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 that could cause actual results to differ materially from those projected. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. We undertake no obligation to publicly release the result of any revisions to these forward-looking statements that may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors including, but not limited to, those set forth elsewhere in this report. Please see "Risk Factors" in our Annual Report on Form 10-K and in our other filings with the Securities and Exchange Commission.

Arotech™ is a trademark and Electric Fuel® 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 file 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

We are a defense and security products and services company, engaged in three business areas: interactive simulation for military, law enforcement and commercial markets (Training and Simulation Division); batteries and charging systems for the military (Battery and Power Systems Division); and high-level armoring for military, paramilitary and commercial vehicles (Armor Division):

Overview of Results of Operations

Acquisitions

In acquisition of subsidiaries, part of the purchase price is allocated to intangible assets and goodwill. Amortization of intangible assets related to acquisition of subsidiaries is recorded based on the estimated expected life of the assets. In the case of goodwill, the assets recorded as

goodwill are not amortized. We are required to review intangible assets and goodwill for impairment at least annually or whenever events or changes in circumstances indicate that carrying amount of the assets may not be recoverable. If we determine, through the impairment review process, that goodwill has been impaired, we must record the impairment charge in our statement of operations.

Financings and Issuances of Warrants

During the third quarter of 2008 and pursuant to the terms of a Securities Purchase Agreement dated August 14, 2008, we issued and sold to a group of institutional investors 10% senior convertible notes in the aggregate principal amount of $5.0 million due August 15, 2011. These notes are convertible at any time prior to August 15, 2011 at a conversion price of $2.24 per share. As part of our analysis of the convertible debt and related warrants, we reviewed and followed the guidance of SFAS No. 150 and EITF Issues No. 00-19, 00-27 and 05-2.

As part of the securities purchase agreement, we issued to the purchasers of its 10% senior convertible notes due August 15, 2011, warrants to purchase an aggregate of 558,036 shares of common stock at any time prior to August 15, 2011 at a price of $2.24 per share. The warrants were classified in 2008 as equity based on relative fair value. The relative fair value of these warrants was determined in 2008 using the Black-Scholes pricing model, assuming a risk-free interest rate of 2.78%, a volatility factor 75%, dividend yields of 0% and a contractual life of 3.0 years.

In connection with these convertible notes, we recorded a deferred debt discount of $412,000 in 2008 with respect to the beneficial conversion feature and the discount arising from fair value allocation of the warrants according to APB No. 14, which was being amortized from the date of issuance to the stated redemption date - August 15, 2011

On January 1, 2009 we adopted Emerging Issues Task Force consensus 07-05, "Determining Whether an Instrument is Indexed to an Entity's Own Stock" (EITF 07-05). EITF 07-05 requires us to re-evaluate the warrants issued with the convertible notes and to also re-evaluate the embedded conversion option and embedded put options within the notes to determine if the previous accounting for these items would change. Upon this re-evaluation, we were required to reclassify the warrants along with the value of the embedded conversion feature from equity to a derivative liability. The embedded put options remained classified as derivative liabilities. The Company again used the Black-Scholes valuation model to determine the value of the warrants, the value of the embedded conversion feature and the value of the embedded put options associated with the convertible notes as of January 1, 2009. In accordance with the guidance of EITF 07-05, a cumulative adjustment increasing January 1, 2009 retained earnings by $ 1,287,000 was made to reflect this new accounting. The adjusted balance of these derivative liabilities of approximately $282,000 as of March 31, 2009 was recorded in the balance sheet in Other Long Term Liabilities. During the first quarter of 2009, we recognized $203,000 of financial expense related to the amortization of the debt discount. At March 31, 2009, the debt discount balance was $1,119,000 and is netted with long term debt on the consolidated balance sheets.

On March 31, 2009, we revalued the warrants, the embedded conversion option and the embedded put options and recorded the change in value of $196,000 as financial expense. The table below lists the variables used in the Black-Scholes calculation and the resulting values.

                 Variables              January 1, 2009        March 31, 2009
        Stock Price                     $            0.41      $          0.78
        Risk free interest rate                      1.00 %               1.15 %
        Volatility                                  81.40 %              83.90 %
        Dividend yield                               0.00 %               0.00 %
        Contractual life                        2.6 years            2.4 years

                  Values                January 1, 2009        March 31, 2009
        Warrants                        $          29,171      $       101,003
        Conversion option                          42,036              168,875
        Puts                                       14,787               11,930
        Total Value                     $          85,994      $       281,808

Change in value - charged to financial expense $ 195,814

Principle payments are due on the convertible notes as follows:

Year Amount 2009 $ 1,363,635 2010 1,818,180 2011 1,363,640 $ 4,545,455

Concurrent with the Securities Purchase Agreement dated August 14, 2008, we purchased a $2,500,000 Senior Subordinated Convertible Note from an unaffiliated company, DEI Services Corporation ("DEI"). This 10% Senior Subordinated Convertible Note is due December 31, 2009. The note is convertible at maturity at our option into such number of shares of DEI's common stock, no par value per share, as shall be equal at the time of conversion to twelve percent (12%) of DEI's outstanding common stock.

