AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 14, 2002.

REGISTRATION NO. 333-


SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM F-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933

ON TRACK INNOVATIONS LTD.
(Exact Name of Registrant as Specified in its Charter)

        STATE OF ISRAEL                                                           NOT APPLICABLE
(State or Other Jurisdiction of       (Primary Standard Industrial     (I.R.S. Employer Identification No.)
 Incorporation or Organization)       Classification Code Number)


Z.H.R. INDUSTRIAL ZONE
P.O. BOX 32
ROSH PINA
ISRAEL 12000
(011) 972-4-686-8000 (Address, Including Zip Code, and Telephone Number, Including Area Code, of Registrant's Principal Executive Offices)
OHAD BASHAN OTI AMERICA, INC.
1601 SOUTH DE ANZA BLVD., SUITE 201
CUPERTINO, CALIFORNIA 95014
(408) 252-0333
(Name, Address, Including Zip Code, and Telephone Number, Including Area Code,
of
Agent for Service)

COPIES OF COMMUNICATIONS TO:

  JON M. JENKINS, ESQ.                    SHMUEL ZYSMAN, ADV.
      Z.A.G / S&W LLP                     ZYSMAN AHARONI GAYER
   292 MADISON AVENUE                      & CO. LAW OFFICES
NEW YORK, NEW YORK 10017                  52A HAYARKON STREET
     (212) 213-8200                      TEL AVIV 63432, ISRAEL
                                          (011) 972-3-795-5555
                    ---------------------------

APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:

AS SOON AS PRACTICABLE AFTER EFFECTIVENESS OF THIS REGISTRATION STATEMENT.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, as amended (the "Securities Act"), check the following box. /X/

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / /

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / /

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earliest effective registration statement for the same offering. / /

If delivery of the prospectus is expected to be made pursuant to Rule 434 under the Securities Act, check the following box. / /

CALCULATION OF REGISTRATION FEE

-------------------------------------------------------------------------------------------------------------------------------
                                                               PROPOSED MAXIMUM       PROPOSED MAXIMUM
   TITLE OF EACH CLASS OF SECURITIES TO    AMOUNT TO BE        OFFERING PRICE PER     AGGREGATE OFFERING        AMOUNT OF
              BE REGISTERED                 REGISTERED              UNIT(1)               PRICE(1)           REGISTRATION FEE
-------------------------------------------------------------------------------------------------------------------------------
Ordinary shares, nominal value NIS 0.1...      754,704             U.S.$9.30            U.S.$7,018,747           U.S.$646
-------------------------------------------------------------------------------------------------------------------------------

(1) Estimated solely for the purpose of computing the amount of the registration fee pursuant to Rule 457 under the Securities Act of 1933 after giving effect to a reverse stock split and issuance of bonus shares described herein. We are registering and expect to offer, separately or together, up to 400,000 ordinary shares at prices and on terms to be determined at the time of the offering of our shares. The remainder of the shares we are registering are expected to be sold by selling shareholders, including affiliates. We will not receive proceeds from the sale of shares by the selling shareholders.


THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.




The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.

PRELIMINARY PROSPECTUS -- SUBJECT TO COMPLETION

754,704 ORDINARY SHARES

O T I
ON TRACK INNOVATIONS LTD.


On Track Innovations Ltd. is registering and expects to offer up to 400,000 ordinary shares nominal value NIS 0.1, from time to time at prices and on terms to be determined at the time of the offering of our shares. The remainder of the shares we are registering are expected to be sold by selling shareholders. We will pay all expenses of registering the securities. We will not receive any proceeds from the sale of ordinary shares by the selling shareholders. Our ordinary shares also are listed on the Neuer Markt of the Frankfurt Stock Exchange under the symbol "OT5". On , 2002, the last reported sale price of our ordinary shares on the Neuer Markt was euro per share, equivalent to $ per share, calculated using the exchange rate of euro per dollar on such date. We have applied to list our ordinary shares on the Nasdaq Small Cap Market under the symbol "OTIV".

The specific terms of our shares that we may offer in the future under this prospectus will be set forth in one or more supplements to this prospectus and will include the number of ordinary shares and the terms of the offering and sale. Our shares may be offered directly, through agents designated from time to time by us, or to or through underwriters or dealers. If any agents or underwriters are involved in the sale of any of our shares, their names, and any applicable purchase price, fee, commission or discount arrangement between or among them, will be set forth, or will be calculable from the information set forth in, the applicable supplement to this prospectus. See "Plan of Distribution". No shares may be sold without delivery of the applicable supplement to this prospectus describing the method of distribution and terms of such shares.

INVESTING IN OUR ORDINARY SHARES INVOLVES RISKS.
SEE "RISK FACTORS" BEGINNING ON PAGE 5.


NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.

The information in this prospectus is not complete and may be changed. We may not and our selling shareholders may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.


The date of this prospectus is June , 2002.


YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED OR INCORPORATED BY REFERENCE IN THIS PROSPECTUS. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH DIFFERENT OR ADDITIONAL INFORMATION. WE ARE NOT MAKING AN OFFER OF THESE SECURITIES IN ANY STATE WHERE THE OFFER IS NOT PERMITTED. YOU SHOULD NOT ASSUME THAT THE INFORMATION PROVIDED BY THIS PROSPECTUS IS ACCURATE AS OF ANY DATE OTHER THAN THE DATE ON THE FRONT OF THIS PROSPECTUS. OUR BUSINESS, FINANCIAL CONDITION, RESULTS OF OPERATIONS AND PROSPECTS MAY HAVE CHANGED SINCE THEN.


TABLE OF CONTENTS

PAGE

Summary.....................................................      1
Risk Factors................................................      5
Special Note Regarding Forward-Looking Statements...........     19
Use of Proceeds.............................................     19
Dividend Policy.............................................     19
Price Range of Our Shares...................................     20
Consolidation of the Company's Share Capital................     21
Issuance of Bonus Shares....................................     21
Capitalization..............................................     22
Selected Consolidated Financial Data........................     23
Management's Discussion and Analysis of Financial Condition
  and Results of Operations.................................     25
Business....................................................     45
Management..................................................     66
Related Party Transactions..................................     78
Certain Transactions........................................     79
Background Information......................................     81
Principal Shareholders......................................     83
Selling Shareholders........................................     84
Description of Ordinary Shares..............................     86
Shares Eligible for Future Sale.............................     89
Conditions in Israel........................................     91
The German Equity Market and the NASDAQ Small Cap Market....     93
Taxation and Foreign Exchange Regulation....................     96
Enforceability of Civil Liabilities.........................    108
Plan of Distribution........................................    109
Legal Matters...............................................    111
Experts.....................................................    111
Where You Can Find More Information.........................    112
Index to Consolidated Financial Statements..................    F-1

i

PROSPECTUS SUMMARY

This summary highlights selected information contained elsewhere in this prospectus. This summary may not contain all of the information that you should consider before buying ordinary shares in this offering. You should carefully read this entire prospectus, including "Risk Factors" and our consolidated financial statements, before making an investment decision.

We design, develop and sell contactless microprocessor-based smart card products. A smart card is traditionally a credit card-sized plastic card containing a semiconductor chip. The type of semiconductor chip determines the amount of information that the card can store and the number and complexity of applications that can be provided by the card, or how "smart" the card is. Our products support smart cards that contain microprocessor chips which run multiple applications, can be reprogrammed and support high levels of security. A smart card system consists of smart cards, readers that transmit and receive data from the smart card and computers that process data received from the readers. Traditionally, the information stored on the smart card chip was updated through contact of the card with the reader either by swiping the card through, or inserting it in, a reader. However, our products utilize "contactless" smart cards which do not require physical contact with a reader, as power and data are transferred to the card through a magnetic field generated by the reader.

By combining the advantages of microprocessors and contactless smart cards, we believe that our products offer the following benefits:

* The information stored on one of our cards and transferred between the card and the reader is secure;

* Our products support multiple, independent applications on the same card;

* Our products provide for a reliable transfer of information to and from a card;

* Our cards are durable, easy to use and take a variety of forms, such as key chains, tags, stickers and wristwatches;

* Our products are easy to install and maintain; and

* Our products enable the transition from other card technologies to our contactless microprocessor-based technology.

Substantially all of our contactless microprocessor-based products are based on a common platform which we currently refer to as EYECON*. EYECON is based on our patented technology and consists of our smart cards, our readers, software that enables the development of applications for the smart card and a communications technology that ensures the transmission of data to and from the card. EYECON can be customized to support a large number of applications such as credit and debit card functions, identification and loyalty programs, and are deployed in different markets, such as petroleum and mass transit, and are being developed for other markets such as national documentation and medical services. For some markets, we have developed extensively customized hardware and software systems based on our EYECON platform, such as a gasoline management system for fleet managers, an electronic parking payment system and a closed campus system.

Additionally, as a result of our acquisition of InterCard GmbH Kartensysteme and InterCard GmbH Systemelectronic, which we refer to as the InterCard group, we offer closed campus products for universities and products that operate copying machines. These products are based on other card technologies that require physical contact between the card and the reader and that do not use
* We have commenced to phase out, and intend to continue to phase out over the next 18 months, our use of the EYECON trademark to identify our platform in accordance with our Agreement with Eicon Networks Corporation--See Recent Developments and Outlook.

1

microprocessors. The InterCard group also manufactures electronic devices some of which it incorporates into contact-based smart card readers that it sells and some of which it sells for non-smart card applications in the transportation industry.

We intend to enhance our position in the design and development of contactless microprocessor-based smart card products by developing new applications for our technology. We also intend to enter new markets, either alone or through relationships with other parties. We have established such relationships, among others, with Xerox, Beyond Petroleum (f/k/a British Petroleum), VeriFone, Inc. and Cubic Transportation Systems, Inc. Our relationship with Xerox is intended to exploit with other parties U.S. public library and higher education markets and our relationship with Beyond Petroleum is focussed on the South African petroleum market. Pursuant to our agreement with VeriFone, VeriFone is entitled to buy smart card products from us and we have agreed to assist VeriFone in customizing these products for its purposes in return for a fee. We have also developed a joint marketing plan with VeriFone for sales in the United States of both our products and one of VeriFone's products which we have customized. Pursuant to our agreement with Cubic, we have agreed to assist Cubic in upgrading its card readers to support contactless microprocessor-based smart cards based on our platform. We will receive royalties from each upgraded reader that Cubic sells.

Our sales and marketing efforts are directed from Cupertino, California, and effected through our global network of subsidiaries in North America, Africa and Europe, as well as through e-Smart System Inc., our joint venture with Cheung Kong Infrastructure Holdings, a Hong Kong-based infrastructure company, for the marketing and distribution of our products in the Asia Pacific region, mainly China and Hong Kong.

Since our initial public offering in 1999, we have acquired City Smart, a Hong Kong-based system integrator, SoftChip, an Israeli designer of microprocessors and operating systems for smart cards and the InterCard group.

We were incorporated in Israel in 1990 and are registered with the Israeli registrar of companies in Jerusalem. Our shares are traded on the Neuer Markt of the Frankfurt Stock Exchange. Our headquarters are located in Rosh Pina, Israel. As of March 31, 2002, we employed 224 employees worldwide, of whom 82 were employed at our headquarters and the remainder were employed by our subsidiaries. In addition, as of that same date, e-Smart, our joint venture, had 21 employees.

RISK FACTORS

Our ability to attain our objectives depends upon our success in addressing the risks relating to our business, industry and conditions in Israel discussed in "Risk Factors" and elsewhere in this prospectus, including the following:

* The market for smart cards in general, and for contactless microprocessor-based smart cards in particular, may not grow as we expect;

* We have a history of losses and may not achieve profitability in the foreseeable future;

* We derive a significant portion of our revenues from sales to system integrators who are not the end-users of our products and we are dependent on their ability to market our products;

* To date we have generated our revenues from a limited number of products. We are currently developing and beginning to market new products and the success of our business is dependent on market acceptance for these new products; and

* Our operations could be materially and adversely affected by acts of terror or by military hostilities between Israel and the Palestinians and/or its Arab neighbors.

2

THE OFFERING

Ordinary shares to be offered by us..........    400,000 shares.

Ordinary shares which may be sold by the         354,704 shares.
  selling shareholders.......................

Ordinary shares to be outstanding after this     2,764,420 after giving effect to the issuance
  offering...................................    of bonus shares and the reverse stock split
                                                 and excluding the ordinary shares issuable as
                                                 of the date of this prospectus on exercise of
                                                 options granted pursuant to our employee
                                                 share option plans.

Use of proceeds..............................    Although the amount of the proceeds is not
                                                 determinable at this time, all such proceeds
                                                 will be used for marketing and research and
                                                 development costs. See "Use of Proceeds."

Neuer Markt symbol...........................    OT5

Proposed Nasdaq Small Cap Market symbol......    OTIV

Risk factors.................................    See "Risk Factors" and the other information
                                                 included in this prospectus for a discussion
                                                 of risk factors you should carefully consider
                                                 before deciding to invest in our ordinary
                                                 shares.


We were incorporated in the State of Israel in February 1990. The address of our registered and principal executive office is Z.H.R. Industrial Zone, P.O. Box 32, Rosh Pina, Israel and our telephone number is (011) 972-4-686-8000. Our web site address is www.oti.co.il. The information on our web site does not constitute part of this prospectus.

"OTI" and "OTI INSIGHT" are both registered trademarks in the United States and Israel and are European Community Trade Marks which cover all the countries of the European Union, "SCIENCE -- NON FICTION" is subject to a pending European Community Trade Mark application and a pending trademark application in the United States and Israel and "EASYPARK" is a registered trademark of Easy Park Ltd. in the United States, Canada and Israel and has been accepted in Singapore. Certain other trademarks and trade names are owned and used by us on an unregistered basis. All other registered trademarks appearing in this prospectus are owned by their respective holders.

As used in this prospectus:

* all references to "Shekels" or "NIS" are to the lawful currency of Israel;

* all references to "Euros", "EUR" or "euro " are to the lawful currency of the European Union;

* all references to "dollars" or "$" are to the lawful currency of the United States.

3

SUMMARY CONSOLIDATED FINANCIAL DATA

The following table presents summary financial and operating data derived from our financial statements. You should read this along with the sections of this prospectus entitled "Selected Financial and Operating Data," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our financial statements and related notes included elsewhere in this prospectus.

                                                                                                            THREE MONTHS ENDED
                                                         YEAR ENDED DECEMBER 31,                                 MARCH 31,
                                      --------------------------------------------------------------      -----------------------
                                         1997         1998         1999         2000         2001            2001         2002
                                      ----------   ----------   ----------   ----------   ----------      ----------   ----------
                                                            (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
                                                                                                                (UNAUDITED)
STATEMENT OF OPERATIONS DATA:
Revenues:
  Products.........................   $    2,034   $    3,175   $    3,892   $   13,389   $   18,217      $    3,719   $    3,588
  Non-recurring engineering........           97          295        1,405          590          500              --          305
  Licensing and transaction fees...           --          400           86        1,095        1,527             302          410
  Customer service and technical
    support........................           --           --           --          428          676              49          118
                                      ----------   ----------   ----------   ----------   ----------      ----------   ----------
Total revenues.....................        2,131        3,870        5,383       15,502       20,920           4.070        4,421
                                      ----------   ----------   ----------   ----------   ----------      ----------   ----------
Cost of revenues:
  Products.........................        1,109        2,032        2,122        7,031       10,727           2,097        2,109
  Non-recurring engineering........           49           88           73           89           20              --           50
  Licensing and transaction fees...           --           --           --           --           --              --           --
  Customer service and technical
    support........................           --           --           --          332          491              33           67
Total cost of revenues.............        1,158        2,120        2,195        7,452       11,238           2,130        2,226
                                      ----------   ----------   ----------   ----------   ----------      ----------   ----------
    Gross profit...................          973        1,750        3,188        8,050        9,682           1,940        2,195
                                      ----------   ----------   ----------   ----------   ----------      ----------   ----------
Operating expenses:
  Research and development.........        1,513        1,282        2,101        4,913        6,737           1,935        1,242
  Less-participation by the Office
    of the Chief Scientist.........          524          474          645        1,031          599              --          206
                                      ----------   ----------   ----------   ----------   ----------      ----------   ----------
  Research and development, net....          989          808        1,456        3,882        6,138           1,935        1,036
  Marketing and selling............        1,311        1,905        2,066        7,437        6,592           1,778          974
  General and administrative.......        1,555        1,916        1,839        3,755        5,159           1,617        1,193
  Amortization of intangible
    assets.........................           --           --           --          465        1,112             278           20
  Other expenses, net..............           --           --           --          599          340              --           --
                                      ----------   ----------   ----------   ----------   ----------      ----------   ----------
    Total operating expenses.......        3,855        4,629        5,361       16,138       19,341           5,608        3,223
                                      ----------   ----------   ----------   ----------   ----------      ----------   ----------
    Operating loss.................       (2,882)      (2,879)      (2,173)      (8,088)      (9,659)         (3,668)      (1,028)
Interest on convertible loan.......           --           --         (250)          --           --              --           --
Financing income...................          343          208          459        1,300          520             281          381
Financing expenses.................         (197)        (184)        (141)        (491)        (471)           (151)        (240)
Other income (expenses), net.......           --           --           --           --       (1,081)            500          (22)
                                      ----------   ----------   ----------   ----------   ----------      ----------   ----------
    Loss before income taxes.......       (2,736)      (2,855)      (2,105)      (7,279)     (10,691)         (3,038)        (909)
Tax benefit (taxes on income)......           34           10          (82)          58           47             (25)         (22)
Minority interest..................           --           --           81          250           37             (11)         (19)
Equity in losses of an affiliated
  company..........................           --          (22)          (2)        (754)      (1,290)           (642)        (287)
                                      ----------   ----------   ----------   ----------   ----------      ----------   ----------
    Net loss.......................   $   (2,702)  $   (2,867)  $   (2,108)  $   (7,725)  $  (11,897)     $   (3,716)  $   (1,237)
                                      ==========   ==========   ==========   ==========   ==========      ==========   ==========
Basic and diluted net loss per
  share(1).........................   $    (1.74)  $    (1.82)  $    (1.17)  $    (3.48)  $    (5.11)     $    (1.56)  $    (0.52)
                                      ==========   ==========   ==========   ==========   ==========      ==========   ==========
Weighted average number of shares
  used in calculation of basic and
  diluted net loss
  per share(1)(2)..................    1,556,664    1,572,859    1,806,977    2,220,741    2,326,599       2,382,020    2,364,420
                                      ==========   ==========   ==========   ==========   ==========      ==========   ==========

(1) Share and per share data have been adjusted to reflect a ten to one reverse share split and the issuance of bonus shares in a ratio of one share for every two shares held (subsequent to the reverse share split)--see Note 13A of the consolidated financial statements.

(2) See note 2L of the consolidated financial statements for an explanation of the methods used to determine the number of shares used in computing net loss per share.

4

RISK FACTORS

This offering involves a high degree of risk. You should carefully consider the following risks together with the other information in this prospectus before deciding to invest in our ordinary shares. If any of the following risks actually occur, our business, financial condition and results of operations could be materially and adversely affected. In that case, the trading price of our ordinary shares could decline, and you may lose all or part of your investment. The risks described below are not necessarily in order of degree or magnitude of risk.

RISKS RELATED TO OUR BUSINESS

WE HAVE A HISTORY OF LOSSES AND MAY NOT ACHIEVE PROFITABILITY IN THE FORESEEABLE FUTURE.

We have incurred losses in each year since we commenced operations in 1990. We reported net losses of $2.9 million in 1998, $2.1 million in 1999, $7.7 million in 2000, $11.9 million in 2001 and $1.2 million for the three months ended March 31, 2002. Our losses resulted primarily from expenses we incurred in marketing and selling, as well as in research and development and general and administrative expenses, which have offset any increases in revenues over the same periods. We expect to continue to incur operating losses in future periods as we invest in the expansion of our global marketing network, reduce our product prices in return for transaction fees based on the volume of transactions effected in systems that contain our products, enhance our research and development capabilities and expand our internal manufacturing capabilities. Although we anticipate becoming profitable in our operations in the second half of 2002, there can be no assurance that we will accomplish that goal.

WE DERIVE SUBSTANTIALLY ALL OF OUR REVENUES FROM A SMALL NUMBER OF CUSTOMERS. THE LOSS OF ONE OR MORE OF THOSE CUSTOMERS, OR OUR FAILURE TO ENTER INTO NEW CONTRACTS WITH LARGE CUSTOMERS IN THE FUTURE, COULD HARM OUR BUSINESS.

To date, we have derived the majority of our revenues from a small number of customers. In 1998, we derived 25% of our revenues from sales to BP Southern Africa (Proprietary) Limited, or BP South Africa, an affiliate of British Petroleum, through Push SA Holdings (Pty) Ltd., our former distributor in South Africa, 14% from sales to Turcas Petrolculuk A.S., a Turkish oil company, through ARS Advanced Refuelling Systems Ltd., our distributor in Turkey, and 14% from Samsung Electronics Company Ltd., a semiconductor manufacturer to which we have licensed part of our technology. In 1999, we derived 29% of our revenues from sales to VeriFone, Inc., a provider of automated payment products, 13% from sales to BP South Africa, 13% from sales to SmartStop, Inc., a system integrator in the transportation industry and 10% from sales to Turcas through ARS. In 2000, we derived 15% of our revenues from sales to VeriFone. In 2001, we derived 14% of our revenues from sales to e-Smart. In the three months ended March 31, 2002 we derived 7% of our revenues from sales to China Integrated Circuit Design Center. We will continue to rely on a limited number of large customers for the foreseeable future. The loss of any of our major customers or reduction or cancellation of orders from such customers could seriously harm our business.

OUR HISTORICAL FINANCIAL DATA IS OF LIMITED VALUE IN EVALUATING OUR FUTURE PROSPECTS, BECAUSE OF OUR RECENT ACQUISITIONS, SIGNIFICANT ONE-TIME PAYMENTS WE RECEIVED IN THE PAST AND EXPECTED INCREASES IN REVENUES FROM CUSTOMER SERVICES AND TECHNICAL SUPPORT FEES AND TRANSACTION FEES.

Our historical financial data is of limited value in evaluating our future prospects for the following reasons:

* During the past 30 months, we have made a number of acquisitions that have had a significant impact on our operating results. For example, in 2000, our revenues increased 188% to $15.5 million from $5.4 million in 1999. Of this increase, 49% was attributable to

5

inclusion for the period from May 1, 2000 to December 31, 2000 of $7.6 million of revenues from the InterCard group.

* In the past we have received significant one-time payments, such as a $3.1 million fee in the first quarter of 2000 for granting distribution rights to our 50% joint venture, e-Smart, of which we recognized net revenues of $1.0 million in 2000, and a $400,000 licensing fee in 1998 from a chip manufacturer.

* To date, we have derived our revenues mainly from sales of products. However, in the future we expect to generate revenues from fees for ongoing customer services and technical support and transaction fees based on the volume of transactions effected in systems that contain our products. For example, our revenues from BP South Africa to date were mainly derived from sales of our products. However, beginning in 2000 we started to generate limited service fees and transaction fees from this customer. Our ability to generate revenues from service fees and transaction fees will depend on obtaining customers' agreement to such arrangements and the level of transaction fees will depend on the amount of usage of the systems that contain our products and that are operated by those customers.

For the reasons stated above, it may be difficult to compare our future results with our results from previous years.

IF THE MARKET FOR SMART CARDS IN GENERAL, AND FOR CONTACTLESS MICROPROCESSOR-BASED SMART CARDS IN PARTICULAR, DOES NOT GROW AS WE EXPECT, WE MAY NOT SUCCEED IN SELLING OUR PRODUCTS.

The success of our products depends on commercial enterprises, governmental authorities and other potential card issuers adopting contactless microprocessor-based smart card technologies. Other card technologies, such as magnetic strips or bar codes, are widely used and could be viewed by potential customers as more cost effective alternatives to our products. Additionally, potential customers in developed countries such as the United States may already have installed systems that are based on technologies different than ours and may therefore be less willing to incur the capital expenditure required to install or upgrade to a contactless microprocessor-based smart card system. As a result, we cannot assure you that there will be significant market opportunities for contactless microprocessor-based smart card products. If demand for contactless microprocessor-based smart card products such as ours does not develop or develops more slowly than we anticipate, we may have fewer opportunities for growth than we expected.

IF WE FAIL TO DEVELOP NEW PRODUCTS OR ADAPT OUR EXISTING PRODUCTS FOR USE IN NEW MARKETS, OUR REVENUE GROWTH MAY BE IMPEDED AND WE MAY INCUR SIGNIFICANT LOSSES.

To date, we have sold products incorporating our technology within a limited number of markets. In 1999, our gasoline management system, or GMS, accounted for 27% of our product sales and sales of other products for use in the petroleum industry accounted for 30%. We are currently developing and marketing products such as medical cards for use in hospitals and identity cards for use by governmental authorities. We have yet to recognize revenues from sales of these products. We are devoting significant resources to developing and marketing these and other products and adapting our existing products for use in new markets. From the beginning of 1999 through March 31, 2002, we spent $15.0 million on research and development and $17.1 million on sales and marketing. If we fail to develop new products or adapt our existing products for new markets, our revenue growth may be impeded and we may incur significant losses.

6

WE DERIVE A SIGNIFICANT PORTION OF OUR REVENUES FROM SALES TO SYSTEMS INTEGRATORS WHO ARE NOT THE END-USERS OF OUR PRODUCTS, AND WE ARE THEREFORE DEPENDENT ON THEIR ABILITY TO MAINTAIN THEIR EXISTING BUSINESS AND SECURE NEW BUSINESS.

In 1998, 47%, in 1999, 63%, in 2000, 35%, in 2001, 21% and in the three months ended March 31, 2002 24% of our revenues were derived from sales to systems integrators, some of which are distributors of our products, who incorporate our products into systems which they supply and install for use in a specific project. We depend on systems integrators to successfully market, sell, install and provide technical support for systems in which our products are integrated or to sell our products on a stand-alone basis. The faulty or negligent implementation and installation of our products by systems integrators may harm our reputation and dilute our brand name. Because we are one step removed from the end users of our products, it may be more difficult for us to rectify damage to our reputation caused by systems integrators who have direct contact with end users. In addition, termination of agreements with systems integrators or revocation of exclusive distribution rights within a certain area can be difficult. For example, we terminated our agreement with our systems integrator in South Africa because we believed it had materially breached its agreement with us. As a result, we were subject to a costly arbitration proceeding which resulted in expenses of $630,000 incurred in 2000. Even in the case of successful arbitration such as this in which we were awarded $400,000, we may not be able to collect in full or at all such award. In addition, if we are unable to maintain our current relationships with systems integrators or develop relationships with new systems integrators, we may not be able to sell our products and our results of operations could be impaired.

Unless we continue to expand our direct sales, our future success will depend upon the timing and size of future purchases by systems integrators and the success of the projects and services for which they use our products.

OUR INABILITY TO MAINTAIN OUR CURRENT, AND ESTABLISH NEW, STRATEGIC RELATIONSHIPS COULD IMPAIR OUR REVENUE GROWTH.

The markets for our products are usually highly specialized and require us to enter into strategic relationships in order to facilitate or accelerate our penetration into new markets. We consider a relationship to be strategic when we integrate our technology into some of the product offerings of a manufacturer or systems integrator that has a significant position in a specified market, and then we cooperate in marketing the resulting product. For example, in order to accelerate our penetration into the U.S. retail petroleum market and other markets, we have formed a strategic relationship with VeriFone. In 1999, we generated 29% of our revenues from VeriFone, 15% in 2000 and 0.5% in 2001. We also have formed a strategic relationship with Cubic Transportation Systems, Inc., but have generated an immaterial amount of revenues from it to date. The termination of any of our strategic relationships or our failure to develop additional relationships in the future may limit our ability to expand the markets in which our products are deployed or to sell particular products, and thereby impair our revenue growth.

SOME OF OUR AGREEMENTS RESTRICT OUR ABILITY TO CONDUCT BUSINESS. AS A RESULT, IN THE FUTURE WE MAY NOT BE ABLE TO TAKE ACTIONS THAT WE MAY BELIEVE ARE DESIRABLE.

Under some of our agreements with suppliers, distributors and joint venture partners, we have agreed to restrict ourselves in some areas of business. For example, we have granted our joint venture, e-Smart, exclusive rights to distribute our products in the Asia Pacific region and we granted our joint venture partner veto rights over key business decisions relating to the distribution of our products in that region. In addition, in the event that our products are sold in the Asia Pacific region by third parties other than through e-Smart, we have agreed to pay to e-Smart 7.5% of the net revenues we receive from such sales. Our agreement with Samsung concerning the development and manufacture of a particular type of microprocessor chip that we refer to as a "monochip" requires us not to sell that microprocessor chip to the existing customers of Samsung. In addition, in some

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markets we sell our products through distributors who, in general, if sales quota are met, have exclusive distribution rights in that market.

WE FACE INTENSE COMPETITION. IF WE ARE UNABLE TO COMPETE SUCCESSFULLY, OUR BUSINESS PROSPECTS WILL BE IMPAIRED.

We face intense competition from developers of contact and contactless microprocessor-based technologies and products, developers of contactless products that use other types of technologies that are not microprocessor-based, and non-smart card technologies. We compete on a range of competitive factors including price, compatibility with the products of other manufacturers, and the ability to support new industry standards and introduce new reliable technologies. Many of our competitors, such as Philips Semiconductors, a division of Philips Electronics N.V., and Infineon Technologies AG, have greater market recognition, larger customer bases, and substantially greater financial, technical, marketing, distribution, and other resources than we possess. As a result, they may be able to introduce new products, respond to customer requirements and adapt to evolving industry standards more quickly than we can.

In addition, we may not be able to differentiate our products sufficiently from those of our competitors. If we cannot compete successfully with our existing and future competitors, we could experience lower sales, price reductions, loss of revenues, reduced gross margins and reduced market share.

From time to time, we or one or more of our present or future competitors may announce new or enhanced products or technologies that have the potential to replace or shorten the life cycles of our existing products. The announcement of new or enhanced products may cause customers to delay or alter their purchasing decisions in anticipation of such products, and new products developed by our competitors may render our products obsolete or achieve greater market acceptance than our products.

IF THERE IS A SUSTAINED INCREASE IN DEMAND FOR MICROPROCESSORS, AVAILABILITY MIGHT BE LIMITED AND PRICES MIGHT INCREASE.

Our products require microprocessors. The microprocessor industry periodically experiences increased demand and limited availability due to production capacity constraints. For example, there has been a shortage in the availability of microprocessors since the middle of 1999. Increased demand for, or limited availability of, microprocessors could substantially increase the cost of producing our products. Because some of our contracts have fixed prices, we may not be able to pass on any increases in costs to these customers, and consequently our profit margin could be reduced. In addition, as a result of the shortages, we may be forced to delay shipments of our products, or devote additional resources to maintaining higher levels of microprocessor inventory. Consequently, we may experience substantial period-to-period fluctuations in our cost of revenues and, therefore, in our future results of operations.

OUR PRODUCTS HAVE LONG SALES CYCLES AND WE MAY EXPEND SIGNIFICANT RESOURCES IN RELATION TO A SPECIFIC PROJECT WITHOUT REALIZING ANY REVENUES.

The sales cycle for our products varies from project to project. Typically, the projects in which we are involved are complex and require customization of our products to our customers needs against payment of a fixed amount. We then conduct evaluation, testing, implementation and acceptance procedures of the customized products with the customer. Only after successful completion of these procedures will customers place orders for our products in commercial quantities. In addition, our contracts do not typically include minimum purchase requirements. We, therefore, cannot assure you that contracts which we enter into will result in commercial sales. Our average sales cycle is typically between 12 and 18 months from initial contact with a potential customer until we deliver commercial quantities to the customer and recognize significant revenues.

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As a result, we may expend financial, management and other resources to develop customer relationships before we recognize any revenues.

FLUCTUATIONS IN OUR QUARTERLY FINANCIAL PERFORMANCE MAY CREATE VOLATILITY IN THE MARKET PRICE OF OUR SHARES AND MAY MAKE IT DIFFICULT TO PREDICT OUR FUTURE PERFORMANCE BASED ON OUR RESULTS IN ANY QUARTER.

Our quarterly revenues and operating results have varied in the past and are likely to do so in the future. These fluctuations may be driven by various factors which are beyond our control, are difficult to predict and may not meet the expectations of analysts and investors. These factors include:

* The size and timing of orders placed by our customers, particularly in government projects. Government projects typically involve a protracted competitive procurement process and in some circumstances litigation following the award of a contract. As a result, it is difficult to predict the timing and size of orders under such contracts. For example, we started to prepare our offer for the Israeli national electronic parking system project in 1992, we were awarded the contract in May 1998, deployment began in January 2000. We started recognizing revenues in the second half of 2000.

* One-time payments for non-recurring engineering services during the first phase of a project, such as a $1.0 million payment made by VeriFone in 1999.

* Receipt of other significant one-time payments which may not recur, such as $3.1 million received from our joint venture, e-Smart, for distribution rights in the first quarter of 2000. We recognized $1.0 million of that payment in 2000 and deferred $2.1 million of that payment of which we recognized $1.0 million in 2001 and of which we will recognize $1.1 million in 2002.

* The fact that our rental and financing expenses are fixed and we may not be able to reduce them in the event of a reduction in revenues in a particular quarter. In addition, our payroll expenses are relatively fixed and we would not expect to reduce our workforce due to a reduction in revenues in any particular quarter.

* The tendency of our clients to place orders for products toward the last quarter of their financial year.

Because of these factors, our revenues and operating results in any quarter may not be indicative of our future performance, and it may be difficult for you to evaluate our prospects.

BECAUSE WE DEPEND ON A SMALL NUMBER OF SUPPLIERS, DELAYS OR DISCONTINUANCE OF THE SUPPLY OF THESE COMPONENTS MAY SUBSTANTIALLY CURTAIL OUR ABILITY TO PRODUCE OUR PRODUCTS.

The components we use in our products, including microprocessors and cards, are supplied by third party suppliers and manufacturers. Except for Samsung, which is currently the sole supplier of the chip that integrates our antenna interface into Samsung's microprocessor, none of these suppliers are sole suppliers. Nevertheless, we sometimes experience short-term adverse effects due to delayed shipments which have in the past, and could in the future, interrupt and delay the supply of our products to our customers, or which may result in cancellation of orders for our products. In addition, we do not generally have long term supply contracts under which our suppliers are committed to supply us with components at a fixed price. Suppliers could increase component prices significantly without warning or could discontinue the manufacture or supply of components used in our products. We may not be able to develop alternative sources for product components if and as required in the future. Even if we are able to identify any alternative source of supply, we may need to modify our products to be compatible with other components, which may cause delays in product shipments, increase manufacturing costs and increase product prices.

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Because some of our suppliers are located in Europe and the Far East, we may experience logistical problems in our supply chain, including long lead times for receipt of products or components and shipping delays. In addition, our subcontractors located in Israel and the Far East may, on occasion, feel the impact of potential economic or political instability in their regions, which could affect their ability to supply us with components for our products in a timely manner.

WE ARE CURRENTLY DEPENDENT ON A THIRD PARTY FOR LICENSING AND UPDATING THE PRIMARY OPERATING SYSTEM WE USE IN OUR PRODUCTS.

We are currently required to license operating system software for the operation of our products. Since 1995, the principal licensor of this software has been Personal Cipher Card Corporation, or PC3, pursuant to a license agreement that terminates on July 5, 2005. If PC3 terminates the license it granted us, we may not be able to provide our products to our customers and we expect that it may take up to six months to provide an adequate alternative.

IF WE FAIL TO HIRE, TRAIN AND RETAIN QUALIFIED RESEARCH AND DEVELOPMENT PERSONNEL, OUR ABILITY TO ENHANCE OUR EXISTING PRODUCTS, DEVELOP NEW PRODUCTS AND COMPETE SUCCESSFULLY MAY BE MATERIALLY AND ADVERSELY AFFECTED.

Our success depends in part on our ability to hire, train and retain qualified research and development personnel. Individuals who have expertise in research and development in our industry are scarce. Competition for such personnel is intense in the electronics industry, particularly in Israel, and therefore hiring, training and retaining such personnel is both time consuming and expensive. In addition, it may be difficult to attract qualified personnel to Rosh Pina, which is in the North of Israel. While substantially all of our employees are subject to non-compete agreements, these agreements may be difficult to enforce as the result of new Israeli case law which limits the scope of employee non-competition undertakings and may make them unenforceable in Israeli courts. If we fail to hire, train and retain employees with skills in research and development, we may not be able to enhance our existing products or develop new products.

OUR ABILITY TO COMPETE DEPENDS ON OUR CONTINUING RIGHT TO USE, AND OUR ABILITY TO PROTECT, OUR INTELLECTUAL PROPERTY RIGHTS.

Our success and ability to compete depend in large part on using our intellectual property and proprietary rights to protect our technology and products. We rely on a combination of patent, trademark, copyright and trade secret law, as well as confidentiality agreements and other contractual relationships with our employees, affiliates, distributors and others.

We currently have patents in the United States, Israel and other countries covering some of our technology and have pending applications in the United States, Europe, Israel and elsewhere which have not yet resulted in granted patents. We cannot be certain that patents will be issued with respect to any of our pending or future patent applications or that the scope of our existing patents, or any future patents that are issued to us, will provide us with adequate protection for our technology and products. Others may challenge our patents or registered trademarks. We do not know whether any of them will be upheld as valid or will be enforceable against alleged infringers and thus we do not know whether they will enable us to prevent or hinder the development of competing products or technologies. Moreover, patents provide legal protection only in the countries where they are registered and the extent of the protection granted by patents varies from country to country.

The measures we have taken to protect our technology and products may not be sufficient to prevent their misappropriation by third parties or independent development by others of similar technologies or products. Competitors may also develop competing technology by designing around our patents and will then be able to manufacture and sell products which compete directly with ours. In that case, our business and operating results would be harmed.

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In order to protect our technology and products and enforce our patents and other proprietary rights, we may need to initiate litigation against third parties or defend opposition proceedings before the European Patent Office or prosecute interference proceedings before the U.S. Patent and Trademark Office. These legal and administrative proceedings could be expensive and occupy significant management time and resources. Our European patent covering contactless transmission of power and data between a microprocessor and a reader was revoked as the result of a third party opposing our patent. Currently, this patent is the subject of an appeal proceeding before the European Patent Office. If our appeal is not successful, we will lose our European patent and therefore the right to prevent others in Europe from using the technology covered by the patent. Furthermore, a successful opposition to our patent could provide a basis for our competitors to claim that our patents in other jurisdictions covering this technology are invalid. See "Business--Proprietary Technologies."

OUR PRODUCTS MAY INFRINGE THE INTELLECTUAL PROPERTY RIGHTS OF OTHERS.

It is not possible to know with certainty that the manufacture and sale of our products do not or will not infringe patents or other intellectual property rights owned by third parties. There may, for example, be patent applications pending at the moment, which when granted, may cover products that we have just developed or are developing. In certain other jurisdictions there is no publication of the subject matter of patents until the patents are issued. Third parties may from time to time claim that our current or future products infringe their patent or other intellectual property rights. In addition, if third parties claim that our customers are violating their intellectual property rights, our customers may seek indemnification from us, which could be costly, or may terminate their relationships with us. Our products depend on operating systems licensed to us and we may also be subject to claims by third parties that our use of these operating systems infringes their intellectual property rights. Any intellectual property claim could involve time-consuming and disruptive litigation and, if determined adversely to us, could prevent us from making or selling our products, subject us to substantial monetary damages or require us to seek licenses.

