Table of Contents
	Page
Summary	3
Risk Factors	10
Information Regarding Forward-Looking Statements	23
About the Offering	23
Use of Proceeds	25
Selling Stockholders	25
Plan of Distribution	28
Description of Capital Stock	30
Description of Common Stock Warrants	31
Legal Matters	32
Experts	32
Business	32
Properties	59
Legal Proceedings	59
Market Price of and Dividends on the Company’s Common Equity and Related Stockholder Matters	60
Selected Financial Data	60
Management’s Discussion and Analysis of Financial Condition and Results of Operations	62
Quantitative and Qualitative Disclosures about Market Risk	87
Directors and Executive Officers	88
Executive Compensation	91
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	96
Certain Relationships and Related Transactions	98
Where You Can Find Additional Information	99
Incorporation by Reference	99

 

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Ø	We develop, manufacture and market advanced high-tech multimedia and interactive digital solutions for use-of-force training and driving training of military, law enforcement, security and other personnel through our Simulation and Training Division:

·	We provide simulators, systems engineering and software products to the United States military, government and private industry through our subsidiary FAAC Incorporated, located in Ann Arbor, Michigan (“FAAC”); and

·	We provide specialized “use of force” training for police, security personnel and the military through our subsidiary IES Interactive Training, Inc., located in Ann Arbor, Michigan (“IES”).

Ø	We utilize sophisticated lightweight materials and advanced engineering processes to manufacture aviation armor and to armor vehicles through our Armor Division:

·	We manufacturer ballistic and fragmentation armor kits for rotary and fixed wing aircraft and marine armor through our subsidiary Armour of America, located in Auburn, Alabama (“AoA”); and

·

We use state-of-the-art lightweight armoring materials, special ballistic glass and advanced engineering processes to fully armor military and civilian SUV’s, buses and vans, through our subsidiaries MDT Protective Industries, Ltd., located in Lod, Israel (“MDT”), of which we own 75.5%, and MDT Armor Corporation, located in Auburn, Alabama (“MDT Armor”), of which we own 88%.

Ø	We manufacture and sell lithium and Zinc-Air batteries for defense and security products and other military applications and we pioneer advancements in Zinc-Air technology for electric vehicles through our Battery and Power Systems Division:

·	We develop and sell rechargeable and primary lithium batteries and smart chargers to the military and to private defense industry in the Middle East, Europe and Asia through our subsidiary Epsilor Electronic Industries, Ltd., located in Dimona, Israel (in Israel’s Negev desert area) (“Epsilor”);

·	We manufacture and sell Zinc-Air batteries and battery electronics for the military, focusing on applications that demand high energy and light weight, through our subsidiary Electric Fuel Battery Corporation, located in Auburn, Alabama (“EFB”); and

·	We produce water-activated lifejacket lights for commercial aviation and marine applications, and we conduct our Electric Vehicle effort, through our subsidiary Electric Fuel (E.F.L.) Ltd., located in Beit Shemesh, Israel (“EFL”).

 

 

 

 

 

 

 

·	we must dedicate a portion of our cash flows from operations to pay principal and interest and, as a result, we may have less funds available for operations and other purposes;

 

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

 

·	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

 

·	if we default under any of our existing debt instruments, including paying the outstanding principal when due, and if our creditors demand payment of a portion or all of our indebtedness, we may not have sufficient funds to make such payments.

 

 

 

 

 

 

 

 

·	our financial condition at the time;

 

·	restrictions in the agreements governing our other indebtedness; and

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

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

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

·	announcements by us, our competitors or our customers;

 

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

 

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

 

·	rumors relating to our competitors or us;

 

·	actual or anticipated fluctuations in our operating results;

 

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

 

·	general market or economic conditions.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

·	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

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ø	4,062,500 shares of common stock that may be acquired upon the conversion of currently outstanding convertible notes; and

 

