fragmentation armor kits for
rotary and fixed wing aircraft, marine armor, personnel armor,
military vehicles and architectural applications, including
both the LEGUARD Tactical Leg Armor and the Armourfloat
Ballistic Floatation Device, which is a unique vest that is
certified by the U.S. Coast Guard ("AoA");

o MDT Protective Industries, Ltd., located in Lod, Israel, which
specializes in using state-of-the-art lightweight ceramic
materials, special ballistic glass and advanced engineering
processes to fully armor vans and SUVs, and is a leading
supplier to the Israeli military, Israeli special forces and
special services ("MDT") (75.5% owned); and

o MDT Armor Corporation, located in Auburn, Alabama, which
conducts MDT's United States activities ("MDT Armor") (88%
owned).

>> Our Battery and Power Systems Division, consisting of:

o Epsilor Electronic Industries, Ltd., located in Dimona, Israel
(in Israel's Negev desert area), which develops and sells
rechargeable and primary lithium batteries and smart chargers
to the military and to private industry in the Middle East,
Europe and Asia ("Epsilor");

o Electric Fuel Battery Corporation, located in Auburn, Alabama,
which manufactures and sells Zinc-Air fuel sells, batteries
and chargers for the military, focusing on applications that
demand high energy and light weight ("EFB"); and

o Electric Fuel (E.F.L.) Ltd., located in Beit Shemesh, Israel,
which produces water-activated lifejacket lights for
commercial aviation and marine applications, and which
conducts our Electric Vehicle effort, focusing on obtaining
and implementing demonstration projects in the U.S. and
Europe, and on building broad industry partnerships that can
lead to eventual commercialization of our Zinc-Air energy
system for electric vehicles ("EFL").

AROTECH CORPORATION

Overview of Results of Operations

We incurred significant operating losses for the years ended December 31,
2003 and 2004 and for the first nine months of 2005. While we expect to continue
to derive revenues from the sale of products that our subsidiaries manufacture
and the services that they provide, there can be no assurance that we will be
able to achieve or maintain profitability on a consistent basis.

Between 2002 and 2004, we substantially increased our revenues and reduced
our net loss, from $18.5 million in 2002 to $9.2 million in 2003 to $9.0 million
in 2004. This was achieved through a combination of cost-cutting measures and
increased revenues, particularly from the sale of Zinc-Air batteries to the
military and from sales of products manufactured by the subsidiaries we acquired
in 2002 and 2004.

While we succeeded during 2004 in moving Arotech to positive EBITDA for
the first time in our history, we are doubtful that we will be able to continue
this success in 2005, since we had substantial negative EBITDA during the first
nine months of 2005. While we believe the fourth quarter of 2005 will be
stronger than the first three quarters, we do not believe that it will be
sufficiently strong to move us to positive EBITDA for 2005.

A portion of our operating loss during the first nine months of 2005 arose
as a result of non-cash charges. These charges were primarily related to
acquisitions made in the previous year and to raising capital through
convertible debenture in the prior years.

Non-cash charges related to acquisitions arise when the purchase price for
an acquired company exceeds the company's book value. In such a circumstance, a
portion of the excess of the purchase price is recorded as goodwill and a
portion as intangible assets. In the case of goodwill, the assets recorded as
goodwill are not amortized; instead, we are required to perform an annual
impairment review. If we determine, through the impairment review process, that
goodwill has been impaired, we must record the impairment charge in our
statement of operations. Intangible assets are amortized in accordance with
their useful life. Accordingly, for a period of time following an acquisition,
we incur a non-cash charge in the amount of a fraction (based on the useful life
of the intangible assets) of the amount recorded as intangible assets. Our
acquisitions of FAAC, Epsilor and AoA resulted in our incurring such non-cash
charges during the first nine months of 2005.

As a result of the application of the above accounting rule, we incurred
non-cash charges related to amortization of intangible assets in the amount of
$2.3 million and an additional $11.6 million related to impairment of goodwill
and other intangible assets during the first nine months of 2005.

The non-cash charges that relate to our financings arise when we sell
convertible debentures or notes and warrants. When we issue convertible
debentures or notes, we record an expense for a beneficial conversion feature
that is amortized ratably over the life of the debenture or note. When a
debenture or note is converted, however, the entire remaining unamortized
beneficial conversion feature expense is immediately recognized in the quarter
in which the debenture or note is converted. Similarly, when we issue warrants
in connection with convertible debentures or notes, we record an expense for
financial expenses that is amortized ratably over the term of the convertible
debentures or notes; when the convertible debentures or notes are converted, the
entire remaining unamortized financial expense is immediately recognized in the
quarter in which the conversion occurs. As and to the extent that our remaining
convertible debentures or notes are converted, we would incur similar non-cash
charges going forward.

AROTECH CORPORATION

As a result of the application of the above accounting rule, we incurred
non-cash charges related to our financings in the amount of $1.2 million during
the first nine months of 2005.

Additionally, in an effort to improve our cash situation and our
shareholders' equity, we have periodically induced holders of certain of our
warrants to exercise their warrants by lowering the exercise price of the
warrants in exchange for immediate exercise of such warrants, and by issuing to
such investors new warrants. Under such circumstances, we record a deemed
dividend in an amount determined based upon the fair value of the new warrants
(using a Black-Scholes pricing model). As and to the extent that we engage in
similar warrant repricings and issuances in the future, we would incur similar
non-cash charges.

As a result of the application of the above accounting rule we recorded a
deemed dividend related to warrants repricing in amount of $0 and $3.3 million
during the first nine months of 2005 and 2004, respectively.

In addition, we incurred non-cash charges in the amount of $606,000 during
the first nine months of 2005 in connection with options and shares granted to
employees and $534,000 in connection with shares granted to consultants and as a
donation.

Overview of Operating Performance and Backlog

We shut down our money-losing consumer battery operations and began
acquiring new businesses in the defense and security field in 2002. Since then,
we have concentrated on eliminating our operating deficit and moving Arotech to
cash-flow positive operations.

In our Simulation and Security Division, revenues grew from approximately
$13.3 million in the first nine months of 2004 to $16.8 million in the first
nine months of 2005. As of September 30, 2005, our backlog for our Simulation
and Security Division totaled $15.6 million, most of which was attributable to
FAAC.

In our Battery and Power Systems Division, revenues decreased from
approximately $8.0 million in the first nine months of 2004 to approximately
$7.6 million in the first nine months of 2005. As of September 30, 2005, our
backlog for our Battery and Power Systems Division totaled $6.1 million.

In our Armor Division, revenues decreased from $12.1 million during the
first nine months of 2004 to $9.4 million during the first nine months of 2005.
As of September 30, 2005, our backlog for our Armor Division totaled $6.0
million.

Functional Currency

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

AROTECH CORPORATION

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

Results of Operations

Preliminary Note

Results for the three and nine months ended September 30, 2005 include the
results of AoA for such period as a result of our acquisition of AoA in August
2004. The results of AoA were not included in our operating results for the full
period of the three and nine months ended September 30, 2004. Accordingly, the
following period-to-period comparisons should not necessarily be relied upon as
indications of future performance.

Three months ended September 30, 2005 compared to the three months ended
September 30, 2004.

Revenues. During the three months ended September 30, 2005, we (through
our subsidiaries) recognized revenues as follows:

>> IES and FAAC recognized revenues from the sale of interactive
use-of-force training systems and from the provision of maintenance
services in connection with such systems;

>> MDT, MDT Armor and AoA recognized revenues from payments under
vehicle armoring contracts, for service and repair of armored
vehicles, and on sale of armoring products;

>> EFB and Epsilor recognized revenues from the sale of batteries,
chargers and adapters to the military, and under certain development
contracts with the U.S. Army; and

>> EFL recognized revenues from the sale of lifejacket lights and from
subcontracting fees received in connection with Phase IV of the
United States Department of Transportation (DOT) electric bus
program.