Intellectual property rights litigation is complex and costly, and we cannot be sure of the outcome of any such litigation. Even if we prevail, the cost of such litigation could harm our results of operations. In addition, such litigation is time consuming and could divert our management's attention and resources away from our business. If we do not prevail in any litigation, in addition to any damages we might have to pay, we might be required to discontinue the use of certain processes, cease the manufacture, use and sale of infringing products and solutions, expend significant resources to develop non-infringing technology or obtain licenses on unfavorable terms. Licenses may not be available to us on acceptable terms or at all. In addition, some licenses are non-exclusive and, therefore, our competitors may have access to the same technology licensed to us. If we fail to obtain a required license or cannot design around any third party patents or otherwise avoid infringements, we may be unable to sell some of our products.

WE HAVE EXPERIENCED RAPID GROWTH IN OUR BUSINESS. OUR FAILURE TO MANAGE OUR GROWTH EFFECTIVELY COULD HARM OUR BUSINESS.

Over the last five years, our business has grown rapidly, with our revenues increasing from $2.1 million for the year ended December 31, 1997 to $20.9 million for the year ended December 31, 2001. Our revenues for the three months ended March 31, 2002 were $4.4 million. In addition, the number of our employees, including those of our subsidiaries, has increased substantially from 40 as of December 31, 1997 to 224 as of March 31, 2002. In addition, as of March 31, 2002, our joint venture, e-Smart, had 21 employees. Management of our growth in the past has placed, and our anticipated growth in the future will place, a significant strain on our management, systems and resources. We expect that we will need to continue to improve our operational and financial control systems, as well as increase our research and development, testing services and sales and marketing

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capabilities, all of which could place a significant strain on our management and financial resources. Failure to maintain adequate operating, management and financial control systems, or to expand and upgrade those systems, or any difficulties encountered with those systems would adversely affect our business, financial condition and results of operations. If we are unable to manage growth effectively, our business would be harmed.

THE LOSS OF THE SERVICES OF OUR CHAIRMAN, PRESIDENT AND CHIEF EXECUTIVE OFFICER, ODED BASHAN, COULD SERIOUSLY HARM OUR BUSINESS.

Our success depends, in part, on the continued service of Oded Bashan, our Chairman, President and Chief Executive Officer. Mr. Bashan is one of our founders and has developed our business and technology strategy since our inception. The loss of services of Mr. Bashan could disrupt our operations and harm our business.

IN THE PAST 30 MONTHS WE HAVE ACQUIRED THREE COMPANIES OR GROUPS OF COMPANIES AND WE INTEND TO CONTINUE TO PURSUE STRATEGIC ACQUISITIONS IN THE FUTURE. THE FAILURE TO SUCCESSFULLY INTEGRATE ACQUIRED COMPANIES AND BUSINESSES OR TO ACQUIRE NEW COMPANIES AND BUSINESSES MAY HARM OUR FINANCIAL PERFORMANCE AND GROWTH.

In the past 30 months we have acquired City Smart, a systems integrator in Hong Kong, SoftChip, an Israeli designer of microprocessors and operating systems for smart cards, and the InterCard group, a German systems integrator for card systems and manufacturer of electronic devices. These and future acquisitions could result in:

* Difficulties in integrating our operations, technologies, products and services with those of the acquired companies. For example, we cannot be sure if the InterCard group's current customer base will upgrade their systems to incorporate our products.

* Difficulty in integrating operations spread across significant geographic distances as our three acquisitions were made in three continents.

* Diversion of our capital and our management's attention away from other business issues.

* Potential loss of key employees and customers of companies we acquire.

* Increased liabilities as a result of liabilities of the companies we acquire.

* Dilution of your shareholding in the event we acquire companies in exchange for our shares. All three of our recent acquisitions were made through the issuance of our ordinary shares.

We may not successfully integrate any technologies, manufacturing facilities or distribution channels that we have or may acquire and we cannot assure you that any of our recent acquisitions will be successful. In addition, if we do not acquire new companies and businesses in the future, we may not be able to grow our business as expected. If any of our recent or future acquisitions are not successful, our financial performance and business may be adversely affected.

WE ARE SUSCEPTIBLE TO CHANGES IN INTERNATIONAL MARKETS AND DIFFICULTIES WITH INTERNATIONAL OPERATIONS COULD HARM OUR BUSINESS.

Over the last five years and three months we have derived revenues from different geographical areas. The following table sets forth our sales in different geographical areas as a percentage of revenues:

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                                                               FAR       NORTH      SOUTH
                                        AFRICA     EUROPE      EAST     AMERICA    AMERICA     ISRAEL
                                       --------   --------   --------   --------   --------   --------
1997.................................     35%        15%        27%         8%         0%        15%
1998.................................     25         21         45          4          0          5
1999.................................     13         13         27         43          2          2
2000.................................      7         53         18         19          1          2
2001.................................      6         68         14          8          1          3
THREE MONTHS PERIOD ENDED
  MARCH 31, 2002.....................      8         67         14          5          0          6

Our ability to maintain our position in existing, and penetrate new, regional and local markets is dependent, in part, on the stability of regional and local economies. For example, we believe that the substantial decline in our sales in the Far East from 1998 to 1999 was mainly due to the financial crisis suffered by the Asian countries in 1998. Our regional sales may continue to fluctuate widely and may be adversely impacted by future political or economic instability in these or other foreign countries or regions.

In addition, there are certain inherent risks in these international operations which include:

* Changes in regulatory requirements and communications standards;

* Required licenses, tariffs and other trade barriers;

* Difficulties in enforcing intellectual property rights across, or having to litigate disputes in, various jurisdictions;

* Difficulties in staffing and managing international operations;

* Potentially adverse tax consequences; and

* The burden of complying with a wide variety of complex laws and treaties in various jurisdictions.

If we are unable to manage the risks associated with our focus on international sales, our business may be harmed.

BECAUSE THE MAJORITY OF OUR REVENUES ARE GENERATED IN DOLLARS, WHILE A PORTION OF OUR EXPENSES ARE INCURRED IN OTHER CURRENCIES, PRINCIPALLY SHEKELS AND EUROS, CURRENCY FLUCTUATIONS COULD ADVERSELY AFFECT OUR RESULTS OF OPERATIONS.

We generate the majority of our revenues in dollars but incur some of our expenses in other currencies, principally some of our employees' salaries in Shekels and the majority of the expenses of the InterCard group in Euros. If the value of a currency in which our revenues are denominated weakens against the value of a currency in which our expenses are denominated, there will be a negative impact on the profit margin for sales of our products. For example, if the dollar cost of our Shekel expenditures increases, our dollar-measured results of operations will be adversely affected. Our operations also could be adversely affected if we are unable to guard against currency fluctuations in the future. Accordingly, we may enter into currency hedging transactions to decrease the risk of financial exposure from fluctuations in the exchange rate of the dollar against the Shekel. However, these measures may not adequately protect us from material adverse effects due to the impact of currency fluctuations. In addition, if we wish to maintain the dollar-denominated value of our products in non-U.S. markets, such as Europe, devaluation in the local currencies of our customers relative to the dollar could cause our customers to cancel or decrease orders or default on payment.

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WE MAY HAVE TO ADAPT OUR PRODUCTS IN ORDER TO INTEGRATE THEM INTO OUR CUSTOMERS' SYSTEMS OR IF NEW GOVERNMENT REGULATIONS OR INDUSTRY STANDARDS ARE ADOPTED OR CURRENT REGULATIONS OR STANDARDS ARE CHANGED.

Some of our products are subject to mandatory government regulation in the countries in which they are used. For example, card readers that are used in the United States require certification of compliance with regulations of the Federal Communications Commission and in Europe of compliance with regulations of European Telecommunications Standards Institute regarding emission limits of radio frequency devices. In addition, governmental certification for the systems into which our products are integrated may be required. The International Standards Organization is in the process of approving industry standards regulating the transfer of data between contactless smart cards and a reader. If there is a change to government regulations or industry standards, we may have to make significant modifications to our products and, as a result, could incur significant costs and may be unable to deploy our products in a timely manner.

In addition, prior to purchasing our products, some customers may require us to receive certification that our products can be integrated successfully into their systems or comply with applicable regulations. Receipt of these certifications may not occur in a timely manner or at all. In some cases, in order for our products, or for the system into which they are integrated, to be certified, we may have to make significant product modifications. Failure to become so certified could render us unable to deploy our products in a timely manner or at all.

OUR PRODUCTS MAY CONTAIN DEFECTS THAT WE FIND ONLY AFTER DEPLOYMENT, WHICH COULD HARM OUR REPUTATION, RESULT IN LOSS OF CUSTOMERS AND REVENUES AND SUBJECT US TO PRODUCT LIABILITY CLAIMS.

Our products are highly technical and deployed as part of large and complex projects. Because of the nature of our products, they can only be fully tested when fully deployed. For example, the testing of our parking payment product required distribution of sample parking payment cards to drivers, installation of electronic kiosks at which a card holder can increase the balance on his or her card, linking the kiosks to financial and parking databases, collecting data through handheld terminals, processing of data that is collected by the system, compilation of reports and clearing the parking transactions. Any defects in our products could result in:

* Harm to our reputation;

* Loss of, or delay in, revenues;

* Loss of customers and market share;

* Failure to attract new customers or achieve market acceptance for our products; and

* Unexpected expenses to remedy errors.

In addition, we could be exposed to potential product liability claims. While we currently maintain product liability insurance, we cannot assure you that this insurance will be sufficient to cover any successful product liability claim. Any product liability claim could result in changes to our insurance policies, such as premium increases or the imposition of a large deductible or co-insurance requirements. Any product liability claim in excess of our insurance coverage would have to be paid out of our cash reserves, which would harm our business. Furthermore, the assertion of product liability claims, regardless of the merits underlying the claim, could result in substantial costs to us, divert management's attention away from our operations and damage our reputation.

CURRENT TERRORIST ATTACKS MAY HAVE A MATERIAL ADVERSE EFFECT ON OUR OPERATING RESULTS.

Terrorist attacks, such as the attacks that occurred in New York and Washington, D.C. on September 11, 2001, and other acts of violence or war may affect the markets on which our ordinary shares trade, the markets in which we operate, our operations and profitability and your investment. There can be no assurance that there will not be further terrorist attacks against the United States or

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Israel, or against American or Israeli businesses. These attacks or subsequent armed conflicts resulting from or connected to them may directly impact our physical facilities or those of our suppliers or customers. Furthermore, these terrorist attacks may make travel and the transportation of our supplies and products more difficult and/or expensive and ultimately affect the sales of our products. Also, as a result of terrorism, the United States and other countries may enter into an armed conflict that could have a further impact on our sales, profitability, supply chain, production capability and ability to deliver product and services to customers.

RISKS RELATED TO THIS OFFERING

OUR SHARE PRICE HAS FLUCTUATED IN THE PAST AND MAY CONTINUE TO FLUCTUATE IN THE FUTURE.

The market price of our ordinary shares has experienced significant fluctuations and may continue to fluctuate significantly. For example, according to the Deutsche Borse, following the initial public offering of our ordinary shares on the Neuer Markt of the Frankfurt Stock Exchange, our share price fell from euro 8.50 at the date of the offering to euro 4.96 on December 3, 1999, before rising to euro 33.40 on February 28, 2000 and falling to euro 0.78 on April 11, 2002. See "Price Range of our Shares." The market price of our ordinary shares may be significantly affected by factors such as the announcements of new products or product enhancements by us or our competitors, technological innovations by us or our competitors or quarterly variations in our results of operations. In addition, while we cannot assure you that any securities analysts will continue to maintain research coverage of our company and our ordinary shares, any statements or changes in estimates by analysts covering our shares or relating to the smart card industry could result in an immediate and adverse effect on the market price of our shares. Further, we cannot predict the effect, if any, that market sales of ordinary shares or the availability of ordinary shares for sale will have on the market price of the ordinary shares prevailing from time to time. Sales of a substantial number of ordinary shares in the public market following this offering, or the perception that such sales could occur, could have a material adverse effect on the market price of our ordinary shares.

The Deutsche Borse may remove our ordinary shares from listing if insolvency proceedings have been commenced against us, or such proceedings have been dismissed on the grounds of insufficient assets, if we breach our obligations under the regulations of the Neuer Markt, if an orderly trading on the Neuer Markt appears to be not ensured anymore or if Deutsche Borse determines it is necessary for the protection of investors. If such circumstances should ever occur, your ability to sell our ordinary shares will be significantly reduced and the value of your investment will decrease accordingly.

In addition, the Deutsche Borse recently issued new quantitative and qualitative criteria to avoid "penny stocks" which must be met in order to maintain the listing of our ordinary shares on the Neuer Markt. After such criteria for the exclusion of penny stock companies have been declared unenforceable by several court decisions, including the Higher Regional Court of Frankfurt am Main, Deutsche Borse AG announced on April 25, 2002, that it will refrain from enforcement of the criteria regarding expulsion of penny stock companies from Neuer Markt for the time being.

For our ordinary shares to be listed and to continue to be quoted on the Nasdaq Small Cap Market, Nasdaq requires both our company and ordinary shares to meet the quantitative maintenance criteria set forth in Rule 4450 of its Marketplace Rules.

If the bid price of our ordinary shares falls below $4.00 and we fail to maintain our Nasdaq listing, our ordinary shares may be a "penny stock" for the purposes of the Securities Exchange Act of 1934. Brokers effecting transactions in a penny stock are subject to additional customer disclosure and record keeping obligations. The additional obligations include disclosure of the risks associated with low price stocks, stock quote information and broker compensation. In addition, brokers making transactions in penny stocks are subject to additional sales practice requirements under the Exchange

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Act. These additional requirements include making inquiries into the suitability of penny stock investments for each customer or obtaining the prior written agreement of the customer for the penny stock purchase. Because of these additional obligations, some brokers will not effect transactions in penny stocks. This could have an adverse effect on the liquidity of our ordinary shares and your ability to sell our ordinary shares.

In addition, Nasdaq may remove our ordinary shares from quotation if we file for bankruptcy protection, our accountants include a disclaimer in our audited financial statements or if Nasdaq determines it is necessary for the protection of investors. If such circumstances should ever occur, your ability to sell our ordinary shares will be significantly reduced and the value of your investment will decrease accordingly. In addition, in those circumstances our ordinary shares may also cease to be marginable for the purposes of the Federal Reserve Board's margin regulations.

Trading in shares of companies listed on the Nasdaq Small Cap and the Neuer Markt of the Frankfurt Stock Exchange in general and trading in shares of technology companies in particular has been subject to extreme price and volume fluctuations that have been unrelated or disproportionate to operating performance. These factors may depress the market price of our ordinary shares, regardless of our actual operating performance.

Securities class action litigation has also often been brought against companies following periods of volatility in the market price of its securities. In the future, we may be the target of similar litigation that could result in substantial costs and diversion of our management's attention and resources.

OUR SHARE PRICE COULD BE ADVERSELY AFFECTED BY FUTURE SALES OF OUR ORDINARY SHARES.

Upon completion of this offering we will have 2,764,420 ordinary shares outstanding, after giving effect to the reverse stock split and the issuance of bonus shares. All of the ordinary shares in this offering will be freely tradeable. Additional shares may be sold in the public market to the extent that the sales are registered under the Securities Act of 1933, as amended, or exempt from registration. In addition, as of March 31, 2002, options to purchase 1,696,518 of our ordinary shares were outstanding, subject to vesting schedules. The market price of our ordinary shares could drop as a result of sales of substantial amounts of our ordinary shares in the public market following this offering or the perception that such sales may occur. These factors could also make it more difficult to raise additional funds through future offerings of our ordinary shares or other securities. See "Shares Eligible for Future Sale" for more detailed information regarding the number of shares that will be eligible for sale in the public market immediately following this offering and subsequently.

WE DO NOT ANTICIPATE PAYING CASH DIVIDENDS IN THE FORESEEABLE FUTURE.

We do not anticipate paying cash dividends in the foreseeable future. We have never declared or paid cash dividends. We intend to retain all future earnings to fund the development of our business. In addition, because we have received benefits under Israeli law for our "Approved Enterprises," payment of a cash dividend may create additional tax liabilities for us. See "Taxation" and "Dividend Policy."

OUR SHAREHOLDERS COULD EXPERIENCE DILUTION OF THEIR OWNERSHIP INTEREST IF WE ISSUE MORE SHARES THAT ARE PURCHASED BY THIRD PARTIES.

Under Israeli law, shareholders in public companies such as us do not have preemptive rights. This means that our shareholders do not have the legal right to purchase shares in a new issue before they are offered to third parties. As a result, our shareholders could experience dilution of their ownership interest if we decide to raise additional funds by issuing more shares and these shares are purchased by third parties.

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OUR CONCENTRATION OF SHARE OWNERSHIP WILL LIMIT YOUR ABILITY TO INFLUENCE OR CONTROL CORPORATE ACTIONS.

A significant percentage of our outstanding capital stock is held by a small number of affiliates. If these shareholders act together, they will have the ability significantly to influence, if not control, the election of directors and the outcome of all corporate actions requiring shareholder approval. This concentration of ownership also may have the effect of delaying or preventing a change in control of us, which in turn could reduce the market price of our ordinary shares.

RISKS RELATED TO ISRAEL

CONDITIONS IN ISRAEL MAY HARM OUR ABILITY TO PRODUCE AND SELL OUR PRODUCTS AND SERVICES AND MAY ADVERSELY AFFECT OUR SHARE PRICE.

Our principal executive offices and research and development facilities, as well as some of our suppliers, are located in Israel. Political, economic and military conditions in Israel directly affect 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. A state of hostility, varying in degree and intensity, has led to security and economic problems for Israel. Despite the progress towards peace between Israel and its Arab neighbors, the future of these peace efforts remains uncertain. In addition, since October 2000, there has been a substantial deterioration in the relationship between Israel and the Palestinian Authority and a significant increase in violence, primarily in the West Bank and Gaza Strip. During 2002, violence has intensified between Palestinians and Israelis and Israel has undertaken military actions in the West Bank and the Gaza Strip. The future effect of the substantial deterioration and the ongoing violence between Israel and the Palestinians is unknown. The ongoing violence between Israel and the Palestinians or any future armed conflicts, political instability or continued violence in the region would likely have a negative effect on our business condition, harm our results of operations and adversely affect the share price of publicly traded Israeli companies such as us. In addition, Israel's economy has been subject to numerous destabilizing factors, including a period of rampant inflation in the early to mid-1980s, low foreign exchange reserves, fluctuations in world commodity prices, military conflicts and civil unrest. Furthermore, several countries still restrict business with Israel and Israeli companies, which may limit our ability to make sales in those countries. These restrictions may have an adverse impact on our operating results, financial condition or the expansion of our business.

OUR OPERATIONS COULD BE DISRUPTED AS A RESULT OF THE OBLIGATION OF KEY PERSONNEL TO PERFORM ISRAELI MILITARY SERVICE.

Some of our executive officers and employees must perform annual military reserve duty in Israel and may be called to active duty at any time. Our operations could be disrupted by the absence for a significant period of one or more of our executive officers or other key employees due to military service. Any disruption to our operations would harm our business.

THE ISRAELI GOVERNMENT PROGRAMS AND TAX BENEFITS IN WHICH WE CURRENTLY PARTICIPATE OR WHICH WE CURRENTLY RECEIVE REQUIRE US TO MEET SEVERAL CONDITIONS AND MAY BE TERMINATED OR REDUCED IN THE FUTURE, WHICH WOULD INCREASE OUR COSTS OR TAXES.

We are entitled to tax benefits under Israeli government programs, largely as a result of the approved enterprise status granted to $3.5 million of our capital investment programs by the Israeli Ministry of Industry and Trade. Taxable income derived from each program is tax exempt for a period of ten years beginning in the year in which the program first generates taxable income. Without such benefits our taxable income would be taxed at a rate of 36%. To maintain our eligibility for these tax benefits, we must continue to meet conditions, including making specified investments in fixed assets, 30% of which must be from paid-in capital. We cannot assure you that we will continue to receive these tax benefits at the same rate or at all. From time to time, we

17

submit requests for expansion of our approved enterprise programs. These requests might not be approved. The termination or reduction of these programs and tax benefits could increase our taxes and have a material adverse effect on our business. We received grants of $524,000 in 1997, $474,000 in 1998, $645,000 in 1999, $1,031,000 in 2000, $599,000 in 2001 and $206,000 in the three months ended March 31, 2002, from the Office of the Chief Scientist to fund our research and development activities. This funding could be diminished or eliminated in the future.

IT MAY BE DIFFICULT TO ENFORCE A UNITED STATES JUDGMENT AGAINST US, OUR OFFICERS AND DIRECTORS AND SOME OF THE EXPERTS NAMED IN THIS PROSPECTUS OR TO ASSERT UNITED STATES SECURITIES LAW CLAIMS IN ISRAEL.

We are incorporated in Israel. Most of our executive officers and directors and the Israeli experts named in this prospectus reside outside of the United States. Therefore, it may be difficult for an investor, or any other person or entity, to enforce a United States court judgment based upon the civil liability provisions of the United States federal securities laws in an Israeli court against us or any of these persons or to effect service of process upon these person in the United States. Additionally, it may be difficult for an investor, or any other person or entity, to enforce civil liabilities under United States federal securities laws in original actions instituted in Israel. See "Enforcement of Civil Liabilities."

We have appointed OTI America, Inc., our United States subsidiary, as our agent to receive service of process in any action against us arising out of this offering. We have not given our consent for our agent to accept service of process in connection with any other claim and it may therefore be difficult for an investor to effect service of process against us or any of our non-United States officers, directors and experts relating to any other claims. If a foreign judgment is enforced by an Israeli court, it will be payable in Israeli currency.

PROVISIONS OF ISRAELI LAW MAY DELAY, PREVENT OR MAKE UNDESIRABLE AN ACQUISITION OF ALL OR A SIGNIFICANT PORTION OF OUR SHARES OR ASSETS.

Israeli corporate law regulates acquisitions of shares through tender offers, requires special approvals for transactions involving significant shareholders and regulates other matters that may be relevant to these types of transactions. These provisions of Israeli law could have the effect of delaying or preventing a change in control and may make it more difficult for a third party to acquire us, even if doing so would be beneficial to our shareholders. These provisions may limit the price that investors may be willing to pay in the future for our ordinary shares. Furthermore, Israeli tax considerations may make potential transactions undesirable to us or to some of our shareholders. See "Description of Ordinary Shares--Anti-Takeover Provisions under Israeli Law."

THE NEW ISRAELI COMPANIES LAW MAY CAUSE UNCERTAINTIES REGARDING CORPORATE GOVERNANCE.

The new Israeli Companies Law, which became effective on February 1, 2000, has resulted in significant changes to Israeli corporate law. Under this new law, uncertainties may arise regarding corporate governance in some areas. For example, uncertainties exist regarding the scope of duty of shareholders to act in a "fair way towards the company" in certain circumstances. These uncertainties and others could exist until this new law has been adequately interpreted, and these uncertainties could inhibit takeover attempts or other transactions and inhibit other corporate decisions.

18

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
AND INDUSTRY DATA

This prospectus includes forward-looking statements. We have based these forward-looking statements on our current expectations and projections about future events.

Words such as "believe," "anticipate," "expect," "intend," "seek," "will," "plan," "could," "may," "project," "goal," "target" and similar expressions often identify forward-looking statements but are not the only way we identify these statements.

These forward-looking statements involve risks, uncertainties, assumptions and other factors that could cause our actual results to differ materially from future results expressed or implied by the forward-looking statements. Important factors that could cause actual results to differ materially from the information set forth in any forward-looking statements include the risk factors described in "Risk Factors" above and other factors discussed elsewhere in this prospectus.

Many of these factors are beyond our ability to control or predict. You should not assume that forecasts and anticipated events will occur, or that our expectations and plans will not change. We do not have any intention to update forward-looking statements after we distribute this prospectus unless we are required to do so under U.S. federal securities laws or other applicable laws.

USE OF PROCEEDS

Although the amount of the proceeds is not determinable at this time, all such proceeds will be used for marketing and research and development costs. We will not receive any proceeds from the sale of the ordinary shares by the selling shareholders.

DIVIDEND POLICY

We have never declared or paid any cash dividends on our ordinary shares or other securities. We currently expect to retain all future earnings, if any, to finance the development of our business, and do not anticipate paying any cash dividends in the foreseeable future. Any future determination relating to dividend policy will be made by our board of directors and will depend on a number of factors, including future earnings, capital requirements, financial condition and future prospects and other factors the board of directors may deem relevant.

19

PRICE RANGE OF OUR SHARES

Prior to this offering, there has been no public market for our shares in the United States. Our shares have been quoted on the Neuer Markt of the Frankfurt Stock Exchange since August 31, 1999. The following table shows, for the periods indicated, the high and low closing prices of our ordinary shares in Euros as reported on the Neuer Markt of the Frankfurt Stock Exchange. It also shows, for the periods indicated, the high and low closing prices of our ordinary shares expressed in U.S. dollars based on the noon buying rate in New York City for cable transfers in foreign currencies, as certified for customs purposes by the Federal Reserve Bank of New York on the relevant dates. See the discussion below for the exchange rates applicable during the periods set forth below.

                                                                      PER                   PER
                                                                  SHARE EURO              SHARE $
                                                              -------------------   -------------------
                                                                HIGH       LOW        HIGH       LOW
                                                              --------   --------   --------   --------
1999
Third quarter (from August 31, 1999)........................    7.78       5.10       8.20       5.36
Fourth quarter..............................................    7.10       4.95       7.20       4.96
2000
First quarter...............................................   33.40       6.47      32.21       6.64
Second quarter..............................................   22.00      14.95      20.06      14.42
Third quarter...............................................   19.35       8.60      18.02       7.59
Fourth quarter..............................................   10.25       3.25       9.02       6.04
2001
First quarter...............................................    7.75       3.14       7.38       2.98
Second quarter..............................................    4.04       2.40       3.56       2.07
Third quarter...............................................    2.57       0.85       2.25       0.74
Fourth quarter..............................................    2.31       1.22       2.09       1.08
2002
First quarter...............................................    1.45       1.04       1.28       0.91
Second quarter (through June 13, 2002)......................    1.14       0.78       1.07       0.69

A recent reported last sale price of our ordinary shares on the Neuer Markt of the Frankfurt Stock Exchange is set forth on the cover page of this prospectus. Our ordinary shares, to the extent they are admitted to the Neuer Markt, are represented by global share certificates registered in the name of Clearstream Banking AG. As a result, we do not know the number of our outstanding ordinary shares held in the United States or the number of holders of our ordinary shares who reside in the United States.

The following table sets forth, for the periods and dates indicated, information concerning the noon buying rate for the Euro, expresses in Euros per dollar.

                                                            AVERAGE                          PERIOD-
                                                            RATE(1)      HIGH       LOW      END RATE
                                                            --------   --------   --------   --------
1999......................................................    .9455      .9984      .8466      .9930
2000......................................................   1.0860     1.2090      .9675     1.0650
2001......................................................   1.1173     1.2346     1.0488     1.1235
2002 (through June 13, 2002)..............................   1.1221     1.1636     1.0556     1.0556


(1) The average daily noon buying rate from the Federal Reserve Bank of New York.

20

CONSOLIDATION OF THE COMPANY'S SHARE CAPITAL

On June 14, 2002 our shareholders assembly adopted a special resolution to consolidate the Company's share capital at a rate of 10:1 (reverse share split), namely, each existing ten (10) registered ordinary shares NIS 0.01 par value were converted into one (1) registered ordinary share NIS 0.1 par value. Our shareholders assembly further resolved that our Board of Directors will determine when the consolidation will become effective. Our board of directors resolved that the reverse share split will become effective on June 27, 2002, prior to the effective date of this prospectus.

Pursuant to the consolidation of the Company's share capital, each ten (10) of the Company's outstanding ordinary shares NIS 0.1 par value owned by a shareholder (referred to as "Old Shares") have been converted into one (1) ordinary share NIS 0.1 par value (referred to as "New Shares"). The number of Old Shares for which each New Share was converted into (i.e., 10) is referred to as the "exchange number". The consolidation of the Company's share capital took place simultaneously for all ordinary shares and the exchange number is the same for all ordinary shares.

The last date in which our ordinary shares were traded on the Neuer Markt before the consolidation of the Company's share capital was June , 2002. As of June , 2002, following the consolidation of the Company's share capital, our ordinary shares are traded on the Neuer Markt.

On June 14, 2002, our Board of Directors resolved that each option to purchase the Company's Old Shares shall be adjusted as follows: The number of New Shares underlying an option shall equal the number of Old Shares underlying such option divided by the exchange number; and, the exercise price of each New Share underlying such option shall be multiplied by the exchange number.

We expect the reverse split to effect an increase in the share price of the ordinary shares to meet listing requirements of the Neuer Markt and Nasdaq.

ISSUANCE OF BONUS SHARES

On June 14, 2002, in order to enable our Board to issue bonus shares, our shareholders assembly determined that the sum of up to NIS that was defined in our financial statements as premium on shares shall be transferred and re-classified as share capital.

On June 14, 2002 our Board of Directors approved the issuance of bonus shares to all shareholders of the Company and such issuance will be completed prior to the effective date of this prospectus. Each holder of two ordinary shares of NIS 0.1 par value will be granted one ordinary share NIS 0.1 par value, for no consideration. In total, ordinary shares NIS 0.1 par value will be issued as bonus shares. Each option for ordinary shares will entitle the holder thereof, upon exercise of the option, to receive one bonus share for each two ordinary shares purchased upon exercise of the option.

The goal of the bonus share issuance is to reward our existing shareholders with additional ownership as we seek additional trading markets for our shares.

21

CAPITALIZATION

The following table sets forth our capitalization as of March 31, 2002*:

* on an actual basis;

You should read this table in conjunction with "Selected Consolidated Financial Data," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our consolidated financial statements and related notes included elsewhere in this prospectus.

                                                                MARCH 31,
                                                                   2002
                                                              --------------
                                                              (IN THOUSANDS)
                                                               (UNAUDITED)
Cash and cash equivalents...................................     $  3,866
                                                                 ========
Current portion of long-term loans..........................     $  1,462
                                                                 ========
Long-term loans (excluding current portion).................     $  4,715
Shareholders' equity
     Ordinary shares, NIS 0.01 par value per share;
     7,500,000 shares
       authorized; 2,364,420 shares issued and outstanding
        actual;
          shares issued and outstanding as adjusted.........           47
  Additional paid-in capital................................       44,917
  Deferred compensation.....................................         (499)
  Other comprehensive income--currency translation
     adjustments............................................           34
  Accumulated deficit.......................................      (29,929)
                                                                 --------
Total shareholders' equity..................................       14,570
                                                                 --------
  Total capitalization......................................     $ 19,285
                                                                 ========

* The following capitalization table reflects the Company's capitalization including the reverse stock split and issuance of bonus shares as described in note 13A of the consolidated financial statements.

22

SELECTED CONSOLIDATED FINANCIAL DATA

The following selected consolidated financial data should be read in conjunction with our consolidated financial statements and the related notes and the section of this prospectus entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this prospectus. The consolidated statement of operations data for the years ended December 31, 1999, 2000 and 2001 and the consolidated balance sheet data as of December 31, 1999, 2000 and 2001 are derived from our consolidated financial statements included elsewhere in this prospectus, which have been prepared in accordance with accounting principles generally accepted in the United States and audited by Luboshitz Kasierer, Arthur Andersen, independent certified public accountants in Israel. Their report appears elsewhere in this prospectus. The consolidated statements of operations data for the three months ended March 31, 2001 and 2002 and the consolidated balance sheet as of March 31, 2002 are derived from our unaudited consolidated interim financial statements which are included elsewhere in this prospectus. The consolidated statement of operations data for the year ended December 31, 1997 and the consolidated balance sheet data as of December 31, 1997 are derived from our audited consolidated financial statements which are not included in this prospectus. Our consolidated statement of operations for the year ended December 31, 2000 includes the operating results of SoftChip Technologies (3000) Ltd. and SoftChip Israel Ltd. from January 1, 2000 and InterCard GmbH Kartensysteme and InterCard GmbH Systemelectronic from May 1, 2000, both of which acquisitions were accounted for on a purchase basis. Our December 1999 acquisition of City Smart Ltd. was accounted for under the pooling of interests method of accounting. Therefore our consolidated statement of operations for the years ended December 31, 1997, 1998 and 1999 includes the results of City Smart Ltd. since its establishment in February 1996.

23

                                                                                                            THREE MONTHS ENDED
                                                         YEAR ENDED DECEMBER 31,                                 MARCH 31,
                                      --------------------------------------------------------------      -----------------------
                                         1997         1998         1999         2000         2001            2001         2002
                                      ----------   ----------   ----------   ----------   ----------      ----------   ----------
                                                            (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
                                                                                                                (UNAUDITED)
STATEMENT OF OPERATIONS DATA:
Revenues:
  Products.........................   $    2,034   $    3,175   $    3,892   $   13,389   $   18,217      $    3,719   $    3,588
  Non-recurring engineering........           97          295        1,405          590          500              --          305
  Licensing and transaction fees...           --          400           86        1,095        1,527             302          410
  Customer service and technical
    support........................           --           --           --          428          676              49          118
                                      ----------   ----------   ----------   ----------   ----------      ----------   ----------
Total revenues.....................        2,131        3,870        5,383       15,502       20,920           4,070        4,421
                                      ----------   ----------   ----------   ----------   ----------      ----------   ----------
Cost of revenues:
  Products.........................        1,109        2,032        2,122        7,031       10,727           2,097        2,109
  Non-recurring engineering........           49           88           73           89           20              --           50
  Licensing and transaction fees...           --           --           --           --           --              --           --
  Customer service and technical
    support........................           --           --           --          332          491              33           67
Total cost of revenues.............        1,158        2,120        2,195        7,452       11,238           2,130        2,226
                                      ----------   ----------   ----------   ----------   ----------      ----------   ----------
    Gross profit...................          973        1,750        3,188        8,050        9,682           1,940        2,195
                                      ----------   ----------   ----------   ----------   ----------      ----------   ----------
Operating expenses:
  Research and development.........        1,513        1,282        2,101        4,913        6,737           1,935        1,242
  Less-participation by the Office
    of the Chief Scientist.........          524          474          645        1,031          599              --          206
                                      ----------   ----------   ----------   ----------   ----------      ----------   ----------
  Research and development, net....          989          808        1,456        3,882        6,138           1,935        1,036
  Marketing and selling............        1,311        1,905        2,066        7,437        6,592           1,778          974
  General and administrative.......        1,555        1,916        1,839        3,755        5,159           1,617        1,193
  Amortization of intangible
    assets.........................           --           --           --          465        1,112             278           20
  Other expenses, net..............           --           --           --          599          340              --           --
                                      ----------   ----------   ----------   ----------   ----------      ----------   ----------
    Total operating expenses.......        3,855        4,629        5,361       16,138       19,341           5,608        3,223
                                      ----------   ----------   ----------   ----------   ----------      ----------   ----------
    Operating loss.................       (2,882)      (2,879)      (2,173)      (8,088)      (9,659)         (3,668)      (1,028)
Interest on convertible loan.......           --           --         (250)          --           --              --           --
Financing income...................          343          208          459        1,300          520             281          381
Financing expenses.................         (197)        (184)        (141)        (491)        (471)           (151)        (240)
Other income (expenses), net.......           --           --           --           --       (1,081)            500          (22)
                                      ----------   ----------   ----------   ----------   ----------      ----------   ----------
    Loss before income taxes.......       (2,736)      (2,855)      (2,105)      (7,279)     (10,691)         (3,038)        (909)
Tax benefit (taxes on income)......           34           10          (82)          58           47             (25)         (22)
Minority interest..................           --           --           81          250           37             (11)         (19)
Equity in losses of an affiliated
  company..........................           --          (22)          (2)        (754)      (1,290)           (642)        (287)
                                      ----------   ----------   ----------   ----------   ----------      ----------   ----------
    Net loss.......................   $   (2,702)  $   (2,867)  $   (2,108)  $   (7,725)  $  (11,897)     $   (3,716)  $   (1,237)
                                      ==========   ==========   ==========   ==========   ==========      ==========   ==========
Basic and diluted net loss per
  share(1).........................   $    (1.74)  $    (1.82)  $    (1.17)  $    (3.48)  $    (5.11)     $    (1.56)  $    (0.52)
                                      ==========   ==========   ==========   ==========   ==========      ==========   ==========
Weighted average number of shares
  used in calculation of basic and
  diluted net loss
  per share(1)(2)..................    1,556,664    1,572,859    1,806,977    2,220,741    2,326,599       2,382,020    2,364,420
                                      ==========   ==========   ==========   ==========   ==========      ==========   ==========

                                                                AS OF DECEMBER 31                     AS OF MARCH 31, 2002
                                               ----------------------------------------------------   --------------------
                                                 1997       1998       1999       2000       2001            ACTUAL
                                               --------   --------   --------   --------   --------   --------------------
                                                                                                          (UNAUDITED)
BALANCE SHEET DATA:
Cash and cash equivalents....................    1,499      2,035     16,315     15,598      6,030          $ 3,866
Total current assets.........................    5,374      6,108     33,423     29,571     17,048           15,030
Total assets.................................    6,803      7,976     35,681     38,580     30,463           28,438
Total liabilities............................    2,308      5,974      7,368     13,859     14,789           13,868
Long term loans, net of current maturities...      260      1,938      1,321      2,463      4,751            4,715
Total shareholders' equity...................    4,495      2,002     28,313     24,721     15,674           14,570


(1) Share and per share data have been adjusted to reflect a ten to one reverse share split and the issuance of bonus shares in a ratio of one share for every two shares held (subsequent to the reverse share split)--see Note 13A of the consolidated financial statements.

(2) See note 2L of the consolidated financial statements for an explanation of the methods used to determine the number of shares used in computing net loss per share.

24

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

The following discussion of our financial condition and results of operations should be read together with our consolidated financial statements and the related notes which appear elsewhere in this prospectus. The following discussion contains forward-looking statements that reflect our plans, estimates and beliefs and involve risks and uncertainties. Our actual results may differ materially from those anticipated in the forward-looking statements. Factors that could cause or contribute to those differences include those discussed in "Risk Factors" and elsewhere in this prospectus.

OVERVIEW

We design, develop and sell contactless microprocessor-based smart card products. Our headquarters and research and development activities are in Israel, our sales and marketing efforts are directed from Cupertino, California, with additional sales and support offices in Europe, South Africa and Asia, and our packaging, assembly and manufacturing facilities are in Israel and Germany.

Since our incorporation in 1990, we have focused on the development of our core technologies and our products based on our EYECON platform. In 1993, we began selling our campus system to kibbutzim, which are self-contained communities found only in Israel. Over time, our customer base for campus systems increased from two kibbutzim in 1993 to over 40 kibbutzim in 2000. In 1995, we began selling our gasoline management system, which we refer to as GMS, which has since been installed in over 700 gas stations in South Africa, Ecuador and Turkey. In 1998, we were awarded a contract for an electronic parking payment system, which we refer to as EasyPark, in Israel. We began to deploy EasyPark in 2000 and completed deployment of the system in June 2001. In 1999, we began selling to VeriFone our OTI FAST product, which, once integrated into VeriFone's products, enables drivers to pay for gasoline at the pump, to pay for other services and products at the gas station and to receive loyalty points for these purchases.

Acquisitions and joint ventures have been a key component of our growth strategy. On December 30, 1999, we acquired City Smart Ltd., a Hong Kong systems integrator. On January 28, 2000, we acquired SoftChip Technologies (3000) Ltd., which we refer to as SoftChip, an Israeli designer of microprocessors and operating systems for smart cards. In June 2000, we acquired a 51% interest in InterCard GmbH Kartensysteme and InterCard GmbH Systemelectronic, which we refer to as the InterCard group, a German systems integrator for card systems and manufacturer of electronic devices. In January 2001, we acquired the remaining 49% of the InterCard group. In February 2000, we formed a joint venture, e-Smart, with a subsidiary of Cheung Kong Infrastructure, for the sale of our products and systems in the Asia Pacific region. During the first quarter of 2001, the operations of City Smart were transferred to e-Smart. Our results of operations for the year ended December 31, 2000 include the operating results of SoftChip from January 1, 2000 and the InterCard group from May 1, 2000, both of which were accounted for on a purchase basis. For this reason, it may be difficult to compare our recent operating results with our operating results from previous years. For example, for the year ended December 31, 2000, revenues from the InterCard group accounted for 49% of our total revenues. Our December 1999 acquisition of City Smart was accounted for under the pooling of interests method of accounting. Therefore, our results of operations from 1997, 1998 and 1999 have been revised to include the results of City Smart's operations since its establishment in February 1996.