Interest on the outstanding principal amount of this note commenced accruing on the issuance date and is payable quarterly, in arrears, on February 15, 2009, May 15, 2009 and August 15, 2009. Interest on this note will be recognized as a reduction of financial expenses and will be shown on an accrual basis. Related fees and costs will be recorded as general and administrative expense.

We incurred non-cash expenses related to our financings in the amount of $195,814 (as discussed above) during the first three months of 2009.

Restricted Shares and Options

In accordance with Statement of Financial Accounting Standards No. 123 (revised 2004), "Share-Based Payments," we incurred, for the three months ended March 31, 2009 and 2008, compensation expense related to stock options and restricted shares of approximately $99,000 and $410,000, respectively, of which $9,000 and $16,000, respectively, was for stock options and $90,000 and $393,000, respectively, was for restricted shares.

Overview of Operating Performance and Backlog

Overall, our net loss before earnings from affiliated company and tax expenses for the three months ended March 31, 2009 was $279,733 on revenues of $20.1 million, compared to a net loss of $735,000 on revenues of $13.3 million during the three months ended March 31, 2008. As of March 31, 2009, our overall backlog totaled $31.8 million.

In our Training and Simulation Division, revenues increased from approximately $7.6 million in the first three months of 2008 to $11.5 million in the first three months of 2009. As of March 31, 2009, our backlog for our Training and Simulation Division totaled $17.0 million.

In our Armor Division, revenues increased from $2.6 million during the first three months of 2008 to $4.7 million during the first three months of 2009. As of March 31, 2009, our backlog for our Armor Division totaled $3.4 million.

In our Battery and Power Systems Division, revenues increased from approximately $3.1 million in the first three months of 2008 to approximately $3.9 million in the first three months of 2009. As of March 31, 2009, our backlog for our Battery and Power Systems Division totaled $11.4 million.

Recent Developments

We have learned that on May 6, 2009, a purported shareholders derivative complaint (the "Complaint") was apparently filed in the United States District Court for the Eastern District of New York against us and certain of our officers and directors. Although we have yet to be served with a copy of the Complaint, the Complaint appears to be based on the same facts as the class action litigation currently pending against us in the same district, and primarily relates to our acquisition of Armour of America in 2005 and certain public statements made by us with respect to our business and prospects during the Period. The Complaint seeks an unspecified amount of damages.

Although the ultimate outcome of this matter cannot be determined with certainty, we believe that the allegations stated in the Complaint are without merit and we and our officers and directors named in the Complaint intend to defend ourselves vigorously against such allegations

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.

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 stockholders' equity.

Results of Operations

Three months ended March 31, 2009 compared to the three months ended March 31, 2008.

Revenues. Revenues for the three months ended March 31, 2009 totaled $20.1 million, compared to $13.3 million in the comparable period in 2008, an increase of $6.8 million, or 51.6%. In the first quarter of 2009, revenues were $11.5 million for the Training and Simulation Division (compared to $7.6 million in the first quarter of 2008, an increase of $3.9 million, or 52.1%, due primarily to increased sales of military vehicle simulators and use of force simulators); $4.7 million for the Armor Division (compared to $2.6 million in the first quarter of 2008, an increase of $2.1 million, or 80.8%, due primarily to increased revenues from MDT and MDT Armor, mostly in respect of the completion of orders for the "David" Armored Vehicle); and $3.9 million for the Battery and Power Systems Division (compared to $3.1 million in the first quarter of 2008, an increase of $806,000, or 25.9%, due primarily to increased sales of our battery products at Epsilor and EFB).

Cost of revenues. Cost of revenues totaled $14.8 million during the first quarter of 2009, compared to $10.0 million in the first quarter of 2008, an increase of $4.8 million, or 48.2%, due primarily to increased sales in all our divisions.