Ø	298,221 shares of common stock that may be acquired upon the exercise of currently outstanding warrants.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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*	Less than 1%.
(1)	Includes all shares being registered hereby, and assumes (i) conversion of all convertible notes at an assumed rate of conversion based solely on the number of conversion shares being registered hereby, and (ii) exercise of all warrants held by the selling stockholders, without regard to any limitations on conversions or exercise. Also assumes that the selling stockholders acquire no additional shares of common stock before completion of this offering. For purposes of determining beneficial ownership of our common stock, owners of options, warrants and other convertible securities exercisable or convertible within sixty days are considered to be the beneficial owners of the shares of common stock for which such securities are exercisable or convertible.
(2)	Assumes that all of the shares offered by the selling stockholders under this prospectus are sold. Percentage ownership is computed in accordance with Rule 13d-3 promulgated by the Securities and Exchange Commission, based on the assumption (expressly required by the applicable rules of the Securities and Exchange Commission) that only the person whose ownership is being reported has exercised such derivative securities for shares of common stock, and is based on 8,468,957 shares issued and outstanding as of August 18, 2006.
(3)	The terms of the notes and warrants whose underlying shares of common stock are included for resale under this prospectus prohibit conversion of the convertible notes and exercise of the warrants to the extent that conversion of the convertible notes and exercise of the warrants would result in the holder, together with its affiliates, beneficially owning in excess of 4.999% of our outstanding shares of common stock.

 

 

(4)	Consists of (i) 1,857,143 shares of common stock, which is approximately 325% of the 571,429 shares originally issuable upon conversion of convertible notes issued in September 2005 (based on the original principal amount outstanding), being registered hereby, of which 275,410 shares are issuable based on the $14.00 conversion price of the remaining convertible notes, (ii) 139,362 shares of common stock issuable upon exercise of the warrants being registered hereby, (iii) 171,429 shares of common stock issuable upon exercise of the warrants issued in connection with the convertible notes, (iv) 103,449 shares of common stock issuable upon conversion of certain convertible debentures, and (v) 207,504 shares of common stock. Highbridge Capital Management, LLC (“Highbridge”) is the trading manager of Smithfield Fiduciary LLC (“Smithfield”) and consequently has voting control and investment discretion over the securities held by Smithfield. Messrs. Glenn Dubin and Henry Swieca control Highbridge. Each of Highbridge and Messrs. Dubin and Swieca disclaims beneficial ownership of the securities held by Smithfield.
(5)	Consists of (i) 41,218 shares of common stock issuable upon exercise of the warrants being registered hereby, (ii) 51,242 shares of common stock issuable upon exercise of the warrants issued in connection with the convertible notes, and (iii) 152,900 shares of common stock. Omicron Capital, L.P., a Delaware limited partnership (“Omicron Capital”), serves as investment manager to Omicron Master Trust, a trust formed under the laws of Bermuda (“Omicron”), Omicron Capital, Inc., a Delaware corporation (“OCI”), serves as general partner of Omicron Capital, and Winchester Global Trust Company Limited (“Winchester”) serves as the trustee of Omicron. By reason of such relationships, Omicron Capital and OCI may be deemed to share dispositive power over the securities owned by Omicron, and Winchester may be deemed to share voting and dispositive power over the securities owned by Omicron. Omicron Capital, OCI and Winchester disclaim beneficial ownership of such securities. Omicron Capital has delegated authority from the board of directors of Winchester regarding the portfolio management decisions with respect to the securities owned by Omicron and, as of April 21, 2003, Mr. Olivier H. Morali and Mr. Bruce T. Bernstein, officers of OCI, have delegated authority from the board of directors of OCI regarding the portfolio management decisions of Omicron Capital with respect to the securities owned by Omicron. By reason of such delegated authority, Messrs. Morali and Bernstein may be deemed to share dispositive power over the securities owned by Omicron. Messrs. Morali and Bernstein disclaim beneficial ownership of such securities and neither of such persons has any legal right to maintain such delegated authority. No other person has sole or shared voting or dispositive power with respect to the securities being offered by Omicron, as those terms are used for purposes under Regulation 13D-G of the Securities Exchange Act of 1934, as amended. Omicron and Winchester are not “affiliates” of one another, as that term is used for purposes of the Securities Exchange Act of 1934, as amended, or of any other person named in this prospectus as a selling stockholder. No person or “group” (as that term is used in Section 13(d) of the Securities Exchange Act of 1934, as amended, or the SEC’s Regulation 13D-G) controls Omicron and Winchester.
(6)	Consists of (i) 1,135,485 shares of common stock, which is 325% of the 349,380 shares originally issuable upon conversion of convertible notes issued in September 2005 based on the original principal amount outstanding, being registered hereby, of which 168,390 shares are issuable based on the $14.00 conversion price of the remaining convertible notes, (ii) 41,273 shares of common stock issuable upon exercise of the warrants being registered hereby, (iii) 53,572 shares of common stock issuable upon exercise of the warrants issued in connection with the convertible notes, (iv) 52,329 shares of common stock issuable upon conversion of certain convertible debentures. Ramius Capital Group, LLC is the investment adviser of Portside Growth and Opportunity Fund and consequently has voting control and investment discretion over securities held by Portside. Ramius Capital disclaims beneficial ownership of the securities held by Portside. Peter A. Cohen, Morgan B. Stark, Thomas W. Strauss and Jeffrey M. Solomon are the sole managing members of C4S & Co., LLC, the sole managing member of Ramius Capital. As a result, Messrs. Cohen, Stark, Strauss and Solomon may be considered beneficial owners of any securities deemed to be beneficially owned by Ramius Capital. Each of Messrs. Cohen, Stark, Strauss and Solomon disclaims beneficial ownership of the securities held by Portside.
(7)	Consists of (i) 464,285 shares of common stock, which is approximately 325% of the 142,857 shares originally issuable upon conversion of convertible notes issued in September 2005 based on the original principal amount outstanding, being registered hereby, of which 68,853 shares are issuable based on the $14.00 conversion price of the remaining convertible notes, (ii) 42,858 shares of common stock issuable upon exercise of the warrants issued in connection with the convertible notes, and (iii) 41,185 shares of common stock. Joshua Silverman has voting control and investment discretion over the securities held by this selling stockholder. Mr. Silverman disclaims beneficial ownership of the securities held by Iroquois Master Fund Ltd.
(8)	Consists of (i) 348,214 shares of common stock, which is approximately 325% of the 107,143 shares originally issuable upon conversion of convertible notes issued in September 2005 based on the original principal amount outstanding, being registered hereby, of which 51,640 shares are issuable based on the $14.00 conversion price of the remaining convertible notes, (ii) 35,095 shares of common stock issuable upon exercise of the warrants being registered hereby, (iii) 32,143 shares of common stock issuable upon exercise of the warrants issued in connection with the convertible notes, (iv) 7,390 shares of common stock issuable upon conversion of certain convertible debentures, and (v) 127,970 shares of common stock. Mitchell P. Kopin, President of Downsview Capital Inc., the General Partner of Cranshire Capital L.P., has the right to vote and/or dispose of the shares held by this selling stockholder. Mr. Kopin and Downsview Capital, Inc. both disclaim beneficial ownership of these securities.