The majority of our revenues are generated in dollars or are dollar-linked, and the majority of our expenses are incurred in dollars and, as a result, we use the dollar as our functional currency. The functional currency of the InterCard group is the Euro and the functional currency of our 50%-owned joint venture, e-Smart, is the Hong Kong dollar. Our consolidated financial statements

25

included elsewhere in this prospectus are prepared in dollars and in accordance with accounting principles generally accepted in the United States.

Revenues

We have experienced rapid revenue growth during the last five years. Our revenues grew from $2.1 million in the year ended December 31, 1997 to $20.9 million in the year ended December 31, 2001. For the three months ended March 31, 2002 our revenues increased 9% to $4.4 million from $4.1 million for the three months ended March 31, 2001.

We derive revenues from product sales, nonrecurring engineering, customer services and technical support, and licensing and transaction fees.

Products. To date, our product sales have consisted primarily of sales of GMS and our campus system. In 1999, we started to derive revenues from sales of customized products, including smart cards, readers and related equipment, for use in the retail petroleum and trucking industries. Additionally, since May 2000, we have derived revenues of $12.6 million from sales by our subsidiary, InterCard GmbH Kartensysteme, of card products based on other technologies and $11.5 million from sales by our subsidiary, InterCard GmbH Systemelectronics, of products for use in the transportation industry.

Nonrecurring engineering. Nonrecurring engineering revenues consist of payments for the adaptation of our products to the requirements of a specific customer. We receive payments for nonrecurring engineering regardless of whether our customers ultimately purchase the customized product. Revenues from nonrecurring engineering have varied widely from period to period. For example, in 1999 nonrecurring engineering accounted for 26% of our revenues, but accounted for only 4% of our revenues for the year ended December 31, 2000, 3% of our revenues for the year ended December 31, 2001 and 7% of our revenues for the three months ended March 31, 2002. Revenues from nonrecurring engineering fluctuate because not all projects that we undertake require customization of our products and those that do require varying degrees of customization.

Customer services and technical support. Customer services and technical support consist of fees paid by purchasers of our products for ongoing customer services and technical support. To date, we have derived only limited fees for customer services and technical support because we only commenced providing these services in 2000.

Licensing and transaction fees. Licensing fees include one-time and periodic payments for manufacturing or distribution rights for our products. These rights have been granted to select customers and the terms and fees are negotiated on a case by case basis. As a result, licensing fees fluctuate. Transaction fees are paid by customers based on the volume of transactions effected in systems that contain our products. We began receiving a small amount of transaction fees in the third quarter of 2000.

We currently derive our revenues primarily from sales of our products. Revenues from product sales accounted for 87% of our total revenues for the year ended December 31, 2001 and 81% for the three months ended March 31, 2002.

Customers and customer concentration. To date, we have derived the majority of our revenues from a small number of customers and expect to continue to do so in the future. For the three months ended March 31, 2002, we derived 7% of our revenues from China integrated circuit design center and 6% of our revenues from e-Smart. The revenues attributable to e-Smart for this period include a $258,000 fee for exclusive distribution rights that we granted to e-Smart. For the three months ended March 31, 2001, we derived 15% of our revenues from e-smart.

Revenues from our customers have fluctuated substantially from period to period in part because sales of our products sometimes involve a one-time payment for nonrecurring engineering

26

followed by an initial bulk sale of tangible products, with lower revenues generated from repeat sales of components and services in following years.

In November of 2001, the Company was notified by P-Card of the termination of the purchase agreement with the Company. The Company fulfilled all of its contractual obligations under its agreement with P-Card. The Company is reviewing its options to pursue all available claims, including specific performance. Since P-Card is currently in bankruptcy, the Company believes recovery from the customer is unlikely. The invalid termination of the agreement had considerable negative effects on the Company's financial results in 2001 with a loss of anticipated earnings of about 20% based upon the Company's projections. The Company took the necessary measures to mitigate the financial consequences of such termination by applying the inventory dedicated to the P-Card agreement to other projects.

Geographical breakdown. We sell our products primarily in Europe, the Far East, North America and Africa, for the three months ended March 31, 2002 we derived 67% of our revenues from sales in Europe, 14% of our revenues from sales in the far east, 8% of our revenues from sales in Africa, 6% of our revenues from sales in Israel, 5% of our revenues from sales in North America and less than 1% of our revenues from sales in South America. For the year ended December 31, 2001, we derived 68% of our revenues from sales in Europe, 14% of our revenues from sales in the Far East, 8% of our revenues from sales in North America, 6% of our revenues from sales in Africa, 3% of our revenues from sales in Israel and 1% of our revenues from sales in South America. For the year ended December 31, 2000, we derived 53% of our revenues from sales in Europe, 18% of our revenues from sales in the Far East, 19% of our revenues from sales in North America, 7% of our revenues from sales in Africa, 2% of our revenues from sales in Israel and 1% of our revenues from sales in South America.

Because the majority of our revenues is derived from a small number of customers, we believe that the geographical breakdown of our revenues is principally a function of our large customers' location at a particular point in time. Nevertheless, we believe that changes in regional and local economies, such as the financial crisis suffered by the Asian countries in 1998, may have affected our sales in that region, and may continue to do so in the future. In addition, because the majority of the InterCard group's customers is located in Europe, the proportion of our revenues derived from European customers has increased following our acquisition of the InterCard group.

Cost of revenues and gross margin

Products. Products cost of revenues consists primarily of materials, as well as the salary and related costs for our technical staff who assemble our products and related overhead expenses.

Nonrecurring engineering. Nonrecurring engineering cost of revenues consists of the salary and related costs for our technical staff who customize our products and related overhead expenses.

Licensing and transaction fees. Licensing and transaction fees revenues do not have associated cost of revenues because the costs incurred to initiate the project from which they are derived are included under marketing and selling expenses.

Customer services and technical support. Customer services and technical support cost of revenues consist of the salary and related costs for our technical staff that provide those services and support and related overhead expenses.

For any given period, our gross margin will depend on the mix of products revenues, nonrecurring engineering revenues, licensing and transaction fees and customer and technical support fees in that period. In general, the gross margin related to products revenues is lower than the gross margin related to nonrecurring engineering and licensing and transaction fees. The gross margin for products sales was 41% for the three months ended March 31, 2002, 44% for the three months ended March 31, 2001, 41% for the year ended December 31, 2001, 47% for 2000, 45% for 1999 and

27

36% for 1998. The gross margin for nonrecurring engineering was 84% for the three months ended March 31, 2002, 96% for the year ended December 31, 2001, 85% for 2000, 95% for 1999 and 70% for 1998. Historically, we have had no costs associated with licensing and transaction fees. The gross margin for customer services and technical support was 43% for the three months ended March 31, 2002, 33% for the three months ended March 31, 2001, 27% for the year ended December 31, 2001, and 22% for the year ended December 31, 2000. We did not receive fees for customer services and technical support prior to 2000. Our total gross margin was 50% for the three months ended March 31, 2002, 48% for the three months ended March 31, 2001, 46% for the year ended December 31, 2001, 52% for 2000, 59% for 1999 and 45% for 1998.

Operating expenses

Research and development. Our research and development expenses consist primarily of salaries and related expenses of our research and development staff, as well as subcontracting expenses and intellectual property registration expenses. All research and development costs are expensed as incurred. Since 1997, we have significantly increased our research and development expenditures.

Research and development expenses, net, are net of payments received from the Government of Israel, through the Office of the Chief Scientist of the Israeli Ministry of Industry and Trade. We received grants from the Office of the Chief Scientist for the development of our products totaling $645,000 in 1999, $1.0 million in 2000, $599,000 in 2001 and $206,000 during the three months ended March 31, 2002. See "--Government of Israel Support Programs."

Marketing and selling. Our marketing and selling expenses consist primarily of salaries and substantially all of the expenses of our sales and marketing subsidiaries and offices in the United States, South Africa, the Far East and Europe, as well as expenses related to advertising, professional expenses, participation in exhibitions and tradeshows.

General and administrative. Our general and administrative expenses consist primarily of salaries and related expenses of our executive, financial and administrative staff. These expenses also include costs of our professional advisors such as legal and accounting experts, expenses related to doubtful accounts and depreciation expenses.

Financing income and expenses

Financing income consists primarily of interest earned on our cash balances and other financial investments and foreign exchange gains. Financing expenses consist primarily of interest payable on bank loans and foreign exchange losses.

Critical Accounting Policies. We prepare our consolidated financial statements in conformity with accounting principles generally accepted in the U.S. As such, we are required to make certain estimates, judgments and assumptions that we believe are reasonable based upon the information available. These estimates and assumptions affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of the periods presented. To fully understand and evaluate our reported financial results, we believe it is important to understand our revenue recognition policy.

Revenue recognition. We recognize product revenues upon delivery, provided there is persuasive evidence of an agreement, the fee is fixed or determinable and collection is probable. In the case of nonrecurring engineering, delivery is deemed to occur on completion of testing and approval of the customization of the product by the customer.

Technology license revenues are recognized at the time the technology and license is delivered to the customer, collection is probable, no significant obligation remains under the sale or licensing agreement and no significant customer acceptance requirements exist after delivery of the technology.

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We recognize revenues from customer services and technical support as the services are rendered.

We recognize transaction fees as they are earned based on usage.

Our revenue recognition policies are consistently applied for all revenues recognized.

Amounts billed where the revenue recognition criteria have not been met, and as a result the revenue is not yet earned, are reflected as deferred revenue, which is netted off against the related receivable. If amounts billed and classified as deferred revenues are collected, the amounts are included in liabilities.

29

RESULTS OF OPERATIONS

The following table sets forth, for the periods indicated, certain operations data expressed as a percentage of our revenues:

                                                                         AS A PERCENTAGE OF TOTAL REVENUES
                                                   ------------------------------------------------------------------------------
                                                                                                            THREE MONTHS ENDED
                                                                 YEAR ENDED DECEMBER 31                          MARCH 31,
                                                   --------------------------------------------------      ----------------------
                                                   1998          1999          2000          2001          2001          2002
                                                   --------      --------      --------      --------      --------      --------
Revenues:
  Products.....................................       82%           72%           86%           87%           91%           81%
  Nonrecurring engineering.....................        8            26             4             3             0             7
  Licensing and transaction fees...............       10             2             7             7             8             9
  Customer services and technical support......        0             0             3             3             1             3
                                                     ---           ---           ---           ---           ---           ---
     Total revenues............................      100           100           100           100           100           100
                                                     ---           ---           ---           ---           ---           ---
Cost of revenues:
  Products.....................................       53            40            45            51            51            48
  Nonrecurring engineering.....................        2             1             1             1             0             1
  Licensing and transaction fees...............        0             0             0             0             0             0
  Customer services and technical support......        0             0             2             2             1             1
                                                     ---           ---           ---           ---
  Total cost of revenues.......................       55            41            48            54            52            50
                                                     ---           ---           ---           ---           ---           ---
     Gross profit..............................       45            59            52            46            48            50
                                                     ---           ---           ---           ---           ---           ---
Operating expenses:
  Research and development.....................       33            39            32            33            48            28
  Less--participation by the Office of the
     Chief Scientist...........................       12            12             7             3             0             4
                                                     ---           ---           ---           ---           ---           ---
  Research and development, net................       21            27            25            30            48            24
  Marketing and selling........................       49            38            48            31            44            22
  General and administrative...................       49            34            24            25            40            27
  Amortization of intangible assets............        0             0             3             5             6             0
  Other expenses, net..........................        0             0             4             2             0             0
                                                     ---           ---           ---           ---           ---           ---
     Total operating expenses..................      119            99           104            93           138            73
                                                     ---           ---           ---           ---           ---           ---
     Operating loss............................      (74)          (40)          (52)          (47)          (90)          (23)
Interest on convertible loan...................        0            (5)            0             0             0             0
Financing income...............................        5             9             5             3             7             9
Financing expenses.............................       (5)           (3)            0            (2)           (4)           (6)
Other income (expenses), net...................        0             0             0            (5)           12            (1)
                                                     ---           ---           ---           ---           ---           ---
     Loss before income taxes..................      (74)          (39)          (47)          (51)          (75)          (21)
Tax benefit (taxes on income)..................        0            (2)            0             0            (1)           (1)
Minority interest..............................        0             2             2             0             0             0
Equity in losses of an affiliated company......        0             0            (5)           (6)          (15)           (6)
                                                     ---           ---           ---           ---           ---           ---
     Net loss..................................      (74)%         (39)%         (50)%         (57)%         (91)%         (28)%
                                                     ===           ===           ===           ===           ===           ===

THREE MONTHS ENDED MARCH 31, 2002 COMPARED TO THREE MONTHS ENDED MARCH 31, 2001
Revenues

Products. Revenues from products decreased 4% to $3.6 million for the three months ended March 31, 2001 from $3.7 million for the same period in 2001.

30

Nonrecurring engineering. Revenues from nonrecurring engineering increased to $305,000 for the three months ended March 31, 2002 from zero for the same period in 2001.

Licensing and transaction fees. Revenues from licensing and transaction fees increased 36% to $410,000 for the three months ended March 31, 2002 from $302,000 for the same period in 2001. The increase in licensing and transaction fees was due to license fees received from OTI Africa and the InterCard group.

Customer services and technical support. Revenues from customer service and technical support increased 141% to $118,000 for the three months ended March 31, 2002 from $49,000 for the same period in 2001. The increase primarily consisted of revenues from the InterCard group, OTI Africa and Easy Park.

Cost of revenues and gross margin

Products. Cost of products revenues increased 1% to $2.1 million for the three months ended March 31, 2002 from $2.1 million for the same period in 2001.

Nonrecurring engineering. Cost of nonrecurring engineering revenues was $50,000 for the three months ended March 31, 2002 from zero for the same period in 2001.

Licensing and transaction fees. Cost of licensing and transaction revenues was zero for the three months ended March 31, 2002 and for the same period in 2001.

Customer services and technical support. Cost of customer services and technical support increased 103% to $67,000 for the three months ended March 31, 2002 from $33,000 for the same period in 2001, due to the increase in revenues from customer service and technical support.

Gross margin increased to 50% for the three months ended March 31, 2002 from 48% for the same period in 2001. The increase in our overall gross margin was primarily due to the change in our revenue mix as compared with the same period in 2001. During the three months ended March 31, 2002, as compared with the same period in 2001 we sold a higher percentage of system products as compared to OEM products. The gross margin of system products is higher than that of OEM products.

Operating expenses

Research and development. Research and development expenses decreased 36% to $1.2 million for the three months ended March 31, 2002 from $1.9 million for the same period in 2001. Research and development expenses, net of participation from the Office of the Chief Scientist ("OCS"), decreased 46% to $1.0 million for the three months ended March 31, 2002 from $1.9 million for the same period in 2001. This decrease was primarily due to $269,000 related to reduction in salaries, a decrease of $230,000 in materials expenses, which reflects the company's trend of developing solutions for our customers' specific order requirements and an increase of $206,000 in the participation by the OCS. Research and development expenses, stated as a percentage of revenues, decreased to 28% for the three months ended March 31, 2002 from 48% for the same period in 2001.

Marketing and selling. Marketing and selling expenses decreased 45% to $974,000 for the three months ended March 31, 2002 from $1.8 million for the same period in 2001. Marketing and selling expenses as a percentage of revenues decreased to 22% for the three months ended March 31, 2002 from 44% for the same period in 2001. The decrease in marketing and selling expenses was primarily due to $446,000 related to salary reductions and a reduction in the number of marketing and selling employees.

General and administrative. General and administrative expenses decreased 26% to $1.2 million for the three months ended March 31, 2002 from $1.6 million for the same period in 2001. The

31

decrease was primarily due to a $503,000 expense in connection with a doubtful account for the period ended March 31, 2001. General and administrative expenses as a percentage of revenues decreased to 27% for the three months ended March 31, 2002 from 40% for the same period in 2001.

Amortization of intangible assets. Amortization of intangible assets decreased 93% to $20,000 for the three months ended March 31, 2002 from $278,000 due to the adoption of SFAS 142, in which the company ceased to amortize goodwill, the Company continues to amortize its intangibles assets.

Financing income and expenses.

Financing income. Our financing income increased 36% to $381,000 for the three months ended March 31, 2002 from $281,000 for the same period of 2001 due to foreign currency gains and due to the interest earned on the proceeds from our 1999 initial public offering.

Financing expenses. Our financing expenses increased 59% to $240,000 for the three months ended March 31, 2002 from $151,000 for the same period of 2001 due to $89,000 attributable to higher loan balances.

Other income (expenses), net. Other income (expenses), net decreased to $22,000 for the three months ended March 31, 2002 from an income of $500,000 for the same period in 2001. We recorded a capital loss from the sale of unused assets in the three months ended March 31, 2002. In the same period in 2001, we recorded a profit of $500,000 due to e-Smart exercising its option to purchase the City-Smart activity.

YEAR ENDED DECEMBER 31, 2001 COMPARED TO YEAR ENDED DECEMBER 31, 2000
Revenues

Products. Revenues from products increased 36% to $18.2 million for the year ended December 31, 2001 from $13.4 million for the same period in 2000. This increase was primarily due to the inclusion of $12.9 million of annual product sales by the InterCard group in 2001, whereas 2000 includes the sales of the InterCard group from May 2000.

Nonrecurring engineering. Revenues from nonrecurring engineering decreased 15% to $500,000 for the year ended December 31, 2001 from $590,000 for the same period in 2000.

Licensing and transaction fees. Revenues from licensing and transaction fees increased 39% to $1.5 million for the year ended December 31, 2001 from $1.1 million for the same period in 2000. The increase in licensing and transaction fees was due to license fees received from OTI Africa and the InterCard group.

Customer services and technical support. Revenues from customer service and technical support increased 58% to $676,000 for the year ended December 31, 2001 from $428,000 for the same period in 2000. The increase primarily consisted of revenues from the InterCard group, OTI Africa and Easy Park.

Cost of revenues and gross margin

Products. Cost of products revenues increased 53% to $10.7 million for the year ended December 31, 2001 from $7.0 million for the same period in 2000 due to the increase in product sales.

Nonrecurring engineering. Cost of nonrecurring engineering revenues was decreased 78% to $20,000 for the year ended December 31, 2001 from $89,000 for the same period in 2000.

32

Licensing and transaction fees. Cost of licensing and transaction revenues was zero for the year ended December 31, 2001 and for the same period in 2000.

Customer services and technical support. Cost of customer services and technical support increased 48% to $491,000 for the year ended December 31, 2001 from $332,000 for the same period in 2000.

Gross margin decreased to 46% for the year ended December 31, 2001 from 52% for the same period in 2000. The decrease in our overall gross margin was primarily due to the change in our revenue mix as compared with the same period in 2000. During the year ended December 31, 2001, as compared with the same period in 2000 we sold a higher percentage of OEM products as compared to system products. The gross margin of OEM products is lower than that of system products.

Operating expenses

Research and development. Research and development expenses increased 37% to $6.7 million for the year ended December 31, 2001 from $4.9 million for the same period in 2000. This increase was primarily due to an increase of $784,000 relating to the hiring of additional research and development staff, an increase of $529,000 in material expenses and an increase of $340,000 in subcontracting expenses. The hiring of additional staff and increased contracting expenses were incurred partly in connection with the development of the company's future line of products and partly in connection with the adaptation of our products to proposed standards of the International Standards Organization for contactless smart cards. Research and development expenses, stated as a percentage of revenues, was 32% for the year ended December 31, 2001 as well as for the same period in 2000.

Research and development expenses, net of participation from the Office of the Chief Scientist ("OCS"), increased 58% to $6.1 million for the year ended December 31, 2001 from $3.9 million for the same period in 2000. The participation received from the OCS totaled $599,000 in 2001 and $1.0 million in 2000.

Research and development expenses, net increased as a result of a change in policy of the OCS, which decreased the OCS's participation in research and development expenses previously estimated by the company based on past experience by $497,000 in the first quarter of 2001 and $504,000 in the second quarter of 2001. This has affected our cash and operational profit by these amounts.

Marketing and selling. Marketing and selling expenses decreased 11% to $6.6 million for the year ended December 31, 2001 from $7.4 million for the same period in 2000. Marketing and selling expenses as a percentage of revenues decreased to 31% for the year ended December 31, 2001 from 48% for the same period in 2000. The decrease was primarily due to the reduction in salaries and the reduction in the amount of staffing.

General and administrative. General and administrative expenses increased 37% to $5.2 million for the year ended December 31, 2001 from $3.8 million for the same period in 2000. This increase was primarily due to an increase of $756,000 related to the hiring of additional general and administrative staff and due to an increase of $501,000 in our provision for doubtful accounts in respect of one customer who is experiencing financial difficulties. General and administrative expenses as a percentage of revenues increased to 25% for the year ended December 31, 2001 from 24% for the same period in 2000.

Amortization of intangible assets. Amortization of intangible assets increased 139% to $1.1 million for the year ended December 31, 2001 from $465,000 due to the amortization of intangible assets in connection with our acquisitions of SoftChip and the InterCard group. Intangible assets are currently being amortized over five years for SoftChip and seven years for the InterCard group.

33

Other expenses. Other expenses decreased 43% to $340,000 for the year ended December 31, 2001 from $599,000 for the same period in 2000. In 2001, we recorded a non-cash provision of $340,000 in respect of the dissolution of our subsidiary InterCard Inc, which will enable us to further reduce our operating expenses without effecting our normal course of business. We incurred $599,000 during the year ended December 31, 2000 due to legal and related expenses in connection with an arbitration proceeding with one of our distributors. We received a favorable award in this arbitration proceeding.

Financing income and expenses.

Financing income. Our financing income decreased 60% to $520,000 for the year ended December 31, 2001 from $1.3 million for the same period of 2000 due to interest earned on the proceeds from our 1999 initial public offering.

Financing expenses. Our financing expenses decreased 4% to $471,000 for the year ended December 31, 2001 from $491,000 for the same period of 2000 due to $47,000 in foreign currency gains and $27,000 attributable to higher loan balances.

Other expenses, net. Other expenses, net was $1.1 million for the year ended December 31, 2001 as compared to expenses of zero for the same period in 2000. Due to costs associated with our compliance with accounting regulations, and in connection with this share offering, we incurred expenses of $1.6 million. The share offering was suspended as a result of the world downturn both in business and in the capital markets. In addition we recorded a gain of $500,000 during the year ended December 31, 2001 due to e-Smart exercising the option to purchase City-Smart's activities.

YEAR ENDED DECEMBER 31, 2000 COMPARED TO YEAR ENDED DECEMBER 31, 1999
Revenues

Products. Revenues from products increased 244% to $13.4 million in 2000 from $3.9 million in 1999. This increase was primarily due to the inclusion of $7.6 million of product sales by the InterCard group, as well as $2.3 million of product sales to VeriFone.

Nonrecurring engineering. Revenues from nonrecurring engineering decreased 58% to $590,000 in 2000 from $1.4 million in 1999. This decrease occurred because nonrecurring engineering revenues in the 1999 period included a one-time payment of $1.0 million from VeriFone for customization.

Licensing and transaction fees. Revenues from licensing and transaction fees increased 1,173% to $1.1 million in 2000 from $86,000 in 1999. The increase in licensing and transaction fees was due to a fee of $3.1 million paid to us for exclusive distribution rights that we granted to e-Smart during this period. We recognized $1.0 million of this fee as revenues in 2000 and have recorded deferred revenues of $2.1 million that we will recognize in 2001 and 2002.

Customer services and technical support. Revenues from customer service and technical support, which we began providing in 2000, were $428,000 in 2000, primarily consisting of $309,000 of revenues from the InterCard group, as well as revenues from OTI Africa.

Cost of revenues and gross margin

Products. Cost of products revenues increased 231% to $7.0 million in 2000 from $2.1 million in 1999 due to the increase in product sales.

Nonrecurring engineering. Cost of nonrecurring engineering revenues increased 22% to $89,000 in 2000 from $73,000 in 1999. This increase occurred despite the decrease in nonrecurring engineering revenues because the costs associated with customizing our EYECON platform are not directly related to the amount of nonrecurring engineering revenues derived.

34

Licensing and transaction fees. Cost of licensing and transaction revenues was zero in 2000 and in 1999.

Customer services and technical support. Cost of customer service and technical support revenues were $332,000 in 2000 as we began providing these services and support during this period.

Gross margin decreased to 52% in 2000 from 59% in 1999. Our gross margin decreased in 2000 primarily as a result of decreased revenues from nonrecurring engineering, which have a high gross margin because there are no costs associated with them, as well as because lower margin product sales accounted for a greater percentage of our total revenues in 2000 compared to 1999.

Operating expenses

Research and development. Research and development expenses increased 134% to $4.9 million in 2000 from $2.1 million in 1999. This increase was primarily due to an increase of $762,000 related to the hiring of additional research and development staff, the inclusion in our consolidated financial statements after January 1, 2000 of $693,000 of research and development expenses of SoftChip and an increase of $1.2 million in subcontracting expenses. The hiring of additional staff and increased contracting expenses were incurred in part in connection with the adaptation of our products to proposed standards of the International Standards Organization for contactless smart cards. Research and development expenses, stated as a percentage of revenues, decreased to 32% in 2000 from 39% in 1999.

Research and development expenses, net of payments received from the Office of the Chief Scientist, increased 167% to $3.9 million in 2000 from $1.5 million in 1999. The payments totaled $1,031,000 in 2000 period and $645,000 in 1999.

Marketing and selling. Marketing and selling expenses increased 260% to $7.4 million in 2000 from $2.07 million in 1999. Marketing and selling expenses increased primarily due to an increase of $2.1 million related to the hiring of additional sales and marketing staff. The increase in marketing and selling expenses was also due to an increase of $787,000 in expenditures on publicity and advertising and public relations expenses and an increase of $927,000 in the marketing and selling expenditures of City Smart Ltd. These increases, other than those of City Smart, were due to the transfer of our marketing headquarters from Israel to Cupertino, California, and the global expansion of our marketing activities. Marketing and selling expenses as a percentage of revenues increased to 48% in 2000 from 38% in 1999.

General and administrative. General and administrative expenses increased 104% to $3.8 million in 2000 from $1.8 million in 1999. This increase was primarily due to the inclusion of $1.3 million of the InterCard group's general and administrative expenses after May 1, 2000 in our consolidated financial statements. General and administrative expenses as a percentage of revenues decreased to 24% in 2000 from 34% in 1999.

Amortization of intangible assets. We incurred expenses of $465,000 in 2000 due to the amortization of intangible assets in connection with our acquisitions of SoftChip and the InterCard group. Intangible assets are being amortized over five years for SoftChip and seven years for the InterCard group.

Other expenses. We incurred $599,000 of legal and related net expenses in 2000 in connection with an arbitration proceeding with one of our distributors. We recently received a favorable award in this arbitration proceeding and, as a result, we may be reimbursed a portion of these expenses.

Financing income and expenses.

Financing income. Our financing income increased 183% to $1.3 million in 2000 from $459,000 in 1999 due to interest earned on the proceeds from our 1999 initial public offering.

35

Financing expenses. Our financing expenses increased 248% to $491,000 in 2000 from $141,000 in 1999 due to $183,000 in foreign currency losses and $167,000 attributable to higher loan balances.

YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
Revenues

Products. Revenues from products increased 23% to $3.9 million for 1999 from $3.2 million in 1998, primarily due to increased sales to VeriFone of our customized EYECON platform for the retail petroleum market.

Nonrecurring engineering. Revenues from nonrecurring engineering increased 376% to $1.4 million for 1999 from $295,000 in 1998, primarily due to a one-time payment of $1.0 million from VeriFone.

Licensing and transaction fees. Revenues from licensing and transaction fees decreased 79% to $86,000 in 1999 from $400,000 in 1998 because of a one-time technology licensing fee of $400,000 received in 1998.

Cost of revenues and gross margin

Products. Cost of products revenues increased 4% to $2.1 million in 1999 from $2.0 million in 1998 due to the increase in product sales.

Nonrecurring engineering. Cost of nonrecurring engineering revenues decreased 17% to $73,000 in 1999 from $88,000 in 1998. This decrease occurred despite the increase in nonrecurring engineering revenues because the costs associated with customizing our EYECON platform are not directly related to the amount of nonrecurring engineering revenues derived.

Gross margin increased to 59% for 1999 from 45% in 1998. Our gross margin increased in 1999 because higher margin nonrecurring engineering accounted for a greater percentage of our total revenues.

Operating expenses

Research and development. Research and development expenses increased 64% in 1999 to $2.1 million from $1.3 million in 1998. This increase primarily resulted from an increase of $463,000 in salary expenses due to hiring additional research and development staff, as well as increases of $148,000 in expenditures on materials and $58,000 on travel to meet with international standards organizations. These increased expenditures were incurred in part in connection with the adaptation of our products to new standards of the International Standards Organization for contactless smart cards. Research and development expenses as a percentage of revenues increased to 39% in 1999 from 33% in 1998.

Research and development expenses, net of payments received from the Office of the Chief Scientist, increased 80% to $1.5 million in 1999 from $808,000 in 1998. These payments totalled $645,000 in 1999 and $474,000 in 1998.

Marketing and selling. Marketing and selling expenses increased 8% to $2.1 million in 1999 from $1.9 million in 1998. The increase was due to the inclusion in marketing and selling expenses of the first full year of operations of our U.S. sales and marketing subsidiary, OTI America. Marketing and selling expenses as a percentage of revenues decreased to 38% in 1999 from 49% in 1998.

General and administrative. General and administrative expenses decreased 4% to $1.8 million in 1999 from $1.9 million in 1998. The decrease was a result of cost savings measures that management implemented in 1999 which resulted in no increase in administrative personnel and closing a representative office in Europe. These savings were partially offset by an increase of $219,000 in professional and related expenditures as a result of our becoming a public company in August 1999. General and administrative expenses as a percentage of revenues decreased to 34% in 1999 from 49% in 1998.

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Interest on convertible loan

We incurred in 1999 an imputed interest expense of $250,000 representing the beneficial conversion feature of a convertible loan received and converted into our ordinary shares in July 1999.

Financing income and expenses

Financing income. Our financing income increased 121% to $459,000 in 1999 from $208,000 in 1998 due to interest earned on the proceeds of our 1999 initial public offering.

Financing expenses. Our financing expenses decreased 23% to $141,000 in 1999 from $184,000 in 1998 due to decreases in foreign currency losses and increases in loan balances.

QUARTERLY RESULTS OF OPERATIONS

The tables below set forth consolidated statement of operations data for each of the eight consecutive quarters ended March 31, 2002, both in dollar amounts and as a percentage of revenues. This information has been derived from our unaudited consolidated financial statements. In management's opinion, the unaudited consolidated financial statements have been prepared on the same basis as our audited consolidated financial statements contained elsewhere in this prospectus and include all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of such financial information. You should read this information together with our consolidated financial statements and the related notes appearing elsewhere in this prospectus. The operating results for any quarter are not necessarily indicative of our results for a full year or any future period and we cannot assure you that any trend reflected in such results will continue in the future.

37

                                                                              QUARTER ENDED
                                        -----------------------------------------------------------------------------------------
                                        JUNE 30,   SEPT. 30,   DEC. 31,   MARCH 31,   JUNE 30,   SEPT. 30,   DEC. 31,   MARCH 31,
                                          2000       2000        2000       2001        2001       2001        2001       2002
                                        --------   ---------   --------   ---------   --------   ---------   --------   ---------
                                                                             (IN THOUSANDS)
Revenues:
  Products............................  $ 3,588     $ 4,798    $ 4,287     $ 3,719    $ 4,160     $ 4,941    $ 5,397     $ 3,588
  Nonrecurring engineering............       89         501          0           0        500           0          0         305
  License and transaction fees........      267         270        291         302        388         454        383         410
  Customer services and technical
    support...........................       48          74        264          49        209         280        138         118
                                        -------     -------    -------     -------    -------     -------    -------     -------
    Total revenues....................    3,992       5,643      4,842       4,070      5,257       5,675      5,918       4,421
                                        -------     -------    -------     -------    -------     -------    -------     -------
Cost of Revenues:
  Products............................    1,885       2,585      1,985       2,097      2,146       3,364      3,120       2,109
  Nonrecurring engineering............       10          62          0           0         20           0          0          50
  License and transaction fees........        0           0          0           0          0           0          0           0
  Customer services and technical
    support...........................        9         140        176          33         64         111        283          67
                                        -------     -------    -------     -------    -------     -------    -------     -------
    Total cost of revenues............    1,904       2,787      2,161       2,130      2,230       3,475      3,403       2,226
                                        -------     -------    -------     -------    -------     -------    -------     -------
      Gross profit....................    2,088       2,856      2,681       1,940      3,027       2,200      2,515       2,195
                                        -------     -------    -------     -------    -------     -------    -------     -------
Operating expenses:
  Research and development............      898       1,098      1,941       1,935      1,886       1,629      1,287       1,242
  Less -- participation by the Office
    of the Chief Scientist............      454          53        339           0        142         231        226         206
                                        -------     -------    -------     -------    -------     -------    -------     -------
  Research and development, net.......      444       1,045      1,602       1,935      1,744       1,398      1,061       1,036
  Marketing and selling...............    1,831       1,827      2,387       1,778      1,740       1,433      1,641         974
  General and administrative..........      956         820      1,339       1,617        993       1,086      1,463       1,193
  Amortization of intangible assets...      120         150        155         278        278         278        278          20
  Other expenses (income).............      200           0        (31)          0          0         320         20           0
                                        -------     -------    -------     -------    -------     -------    -------     -------
    Total operating expenses..........    3,551       3,842      5,452       5,608      4,755       4,515      4,463       3,223
                                        -------     -------    -------     -------    -------     -------    -------     -------
    Operating loss....................   (1,463)       (986)    (2,771)     (3,668)    (1,728)     (2,315)    (1,948)     (1,028)
Interest on convertible loan..........        0           0          0           0          0           0          0           0
Financing income (expenses)...........      281         294        271         130         55          59       (195)        141
Other income (expenses)...............        0           0          0         500          6           0     (1,587)        (22)
                                        -------     -------    -------     -------    -------     -------    -------     -------
    Loss before taxes on income.......   (1,182)       (692)    (2,500)     (3,038)    (1,667)     (2,256)    (3,730)       (909
Tax benefit (taxes on income).........      (75)        (36)       115         (25)        13          (7)        66         (22)
Minority interest.....................       91         (17)       132         (11)         3         (14)        59         (19)
Equity in earnings (losses) of an
  affiliated company..................      (90)       (329)      (149)       (642)      (316)       (544)       212        (287)
                                        -------     -------    -------     -------    -------     -------    -------     -------
    Net loss..........................  $(1,256)    $(1,074)   $(2,402)    $(3,716)   $(1,967)    $(2,821)   $(3,393)    $(1,237)
                                        =======     =======    =======     =======    =======     =======    =======     =======

38

AS A PERCENTAGE OF TOTAL REVENUES

                                                                        QUARTER ENDED
                                  -----------------------------------------------------------------------------------------
                                  JUNE 30,   SEPT. 30,   DEC. 31,   MARCH 31,   JUNE 30,   SEPT. 30,   DEC. 31,   MARCH 31,
                                    2000       2000        2000       2001        2001       2001        2001       2002
                                  --------   ---------   --------   ---------   --------   ---------   --------   ---------
Revenues
  Products......................     90%         85%        89%         91%        79%         87%        91%         81%
  Nonrecurring engineering......      2           9          0           0         10           0          0           7
  License and transaction
    fees........................      7           5          6           8          7           8          7           9
  Customer services and
    technical support...........      1           1          5           1          4           5          2           3
                                    ---         ---        ---         ---        ---         ---        ---         ---
  Total revenues................    100         100        100         100        100         100        100         100
Cost of revenues
  Products......................     47          46         41          51         41          59         53          48
  Nonrecurring engineering......      1           1          0           0          0           0          0           1
  License and transaction
    fees........................      0           0          0           0          0           0          0           0
  Customer services and
    technical support...........      0           2          4           1          1           2          5           1
                                    ---         ---        ---         ---        ---         ---        ---         ---
  Total cost of revenues........     48          49         45          52         42          61         58          50
                                    ---         ---        ---         ---        ---         ---        ---         ---
  Gross profit..................     52          51         55          48         58          39         42          50
                                    ---         ---        ---         ---        ---         ---        ---
Operating expenses..............
  Research and development......     22          19         40          48         36          29         22          28
  Less -- participation by the
    Office of the Chief
    Scientist...................     11           1          7           0          3           4          4           4
                                    ---         ---        ---         ---        ---         ---        ---         ---
  Research and development,
    net.........................     11          18         33          48         33          25         18          24
  Marketing and selling.........     46          32         49          44         33          25         28          22
  General and administrative....     24          15         28          40         19          19         24          27
  Amortization of intangible
    assets......................      3           3          3           6          5           5          5           0
  Other expenses (income).......      5           0         (1)          0          0           6          1           0
                                    ---         ---        ---         ---        ---         ---        ---         ---
    Total operating expenses....     89          68        112         138         90          80         76          73
                                    ---         ---        ---         ---        ---         ---        ---         ---
    Operating loss..............    (37)        (17)       (57)        (90)       (32)        (41)       (34)        (23)
Interest on convertible loan....      0           0          0           0          0           0          0           0
Financing income (expenses).....      7           5          5           3          1           1         (3)          3
Other income (expenses).........      0           0          0          12          0           0        (26)         (1)
                                    ---         ---        ---         ---        ---         ---        ---         ---
    Loss before taxes on
      income....................    (30)        (12)       (52)        (75)       (31)        (40)       (63)        (21)
Tax benefit (taxes on income)...     (2)         (1)         2          (1)         0           0          1          (1)
Minority interest...............      2           0          3           0          0           0          1           0
Equity in earnings (losses) of
  an affiliated company.........     (2)         (6)        (3)        (15)        (6)        (10)         4          (6)
                                    ---         ---        ---         ---        ---         ---        ---         ---
    Net loss....................    (32)%       (19)%      (50)%       (91)%      (37)%       (50)%      (57)%       (28)%
                                    ===         ===        ===         ===        ===         ===        ===         ===

39

LIQUIDITY AND CAPITAL RESOURCES

Our principal sources of liquidity since our inception have been cash from operations, private and public sales of equity securities, borrowings from banks, convertible loans, cash from the exercise of options and grants from the Office of the Chief Scientist. We had cash and cash equivalents of $3.9 million as of March 31, 2002 and $13.6 million as of March 31, 2001.

Operating activities. For the three months ended March 31, 2002 we used $1.3 million of cash in operating activities primarily due to our net loss of $1.2 million and from a $361,000 decrease in other current liabilities which mainly reflects the reduction in employee salaries, partially offset by a $287,000 of equity losses by an affiliated company. In the same period in 2001, we used $2.2 million of cash in operating activities primarily due to our net loss of $3.7 million and from a $569,000 increase in inventories as a result of increased revenues and anticipated growth in revenues which was partially offset by a $1.9 decrease in trade receivables due to improvement in the collection of receivables and increase in provision for doubtful accounts. For the year ended December 31, 2001, we used $6.7 million of cash in operating activities primarily due to our net loss of $11.9 million and from a $270,000 decrease in other current liabilities, partially offset by a $1.3 million of equity losses by an affiliated company, a $1.2 million decrease in trade receivables due to improved collections and the increase in our provision for doubtful accounts and a $1.2 million decrease in other receivables and prepaid expenses as a result of a write off of expenses in connection with this share offering. In the same period in 2000, net cash provided by operating activities totaled $678,000 primarily due to a $10.4 million decrease in short-term investments, partially offset by our net loss of $7.7 million and a $1.5 million increase in inventories as a result of increased revenues and anticipated growth in revenues. In 1999, we used $13.0 million in operating activities primarily due to a $11.6 million increase in short-term investments, from our net loss of $2.1 million and a $1.1 million increase in trade receivables as a result of increased revenues from two major customers, partially offset by a $759,000 increase in other current liabilities relating to liabilities in respect of our initial public offering.