Revenues for the three months ended September 30, 2005 totaled $11.2
million, compared to $16.3 million in the comparable period in 2004, a decrease
of $5.1 million, or 31.2%. This decrease was primarily attributable to decreased
revenues from our Armor Division ($1.5 million in the third quarter of 2005
compared to $7.3 million in the comparable period in 2004), primarily as a
result of low revenues of AoA and decreased revenues of MDT Armor. These
decreased revenues were offset to some extent by increased revenues from our
Simulation and Security Division ($7.2 million in the third quarter of 2005
compared to $6.0 million in the comparable period in 2004).

AROTECH CORPORATION

In the third quarter of 2005, revenues were $7.2 million for the
Simulation and Security Division (compared to $6.0 million in the third quarter
of 2004, an increase of $1.1 million, or 18.6%, due primarily to increased sales
of FAAC); $2.5 million for the Battery and Power Systems Division (compared to
$2.9 million in the third quarter of 2004, a decrease of $375,000, or 12.9%, due
primarily to decreased sales of Epsilor); and $1.5 million for the Armor
Division (compared to $7.3 million in the third quarter of 2004, a decrease of
$5.8 million, or 79.6%, due primarily to the decreased revenues of MDT Armor).

Cost of revenues and gross profit. Cost of revenues totaled $8.4 million
during the third quarter of 2005, compared to $11.5 million in the third quarter
of 2004, a decrease of $3.1 million, or 27.0%, due primarily to decreased sales
in our Armor Division.

Direct expenses for our three divisions during the third quarter of 2005
were $6.0 million for the Simulation and Security Division (compared to $5.0
million in the third quarter of 2004, an increase of $984,000, or 19.6%, due
primarily to increased sales of FAAC); $2.4 million for the Battery and Power
Systems Division (compared to $2.4 million in the third quarter of 2004, a
decrease of $20,000, or 0.8%, due primarily to decreased sales of Epsilor); and
$2.9 million for the Armor Division (compared to $6.2 million in the third
quarter of 2004, a decrease of $3.3 million or 53.6%, due primarily to the
decreased revenues of MDT Armor, offset to some extent by an inventory write-off
and write-down in the amount of $647,000 in the Armor Division, primarily in
AoA).

Gross profit was $2.8 million during the third quarter of 2005, compared
to $4.7 million during the third quarter of 2004, a decrease of $2.0 million, or
39.9%. This decrease was the direct result of all factors presented above, most
notably the decrease in revenues from our Armor Division and the write-off of
inventory referred to above, offset to some extent by increased revenues from
our Simulation and Security Division.

Research and development expenses. Research and development expenses for
the third quarter of 2005 were $347,000, compared to $431,000 during the third
quarter of 2004, a decrease of $84,000, or 20.0%. This decrease was primarily
attributable to allocating research and development expenses to the cost of
revenues due to research and development contracts in the Battery and Power
Systems Division.

Sales and marketing expenses. Sales and marketing expenses for the third
quarter of 2005 were $1.0 million, compared to $1.3 million the third quarter of
2004, a decrease of $276,000, or 21.3%. This decrease was primarily attributable
to the decrease in sales commissions.

General and administrative expenses. General and administrative expenses
for the third quarter of 2005 were $4.0 million compared to $2.1 million in the
third quarter of 2004, an increase of $1.9 million, or 90.9%. This increase was
primarily attributable to the following factors:

AROTECH CORPORATION

>> Costs related to abandoned acquisition activities;

>> The presence of AoA's general and administrative expenses for three
full months in 2005 in comparison to only half of the comparable
period in 2004; and

>> Increase in other general and administrative expenses such as
auditing and legal expenses.

Financial income (expenses), net. Financial expenses, net totaled
approximately $750,000 in the third quarter of 2005 compared to financial
income, net of $1.1 million in the third quarter of 2004. The difference was due
primarily to an adjustment of liability in the amount of $1.8 million in 2004
created in connection with warrants issued to investors, not present in 2005.

Income taxes. We and certain of our subsidiaries incurred net operating
losses during the three months ended September 30, 2005 and, accordingly, we
were not required to make any provision for income taxes. With respect to some
of our subsidiaries that operated at a net profit during 2005, we were able to
offset federal taxes against our accumulated loss carry forward. We recorded a
total of $48,000 in tax expenses in the third quarter of 2005, mainly in respect
of state taxes. We recorded a total of $116,000 in tax expenses in the third
quarter of 2004 with respect to certain of our subsidiaries that operated at a
net profit during 2004, and we were not able to offset their taxes against our
loss carry forward and with respect to state taxes.

Amortization of intangible assets. Amortization of intangible assets
totaled $700,000 in the third quarter of 2005, compared to $739,000 the third
quarter of 2004, a decrease of $39,000, or 5.3%.

Impairment of goodwill and other intangibles assets. Current accounting
standards require us to test goodwill for impairment at least annually, and
between annual tests in certain circumstances; when we determine goodwill is
impaired, it must be written down, rather than being amortized as previous
accounting standards required. Goodwill is tested for impairment by comparing
the fair value of our reportable units with their carrying value. Fair value is
determined using discounted cash flows. Significant estimates used in the
methodologies include estimates of future cash flows, future short-term and
long-term growth rates, weighted average cost of capital and estimates of market
multiples for the reportable units.

We performed in the third quarter an impairment test of goodwill, based on
our management's projections and using expected future discounted operating cash
flows. As of September 30, 2005, we identified in AoA an impairment of goodwill
in the amount of $8.5 million.

Our and our subsidiaries' long-lived assets and certain identifiable
intangibles are reviewed for impairment in accordance with current accounting
standards whenever events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable. Recoverability of the carrying amount
of assets to be held and used is measured by a comparison of the carrying amount
of the assets to the future undiscounted cash flows expected to be generated by
the assets. If such assets are considered to be impaired, the impairment to be
recognized is measured by the amount by which the carrying amount of the assets
exceeds the fair value of the assets. As of September 30, 2005 we identified an
impairment of other intangible assets, such as customer list, trademark, etc.
previously identified with the AoA acquisition and as a result we recorded an
impairment loss in the amount of $153,000.

AROTECH CORPORATION

Loss from continuing operations. Due to the factors cited above, we
reported a loss from continuing operations of $12.7 million in the third quarter
of 2005, compared to income of $1.1 million in the third quarter of 2004.

Net loss attributable to common stockholders. Due to the factors cited
above, we reported a net loss of $12.7 million in the third quarter of 2005,
compared to a net loss of $1.0 million in the third quarter of 2004, an increase
of $11.7 million.

Nine months ended September 30, 2005 compared to the nine months ended September
30, 2004.

Revenues. During the nine months ended September 30, 2005, we (through our
subsidiaries) recognized revenues as follows:

>> IES and FAAC recognized revenues from the sale of interactive
use-of-force training systems and from the provision of maintenance
services in connection with such systems;

>> MDT, MDT Armor and AoA recognized revenues from payments under
vehicle armoring contracts, for service and repair of armored
vehicles, and on sale of armoring products;

>> EFB and Epsilor recognized revenues from the sale of batteries,
chargers and adapters to the military, and under certain development
contracts with the U.S. Army; and

Revenues for the nine months ended September 30, 2005 totaled $33.8
million, compared to $33.4 million in the comparable period in 2004, an increase
of $431,000, or 1.3%. This increase was primarily attributable to increased
revenues of $3.5 million from our Simulation and Security Division, particularly
FAAC. These revenues were offset to some extent by decreased revenues in our
Armor and Battery and Power Systems Divisions.