 

 

(9)	Consists of (i) 41,273 shares of common stock issuable upon exercise of the warrants being registered hereby, and (ii) 53,652 shares of common stock issuable upon conversion of certain convertible debentures. Pursuant to an investment management agreement, Avi Vigder has voting and dispositive control over the Shares held by Mainfield Enterprises, Inc. Avi Vigder disclaims beneficial ownership of said shares.
(10)	Consists of (i) 257,373 shares of common stock, which is approximately 325% of the 79,192 shares originally issuable upon conversion of convertible notes issued in September 2005 based on the original principal amount outstanding, being registered hereby, of which 38,168 shares are issuable based on the $14.00 conversion price of the remaining convertible notes, (ii) 23,758 shares of common stock issuable upon exercise of the warrants issued in connection with the convertible notes, (iii) 3,706 shares of common stock issuable upon conversion of certain convertible debentures, debentures, all of which securities it acquired in transfers from Omicron Master Trust in July 2006, and (iv) 65,361 shares of common stock. Rockmore Capital, LLC (“Rockmore Capital”) and Rockmore Partners, LLC (“Rockmore Partners”), each a limited liability company formed under the laws of the State of Delaware, serve as the investment manager and general partner, respectively, to Rockmore Investments (US) LP, a Delaware limited partnership, which invests all of its assets through Rockmore Investment Master Fund Ltd., an exempted company formed under the laws of Bermuda (“Rockmore Master Fund”). By reason of such relationships, Rockmore Capital and Rockmore Partners may be deemed to share dispositive power over the shares of our common stock owned by Rockmore Master Fund. Rockmore Capital and Rockmore Partners disclaim beneficial ownership of such shares of our common stock. Rockmore Partners has delegated authority to Rockmore Capital regarding the portfolio management decisions with respect to the shares of common stock owned by Rockmore Master Fund and, as of August 18, 2006, Mr. Bruce T. Bernstein and Mr. Brian Daly, as officers of Rockmore Capital, are responsible for the portfolio management decisions of the shares of common stock owned by Rockmore Master Fund. By reason of such authority, Messrs. Bernstein and Daly may be deemed to share dispositive power over the shares of our common stock owned by Rockmore Master Fund. Messrs. Bernstein and Daly disclaim beneficial ownership of such shares of our common stock and neither of such persons has any legal right to maintain such authority. No other person has sole or shared voting or dispositive power with respect to the shares of our common stock as those terms are used for purposes under Regulation 13D-G of the Securities Exchange Act of 1934, as amended. No person or “group” (as that term is used in Section 13(d) of the Securities Exchange Act of 1934, as amended, or the SEC’s Regulation 13D-G) controls Rockmore Master Fund.

