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); high-level armoring for military, paramilitary and commercial vehicles (Armor Division); batteries and charging systems for the military (Battery and Power Systems 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 the original accounting for these convertible notes, we recorded a deferred debt discount on the balance sheet of $412,000 in 2008. The beneficial conversion feature and the discount arising from fair value allocation of the warrants according to APB No. 14 is 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), due to the reset provision in the convertible notes. 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. We 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 in the first quarter to reflect this new accounting. We re-valued this amount in the second quarter of 2009 based on a revised valuation of the derivative liability. This resulted in a debt discount balance in the amount of approximately $325,000, which is included in Long Term Debt on the balance sheet, and a revised cumulative adjustment to retained earnings of $471,000.

On June 30, 2009, we revalued these warrants, their embedded conversion option and their embedded put options and recorded an expense of approximately $283,000 in the second quarter as financial expense. The year to date financial expense associated with this transaction is approximately $479,000. The table below lists the variables used in the Black-Scholes calculation and the resulting values.

         Variables              January 1, 2009        June 30, 2009
Stock price                    $             0.41     $          1.76
Risk free interest rate                      1.00 %              1.64 %
Volatility                                  81.40 %             83.60 %
Dividend yield                               0.00 %              0.00 %
Contractual life                   2.6 years             2.1 years


          Values                January 1, 2009        June 30, 2009
Warrants                       $           29,171     $       394,899
Conversion option                           8,013             122,962
Puts                                       14,997              13,609
Total value                    $           52,181     $       531,470

Change in value - charged to financial expense $ 479,289

Principal payments are due on the convertible notes as follows:

Year     Amount
2009   $   909,090
2010     1,818,180
2011     1,363,640
       $ 4,090,910

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. The remaining interest payments are due on August 15 and November 15 of this year with the final payment due on December 31, 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 $626,000 (as discussed above) during the first six 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 six months ended June 30, 2009 and 2008, compensation expense related to stock options and restricted shares of approximately $212,000 and $631,000, respectively, of which $18,000 and $34,000, respectively, was for stock options and $194,000 and $597,000, respectively, was for restricted shares.

On June 29, 2009, the executive officers of the company were granted restricted stock and restricted stock units totaling 378,334 shares at a grant price of $1.67 per share (the closing price on the date of grant) as authorized by our compensation committee. These shares will vest 50% six months after the date of grant and 50% twelve months after the date of grant and will be expensed over the vesting period.

Overview of Operating Performance and Backlog

Overall, our net loss before earnings from affiliated company and tax expenses for the six months ended June 30, 2009 was $864,000 on revenues of $36.1 million, compared to a net loss of $2.8 million on revenues of $25.9 million during the six months ended June 30, 2008. As of June 30, 2009, our overall backlog totaled $42.9 million.

In our Training and Simulation Division, revenues increased from approximately $14.7 million in the first six months of 2008 to $21.3 million in the first six months of 2009. As of June 30, 2009, our backlog for our Training and Simulation Division totaled $17.6 million.

In our Armor Division, revenues increased from $5.8 million during the first six months of 2008 to $6.4 million during the first six months of 2009. As of June 30, 2009, our backlog for our Armor Division totaled $15.4 million.

In our Battery and Power Systems Division, revenues increased from approximately $5.3 million in the first six months of 2008 to approximately $8.4 million in the first six months of 2009. As of June 30, 2009, our backlog for our Battery and Power Systems Division totaled $9.8 million.

Common Stock Repurchase Program

In February of 2009, we authorized, for a period of one year, the repurchase in the open market or in privately negotiated transactions of up to $1 million of our common stock. Pursuant to this plan, through June 30, 2009 we have repurchased 260,738 shares of our common stock for $258,596, all of which was purchased in the second quarter of 2009. Shares repurchased are carried on our books as treasury stock. At June 30, 2009, we had remaining authorization for the repurchase of up to $741,404 in shares of our common stock. The repurchase program is subject to the discretion of our management.

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. The Complaint is 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 June 30, 2009 compared to the three months ended June 30, 2008.