Investing and financing activities.

We invested the following amounts during the periods ended December 31, 1999, 2000, 2001 and three months ended March 31, 2002:

                                               YEAR ENDED DECEMBER 31,              THREE MONTHS
                                         ------------------------------------          ENDED
                                           1999          2000          2001        MARCH 31, 2002
                                         --------      --------      --------      --------------
                                                              (IN THOUSANDS)
Fixed assets, net......................     513         2,627         2,625             265

Fixed assets consist primarily of investments in building, computers, software, manufacturing equipment and office equipment. In addition, we have acquired City Smart, SoftChip and the InterCard group by means of exchange of our shares, and our joint venture, e-Smart, for cash. Please see "Certain Transactions" for further details of these acquisitions.

For the three months ended March 31, 2002, net cash used in investing activities was $572,000 primarily due to $307,000 investment in subsidiaries and affiliates and $275,000 investment in equipment purchases. For the same period in 2001, net cash used in investing activities was $875,000 primarily due to $541,000 investment in equipment purchases and $334,000 investment in subsidiaries and affiliates. For the year ended December 31, 2001, net cash used in investing activities was $4.0 million primarily due to a $2.6 million investment in plant and equipment purchases and a $1.3 million in investments in subsidiaries and affiliates. For the same period in 2000, net cash used in investing activities was $4.0 million primarily due to a $2.6 million investment in plant and equipment purchases and a $1.3 million in investments in subsidiaries and affiliates. In 1999, net cash used in investment activities was $513,000 in plant and equipment purchases.

40

For the three months ended March 31, 2002, net cash used in financing activities was $284,000 due to $429,000 repayment of long-term loans and a decrease of $227,000 in short-term credit partially offset by $372,000 long-term loans received. For the same period in 2001, net cash provided by financing activities was $1.1 million due to $2.2 million long-term loans received, partially offset by a decrease of $797,000 in short-term credit and $316,000 repayment of long-term loans. For the year ended December 31, 2001, net cash provided by financing activities was $1.1 million due to a $4.0 million long-term loans received, partially offset by a $2.3 million repayment of long-term loans and decrease of $582,000 in short-term credit. For the same period in 2000, net cash provided by financing activities totaled $2.6 million primarily due to a $2.5 million long-term loans received and an increase of $1.6 million in short-term credit partially offset by a $1.7 million repayment of long-term loans. In 1999, net cash provided by financing activities totaled $27.7 million primarily due to our August 1999 initial public offering.

The Company has recently completed the building of a new manufacturing facility in Rosh Pina, Israel. The opening was announced on December 11, 2001. The new facility supports the research and development, testing and manufacturing of the Company's contactless microprocessor-based smart card products. The completion of the new facility cost $3.7 million, approximately $2.8 million of which was financed by a loan from Bank Hapoalim, and the remainder from the Company's cash balances. The facility is pledged as security for the loan. The new facility is built on a 4,000 square meters area located next to the Company's old facility, which now houses the Company's global management offices. The land for the new facility was leased from the Israeli Lands Authority for a period of 49 years, expiring on September 14, 2047 with an option to extend the lease for additional 49 years.

In connection with our joint venture, e-Smart, we have agreed to guarantee up to $2.0 million of borrowings under a line of credit that Cheung Kong Infrastructure has undertaken to provide, or cause to be provided, to the joint venture. See "Certain Transactions--Establishment of Joint Venture with Cheung Kong Infrastructure."

RECENT DEVELOPMENTS AND OUTLOOK

We expect the following trends to influence our results of operation:

Products. Our acquisition of the InterCard group has increased the percentage of our revenues derived from customers in Europe. In addition, for the three months period ended March 31, 2002, revenues from sales by the InterCard group accounted for 66% of our total revenues. We expect that revenues from product sales by the InterCard group will continue to constitute a significant portion of our revenues in the near term, but will constitute a smaller portion as other product sales increase.

Nonrecurring engineering. We expect that revenues from non-recurring engineering will continue to fluctuate in the future as not all projects will require customization of our products and those that do require varying degrees of customization.

Licensing and transaction fees. We expect to generate additional revenues from transaction fees based on usage of systems that contain our products. During the first three months of 2002, we received limited transaction fees from BP South Africa, Easy Park Israel, InterCard and Samsung. In the near term we may offer customers a reduction in up-front product and system prices as an inducement to accept transaction fee-based pricing.

Research and development. We expect that our research and development expenses will increase substantially in the future as we continue to develop new products and new applications for our existing products. We also expect research and development expenses to increase, partly as a result of designing our own microprocessors and smart card operating system.

41

Marketing and selling. We expect that our marketing and selling expenses will increase in the future as we continue to expand our local sales and marketing subsidiaries, open new offices and hire additional personnel. Although we lost expected earnings relating to the termination by P-Card of its contract with us, we believe that our sales volumes should recover in 2002.

General and administrative. We expect that general corporate and administrative expenses will increase for the foreseeable future as we continue to expand our operations. We also anticipate an increase in administrative costs associated with our becoming a publicly traded company in the United States.

The Company and Eicon Networks Corporation reached an agreement on January 2, 2002 regarding the future use of the EYECON trademark described in the Company's US Trademark Application Serial No. 75/313,746 and Israeli Trademark Application No. 110844. According to the agreement, the Company will: (i) withdraw its US trademark application and all other applications associated with the EYECON trademark worldwide and notify all trademark offices of its intention to withdraw such applications within 30 days of the effective date of the agreement; (ii) cancel any existing registrations of the EYECON trademark by providing notice of such cancellation to the relevant trademark offices worldwide, no later than December 18, 2003 for the US and Canada and no later than December 18, 2004 for all other countries worldwide, except several countries including Israel, where the applicable date will be December 18, 2005; and (iii) immediately begin phasing out its use of the EYECON trademark worldwide. The agreement further provides that for as long as the Company and its successors are in compliance with the forgoing, Eicon will not bring any claim or action against the Company with respect to the EYECON trademark. The Company believes that complying with the agreement will not have a material adverse effect on its business.

Liquidity and capital resources. We expect to experience significant growth in our operating expenses in the future due to the needs to finance the operations of our newly acquired subsidiaries.

As a result, we anticipate that operating expenses, as well as planned capital expenditures will constitute a material use of our cash resources.

Furthermore, in order to implement our strategy of receiving transaction fees from customers each time our systems are utilized, we anticipate reducing customers' up-front payments for our products in return for receiving ongoing participation in the revenues they generate. Our current principal source of short-term liquidity is available cash and cash equivalents. We believe that our cash on hand and the net proceeds from the sale of our ordinary shares in this offering will sufficiently meet our liquidity requirements for the foreseeable future. We have no current plans for further equity offerings in the near term.

Notwithstanding the worldwide economic slowdown during 2001, the Company has continued to reduce operating costs and salary obligations. The Company is expecting that its increase in revenues in 2001 over 2000 will continue into the year 2002 and that the Company will become profitable in its operations in the second half of 2002, but there can be no assurance that we will do so.

IMPACT OF INFLATION AND CURRENCY FLUCTUATIONS

Our functional currency is the U.S. dollar. We and the majority of our subsidiaries generate substantially all of our revenues in dollars. Our costs relating to marketing, services, purchases of materials and components and rentals are also in dollars or are dollar-linked. However, we incur some of our expenses, principally salaries and related personnel expenses, in Shekels. As a result, we are exposed to the risk that the rate of inflation in Israel will exceed the rate of devaluation of the Shekel in relation to the dollar or that the timing of this devaluation will lag behind inflation in Israel. In addition, we are exposed to the risk that the dollar will be devalued against the Shekel. To date, we have not been materially affected by changes in the Israeli rate of inflation or the exchange

42

rates of the Shekel compared to the dollar, but we cannot assure you that we will not be adversely affected in the future.

The annual rate of inflation in Israel was 1.4% in 2001, 0% in 2000, 1.3% in 1999, 8.6% in 1998 and 7.0% in 1997. The Shekel devalued against the dollar by approximately 9.4% in 2001, 17.6% in 1998 and 8.8% in 1997 and the Shekel appreciated against the dollar by approximately 2.7% in 2000 and 0.2% in 1999.

The functional currency of the InterCard group is the Euro. Approximately 96% of InterCard group's revenues are earned and approximately 96% of its expenses are incurred in Euros. To the extent that there are fluctuations between the Euro and the U.S. dollar, the translation adjustment will be included in our consolidated changes in shareholders' equity and will not impact the consolidated statement of operations. We do not expect our exposure to these fluctuations to be material.

MARKET RISK

We do not currently use financial instruments for trading purposes and do not currently hold any derivative financial instruments that could expose us to significant market risk.

Currently, a majority of our loan facilities bear interest fixed rates. As a result, changes in the general level of interest rates or the Israeli consumer price index will not materially affect the amount of money payable by us under these facilities.

CORPORATE TAX RATE

Israeli companies are generally subject to income tax at the corporate tax rate of 36%. As of December 31, 2001, our net operating loss carry-forwards for Israeli tax purposes amounted to approximately $18.3 million. Under Israeli law, net operating losses can be carried forward indefinitely and offset against certain future taxable income. Since we have incurred tax losses through December 31, 2001, we have not yet utilized the tax benefits for which we are eligible. In addition, $3.5 million of our investment programs in buildings, equipment and production facilities have been granted approved enterprise status and we are, therefore, eligible for a tax exemption under the Law for the Encouragement of Capital Investments, 1959. A total of $260,000 of the investment programs of our subsidiary, Easy Park, has also been granted approved enterprise status. We have derived approximately 29% of our consolidated income from our approved enterprise programs. All of our operating income and the operating income of Easy Park generated in Israel is derived from approved enterprise programs. Subject to compliance with applicable requirements, the portion of our income derived from the approved enterprise programs is tax-exempt for a period of the earliest of (1) ten years commencing in the first year in which it generates taxable income, (2) 14 years from the date of approval or (3) 12 years from the date of beginning of production. If we do not comply with these conditions, the tax benefits may be cancelled. We believe that we comply with these conditions.

GOVERNMENT OF ISRAEL SUPPORT PROGRAMS

We participate in programs offered by the Office of the Chief Scientist of the Ministry of Industry and Trade that support research and development activities. In 1998, 1999, 2000, 2001 and in the three months ended March 31, 2002, we received grants of $474,000, $645,000, $1.0 million, $599,000 and $206,000 from the Office of the Chief Scientist with respect to our e-purse application. Under the terms of these grants, a royalty of 3% to 5% of the net sales of this product must be paid to the Office of the Chief Scientist, beginning with the commencement of sales of products developed with grant funds and ending when 100% of the dollar value of the grant is repaid.

43

Royalties payable with respect to grants received under programs approved after January 1, 1999, however, will be subject to interest on the dollar-linked value of the total grants received at an annual rate of LIBOR applicable to dollar deposits. As of March 31, 2002, we have received a total of $2.6 million from the Office of the Chief Scientist net of royalties paid to it. The terms of Israeli government participation also require that the manufacturing of products developed with government grants be performed in Israel, unless the Office of the Chief Scientist has granted special approval. If the Office of the Chief Scientist consents to the manufacture of the products outside Israel, we may be required to pay increased royalties, ranging from 120% to 300% of the amount of the Office of the Chief Scientist grant, depending on the percentage of foreign manufacture. These restrictions continue to apply even after we have paid the full amount of royalties payable in respect of the grants. Based upon the aggregate grants received to date, we expect that we will continue to pay royalties to the Office of the Chief Scientist on sales of our products and related services for the foreseeable future. Separate Office of the Chief Scientist consent is required to transfer to third parties technologies developed through projects in which the government participates. These restrictions do not apply to exports from Israel of products developed with these technologies.

44

BUSINESS

OVERVIEW

Since our incorporation in 1990, we have designed, developed and sold contactless microprocessor-based smart card products. Because our cards contain a microprocessor, they can store and process information and run multiple applications. Our cards are referred to as "contactless" because they do not require physical contact with a card reader, as power and data are transferred to a card through a magnetic field generated by a card reader. Our products combine the benefits of both microprocessors and contactless cards. We believe that we are one of the first companies to deploy contactless microprocessor-based smart card products for commercial use. In addition to contactless microprocessor-based smart cards, we also sell, through the InterCard group, products that are based on other card technologies.

Substantially all of our contactless microprocessor-based products are based on a common platform which we currently refer to as EYECON*. EYECON is based on our patents and technologies and consists of our smart cards, readers, software that enables the development of applications for smart cards and a communication technology that ensures that the transmission of data to and from the card is secure and reliable. EYECON can be customized to support a large number of applications in a multitude of markets. Some of the markets for which we have customized EYECON include petroleum, parking, mass transit, border crossing and medical services.

Our products offer the following benefits:

* The information stored on our card and transferred between the card and the reader is secure;

* Our products provide for a reliable transfer of information to and from a card;

* Our cards are durable, easy to use and take a variety of forms such as key chains, tags, stickers and wristwatches;

* Our products are easy to install and maintain;

* Our products enable the transition from other card technologies to our contactless microprocessor-based technology; and

* Our products support multiple, independent applications on the same card.

We intend to enhance our position in the design and development of contactless microprocessor-based smart card products by developing new applications for our technology. We also intend to enter new markets, either alone or through strategic relationships. Additionally, we aim to generate additional revenues from transaction fees and ongoing payments for customer support.

We market our technologically advanced products through our global network of subsidiaries and strategic relationships. Our sales and marketing efforts are directed from Cupertino, California, and carried out through our subsidiaries in North America, Africa and Europe and our joint venture in Asia.

INDUSTRY BACKGROUND
What is a smart card?

Plastic cards that contain a semiconductor chip are generally referred to as "smart cards." Smart card technologies were first developed in response to the limitations of the magnetic strip commonly used in most credit and debit cards, telephone cards and hotel room access cards. Smart cards store larger amounts of information than magnetic strip cards. They can also update this information and
* We have commenced to phase out, and intend to continue to phase out over the next 18 months, our use of the EYECON trademark to identify our platform in accordance with our Agreement with Eicon Networks Corporation--See Recent Developments and Outlook.

45

store it more securely than a magnetic strip card can. Depending on the complexity of the chip that a smart card contains, some smart cards can process the stored information and support more than one application. For example, smart cards can act as a substitute for cash by storing a cash balance on the card that may later be reduced or increased. The same card can also store information identifying its holder.

What is a smart card system?

[PICTURE]

[Computer, reader and cards/tags]

A smart card system is comprised of a smart card, a reader that transmits and receives data from the smart card, and a computer that processes data received from the reader. A reader housed in a protective casing is known as a terminal. Most terminals today are designed for "contact" smart cards. These terminals rely on physical contact between the card and the reader and contain a slot into which the smart cards are inserted or through which they are swiped. Most smart cards today are credit card-sized plastic cards. However, with the introduction of "contactless" smart cards that do not need any physical contact with a reader, the form which smart cards and readers take can vary widely.

Types of smart card chips

The type of semiconductor chip on a smart card determines the amount of information and the number and complexity of applications that can be provided by the card, or how "smart" the card is. In today's market, there are three primary types of chips. From the least technologically advanced to the most technologically advanced, they are as follows:

Memory chip. The most basic type of chip used in smart cards is the memory chip. Smart cards containing memory chips are more advanced than magnetic strip cards because they can store larger amounts of data. Like magnetic strip cards, however, memory chips are not capable of processing the stored information. An external reader extracts the data stored on a memory chip card which is then transferred to an external computer system where it is processed. Updated information is then transferred back to the reader and then to the card. The most common memory card application is a disposable prepaid telephone card.

Application Specific Integrated Circuit, or ASIC, chip. The ASIC chip can store data and perform limited pre-determined data processing tasks. It cannot be reprogrammed once created. ASIC-based chips are primarily used for applications that require limited processing capabilities and lower levels of security, such as premises access control and mass transit.

Microprocessor chip. Unlike ASIC chips, microprocessor chips can be reprogrammed after being manufactured. New software applications can be added, replaced or updated at any time. Microprocessor chips can also run more applications and perform more complex calculations than ASIC chips. The difference between an ASIC-based smart card and a microprocessor-based smart card can be analogized to the difference between a calculator and a personal computer. A calculator is typically programmed at the time of manufacture to perform only a limited number of functions, and like an ASIC-based smart card, these functions cannot subsequently be changed. A personal

46

computer has an operating system that can run many different applications, and like a microprocessor-based smart card, these applications can be modified and added to a personal computer.

Microprocessors can process information using a formula, or algorithm, with a great number of variables, whereas ASIC chips can only repeat a fixed algorithm with a limited number of variables. Therefore, data stored on a microprocessor chip can be encrypted using a random code that is difficult to break. As a result, data stored on a microprocessor chip benefits from a higher level of security than data stored on an ASIC chip. At the same time, microprocessors require more power than ASIC chips for their operations and are typically more expensive.

Contact vs. Contactless

Another primary distinction between types of smart cards is whether they are "contact" or "contactless," that is, whether physical contact between the card and the reader is required in order to transfer data and power between them. When using a contact card, the cardholder swipes or inserts the card into a slot in the card reader. When inserted properly, a metallic pad, or contact plate, on the smart card aligns with the electronic contacts inside the reader, and data and power are transferred across this connection. In contrast, in contactless smart card systems, power and data are transmitted through antennas located on the smart card and the reader without making physical contact.

The developers of contactless microprocessor-based smart cards face the following significant challenges:

* Support of ISO standards. The International Standard Organization, or ISO, is in the process of approving standards regulating the transfer of data between a contactless smart card and its reader, under the name ISO 14443. Currently, two separate types of standards--Type A and Type B--are undergoing approval by ISO. Because both standards are currently being used, only readers that can support both standards offer users the flexibility to use smart cards based on either standard.

* Transfer of power to the card. Most providers of contactless smart card systems use a technology called resonant circuitry to create a magnetic field between the card and reader through which power is transferred to the card. Current limitations of resonant circuitry technology make this technology impractical for providing sufficient power to a microprocessor-based smart card in a contactless system.

* Support of existing card-based infrastructure. Because of the large existing base of contact-based systems, there is demand for technologies that can support both contact and contactless applications with the same equipment. However, combined contact and contactless cards have traditionally contained two chips, one for use by the contact-based system and one for the contactless-based systems. The use of two chips increases the cost of the card, as well as the likelihood of discrepancies between the information stored on each chip by different applications and limits the level of security to the level offered by the ASIC chip. We believe that the shortcomings of these dual contact/contactless cards create a need for a single chip that can work with both contact and contactless systems. There have been attempts, principally by some of the larger chip manufacturers, to develop a technology that uses a single chip based on a device that would switch between contact and the contactless operations. We are unaware of any successful commercial implementation of this technology other than by us.

Despite the challenges discussed above, contactless smart cards offer considerable advantages over traditional contact-based smart cards including:

47

* Speed. Transaction time in contactless systems is shorter than in contact systems because it is not necessary to insert the card in, or swipe it through, a reader or otherwise position it in any specific direction. As a result, for systems that need to handle a large number of users over a short period of time, such as mass transit systems, contactless systems provide considerable time savings when aggregated over a large number of users while users save time on each of their transactions.

* Convenience. Contactless systems simplify the way transactions are executed. For example, a shopper can pay for goods in a retail outlet simply by positioning a wallet containing a contactless smart card in close proximity to a reader positioned at the check-out, without the need to withdraw the card from the wallet.

* Variety of forms. Because contactless smart cards do not need to fit into a slot in a reader, they can take a wider array of forms desired by smart card users and providers, such as key chains, tags, wristwatches and other forms.

Maintenance costs of contactless smart card systems are lower than maintenance costs for contact systems since the components can be shielded in a protective casing, and the readers and the cards are not subject to friction caused by inserting the card into, or swiping it through, a reader. Moreover, contactless smart card readers do not contain moving parts such as the contact plates in contact-based systems that are subject to wear and tear. As a result, contactless systems can operate under harsher conditions and have longer lives than contact systems. However, because contactless smart card systems require additional components, such as antennas in the reader and on the card and other transmission components at the level of the reader, the up-front costs associated with a contactless system are higher than the costs associated with a contact-based system.

Conclusion

Given the benefits of contactless smart cards and microprocessor-based smart cards, we believe that there is strong demand within the smart card industry for cards that combine the benefits of both technologies. A number of companies such as Infineon and ST Microelectronics have already indicated their intention to offer contactless microprocessor-based smart cards. However, we believe that we are one of the first companies to deploy contactless microprocessor-based smart card products for commercial use.

THE OTI SOLUTION

Our technology enables microprocessor-based smart card systems to operate in a contactless environment. This technology is not only available for new systems, but can be integrated with and upgrade existing contact systems and other contactless systems. Our products have the benefits discussed below.

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* Combining the advantages of contactless systems and microprocessor-based systems. Our technology successfully combines the features of microprocessor-based cards and contactless cards and provides the following benefits to card users and card issuers:

           FEATURES                 ADVANTAGES TO CARD USERS       ADVANTAGES TO CARD ISSUERS
           --------                 ------------------------       --------------------------
Benefits of contactless cards
compared to contact cards
Faster transaction time           Shorter time to complete a      More transactions per minute
                                  transaction
Cards do not need to be           Easier to use and come in a     Lower maintenance costs
inserted or put into readers      variety of forms
Durability                        The card lasts longer           Reduce card replacement cost
Benefits of microprocessors
compared to ASIC or memory
chips
Multiple applications             The card has multiple uses      Generates revenues from
                                                                  additional applications
Enhanced security                 Information on the card is      System is less vulnerable to
                                  more secure                     fraud

* Ease of transition from other card systems to contactless microprocessor-based systems. We provide our customers with an easy upgrade of their existing systems by allowing card issuers who currently utilize magnetic strip card systems or other contact-based systems to switch to a contactless system without forcing them to replace their existing infrastructure. For example, as part of a project for SmartStop, we upgraded standard point-of-sales and gaming machines that supported only magnetic strip and coins to support contactless microprocessor- based smart cards.

* Ease of transition from contact-based microprocessors to contactless microprocessors. Chip manufacturers and operating system providers can use our technology to upgrade their off-the-shelf products to support both contact and contactless operations. This can be done by combining our technology with our customer's microprocessor, enabling the microprocessor to support contact and contactless operations. By applying our patented hardware, save months of development time and reduce the time to market for its products.

* Support of multiple standards. Our readers are capable of supporting ISO 14443 Type A and Type B standards. Because both of these standards are currently being used, we offer users the flexibility to adopt either standard.

STRATEGY

Our goal is to be the leading provider of contactless microprocessor-based smart card products. Key elements of our strategy include:

Enhance technological position. We intend to continue to invest in research and development in order to enhance our technological position, develop new technologies, extend the functionality of our products and services, and offer innovative products to our customers. For example, currently the microprocessors in our products are designed and supplied by STM, Atmel and Samsung, and the smart card operating systems by Personal Cipher Card Corporation and ZhongChao TongFang Smart Card Ltd. In the future, through our subsidiary, SoftChip, we intend to achieve an in-house capability to design microprocessors and operating systems for smart cards.

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Expand global market presence. Our sales and marketing effort is directed from Cupertino, California. We market our product through a global network of marketing subsidiaries in North America, Europe and Africa, and in Asia through our joint venture, e-Smart. We intend to use these entities to strengthen our presence in existing markets, penetrate new markets, provide local customer service and technical support, and adapt our products to our local customers' specific needs.

Generate recurring revenues. We currently derive most of our revenues from one-time payments for our products and technologies. We intend to generate additional revenues by receiving services fees for ongoing customer services and technical support and transaction fees from our customers based on the volume of transactions effected in systems that contain our products. For example, we have entered into such fee arrangements with respect to our parking systems in Israel, our gasoline management systems in South Africa and our project with SmartStop in the United States.

Leverage existing and seek new relationships. We have entered into relationships with Xerox, to cover the U.S. public library and higher education markets, and Beyond Petroleum (f/k/a British Petroleum), to cover the South African petroleum market, and with two manufacturers and systems integrators:
Cubic Transportation Systems, Inc., a leading mass transit ticketing provider, and VeriFone, a leading provider of automatic payment products. We have entered into these relationships in order to facilitate or accelerate our penetration into new markets, as well as assist us in defining and pursuing new applications for our products. We are continuously seeking additional relationships to complement our marketing strategy and promote our brand worldwide.

Leverage presence in existing industries to enter into new industries. We offer our customers the ability to add new applications to their smart cards, thereby expanding the number of industries in which our products are used. For example, users of the gasoline management system we have sold to British Petroleum in South Africa will have in the future the option to add a payment application to their card. The application will allow them to pay with the card at convenience stores that install the system and to earn loyalty points every time they do so. We plan to generate additional revenues through the sale of products required to add and operate these applications.

Pursue strategic acquisitions. We plan to pursue acquisitions of companies that enhance our manufacturing, sales, marketing and research and development capabilities. In this way, we plan to expand our product offerings and provide more comprehensive service to our customers. Since our initial public offering in 1999, we have acquired CitySmart, a systems integrator in Hong Kong, SoftChip, an Israeli based developer and designer of microprocessors and operating systems for smart cards, and the InterCard group, a German systems integrator for card systems and manufacturer of electronic devices.

CORE TECHNOLOGIES

Since our inception in 1990, we have developed technologies that facilitate the transmission of data and power between a contactless microprocessor-based smart card and a reader. Our products are based on a number of core technologies, which are discussed below.

Power and data transmission technology

We refer to our power and data transmission technology as "matched antenna" technology. The power, as well as the data, is transmitted to the microprocessor installed on the smart card through an electro-magnetic field generated by the reader. Our technology offers a number of key advantages:

* Contactless smart cards can be based on microprocessors. In contrast to resonant circuitry technology, which is the predominant technology used for ASIC-based contactless smart cards, our matched antenna technology enables a reader to power a standard microprocessor embedded in the contactless card.

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* Replacing one of the components of the smart card system does not require re-tuning the system. In smart card systems based on resonant circuitry, once a component of the system is replaced the whole system needs to be re-tuned in order to function properly. This increases maintenance time and costs. Our technology allows components of the system to be replaced without any need for re-tuning, providing for easy, cost effective installation and maintenance of our products.

* The reader does not need to be installed in close proximity to its antenna. The reader can be installed at a distance of up to 33 meters, or 100 feet, from the antenna, providing the ability to install smart card systems in harsh conditions, including potentially explosive environments such as gasoline stations. In addition, the customer can install the reader where there is easy access, facilitating installation and maintenance of the reader.

Antenna interface

[PICTURE]

[Diagram of Antenna interface]

Our antenna interface technology enables a single microprocessor to connect, or interface, with both contact and contactless readers. We refer to this as a "dual interface" feature. This enables customers with existing contact systems to gradually transition to contactless cards, rather than incurring up-front all the costs of replacing the contact system with a contactless system. We have developed the following two methods of implementing our dual interface feature:

* Adding our antenna interface chip. The chip can be added to standard microprocessor-based contact cards, allowing the card to operate as a contactless smart card, in addition to being a contact card. This can be implemented within a relatively short period of up to three months, which reduces our customers' time to market.

* Integrating an antenna interface into the microprocessor. The antenna interface can be integrated into a microprocessor, which reduces the cost of manufacturing dual interface cards once manufacturing levels reach significant volumes of chips. At that point, the additional up-front cost of engineering work required in order to successfully integrate the two components--the microprocessor and the antenna interface--into one chip, is offset by the fact that only a single component is required. This is referred to as a monochip.

In 1998, our antenna interface, which enables any contact-based microprocessor with any operating system to work in a contactless environment, was awarded the annual prize of the European Smart Card Applications and Technology organization for the most innovative achievement for smart cards in 1997.

Antenna module

Contactless smart cards require an antenna as a conduit for ingoing and outgoing transmissions of power and data. Traditional contactless smart cards contain an antenna coil that is embedded around the edge of the card. The technology for embedding the antenna coil into the card is

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complex, creating a barrier for contact smart card manufacturers to transition to manufacturing contactless smart cards. Our technology eliminates the need to embed the antenna coil around the edge of the smart card by mounting the antenna on a standard size platform, or module, into which the microprocessor is embedded. Our technology allows contactless cards to be produced using existing contact card production processes without the need for new machinery. This significantly reduces manufacturing costs. In addition, when a manufacturing infrastructure exists in the local market, shipping costs to the local market and possibly duties can be reduced.

In 2000, our antenna module was awarded the annual prize of the European Smart Card Applications and Technology organization for the most innovative achievement for smart cards in 1999.

Communications technology

We have developed a unique communications technology that includes:

* a set of rules, or a protocol, that is designed to ensure that information is properly transmitted from the reader to the card, and vice versa;

* an additional layer of coding that makes the transmission of information more difficult to intercept and read; and

* a technique that reduces the effect of background interference on the quality of the transmission.

Microprocessor chip and operating system design know-how

Through the acquisition of SoftChip we have acquired significant know-how in the design of microprocessors and development of operating systems for smart cards. SoftChip acquired its know-how through its involvement in the design of microprocessors for smart cards on behalf of leading microprocessor manufacturers. In addition, SoftChip has developed DVK, a smart card operating system for contact-based microprocessors. We intend to upgrade the DVK operating system to contactless operation and incorporate DVK into some of our products over the next 12 months.

PRODUCTS
The EYECON platform

Substantially all of our products are based on a common platform, which we refer to as the EYECON platform. The EYECON platform combines our patented technologies and consists of:

* smart cards, which can take a variety of forms including tags, stickers, wristwatches, key chains and plastic credit card-sized cards;

* smart card readers;

* software that enables the development of applications on contactless microprocessor-based smart cards; and

* a method of communications that regulates the transmission of data between a contactless smart card and a reader.

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The following is a graphical representation of a contactless microprocessor-based smart card based on our EYECON platform:

[PICTURE]

[EYECON-Based Contactless Multi Application Card]

All of these elements work together to provide a foundation, upon which we or our customers build applications. The transmission of information between the card and the reader in an EYECON-based product is secure and reliable. For example, if communications are interrupted in the course of a transmission, the information transferred is incomplete, and the EYECON platform will reject the impaired transmission and require that the information be re-transmitted. In addition, our EYECON platform ensures that information is transmitted from the card in an encrypted form only to readers that are authorized to receive and able to decipher the transmission.

EYECON supports several types of payment methods including debit and credit applications, loyalty points and an electronic cash substitute that increases or reduces the balance on the user's card. We refer to these as e-purse applications.

Our products

Our products consist of:

* Customized products. We sell customized equipment based on our EYECON platform, including smart cards, readers and related equipment, to support applications in particular markets. Examples of these applications are described below. We typically receive payments for nonrecurring engineering for this customization and then sell the customized product to the customer.

* Complete systems. We sell complete systems based on our EYECON platform. In addition to the equipment included in our customized products, complete systems include application software and specifically designed hardware. Our complete systems currently consist of our gasoline management system, our campus system and our parking payment system.

* OEM: We sell components including smart cards and readers, with development tools for integration into other products.

Customized products

Retail petroleum. We have designed a payment and loyalty product for the retail petroleum industry, which we refer to as our OTI FAST product. OTI FAST enables drivers to pay for gasoline at the pump, to pay for other services and products at the gas station and to receive loyalty points for these purchases.

We began selling OTI FAST in 1999. Sales of OTI FAST, including associated nonrecurring engineering, accounted for 0.5% of our revenues in 2001, 15% in 2000 and 29% in 1999. To date, OTI FAST is the primary product that we have sold to VeriFone.

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Trucking. We have designed a product for use in truck stops. The product enables truck drivers to use contactless smart cards for local and long distance telephone services, electronic identification, fuel management, truck scale services, gaming machine payment, web access and e-purse, including loyalty programs. In 2001, we installed in two additional truck stop chains.

Sales of our trucking product, including associated nonrecurring engineering, accounted for 1% of our revenues in 2000, 13% in 1999 and insignificant amounts in 1998 and 1997. In the first half of 2000, our product was installed as part of a pilot program at one truck stop in a truck stop chain. We have begun to install it in additional truck stops in the same chain.

Mass transit. We have designed a product that enables efficient fare collection from a large volume of passengers in various types of mass transportation systems, such as buses and trains. The smart card serves as the passenger's ticket. The chip in the smart card stores the passenger's fare balance and is debited with the fare when the passenger boards or disembarks. The balance on the smart card can be increased repeatedly.

We have not derived significant revenues from sales of our mass transit product. e-Smart received the first commercial order for this product for installation in a mass transit system in China. Installation of the system commenced in the first quarter of 2001. We started the installation of the system from which we derived revenues which accounted for 9% of our revenues in 2001.

Medical services. We currently are testing a product that will be designed to secure, process and manage medical information. The product will provide doctors and hospital administrators with information regarding the patient's identity, medical history, insurance coverage and payment history. This information could be automatically updated after each treatment. Treatment information could be automatically transferred to the insurance provider's computer system. This product would reduce costs to medical providers, provide increased security for a patient's medical history and improve the quality and speed of service to patients.

We have not derived revenues from sales of our medical services product. We began a pilot program for the product in South Africa during the second quarter of 2001.

National documentation. We have developed a product that supports various types of user authentification through advanced authentication methods developed by other companies such as biometrics, which are required by governments for identification documentation. Biometric identification involves inputting data regarding the physical characteristics of the smart card holder, such as his fingerprints or facial impression, into the smart card. This data is stored in the smart card and compared with the actual characteristics of the smart card holder when the card is presented for identity validation. This enables governments to transition from paper-based national documentation systems to a more cost-effective paperless identification system, encompassing multiple forms of government identification such as passports, national identification cards, driver's licenses and national health cards. In addition, we have incorporated our antenna module into a sticker. The sticker can be attached to existing paper documentation and thus converting it into a contactless smart card.

The Israeli government selected our technology and products for use in a system controlling passage between Israel and areas governed by the Palestinian Authority which will be supplied by Electronic Data Systems. The system is currently being developed.

Complete systems

Gasoline management system. Our gasoline management system, or GMS, records and monitors the identity of the driver and the vehicle, the driver's or fleet's credit status, the vehicle's fuel consumption and other information determined by the customer, such as periodic vehicle maintenance. By processing and managing this information, GMS allows oil companies and fleet managers to receive billing information automatically, simplify payment processes, track the use of

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each vehicle and reduce the risk of theft or fraud. GMS also enhances the loyalty of fleet drivers and managers to oil companies operating participating gas stations.

The information is communicated via an antenna in the vehicle's gas tank to an antenna mounted on the fuel nozzle when the fuel nozzle is inserted into the vehicle's gas tank, and is then transferred to the gas station computer. Disengaging the nozzle from the gas tank will immediately turn off the pump. The following diagram illustrates a typical GMS system:

[PICTURE]

[Diagram of GMS system]

We commenced sales of GMS in 1995. Sales of GMS accounted for 10% of our revenues in the three months ended March 31, 2002, 6% of our revenues in 2001, 11% in 2000, 27% in 1999, 40% in 1998 and 50% in 1997. GMS is being used by a number of petroleum companies, such as BP South Africa in Africa, Turcas in Turkey and Mobil in Ecuador. As of December 31, 2001, a total of approximately 700 gas stations have been equipped with GMS, including in South Africa, Turkey and Ecuador, and we have delivered GMS equipment for approximately 70,000 vehicles.

Campus systems. We designed our campus system for use in self-contained or campus environments, such as closed communities, kibbutzim, which are self-contained communities found only in Israel, senior citizen homes, universities, schools and corporate facilities. Each campus user is provided with a contactless smart card which provides secured access to different areas of the campus, and can include various types of e-purse applications, monitoring of time and attendance at work, vending machine functions, gasoline management and cafeteria operations.

Our campus system has been in full commercial operation in over 40 kibbutzim in Israel since 1993, more than 20 residential complexes in Hong Kong since 1997, two senior citizen homes in Israel since 1998 and a country club in Israel since 2000. We also have installed a campus system operation at a University in Germany and in January, 2001, we established a relationship with Xerox to exploit our campus system operation in the United States. Sales of our campus system accounted for 3% of our revenues in the three months ended March 31, 2002, 5% of our revenues in 2001, 7% in 2000, 28% in 1999, 40% in 1998 and 37% in 1997.

Parking payment system. Our electronic parking payment system, which we refer to as EasyPark, enables drivers to be charged for the exact period of time they are parked and simplifies the monitoring and collection of parking fees. Drivers are issued contactless microprocessor-based smart cards, or EasyPark cards, to replace existing parking payment methods, including parking meters. The EasyPark card stores the amount of money, or the balance that is available for payment of parking fees. A driver can increase the balance at special self-service kiosks placed at convenient locations. Compliance with parking regulations is monitored by inspectors using specially designed hand-held terminals.

In May 1999, the EasyPark system was selected as the national parking system for Israel. During 2000, the system was widely implemented throughout Israel. We are currently marketing the EasyPark system through our global network of subsidiaries.

Other products

Through InterCard GmbH Kartensysteme, we offer products that are based on other card technologies. These products include the following:

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InterCard campus system. The InterCard group currently sells and manages campus systems that are operated by cards based on a wide array of technologies, including magnetic strips, ASIC-based systems and contact microprocessor-based systems, provided by a number of companies, such as GemPlus and Giesecke & Devrient GmbH. The InterCard group's campus system is used in 30 universities in Germany under the name UniCard. The primary difference between the InterCard group's campus system and the campus system that we offer is that the InterCard group's campus system includes management and clearing software for closed campus environments and is based solely on contact cards. Within the next 12 months we intend to offer campus systems integrating our contactless smart card technology with the InterCard group's management and clearing software. Additionally, we intend to offer the InterCard group's customers the option to gradually replace or upgrade their readers and cards to our contactless microprocessor-based systems. Revenues from the InterCard group's campus systems have accounted for $700,000 of the InterCard group's revenues in the three months ended March 31, 2002.

CopyTex. CopyTex is a line of products that operate copying machines. CopyTex products use a variety of technologies including paper or plastic magnetic strips and microprocessor-based smart cards. There are approximately 10,000 customers for CopyTex which is installed in universities, schools, corporations and libraries. Revenues from CopyTex have accounted for $900,000 of the InterCard group's revenues in the three months ended March 31, 2002.

Transportation. In addition, InterCard GmbH Systemelectronic manufactures and sells electronic devices for InterCard GmbH Kartensysteme and for non-smart card applications in the transportation industry. Revenues from sales by InterCard GmbH Systemelectronic, excluding sales to InterCard GmbH Kartensysteme, accounted for $3.8 million or 41% of the InterCard group's revenues in 1999, $3.9 million or 52% in 2000, $4.7 million or 35% in 2001 and $1.4 million or 48% in the three months ended March 31, 2002.

Technology licensing

In 1998, we licensed our contactless technology on a non-exclusive basis to Samsung for the purpose of developing a microprocessor that integrates our antenna interface into Samsung's microprocessor, which we refer to as a monochip. The duration of the license is ten years and is extended automatically for one-year periods for so long as Samsung continues to commercially manufacture monochips. We received a one-time technology licensing fee from Samsung and will receive royalties from sales of monochips by Samsung. We may purchase monochips from Samsung at a preferential price and we have agreed to sell components for card readers to Samsung at preferential prices. Both we and Samsung are permitted to sell monochips worldwide other than to customers who are known to be a client of the other party. We may license our technology to other microprocessor manufacturers in the future.