 

 

 

 

Ø	on any national securities exchange or quotation service on which the securities may be listed or quoted at the time of sale;

 

Ø	in the over-the-counter market;

 

 

Ø	in transactions otherwise than on these exchanges or systems or in the over-the-counter market;

 

Ø	through the writing of options, whether such options are listed on an options exchange or otherwise;

 

Ø	ordinary brokerage transactions and transactions in which the broker-dealer solicits purchasers;

 

Ø	block trades in which the broker-dealer will attempt to sell the shares as agent but may position and resell a portion of the block as principal to facilitate the transaction;

 

Ø	purchases by a broker-dealer as principal and resale by the broker-dealer for its account;

 

Ø	an exchange distribution in accordance with the rules of the applicable exchange;

 

Ø	privately negotiated transactions;

 

Ø	short sales;

 

Ø	sales pursuant to Rule 144;

 

Ø	broker-dealers may agree with the selling securityholders to sell a specified number of such shares at a stipulated price per share;

 

Ø	a combination of any such methods of sale; and

 

Ø	any other method permitted pursuant to applicable law.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

·	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

 

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

 

 

 

 

 

 

 

Ø	declare or pay a dividend in shares of common stock or make a distribution of shares of common stock to holders of our outstanding common stock;

 

Ø	subdivide or combine our common stock; or

 

Ø	issue shares of our capital stock in any reclassification of our common stock.

 

 

 

 

 

 

 

 

 

 

 

 

Ø	We develop, manufacture and market advanced high-tech multimedia and interactive digital solutions for use-of-force training and driving training of military, law enforcement, security and other personnel through our Simulation and Training Division:

 

·	We provide simulators, systems engineering and software products to the United States military, government and private industry through our subsidiary FAAC Incorporated, located in Ann Arbor, Michigan (“FAAC”); and

 

·	We provide specialized “use of force” training for police, security personnel and the military through our subsidiary IES Interactive Training, Inc., located in Ann Arbor, Michigan (“IES”).

 

Ø	We utilize sophisticated lightweight materials and advanced engineering processes to manufacture aviation armor and to armor vehicles through our Armor Division:

 

·	We manufacturer ballistic and fragmentation armor kits for rotary and fixed wing aircraft and marine armor through our subsidiary Armour of America, located in Auburn, Alabama (“AoA”); and

 

·

We use state-of-the-art lightweight armoring materials, special ballistic glass and advanced engineering processes to fully armor military and civilian SUV’s, buses and vans, through our subsidiaries MDT Protective Industries, Ltd., located in Lod, Israel (“MDT”), of which we own 75.5%, and MDT Armor Corporation, located in Auburn, Alabama (“MDT Armor”), of which we own 88%.

 

Ø	We manufacture and sell lithium and Zinc-Air batteries for defense and security products and other military applications and we pioneer advancements in Zinc-Air technology for electric vehicles through our Battery and Power Systems Division:

 

·	We develop and sell rechargeable and primary lithium batteries and smart chargers to the military and to private defense industry in the Middle East, Europe and Asia through our subsidiary Epsilor Electronic Industries, Ltd., located in Dimona, Israel (in Israel’s Negev desert area) (“Epsilor”);

 

·	We manufacture and sell Zinc-Air batteries and battery electronics for the military, focusing on applications that demand high energy and light weight, through our subsidiary Electric Fuel Battery Corporation, located in Auburn, Alabama (“EFB”); and

 

·	We produce water-activated lifejacket lights for commercial aviation and marine applications, and we conduct our Electric Vehicle effort, through our subsidiary Electric Fuel (E.F.L.) Ltd., located in Beit Shemesh, Israel (“EFL”).