In the first nine months of 2005, revenues were $16.8 million for the
Simulation and Security Division (compared to $13.3 million in the first nine
months of 2004, an increase of $3.5 million, or 26.7%, due primarily to
increased sales of FAAC); $7.6 million for the Battery and Power Systems
Division (compared to $8.0 million in the first nine months of 2004, a decrease
of $446,000, or 5.5%, due primarily to decreased revenues from our Epsilor
subsidiary); and $9.4 million for the Armor Division (compared to $12.1 million
in the first nine months of 2004, a decrease of $2.7 million, or 22.0%, due
primarily to the decreased revenues from MDT and MDT Armor, offset to some
extent by the inclusion of AoA's revenues for all nine months in 2005 but only
the latter half of the third quarter in 2004).

AROTECH CORPORATION

Cost of revenues and gross profit. Cost of revenues totaled $23.4 million
during the first nine months of 2005, compared to $22.7 million in the first
nine months of 2004, an increase of $734,000, or 3.2%, due primarily to
increased sales and the write-off and write-down of inventory in our Armor
Division in the amount of $648,000 in 2005.

Direct expenses for our three divisions during the first nine months of
2005 were $14.5 million for the Simulation and Security Division (compared to
$11.9 million in the first nine months of 2004, an increase of $2.5 million, or
21.2%, due primarily to increased sales of FAAC); $7.4 million for the Battery
and Power Systems Division (compared to $7.5 million in the first nine months of
2004, a decrease of $35,000, due primarily to decreased revenues from Epsilor
and lower margins in 2004 as a result of a different product mix); and $10.6
million for the Armor Division (compared to $10.7 million in the first nine
months of 2004, a decrease of $4,000, due primarily to lower margins in 2004 as
a result of a different product mix).

Gross profit was $10.4 million during the first nine months of 2005,
compared to $10.7 million during the first nine months of 2004, a decrease of
$303,000, or 2.1%. This decrease was the direct result of all factors presented
above, most notably the decrease in revenues and margins from MDT Armor and
Epsilor and the write-off and write-down of inventory, primarily in AoA, which
were not entirely offset by the increase in simulation revenues.

Research and development expenses. Research and development expenses for
the first nine months of 2005 were $1.2 million, compared to $1.3 million during
the first nine months of 2004, a decrease of $57,000, or 4.4%. This decrease was
primarily attributable to allocating research and development expenses to the
cost of revenues due to research and development contracts in the Battery and
Power Systems Division.

Sales and marketing expenses. Sales and marketing expenses for the first
nine months of 2005 were $3.2 million, compared to $3.4 million the first nine
months of 2004, a decrease of $194,000, or 5.6%. This decrease was primarily
attributable to our decreased in sales commissions in the Battery and Power
Systems Division.

General and administrative expenses. General and administrative expenses
for the first nine months of 2005 were $10.9 million, compared to $7.6 million
in the first nine months of 2004, an increase of $3.3 million, or 43.6%. This
increase was primarily attributable to the following factors:

>> The inclusion of the general and administrative expenses of AoA in
our results for the entire nine months of 2005;

>> Increases in general and administrative expenses in our FAAC
subsidiary due to legal expenses, employee relocation, accounting,
incentive pay accruals, etc.;

>> Increase in other general and administrative expenses such as
auditing and legal expenses and higher liability insurance premiums;
and

>> Increase in costs related to abandoned acquisition activities.

AROTECH CORPORATION

Financial expenses, net. Financial expenses, net of financial income and
exchange differentials, totaled approximately $2.1 million in the first nine
months of 2005 compared to $2.1 million in the first nine months of 2004.

Income taxes. We and certain of our subsidiaries incurred accumulated net
operating losses during the nine months ended September 30, 2005 and,
accordingly, we were not required to make any provision for income taxes. With
respect to some of our subsidiaries that operated at a net profit during 2005,
we were able to offset federal taxes against our accumulated loss carry forward.
We recorded a total of $315,000 in tax expenses in the first nine months of
2005, with respect to certain of our subsidiaries that operated at a net profit
during 2005 and we are not able to offset their taxes against our loss carry
forward and with respect to state taxes. We recorded a total of $287,000 in tax
expense in the first nine months of 2004 with respect to certain of our
subsidiaries that operated at a net profit during 2004, and we were not able to
offset their taxes against our loss carry forward and with respect to state
taxes.

Amortization of intangible assets. Amortization of intangible assets
totaled $2.3 million in the first nine months of 2005, compared to $1.7 million
the first nine months of 2004, an increase of $615,000, or 35.5%, due primarily
to amortization of intangible assets related to our subsidiary, AoA, that we
acquired in August 2004.

We performed the required annual impairment test of goodwill, based on our
management's projections and using expected future discounted operating cash
flows. As of June 30, 2005, we identified in AoA an impairment of goodwill in
the amount of $2.0 million. As of September 30, 2005, we performed another
impairment test in AoA in response to several factors, including without
limitation the reduced sales in AoA during the third quarter of 2005, the fact
that since the last impairment test AoA received no substantial new orders and
therefore failed to meet its projections, the decision of the General Manager of
AoA and his new supervisor to leave the employ of AoA and us, respectively, and
general uncertainty about the market for AoA's products in general and AoA's
business in particular; specifically, the delay or loss of several potential
orders, decisions by customers to utilize methods of armor not produced by AoA
(hard armor instead of soft armor), and the change in U.S. military priorities
from acquiring new armor to funding the ground forces in Iraq and Afghanistan.
As a result of this impairment test, we identified an additional impairment of
goodwill and other intangible assets such as backlog, customer list,
certifications and trademarks in AoA in the amount of $8.5 million.

AROTECH CORPORATION

Our and our subsidiaries' long-lived assets and certain identifiable
intangibles are reviewed for impairment in accordance with current accounting
standards whenever events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable. Recoverability of the carrying amount
of assets to be held and used is measured by a comparison of the carrying amount
of the assets to the future undiscounted cash flows expected to be generated by
the assets. If such assets are considered to be impaired, the impairment to be
recognized is measured by the amount by which the carrying amount of the assets
exceeds the fair value of the assets. As of June 30, 2005 we identified an
impairment of backlog previously identified with the AoA acquisition and as a
result recorded an impairment loss in the amount of $346,000. As a result of the
additional impairment test performed in connection with preparation of the third
quarter financial statements, we recorded an additional impairment in the amount
of $153,000 as of September 30, 2005.

Loss from continuing operations. Due to the factors cited above, we
reported a loss from continuing operations of $20.6 million in the first nine
months of 2005, compared to $5.8 million in the first nine months of 2004, an
increase of $14.8 million, or 255.8%.

Loss from discontinued operations. Net loss from discontinued operations
for the first nine months of 2005 was $200,000 compared to $0 in the first nine
months of 2004. This is because during the second quarter of 2005 we took an
accrual for a litigation contingency related to the discontinued operations.

Net loss before deemed dividend to certain stockholders of common stock.
Due to the factors cited above, we reported a net loss of $20.8 million in the
first nine months of 2005, compared to a net loss of $5.8 million in the first
nine months of 2004, an increase of $15.0 million, or 259.2%.

Net loss attributable to common stockholders. Due to the factors cited
above, we reported a net loss of $20.8 million in the first nine months of 2005,
compared to a net loss of $9.1 million in the first nine months of 2004, an
increase of $11.7 million, or 128.0%.

Liquidity and Capital Resources

As of September 30, 2005, we had $11.2 million in cash, $2.3 million in
restricted collateral securities and cash deposits due within one year, $4.2
million in long-term restricted securities and deposits, and $36,000 in
marketable securities, as compared to at December 31, 2004, when we had $6.7
million in cash, $7.0 million in restricted collateral securities and restricted
held-to-maturity securities due within one year, $4.0 million in long-term
restricted deposits, and $136,000 in available-for-sale marketable securities.
The increase in cash was primarily the result of the sale of convertible
debentures, which was completed in September 2005.