CUSTOMER SERVICE AND TECHNICAL SUPPORT

We provide our customers with training and installation support and ongoing customer service and technical support through our global network of subsidiaries. We have a support team of 14 employees consisting of three employees located in our corporate headquarters in Rosh Pina, Israel, three in the United States, three in Africa and five in Europe. Our customer service team in Rosh Pina, Israel provides central services to our network of local subsidiaries which provide 24-hour customer support to our customers, through telephone and email for an ongoing fee. On-site technical support is provided to customers for a fee. For 1998, 1999, 2000, 2001 and for the three months ended March 31, 2002 revenues derived from customer service and technical support constituted less than 4% of our total revenue for each year.

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SUBSIDIARIES AND AFFILIATES

The chart below describes the corporate structure of our principal subsidiaries and major affiliate.

[OTI Organization Chart]


(1) The remaining shares of Easy Park are held by two investors.

(2) Y. Yogev Projects Management and Buildings Systems Ltd. holds 10% of the shares of Easy Park Israel Ltd.

(3) We acquired a 51% interest in InterCard GmbH Systemelectronic and InterCard GmbH Kartensysteme in June 2000. We acquired the remaining 49% in January 2001.

(4) Cheung Kong Infrastructure holds its interest in e-Smart System Inc. through its subsidiary Ocean Wonder Ltd.

(5) The remaining shares of OTI Africa are held by OTI Africa's employees.

The following table shows information relating to those of our subsidiaries and affiliate that had a book value representing at least 10% of our equity as of December 31, 2001 or contributed at least 10% towards either our consolidated net revenue or consolidated net loss in 2001:

                                                                                               REVENUES
                                                      BOOK                                       FROM       RECEIVABLES
                                                    VALUE OF                                    SHARES      OF OTI DUE
                         SUBSCRIBED     % EQUITY     SHARES    ACCUMULATED        LOSS        HELD IN FY       FROM
        NAME             CAPITAL(1)     OWNERSHIP     HELD       DEFICIT       IN FY 2001        2001      SUBSIDIARIES
---------------------  --------------   ---------   --------   -----------   --------------   ----------   -------------
                       (IN THOUSANDS)      (%)                               (IN THOUSANDS)
e-Smart System
  Inc................      $7,200           50%     $ 2,466      $2,267          $1,834        $     0        $   91
Easy Park Ltd........         878          100       (3,853)      4,731             942            518         3,639
The InterCard
  group(2)...........       1,808          100          161       1,647             215         13,573           668


(1) Represents par value, where applicable, and additional paid-in capital.

(2) Consists of InterCard GmbH Systemelectronic and InterCard GmbH Kartensysteme.

Easy Park Ltd.

Our subsidiary, Easy Park Ltd., developed our EasyPark system. Easy Park is incorporated under the laws of the State of Israel and uses office space in our headquarters in Rosh Pina, Israel. Each holder or holders, individually or in the aggregate, of 10.5% of Easy Park's issued share capital

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may appoint one member to Easy Park's board of directors. Currently, we appoint all of the members of the board of directors.

Our Easy Park system was selected for a national parking system for Israel. The deployment and operation of the Israeli project is managed by a subsidiary of Easy Park called Easy Park Israel Ltd. Easy Park holds 90% of the issued share capital of Easy Park Israel.

OTI America, Inc.

OTI America, Inc. is headquartered in Cupertino, California and provides marketing and customer support services for our products in North and South America. In addition, our global marketing and strategy development is headed from OTI America.

e-Smart System Inc.

e-Smart System Inc. is a 50% owned joint venture with Cheung Kong Infrastructure Holdings Ltd., a Hong Kong-based infrastructure company, and subsidiary of Cheung Kong (Holdings) Ltd. through its subsidiary Ocean Wonder Limited. Cheung Kong (Holdings) has significant stakes in Hutchison Wampoa, a Hong Kong based telecommunications company, and Hong Kong Electric. As part of the joint venture, we appointed e-Smart as exclusive distributor for our products in the Asia Pacific region (mainly China and Hong Kong). The venture is using the established distribution network of Cheung Kong (Holdings) and will also undertake marketing activities in the Asia Pacific region. The venture is building a research and development center in Hong Kong that will conduct ongoing product and technological research to customize our products to different local needs within the Asia-Pacific region.

In January 2001, e-Smart exercised an option that we had granted to it to acquire the assets of City Smart, our wholly-owned systems integrator located in Hong Kong.

OTI Africa Ltd.

OTI Africa Ltd. is headquartered in South Africa and provides marketing, distribution and customer support services for our products in Africa.

SoftChip

SoftChip is a designer of microprocessors and operating systems for smart cards. SoftChip has developed DVK, an operating system for microprocessors, and has been involved in the design of microprocessors. Through SoftChip we intend to achieve in-house capability to design microprocessors and operating systems for smart cards.

The InterCard group

We acquired 51% of the InterCard group in June 2000 and the remaining 49% in January 2001. The InterCard group consists of two main companies:

InterCard GmbH Kartensysteme is a systems integrator primarily supplying smart card systems for 30 university campuses in Germany. InterCard GmbH Kartensysteme also sells copy machine payment systems to universities, libraries and corporations. We plan to offer to the InterCard group's customers the option to upgrade their existing payment systems to contactless smart card systems using our technologies. In addition, we intend to market, distribute and support our products through the InterCard group's marketing, distribution and support network in Europe to their existing customer base in order to accelerate our penetration into the European market.

InterCard GmbH Systemelectronic has a manufacturing facility which currently manufactures electronic devices for InterCard GmbH Kartensysteme and the transportation industry. We manufactured some of our readers in this facility commencing in 2001, and we expect to continue manufacturing products for the transportation industry.

For more details on these acquisitions see "Certain Transactions."

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CUSTOMERS

We sell our products to systems integrators and service providers. Our customers can be divided into the following groups:

* Systems integrators. Systems integrators incorporate our products into their systems, which they then sell to service providers and install for use in a specific project. Some of these systems integrators also market and distribute our products. We derived 63% of our revenues in 1999, 35% in 2000, 21% in 2001 and 24% in the three months ended March 31, 2002 from sales to systems integrators.

* Service providers. Service providers include companies and government agencies that offer smart card services to end-users who are their customers. We derived 37% of our revenues in 1999, 65% in 2000, 79% in 2001 and 76% in the three months ended March 31, 2002 from sales to service providers.

The following is a list of certain customers from whom we have derived revenues of more than US$100,000 from January 1, 2000 through December 31, 2001:

                  CUSTOMER                               PRODUCT
                  --------                               -------
Xerox                                            Campus system
ARS (for Turcas)                                 GMS
Autotrack (for Mobil Ecuador)                    GMS
BP South Africa                                  GMS
e-Smart                                          Distribution rights*
Perkin Elmer                                     Parking meters
Smart Stop                                       Trucking
VeriFone                                         OTI FAST


* One-time payment

SALES AND MARKETING

We have built a global network of subsidiaries through which we sell and market our products. As of March 31, 2002, we had a total sales and marketing staff of 20 employees in four locations. We market our products in the Americas through OTI America, which employs five employees, in Africa we sell and market through OTI Africa, which also employs five employees, in Europe we sell and market through the InterCard group and our Frankfurt office, which together employ six employees, and to Israel through our headquarters in Rosh Pina, which employs four employees. Our sales and marketing staff implements marketing programs to promote our products and services and enhance our global brand recognition. Our current marketing efforts include participation in trade shows and conferences, press releases, updating our web site, conducting speaking engagements and advertising in industry publications. We also conduct technical seminars to inform customers, distributors and other industry participants of the benefits of our products and technologies.

We also sell our products through independent systems integrators, some of which also act as distributors for our products. We have granted some of our systems integrators exclusive distribution rights within a particular country or region. In such cases, we generally guarantee exclusivity only if certain sales targets are met. In addition, we have appointed our joint venture, e-Smart, as exclusive distributor of our products in the Asia Pacific region, not subject to any minimum sales targets. e-Smart will remain our exclusive distributor in the Asia Pacific region for so long as we and our joint venture partner, Cheung Kong Infrastructure Holdings, hold any shares of e-Smart, unless we and Cheung Kong Infrastructure Holdings agree to terminate the appointment. We have also undertaken not to compete with the activities of e-Smart in the Asia Pacific region for so long as we are a shareholder of e-Smart and for a period of one year after the termination of our distribution agreement if the termination occurs due to our default. e-Smart has undertaken not to compete with our activities in the Asia Pacific region for one year following the termination of our distribution

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agreement for any reason. Cheung Kong Infrastructure Holdings has agreed to use reasonable efforts to cause its affiliated companies not to compete with e-Smart. For further details, see "Certain Transactions--Establishment of Joint Venture with Cheung Kong Infrastructure."

We have entered into relationships which we believe will enable us to penetrate new markets, develop new products and enhance the visibility of our brand name. We consider a relationship to be strategic when we integrate our technology into some of the product offerings of a manufacturer or systems integrator that has a significant position in a specified market, and we then cooperate in marketing the resulting product. We have established relationships with Xerox, Beyond Petroleum (f/ k/a British Petroleum), VeriFone, Inc. and Cubic Transportation Systems, Inc. Our relationship with Xerox is intended to exploit U.S. public library and higher education markets and our relationship with Beyond Petroleum is focussed on the South African petroleum market. Pursuant to our agreement with VeriFone, VeriFone is entitled to buy smart card products from us and we have agreed to assist VeriFone in customizing these products for its purposes in return for a fee. We have also developed a joint marketing plan with VeriFone for sales in the United States of both our products and one of VeriFone's products which we have customized. Pursuant to our agreement with Cubic, we have agreed to assist Cubic in upgrading its card readers to support contactless microprocessor-based smart cards based on our platform. We will receive royalties from each upgraded reader that Cubic sells.

MANUFACTURING

External manufacturers and suppliers

We currently purchase substantially all of the hardware components and software for our products from third-party suppliers and outsource substantially all of the manufacturing and assembling of our products to manufacturing subcontractors. We have not entered into long-term supply contracts and purchase these hardware components on a purchase order basis. This allows us to focus our resources on the design, development and marketing of our products. Our policy is to use more than one supplier and manufacturing subcontractor for each part of our production process in order to limit over-dependence on any one supplier or manufacturer.

Smart cards.

* Microprocessors. The current suppliers of microprocessors for our smart cards are STM, Atmel, and Samsung. In addition, we have jointly developed together with Samsung a "monochip" that integrates our antenna interface with Samsung's microprocessor. Samsung began production of the monochip. In addition, through SoftChip, we are currently developing a microprocessor design for smart cards.

* Modules. A module is a silicon plate into which the components of a microprocessor are embedded. The microprocessor module and the antenna module on which the microprocessor and antenna interface are mounted are manufactured in Europe and South East Asia.

* Packaging. We package the components for our smart cards in a variety of forms, such as key chains, tags, stickers and cards. The key chains, tags and stickers containing our microprocessor and antenna modules are manufactured in China and in Europe. Our credit card-sized smart cards are manufactured in Korea, China, Thailand and the United States.

Readers. We purchase off-the-shelf components for our readers from various suppliers including Infineon, Motorola, AMD and National Semiconductor. The readers are assembled for us in Israel mainly by USR Electronics Ltd.

Operating systems. We currently use two different operating systems in our EYECON platform:

* PC3 smart card operating system. We have licensed the PC3 smart card operating system from Personal Cipher Card Corporation under a royalty-bearing non-exclusive license since July 1995 which terminates in July 2005. Sales of products containing the PC3 smart card

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operating system accounted for 73% of our revenues from smart cards in 1999 and substantially all of our revenues from smart cards in 2000.

* ZT smart card operating system. Through our relationship with Tsinguha TongFang, a significant systems integrator in China, we have upgraded the Public Bank of China (PBOC) smart card operating system to a contactless smart card environment, utilizing chips manufactured by Samsung. In addition, this same system is being implemented as a smart card system for the city of Shengyang, China.

In addition, SoftChip has developed DVK, a smart card operating system for contact-based microprocessors, that we intend to upgrade to contactless operation and incorporate into some of our products over the next 12 months. Through SoftChip we are currently developing our own operating system for smart cards. There can be no assurance that we will develop such an operating system.

Quality control. We maintain strict internal and external quality control processes. We require that the facilities of our suppliers and manufacturing subcontractors are ISO 9002 certified. ISO 9002 refers to a quality assurance model established by ISO for companies that design, produce, install, inspect and test products.

Internal manufacturing capabilities

We currently package, test and encode our readers at our production facility in Rosh Pina, Israel. Our packaging and testing facilities are ISO 9002 certified. We consummated recently the building of a manufacturing facility in Rosh Pina, which will permit us to incorporate modules into credit card-sized contactless smart cards. This expansion will enable us to respond more rapidly to customer demand for smart cards in the initial phase of a project.

InterCard Systemelectronic, our subsidiary, owns a manufacturing facility in Germany for electronic devices primarily for the transportation industry and card terminals for the systems provided by InterCard Kartensysteme, its sister company. Our acquisition enhances our in-house manufacturing capabilities to manufacture our terminals and card readers. We started manufacturing small quantities of our readers at the facilities of InterCard Systemelectronic in 2001. We expect that InterCard Systemelectronic will also continue to manufacture products for the transportation industry.

We have granted our joint venture, e-Smart, an option exercisable after January 1, 2001, to manufacture smart cards using our technology for sale in the Asia Pacific region. In such event, we will retain exclusive rights to our technology and any smart cards manufactured by e-Smart must contain modules manufactured by us. We are entitled to receive royalties at rates to be agreed upon for smart cards manufactured by e-Smart.

Government regulations

Some of our products are subject to mandatory government regulation in the countries in which they are used. For example, card readers that are used in the United States require certification of compliance with regulations of the Federal Communications Commission and those used in Europe require certification of compliance with regulations of European Telecommunications Standards Institute regarding emission limits of radio frequency devices. In the United States, our GMS and retail petroleum products are subject to compliance with regulations of Underwriters Laboratories Inc., a public safety and testing certification organization, and in Europe to regulations of the European Union. Our products are compliant with these regulations.

RESEARCH AND DEVELOPMENT

We believe that our future success depends on our ability to maintain our technological leadership, enhance our existing products and develop new products and technologies. Accordingly, we intend to continue devoting substantial resources to research and development. In 1999, in 2000, in 2001 and for the three months ended March 31, 2002, we invested approximately $1.5 million, $3.9 million, $6.1 million and $1.0 million respectively, in research and development, net of grants from

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the Office of the Chief Scientist, representing 27%, 25%, 30% and 24% of our revenues for each of those periods. In 1999, 2000, in 2001 and in the three months ended March 31, 2002, we received grants from the Office of the Chief Scientist in the amount of $645,000, $1.0 million, $599,000 and $206,000, respectively, to be used for research and development. We are paying royalties to the Government of Israel at a rate of 3% of sales of the products in which the Government of Israel has participated in financing through grants, up to the amounts granted.

Our research and development activities focus on three areas:

* implementing our core technologies in microprocessors and readers;

* enhancing the functionality of our components and expanding the range of our products to serve new markets; and

* developing new innovative technologies related to the operation of contactless microprocessor-based smart cards.

As of March 31, 2002, we employed 71 persons in our research and development department. Our research and development facilities are located at our headquarters in Rosh Pina, Israel. We also have a research and development facility in Jerusalem, Israel, as a result of our acquisition of SoftChip. We believe that our success is based on our experienced team of senior engineers and technicians who have on average 12 years of experience in their respective fields. Our research and development facilities are ISO 9001 certified. ISO 9001 refers to a quality assurance model established by ISO for research and development facilities.

PROPRIETARY TECHNOLOGIES

Our success and ability to compete depend in large part upon protecting our proprietary technology. We rely on a combination of patent, trademark, copyright and trade secret law, as well as know-how, confidentiality agreements and other contractual relationships with our employees, affiliates, distributors and others. We have a number of issued patents in various jurisdictions with respect to our technologies, as well as a number of pending patent applications. The more significant of these are as follows:

                TECHNOLOGY                                           STATUS
                ----------                                           ------
Contactless transmission of power and data   Patents granted in the United States, Israel, Canada,
between a smart card and a reader.           Singapore, Australia, South Africa and Hong Kong. The
                                             U.S. patent expires in 2010 and the other patents
                                             expire in 2011.
Dual interface technology for contact/       Patent granted in the United States, Israel and
contactless operation using a single         Australia. These patents expire in 2017. European,
microprocessor on the same card.             Canadian and Hong Kong patent applications pending. PCT
                                             application in the national phase.
System that uses contactless smart card      Patents granted to Easy Park in Israel, the United
for parking systems.                         States, Europe, Hong Kong and South Africa. These
                                             patents expire in 2012.
Dual interface technology for contact/       Patent granted in the United States, Europe and Hong
contactless operating in a single card       Kong. PCT in national phase. Application pending in
conforming to ISO 14443 Type A and B         Israel, Canada and Australia.
standards.
Long range transmission of data.             Patent granted in the United States, Europe, Hong Kong
                                             and in Israel. PCT in national phase. Applications
                                             pending in Canada and Australia.
Vehicle tag incorporated into a capless      Patent granted in Europe, United States and Australia.
fuel inlet cap.                              Accepted in Israel and Hong Kong. Application pending
                                             in Canada. PCT in the national phase.

We cannot be certain that patents will be issued with respect to any of our pending or future patent applications. In addition, we do not know whether any issued patents will be enforceable against alleged infringers or will be upheld if their validity is challenged. We are currently appealing

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the decision of the European Patent Office revoking our patent relating to contactless transmission of power and data. Our reader products, but not those of the InterCard group, are based on the technology covered by this patent. We cannot assure you that this proceeding will be successful. If our appeal is not successful, we could lose the right to prevent others in Europe from using the technology covered by the patent. Our right to manufacture and sell our products in Europe is not dependent on the outcome of this opposition proceeding. This proceeding does not have a direct effect on our patents granted in the United States and elsewhere although a successful opposition to this patent could provide a basis for our competitors to claim that our patents in other jurisdictions covering this technology are invalid.

We have registered trademarks in the United States, the European Community and Israel for OTI and OTI INSIGHT. EYECON is a registered European Community Trade Mark and is also registered in Israel. As the result of an opposition action by Eicon Networks Corporation, the Company and Eicon reached an agreement on January 2, 2002 regarding the future use of the EYECON trademark described in the Company's US Trademark Application Serial No. 75/313,746 and Israeli Trademark Application No. 110844. According to the agreement, the Company will:
(i) withdraw its US trademark application and all other applications associated with the EYECON trademark worldwide and notify all trademark offices of its intention to withdraw such applications within 30 days of the effective date of the agreement; (ii) cancel any existing registrations of the EYECON trademark by providing notice of such cancellation to the relevant trademark offices worldwide, no later than December 18, 2003 for the US and Canada and no later than December 18, 2004 for all other countries worldwide, except several countries including Israel, where the applicable date will be December 18, 2005; and (iii) immediately begin phasing out its use of the EYECON trademark worldwide. SCIENCE-NON FICTION is a registered European Community Trade Mark and registered in Israel and is a pending trademark application in the United States. EASY PARK is a registered trademark in the United States, Canada, Singapore and Israel. We are also using other less important registered trademarks and unregistered trademarks and trade names.

COMPETITION

Contactless microprocessor-based products and technologies. We anticipate competition in sales of our products, systems and technologies from other providers of contactless microprocessor-based smart card technologies. We expect competition to intensify as our competitors commit greater resources to the development of contactless microprocessor-based smart cards. Some of the larger chip manufacturers that operate in the smart card market, including Atmel, STM, Infineon and Philips Semiconductors, have announced that they are developing contactless microprocessor-based smart cards. However, we are not aware of any other company that has deployed contactless microprocessor-based smart card products for commercial use.

Contactless ASIC-based products and technologies. We compete with contactless ASIC-based technologies developed primarily by Philips Semiconductors, which comply with ISO 14443 and which are used by some of the largest manufacturers of smart cards, including Gemplus, Schlumburger and Giesecke & Devrient, and Sony's contactless ASIC-based technology, that is not ISO compliant. Other companies offer contactless ASIC-based systems for specific applications. For example, TIRIS, a subsidiary of Texas Instruments, provides ASIC-based keyring tags for gasoline management systems, which compete with the VeriPass system which we have developed with and for VeriFone. In addition, Orpak Industries, Ltd. and Roisman Engineering Ltd., both based in Israel, also offer gasoline management systems, which use simple ASIC-based devices powered by batteries and that do not comply with the standards set by ISO.

Other contact-based technologies. We compete with contact-based products such as microprocessor-based contact cards, ASIC-based contact cards, memory chip cards and magnetic strip cards. We believe that these cards offer inferior functionality compared to contactless

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microprocessor-based smart cards. Nevertheless, some of our potential customers have in the past, and may in the future, consider these alternatives sufficient for their needs.

REAL PROPERTY

We lease an aggregate of 10,639 square meters of land in Rosh Pina, Israel from the Israel Lands Authority. Out of the 10,639 square meters, 2,377 meters are leased under a 49 year lease which expires on November 16, 2041, with an option to extend for a further period of 49 years. Our principal management, administration and marketing activities occupy a 1,188 square meter facility on the site. The remaining 8,262 square meters of land are leased under a 49 year lease with the Israel Lands Authority which expires on September 14, 2047, with an option to extend for a further period of 49 years. Our principal engineering, research and development and part of our manufacturing activities occupy a 4,000 square meter facility on this site. The rent for the initial 49-year term of each of these leases was prepaid in its entirety at the beginning of the lease terms as is customary in Israel for leases of property for industrial purposes from the Israel Lands Authority. Our majority owned subsidiary, Easy Park Ltd., leases office space in this complex from us.

OTI America, Inc. leases an aggregate of 1,964 square meters of office space in Cupertino, California pursuant to a lease that expires on January 31, 2005. e-Smart leases an aggregate of 427 square meters of office space in Hong Kong pursuant to a lease that expires on July 9, 2003. OTI Africa Ltd. leases an aggregate of 2,500 square meters of office space in Cape Town, South Africa, pursuant to a lease that expires on December 31, 2002, with an option to extend the lease for an additional three years.

Softchip utilizes an aggregate of 204 square meters in Jerusalem pursuant to a lease which expired on December 31, 1998. The lease agreement was not extended, but the parties continue to act according to the provisions of it.

InterCard GmbH Kartensysteme owns an aggregate of 5,201 square meters of land in Bad Durrheim, Germany. Of this land 3,000 square meters can be used commercially and the remainder is currently designated as farmland. The commercially usable land is leased by InterCard GmbH Kartensysteme to InterCard GmbH Systemelectronic. This land is used by InterCard GmbH Systemelectronic for its manufacturing facility. InterCard GmbH Kartensysteme leases an additional 1,626 square meters of space which is used for administration, storage and development purposes. The lease agreement terminates on December 31, 2002, but will be automatically extended until December 31, 2003, unless nine months' prior notice is given.

EMPLOYEES

As of December 31, 1998, we had 54 employees. As of December 31, 1999, we had 75 employees. As of December 31, 2000, we had 255 employees. As of December 31, 2001, we had 247 employees. As of March 31, 2002, we had 245 employees. Our average number of employees during 1998, 1999, 2000, 2001 and for the three months ended March 31, 2002 was 46, 60, 183, 250 and 246. These numbers include employees of our subsidiaries and 50% joint venture, e-Smart. The breakdown of our employees by department is as follows:

                                                                   OTI                                        E-SMART
                                          -----------------------------------------------------   -------------------------------
                                          DEC. 31,   DEC. 31,   DEC. 31,   DEC. 31,   MARCH 31,   DEC. 31,   DEC. 31,   MARCH 31,
               DEPARTMENT                   1998       1999       2000       2001       2002        2000       2001       2002
               ----------                 --------   --------   --------   --------   ---------   --------   --------   ---------
Sales and marketing.....................      8         19         30         20          20          7          7           7
Research and development and
  engineering...........................     19         23         58         68          68          2          3           3
Manufacturing and operations............     14         17         98         78          78          0          6           6
Customer support........................      5          8         26         14          14          6          0           0
Management and administration...........      8          8         22         46          44          6          5           5
                                             --         --        ---        ---         ---         --         --         ---
Total...................................     54         75        234        226         224         21         21          21

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Of these employees, on March 31, 2002, 82 were based in Israel, 11 in the United States, 113 in Europe and 18 in South Africa. In addition, e-Smart, our joint venture, had 21 employees in the Asia Pacific region as of March 31, 2002.

Under applicable law and by order of the Israeli Ministry of Labor and Welfare, we and our Israeli employees are subject to certain provisions of the collective bargaining agreements between the Histadrut, the General Federation of Labor in Israel and the Coordination Bureau of Economic Organizations, including the Industrialists Association. These provisions principally concern cost of living increases, length of the working day, minimum daily wages for professional employees, contributions to pension funds, insurance for work-related accidents, procedures for dismissing employees, determination of severance pay, annual and other vacation, sick pay and other conditions of employment. We provide our employees with benefits and working conditions above the required minimum and which we believe are competitive with benefits and working conditions provided by similar companies in Israel. Our employees are not represented by a labor union. We have written employment agreements with substantially all of our employees. Competition for qualified personnel in our industry is intense and it may be difficult to attract qualified personnel to our offices. We dedicate significant resources to employee retention and have never experienced work stoppages and believe that our relations with our employees are good.

LEGAL PROCEEDINGS

We are currently not a party to any material legal proceedings and are not aware of any pending or threatened litigation against us that we believe would have a material adverse effect on our business and the business of our subsidiaries taken as a whole. During the last two fiscal years, we have not been a party to any legal proceedings that have had a material adverse effect on our business and the business of our subsidiaries taken as a whole. In November, 2001, we were notified by a contracting party, P-Card, of the termination of our purchase agreement with them. We continue to review our options to pursue available claims against P-Card, and we believe that all claims that P-Card has suggested may be available to them are baseless and otherwise without merit and we will aggressively defend against any such claims if they are ever asserted.

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MANAGEMENT

The following table sets forth certain information concerning our current directors and executive officers, including officers of certain of our subsidiaries:

                 NAME                      AGE                             POSITION
                 ----                      ---                             --------
Oded Bashan (1)........................     55      President, Chief Executive Officer and Chairman
Ronnie Gilboa..........................     46      Vice President--Projects and director
Guy Shafran............................     30      Chief Financial Officer
Moshe Aduk.............................     45      Vice President--Gasoline Management System
Nehemya Itay...........................     53      Vice President--Hardware Engineering
Ohad Bashan............................     31      Head of Global Marketing and Strategy Development;
                                                      President and Chief Executive Officer, OTI America,
                                                      Inc.
Shulamith Shiffer (1)(2)(3)............     55      Director
Felix Goedhart (2).....................     36      Director
Raanan Ellran (1)(2)(3)................     52      Director


(1) Compensation committee member

(2) Audit committee member

(3) External director

Oded Bashan co-founded us in 1990 and has continued to serve as our President, Chief Executive Officer and Chairman since that time. Prior to founding us, he served as the president of Electo-Galil, an Israeli manufacturer of radio frequency identification cards, from 1984 to 1990. Mr. Bashan is a director of OTI America, Inc., OTI Africa Ltd., e-Smart System Inc., SoftChip Technologies (3000) Ltd., Easy Park Ltd. and Easy Park Israel Ltd. and Z.H.R. Industrial Park Company Ltd. In 1997, Mr. Bashan was awarded the Leading Businessman Award in Management, Business and Economics by the Israeli Institute of Public Opinion. He is currently a member of the trustee committee of the Tel-Chai College and a member of the consulting committee for the Executive MBA program at Bar Ilan University. Mr. Bashan holds both a B.A. and an M.A. in economics and business management from the Hebrew University of Jerusalem.

Ronnie Gilboa co-founded us in 1990 and serves as our Vice President--Projects and as a director. He serves on the board of directors of OTI America, Inc., e-Smart System Inc., OTI Africa Ltd., Easy Park Ltd., Easy Park Israel Ltd. and Softchip Technologies (3000) Ltd. Prior to founding us, Mr. Gilboa was the manager of research and development at Electo-Galil, an Israeli manufacturer of radio frequency-based identification cards, from 1984 to 1990. Mr. Gilboa holds a B.Sc. in electrical engineering from The Technion (Israeli Institute of Technology).

Guy Shafran serves as our Chief Financial Officer and has served as a director of Easy Park Ltd. since June 2000 and as a director of Easy Park (Israel) Ltd. since March, 2002. Prior to joining us, Mr. Shafran was chief financial officer at the Israel Cold Storage and Supply Company Ltd., an Israeli public company engaged in the distribution of soft drinks and cold storage, from June 1996 to March 2000. From July 1995 to February 1996, Mr. Shafran was assistant to the chairman of the Baran Group Ltd., an Israeli engineering company. Mr. Shafran holds a B.A. in economics with a specialization in business administration from Ben Gurion University, Beer Sheba.

Moshe Aduk serves as our Vice President--Gasoline Management System having served in that position since July 1995. From 1990 to July 1995, he was employed by us as a research and development engineer. He served as a director from 1995 to July 1999. Prior to joining us, Mr. Aduk was a hardware and software development engineer at Electo-Galil, an Israeli manufacturer of radio frequency-based identification cards, from 1985 to 1990. From 1984 to 1985, he was employed as a technical support engineer at Motorola Israel. Mr. Aduk holds a B.Sc. in electrical engineering from The Technion (Israeli Institute of Technology).

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Nehemya Itay serves as our Vice President--Hardware Engineering, having served in that position since July 1995. From 1990 to July 1995, he was employed by us as a research and development engineer. He served as a director from 1991 to July 1999. Mr. Itay is a member of the Joint Task Committee of the International Standards Organisation on standards for contactless smart cards. Prior to joining us, Mr. Itay was a hardware development engineer at Electo-Galil, an Israeli manufacturer of radio frequency-based identification cards, from 1986 to 1990. From 1982 to 1985, he was an hardware electronic engineer at Elscint, an Israeli technology company. Mr. Itay holds a B.Sc. in electrical engineering from The Technion (Israeli Institute of Technology) and an M.A. in electronics from Drexel University, Philadelphia.

Ohad Bashan serves as our Head of Global Marketing and Strategy Development, having served in that position since June 2000 and as President, Chief Executive Officer and a director of OTI America, Inc., since August 1998. From 1996 to August 1998, he was our business development manager. Mr. Bashan holds a B.A. in business from the College of Business Management, Tel Aviv, with specializations in marketing and finance, and an M.B.A. from Pepperdine University, California.

Shulamith Shiffer serves as a director, having served in that position since May 2000. Ms. Shiffer is a Judge -- Vice President of the disciplinary court of the Israeli Bar Association in the district of Jerusalem and serves as Vice Chairman of the Israeli Bar Association tax committee. Ms. Shiffer has been a practicing lawyer and member of the Israel Bar Association since 1968 and has headed a private law office with offices in Jerusalem, Tel Aviv and Zichron Ya'akov, since that time. From 1970 to 1985, Ms. Shiffer was legal adviser to the district of Jerusalem and the Department of Customs and V.A.T. Ms. Shiffer holds an LL.B. and an LL.M., both from the Hebrew University of Jerusalem.

Felix Goedhart serves as a director, having served in that position since August 1999. He has served as chief executive officer of Equitrust AG, formerly Pre IPO AG of Hamburg, Germany since June 1999. Prior to this position he served as a member of the Management Board of Premiere Medien GmbH & Co. KG, the German Pay-TV station. From 1995 to 1996, he was head of digital projects at Kirch Group, Munich. From 1991 to 1995, he was a senior associate at Booz-Allen & Hamilton, management consultants. Mr. Goedhart holds a Lic.Dec.HSG from Hochschule St. Gallen, Switzerland, and an M.B.A. from the University of Chicago.

Raanan Ellran serves as a director, having served in that position since July 1999. He serves as a director and as the Chairman of the Finance Committee of Rafael Ltd, as a director and the Chairman of the Investments Committee of Dikla Mutual Funds Management Company (sister company to the First International Bank), F.I.B.I Holding Company Ltd., and as a director of AAI Ltd., an Israeli internet software designer. From 1993 to 1998, he was a director of First International Bank of Israel, Provident and Pension Funds. He has served as the General Manager of Assuta Medical Centers since March 1997. From 1995 to February 1997, he served as the General Manager of Ration Import Ltd. From 1994 to 1995, he was the General Manager of Ace Hardware (Israel) Ltd., Mr. Elran holds a B.A in economic and business administration and a M.A in finance from Bar llan University.

ELECTION OF DIRECTORS; APPOINTMENT OF OFFICERS

Our current board of directors consists of five directors. Under our articles of association, our board of directors may not consist at any time of more than seven members. A majority of these directors must be non-executive directors, who are directors that are neither office holders nor our employees. Directors are appointed, removed or replaced, by a majority vote of our shareholders present in person or by proxy at a general meeting of shareholders. Each group of shareholders holding in aggregate 20% or more of our outstanding share capital is entitled to submit a written list of candidates for appointment as directors at a general meeting. Shareholders may only vote for a list in its entirety unless shareholders present at the meeting holding at least 20% of our outstanding share capital require that the vote be for individual directors.

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On July 19, 1999, some of our shareholders, including Oded Bashan, Ronnie Gilboa, Moshe Aduk and Ohad Bashan, who hold in the aggregate approximately 15% of our outstanding share capital, entered into a voting agreement together with a number of our former directors and officers. Under this agreement, any party or parties to the agreement that hold individually or in the aggregate at least 7% of our outstanding share capital may call a meeting of the other parties. At that meeting, each party that holds at least 7% of our outstanding share capital may:

* designate one person to be placed on the list of proposed directors to be submitted to the shareholders; and

* propose candidates to act as external directors subject to the approval of a majority of the other parties. If this approval is not received, then the two candidates with the highest number of votes are placed on the list of proposed directors.

In lieu of a meeting, all of the parties to the agreement holding 7% or more of our outstanding share capital may determine the matters described above by written resolution. Once the list to be submitted to the shareholders has been determined, the parties to the voting agreement have undertaken to vote for the list, either in person or by proxy, at the shareholders meetings at which it is discussed. Currently Oded Bashan beneficially owns and is able to vote 6.05% of our outstanding share capital and Ronnie Gilboa beneficially owns 6.54%.

Once elected at a shareholders' meeting, our directors, except our external directors, hold office until the first general meeting of shareholders held at least twenty-four months after their election. Incumbent directors may be reelected at that meeting. Prior to December 31, 2004, however, our founders, Oded Bashan and Ronnie Gilboa, may not be replaced or removed without the affirmative vote of 75% of our shareholders entitled to vote and voting, in person or by proxy, at a general shareholders' meeting. Unless contrary to the law, a director may be elected for consecutive terms. Under the new Israeli Companies Law, which took effect on February 1, 2000, the chief executive officer of a public company may not serve as a chairman of the board of directors unless authorized by a general meeting of the shareholders and then only for a period of time that does not exceed three years. As a result, Oded Bashan, who has served as our President and Chief Executive Officer since 1990, will be required to relinquish one of these positions no later than February 1, 2003.

Our board of directors appoints our chief executive officer. Each of our executive officers serves at the discretion of the board of directors, subject to the terms of any employment agreement, and holds office until his or her successor is elected or until his or her earlier resignation or removal. Except for Ohad Bashan, our Head of Global Marketing and Strategy Development, and President and Chief Executive Officer of OTI America, Inc., who is the son of Oded Bashan, our co-founder and chairman of our board of directors, none of our directors or executive officers has any family relationship with any other director or executive officer.

EXTERNAL DIRECTORS

The new Israeli Companies Law, which took effect on February 1, 2000, requires Israeli companies with shares that have been offered to the public in or outside of Israel to appoint two external directors. No person may be appointed as an external director of a company if the person, or the person's relative, partner, employer or any entity under the person's control, has, or had within the two years preceding the person's appointment as an external director, any affiliation with the company or with any entity controlling, controlled by or under common control with the company. The term "affiliation" includes control, an employment relationship, a business or professional relationship maintained on a regular basis, or service as an office holder, excluding service as a director for a period of not more than three-months during which the company first offered its shares to the public. The term "office holder" is defined as a director, general manager, chief business manager, deputy general manager, vice general manager, chief business manager, executive vice president, vice president, other manager directly subordinate to the general manager

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or any other person assuming the responsibilities of any of the foregoing positions, without regard to such person's title. Each person listed in the table above is an office holder.

In addition, no person may serve as an external director if that person's other positions or business activities create, or may create, a conflict of interest with the person's service as an external director or may otherwise interfere with the person's ability to serve as an external director. If, at the time an external director is appointed, all current members of the board of directors are of the same gender, then that external director must be of the other gender. Regulations promulgated under the Companies Law provide that the requirement of Israeli residency does not apply to the external directors of companies whose shares are listed for trading outside of Israel.

External directors are elected by a majority vote at a shareholders' meeting at which either

* the majority of shares voted at the meeting, including at least one-third of the shares held by non-controlling shareholders voted at the meeting, vote in favor of the election of the external director; or

* the total number of shares held by non-controlling shareholders voted against the election of the external director does not exceed one percent of the aggregate voting rights in the company.

The initial term of an external director is three years and may be extended for one additional three year period. External directors may only be removed by the same percentage of shareholders as is required for their election, or by a court, and then only if the external directors cease to meet the statutory qualifications for their appointment or if they violate their duty of loyalty to the company. If an external directorship becomes vacant, our board of directors is required under the Companies Law to call a shareholders' meeting immediately to appoint a new external director.

A company may not appoint an external director as an office holder and may not employ or receive services from an external director, directly or indirectly, including through a corporation controlled by that person, for two years following the termination of his or her service as an external director of that company.

Each committee of our board of directors must include at least one external director and the audit committee must include all of the external directors. An external director is entitled to compensation as provided in regulations adopted under the Companies Law and is otherwise prohibited from receiving any other compensation, directly or indirectly, in connection with services provided as an external director.

In addition, our board of directors must include at least three independent directors within the meaning of the Nasdaq National Market listing requirements. Our directors, Shulamith Shiffer and Raanan Ellran, qualify both as external directors under the Companies Law and independent directors under the Nasdaq National Market listing requirements. Our director, Felix Goedhart, qualifies as an independent director under the Nasdaq National Market listing requirements.

ALTERNATE DIRECTORS

Under our articles of association, each of our directors, other than our external directors, may appoint, by written notice to us, any person to serve as an alternate director. Under the Companies Law, a current director cannot be appointed as an alternate director nor can a currently-serving alternate director be appointed as an alternate director. An alternate director has all the rights and duties of the director appointing him, unless the appointment of the alternate provides otherwise, and the right to remuneration. The alternate director may not act at any meeting at which the appointing director is present. Unless the time period or scope of the appointment is limited by the appointing director, the appointment is effective for all purposes, but expires upon the expiration of the appointing director's term. Currently, none of our directors has appointed any alternate directors.

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EXCULPATION, INDEMNIFICATION AND INSURANCE OF OFFICE HOLDERS

Under the Companies Law, an Israeli company may only exculpate an office holder in advance, in whole or in part, for breach of duty of care and only if a provision authorizing such exculpation is included in its articles of association. Our articles of association include such a provision. A company may not exculpate an office holder for breach of duty of loyalty. However, the company may approve an act performed in breach of the duty of loyalty of an office holder provided that the office holder acted in good faith, the act or its approval does not harm the company, and the office holder discloses the nature of his or her personal interest in the act and all material facts and documents a reasonable time before discussion of the approval.

A company may indemnify an office holder in respect of certain liabilities either in advance of an event or following an event provided a provision authorizing such indemnification is inserted in its articles of association. Advance indemnification of an office holder must be limited to foreseeable liabilities and reasonable amounts determined by the board of directors. A company may indemnify an office holder against the following liabilities incurred for acts performed as an office holder:

* a financial liability imposed on him in favor of another person pursuant to a judgment, settlement or arbitrator's award approved by court; and

* reasonable litigation expenses, including attorneys' fees, incurred by the office holder or imposed by a court in proceedings instituted against him by the company, on its behalf or by a third party, in connection with criminal proceedings in which the officer holder was acquitted or as a result of a conviction for a crime that does not require proof of criminal intent.

A company may insure an office holder against the following liabilities incurred for acts performed as an office holder:

* a breach of duty of loyalty to the company, to the extent that the office holder acted in good faith and had a reasonable basis to believe that the act would not prejudice the company;

* a breach of duty of care to the company or to a third party; and

* a financial liability imposed on the office holder in favor of a third party.