 

 

 

 

 

Ø	Off-road driving on severe slopes, including muddy or swampy terrain;

Ø	Driving in night vision goggle and blackout conditions;

Ø	Convoy training; and

Ø	The use of the Central Tire Inflation System in response to changing terrain.

Ø	Leading Technology− We believe that we offer better-developed, more dynamic software than our competitors. Additionally, we incorporate leading graphics and motion-cueing technologies in our systems to provide customers with the most realistic simulation experience on the market.

Ø	Long History in the Simulation Software Business− As a market leader in the simulation software business for more than thirty years, FAAC’s professionals understand customer requirements and operating environments. Thus, we build our software to meet and exceed demanding customers’ expectations.

Ø

Low-Cost Research and Development Capabilities for New Products− Our customers benefit from government and commercial funding of research and development and the low cost of subsequent adaptation. As such, internally funded new product development costs have been less than $100,000 per year since 1999.

Ø	Service Reputation− We are known for providing strong customer service, a characteristic that drives new business within our chosen markets.

Ø	Standardized Development Processes− We generally deliver our pro-ducts to market quickly and at high quality due to our standardized development processes.

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

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

Ø	Range FDU (Firearms Diagnostic Unit) - a unique combination of training and interactive technologies that give instructors a first-person perspective of what trainees are seeing and doing when firing a weapon.

Ø	Milo (Multiple Interactive Learning/training Objectives) - a simulator designed with “plug in” modules to customize the training system to meet end user needs.

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

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

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

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

Ø

Less-Than-Lethal Training - Training in the use of non-lethal devices such as TASER, OC (pepper spray), batons and other devices can be used with the video training scenarios with appropriate reactions of each. We produce an interactive system especially for TASER products called the TASER™ Judgmental Trainer, which delivers advance simulated training for law enforcement and government agencies deploying TASER non-lethal devices.

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

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

Ø	Provides repeatable training to a standard based on established policy

Ø	Quick dissemination and reinforcement of correct behavior and policies

Ø	Helps reduce liability

Ø	More efficient than “traditional and redundant” role-playing methods

Ø	Realistic scenarios instead of outdated “play-acting”

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

Ø	Easy Self-Authoring of interactive training content

Ø	PC-Pentium platform facilitates low cost of ownership

Ø	Easy to use Windows XP-based software

Ø	Easy to deploy in any classroom

Ø	Fall of shot feedback

Ø	Trigger pressure analysis

Ø	Recoil control, grip and stance assessment

Ø	Sight alignment

Ø	Sight picture analysis and target reacquisition

Ø	Recruiting and Retention of Law Enforcement and Corrections Personnel

Ø	Ethics and Integrity

Ø	Issues of Hate Crimes

Ø	Traffic Stops and Use of Force

Ø	Community and Corporate Partnerships for Public Safety

Ø	Creating a Safe School Environment

Ø	Bristlecone Products

Ø	Fox Valley Technical College

Ø	TASER International, Inc.

Ø	Force Science Research Center

Ø	H&K Training Centers

Ø	The David, an Ultra Light Armored Vehicle based on a Land Rover or Mercedes platform;

Ø	Command vehicles (such as the Land Rover Defender 110); and

Ø	Pickup trucks such as the Defender 130.

Ø	Sports utility vehicles (such as the GM Suburban, the Toyota Land Cruiser and the Land Rover Defender);

Ø	Trucks, such as the Ford F550;

Ø	Passenger vans (such as the Chevrolet Express, the General Motors Savana and the Ford Econoline); and

Ø	Small buses (based on vehicles in the Mercedes-Benz Vario and Sprinter lines).

Ø	Primary batteries;

Ø	Rechargeable batteries;

Ø	Smart chargers;

Ø	State of charge indicators; and

Ø	Control and monitoring battery circuits

Ø	Armed forces in the Middle East and Asia;

Ø	Military original equipment manufacturers (OEMs); and

Ø	Various battery manufacturers.