Direct expenses for our three divisions during the first quarter of 2009 were $9.8 million for the Training and Simulation Division (compared to $6.0 million in the first quarter of 2008, an increase of $3.8 million, or 62.2%, due primarily to increased revenues at FAAC partially offset by increased materials costs); $3.5 million for the Battery and Power Systems Division (compared to $3.3 million in the first quarter of 2008, an increase of $154,000, or 4.6%, due primarily to increased revenues at Epsilor offset by a reduction in material costs); and $4.5 million for the Armor Division (compared to $2.3 million in the first quarter of 2008, an increase of $2.2 million, or 99.5%, due primarily to increased production of the "David" Armored Vehicle along with increased labor and material costs).

Amortization of intangible assets. Amortization of intangible assets totaled $373,000 in the first quarter of 2009, compared to $493,000 in the first quarter of 2008, a decrease of $120,000, or 24.4%, due primarily to intangible assets in our Training and Simulation division that are now fully amortized

Research and development expenses. Research and development expenses for the first quarter of 2009 were $332,000, compared to $607,000 during the first quarter of 2008, a decrease of $275,000, or 45.3%. This decrease was primarily attributable to decreased expenses in our Armor division.

Selling and marketing expenses. Selling and marketing expenses for the first quarter of 2009 were $ 1.1 million, compared to $1.1 million in the first quarter of 2008, an increase of $3,000, or 0.3%. Expenses were unchanged for the quarter and expenses in each division did not vary significantly.

General and administrative expenses. General and administrative expenses for the first quarter of 2009 were $2.8 million, compared to $3.5 million in the first quarter of 2008, a decrease of $766,000, or 21.7%. This decrease was primarily attributable to a reduction in stock compensation expense and the expenses booked in 2008 for the minority interest buyout in the amount of $339,000.

Financial expenses, net. Financial expenses totaled approximately $973,000 in the first quarter of 2009, compared to $190,000 in the first quarter of 2008, an increase of $783,000, or 412.1%. The difference was due primarily to expenses relating to our debt discount, currency fluctuations and expenses for the mark-to-market adjustment related to our convertible debt

Income taxes. We and certain of our subsidiaries incurred net operating losses during the three months ended March 31, 2009 and accordingly, no provision for income taxes was recorded in this quarter. With respect to some of our subsidiaries that operated at a net profit during 2009, we were able to offset federal taxes against our accumulated loss carry forward. We recorded a total of $196,000 in tax expense in the first quarter of 2009, compared to $120,000 in tax expense in the first quarter of 2008, an increase of $76,000, or 63.7%, mainly concerning state and local taxes along with the required adjustment of taxes due to the deduction of goodwill for U.S. federal taxes, which totaled $140,000 in the first quarter of 2009.

Net loss. Due to the factors cited above, net loss decreased from $971,000 in 2008 to $476,000 in 2009, a decrease of $495,000, or 51.0%.

Liquidity and Capital Resources

As of March 31, 2009, we had $3.5 million in cash, $373,000 in restricted collateral securities and restricted held-to-maturity securities due within one year, and $45,000 in available-for-sale marketable securities, as compared to December 31, 2008, when we had $4.3 million in cash, $382,000 in restricted collateral securities and $49,000 in available-for-sale marketable securities.

We used available funds in the three months ended March 31, 2009 primarily for sales and marketing, continued research and development expenditures, and other working capital needs. We purchased approximately $20,000 of fixed assets during the three months ended March 31, 2009 and also received a fixed asset grant of approximately $40,000 that was credited to fixed assets. Our net fixed assets amounted to $4.7 million at quarter end.

Net cash provided by operating activities from continuing operations for the three months ended March 31, 2009 and 2008 was $659,000 and $685,000, respectively, a decrease of $26,000. This decrease in cash used was primarily the result of changes in working capital.

Net cash provided by (used) in investing activities for the three months ended March 31, 2009 and 2008 was $23,000 and $(1.8 million), an increase of $1.8 million. This change was primarily the result of the acquisition activities that took place in 2008.

Net cash used in financing activities for the three months ended March 31, 2009 and 2008 was $1,369,000 and $10,000, respectively, an increase of $1.4 million, primarily due to the change in short term debt and the repayment of long term debt.

As of March 31, 2009, we have approximately $ 2.7 million in bank debt and $ 4.5 million in principal, in long term senior subordinated notes outstanding. This is in comparison to $3.6 million in bank debt and $5.0 million in principal, in long term senior subordinated notes outstanding, as of December 31, 2008.

Subject to all of the reservations regarding "forward-looking statements" set forth above, we believe that our present cash position, anticipated cash flows from operations and lines of credit should be sufficient to satisfy our current estimated cash requirements through the remainder of the year.