An Israeli company may not indemnify or insure an office holder against any of the following:

* a breach of duty of loyalty, except to the extent that the office holder acted in good faith and had a reasonable basis to believe that the act would not prejudice the company;

* a breach of duty of care committed intentionally or recklessly;

* an act or omission committed with intent to derive illegal personal benefit; or

* a fine levied against the office holder.

Under the Companies Law, indemnification and insurance of office holders must be approved by our audit committee and our board of directors and, in specified circumstances, by our shareholders.

Our articles of association allow us to indemnify and insure our office holders to the fullest extent permitted by the Companies Law. Our office holders are currently covered by a directors and officers' liability insurance policy with an aggregate claim limit of $20 million. Prior to the closing of this offering, we intend to raise the aggregate claims limit to $25 million. As of the date of this offering, no claims for directors and officers' liability insurance have been filed under this policy.

Our board of directors has resolved to indemnify and insure our office holders with respect to liabilities resulting from this offering to the extent that these liabilities are not covered by insurance. In the opinion of the U.S. Securities and Exchange Commission, however, indemnification of directors and office holders for liabilities arising under the Securities Act is against public policy and therefore unenforceable.

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COMPENSATION COMMITTEE

Our board of directors established our compensation committee in July 1999. The duties of the compensation committee are to review the terms of employment of our senior management, to review and recommend to our board of directors the issuance the allocation of options under our share option plans and to perform any other task delegated by our board of directors.

The current members of our compensation committee are Oded Bashan, Shulamith Shiffer and Raanan Ellran.

AUDIT COMMITTEE

Our board of directors established our audit committee in July 1999. The Companies Law requires public companies to appoint an audit committee consisting of at least three directors, including all the external directors. The responsibilities of the audit committee include identifying irregularities in the management of the company's business in consultation with the company's independent accountants and the internal auditor and suggesting appropriate responses. The audit committee's responsibilities also include approving related party transactions as required by law. Neither the chairman of the board of directors, a director employed by or otherwise providing services on a regular basis to the company, a controlling shareholder, nor any relative of a controlling shareholder may be a member of the audit committee. The audit committee may not approve an action or a transaction with a controlling shareholder, or with an office holder, unless at least two external directors are serving on the audit committee at the time of the approval, one of whom is present at the meeting at which the approval is granted. In addition, pursuant to the listing requirements of the Nasdaq National Market, we are required to maintain an audit committee including at least three independent directors.

The current members of our audit committee are Shulamith Shiffer, Raanan Ellran and Felix Goedhart.

INTERNAL AUDITOR

Under the Companies Law, the board of directors must appoint an internal auditor that is recommended by the audit committee. The role of the internal auditor is to examine, among other things, whether the company's actions comply with the law and orderly business procedure. Under the Companies Law, the internal auditor may not be an office holder or an interested party, as defined below, or a relative of an office holder or an interested party, and he or she may not be the company's independent accountant or the independent accountant's representative. The Companies Law defines an "interested party" as a holder of 5% or more of the issued shares or voting rights of a company, a person or entity who has the right to designate at least one director or the general manager of the company, and a person who serves as a director or general manager. In August 2000, our audit committee recommended and our board of directors appointed Brightman Almagor & Co., the Israeli practice of Deloitte & Touche LLP, as our internal auditors.

FIDUCIARY DUTIES; APPROVAL OF CERTAIN TRANSACTIONS

The Companies Law codifies the fiduciary duties that office holders owe to a company. An office holder's fiduciary duties consist of a duty of care and a duty of loyalty. The duty of care requires an office holder to act with the degree of care with which a reasonable office holder in the same position would act under the same circumstances. The duty of care includes using reasonable means to obtain information as to the advisability of a given action submitted for his or her approval or performed by virtue of his or her position, as well as all other information pertaining to such actions. The duty of loyalty requires an office holder to act in good faith and for the benefit of the company, and includes avoiding any conflict of interest between the office holder's other positions or personal affairs and the performance of his or her position in the company, avoiding any competition with the company, avoiding exploiting any business opportunity of the company in order to receive a personal benefit for himself or herself or others, and revealing to the company any information or documents

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relating to the company's affairs which come into the office holder's possession as a result of his or her position as an office holder.

The Companies Law further requires that an office holder disclose to the company any personal interest that he or she may have and all related material information known to him or her in connection with any existing or proposed transaction by the company. The disclosure must be made promptly and in no event later than the board of directors meeting at which the transaction is first discussed. In addition, if the transaction is an extraordinary transaction, as defined below, the office holder must also disclose any personal interest held by the office holder's spouse, siblings, parents, grandparents, descendants, spouse's descendants and the spouses of any of the foregoing and by any corporation in which the office holder is a 5% or greater shareholder, director or general manager or in which he or she has the right to appoint the general manager or at least one director. The Companies Law defines an "extraordinary transaction" as a transaction that is not in the ordinary course of business, that is not on market terms, or that is likely to have a material impact on a company's profitability, assets or liabilities. In the case of a transaction between the company and an office holder, or a third party in which an office holder has a personal interest, but that is not an extraordinary transaction and is not adverse to the company's interest, once the office holder complies with the above disclosure requirements only board approval is required unless the articles of association of the company provide otherwise. In the case of an extraordinary transaction between the company and an office holder, or a third party in which an office holder has a personal interest, in addition to any approval required by the articles of association, the transaction must be approved first by the audit committee, then by the board of directors and, in certain cases, by the shareholders. A director who has a personal interest in a matter that is considered at a meeting of the board of directors or the audit committee may in general not be present at this meeting or vote on this matter. If a majority of the directors have a personal interest in an extraordinary transaction, these directors are permitted to be present and vote on the transaction, but shareholder approval is also required.

Under the Companies Law, all arrangements as to compensation of office holders who are not directors require approval by the board of directors, and undertakings to indemnify or insure an office holder who is not a director require both board and audit committee approval. In general, arrangements regarding the compensation, indemnification and insurance of directors require audit committee and shareholder approval in addition to board approval.

The Companies Law applies the same disclosure requirements to a controlling party of a public company that it applies, as described above, to an office holder. For these purposes a "controlling party" is any person possessing the ability to direct the activities of the company, including a shareholder which holds 25% or more of the voting rights of the company if no other shareholder owns more than 50% of the voting rights in the company, but excluding a person whose power is derived solely from his or her position on the board of directors or from another position with the company. Two or more shareholders with a personal interest in the approval of the same transaction are deemed to be joint shareholders. Extraordinary transactions with a controlling party or in which a controlling party has a personal interest, and the engagement and terms of compensation of a controlling party as an office holder, require the approval of the audit committee, the board of directors and the shareholders. Shareholder approval must be by a majority of shares voted at the meeting, including at least one-third of the shares of the disinterested shareholders who are present, in person or by proxy, at the meeting, or, alternatively, the total shareholdings of the disinterested shareholders who vote against the transaction must not represent more than 1% of the aggregate voting rights in the company.

Under the Companies Law, a shareholder has a duty to refrain from abusing his or her power in the company and to act in good faith in exercising its rights and performing its obligations to the company and other shareholders, including, among other things, voting at a general meeting of shareholders on the following matters:

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* an amendment to the articles of association;

* an increase in the company's authorized share capital;

* a merger; and

* approval of a related-party transaction requiring shareholder approval.

In addition, any controlling shareholder, any shareholder who knows that its vote can determine the outcome of a shareholder vote and any shareholder who, under a company's articles of association, can appoint or prevent the appointment of an office holder, is under a duty to act with fairness towards the company. The Companies Law does not describe the substance of this duty.

For information concerning the direct and indirect personal interests of some of our office holders and principal shareholders in transactions with us, see "Related Party Transactions."

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

Other than Oded Bashan, who serves as a member of our compensation committee, none of the members of our compensation committee or audit committee is currently, or has ever been at any time since our formation, an officer or employee of our company. None of our executive officers serves as a member of the board of directors or compensation committee of any entity that has one or more executive officers serving on our compensation committee.

EXECUTIVE COMPENSATION

The aggregate compensation paid by us and our subsidiaries to our executive directors and executive officers listed in "Management" in the year ended December 31, 2001 was $635,000. This amount includes approximately $83,000 set aside or accrued to provide pension, severance, retirement or similar benefits or expenses, but does not include business travel, relocation, professional and business association dues and expenses reimbursed to officers, and other benefits commonly reimbursed or paid by companies in Israel.

Non-executive directors are reimbursed for their expenses for each board meeting attended and in addition receive compensation for their service on the board. Our executive directors do not receive compensation for their service on the board of directors or any committee of the board of directors. The aggregate amount paid by us and our subsidiaries to our non-executive directors in the year ended December 31, 2001 was $27,800.

See "Principal Shareholders" for information on beneficial ownership of our shares by our directors and executive officers. We have no outstanding loans to any of our directors or executive officers.

EMPLOYMENT AGREEMENTS

We maintain written employment and related agreements with all of our office holders. These agreements provide for monthly salaries and contributions by us to executive insurance and vocational studies funds. The employment agreements of certain of our office holders further provide that we may give the employee an annual bonus in accordance with targets to be determined by the compensation committee by December 31 of each calendar year in respect of the following year. In determining the amount of the bonus, the compensation committee must relate it to our revenues or profits, as applicable to the employee. If justifiable in light of our quarterly financial results, we may make advances on bonus payments pursuant to a resolution of our board of directors. All of our office holders' employment and related agreements contain provisions regarding noncompetition, confidentiality of information and assignment of inventions. The enforceability of covenants not to compete in Israel is unclear.

Agreement with Oded Bashan. The employment agreement of Oded Bashan, dated July 1, 1999, provides for a five-year term ending on June 30, 2004, which is to be extended automatically unless terminated as described below. Mr. Bashan may terminate his employment, and we may terminate his employment for reasonable and justifiable cause, in either case on six months' notice.

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In the event of termination, Mr. Bashan is entitled to receive severance pay equal to twice the statutory rate of one month's current salary multiplied by the number of years of employment. In the event we terminate his employment prior to June 30, 2004, unless the termination occurred as a result of circumstances depriving him of the right to severance pay at law or as a result of a breach of fiduciary duty or a material breach of confidentiality or noncompetition undertakings, we are required to continue paying Mr. Bashan a monthly salary, including benefits but excluding bonuses, until June 30, 2004, and in any event, for a period that shall not be less than six months following the notice period described above. In addition to the salary, contributions and bonus described above, Mr. Bashan was entitled under his contract of employment to an additional bonus of $15,000 for every one percent increase in our average share price quoted for the last two months of any year over the average share price quoted for the last two months of the preceding year. This arrangement was terminated in consideration for a one-time award to Mr. Bashan of an option to purchase 250,000 of our shares at an exercise price of euro 6.00 per share.

Agreement with Ronnie Gilboa. The employment agreement of Ronnie Gilboa, dated July 1, 1999, provides for a five-year term ending on June 30, 2004, which is to be extended automatically unless terminated as described below. Mr. Gilboa may terminate his employment, and we may terminate his employment for reasonable and justifiable cause, in either case on six months' notice. In the event of termination, Mr. Gilboa is entitled to receive severance pay equal to twice the statutory rate of one month's current salary multiplied by the number of years of employment. In the event we terminate his employment prior to June 30, 2002, unless the termination occurred as a result of circumstances depriving him of the right to severance pay at law or as a result of a breach of fiduciary duty or a material breach of confidentiality or noncompetition undertakings, we are required to continue paying Mr. Gilboa a monthly salary until June 30, 2002, and in any event, for a period that shall not be less than six months following the notice period described above.

Agreement with Guy Shafran. The employment agreement of Guy Shafran, dated June 4, 2000, provides for a five-year term ending on June 3, 2005, which is to be extended automatically unless terminated as described below. Mr. Shafran may terminate his employment on three months notice, and we may terminate his employment for reasonable or justifiable cause on three months notice.

Agreements with Moshe Aduk and Nehemya Itay. The employment agreements of Moshe Aduk and Nehemya Itay, each dated July 1, 1999, provide for a five-year term ending on June 30, 2004, which is to be extended automatically unless terminated as described below. These individuals may terminate their employment, and we may terminate their employment for reasonable and justifiable cause, in either case on six months' notice. In the event of termination, these individuals are entitled to receive severance pay equal to twice the statutory rate of one month's current salary multiplied by the number of years of employment. In the event we terminate the employment of either Mr. Aduk or Mr. Itay, unless the termination occurred as a result of circumstances depriving them of the right to severance pay at law or as a result of a breach of fiduciary duty or a material breach of his confidentiality or noncompetition undertakings, we are required to continue paying each of them a monthly salary for three months following the notice period described above.

Agreement with Ohad Bashan. The employment agreement of Ohad Bashan with OTI America, Inc., dated August 23, 1998, provides for a two-year term which has been extended until August 22, 2002. Mr. Bashan may terminate his employment on three months notice and we may terminate his employment only for cause. In addition to his monthly salary, Mr. Bashan is entitled to receive a graduated sales bonus of between 1% and 3% of net revenues exceeding $4.9 million in 2000 and $8.4 million in 2001. In consideration for his appointment as head of our global marketing and strategy development, Mr. Bashan is further entitled to receive for each 12-month period of his employment an option to purchase 10,000 of our ordinary shares at a price of $4.50 per share, which will vest at the termination of that 12-month period. He is entitled to an additional option to purchase a maximum of 50,000 of our ordinary shares, at a price of $4.50 per share, in an amount equal to 0.5% of any funds invested in OTI America, Inc. by third parties as a result of his efforts.

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SHARE OPTION PLANS

The following is a description of the share option plans that we and our subsidiaries maintain. In addition to the discussion below, please see Note 13B to our consolidated financial statements included elsewhere in this prospectus.

2001 Share Option Plan

We established our 2001 Share Option Plan in February 2001. The plan provides for the grant of options to our employees, directors and consultants, and those of our subsidiaries and affiliates. Upon establishment of the plan, we reserved 750,000 ordinary shares for issuance. On February 26, 2002, the Company's Board of Directors adopted certain resolutions with regard to the 2001 Share Option Plan that increased the number of available options under the plan by 1,500,000 so that the aggregate number of options available under the plan is now 2,250,000. Under this plan as of the date of this prospectus, we have granted 6,353,640 options, no shares had been exercised and 6,298,229 are outstanding of which 3,718,621 were vested and exercisable. Of the options that are outstanding 3,359,000 are held by our directors and officers listed under "Management." The weighted average price of these share options is $1.14. Prior to the effectiveness of this Registration Statement, we intend to increase the number of available shares under the Plan by a sufficient number to cover all options we granted. Subject to the listing of the ordinary shares on Nasdaq, the Company's Board of Directors has approved the grant of options to management for an aggregate of 240,000 ordinary shares after giving effect to the reverse stock split and allocated sufficient shares to cover such grants and the Company has obtained the approval of the shareholders for such grants.

On February 26, 2002, our Board resolved to approve a plan by which, inter alia, the Company may pay, during a 12 month period, the salaries of certain of its employees who agree to participate in the plan, by way of grant of options. All such options are to be held by a trustee, for the benefit of each such employee. The trustee shall exercise such options and sell them, in accordance with instructions given to it by the relevant employee. The proceeds mentioned above will be released on a monthly basis by the trustee to the relevant employee (net of deductions required by law) to the maximum extent necessary for payment of such monthly salary to such employee. The Company undertook to pay from its own sources any and all differences between the relevant monthly salary and such proceeds. The arrangement is subject to the Company, the employees and the trustee's signature on a detailed agreement and necessary ancillary documents.

Our 2001 Share Option Plan is administered by our compensation committee which makes recommendations to our board of directors regarding the grantees of options and the terms of the grant, including exercise prices, grant dates, vesting schedules, acceleration of vesting and forfeiture. Under the Companies Law the allocation of options is solely within the authority of our board of directors. Under the plan, the terms and conditions of options are set forth in individual option agreements with the grantee.

Under the plan, if the employment of a grantee is terminated for cause, all of his or her options expire immediately. A grantee whose employment is terminated without cause may exercise his or her vested options within three months of termination. If the termination is due to the death or disability of the grantee, the options may be exercised within 18 months of the date of termination in the case of death and 12 months in the case of disability.

Our 2001 Share Option Plan is subject to two different provisions of the Israeli Income Tax Ordinance. Generally, we allow our employees to choose under which tax provisions they receive their options: the provisions of Section 102 or the provisions of Section 3(i). Under Section 102 of the Israeli Income Tax Ordinance and the rules promulgated thereunder, the options or the ordinary shares issued upon exercise of an option must be deposited with a trustee for at least two years. The tax on the benefit accruing to the employee from the grant and exercise of options, as well as from the issuance of ordinary shares pursuant to exercise of these options, is deferred until the transfer of the options or ordinary shares by the trustee to the employee or upon sale of those options or

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ordinary shares. Under Section 3(i) of the Israeli Income Tax Ordinance and the rules promulgated thereunder, the tax on the benefit arising to the grantee upon the exercise of options and the issuance of ordinary shares pursuant to exercise of these options is generally due upon the time of exercise of the options.

1995 Share Option Plan

We established our 1995 Share Option Plan in December 1995. The plan provides for the grant of options to our employees. Our 1995 Share Option Plan has been superseded by our 2001 Share Option Plan and we have ceased issuing options under our 1995 Share Option Plan. As of the date of this prospectus, we have reserved 1,000,000 ordinary shares to cover issuance of options under the 1995 Plan. Under this plan, as of March 31, 2002, options to purchase 474,069 shares had been exercised and 761,234 were outstanding of which 484,730 were vested and exercisable. Of the options that are outstanding, 320,000 are held by our directors and officers listed under "Management." The weighted average exercise price of these share options is $6.49. Prior to the effectiveness of this Registration Statement, we intend to increase the number of available shares under the plan by a sufficient number to cover all options we have granted.

Generally, options issued under the plan vest over a period of three to five years in equal annual installments commencing immediately following the grant date. Under the plan, if the employment of a grantee is terminated for cause, all of his or her options expire immediately. Generally, a grantee whose employment is terminated without cause may exercise his or her vested options. If the termination is due to the death of the grantee, the options may be exercised within twelve months of the date of termination.

Our 1995 Share Option Plan is subject to the same provisions of the Israeli Income Tax Ordinance as our 2001 Share Option Plan.

2001 Employee Share Purchase Plan

We approved the establishment of an employee share purchase plan. No shares have been issued under the plan. Under the plan, we have reserved 675,000 ordinary shares for purchase by our employees and those of our subsidiaries who have been employed for at least six months. The purchase price of our ordinary shares will be 85% of their trading price on the date of purchase.

OTI America Stock Option Plan

The OTI America Stock Option Plan was established in April 2000. The plan is administered by OTI America's board of directors, which may designate grantees of options and determine the terms of the award, including stock appreciation rights, restricted stock terms, exercise prices, grant dates, vesting schedules, acceleration of vesting schedules and forfeiture of options. The board of directors may also determine whether options are incentive stock options within the meaning of Section 422 of the Internal Revenue Code of 1986 or stock options that are not intended to qualify as incentive stock options, or non-qualified stock options. Under the plan a total of 1,500 of OTI America's shares of common stock, equivalent to 15% of OTI America's outstanding share capital, may be issued to officers and key employees of OTI America. Of these shares, there are currently outstanding options to purchase 309 shares of OTI America's common stock of which none have vested. Of these options, 230 are incentive stock options and 79 are non-qualified stock options. None of the options that are outstanding are held by our directors and officers listed under "Management." The weighted average exercise price of these stock options is $20.00.

Generally, options issued under the plan vest over a four-year period in equal annual installments commencing one year after the grant date. However, all incentive stock options and non-qualified stock options become immediately exercisable upon the occurrence of a change of control of OTI America. A grantee whose employment has been terminated may exercise his or her vested options within 90 days of termination. If such termination is due to death or disability of the

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grantee, the options may be exercised within twelve months of termination. Incentive stock options may not be exercised if more than ten years have elapsed since the grant date.

Under the plan, upon completion of this offering, the incentive stock options granted under the plan automatically convert to incentive stock options to purchase our ordinary shares. Non-qualified stock option holders may elect, within 90 days of the closing of this offering, to modify their options to provide that the holder may acquire our ordinary shares upon exercise of the option. The conversion ratio for both incentive options and non-qualified is one OTI America share of common stock to 200 of our ordinary shares. In the event of conversion, the exercise price is $15.50 for each of our ordinary shares.

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RELATED PARTY TRANSACTIONS

Our policy is to enter into transactions with related parties on terms that are on the whole no less favorable than those that would be available from unaffiliated parties. Based on our experience in the business sectors in which we operate and the terms of our transactions with unaffiliated third parties, we believe that all of the transactions described below met this policy standard at the time they occurred.

CHANGES TO CAPITAL STRUCTURE

Prior to the initial public offering of our ordinary shares on the Neuer Markt of the Frankfurt Stock Exchange, there were outstanding seven management shares, each of which entitled the holder to appoint one director to our board of directors. Two of these management shares were owned by Oded Bashan, a director and chairman of our board of directors, two by Ronnie Gilboa, our co- founder and a director, one by Astra Technological Investments Ltd. and two by two other shareholders. In June 1999, in consideration for the surrender of these shares, Oded Bashan and Ronnie Gilboa each received 80,000 ordinary shares valued at approximately $240,000 and Astra Technological Investments Ltd. and the two other shareholders each received 20,000 ordinary shares valued at approximately $120,000.

AGREEMENT WITH HOLYTECH LTD.

In January 1996, we entered into an agreement with HolyTech Ltd., a company owned by Varda Bashan, Ora Gilboa and certain other of our shareholders, which formalized an arrangement that had existed since 1992. Varda Bashan is the spouse of Oded Bashan, our co-founder and chairman of our board of directors, and Ora Gilboa is the spouse of Ronnie Gilboa, our co-founder and a director. Under the agreement, HolyTech provides us with management and engineering services as needed. Mrs. Bashan provides administration services, Mrs. Gilboa provides sales operation services and a number of other shareholders of Holytech, who are also our employees, provide engineering and warehouse services. HolyTech has no activities other than the provision of these services to us. The cost of these services is intended to equal the cost of these services if performed by unrelated parties. The aggregate consideration for the services that HolyTech provided to us was $95,026 in 1997, $141,385 in 1998, $141,723 in 1999, $191,714 in 2000, $157,401 in 2001 and $32,021 for the three months ended March 31, 2002. On August 25, 2000, our audit committee reviewed and reapproved the terms of this agreement.

AGREEMENTS WITH DIRECTORS AND OFFICERS

We have entered into employment agreements with all of our officers. In addition, we have granted options to purchase our ordinary shares to our officers and directors.

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CERTAIN TRANSACTIONS

ACQUISITION OF CITY SMART

On December 29, 1999, we entered into an agreement to acquire all of the shares of City Smart Ltd. in exchange for 66,860 of our ordinary shares. The closing price of our ordinary shares on this date was euro 6.85 per share (equivalent to $6.88 per share). Wong Ching Shan and City Smart (Australia) PTY Ltd. owned all of the shares of City Smart. The acquisition was completed on December 30, 1999. Under the acquisition agreement, Wong Ching Shan and City Smart (Australia) PTY Ltd. agreed not to develop, promote or sell, competing or similar products to our products or City Smart's products for a period of ten years from the date of the agreement without our and City Smart's prior approval. Wong Ching Shan and City Smart (Australia) PTY Ltd. have undertaken to indemnify us in respect of losses that we incur as a result of undisclosed liabilities associated with City Smart.

ACQUISITION OF SOFTCHIP

On January 28, 2000, we acquired from Michael and Yael Cohen all of the shares of SoftChip Israel Ltd. and SoftChip Technologies (3000) Ltd., referred to here as the Softchip companies, in exchange for 121,184 of our ordinary shares. The closing price of our ordinary shares on this date was euro 10.33 per share (equivalent to $10.09 per share). It was agreed that Michael Cohen would continue as chief executive officer of SoftChip Technologies (3000) Ltd. pursuant to an employment agreement with a six year term. Michael Cohen's employment agreement is terminable for cause upon three months prior notice. We also granted Michael Cohen options to purchase 100,000 of our ordinary shares at an exercise price of $3.00 per share. These options vest in five equal instalments commencing on February 1, 2001.

Under the share purchase agreement, Michael and Yael Cohen agreed not to develop, promote or sell competing or similar products to our products or the SoftChip companies' products for so long as Michael Cohen is a member of the board of directors of, or employed by, the SoftChip companies, and for a period of two years thereafter, without our or the SoftChip companies' prior approval.

ESTABLISHMENT OF JOINT VENTURE WITH CHEUNG KONG INFRASTRUCTURE

On February 2, 2000, we entered into a shareholders agreement with Ocean Wonder Limited, an indirect wholly-owned subsidiary of Cheung Kong Infrastructure Ltd., or CKI, to establish e-Smart System Inc., a joint venture in Hong Kong owned 50% by us and 50% by CKI. In exchange for its interest in the venture, CKI contributed $3.6 million in cash. We contributed $3.1 million in cash and undertook to contribute an additional $500,000 on February 2, 2001. In January 2001, e-Smart exercised an option that we had granted to it to acquire the assets of our subsidiary, City Smart Ltd., in lieu of the additional $500,000 we had undertaken to contribute to e-Smart. We have agreed to indemnify e-Smart and CKI against any losses they incur in connection with City Smart as a result of any event occurring prior to February 2, 2000 or arising out of any City Smart customer contract entered into prior to the exercise of the option, provided we are notified of the claim prior to February 2, 2002.

Under the shareholders agreement, the board of directors of e-Smart has six members, three of whom are appointed by us and three by CKI. Each party will appoint one less director for each 20% of the company's share capital that it transfers to an unaffiliated third party. The chairman of the board of directors is nominated by CKI and the deputy chairman by us.

* For so long as CKI retains at least a 50% interest in e-Smart, the chairman of the board has a tie-breaking vote with respect to approval or alteration of the annual business plan, any borrowings, giving of guarantees or indemnities or creation of encumbrances over e-Smart assets or property, and taking any actions that deviate from the annual business plan or that is or may be detrimental to the interests of CKI.

* For so long as we retain at least a 50% interest in e-Smart, the deputy chairman has a right of veto with respect to use by e-Smart of any smart card technology other than our technology or

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technology similar to ours, provided that we can timely (1) provide such other smart card technology to e-Smart, or (2) obtain such other smart card technology for e-Smart at direct cost price plus a mark-up of between 7.5% plus a $0.10 per product handling cost, and 9.5%.

Subject to e-Smart's cash flow or unless otherwise decided by its board of directors, a minimum of 50% of e-Smart's net profits after taxes are to be distributed to its shareholders each year. The following payments are to be paid prior to any distribution of profits:

* In the event that e-Smart's annual gross profits exceed $750,000, CKI is entitled to receive a yearly management fee equal to 20% of e-Smart's gross annual profit until it has received an aggregate amount equal to $5,050,000.

* In consideration for granting distribution and other rights with respect to our products, we received $1,550,000 at the end of the first and second quarters of 2000 and are entitled to receive $170,000 at the end of 2001 and 2002, and $160,000 at the end of 2003.

In order to fund the operations of e-Smart, CKI has undertaken to provide, or procure from a third party, a $4.0 million line of credit. We have agreed to guarantee up to $2.0 million of any borrowings under this line of credit if requested to do so.

ACQUISITION OF THE INTERCARD GROUP

On June 15, 2000, we acquired 51% of the issued share capital of InterCard GmbH Kartensysteme and InterCard GmbH Systemelectronic, referred to here as the InterCard group, with an option to acquire the remaining 49%. We paid DM 5 million in consideration for these shares in five equal monthly installments of our ordinary shares valued at DM 1 million each at the time of transfer followed by a sixth installment such that the total number of shares transferred in each installment multiplied by the average closing price of our shares on the Neuer Markt of the Frankfurt Stock Exchange for the twenty days immediately following each installment, equals DM 5 million. Pursuant to this transaction, in June 2000, we issued an aggregate of 393,171 ordinary shares which were held in escrow for the purpose of these transfers. In consideration for the transfer of 51% of the issued share capital of the InterCard group, as of December 15, 2000, we had transferred an aggregate of 297,422 ordinary shares to the sellers.

In January 2001, we completed our acquisition of the InterCard group following the exercise of an option by the shareholders of the InterCard group requiring us to purchase all of their remaining shares in consideration for DM 7 million payable in seven monthly installments of our ordinary shares valued at DM 1 million each at the time of transfer. The number of shares transferred in these installments will be determined by the average closing price of our shares on the Neuer Markt of the Frankfurt Stock Exchange on the three trading days prior to the date of the particular installment. The number of shares transferred in the seventh installment were determined by subtracting from DM 7 million the aggregate value of the previous six installments based on the average closing price on the twenty days immediately following the date of the particular installment. The total number of shares transferred was subject to adjustment by a eighth installment such that the total number of shares transferred in each installment multiplied by the average closing price for the twenty days immediately following each installment, equals DM 7 million. Pursuant to this transaction, in January 2001, we issued 785,000 ordinary shares which were held in escrow for the purpose of these transfers. To date, all such shares have been released from escrow to the sellers. Instead of issuing additional shares, we restructured our payment obligations to the sellers. A payment of Euro 216,105 (approximately $198,000) was paid on October 4, 2001. The balance of Euro 648,360 (approximately $595,000) was granted to us as a loan from the sellers and is payable in 36 monthly installments of Euro 19,724 which includes interest on the outstanding principal at the rate of 6% per annum. As security for payment of the loan we have pledged 18% of our shares in the InterCard group to the sellers. These shares will be gradually released as the loan is paid. The pledge will terminate upon complete payment of the loan.

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BACKGROUND INFORMATION

ESTABLISHMENT

We were incorporated under the laws of the State of Israel on February 15, 1990, under the name of De-Bug Innovations Ltd., with unlimited duration. We are registered with the Israeli registrar of companies in Jerusalem. Our founders were Oded Bashan and Ronnie Gilboa and our registration number is 52-004286-2. Our name was changed to On Track Innovations on July 8, 1991. Our objectives under our memorandum of association are to engage in any activity related to innovation and inventions in the fields of science and technology.

HISTORY OF SHARE CAPITAL
Authorized share capital

The following table sets out changes in our issued share capital occurring during the last three years:

     DATE                        NATURE OF ACTION                  STATE OF AUTHORIZED SHARE CAPITAL
     ----                        ----------------                  ---------------------------------
June 29, 1999          Conversion of management                 NIS 250,000 divided into 25,000,000
                       shares; Increase in share capital        ordinary shares of nominal value NIS
                                                                0.01.
March 11, 2001         Increase in share capital                NIS 500,000 divided into 50,000,000
                                                                ordinary shares of nominal value NIS
                                                                0.01.
June 27, 2002*         Consolidation of share capital           NIS 500,000 divided into 5,000,000
                                                                ordinary shares of nominal value NIS
                                                                0.1.

*Resolutions adopted to set June 27, 2002 as prospective date of consolidation.

Issued Share Capital

The following table sets out changes in our issued share capital occurring during the last three years:

                                                                                             TOTAL
                                                                                            ORDINARY
                                                               TOTAL      ALLOTMENT OF       SHARES
                                                             INVESTMENT     ORDINARY         AFTER
       DATE               DESCRIPTION OF TRANSACTION           AMOUNT        SHARES      TRANSACTION(1)
       ----               --------------------------         ----------   ------------   --------------
June 24, 1999       Exercise of option by Hapoalim            1,322,250      205,000       10,847,267
                    Nechasim (Menayot) Ltd.
June 29, 1999       Conversion of management shares and         Nominal      220,000       11,067,267
                    additional allotment to previous              value
                    holders of management shares.
June 29, 1999       Issuance to pre-IPO AG.                   1,075,000      128,435       11,195,702
August 12, 1999     Initial public offering on the Neuer     27,200,000    3,200,000       14,395,702
                    Markt of the Frankfurt Stock Exchange.
September 1, 1999   Issuance to net.IPO AG upon a               250,000       63,558       14,459,260
                    conversion of a convertible loan.
September 5, 1999   Issuance to pre-IPO AG upon exercise        Nominal       43,565       14,502,825
                    of option.                                    value
September 8, 1999   Issuance to our former representative       Nominal       24,000       14,526,825
                    in Europe pursuant to the exercise of         value
                    options granted to him by us.

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                                                                                             TOTAL
                                                                                            ORDINARY
                                                               TOTAL      ALLOTMENT OF       SHARES
                                                             INVESTMENT     ORDINARY         AFTER
       DATE               DESCRIPTION OF TRANSACTION           AMOUNT        SHARES      TRANSACTION(1)
       ----               --------------------------         ----------   ------------   --------------
December 29, 1999   Issuance to Wong Ching Shan and City           --(2)      66,860       14,593,685
                    Smart (Australia) PTY Ltd. in
                    consideration for the transfer to us
                    of the entire issued and outstanding
                    capital of City Smart Ltd.
January 27, 2000    Allocation to Michel Cohen and Yael            --(3)     121,184       14,714,869
                    Cohen in consideration for the
                    transfer to us of the entire issued
                    and outstanding capital of Softchip
                    Israel Ltd. and Softchip
                    (Technologies) 3000 Ltd.
March 7, 2000       Issuance of shares for options.             Nominal      176,000       14,890,869
                                                                  value
June 1, 2000        Allocation to a trustee in connection    51% of the      393,171       15,284,040
                    with our acquisition of 51% of the           issued
                    issued share capital of the InterCard         share
                    group and with the put and call          capital of
                    options with respect to the group               the
                    remaining 49% of the issued share         InterCard
                    capital of the InterCard group.               group
January 3, 2001     Allocation to a trustee in connection    49% of the      785,000       16,069,040
                    with our exercise of put option with         issued
                    respect to the remaining 49% of the           share
                    issued share capital of the InterCard    capital of
                    group.                                          the
                                                              InterCard
                                                                  group
April 3, 2002       Issuance of shares for options              Nominal    2,250,000       18,319,040
                                                                  value
June   , 2002       Issuance of bonus shares                          0                            (4)


(1) The number of ordinary shares outstanding after transactions includes all ordinary shares issued by us, including shares issued to trustees pending exercise of employee share options or pending transfer to third parties pursuant to acquisitions that we have made. In the financial statements included elsewhere in this prospectus, shares issued to such a trustee are not included in the statements of shareholder's equity until the shares are transferred to their ultimate beneficiary.

(2) On the date of transfer, the total value of our ordinary shares transferred to the shareholders of City Smart Ltd. was $459,997.

(3) On the date of transfer, the total value of our ordinary shares transferred to the shareholders of SoftChip Technologies (3000) Ltd. and SoftChip Israel Ltd. was $1,222,747.

(4) After consolidation of share capital.

ISSUANCE OF SHARES

We authorized the issuance to our existing shareholders one ordinary share for every two ordinary shares they hold, as bonus shares, see "Issuance of Bonus Shares." We currently have 2,747,856 ordinary shares issued and outstanding on a fully diluted basis (after giving effect to the approved reverse stock split and the issuance of bonus shares), and following the issuance of the shares by us as contemplated by this prospectus, we will have 3,147,856 ordinary shares issued and outstanding. The shares to be issued in this offering will be approved for issuance pursuant to a resolution of our board of directors.

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PRINCIPAL SHAREHOLDERS

The following table provides summary information regarding the beneficial ownership by the following persons of our outstanding ordinary shares as of June , 2002 and as adjusted to reflect the sale of the ordinary shares in this offering, the issuance of bonus shares and reverse stock split:

* each person or entity known to beneficially own more than 5% of our ordinary shares;

* each of our directors individually;

* each of our executive officers individually; and

* all of our executive officers and directors as a group.

Beneficial ownership of shares is determined under the rules of the Securities and Exchange Commission and generally includes any shares over which a person exercises sole or shared voting or investment power. To our knowledge and except as indicated by footnote, each person identified in the table below possesses sole voting and investment power with respect to all ordinary shares held by them. The table provides post-offering summary information assuming both full and no exercise of the underwriters' over-allotment option.

The table also includes the number of shares underlying options that are exercisable within 60 days of the date of this offering. Ordinary shares subject to these options are deemed to be outstanding for the purpose of computing the ownership percentage of the person holding these options, but are not deemed to be outstanding for the purpose of computing the ownership percentage of any other person. The table reflects 2,747,856 ordinary shares outstanding as of June , 2002, after giving effect to the reverse stock split and the issuance of the bonus shares. Unless otherwise indicated below, the address of each director, executive officer or listed shareholder is care of On Track Innovations Ltd., Z.H.R. Industrial Zone, P.O. Box 32, Rosh Pina, Israel.

                                                            SHARES BENEFICIALLY      SHARES BENEFICIALLY
                                                                   OWNED                    OWNED
                                                           BEFORE THIS OFFERING*    AFTER THIS OFFERING**
                                                           ----------------------   ---------------------
                NAME OF BENEFICIAL OWNER                     NUMBER      PERCENT     NUMBER      PERCENT
                ------------------------                   ----------   ---------   ---------   ---------
Oded Bashan (1)..........................................  2,743,680      13.64      411,552     13.64
Ronnie Gilboa (2)........................................  1,320,600       7.10      198,090      7.10
Guy Shafran (3)..........................................    447,200       2.38       67,080      2.38
Moshe Aduk (4)...........................................    518,480       2.79       77,772      2.79
Nehemya Itay (5).........................................    814,955       4.38      122,243      4.38
Ohad Bashan (6)..........................................    612,208       3.27       91,831      3.27
Shulamith Shiffer (7)....................................     16,000        ***        2,400       ***
Felix Goedhart (8).......................................    116,000        ***       17,400       ***
Raanan Ellran (9)........................................     16,000        ***        2,400       ***
All executive officers and directors as a group..........  6,605,123       31.2      990,768      31.2


* The numbers set forth in this chart and in the accompanying footnotes are without giving effect to the reverse stock split and the issuance of bonus shares.

** After giving effect to the reverse stock split and the issuance of the bonus shares.

*** Less than 1%

(1) Includes 230,000 ordinary shares held by Oded Bashan Shares Ltd., 230,000 ordinary shares held by Oded Bashan Securities Ltd. and 240,000 ordinary shares held by Oded Bashan Assets Ltd., all of which are wholly-owned by Mr. Bashan. Also includes 40,000 ordinary shares held by Oded Bashan Holdings Ltd., which is wholly-owned by Mr. Bashan's wife. Mr. Bashan disclaims beneficial ownership of the shares held by Oded Bashan Holdings Ltd. The remaining 213,680 ordinary shares are held directly by Mr. Bashan. Also includes options to purchase 1,750,000 ordinary shares and options held by Mr. Bashan's wife to purchase 40,000 ordinary shares. Mr. Bashan disclaims beneficial ownership of the options held by his wife.

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(2) Includes 250,000 ordinary shares held by Ronnie Gilboa Securities Ltd., 200,000 ordinary shares held by Ronnie Gilboa Shares Ltd. and 250,000 ordinary shares held by Ronnie Gilboa Assets Ltd., all of which are wholly-owned by Mr. Gilboa. The remaining 330,600 ordinary shares are held directly by Mr. Gilboa. Also includes options to purchase 250,000 ordinary shares and options held by Mr. Gilboa's wife to purchase 40,000 ordinary shares. Mr. Gilboa disclaims beneficial ownership of the options held by his wife.

(3) Consists of options held by Mr. Shafran to purchase 447,200 ordinary shares.

(4) Includes 100,000 ordinary shares held by Moshe Aduk Assets Ltd., which is wholly-owned by Mr. Aduk, and 142,480 ordinary shares and options to purchase 276,000 ordinary shares held directly by Mr. Aduk.

(5) Consists of 200,000 ordinary shares held by Likuy Meorot Ltd., 150,000 ordinary shares held by Josphid Ltd., 150,000 ordinary shares held by Likuy Chama Ltd., and 2,555 ordinary shares held by Toussia-Cohen Company for Trust Holding Ltd. These companies are owned by Adv. Toussia-Cohen in trust for Mr. Itay. An additional 40,000 ordinary shares are held by j.o.g.o.f Ltd., which is wholly owned by Mr. Itay and options to purchase 272,400 ordinary shares are held directly by Mr. Itay.