Ø	Tactical radios

Ø	SIGINT systems

Ø	Training systems

Ø	SATCOM radios

Ø	Nightscope power

Ø	Guidance systems

Ø	Surveillance systems

Ø

Sensors

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

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

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

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

Ø	we develop, manufacture and market advanced high-tech multimedia and interactive digital solutions for use-of-force and driving training of military, law enforcement, security and other personnel (our Simulation and Training Division);

Ø	we manufacture aviation armor and we utilize sophisticated lightweight materials and advanced engineering processes to armor vehicles (our Armoring Division); and

Ø	we manufacture and sell Zinc-Air and lithium batteries for defense and security products and other military applications and we pioneer advancements in Zinc-Air battery technology for electric vehicles (our Battery and Power Systems Division).

Ø	Our Simulation and Training Division, consisting of:

·	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

·	IES Interactive Training, Inc., located in Ann Arbor, Michigan, which provides specialized “use of force” training for police, security personnel and the military (“IES”).

Ø	Our Armor Division, consisting of:

·

Armour of America, located in Auburn, Alabama, 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”);

·

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

·	MDT Armor Corporation, located in Auburn, Alabama, which conducts MDT’s United States activities (“MDT Armor”) (88% owned).

Ø	Our Battery and Power Systems Division, consisting of:

·	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”);

·	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

·

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”).

Ø	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.

Ø	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.

Ø	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.

Ø	EFL recognized revenues from the sale of water-activated battery (WAB) lifejacket lights.

Ø	Decreased revenues from our Armor Division ($3.9 million less in the three months ended June 30, 2006 versus the three months ended June 30, 2005).

Ø	Decreased revenues from our Simulation and Training Division, particularly FAAC ($1.0 million less in the three months ended June 30, 2006 versus the three months ended June 30, 2005).

Ø	Decreases in certain general and administrative expenses in comparison to 2005, such as auditing, legal expenses and travel expenses, as a result of cost-cutting programs implemented by management.

Ø	Decrease in general and administrative expenses related to our Simulation and Training Division (payroll, legal and other expenses).

Ø	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.

Ø	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.

Ø	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.

Ø	EFL recognized revenues from the sale of water-activated battery (WAB) lifejacket lights.

Ø	Decreased revenues from our Armor Division ($5.2 million less in the first six months of 2006 versus the first six months of 2005).

Ø	Decreased revenues from our Battery and Power Systems Division, particularly Epsilor ($920,000 less in the first six months of 2006 versus the first six months of 2005).

Ø	Decreases in certain general and administrative expenses in comparison to 2005, such as auditing, legal expenses and travel expenses, as a result of cost-cutting programs implemented by management ($366,000).

Ø	Decrease in general and administrative expenses related to FAAC, primarily payroll, legal and other expenses ($350,000).

Ø	Decrease in general and administrative expenses related to IES as a result of the consolidation of IES and FAAC operations ($106,000).

Ø	Decrease in general and administrative expenses related to AoA due to decrease in operations, employees and the relocation of AoA to Alabama ($248,000).

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

Ø	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;

Ø	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

Ø	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.

Ø	$26.8 million for the Simulation and Training Division, compared to $21.5 million in 2004, an increase of $5.3 million, or 25%, due primarily to the increased revenues of FAAC (approximately $4.5 million).

Ø

$12.3 million for the Armor Division, compared to $18.0 million in 2004, a decrease of $5.7 million, or 32%, due primarily to the decreased revenues from MDT Armor (approximately $8.3 million) as a result of a slowdown in armoring orders related to the Iraq War. This decrease was partially offset by higher revenues recorded by us in 2005 from AoA in comparison to 2004, due to the fact that AoA’s revenues were included for all of 2005 but only for the last five months of 2004. On a pro forma basis, AoA’s revenues decreased in 2005 versus 2004, due to decisions by customers to utilize methods of armor not produced by AoA (hard armor instead of soft armor), the change in U.S. military priorities from acquiring new armor to funding the ground forces in Iraq and Afghanistan, and, following Hurricane Katrina, the fact that substantial funds earmarked for defense were delayed to provide funds for hurricane relief.

Ø

$9.9 million for the Battery and Power Systems Division, compared to $10.5 million in 2004, a decrease of $585,000, or 6%, due primarily to decreased sales of lithium batteries and chargers by our Epsilor subsidiary as a result of reduced equipment purchases by one of its customers, offset to some extent by increased revenues from our Zinc-Air military batteries.