We used available funds in the third quarter of 2005 primarily for sales
and marketing, continued research and development expenditures, and other
working capital needs. We increased our investment in fixed assets during the
three months ended September 30, 2005 by $226,000 over the investment as at
December 31, 2004, primarily in the Battery and Power Systems Division and in
the Simulation and Security Division. Our net fixed assets amounted to $4.2
million at quarter end.

Net cash used in operating activities from continuing operations for the
nine months ended September 30, 2005 and 2004 was $5.2 million and $1.0 million,
respectively, an increase of $4.1 million. This increase was primarily the
result of increased loss in 2005 and an increase in trade receivables and
decrease in trade payables and other account payables.

AROTECH CORPORATION

Net cash used in investing activities for the nine months ended September
30, 2005 and 2004 was $10.8 million and $52.2 million, a decrease of $41.4
million. This decrease was primarily the result of our investment in the
acquisition of FAAC, Epsilor and AoA in the first nine months of 2004.

Net cash provided by financing activities for the nine months ended
September 30, 2005 and 2004 was $20.4 million and $44.3 million, respectively.
This decrease was primarily the result of lower amounts of funds raised through
sales of our securities in 2005 compared to 2004.

As of September 30, 2005, we had (based on the contractual amount of the
debt and not on the accounting valuation of the debt) approximately $10.2
million in long term bank and certificated debt outstanding, all of which was
convertible debt, and approximately $14.5 million in short-term debt (which
including short-term bank credit, current portion of long-term loan and
convertible debentures in an amount of $11.8 million, and liabilities due to
subsidiaries acquisitions, in the amount of $1.5 million).

Based on our internal forecasts, we believe that our present cash position
and anticipated cash flows from operations should be sufficient to satisfy our
current estimated cash requirements through the next twelve months. This belief
is based on certain earnout and other assumptions that our management and our
subsidiaries managers believes to be reasonable, some of which are subject to
the risk factors detailed below, including without limitation our ability to
refinance, restructure or convert to equity our $4.5 million in 8% secured
convertible debentures due September 30, 2006 and our ability to make principal
payments on our secured convertible notes in shares. In this connection, we note
that from time to time our working capital needs are partially dependent on our
subsidiaries' lines of credit. In the event that we are unable to continue to
make use of our subsidiaries' lines of credit for working capital on
economically feasible terms, our business, operating results and financial
condition could be adversely affected.

Over the long term, we will need to become profitable, at least on a
cash-flow basis, and maintain that profitability in order to avoid future
capital requirements. Additionally, we would need to raise additional capital in
order to fund any future acquisitions.

RISK FACTORS

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

Business-Related Risks

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

AROTECH CORPORATION

We were incorporated in 1990 and began our operations in 1991. We have
funded our operations principally from funds raised in each of the initial
public offering of our common stock in February 1994; through subsequent public
and private offerings of our common stock and equity and debt securities
convertible or exercisable into shares of our common stock; research contracts
and supply contracts; funds received under research and development grants from
the Government of Israel; and sales of products that we and our subsidiaries
manufacture. We have incurred significant net losses since our inception.
Additionally, as of September 30, 2005, we had an accumulated deficit of
approximately $139.7 million. In an effort to reduce operating expenses and
maximize available resources, we intend to consolidate certain of our
subsidiaries, shift personnel and reassign responsibilities. We have also
substantially reduced senior employee salaries, cut directors' fees, and taken a
variety of other measures to limit spending and will continue to assess our
internal processes to seek additional cost-structure improvements. Although we
believe that such steps will help to reduce our operating expenses and maximize
our available resources, there can be no assurance that we will ever be able to
achieve or maintain profitability consistently or that our business will
continue to exist.

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

Our bank and certificated indebtedness (short and long term) aggregated
approximately $24.7 million as of September 30, 2005 (not including trade
payables, other account payables and accrued severance pay). In addition, we may
incur additional indebtedness in the future. Accordingly, we are subject to the
risks associated with indebtedness, including:

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

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

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

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

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

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

AROTECH CORPORATION

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

A failure to comply with the obligations contained in the agreements
governing our indebtedness could result in an event of default under such
agreements which could result in an acceleration of the debentures and notes and
the acceleration of debt under other instruments evidencing indebtedness that
may contain cross-acceleration or cross-default provisions. If the indebtedness
under the debentures, notes or other indebtedness were to be accelerated, there
can be no assurance that our future cash flow or assets would be sufficient to
repay in full such indebtedness.

We may not generate sufficient cash flow to service all of our debt
obligations.

Our ability to make payments on and to refinance our indebtedness and to
fund our operations depends on our ability to generate cash in the future. Our
future operating performance is subject to market conditions and business
factors that are beyond our control. Consequently, we cannot assure you that we
will generate sufficient cash flow to pay the principal and interest on our
debt. If our cash flows and capital resources are insufficient to allow us to
make scheduled payments on our debt, we may have to reduce or delay capital
expenditures, sell assets, seek additional capital or restructure or refinance
our debt. We cannot assure you that the terms of our debt will allow for these
alternative measures or that such measures would satisfy our scheduled debt
service obligations. In addition, in the event that we are required to dispose
of material assets or restructure or refinance our debt to meet our debt
obligations, we cannot assure you as to the terms of any such transaction or how
quickly such transaction could be completed. Our ability to refinance our
indebtedness or obtain additional financing will depend on, among other things:

o our financial condition at the time;

o restrictions in the agreements governing our other indebtedness; and

o other factors, including the condition of the financial markets and
our industry.

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

We require substantial funds to operate our business, including to market
our products and develop and market new products and to pay our outstanding debt
as it comes due. To the extent that we are unable to fully fund our operations,
including repaying our outstanding debt, through profitable sales of our
products and services, we will need to seek additional funding, including
through the issuance of equity or debt securities. In addition, based on our
internal forecasts and the assumptions described under "Liquidity and Capital
Resources" in our Management's Discussion and Analysis of Financial Condition
and Results of Operations, we believe that our present cash position and
anticipated cash flows from operations should be sufficient to satisfy our
current estimated cash requirements through the next twelve months. However, in
the event our internal forecasts and other assumptions prove to be incorrect, we
may need to seek additional funding. There can be no assurance that we will
obtain any such additional financing in a timely manner, on acceptable terms, or
at all. Moreover, the issuance by us of additional debt or equity is severely
restricted by the terms of our existing indebtedness. If additional funds are
raised by issuing equity securities or convertible debt securities, stockholders
may incur further dilution. If we incur additional indebtedness, we may be
subject to affirmative and negative covenants that may restrict our ability to
operate or finance our business. If additional funding is not secured, we will
have to modify, reduce, defer or eliminate parts of our present and anticipated
future commitments and/or programs.

AROTECH CORPORATION

The payment by us of our secured convertible notes in stock or the
conversion of such notes by the holders could result in substantial numbers of
additional shares being issued, with the number of such shares increasing if and
to the extent our market price declines, diluting the ownership percentage of
our existing stockholders.

In September 2005, we issued $17.5 million in secured convertible notes
due March 31, 2008. The Notes are convertible at the option of the holders at a
fixed conversion price of $1.00. We will repay the principal amount of the notes
over the next two and one-half years, with the principal amount being amortized
in twelve payments payable at our option in cash and/or stock, provided certain
conditions are met; the failure to meet such conditions could make us unable to
pay our notes, causing us to default. If the price of our common stock is above
$1.00, the holders of our notes will presumably convert their notes to stock
when payments are due, or before, resulting in the issuance of up to an
additional 17.5 million shares of common stock.

In the event we elect to make payments of principal on our convertible
notes in stock, either because our cash position at the time makes it necessary
or we otherwise deem it advisable, the price used to determine the number of
shares to be issued will be calculated using an 8% discount to the average
trading price of our common stock during 17 of the 20 consecutive trading days
ending two days before the payment date. Accordingly, the lower the market price
of our common stock at the time at which we make payments of principal in stock,
the greater the number of shares we will be obliged to issue and the greater the
dilution to our existing stockholders.