(6) Consists of 182,208 ordinary shares and options to purchase 430,000 ordinary shares. Mr. Bashan's address is c/o OTI America, Inc., 1601 South De Anza Blvd., Suite 201, Cupertino, California.

(7) Consists of options held by Ms. Shiffer to purchase 16,000 ordinary shares.

(8) Mr. Goedhart holds options to purchase 116,000 ordinary shares. Mr.
Goedhart's address is c/o pre-IPO AG, Am Sandtorkai 75, Hamburg 20457.

(9) Consists of options held by Mr. Ellran to purchase 16,000 ordinary shares.

SELLING SHAREHOLDERS

We understand that the selling shareholders (or the registered holders) named below may elect to sell the ordinary shares issued to them in the issuance of bonus shares or otherwise issued to them in private placements of our securities once the listing on Nasdaq is completed. The table identifies all shareholders who are either directors, officers, consultants or, to our knowledge, holders of 10% or more of our shares. The information provided in the table below with respect to each selling shareholder has been obtained from that selling shareholder. The numbers set forth below do not include options held by the selling shareholders. Because the selling shareholders may sell all, some or no portion of the ordinary shares beneficially owed by them, we cannot estimate either the number or percentage of ordinary shares that will be beneficially owned by the selling shareholders following this offering. We believe that the selling shareholders have sole voting and investment powers over their ordinary shares. We will not receive any proceeds from the sale of the ordinary shares by the selling shareholders.

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                                                                            AMOUNT TO BE
                                                                              OFFERED             AMOUNT
                                                         TOTAL AMOUNT     FOR THE SELLING      BENEFICIALLY
                             RELATIONSHIP WITH           BENEFICIALLY      SHAREHOLDERS'       OWNED AFTER
        NAME          THE COMPANY WITHIN PAST 3 YEARS       OWNED*            ACCOUNT          OFFERING(1)
        ----          -------------------------------    ------------     ---------------      ------------
Oded Bashan.........  President, CEO, Chairman              143,052             47,684
Ronnie Gilboa.......  Vice-President, Director              154,590             51,530
Moshe Aduk..........  Vice-President                         36,372             12,124
Nehemya Itay........  Vice-President                         81,383             27,128
Ohad Bashan.........  Manager of Global Marketing CEO        27,331              9,110
                        OTI America
Yossef
Tussya-Cohen........                                         49,404             16,468
Michael Cohen.......                                            150                 50
Astra Technological
  Investments
  Ltd...............                                        108,982             36,327
Dov Shure...........                                         28,155              9,385
Eddy Wuhl...........                                            593                198
Guri Jackobs........                                         70,674             23,558
Manfred Weise.......                                            750                250
Ofer Tziperman......                                          2,968                989
Broadband Capital
  Management LLC....  Financial Adviser                      50,000(2)        50,000(2)
Rockwood, Inc.......  Financial Adviser                      56,000(3)        56,000(3)
Dionysos Investments
  Ltd...............  Consultant                              8,625              8,625
Z.A.G/S&W LLP.......  Counsel                                 5,278              5,278


* After giving effect to the reverse stock split and the issuance of bonus shares.

(1) Because the selling shareholders may sell all, some or no portion of the ordinary shares beneficially owned by them, we cannot estimate either the number or percentage of ordinary shares that will be beneficially owned by the selling shareholders following this offering.

(2) Shares underlying warrants.

(3) Includes 50,000 shares underlying warrants.

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DESCRIPTION OF ORDINARY SHARES

Prior to the effectiveness of this Registration Statement, our authorized share capital shall consist of 5,000,000 ordinary shares, nominal value of NIS 0.1 per share, of which shall be issued and outstanding. Following the completion of this offering, we will have ordinary shares issued and outstanding.

The ownership or voting of ordinary shares by non-residents of Israel is not restricted in any way by our articles of association or the laws of the State of Israel, except that nationals of countries which are in a state of war with Israel might not be recognized as owners of ordinary shares.

DIVIDEND AND LIQUIDATION RIGHTS

We may declare a dividend to be paid to the holders of ordinary shares. Dividends may only be paid out of our profits and other surplus funds, as defined in the Companies Law, as of the end of the most recent fiscal year or as accrued over a period of two years, whichever is higher, provided that there is no reasonable concern that payment of a dividend will prevent us from satisfying our existing and foreseeable obligations as they become due. In the event of our liquidation, after satisfaction of liabilities to creditors, our assets will be distributed to the holders of ordinary shares in proportion to the nominal value of their holdings. This right may be affected by the grant of preferential dividend or distribution rights to the holders of a class of shares with preferential rights that may be authorized in the future by our shareholders. Under the Companies Law, the declaration of a dividend does not require the approval of the shareholders of a company unless the company's articles of association require otherwise. Our articles of association provide that our board of directors may declare and pay dividends without the approval of our shareholders.

PREEMPTIVE RIGHTS

Under Israeli law, shareholders in public companies such as us do not have preemptive rights. This means that our shareholders do not have the legal right to purchase shares in a new issue before they are offered to third parties. As a result, our shareholders could experience dilution of their ownership interest if we decide to raise additional funds by issuing more shares and these shares are purchased by third parties.

VOTING, SHAREHOLDERS' MEETINGS AND RESOLUTIONS

Holders of our ordinary shares have, for each ordinary share held, one vote on all matters submitted to a vote of shareholders. These voting rights may be affected by the grant of any special voting rights to the holders of a class of shares with preferential rights that may be authorized in the future by our shareholders. The quorum required for a general meeting of shareholders consists of at least two shareholders present, in person or by proxy, who hold or represent together at least 25% of our issued and outstanding ordinary shares. Prior to the closing of this offering, we intend to amend our articles of association to increase this number to 33 1/3% of our issued and outstanding shares. A meeting adjourned for lack of a quorum is generally adjourned to the same day in the following week at the same time and place. If a quorum is not present within half an hour following the time appointed for the reconvened meeting, the shareholders then present, in person or by proxy, shall constitute a quorum.

Under the Companies Law, unless otherwise provided in the articles of association or by applicable law, shareholders' resolutions require the approval of holders of a simple majority of our ordinary shares voting, in person or by proxy on the matter. A shareholders' resolution to amend our articles requires the approval of a simple majority of our shareholders present in person or by proxy.

Under the Companies Law, a shareholder has certain duties of good faith and fairness towards the company. See "Management--Fiduciary Duties; Approval of Certain Transactions."

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TRANSFER OF SHARES AND NOTICES

Fully paid ordinary shares are issued in registered form and may be freely transferred under our articles of association unless the transfer is restricted or prohibited by Israeli law or the rules of a stock exchange on which the shares are traded. Under the Companies Law, unless otherwise provided in the articles of association or by applicable law, shareholders of record are entitled to receive at least 21 days' prior notice of meetings of shareholders. Our articles of association provide that each shareholder of record is entitled to receive at least 14 days' prior notice of any annual or extraordinary shareholders' meeting and at least 21 days' prior notice of any shareholders' meeting at which a special resolution is proposed.

SPECIAL NOTIFICATION DUTIES

Our articles of association provide that any shareholder whose shareholding increases above 1%, 5%, 10%, 15%, 20%, 25%, 30%, and so on, of our then outstanding share capital, is obliged to notify us in writing of such change within ten days. A shareholder who fails to comply with this requirement will be denied his or her voting rights, in respect of shares in excess of the particular threshold the crossing of which was not reported, for a six- to 24-month period to be determined in light of relevant circumstances by the board of directors in its sole discretion. Shareholders complying with the filing requirements of Sections 13(d) and 13(g) of the U.S. Securities Exchange Act of 1934 and the regulations promulgated thereunder will not be subject to this requirement.

The German Securities Trading Act (Wertpapierhandelsgesetz--WpHG) provides that any shareholder whose shareholdings in a listed company reaches, exceeds or falls short of 5%, 10%, 25%, 50% or 75% of the voting rights by purchase, sale of by any other means shall immediately, and at the latest within seven calendar days, notify the company and the Federal Agency for Supervision for Financial Services (Bundesanstalt fur Finanzdienstleistungsaufsicht) in writing of having reached, exceeded or fallen short of the above-mentioned thresholds and of their percentage of the voting rights, by indicating his address and the day on which he has reached, exceeded or fallen short of the respective threshold.

ANTI-TAKEOVER PROVISIONS UNDER ISRAELI LAW

Tender Offer. A person wishing to acquire shares of a publicly traded Israeli company and who would as a result hold over 90% of the company's issued and outstanding share capital is required by the Companies Law to make a tender offer to all of the company's shareholders for the purchase of all of the issued and outstanding shares of the company. If the shareholders who refuse to sell their shares hold less than 5% of the issued share capital of the company, all of the shares held by such shareholders that the acquirer offered to purchase will be transferred to the acquirer by operation of law. However, the shareholders may petition the court to alter the consideration for the acquisition. If the dissenting shareholders hold more than 5% of the issued and outstanding share capital of the company, the acquirer may not acquire additional shares of the company from shareholders who accepted the tender offer if following such acquisition the acquirer would then own over 90% of the company's issued and outstanding share capital.

The Companies Law provides that an acquisition of shares of a public company must be made by means of a tender offer if as a result of the acquisition the purchaser would become a 25% or greater shareholder of the company. This rule does not apply if there is already another 25% shareholder of the company. As of the date of this offering, we are not aware of any single shareholder which holds 25% or more of our shares. Similarly, the Companies Law provides that an acquisition of shares in a public company must be made by means of a tender offer if as a result of the acquisition the purchaser would become a 45% or greater shareholder of the company, if there is no 50% or greater shareholder of the company. Regulations promulgated under the Companies Law provide that the tender offer requirements described in this paragraph do not apply to companies

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whose shares are listed for trading outside of Israel if, according to the law in the country in which the shares are traded, including the rules and regulations of the stock exchange on which the shares are traded, either:

* there is a limitation on the acquisition of any level of control of the company; or

* the acquisition of any level of control must be by means of a tender offer to the public.

Merger. The Companies Law permits merger transactions if approved by each party's board of directors and the majority of each party's shares voted on the proposed merger at a shareholders' meeting called on at least 21 days' prior notice. Our articles of association provide that merger transactions may be approved by a simple majority of the shareholders present, in person or by proxy, at a general meeting of our shareholders. Under the Companies Law, in determining whether the required majority has approved the merger, shares held by the other party to the merger, any person holding at least 25% of the outstanding voting shares or holding at least 25% of the means of appointing directors of the other party to the merger, or anyone acting on their behalf, including their relatives or companies controlled by them, are excluded from the vote. If a majority of shareholders of one of the parties do not approve the transaction because the votes of certain shareholders are excluded from the vote, a court may still approve the merger upon the request of holders of at least 25% of the voting rights of a company, if the court holds that the merger is fair and reasonable, taking into account the value of the parties to the merger and the consideration offered to the shareholders. Upon the request of a creditor of either party to the proposed merger, the court may delay or prevent the merger if it concludes that there exists a reasonable concern that, as a result of the merger, the surviving company will be unable to satisfy the obligations of any of the parties to the merger. In addition, a merger may not be executed unless at least 70 days have passed from the time that a proposal for approval of the merger has been filed with the Israeli Registrar of Companies.

Tax Law. Israeli tax law treats specified acquisitions, including a share-for-share swap between an Israeli company and a foreign company, less favorably than does United States tax law. For example, Israeli tax law may subject a shareholder who exchanges ordinary shares in an Israeli company for shares in a foreign company to immediate taxation. Please see "Taxation and Foreign Exchange Regulation."

OTHER ANTI-TAKEOVER PROVISIONS

Under the German Act relating to Tenders for the Acquisition of Securities and Companies (Wertpapiererwerbs- und Ubernahmegesetz--WpUG), anybody who obtains the control of a target company is obligated to make an offer for the acquisition of the shares of the outside shareholders for adequate consideration. Control under the WpUG means the direct or indirect holding of 30% of the voting rights of the target company. Following the closing of this offering, we will also be subject to the tender offer provisions of the U.S. Securities Exchange Act of 1934, as amended.

Prior to December 31, 2004, our co-founders, Oded Bashan and Ronnie Gilboa, may not be removed from our board without the affirmative vote of 75% of our shareholders entitled to vote and voting, in person or by proxy, at a general shareholders' meeting.

TRANSFER AGENT, REGISTRAR AND PAYING AGENT

The transfer agent and registrar for our ordinary shares in the United States is Continental Stock Transfer & Trust Company. Its address is 2 Broadway, New York, New York 10004, and its telephone number at this location is 212-509-4000. Our paying agent in Germany is Dresdner Bank AG.

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LISTING

Our ordinary shares are listed on the Neuer Markt of the Frankfurt Stock Exchange under the symbol "OT5". Any new share issued by us must be admitted for listing on the Neuer Markt by the Admission Committee of Frankfurt Stock Exchange before such shares can be traded on the Neuer Markt. We expect from time to time to apply for admission of those shares to the Neuer Markt. We have also applied to list our ordinary shares on the Nasdaq Small Cap Market under the symbol "OTIV".

SHARES ELIGIBLE FOR FUTURE SALE

Sales of substantial amounts of our ordinary shares in the public market following this offering, or the perception that such sales may occur, could adversely affect the prevailing market price of our ordinary shares or adversely affect our ability to raise additional equity capital in the future and on terms favorable to us or at all.

Assuming no exercise of outstanding options, we will have an aggregate of ordinary shares outstanding upon completion of this offering. Of these shares, the ordinary shares sold in this offering generally will be freely tradable without restriction or further registration under the Securities Act unless purchased by "affiliates," as that term is defined in Rule 144 under the Securities Act, who may sell only the volume of shares described below and whose sales would be subject to additional restrictions described below.

The remaining ordinary shares are deemed "restricted securities" as defined under Rule 144. Restricted securities may be sold in the public market only pursuant to an effective registration statement under the Securities Act or pursuant to an exemption from registration under Rule 144, Rule 701 or Rule 904 under the Securities Act, which are summarized below. Subject to the provisions of Rules 144, 701 and 904, shares will be eligible for sale from time to time after the date of this prospectus.

RULE 144

In general, under Rule 144 as currently in effect, beginning 90 days after the date of this offering, a person who has beneficially owned ordinary shares for at least one year is entitled to sell within any three-month period a number of shares that does not exceed the greater of:

* 1.0% of the total number of our ordinary shares then outstanding, which is expected to equal approximately shares immediately after this offering; or

* the average weekly trading volume of our ordinary shares on the Nasdaq Market during the four calendar weeks preceding the filing of a notice on Form 144 with respect to that sale.

Sales under Rule 144 are also subject to other requirements regarding the manner of sale, notice filing and the availability of current public information about us. In addition, under Rule 144(k) as currently in effect, a person who has not been an affiliate of ours at any time during the 90 days preceding a sale and who has beneficially owned our ordinary shares for at least two years, including the holding period of any owner other than an affiliate, is entitled to sell those shares without regard to volume limitations, manner of sale provisions or information requirements under Rule 144. Therefore, unless subject to a lock-up agreement or otherwise restricted, such "144(k) shares" may be sold immediately upon the closing of this offering.

RULE 701

In general, any of our employees, officers or directors, as well as bona fide consultants or advisors, who before the closing of this offering purchased our ordinary shares pursuant to a written compensatory benefit plan or contract, are entitled to rely on the resale provisions of Rule 701. Those provisions permit non-affiliates to sell such shares without having to comply with the public

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information, holding period, volume limitation or notice provisions of Rule 144 and permit affiliates to sell such shares without having to comply with the Rule 144 holding period restrictions, in each case commencing 90 days after the date that we become subject to the reporting requirements of the Securities Exchange Act of 1934.

RULE 904

Rule 904 of Regulation S under the Securities Act provides that shares owned by any person, other than persons deemed to be affiliates by virtue of their significant shareholdings in our company, may be sold without registration outside the United States, provided the sale is accomplished in an offshore transaction, and no directed selling efforts are made, as those terms are defined in Regulation S, subject to certain other conditions. In general, this means that the shares, including "restricted" shares and shares held by our directors and officers who do not own a significant percentage of the shares, may be sold without registration in the United States on the Neuer Markt of the Frankfurt Stock Exchange or otherwise outside the United States.

OPTIONS

Following the completion of this offering, we intend to file a registration statement on Form S-8 under the Securities Act to register 7,059,463 ordinary shares issuable under our share option plans. The registration statement on Form S-8 is expected to become effective automatically upon filing. As of March 31, 2002, options to purchase 1,696,518 ordinary shares were issued and outstanding, of which options to purchase 1,053,960 ordinary shares had vested and had not been exercised. Ordinary shares issued upon exercise of a share option and registered under the Form S-8 registration statement will, subject to the vesting provisions and Rule 144 volume limitations applicable to our affiliates, be available for sale in the public markets upon the expiration or release from the terms of any applicable lock-up agreements.

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CONDITIONS IN ISRAEL

We are incorporated under the laws of and our principal offices and research and development facilities are located in the State of Israel. Accordingly, we are directly affected by political, military and economic conditions in Israel. Our operations would be materially adversely affected if major hostilities involving Israel occur, Israel's political or economic conditions deteriorate or trade between Israel and its present trading partners is curtailed.

POLITICAL AND MILITARY CONDITIONS

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 from time to time in intensity and degree, has led to security and economic problems for Israel. Additionally, from time to time since December 1987, Israel has experienced civil unrest, primarily in the West Bank and Gaza Strip administered by Israel since 1967. A peace agreement between Israel and Egypt was signed in 1979, a peace agreement between Israel and Jordan was signed in 1994 and, since 1993, several agreements between Israel and Palestinian representatives have been signed pursuant to which certain territories in the West Bank and Gaza Strip were handed over to Palestinian administration. The implementation of these agreements with the Palestinian representatives has been subject to difficulties and delays and a resolution of all of the differences between the parties remains uncertain. In addition, since October 2000, there has been a substantial deterioration in the relationship between Israel and the Palestinian Authority and a significant increase in violence in the West Bank and Gaza Strip. During 2002, violence intensified between Palestinians and Israelis and Israel has undertaken military actions in the West Bank and the Gaza Strip. In May 2000, Israeli forces withdrew from southern Lebanon. As of the date hereof, Israel has not entered into any peace agreement with Syria or Lebanon. We cannot predict whether any other agreements will be entered into between Israel and its neighboring countries, whether a final resolution of the area's problems will be achieved, the nature of any resolution of this kind, or whether the current civil unrest will continue and to what extent this unrest will have an adverse impact on Israel's economic development, on our operations in the future and on our share price.

Despite the progress towards peace between Israel and its Arab neighbors, certain countries, companies and organizations continue to participate in a boycott of Israeli firms and others doing business in Israel or with Israeli companies. Although we are precluded from marketing our products to these countries, we believe that in the past the boycott has not had a material adverse effect on us. However, restrictive laws, policies or practices directed towards Israel or Israeli businesses could have an adverse impact on the expansion of our business.

Generally, all male adult citizens and permanent residents of Israel under the age of 48 are, unless exempt, obligated to perform up to 35 days of military reserve duty annually. Additionally, all residents of this age are subject to being called to active duty at any time under emergency circumstances. Most of our male officers and employees are currently obligated to perform annual reserve duty. Although we have operated effectively under these requirements, we cannot assess the full impact of these requirements on our workforce or business if conditions should change, and no prediction can be made as to the effect on us of any expansion of these obligations.

ECONOMIC CONDITIONS

Israel's economy has been subject to numerous destabilizing factors, including rampant inflation in the early to mid-1980s, low foreign exchange reserves, fluctuations in world commodity prices, military conflicts and civil unrest. The Israeli Government has, for these and other reasons, intervened in various sectors of the economy by utilizing, among other means, fiscal and monetary policies, import duties, foreign currency restrictions and control of wages, prices and foreign currency exchange rates. In 1998, the Israeli currency control regulations were liberalized significantly, as a

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result of which Israeli residents may deal in foreign currency and non-residents of Israel may purchase and sell Israeli currency and assets. The Israeli Government has periodically changed its policies in all these areas. There are currently no Israeli currency control restrictions on remittances of dividends on ordinary shares or proceeds from the sale of shares. However, there remains in effect legislation pursuant to which currency controls can be imposed by administrative action at any time. In addition, Israeli residents are required to file reports on certain types of actions or transactions.

TRADE RELATIONS

Israel is a member of the United Nations, the International Monetary Fund, the International Bank for Reconstruction and Development and the International Finance Corporation. Israel is a member of the World Trade Organization and is signatory to the General Agreement on Tariffs and Trade, which provides for the reciprocal lowering of trade barriers among its members. In addition, Israel has been granted preferences under the Generalized System of Preferences from the United States, Australia, Canada and Japan. These preferences allow Israel to export the products covered by such programs either duty-free or at reduced tariffs.

Israel and the European Economic Community, now known as the European Union, concluded a Free Trade Agreement in July 1975 which confers certain advantages with respect to Israeli exports to most European countries and obligates Israel to lower its tariffs with respect to imports from these countries over a number of years. In 1985, Israel and the United States entered into an agreement to establish a free trade area. The free trade area has eliminated all tariff and certain non-tariff barriers on most trade between the two countries. On January 1, 1993, an agreement between Israel and the European Free Trade Association, which includes Norway, Switzerland, Iceland and Liechtenstein, established a free-trade zone between Israel and those nations. In November 1995, Israel entered into a new agreement with the European Union that redefines rules of origin and makes other improvements, such as providing for Israel to become a member of the research and technology programs of the European Union. In recent years, Israel has established commercial and trade relations with a number of other nations, including Russia, China, India, Turkey and other nations in Eastern Europe and Asia.

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THE GERMAN EQUITY MARKET AND THE NASDAQ SMALL CAP MARKET

FRANKFURT STOCK EXCHANGE (FRANKFURTER WERTPAPIERBORSE) AND THE NEUER MARKT

According to the currently available information on the internet pages of Deutsche Borse AG the Frankfurt Stock Exchange is the world's third largest organized exchange-trading market in terms of turnover and dealings in securities. It accounts for more than 85 percent of the total securities turnover in Germany and is therefore the leader of the eight German stock exchanges. The public guarantor of the Frankfurt Stock Exchange is the Deutsche Borse AG whose duty it is to ensure the full viability of trading in securities. In addition to the traditional floor trading, Frankfurt Stock Exchange has developed a full spectrum of computerised security trading called XetraRegistered. Xetra was established in November 1997. Buy and sell orders placed by licensed traders from any location are compared by Xetra using a central computer and--if lot sizes and prices match--automatically executed. By end of 2001, about 431 banks and securities trading houses from all over Europe traded through the Xetra-system. Xetra is integrated into the Frankfurt Stock Exchange and is subject to its rules and regulations.

For the year ended December 20011, the total turnover in traded equities in Germany amounted to euro 3.188 trillion and was divided in 61.70% on Xetra turnover, 31.81% on Frankfurt Stock Exchange turnover and the rest was divided between the other German stock exchanges. As of December 31, 2001, the equity securities of 5,777 companies, including 4,865 foreign companies, were traded on the Frankfurt Stock Exchange. The aggregate annual equity turnover of the Frankfurt Stock Exchange in 2001 was almost euro 1.82 trillion and on Xetra about euro 1.97 trillion, based on the Frankfurt Stock Exchange's practice of separately recording the sale and purchase components involved in any trade, for both equity and debt instruments.

Transactions on the Frankfurt Stock Exchange, including transactions within the Xetra system, are settled on the second business day following trading. Over-the-Counter transactions (which may take place in the case of large trade volumes or if one of the parties is a foreigner) are generally also settled at the second business day following the trade, although a different period may be agreed upon by the parties. According to the German banks' standard terms and conditions for securities transactions (Sonderbedingungen fur Wertpapiergeschafte), customers' orders for listed securities must be executed on a stock exchange unless the customer gives specific instructions to the contrary. A quotation or trading as a whole can be suspended by the Frankfurt Stock Exchange if in the public interest or orderly stock exchange trading is temporarily endangered or if a suspension is in the public interest.

The Neuer Markt segment of the Frankfurt Stock Exchange is a trading segment that was launched in March 1997. As of April 30, 2002, the equity securities of 305 companies, including 51 foreign companies were traded on the Neuer Markt segment. It is designed primarily for small to medium-sized domestic and foreign companies, which meet international standards of transparency and publicity. Issuers are, in particular, innovative enterprises which develop new sales markets, utilize new methods of, for example, procurement, production or distribution, or offer new products and/or services, and whose activities can be expected to generate high turnover and profits in the future (Part 1 of Rules and Regulations Neuer Markt). The Frankfurt Stock Exchange reserves the right not to admit issuers if it considers them inappropriate for the Neuer Markt in terms of such criteria. Issuers are requested to provide to investors on an ongoing basis such information as corporate action timetable and annual and quarterly reports, including cash flow statements. This information is required to be submitted in English and German as well as in electronic form, thus enabling the stock exchange to disseminate corporate information via the Internet.


1 all figures were taken from Factbook of Deutsche Borse AG as available on the Internet under
http://www.ip.exchange.de/INTERNET/IP/ip-stats.nsf/WebStatistik+Kassamarkt+ Jaehrlich+Historical+Statistics/3B850EAD6DEE29A3C1256B8E00683CF5/ $FILE/Factbook_2001.pdf?openElement

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Trading on the Neuer Markt

Trading of shares listed on the Neuer Markt takes place on the floor of the stock exchange but is Computer aided. Trading on the floor is generally of the auction type, but listed securities are also traded in inter-bank dealer markets off the Frankfurt Stock Exchange. Price formation is determined by open bid by state-appointed brokers who are themselves exchange members but who do not, as a rule, deal with the public. Prices of currently traded securities are displayed continuously during trading hours. At the half-way point of each trading day, a single standard quotation is determined for all shares. Shares traded on the Neuer Markt are also traded on the above described Computer-system Xetra. Trading takes place every business day between 9:00 a.m. and 8:00 p.m. Frankfurt time. Trading within the Xetra system is done by banks and securities dealers admitted to trading an at least one of Germany's stock exchanges.

The members' association of the Frankfurt Stock Exchange publishes a daily list of prices which contains the standard prices of all traded securities and their highest and lowest quotations during the past year. This list is available on the Internet at http://www.exchange.de.

A specific feature of the Neuer Markt segment of the Frankfurt Stock Exchange has been the introduction of obligatory designated sponsors, entities admitted to trading at the Frankfurt Stock Exchange that provide additional liquidity by quoting prices through Xetra for the buying and selling of shares on request. Each issuer an the Neuer Markt has to nominate at least two obligatory designated sponsors which will ensure sufficient liquidity for its shares and serve as consultants an all stock market related inatters for the issuer. Our designated sponsors are M.M. Warburg GmbH & Co KGaA, Baden-Wurttembergische Landesbank AG and Schmidt Bank. Neuer Markt equity listings are admitted to electronic trading through Xetra.

Trading activities an the German stock exchanges are supervised by the Federal Agency for Supervision of Financial Services (Bundesanstalt fur Finanzdienstleistungsaufsicht--BAFin).

The listing requirements for the Neuer Markt that we have satisfied may be summarized as follows. The issuer must hold at least EUR 1.5 million of equity capital. For the first issue of shares on the Neuer Markt, i.e. when the company goes public, only ordinary shares may be floated and at least 100,000 shares have to be issued. Upon going public, the equity capital of the company must be increased by cash deposits; at least 50 percent of this capital increase represents the volume of the issue to be placed; at least 20 percent of the shares have to be spread among the public to provide for a free float of the shares and the requirements recommend that at least 25 percent of the shares not be closely held. The percentage may not be less than ten percent, if the issue volume is over 100 million EUR. The "Minimum Volume" criteria -- namely,
(1) that the aggregate nominal value must amount to at least two hundred and fifty thousand EUR, (2) that the minimum number of the shares must be one hundred thousand and (3) that the estimated aggregate market price of the shares to be placed must amount to at least five million EUR -- were met at the time we originally listed and continued to be met today.

There are certain additional criteria in order to be admitted to Neuer Markt. Issuers have to nominate Designated Sponsors, agree to a restraint on transfer and acknowledge the take-over code, and we currently comply with these requirements:

Nomination of Designated Sponsor: Every company requires at least two Designated Sponsors at the Neuer Markt to boost liquidity and to fulfill the requirements set forth in the trading regulations for the Neuer Markt.

Agreement to restrict transfer: We and our former owners agreed that no transfer of their company shares shall take place for a minimum of 6 months after the company goes public. The restriction has lapsed as to the present management.

Take-over Code. We have agreed to comply with the take-over code laid down by the German Stock Exchange Expert Committee (`Borsensachverstandigenkommission') at the

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Federal Ministry of Finance, although the take-over code has been overruled by the German Act relating to Tenders for the Acquisition of Security and Companies (Westpapeierewerbs-und and Ubernahmegesetz WpUG) effective from January 1, 2002.

THE NASDAQ SMALL CAP MARKET

The National Association of Securities Dealers Automated Quotations system, or Nasdaq, was established in 1971. Nasdaq is owned and operated by the National Association of Securities Dealers, or NASD. Nasdaq is a computerized system that provides brokers and dealers with price quotations for securities traded on the "over-the-counter" market as well as for many securities listed on the New York Stock Exchange.

Stocks trading on the Nasdaq Small Cap Market must meet certain criteria for market value, profitability and trading activity. More comprehensive information is available for stocks trading on the Nasdaq Small Cap Market than for other stocks traded on the over-the-counter market.

The principal qualification requirements for listing our ordinary shares on the Nasdaq Small Cap Market include the following:

(1) For initial inclusion, we should have three registered and active market makers, and for continued inclusion, we should have two registered and active market makers.

(2) For initial inclusion, we should have:

(i) stockholders' equity of $5 million; or

(ii) market capitalization of U.S. $50 million; or

(iii) net income of U.S. $750,000 (excluding extraordinary or non-recurring items) in the most recently completed fiscal year or in two of the last three most recently completed fiscal years.

(3) For continued inclusion, we should maintain:

(i) stockholders' equity of $2.5 million; or

(ii) market capitalization of $35 million; or

(iii) net income of U.S. $500,000 (excluding extraordinary or non-recurring items) in the most recently completed fiscal year or in the last three most recently completed fiscal years

(4) We should have at least 300 round lot holders of the security.

(5) We should have at least 1,000,000 publicly held shares for initial inclusion and 500,000 publicly held shares for continued inclusion. Shares held directly or indirectly by any officer or director of the issuer and by any person who is the beneficial owner of more than 10 percent of the total shares outstanding are not considered to be publicly held.

We currently comply with all of the above-mentioned criteria.

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TAXATION AND FOREIGN EXCHANGE REGULATION
ISRAELI TAX CONSIDERATIONS

In the opinion of Zysman Aharoni Gayer & Co. Law Offices, the following is a summary of the material aspects of the current tax structure applicable to companies in Israel and their effect on us. The summary also contains a discussion of Israeli tax consequences to persons purchasing our ordinary shares not by way of issuance of bonus shares and Israel Government programs benefiting us. Portions of this discussion are based on tax legislation that has not yet been subject to judicial or administrative interpretation, and we cannot assure you that the views expressed in this discussion will be accepted by the tax authorities in question. The discussion should not be relied on as legal or professional tax advice and is not exhaustive of all possible tax considerations.

WE URGE PROSPECTIVE PURCHASERS OF ORDINARY SHARES TO CONSULT THEIR OWN TAX ADVISORS AS TO THE ISRAELI OR OTHER TAX CONSEQUENCES OF THE PURCHASE, OWNERSHIP AND DISPOSITION OF ORDINARY SHARES, INCLUDING, IN PARTICULAR, THE EFFECT OF ANY FOREIGN, STATE OR LOCAL TAXES.

Taxation of companies

General Corporate Tax Structure. Israeli companies are subject to corporate tax at the rate of 36% of taxable income. However, the effective tax rate payable by a company which derives income from certain approved enterprises may be considerably lower, as discussed further below.

Tax Benefits Under the Law for the Encouragement of Capital Investments, 1959. The Law for the Encouragement of Capital Investment, 1959, commonly referred to as the Investment Law, provides that a proposed capital investment in eligible facilities may, upon application to the Investment Center of the Ministry of Industry and Trade of the State of Israel, be designated as an approved enterprise. Each certificate of approval for an approved enterprise relates to a specific investment program delineated both by its financial scope, including its capital sources, and by its physical characteristics, e.g., the equipment to be purchased and utilized under the program. The tax benefits derived from any certificate of approval relate only to taxable income attributable to the specific approved enterprise. If a company has more than one approval or only a portion of its capital investments is approved, its effective tax rate is the result of a weighted combination of the applicable rates. Income derived from activity which is not integral to the activity of the enterprise should not be divided between the different enterprises and should not enjoy tax benefits.

Taxable income of a company derived from an approved enterprise is subject to a reduced corporate tax rate of 25%. The tax rate is subject to additional reductions depending on the percentage of foreign investment in the relevant company until the earlier of:

* Seven consecutive years, or ten years in the case of a foreign investors' company as defined below, starting in the year in which the approved enterprise first generates taxable income;

* Twelve years from the start of production; or

* Fourteen years from the date of approval of the approved enterprise status.

A company owning an approved enterprise may elect to forego entitlement to grants otherwise available as a result of an approved enterprise in return for an alternative package of benefits. Under the alternative package of benefits, a company's undistributed income derived from an approved enterprise will be exempt from company tax for a period of between two and ten years from the first year of taxable income, depending on the geographic location of the approved enterprise within Israel, and the company will be eligible for a reduced tax rate for the remainder of the benefits period.

We elected to adopt the "Alternative Benefits Program" status for our investment programs.

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A company that has elected to receive the alternative package of benefits and that subsequently pays a dividend out of income derived from the approved enterprise during the tax exemption period will be subject to tax in respect of the amount distributed, including any company tax on these amounts, at the rate which would have been applicable had it not elected the alternative package of benefits, generally 10%-25%, depending on the percentage of the investment in the company's shares held by foreign shareholders. The dividend recipient is taxed at the reduced rate applicable to dividends from approved enterprises, which is 15%, if the dividend is distributed during the tax exemption period or within 12 years after this period. The company must withhold this tax at the source. If classified as a foreign investors company there is no limit on the period during which a dividend may be distributed from approved enterprise profits and it should always enjoy the benefits of the law.

A foreign investors company as described in the law of encouragement of capital investment may enjoy benefits for a period of up to 10 years. A foreign investors company is a company of which more than 25% of its shareholders are foreign residents.

Subject to the provisions of the law concerning income under the alternative package of benefits, all dividends are considered to be attributable to the entire enterprise and their effective tax rate is the result of a weighted combination of the various applicable tax rates. Under the Investment Law, a company that has elected the alternative package of benefits is not obliged to distribute exempt retained profits, and may generally decide from which year's profits to declare dividends. We currently intend to reinvest any amount derived from our approved enterprise programs and not to distribute the income as a dividend. See "Dividend Policy."

A company that has an approved enterprise program is eligible for further tax benefits if it qualifies as a foreign investors' company. A foreign investors' company is a company whose investees, comprising non-Israeli residents, directly or indirectly hold more than 25% of the company's share capital and combined share and loan capital. A company that qualifies as a foreign investors' company and has an approved enterprise program is eligible for tax benefits for a ten-year benefit period. The company tax rate applicable to income earned from approved enterprise programs in the benefit period (following the period, if any, of no tax) by a company meeting these qualifications is as follows:

          FOR A COMPANY WITH FOREIGN INVESTMENT OF              TAX RATE
          ----------------------------------------              ---------
Over 25% but less than 49%..................................       25%
49% or more but less than 74%...............................       20%
74% or more but less than 90%...............................       15%
90% or more.................................................       10%

Pursuant to the proposed legislation described above, foreign investors' companies would no longer be entitled to this preferential tax treatment but would instead be taxed the same as Israeli investors' companies.

The Investment Center bases its decision as to whether or not to approve an application on the criteria set forth in the Investment Law and regulations, the then prevailing policy of the Investment Center, and the specific objectives and financial criteria of the applicant. Accordingly, there can be no assurance that any such applications will be approved. In addition, the benefits available to an approved enterprise are conditional upon the fulfillment of conditions stipulated in the Investment Law and its regulations and upon the criteria in the specific certificate of approval, as described above. In the event that a company does not meet these conditions, it would be required to refund the amount of tax benefits, with the addition of consumer price index linkage adjustment and interest.

The Investment Center has granted approved enterprise status to three of our investment programs under the alternative benefits option. Taxable income derived from these programs is tax

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exempt for a period of ten years beginning with the year in which we first generate taxable income. We have derived, and expect to continue to derive, a substantial portion of our revenues from our approved enterprise programs at our manufacturing facility. The Investment Law also provides that an approved enterprise is entitled to accelerated depreciation on its property and equipment that are included in an approved investment program. There is no certainty that the Israeli government will continue to provide the same, or similar tax benefits in the future.

Grants under the Law for the Encouragement of Industrial Research and Development, 1984. Under the Law for the Encouragement of Industrial Research and Development, 1984, research and development programs which meet certain criteria and are approved by a governmental committee of the Office of the Chief Scientist are eligible for grants of up to 50% of the project's expenditure, as determined by the research committee, in return for the payment of royalties from the sale of the product developed in accordance with the program and subject to other conditions. Regulations promulgated under the Research Law provide for the payment of royalties to the Chief Scientist ranging from 3% to approximately 6%, on revenues from products developed using such grants until 100-300% of the dollar-linked grant is repaid. For programs approved from 1999 and thereafter, the amount of the grant to be repaid will include annual interest at LIBOR from the date of approval. Following the full repayment of the grant, there is no further liability for payment. See "Management's Discussion and Analysis of Financial Condition and Results of Operations."

The terms of the Israeli government participation also require that the manufacture of products developed with government grants be performed in Israel. However, under the regulations promulgated under the Research Law, in the event that any of the manufacturing is performed outside Israel by any entity other than us, if approval is received from the Office of the Chief Scientist for such foreign manufacturing and the identity of the foreign manufacturers, we may be required to pay increased royalties. If the manufacturing volume that is performed outside of Israel is less than 50%, the total amount to be repaid to the Office of the Chief Scientist may be adjusted to 120% of the grant. If the manufacturing volume that is performed outside of Israel is between 50% and 90% of the total amount may be adjusted to 150% of the grant and if it is more than 90%, the total amount may be adjusted to 300% of the grant. Since our manufacturing activities are performed by subcontractors outside of Israel, the consent of the Office of the Chief Scientist is required for these activities and additional consents will be required in connection with the manufacturing of products developed in the future with Office of the Chief Scientist grants. The Office of the Chief Scientist has given its ongoing consent in writing to the manufacturing of chips made for us by Samsung, with no increase in royalties. There can be no assurance that this ongoing consent will not be reversed or modified in any way or that we will obtain consents for such activities at all from the Office of the Chief Scientist in the future. Based on full disclosure made by us to the Office of the Chief Scientist regarding our manufacturing activities, the fact that there is no Israeli manufacturer for our modules and the fact that, except for the manufacturing conducted by Samsung, our other non-Israeli manufacturing activities are not based on the intellectual property for which we received grants from the Office of the Chief Scientist, we believe that other consents of the Office of the Chief Scientist are not required. Failure to comply with the requirements for consents for manufacturing outside of Israel could result in penalties, cancellation of grants and denial of any future applications for grants or for these consents. If the consents obtained from the Office of the Chief Scientist to manufacture our chip sets outside of Israel are terminated or if we are unable to obtain similar consents in the future, our business could be harmed.

The technology developed pursuant to the terms of these grants may not be transferred to third parties without the prior approval of a governmental committee under the Research Law. Such approval is not required for the export of any products resulting from such research or development. Approval of the transfer of technology may be granted in certain circumstances only if the recipient abides by all the provisions of the Research Law and regulations promulgated thereunder, including the restrictions on the transfer of know-how and the obligation to pay royalties in an amount that

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may be increased. It is difficult to quantify the consequences of a change in the royalties payable to the OCS upon transfer of the technology and there can be no assurance that such consent, if requested, will be granted.