Ø	The inclusion of the general and administrative expenses of AoA in our results for all of 2005 but only five months of 2004 ($836,000);

Ø	Increases in general and administrative expenses in our FAAC subsidiary due to legal expenses, employee relocation, accounting, incentive pay accruals, and similar expenses ($809,000);

Ø	Increase in other corporate general and administrative expenses such as auditing, legal and travel expenses ($800,000); and

Ø	Increase in costs related to abandoned acquisition activities ($1.1 million).

Ø	From the sale of interactive training systems and from the provision of warranty services in connection with such systems (FAAC and IES);

Ø	From payments under armor contracts and for service and repair of armored vehicles (AoA and MDT);

Ø	From the sale of batteries, chargers and adapters to the military, and under certain development contracts with the U.S. Army (EFB and Epsilor);

Ø	From the sale of lifejacket lights (EFL); and

Ø

From subcontracting fees received in connection with Phase III of the United States Department of Transportation (DOT) electric bus program, which began in October 2003 and was completed in March 2004. Phase IV of the DOT program, which began in October 2004, did not result in any revenues during 2004 (EFL).

Ø	Increased revenues from vehicle armoring; and

Ø	Revenues generated by FAAC, Epsilor and AoA in 2004 that were not present in 2003.

Ø	The inclusion of the general and administrative expenses of FAAC, Epsilor and AoA in our results for 2004 ($2.4 million);

Ø	Expenses in 2004 in connection with grant of options and shares to employees that were not present in 2003 ($830,000);

Ø	Costs associated with our compliance with Section 404 of the Sarbanes-Oxley Act of 2002 that were not present in 2003 ($150,000); and

Ø	Increases in other general and administrative expenses, such as employee salaries and bonuses, travel expenses, audit fees, director fees, legal fees, and expenses related to due diligence performed in connection with certain potential acquisitions, which were not present in 2003.

Ø	Expenses in 2003 in connection with a litigation settlement agreement that were not present in 2004 ($700,000); and

Ø	Amortization of legal and consulting expenses in 2003 in connection with our convertible debentures that were lower (by $260,000) than in 2004.

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

Ø	MDT recognized revenues from payments under vehicle armoring contracts and for service and repair of armored vehicles;

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

Ø	Arocon recognized revenues under consulting agreements; and

Ø

EFL recognized revenues from the sale of lifejacket lights and from subcontracting fees received in connection with Phase III of the United States Department of Transportation (DOT) electric bus program, which began in October 2002 and was completed in March 2004. Phase IV of the DOT program, which began in October 2003, did not result in any revenues during 2003.

Ø	The inclusion of the sales and marketing expenses of IES and MDT in our results for the full year of 2003 but only part of 2002;

Ø	An increase in IES’s sales activity during 2003, which resulted in both increased sales and increased sales and marketing expenses during 2003; and

Ø	We incurred expenses for consultants in the amount of $810,000 in connection with our CECOM battery program with the U.S. Army and $345,000 in connection with our security consulting business.

Ø	The inclusion of the general and administrative expenses of IES and MDT in our results for the full year of 2003 but only part of 2002;

Ø	Expenses in 2003 in connection with a litigation settlement agreement, in the amount of $714,000, that were not present in 2002;

Ø	Expenses in 2003 in connection with warrant grants, in the amount of $199,500, that were not present in 2002;

Ø	Legal and consulting expenses in 2003 in connection with our convertible debentures, in the amount of $484,000, that were not present in 2002; and

Ø	Expenses in 2003 in connection with the start-up of our security consulting business in the United States and with the beginning of operations of MDT Armor, in the amount of $250,000, that were not present in 2002.

Ø	cash salary;

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

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

Ø	accruals (but not cash payments) in respect of contractual termination com-pen-sa-tion in excess of the Israeli statutory minimum;

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

Ø	stock options;

Ø

grants of restricted stock, where the sale of such stock is prohibited for a period of two years and such stock is forfeit to us should the Named Executive Officer’s employment be terminated for cause, as defined in such Executive’s employment agreement (e.g., fraud, reckless or willful misconduct, etc.); and

Ø	other benefits, primarily consisting of annual statutory holiday pay and redemption of unused vacation days and sick days.