In either case, the issuance of the additional shares of our common stock
could adversely affect the market price of our common stock.

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

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

Any inability to continue to make use from time to time of our
subsidiaries' current working capital lines of credit could have an adverse
effect on our ability to do business.

From time to time our working capital needs are partially dependent on our
subsidiaries' lines of credit. In the event that we are unable to continue to
make use of our subsidiaries' lines of credit for working capital on
economically feasible terms, our business, operating results and financial
condition could be adversely affected.

AROTECH CORPORATION

We may not be successful in operating new businesses.

Prior to the acquisitions of IES and MDT in 2002 and the acquisitions of
FAAC and Epsilor in January 2004 and AoA in August 2004, our primary business
was the marketing and sale of products based on primary and refuelable Zinc-Air
fuel cell technology and advancements in battery technology for defense and
security products and other military applications, electric vehicles and
consumer electronics. As a result of our acquisitions, a substantial component
of our business is the marketing and sale of hi-tech multimedia and interactive
training solutions and sophisticated lightweight materials and advanced
engineering processes used to armor vehicles. These are relatively new
businesses for us and our management group has limited experience operating
these types of businesses. Although we have retained our acquired companies'
management personnel, we cannot assure that such personnel will continue to work
for us or that we will be successful in managing these new businesses. If we are
unable to successfully operate these new businesses, our business, financial
condition and results of operations could be materially impaired.

Our earnings will decline if we write off additional goodwill and other
intangible assets.

As of December 31, 2004, we have recorded goodwill of $39.7 million. On
January 1, 2002, we adopted SFAS No. 142, "Goodwill and Other Intangible
Assets." SFAS No. 142 requires goodwill to be tested for impairment on adoption
of the Statement, at least annually thereafter, and between annual tests in
certain circumstances, and written down when impaired, rather than being
amortized as previous accounting standards required. Goodwill is tested for
impairment by comparing the fair value of our reportable units with their
carrying value. Fair value is determined using discounted cash flows.
Significant estimates used in the methodologies include estimates of future cash
flows, future short-term and long-term growth rates, weighted average cost of
capital and estimates of market multiples for the reportable units. We performed
the required annual impairment test of goodwill, based on our projections and
using expected future discounted operating cash flows. As of September 30, 2005,
we identified in AoA an impairment of goodwill in the amount of $11.6 million.

Our and our subsidiaries' long-lived assets and certain identifiable
intangibles are reviewed for impairment in accordance with Statement of
Financial Accounting Standard No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets," whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable.
Recoverability of the carrying amount of assets to be held and used is measured
by a comparison of the carrying amount of the assets to the future undiscounted
cash flows expected to be generated by the assets. If such assets are considered
to be impaired, the impairment to be recognized is measured by the amount by
which the carrying amount of the assets exceeds the fair value of the assets. As
of September 30, 2005, we identified an impairment of backlog previously
identified with the AoA acquisition and as a result we recorded an impairment
loss in the amount of $346,000.

We will continue to assess the fair value of our goodwill annually or
earlier if events occur or circumstances change that would more likely than not
reduce the fair value of our goodwill below its carrying value. These events or
circumstances would include a significant change in business climate, including
a significant, sustained decline in an entity's market value, legal factors,
operating performance indicators, competition, sale or disposition of a
significant portion of the business, or other factors. If we determine that
significant impairment has occurred, we would be required to write off the
impaired portion of goodwill. Impairment charges could have a material adverse
effect on our financial condition and results

AROTECH CORPORATION

We may consider acquisitions in the future to grow our business, and such
activity could subject us to various risks.

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

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

We may not successfully integrate our prior acquisitions.

In light of our acquisitions of IES, MDT, FAAC, Epsilor and AoA, our
success will depend in part on our ability to manage the combined operations of
these companies and to integrate the operations and personnel of these companies
along with our other subsidiaries and divisions into a single organizational
structure. There can be no assurance that we will be able to effectively
integrate the operations of our subsidiaries and divisions and our acquired
businesses into a single organizational structure. Integration of these
operations could also place additional pressures on our management as well as on
our key technical resources. The failure to successfully manage this integration
could have an adverse material effect on us.

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

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

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

AROTECH CORPORATION

A significant portion of our business is dependent on government contracts
and reduction or reallocation of defense or law enforcement spending could
reduce our revenues.

Many of the customers of IES, FAAC and AoA to date have been in the public
sector of the U.S., including the federal, state and local governments, and in
the public sectors of a number of other countries, and most of MDT's customers
have been in the public sector in Israel, in particular the Ministry of Defense.
Additionally, all of EFB's sales to date of battery products for the military
and defense sectors have been in the public sector in the United States. A
significant decrease in the overall level or allocation of defense or law
enforcement spending in the U.S. or other countries could reduce our revenues
and have a material adverse effect on our future results of operations and
financial condition. MDT has already experienced a slowdown in orders from the
Ministry of Defense due to budget constraints and a requirement of U.S. aid to
Israel that a substantial proportion of such aid be spent in the U.S., where MDT
has only recently opened a factory.

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

Our U.S. government contracts may be terminated at any time and may
contain other unfavorable provisions.

The U.S. government typically can terminate or modify any of its contracts
with us either for its convenience or if we default by failing to perform under
the terms of the applicable contract. A termination arising out of our default
could expose us to liability and have a material adverse effect on our ability
to re-compete for future contracts and orders. Our U.S. government contracts
contain provisions that allow the U.S. government to unilaterally suspend us
from receiving new contracts pending resolution of alleged violations of
procurement laws or regulations, reduce the value of existing contracts, issue
modifications to a contract and control and potentially prohibit the export of
our products, services and associated materials.

AROTECH CORPORATION

Government agencies routinely audit government contracts. These agencies
review a contractor's performance on its contract, pricing practices, cost
structure and compliance with applicable laws, regulations and standards. If we
are audited, we will not be reimbursed for any costs found to be improperly
allocated to a specific contract, while we would be required to refund any
improper costs for which we had already been reimbursed. Therefore, an audit
could result in a substantial adjustment to our revenues. If a government audit
uncovers improper or illegal activities, we may be subject to civil and criminal
penalties and administrative sanctions, including termination of contracts,
forfeitures of profits, suspension of payments, fines and suspension or
debarment from doing business with United States government agencies. We could
suffer serious reputational harm if allegations of impropriety were made against
us. A governmental determination of impropriety or illegality, or an allegation
of impropriety, could have a material adverse effect on our business, financial
condition or results of operations.

We may be liable for penalties under a variety of procurement rules and
regulations, and changes in government regulations could adversely impact our
revenues, operating expenses and profitability.

Our defense and commercial businesses must comply with and are affected by
various government regulations that impact our operating costs, profit margins
and our internal organization and operation of our businesses. Among the most
significant regulations are the following:

o the U.S. Federal Acquisition Regulations, which regulate the
formation, administration and performance of government contracts;

o the U.S. Truth in Negotiations Act, which requires certification and
disclosure of all cost and pricing data in connection with contract
negotiations; and

o the U.S. Cost Accounting Standards, which impose accounting
requirements that govern our right to reimbursement under certain
cost-based government contracts.

These regulations affect how we and our customers do business and, in some
instances, impose added costs on our businesses. Any changes in applicable laws
could adversely affect the financial performance of the business affected by the
changed regulations. With respect to U.S. government contracts, any failure to
comply with applicable laws could result in contract termination, price or fee
reductions or suspension or debarment from contracting with the U.S. government.

Our operating margins may decline under our fixed-price contracts if we
fail to estimate accurately the time and resources necessary to satisfy our
obligations.

Some of our contracts are fixed-price contracts under which we bear the
risk of any cost overruns. Our profits are adversely affected if our costs under
these contracts exceed the assumptions that we used in bidding for the contract.
Often, we are required to fix the price for a contract before we finalize the
project specifications, which increases the risk that we will mis-price these
contracts. The complexity of many of our engagements makes accurately estimating
our time and resources more difficult. In the event we fail to estimate our time
and resources accurately, our expenses will increase and our profitability, if
any, under such contracts will decrease.