Revenues. Revenues for the three months ended June 30, 2009 totaled $16.0 million, compared to $12.6 million in the comparable period in 2008, an increase of $3.4 million, or 27.2%. In the second quarter of 2009, revenues were $9.8 million for the Training and Simulation Division (compared to $7.2 million in the second quarter of 2008, an increase of $2.6 million, or 37.0%, due primarily to increased sales of military vehicle simulators and use of force simulators); $1.7 million for the Armor Division (compared to $3.2 million in the second quarter of 2008, a decrease of $1.5 million, or 46.3%, due primarily to decreased revenues from MDT and MDT Armor, mostly as a result of the previous completion of most of the remaining outstanding orders for the "David" Armored Vehicle); and $4.5 million for the Battery and Power Systems Division (compared to $2.2 million in the second quarter of 2008, an increase of $2.3 million, or 102.1%, due primarily to increased sales of our battery products at Epsilor and EFB).

Cost of revenues. Cost of revenues totaled $11.8 million during the second quarter of 2009, compared to $9.8 million in the second quarter of 2008, an increase of $2.0 million, or 20.4%, due primarily to increased sales in all our divisions.

Direct expenses for our three divisions during the second quarter of 2009 were $8.1 million for the Training and Simulation Division (compared to $6.3 million in the second quarter of 2008, an increase of $1.8 million, or 30.1%, due primarily to increased revenues at FAAC partially offset by increased materials costs); $2.6 million for the Armor Division (compared to $5.2 million in the second quarter of 2008, a decrease of $2.6 million, or 50.0%, due primarily to decreased production of the "David" Armored Vehicle); and $4.2 million for the Battery and Power Systems Division (compared to $2.5 million in the second quarter of 2008, an increase of $1.7 million, or 67.0%, due primarily to increased revenues at Epsilor and EFL).

Amortization of intangible assets. Amortization of intangible assets totaled $374,000 in the second quarter of 2009, compared to $492,000 in the second quarter of 2008, a decrease of $118,000, or 24.0%, 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 second quarter of 2009 were $404,000, compared to $226,000 during the second quarter of 2008, an increase of $178,000, or 78.8%. This increase was primarily attributable to increased expense in our Training and Simulation Division offset by decreased expense in our Battery Division.

Selling and marketing expenses. Selling and marketing expenses for the second quarter of 2009 were $1.2 million, compared to $1.1 million in the second quarter of 2008, an increase of $27,000, or 2.4%. Expenses were essentially unchanged for the quarter and expenses in each division did not vary significantly.

General and administrative expenses. General and administrative expenses for the second quarter of 2009 were $2.8 million, compared to $3.3 million in the second quarter of 2008, a decrease of $511,000, or 15.5%. This decrease was primarily attributable to a reduction in stock compensation expense, mandated severance expense in Israel and corporate audit expense.

Financial income (expenses), net. Financial expenses totaled $(126,000) in the second quarter of 2009, compared to financial income of $137,000 in the second quarter of 2008, an increase in expense of $263,000, or 192.2%. 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 June 30, 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 $(272,000) in tax expense in the second quarter of 2009, compared to $108,000 in tax expense in the second quarter of 2008, an increase of $380,000, or 351.9%, 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 second quarter of 2009.

Net loss. Due to the factors cited above, net loss decreased from $1.9 million in the second quarter of 2008 to $857,000 in the second quarter of 2009, a decrease of $1.1 million, or 56.0%.

Six months ended June 30, 2009 compared to the six months ended June 30, 2008.

Revenues. Revenues for the six months ended June 30, 2009 totaled $36.1 million, compared to $25.9 million in the comparable period in 2008, an increase of $10.3 million, or 39.7%. In the first six months of 2009, revenues were $21.3 million for the Training and Simulation Division (compared to $14.7 million in the first six months of 2008, an increase of $6.6 million, or 44.7%, due primarily to increased sales of military vehicle simulators and use of force simulators); $6.4 million for the Armor Division (compared to $5.8 million in the first six months of 2008, an increase of $622,000, or 10.7%, due primarily to increased revenues from MDT and MDT Armor, mostly in respect of the completion of orders in the first quarter for the "David" Armored Vehicle); and $8.4 million for the Battery and Power Systems Division (compared to $5.3 million in the first six months of 2008, an increase of $3.1 million, or 57.6%, due primarily to increased sales of our battery products at Epsilor and EFL).