AROTECH CORPORATION

If we are unable to retain our contracts with the U.S. government and
subcontracts under U.S. government prime contracts in the competitive rebidding
process, our revenues may suffer.

Upon expiration of a U.S. government contract or subcontract under a U.S.
government prime contract, if the government customer requires further services
of the type provided in the contract, there is frequently a competitive
rebidding process. We cannot guarantee that we, or if we are a subcontractor
that the prime contractor, will win any particular bid, or that we will be able
to replace business lost upon expiration or completion of a contract. Further,
all U.S. government contracts are subject to protest by competitors. The
termination of several of our significant contracts or nonrenewal of several of
our significant contracts, could result in significant revenue shortfalls.

The loss of, or a significant reduction in, U.S. military business would
have a material adverse effect on us.

U.S. military contracts account for a significant portion of our business.
The U.S. military funds these contracts in annual increments. These contracts
require subsequent authorization and appropriation that may not occur or that
may be greater than or less than the total amount of the contract. Changes in
the U.S. military's budget, spending allocations and the timing of such spending
could adversely affect our ability to receive future contracts. None of our
contracts with the U.S. military has a minimum purchase commitment, and the U.S.
military generally has the right to cancel its contracts unilaterally without
prior notice. We manufacture for the U.S. aircraft and land vehicle armor
systems, protective equipment for military personnel and other technologies used
to protect soldiers in a variety of life-threatening or catastrophic situations,
and batteries for communications devices. The loss of, or a significant
reduction in, U.S. military business for our aircraft and land vehicle armor
systems, other protective equipment, or batteries could have a material adverse
effect on our business, financial condition, results of operations and
liquidity.

A reduction of U.S. force levels in Iraq may affect our results of
operations.

Since the invasion of Iraq by the U.S. and other forces in March 2003, we
have received steadily increasing orders from the U.S. military for armoring of
vehicles and military batteries. These orders are the result, in substantial
part, from the particular combat situations encountered by the U.S. military in
Iraq. We cannot be certain to what degree the U.S. military would continue
placing orders for our products if the U.S. military were to reduce its force
levels or withdraw completely from Iraq. A significant reduction in orders from
the U.S. military could have a material adverse effect on our business,
financial condition, results of operations and liquidity.

There are limited sources for some of our raw materials, which may
significantly curtail our manufacturing operations.

The raw materials that we use in manufacturing our armor products include
Kevlar(R), a patented product of E.I. du Pont de Nemours Co., Inc. We purchase
Kevlar in the form of woven cloth from various independent weaving companies. In
the event Du Pont and/or these independent weaving companies were to cease, for
any reason, to produce or sell Kevlar to us, we might be unable to replace it
with a material of like weight and strength, or at all. Thus, if our supply of
Kevlar were materially reduced or cut off or if there were a material increase
in the price of Kevlar, our manufacturing operations could be adversely affected
and our costs increased, and our business, financial condition and results of
operations could be materially adversely affected.

AROTECH CORPORATION

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

Some of the components of our products contain elements that are known to
pose potential safety risks. In addition to these risks, there can be no
assurance that accidents in our facilities will not occur. Any accident, whether
occasioned by the use of all or any part of our products or technology or by our
manufacturing operations, could adversely affect commercial acceptance of our
products and could result in significant production delays or claims for damages
resulting from injuries. Any of these occurrences would materially adversely
affect our operations and financial condition. In the event that our products,
including the products manufactured by MDT and AoA, fail to perform as
specified, users of these products may assert claims for substantial amounts.
These claims could have a materially adverse effect on our financial condition
and results of operations. There is no assurance that the amount of the general
product liability insurance that we maintain will be sufficient to cover
potential claims or that the present amount of insurance can be maintained at
the present level of cost, or at all.

Our fields of business are highly competitive.

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

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

Our battery technology competes with other battery technologies, as well
as other Zinc-Air technologies. The competition in this area of our business
consists of development stage companies, major international companies and
consortia of such companies, including battery manufacturers, automobile
manufacturers, energy production and transportation companies, consumer goods
companies and defense contractors.

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

AROTECH CORPORATION

Many of our competitors have financial, technical, marketing, sales,
manufacturing, distribution and other resources significantly greater than ours.
If we are unable to compete successfully in each of our operating areas,
especially in the defense and security products area of our business, our
business and results of operations could be materially adversely affected.

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

Our ability to compete effectively will depend on our ability to maintain
the proprietary nature of our technology and manufacturing processes through a
combination of patent and trade secret protection, non-disclosure agreements and
licensing arrangements.

Litigation, or participation in administrative proceedings, may be
necessary to protect our proprietary rights. This type of litigation can be
costly and time consuming and could divert company resources and management
attention to defend our rights, and this could harm us even if we were to be
successful in the litigation. In the absence of patent protection, and despite
our reliance upon our proprietary confidential information, our competitors may
be able to use innovations similar to those used by us to design and manufacture
products directly competitive with our products. In addition, no assurance can
be given that others will not obtain patents that we will need to license or
design around. To the extent any of our products are covered by third-party
patents, we could need to acquire a license under such patents to develop and
market our products.

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

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

AROTECH CORPORATION

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

We are highly dependent on the presidents of our IES, FAAC and AoA
subsidiaries and the general managers of our MDT and Epsilor subsidiaries, and
the loss of the services of one or more of these persons could adversely affect
us. We are especially dependent on the services of our Chairman, President and
Chief Executive Officer, Robert S. Ehrlich. The loss of Mr. Ehrlich could have a
material adverse effect on us. We are party to an employment agreement with Mr.
Ehrlich, which agreement expires at the end of 2007. We do not have key-man life
insurance on Mr. Ehrlich.

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

A significant portion of our sales are made to customers located outside
the U.S., primarily in Europe and Asia. In 2004, 2003 and 2002, without taking
account of revenues derived from discontinued operations, 19%, 42% and 56%,
respectively, of our revenues, were derived from sales to customers located
outside the U.S. We expect that our international customers will continue to
account for a substantial portion of our revenues in the near future. Sales to
international customers may be subject to political and economic risks,
including political instability, currency controls, exchange rate fluctuations,
foreign taxes, longer payment cycles and changes in import/export regulations
and tariff rates. In addition, various forms of protectionist trade legislation
have been and in the future may be proposed in the U.S. and certain other
countries. Any resulting changes in current tariff structures or other trade and
monetary policies could adversely affect our sales to international customers.

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

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

Market-Related Risks

The price of our common stock is volatile.

The market price of our common stock has been volatile in the past and may
change rapidly in the future. The following factors, among others, may cause
significant volatility in our stock price:

o announcements by us, our competitors or our customers;

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

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

o rumors relating to our competitors or us;

o actual or anticipated fluctuations in our operating results;

AROTECH CORPORATION

o the issuance of our securities, including warrants, in connection
with financings and acquisitions; and

o general market or economic conditions.

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

One of the continued listing standards for our stock on the Nasdaq Stock
Market (both the Nasdaq National Market, on which our stock is currently listed,
and the Nasdaq Capital Market (formerly known as the Nasdaq SmallCap Market)) is
the maintenance of a $1.00 bid price. Our stock price is currently below $1.00,
and has been so since August 15, 2005. On September 27, 2005, we received a
notice from Nasdaq to the effect that our common stock does not satisfy the
minimum bid price rule (Nasdaq Marketplace Rule 4350(a)(5)), and that in
accordance with the rules of the Nasdaq National Market, we will be provided 180
calendar days, or until March 27, 2006, to regain compliance with the Nasdaq's
minimum bid price rule or be delisted from the Nasdaq National Market.

If our common stock were to be delisted from the Nasdaq National Market,
we might apply to be listed on the Nasdaq Capital Market if we then met the
initial listing standards of the Nasdaq Capital Market (other than the $1.00
minimum bid standard). If we were to move to the Nasdaq Capital Market, current
Nasdaq regulations would give us the opportunity to obtain an additional 180-day
grace period (until September 23, 2006) if we meet certain net income,
stockholders' equity or market capitalization criteria; if at the end of that
period we had not yet achieved compliance with the minimum bid price rule, we
would be subject to delisting from the Nasdaq Capital Market. Although we would
have the opportunity to appeal any potential delisting, there can be no
assurances that this appeal would be resolved favorably. As a result, there can
be no assurance that our common stock will remain listed on the Nasdaq Stock
Market.

While our stock would continue to trade on the over-the-counter bulletin
board following any delisting from the Nasdaq, any such delisting of our common
stock could have an adverse effect on the market price of, and the efficiency of
the trading market for, our common stock. Trading volume of over-the-counter
bulletin board stocks has been historically lower and more volatile than stocks
traded on an exchange or the Nasdaq Stock Market. As a result, holders of our
securities could find it more difficult to sell their securities. Also, if in
the future we were to determine that we need to seek additional equity capital,
it could have an adverse effect on our ability to raise capital in the public
equity markets.

In addition, if we fail to maintain Nasdaq listing for our securities, and
no other exclusion from the definition of a "penny stock" under the Securities
Exchange Act of 1934, as amended, is available, then any broker engaging in a
transaction in our securities would be required to provide any customer with a
risk disclosure document, disclosure of market quotations, if any, disclosure of
the compensation of the broker-dealer and its salesperson in the transaction and
monthly account statements showing the market values of our securities held in
the customer's account. The bid and offer quotation and compensation information
must be provided prior to effecting the transaction and must be contained on the
customer's confirmation. If brokers become subject to the "penny stock" rules
when engaging in transactions in our securities, they would become less willing
to engage in transactions, thereby making it more difficult for our stockholders
to dispose of their shares.

AROTECH CORPORATION

Additionally, delisting from the Nasdaq Stock Market would constitute an
event of default under certain of our debt instruments.

Our management has determined that we have material weaknesses in our
internal controls. If we fail to achieve and maintain effective internal
controls in accordance with Section 404 of the Sarbanes-Oxley Act, we may not be
able to accurately report our financial results.

We have, with our auditors' concurrence, identified significant
deficiencies that constitute material weaknesses under standards established by
the Public Company Accounting Oversight Board (PCAOB). A material weakness is a
condition in which the design or operation of one or more of the internal
control components does not reduce to a relatively low level the risk that
misstatements caused by error or fraud in amounts that would be material in
relation to the financial statements being audited may occur and not be detected
within a timely period by employees in the normal course of performing their
assigned functions. Our auditors have reported to us that at December 31, 2004,
we had material weaknesses for inadequate controls related to the financial
statement close process, convertible debentures and share capital processes as
it applies to non-routine and highly complex financial transactions. The
material weaknesses arise from insufficient staff with technical accounting
expertise to independently apply our accounting policies, as they relate to
non-routine and highly complex transactions, in accordance with U.S. generally
accepted accounting principles.

As a public company, we will have significant requirements for enhanced
financial reporting and internal controls. The process of designing and
implementing effective internal controls is a continuous effort that requires us
to anticipate and react to changes in our business and the economic and
regulatory environments and to expend significant resources to maintain a system
of internal controls that is adequate to satisfy our reporting obligations as a
public company. We cannot assure you that the measures we have taken or will
take to remediate any material weaknesses or that we will implement and maintain
adequate controls over our financial processes and reporting in the future as we
continue our rapid growth. If we are unable to establish appropriate internal
financial reporting controls and procedures, it could cause us to fail to meet
our reporting obligations, result in material misstatements in our financial
statements, harm our operating results, cause investors to lose confidence in
our reported financial information and have a negative effect on the market
price for shares of our common stock.

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

Sales of a substantial number of shares of common stock into the public
market, or the perception that those sales could occur, could adversely affect
our stock price or could impair our ability to obtain capital through an
offering of equity securities. As of October 31, 2005, we had 90,204,708 shares
of common stock issued and outstanding (prior to cancellation of 3,479,464
shares returned to us in connection with the FAAC earnout). Of these shares,
most are freely transferable without restriction under the Securities Act of
1933 or pursuant to effective resale registration statements, and a substantial
portion of the remaining shares may be sold subject to the volume restrictions,
manner-of-sale provisions and other conditions of Rule 144 under the Securities
Act of 1933.

AROTECH CORPORATION

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

As of October 31, 2005, there were outstanding warrants to purchase a
total of 22,211,463 shares of our common stock at a weighted average exercise
price of $1.44 per share, options to purchase a total of 9,661,647 shares of our
common stock at a weighted average exercise price of $1.32 per share, of which
7,707,830 were vested, at a weighted average exercise price of $1.33 per share,
and outstanding debentures and notes convertible into a total of 20,656,298
shares of our common stock at a weighted average conversion price of $1.07 per
share. Holders of our options, warrants and convertible debt will probably
exercise or convert them only at a time when the price of our common stock is
higher than their respective exercise or conversion prices. Accordingly, we may
be required to issue shares of our common stock at a price substantially lower
than the market price of our stock. This could adversely affect our stock price.
In addition, if and when these shares are issued, the percentage of our common
stock that existing stockholders own will be diluted.

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

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

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

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

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

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

AROTECH CORPORATION

Israel-Related Risks

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

The offices and facilities of three of our subsidiaries, EFL, MDT and
Epsilor, are located in Israel (in Beit Shemesh, Lod and Dimona, respectively,
all of which are within Israel's pre-1967 borders). Most of our senior
management is located at EFL's facilities. Although we expect that most of our
sales will be made to customers outside Israel, we are nonetheless directly
affected by economic, political and military conditions in that country.
Accordingly, any major hostilities involving Israel or the interruption or
curtailment of trade between Israel and its present trading partners could have
a material adverse effect on our operations. Since the establishment of the
State of Israel in 1948, a number of armed conflicts have taken place between
Israel and its Arab neighbors and a state of hostility, varying in degree and
intensity, has led to security and economic problems for Israel.

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

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

We are organized under the laws of the State of Delaware and will be
subject to service of process in the United States. However, approximately 22%
of our assets are located outside the United States. In addition, two of our
directors and most of our executive officers are residents of Israel and a
portion of the assets of such directors and executive officers are located
outside the United States.

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

AROTECH CORPORATION

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

Although a substantial majority of our revenues and a substantial portion
of our expenses are denominated in U.S. dollars, a portion of our costs,
including personnel and facilities-related expenses, is incurred in New Israeli
Shekels (NIS). Inflation in Israel will have the effect of increasing the dollar
cost of our operations in Israel, unless it is offset on a timely basis by a
devaluation of the NIS relative to the dollar. In 2005, the inflation adjusted
NIS depreciated against the dollar.

Some of our agreements are governed by Israeli law.

Israeli law governs some of our agreements, such as our lease agreements
on our subsidiaries' premises in Israel, and the agreements pursuant to which we
purchased IES, MDT and Epsilor. While Israeli law differs in certain respects
from American law, we do not believe that these differences materially adversely
affect our rights or remedies under these agreements.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Interest Rate Risk

It is our policy not to enter into interest rate derivative financial
instruments, except for hedging of foreign currency exposures discussed below.
We do not currently have any significant interest rate exposure.

Foreign Currency Exchange Rate Risk

Since a significant part of our sales and expenses are denominated in U.S.
dollars, we have experienced only insignificant foreign exchange gains and
losses to date, and do not expect to incur significant gains and losses in 2005.
Certain of our research, development and production activities are carried out
by our Israeli subsidiary, EFL, at its facility in Beit Shemesh, and accordingly
we have sales and expenses in NIS. Additionally, our MDT and Epsilor
subsidiaries operate primarily in NIS. However, the majority of our sales are
made outside Israel in U.S. dollars, and a substantial portion of our costs are
incurred in U.S. dollars. Therefore, our functional currency is the U.S. dollar.