Cost of revenues. Cost of revenues totaled $26.6 million during the first six months of 2009, compared to $19.8 million in the first six months of 2008, an increase of $6.8 million, or 34.5%, due primarily to increased sales in all our divisions.

Direct expenses for our three divisions during the first six months of 2009 were $17.9 million for the Training and Simulation Division (compared to $12.3 million in the first six months of 2008, an increase of $5.6 million, or 45.8%, due primarily to increased revenues at FAAC partially offset by increased materials costs); $7.1 million for the Armor Division (compared to $7.4 million in the first six months of 2008, a decrease of $344,000, or 4.6%, due primarily to decreased production of the "David" Armored Vehicle in the first quarter offset by increased labor and material costs); and $7.7 million for the Battery and Power Systems Division (compared to $5.8 million in the first six months of 2008, an increase of $1.8 million, or 31.4%, due primarily to increased revenues at Epsilor and EFL offset by a reduction in material costs).

Amortization of intangible assets. Amortization of intangible assets totaled $747,000 in the first six months of 2009, compared to $985,000 in the first six months of 2008, a decrease of $238,000, or 24.2%, 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 six months of 2009 were $736,000, compared to $833,000 during the first six months of 2008, a decrease of $97,000, or 11.7%. This decrease was primarily attributable to decreased expenses in our Armor Division.

Selling and marketing expenses. Selling and marketing expenses for the first six months of 2009 were $2.3 million, compared to $2.3 million in the first six months of 2008, an increase of $30,000, or 1.3%. Expenses were essentially unchanged for the quarter and expenses in each division did not vary significantly.

General and administrative expenses. General and administrative expenses for the first six months of 2009 were $5.5 million, compared to $6.8 million in the first six months of 2008, a decrease of $1.3 million, or 18.7%. This decrease was primarily attributable to a reduction in stock compensation and other corporate expenses along with the expenses recorded in 2008 for

the minority interest buyout in the amount of $339,000. The decrease was partially offset by an increase in expenses in the Training and Simulation Division.

Escrow adjustment - credit. An escrow adjustment - credit of $1.4 million in the first six months of 2008 represents the first quarter 2008 adjustment to operating expenses resulting from the completion of the escrow arbitration. This was a contingent earnout obligation that was identified by us when AoA was purchased. There was no corresponding adjustment in 2009.

Financial income (expenses), net. Financial expenses totaled $1.1 million in the first six months of 2009, compared to $53,000 in the first six months of 2008, an increase in expense of $1.0 million, or 1,976.4%. 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 six months ended June 30, 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 $469,000 in tax expense in the first six months of 2009, compared to $12,000 in tax expense in the first six months of 2008, an increase of $457,000, or 3,862.2%, 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 $280,000 in the first six months of 2009.

Net loss. Due to the factors cited above, net loss decreased from $2.9 million in the first half of 2008 to $1.3 million in the first half of 2009, a decrease of $1.6 million, or 54.3%.

Liquidity and Capital Resources

As of June 30, 2009, we had $3.1 million in cash, $296,000 in restricted collateral securities and restricted held-to-maturity securities due within one year, and $48,000 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 six months ended June 30, 2009 primarily for sales and marketing, continued research and development expenditures, and other working capital needs. We purchased approximately $131,000 of fixed assets during the six months ended June 30, 2009 and also received a fixed asset grant in the first quarter of approximately $40,000 that was credited to fixed assets at the then-current exchange rate. Our net fixed assets amounted to $4.5 million at quarter end.

Net cash provided by operating activities from continuing operations for the six months ended June 30, 2009 and 2008 was $180,000 and $(487,000), respectively, an increase of $595,000. This increase in cash provided was primarily the result of changes in working capital.

Net cash provided by investing activities for the six months ended June 30, 2009 and 2008 was $12,000 and $956,000, a decrease of $944,000. This change was primarily the result of the acquisition activities and the escrow settlement that took place in 2008.

Net cash used in financing activities for the six months ended June 30, 2009 and 2008 was $1.3 million and $2.3 million, respectively, a decrease of $979,000, primarily due to the change in short term debt and the repayment of long term debt.

As of June 30, 2009, we have approximately $3.5 million in bank debt and $4.2 million in principal, in long term debt outstanding. This is in comparison to $3.6 million in bank debt and $5.7 million in principal, in long term debt 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.