While we conduct our business primarily in U.S. dollars, some of our
agreements are denominated in foreign currencies, and we occasionally hedge part
of the risk of a devaluation of the U.S dollar, which could have an adverse
effect on the revenues that we incur in foreign currencies. We do not hold or
issue derivative financial instruments for trading or speculative purposes

ITEM 4. CONTROLS AND PROCEDURES.

Evaluation of Disclosure Controls and Procedures

As of September 30, 2005, our management, including the principal
executive officer and principal financial officer, evaluated our disclosure
controls and procedures related to the recording, processing, summarization, and
reporting of information in our periodic reports that we file with the SEC.
These disclosure controls and procedures are intended to ensure that material
information relating to us, including our subsidiaries, is made known to our
management, including these officers, by other of our employees, and that this
information is recorded, processed, summarized, evaluated, and reported, as
applicable, within the time periods specified in the SEC's rules and forms. Due
to the inherent limitations of control systems, not all misstatements may be
detected. These inherent limitations include the realities that judgments in
decision-making can be faulty and that breakdowns can occur because of simple
error or mistake. Any system of controls and procedures, no matter how well
designed and operated, can at best provide only reasonable assurance that the
objective of the system are met and management necessarily is required to apply
its judgment in evaluating the cost benefit relationship of possible controls
and procedures. Additionally, controls can be circumvented by the individual
acts of some persons, by collusion of two or more people, or by management
override of the control. Our controls and procedures are intended to provide
only reasonable, not absolute, assurance that the above objectives have been
met.

AROTECH CORPORATION

Based on their evaluation, our principal executive officer and principal
financial officer concluded that our controls and procedures (as defined in
Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) were
not effective as of September 30, 2005.

Our management has not completed implementation of the changes it believes
are required to remediate the previously reported material weaknesses for
inadequate controls related to the financial statement close process,
convertible debentures and share capital processes as it applies to non-routine
and highly complex financial transactions. The material weaknesses arise from
insufficient staff with technical accounting expertise to independently apply
our accounting policies, as they relate to non-routine and highly complex
transactions, in accordance with U.S. generally accepted accounting principles.
Management has identified that due to the reasons described above, we did not
consistently follow established internal control over financial reporting
procedures related to the analysis, documentation and review of selection of the
appropriate accounting treatment for non-routine and highly complex
transactions. Because of these material weaknesses, we have concluded that we
did not maintain effective internal control over financial reporting as of
September 30, 2005, based on the criteria set forth by the Committee of
Sponsoring Organizations ("COSO") of the Treadway Commission in Internal Control
- - Integrated Framework.

In light of the material weakness described above, our management
performed additional analyses and other post-closing procedures to ensure our
consolidated financial statements are prepared in accordance with generally
accepted accounting principles in the United States (U.S. GAAP). Accordingly,
management believes that the consolidated financial statements included in this
report fairly present in all material respects our financial position, results
of operations and cash flows for the periods presented.

Management's Response to the Material Weaknesses

In response to the material weaknesses described above, we have undertaken
to take the following initiatives with respect to our internal controls and
procedures that we believe are reasonably likely to improve and materially
affect our internal control over financial reporting. We anticipate that
remediation will be continuing throughout fiscal 2005, during which we expect to
continue pursuing appropriate corrective actions, including the following:

AROTECH CORPORATION

>> Preparing appropriate written documentation of our financial control
procedures (currently in process);

>> Adding additional qualified staff to our finance department
(currently in process);

>> Scheduling training for accounting staff to heighten awareness of
generally accepted accounting principles applicable to complex
transactions (not yet begun);

>> Strengthening our internal review procedures in conjunction with our
ongoing work to enhance our internal controls so as to enable us to
identify and adjust items proactively (currently in process);

>> Engaging an outside accounting firm to support our Sarbanes-Oxley
Section 404 compliance activities and to provide technical expertise
in the selection and application of generally accepted accounting
principles related to complex transactions to identify areas that
require control or process improvements and to consult with us on
the appropriate accounting treatment applicable to complex
transactions (done); and

>> Implementing the recommendations of our outside accounting
consultants (currently in process).

Additionally, we believe that our substantial diminution of acquisition
activity will enable our current accounting staff to maintain better internal
control over financial reporting.

Our management and Audit Committee have monitored and will continue to
monitor closely the implementation of our remediation plan. The effectiveness of
the steps we intend to implement is subject to continued management review, as
well as Audit Committee oversight, and we may make additional changes to our
internal control over financial reporting.

Changes in Internal Controls Over Financial Reporting

Except as noted above, there have been no changes in our internal control
over financial reporting that occurred during our last fiscal quarter to which
this Quarterly Report on Form 10-Q relates that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.

AROTECH CORPORATION

PART II

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

Issuance of Restricted Stock to Certain Service Providers

In August 2005, pursuant to the terms of agreements between us and Artemis
Equity LLC, we issued an aggregate of 425,000 shares of our common stock as part
of the fee arrangements in connection with investment banking, financial
consulting and investor relations services that Artemis rendered to us.

In August 2005, pursuant to the terms of an agreement between us and RK
Equity Advisors, LLC, we issued 9,600 shares of our common stock as part of the
fee arrangements in connection with investor relations services that RK Equity
rendered to us.

We issued the above securities in reliance on the exemption from
registration provided by Section 4(2) of the Securities Act as transactions by
an issuer not involving a public offering. The issuance of these securities was
without the use of an underwriter, and the shares of common stock were issued
with restrictive legends permitting transfer thereof only upon registration or
an exemption under the Act.

ITEM 6. EXHIBITS.

The following documents are filed as exhibits to this report:

Exhibit Number Description
10.1.......Securities Purchase Agreement dated September 29, 2005
between the Company and certain investors
(incorporated by reference to the Company's Current
Report on Form 8-K filed with the Commission on
September 30, 2005)
10.2.......Form of Note due March 31, 2008 (incorporated by
reference to the Company's Current Report on Form
8-K filed with the Commission on September 30, 2005)
10.3.......Form of Warrant (incorporated by reference to the
Company's Current Report on Form 8-K filed with the
Commission on September 30, 2005)
10.4.......Form of Guaranty (incorporated by reference to the
Company's Current Report on Form 8-K filed with the
Commission on September 30, 2005)
10.5.......Form of Security Agreement (incorporated by reference
to the Company's Current Report on Form 8-K filed
with the Commission on September 30, 2005)
10.6.......Form of Intellectual Property Security Agreement
(incorporated by reference to the Company's Current
Report on Form 8-K filed with the Commission on
September 30, 2005)

AROTECH CORPORATION

10.7.......Registration Rights Agreement dated September 29, 2003
between the Company and the Investors (incorporated
by reference to the Company's Current Report on Form
8-K filed with the Commission on September 30, 2005)
31.1.......Certification of Chief Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002

31.2.......Certification of Chief Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002

32.1.......Certification of Chief Executive Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002

32.2.......Certification of Chief Financial Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002

AROTECH CORPORATION

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.

Dated: November 14, 2005

AROTECH CORPORATION

By: /s/ Robert S. Ehrlich
-------------------------------------
Name: Robert S. Ehrlich
Title: Chairman, President and CEO
(Principal Executive Officer)

By: /s/ Avihai Shen
-------------------------------------
Name: Avihai Shen
Title: Vice President - Finance
(Principal Financial Officer)

AROTECH CORPORATION

EXHIBIT INDEX

Exhibit Number Description
31.1.......Certification of Chief Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
31.2.......Certification of Chief Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
32.1.......Certification of Chief Executive Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
32.2.......Certification of Chief Financial Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002