The funds available for grants from the Office of the Chief Scientist were reduced for 1998, and the Israeli authorities have indicated that the government may further reduce or abolish grants from the Office of the Chief Scientist in the future. Even if these grants are maintained, there is no assurance we will receive Office of the Chief Scientist grants in the future. In addition, each application to the Office of the Chief Scientist is reviewed separately, and grants are based on the program approved by the Research Committee. Generally, expenditures supported under other incentive programs of the State of Israel are not eligible for grants from the Office of the Chief Scientist. There is no assurance that applications to the Office of the Chief Scientist will be approved and, until approved, the amounts of any such grants is not determinable.

Tax Benefits for Research and Development. Israeli tax law allows, under specific conditions, a tax deduction in the year incurred for expenditures, including capital expenditures, relating to scientific research and development projects, if the expenditures are approved by the relevant Israeli government ministry, determined by the field of research, and the research and development is for the promotion of the enterprise and is carried out by or on behalf of the company seeking the deduction. Expenditures not so approved are deductible over a three-year period. However, expenditures made out of proceeds made available to us through government grants are not deductible according to Israeli law.

Tax Benefits Under the Law for the Encouragement of Industry (Taxes), 1969. The Law for the Encouragement of Industry (Taxation), 1969, generally referred to as the Industry Encouragement Law, provides several tax benefits for industrial companies. An "Industrial Company" is defined as a company resident in Israel, at least 90% of whose income in a given tax year exclusive of income from specified sources, is derived from an industrial enterprise owned by it. An "industrial enterprise" is defined as an enterprise whose major activity in a given tax year is industrial production activity.

Under the Industry Encouragement Law, industrial companies are entitled to the following preferred corporate tax benefits:

* deduction of purchase of know-how and patents utilized in the development of the company over an eight-year period;

* deduction of expenses incurred in connection with a public stock issuance over a three-year period; and

* right to elect, under certain conditions, to file a consolidated tax return with additional related Israeli industrial companies operating a common production line.

Under some tax laws and regulations, an industrial enterprise may be eligible for special depreciation rates for machinery, equipment and buildings. These rates differ based on various factors including the date operations begin and the number of work shifts. An industrial company owning an approved enterprise may choose between the depreciation rates provided for in the Law for the Encouragement of Industry (Taxes), 1969 and the depreciation rates available to approved enterprises under the Income Tax Regulations (Inflationary Adjustments Depreciation Rates) 5746-1986.

Eligibility for benefits under the Industry Encouragement Law is not subject to receipt of prior approval from any governmental authority. We cannot assure you that we will continue to qualify as an industrial company or that the benefits described above will be available to us in the future.

Special Provisions Relating to Taxation under Inflationary Conditions. The Income Tax Law (Inflationary Adjustments), 1985, referred to as the Inflationary Adjustments Law, represents an

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attempt to overcome the problems presented to a traditional tax system by an economy undergoing rapid inflation. The Inflationary Adjustments Law is highly complex. These are some of its important features:

* There is a special tax adjustment for the preservation of equity whereby certain corporate assets are classified broadly into fixed (inflation resistant) assets and non-fixed assets. Where a company's equity, as defined in the law, exceeds the depreciated cost of fixed assets, a deduction from taxable income that takes into account the effect of the applicable annual rate of inflation on the excess is allowed up to a ceiling of 70% of taxable income in any single tax year, with the unused portion permitted to be carried forward on a linked basis. If the depreciated cost of fixed assets exceeds a company's equity, then the excess multiplied by the applicable annual rate of inflation is added to taxable income.

* Subject to certain limitations, depreciation deductions on fixed assets and losses carried forward are adjusted for inflation based on the increase in the Israeli consumer price index.

* Gains on traded securities, which are normally exempt from tax under Israeli law, are taxable in certain circumstances determined under the Inflationary Adjustments Law. However, dealers in securities are subject to the regular tax rules applicable to business income in Israel.

One of the net effects of the Inflationary Adjustments Law is that our taxable income for Israeli corporate tax purposes will be different from our dollar income reflected in our financial statements, which are based on changes in the Shekel exchange rate with respect to the dollar.

Taxation of our shareholders

Capital Gains Tax on Sales of Our Ordinary Shares. Israeli law imposes a capital gains tax on the sale of capital assets. The law distinguishes between real gain and inflationary surplus. The inflationary surplus is a portion of the total capital gain that is equivalent to the increase of the relevant asset's purchase price that is attributable to the increase in the Israeli consumer price index between the date of purchase and the date of sale. The real gain is the excess of the total capital gain over the inflationary surplus. The inflationary surplus accumulated from and after December 31, 1993 is exempt from any capital gains tax in Israel. The real gain is added to ordinary income, which is taxed at ordinary rates of 30% to 50% for individuals and 36% for corporations.

Under current law, sales of our ordinary shares offered by this prospectus are exempt from Israeli capital gains for so long as they are quoted on the Nasdaq Small Cap Market or recognized by the Israeli Ministry of Finance and we qualify as an Industrial Company. We cannot assure you that we will maintain this qualification or our status as an industrial company. This exemption does not apply to dealers in securities in Israel or to persons (or companies) subject to the Inflationary Adjustment Law who are taxed at regular tax rates applicable to business income.

If the proposed legislation becomes law, this exemption will no longer apply and, subject to any lower tax rate that may apply pursuant to the provisions of any applicable double taxation treaty, individuals would be taxed at their marginal rate up to a maximum rate of 25% and companies would be taxed at the company rate of 36%.

Under the convention between the government of the United States of America and the government of Israel with respect to taxes on income, the sale, exchange or disposition of ordinary shares by a person who qualifies as a resident of the United States within the meaning of the U.S.-Israel tax treaty and who is entitled to claim the benefits afforded to the person by the U.S.-Israel tax treaty generally will not be subject to the Israeli capital gains tax unless certain exceptions apply, including where the U.S. resident holds, directly or indirectly, shares representing 10% or more of our voting

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power during any part of the 12-month period preceding the sale, exchange or disposition of the shares subject to certain conditions. A sale, exchange or disposition of ordinary shares by a treaty U.S. resident who holds, directly or indirectly, shares representing 10% or more of our voting power at any time during the preceding 12-month period would be subject to Israeli tax, to the extent applicable and subject to the general exemption described in the previous paragraph. Under the U.S.-Israel tax treaty, however, the U.S. resident would be permitted to claim a credit for the taxes against the U.S. federal income tax imposed with respect to the sale, exchange or disposition, subject to the limitations in U.S. laws applicable to foreign tax credits. The U.S.-Israel tax treaty does not relate to U.S. state or local taxes.

Taxation of Non-Resident Holders of Shares. Non-residents of Israel are subject to income tax on income accrued or derived from sources in Israel. These sources of income include passive income, including dividends, royalties and interest, as well as non-passive income from services rendered in Israel. On distribution of dividends other than bonus shares, income tax is withheld at source, at the rate of 25%, (or 12.5% for dividends not generated by an approved enterprise if the non-resident is a U.S. corporation and holds at least 10% of our voting power throughout a certain period, and 15% for dividends generated by an approved enterprise), unless in each case a different rate is provided in a treaty between Israel and shareholder's country of residence. Under the U.S.- Israel tax treaty, the maximum tax on dividends paid to a holder of ordinary shares who is a U.S. resident will be 25%. However, under the Investment Law, dividends generated by an approved enterprise are taxed at the rate of 15%.

Foreign Exchange Regulations. We are permitted to pay in Israeli and non-Israeli currency:

* dividends to holders of our ordinary shares; and

* any amounts payable with respect to our ordinary shares upon our dissolution, liquidation or winding up.

If we make any payments in Israeli currency, the payments may be converted into freely repatriable dollars at the rate of exchange prevailing at the time of conversion.

UNITED STATES FEDERAL INCOME TAXATION

In the opinion of our counsel, Z.A.G/S&W, the following is a summary of the material United States federal income tax consequences of the acquisition, ownership and disposition of our ordinary shares by United States holders. Our counsel's legal opinion is based upon the United States Internal Revenue Code of 1986, as amended, applicable Treasury regulations promulgated and proposed under the Internal Revenue Code, judicial authority and current administrative rulings and practices, all of which are subject to change, possibly with retroactive effect or different interpretations. As to all matters of fact essential to their opinion, Z.A.G/S&W has relied upon our representations, certificates from our officers, and facts set forth in this prospectus. We have not sought any ruling from the United States Internal Revenue Service with respect to the matters discussed below, and we cannot provide any assurance that the IRS or a court will agree with our counsel's legal opinion. The discussion below assumes that you will hold the ordinary shares as capital assets.

This discussion is not a comprehensive description of all of the tax consequences that may be relevant to United States holders of ordinary shares, and you should consult your professional advisor as to the tax consequences of the acquisition, ownership and disposition of our ordinary shares. In particular, this discussion does not address your tax treatment if you are subject to special tax rules under United States federal income tax law, for example, if you are:

* a bank, insurance company or other financial institution,

* a regulated investment company, real estate investment trust or grantor trust,

* a broker or dealer in securities or foreign currency,

* a person who has a functional currency other than the United States dollar,

* a person who acquires ordinary shares in connection with employment or other performance of services, or who acquires ordinary shares in the form of bonus shares from us,

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* a person subject to alternative minimum tax,

* a person who owns, or is deemed to own, at least 10% or more, by voting power or value, of our shares,

* a person who owns ordinary shares as part of a straddle, hedging transaction, conversion transaction or constructive sale transaction for United States federal income tax purposes,

* a tax-exempt entity, or

* an expatriate of the United States.

Further, this description does not address any United States federal estate and gift tax consequences, nor any state, local or foreign tax consequences relating to the acquisition, ownership and disposition of our ordinary shares.

For purposes of this discussion, you are a United States holder if you are:

(i) a citizen or resident of the United States, including an alien individual who is a lawful permanent resident of the United States or meets the substantial presence residency test under United States federal income tax laws,

(ii) a corporation, partnership or other entity treated as a corporation or partnership for United States federal income tax purposes, which is created or organized in or under the laws of the United States, any of its states or the District of Columbia, unless otherwise provided by Treasury regulations,

(iii) an estate the income of which is subject to United States federal income taxation regardless of its source,

(iv) a trust if a court within the United States is able to exercise primary supervision over the administration of the trust and one or more United States persons have the authority to control all substantial decisions of the trust, or electing trusts in existence on August 20, 1996 to the extent provided in Treasury regulations, or

(v) any person otherwise subject to United States federal income tax on a net income basis in respect of ordinary shares,

and if your status as a United States holder is not overridden pursuant to the provisions of an applicable tax treaty.

Your initial income tax basis in any ordinary shares that you acquire will be the U.S. dollar amount that you paid for the ordinary shares, or the U.S. dollar equivalent of the fair market value of any property, including foreign currency, you exchanged for the ordinary shares as of the date of exchange.

Distributions

We do not at this time anticipate paying any dividends. But, if we do distribute property to you in the future, then subject to the discussion below under "Passive Foreign Investment Company Considerations," the following Internal Revenue Code rules regarding taxable distributions will generally apply.

Distributions you receive from us with respect to your ordinary shares, including any related tax withheld by Israel, will constitute dividends for United States federal income tax purposes to the extent paid out of our current or accumulated earnings and profits as determined for United States federal income tax purposes. To the extent that a distribution exceeds our available earnings and profits, it will be treated as a nontaxable return of capital to the extent of your adjusted tax basis in the ordinary shares (reducing such adjusted tax basis dollar for dollar), and thereafter as capital gain. Dividends you receive generally will be treated as foreign source dividend income and will not be

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eligible for the dividends-received deduction allowed to corporate shareholders under the Internal Revenue Code.

The amount of any distribution we make to you will equal the fair market value in United States dollars of the Israeli Shekels or other property you receive, including the amount of any related withheld tax, on the date of distribution, which, in the case of a distribution paid in Israeli Shekels will be based on the exchange rate on the date of your receipt. For United States federal income tax purposes, you will have a basis in any Israeli Shekels you receive equal to the dollar value of the Israeli Shekels on the date of payment. Any gain or loss that you recognize upon a subsequent disposition of these Israeli Shekels will generally be ordinary income or loss.

The Israeli withholding tax will generally be treated for United States federal income tax purposes as a foreign tax that you may claim as a foreign tax credit against your United States federal income tax liability, subject to limitations generally applicable to foreign tax credits. For example, dividends distributed by us will generally be categorized as passive income or, in the case of some holders, as financial services income, for purposes of computing allowable foreign tax credits for United States federal income tax purposes. In general, you may not claim a foreign tax credit with respect to a category of income in excess of the United States federal income tax otherwise payable with respect to that category of income. However, you may carry back any excess foreign tax credits to the two preceding tax years and then carry any remaining excess credits forward five subsequent tax years to reduce your United States federal income tax payable on foreign source income in the same category that is not otherwise offset by a foreign tax credit. The consequences of the separate limitation calculation will depend on the nature and sources of your income and the deductions allocable to that income. You should consult with your tax advisor regarding the use of foreign tax credits.

In lieu of claiming a credit, you may claim all foreign tax that you paid during a particular taxable year as an itemized deduction. Unlike a credit, a deduction does not reduce your United States federal income tax on a dollar for dollar basis. The deduction, however, is not subject to the category limitations described above regarding foreign tax credits. You are urged to consult your own tax advisor concerning whether you are eligible for benefits under the United States-Israel tax treaty, whether, and to what extent, a foreign tax credit will be available with respect to dividends received from us, and the treatment of any foreign currency gain or loss on any Israeli Shekels received with respect to the shares that are not converted into United States dollars on the date the Israeli Shekels are actually or constructively received.

Sale or Exchange of Our Ordinary Shares

Subject to the discussion below under "Passive Foreign Investment Company Considerations," the following Internal Revenue Code rules regarding dispositions will generally apply.

In general, you will recognize gain or loss upon the sale, exchange, redemption or other taxable disposition of an ordinary share equal to your amount realized in the disposition less your adjusted income tax basis in the ordinary share. Your amount realized is the amount of cash and the fair market value of property received, or the United States dollar value on the date of the disposition of the amount realized in Israeli Shekels. Your adjusted income tax basis in an ordinary share is discussed above.

Gain or loss recognized upon the sale, exchange, redemption or other taxable disposition of an ordinary share will generally be capital gain or loss, and will generally be long-term capital gain or loss if your holding period in the disposed of ordinary shares exceeds one year. Special rates of tax apply to long-term capital gains recognized by noncorporate United States holders. Also, your gain will generally be treated as United States source income for United States foreign tax credit purposes. You should consult your tax advisor regarding the source of loss recognized on the sale, exchange, redemption or other taxable disposition of an ordinary share.

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Passive Foreign Investment Company Considerations

Special United States federal income tax rules apply to a United States holder who owns shares of a corporation that was at any time during the United States holder's holding period a passive foreign investment company (a "PFIC"). A non-United States corporation will be classified as a PFIC for United States federal income tax purposes in any taxable year in which, after applying look-through rules for lower tier affiliates, either (1) at least 75% of its gross income is "passive income," or (2) at least 50% of the gross value of its assets is attributable to assets that produce passive income or are held for the production of passive income. Passive income for this purpose generally includes dividends, interest, royalties, rents and gains from commodities and securities transactions.

Based on our estimated gross income, the average value of our gross assets (assuming that we are entitled to value our intangible assets using the methods prescribed for publicly traded corporations) and the nature of our business, we believe there is only a small chance that we will be a PFIC for our current taxable year and in the foreseeable future. Since PFIC status is a factual determination that must be made annually and is therefore subject to change, our status in current and future years depends on our assets and activities in those years. Because the market price of our ordinary shares is likely to fluctuate and because the market price of the shares of technology companies has been especially volatile, we cannot assure you whether or not we will be considered a PFIC for any taxable year. In addition, we cannot provide any assurance that the applicable tax law will not change in a manner which adversely affects our PFIC determination. If we were a PFIC for a taxable year and you are a United States holder of our ordinary shares at any point during that year, you generally could be subject to imputed interest charges and other disadvantageous tax treatment with respect to any gain from the sale or exchange of, and certain distributions with respect to, your ordinary shares.

If we were a PFIC, a United States holder of our ordinary shares could make a variety of elections that may alleviate the tax consequences referred to above. However, it is expected that the conditions necessary for making an election to treat us as a qualified electing fund under the PFIC rules will not be available. You should consult your tax advisor regarding our potential status as a PFIC and the tax consequences to you that would arise if we were treated as a PFIC.

Backup Withholding and Information Reporting

If you hold ordinary shares, you may be subject to information reporting and backup withholding of United States federal income tax with respect to cash payments in respect of dividends or the gross proceeds from dispositions. The backup withholding rate is currently 30%, but is scheduled to be reduced to 28% over the next several years. However, you will not be subject to backup withholding if you properly execute, under penalties of perjury, an IRS Form W-9 or a substantially similar form in which you provide your correct taxpayer identification number, certify that it is correct, certify that you are a United States person, and certify as to one of the following conditions: (1) you are not subject to backup withholding because you are a corporation or come within another enumerated exempt category, (2) you have not been notified by the IRS that you are subject to backup withholding, or (3) you have been notified by the IRS that you are no longer subject to backup withholding.

If you do not provide your correct taxpayer identification number on the IRS Form W-9 or a substantially similar form, you may be subject to penalties imposed by the IRS. Unless you have established on a properly executed IRS Form W-9 or a substantially similar form that you are a corporation or come within another enumerated exempt category, dividends and other payments paid to you during the taxable year, and the amount of tax withheld, if any, will be reported to you and to the IRS.

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Amounts withheld under backup withholding are generally not an additional tax and may be refunded or credited against your United States federal income tax liability, provided you furnish the required information to the IRS. You should consult your tax advisor as to your qualification for exemption from backup withholding and the procedure for obtaining that exemption.

THE ABOVE DESCRIPTION IS NOT INTENDED TO CONSTITUTE A COMPLETE ANALYSIS OF ALL TAX CONSEQUENCES RELATING TO THE OWNERSHIP OR DISPOSITION OF OUR ORDINARY SHARES BY UNITED STATES HOLDERS. YOU SHOULD CONSULT YOUR OWN TAX ADVISORS CONCERNING THE TAX CONSEQUENCES OF YOUR PARTICULAR SITUATIONS, AS WELL AS ANY TAX CONSEQUENCES THAT MAY ARISE UNDER THE LAWS OF ANY STATE, LOCAL, FOREIGN, OR OTHER TAXING JURISDICTION.

GERMAN TAXATION CONSIDERATIONS

In the opinion of FPS Fritze Paul Schmitt, Rechtsanwalte, Frankfurt am Main and Seelig & Preu, Bohlig, Rechtsanwalte, Steuerberater, Wirtschaftsprufer, Munich, the following is a description of tax matters arising under German tax law in consideration of the German-Israeli tax treaty. This description takes into account the material changes of German tax law as a result of the reform of the taxation of enterprises which was enacted in summer 2000 and implemented in the years 2001 and 2002. This description assumes that holders are initial purchasers of the ordinary shares, that will hold the ordinary shares as a capital asset. They have relied on the facts presented to them by us.

THIS DESCRIPTION DOES NOT PURPORT TO BE A COMPREHENSIVE DESCRIPTION OF ALL OF THE TAX CONSIDERATIONS WHICH MAY BE RELEVANT TO A DECISION TO PURCHASE OUR ORDINARY SHARES IN THE OFFERING. THIS DESCRIPTION IS BASED ON THE TAX LAWS OF GERMANY AS IN EFFECT ON THE DATE OF THIS PROSPECTUS, WHICH ARE SUBJECT TO CHANGE, POSSIBLY WITH RETROACTIVE EFFECT. THIS DESCRIPTION IS LIMITED TO INCOME TAXATION OF DIVIDENDS AND CAPITAL GAINS AS WELL AS GIFT AND INHERITANCE TAX UNDER GERMAN LAW BUT DOES NOT ADDRESS ALL ASPECTS OF SUCH GERMAN TAXATION. THIS DESCRIPTION DOES NOT CONSIDER ANY SPECIFIC FACTS OR CIRCUMSTANCES THAT MAY APPLY TO A PARTICULAR HOLDER. YOU SHOULD CONSULT YOUR OWN TAX ADVISOR WITH RESPECT TO THE GERMAN TAX CONSEQUENCES OF ACQUIRING, OWNING OR DISPOSING OF OUR ORDINARY SHARES.

Taxation of dividends

If you are a German resident shareholder, liable to personal income tax, the dividends received from us must be generally treated as taxable income in Germany. Beginning with the tax year 2001 only 50% of these dividends are subject to income tax (so called Halbeinkunfteverfahren). The other 50% are not subject to any income tax.

In connection with this enactment, a private German shareholder may only deduct 50% of his dividend-related-expenses (Werbungskosten). Such expenses can occur for the acquisition, safeguarding and maintenance of the dividend-income (including fees for the depository bank and finance charges like interest for loans taken for the acquisition of the shares of our company) and 50% of these expenses can be deducted from the dividend income of ordinary shares held in private. Absent itemized expenses, you may deduct income-related expenses in a lump sum amount of euro 51 (or euro 102 for joint tax returns) p.a. For income from capital assets, an additional annual savers' tax allowance of euro 1,550 (or euro 3,100 for joint returns) is granted (Sparerfreibetrag). In accordance with the German-Israeli tax treaty, any remaining Israeli withholding tax on dividends is credited to the German part of the income tax on the dividend income. For example, if the German income tax on these dividend income, as a result of deductions for income-related expenses (e.g. refinancing costs), is lower than the Israeli withholding tax, this Israeli withholding tax can only be offset by the amount of the German tax. Upon your request, the Israeli withholding tax may be deducted at the time income is determined instead of being offset.

If you are a holder of our ordinary shares and you are liable to unlimited corporation income tax, then dividends will not be taxed. On the other hand, due to this exemption, no expenses can be deducted which relate to this dividend income of the company. In addition to this, an amount of 5%

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of your tax exempt dividends is treated as a non-deductible expense. This will increase your taxable-income. The same exemption occurs, if you are a non-resident corporation with a permanent establishment in Germany that holds our ordinary shares as asset. The Israeli withholding tax with respect to the amount of the tax exempt dividends cannot be offset against the German tax. Dividends in Germany constitute taxable income if they are re-distributed to a domestic natural person, who is a shareholder of the German corporation.

If you are a German non commercial asset management partnership, that holds our ordinary shares, a pro rata share of dividends is attributed to the investment income of each partner. If You are a German commercial partnership, that holds our ordinary shares as operating assets, a pro rata share of the dividends is attributed to each partner's income from commercial activities. In the latter case the partner may not claim the savers' tax allowance in respect of such commercial income.

If you are non-German resident that holds our ordinary shares, you will not be subject to German income or withholding tax on dividends received on our ordinary shares, unless such income is effectively connected with the conduct of a trade or business of the non German resident in Germany.

Taxation of capital gains

If you are an incorporated holder of our ordinary shares and you have unlimited corporation tax liability, you will not be taxed on capital gains at this level. No expenses can be deducted which relate to this capital gain income of the company. In addition to this, an amount of 5% of your tax exempt capital gain income is treated as a non-deductible expense, which increases your income. On the other hand write-down of the value of the ordinary share is not a tax-deductible expense anymore and the capital gain, which is the result of a disposal of ordinary shares, which were written- down in previous periods is subject to unlimited taxation. The same rules are applicable to shares, that form part of the assets of a non-resident corporations permanent establishment in Germany.

If you are a private investor 50% of the capital gains are subject to personal income tax, if he, or in the case of an acquisition without consideration, one of his predecessors in title, has held 1% or more of the company's nominal capital at any time within the five years preceding the transfer. If you are a private investor and you have held 1% or more of the company's nominal capital within this five year period, the capital gain will not be taxed, if the holding period of the shares was more than 1 year. Otherwise the capital gain will be subject to unlimited tax liability, if the disposal takes place within one year after acquisition and if you, or in the case of an acquisition without consideration, one of your predecessors in title at the time of the disposal or at any time within the five years preceding the sale, directly or indirectly held a participation in our company of at least 1% of the nominal share capital of our company.

If you are a non-German resident that holds our ordinary shares you will not be subject to German income or withholding tax on a gain realized on the sale or exchange of our ordinary shares unless such gain is effectively connected with the conduct of trade or business of the non-German resident in Germany.

Gift and inheritance tax

In accordance with German tax law, the transfer of our ordinary shares upon death or as a donation is subject to the German inheritance and gift tax, if:

* the shares in the case of a testator or donor belong to business assets for which a permanent establishment in Germany is maintained or a permanent representative appointed; or

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* the testator or donor, the heir or other acquirer at the time of the death or when the gift takes place had his domicile or his habitual abode in Germany, or as a German national with no domicile in Germany had not resided continuously abroad for more than five years.

Israel abolished inheritance tax in 1985. The German-Israeli tax treaty is not applicable to cases later than March 31, 1982.

Other German taxes

The sale or transfer of our ordinary shares is not subject to stock exchange turnover tax, stamp duty or similar taxes in Germany. Wealth tax is no longer levied for the tax assessment period from 1997; for collection periods from 1998 and later, the trade capital tax has been repealed.

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ENFORCEABILITY OF CIVIL LIABILITIES

We are incorporated under the laws of the State of Israel. Service of process upon our directors and executive officers and the Israeli experts named in this prospectus, substantially all of whom reside outside the United States, will be difficult to obtain within the United States. Furthermore, because substantially all of our assets and substantially all of our directors and officers are located outside the United States, any judgment obtained in the United States against us or any of our directors and officers or the Israeli experts named in the prospectus, will be difficult to collect outside those countries.

We have been informed by our legal counsel in Israel, Zysman Aharoni Gayer & Co. Law Offices, that there is doubt as to the enforceability of civil liabilities under the Securities Act and the Securities Exchange Act of 1934 in original actions instituted in Israel. However, subject to certain time limitations, Israeli courts generally enforce a final executory judgment of a foreign court in civil matters including judgments based upon the civil liability provisions of the Securities Act and the Securities Exchange Act or the German securities laws and including a monetary or compensatory judgment in a non-civil matter, provided that:

* the judgments are obtained after due process before a court of competent jurisdiction, according to the laws of the state in which the judgment is given and the rules of private international law currently prevailing in Israel;

* the foreign court is not prohibited by law from enforcing judgments of Israeli courts;

* adequate service of process has been effected and the defendant has had a reasonable opportunity to be heard and to present his evidence;

* the judgments and the enforcement of the civil liabilities are not contrary to the law, public policy, security or sovereignty of the State of Israel;

* the judgments were not obtained by fraud and do not conflict with any other valid judgment in the same matter between the same parties;

* an action between the same parties in the same matter is not pending in any Israeli court at the time the lawsuit is instituted in the foreign court; and

* the obligations under the judgment are enforceable according to the laws of the State of Israel.

We have irrevocably appointed OTI America, Inc. as our agent solely to receive service of process in any action against us in any United States federal court or the courts of the State of New York arising out of this offering.

Foreign judgments enforced by Israeli courts will be payable in Israeli currency, which can then be converted into non-Israeli currency and transferred out of Israel. The usual practice in an action before an Israeli court to recover an amount in a non-Israeli currency is for the Israeli court to render judgment for the equivalent amount in Israeli currency at the rate of exchange in force on the date thereof, but the judgment debtor may make payment in foreign currency. Pending collection, the amount of the judgment of an Israeli court stated in Israeli currency ordinarily will be linked to the Israeli consumer price index plus interest at the annual statutory rate set by Israeli law prevailing at that time. Judgment creditors must bear the risk of unfavorable exchange rate movement.

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PLAN OF DISTRIBUTION

We may sell our shares in or outside the United States to or through underwriters or dealers, through agents or directly to other purchasers. The applicable supplement to this prospectus with respect to our shares will set forth the terms of the offering of our shares, including the name or names of any underwriters, dealers or agents, the public offering price, any underwriting discounts and other items constituting underwriter compensation, any discounts or concessions allowed or reallowed or paid to dealers, and any securities exchanges on which the securities may be listed.

Our shares may be sold directly by us or through agents designated by us from time to time at fixed prices, which may be changed. Any agent involved in the offer or sale of our shares will be named, and any commissions payable by us to such agent will be set forth, in the supplement to this prospectus relating thereto.

In connection with the sale of our shares, underwriters or agents may receive compensations from us or from purchasers of our shares, for whom they may act as agents, in the form of discounts, concessions or commissions. Underwriters may sell our shares to our through dealers, and such dealers may receive compensation in the form of discounts, concessions or commissions from the underwriters and/or commissions from the purchasers from whom they may act as agents. Underwriters, dealers and agents that participate in the distribution of our shares may be deemed to be underwriters under the Securities Act, and any discounts of commissions they receive from us and any profit on the resale of our shares they realize may be deemed to be underwriting discounts and commissions under the Securities Act. Any such underwriter or agent will be identified, and any such compensation received from us will be described, in the applicable supplement to this prospectus. Unless otherwise set forth in the supplement to this prospectus relating thereto, the obligations of the underwriters or agents to purchase our shares will be subject to conditions precedent and the underwriters will be obligated to purchase all our shares if any are purchased. The public offering price and any discounts or concessions allowed or reallowed or paid to dealers may be changed from time to time.

Any ordinary shares sold pursuant to this prospectus and applicable prospectus supplement, will be approved for trading, upon notice of issuance, on Nasdaq.

Under agreements into which we may enter, underwriters, dealers and agents who participate in the distribution of our shares may be entitled to indemnification by us against and contribution toward certain liabilities, including liabilities under the Securities Act.

Underwriters, dealers and agents may engage in transactions with, or perform services for, us in the ordinary course of business.

We expect that our selling shareholders may sell their shares on NASDAQ Small Cap Market after the listing on NASDAQ Small Cap Market is effective. The selling shareholders and their successors, including their permitted transferees, pledgees or donees or their successors, may sell the shares of common stock directly to purchasers or through underwriters, broker-dealers or agents, who may receive compensation in the form of discounts, concessions or commissions from the selling shareholders or the purchasers. These discounts, concessions or commissions as to any particular underwriter, broker-dealer or agent may be in excess of those customary in the types of transactions involved.

The shares covered by this prospectus to be sold from time to time by the selling shareholders may be sold in one or more transactions at fixed prices, at prevailing market prices at the time of sale, at prices related to the prevailing market prices, at varying prices determined at the time of sale, or at negotiated prices. These sales may be effected in transactions:

* on any national securities exchange or U.S. inter-dealer system of a registered national securities association on which the common stock may be listed or quoted at the time of sale;

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* in the over-the-counter market;

* in private transactions;

* by pledge to secure debts and other obligations; or

* a combination of any of the above transactions.

The selling shareholders may either sell shares directly to purchasers, or sell shares to, or through, broker-dealers. These broker-dealers may act either as an agent of the selling shareholders, or as a principal for the broker-dealer's own account. These transactions may include transactions in which the same broker-dealer acts as an agent on both sides of the trade. Such broker-dealers may receive compensation in the form of discounts, concessions or commissions from the selling shareholders and/or the purchasers of the shares. This compensation may be received both if the broker-dealer acts as an agent or as principal. This compensation might also exceed customary commissions.

If any selling security holder notifies us that any material arrangement has been entered into with a broker-dealer for the sale of shares through:

* a block trade,

* a special offering,

* an exchange distribution or secondary distribution, or

* a purchase by a broker or dealer,

then we will file, if required, a supplement to this prospectus under Rule 424(b) of the Securities Act.

The supplement will disclose, to the extent required:

* the names of the selling shareholders and of the participating broker-dealer(s);

* the number of shares involved;

* the price at which such shares were sold;

* the commissions paid or discounts or concessions allowed to such broker-dealer(s), where applicable;

* that such broker-dealer(s) did not conduct any investigation to verify the information set out or incorporated by reference in this prospectus; and

* any other fact material to the transaction.

The selling shareholders and any underwriters, broker-dealers or agents that participate in the sale or distribution of the shares of common stock may be deemed "underwriters" within the meaning of Section 2(11) of the Securities Act. Any discounts, commissions, concessions or profit they earn on any resale of the shares may be underwriting discounts and commissions under the Securities Act. Selling shareholders who are "underwriters" within the meaning of Section 2(11) of the Securities Act will be subject to the prospectus delivery requirements of the Securities Act.

Under the Securities Exchange Act of 1934, any person engaged in the distribution of the shares may not simultaneously engage in market making activities with respect to our common stock for a period of up to 5 business days prior to the commencement of such distribution. In addition, the selling shareholders will be subject to the applicable provisions of the Securities Exchange Act of 1934, including Regulation M, which may limit the timing of purchases and sales of shares of common stock by the selling shareholders or any other such persons. These restrictions may affect the marketability of the shares and the ability of any person or entity to engage in market-making activities with respect to the shares.

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In order to comply with the securities laws of some jurisdictions, if applicable, the shares of common stock must be sold in these jurisdictions only through registered or licensed brokers or dealers. In addition, in certain jurisdictions, the shares of common stock may not be sold unless they have been registered or qualified for sale or an exemption from registration or qualification requirements is available and is complied with.

LEGAL MATTERS

The validity of the ordinary shares offered in this offering and certain other matters in connection with this offering relating to Israeli law will be passed upon for us by Zysman Aharoni Gayer & Co. Law Offices, Tel Aviv, Israel. Certain legal matters in connection with this offering relating to United States law will be passed upon for us by Z.A.G/S&W, New York, New York. As of the date of this prospectus, Zysman Aharoni Gayer & Co. beneficially owns ordinary shares of the Company and options to acquire ordinary shares of the Company and Z.A.G/S&W beneficially owns 5,278 ordinary shares of the Company (after giving effect to the reverse stock split).

EXPERTS

Our consolidated financial statements for the years ended December 31, 1999, 2000 and 2001, and as of December 31, 1999, 2000 and 2001, appearing elsewhere in this prospectus have been audited by Luboshitz Kasierer, Arthur Andersen, independent public accountants in Israel, as set forth in their report appearing in this prospectus, and are included in reliance upon the report of such firm given upon their authority as experts in auditing and accounting. The address of Luboshitz Kasierer is Ahad Ha'am Street 9, Shalom Tower, Tel Aviv 29452, Israel.

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WHERE YOU CAN FIND MORE INFORMATION

We have filed a registration statement on Form F-1, including the exhibits and schedules thereto, with the Securities and Exchange Commission, or SEC, under the Securities Act of 1933, as amended, and the rules and regulations thereunder, for the registration of the ordinary shares that are being offered by this prospectus. This prospectus does not include all of the information contained in the registration statement. You should refer to the registration statement and its exhibits for additional information. Whenever we make reference in this prospectus to any of our contracts, agreements or other documents, the references are not necessarily complete and you should refer to the exhibits attached to the registration statement for copies of the actual contract, agreements or other document.

After this offering, we will become subject to the informational requirements of the Securities Exchange Act of 1934, as amended, applicable to foreign private issuers and will fulfill the obligations with respect to such requirements by filing reports with the SEC. We, as a "foreign private issuer," will be exempt from the rules under the Securities Exchange Act prescribing certain disclosure and procedural requirements for proxy solicitations, and our officers, directors and principal shareholders will be exempt from the reporting and "short-swing" profit recovery provisions contained in Section 16 of the Securities Exchange Act, with respect to their purchases and sales of shares. In addition, we will not be required to file annual, quarterly and current reports and financial statements with the SEC as frequently or as promptly as United States companies whose securities are registered under the Securities Exchange Act. However, we intend to file with the SEC, within 180 days after the end of each fiscal year, an annual report on Form 20-F containing financial statements audited by an independent accounting firm. We will also furnish quarterly reports on Form 6-K containing unaudited interim financial information for the first three quarters of each fiscal year, within 60 days after the end of such quarter.

You may read and copy any document we file with the SEC at reference facilities at 450 Fifth Street, NW, Washington, DC 20549, and at the SEC's regional offices at 233 Broadway, New York, New York 10279 and Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511. You may also obtain copies of the documents at prescribed rates by writing to the Public Reference Section of the SEC at 450 Fifth Street, NW, Washington, DC 20549. Please call the SEC at 1-800-SEC-0330 for further information on the operation of the public reference facilities.

In addition, under German law, documents referred to in this Prospectus, in so far as they relate to the Company may be inspected during normal business hours at On Track Innovations Ltd., Z.H.R. Industrial Zone, P.O. Box 32, Rosh Pina, Israel.

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ON TRACK INNOVATIONS LTD.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

                                                                  PAGE
                                                                  ----
Report of Independent Public Accountants....................      F-2

Consolidated Balance Sheets as of December 31, 1999, 2000,
  and 2001 (audited) and March 31, 2002 (unaudited).........      F-3

Consolidated Statements of Operations for the years ended
  December 31, 1999, 2000, and 2001 (audited) and for the
  three months period ended March 31, 2001 and 2002
  (unaudited)...............................................      F-4

Consolidated Statements of Shareholders' Equity for the
  years ended December 31, 1999, 2000, and 2001 (audited)
  and for the three months period ended March 31, 2002
  (unaudited)...............................................    F-5-F-6

Consolidated Statements of Cash Flows for the years ended
  December 31, 1999, 2000, and 2001 (audited) and for the
  three months period ended March 31, 2001 and 2002
  (unaudited)...............................................    F-7-F-8

Notes to the Consolidated Financial Statements..............    F-9-F-26

F-1

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Shareholders of
On Track Innovations Ltd.

We have audited the accompanying consolidated balance sheets of On Track Innovations Ltd. and subsidiaries as of December 31, 1999, 2000, and 2001 and the related consolidated statements of operations, shareholders' equity and cash flows for each of the three years ended December 31, 1999, 2000, and 2001. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of On Track Innovations Ltd. and subsidiaries as of December 31, 1999, 2000, and 2001 and the consolidated results of their operations and their cash flows for the three years ended December 31, 1999, 2000, and 2001 in conformity with accounting principles generally accepted in the United States.

LUBOSHITZ KASIERER
ARTHUR ANDERSEN

TEL-AVIV, ISRAEL
MARCH 22, 2002

F-2

ON TRACK INNOVATIONS LTD.

CONSOLIDATED BALANCE SHEETS

In thousands of U.S. Dollars, except share data

                                                                     DECEMBER 31,
                                                       -----------------------------------------    MARCH 31,
                                                         NOTE      1999       2000        2001        2002
                                                       --------  --------   ---------   --------   -----------
ASSETS                                                                      (AUDITED)              (UNAUDITED)
  CURRENT ASSETS
    Cash and cash equivalents........................    (3)     $16,315     $15,598    $ 6,030      $ 3,866
    Short-term investments...........................    (4)      12,252       1,885      1,946        1,671
    Trade receivables (net of allowance for doubtful
      accounts of $151, $240, $565 and $362 as of
      December 31, 1999, 2000, 2001 and March 31,
      2002, respectively)............................              2,146       4,458      2,983        3,091
    Other receivables and prepaid expenses...........    (5)         776       2,305      1,091        1,306
    Inventories......................................    (6)       1,934       5,325      4,998        5,096
                                                                 -------     -------    -------      -------
      Total current assets...........................             33,423      29,571     17,048       15,030
                                                                 -------     -------    -------      -------
  INVESTMENT IN AN AFFILIATED COMPANY................    (7D)         --         329        570          541
                                                                 -------     -------    -------      -------
  PROPERTY, PLANT AND EQUIPMENT, NET.................    (8)       1,946       4,877      6,502        6,569
                                                                 -------     -------    -------      -------
  OTHER ASSETS, NET..................................    (7F)         --       3,396      5,661        5,641
                                                                 -------     -------    -------      -------
  SEVERANCE PAY DEPOSITS.............................    (11)        312         407        682          657
                                                                 -------     -------    -------      -------
      Total assets...................................            $35,681     $38,580    $30,463      $28,438
                                                                 =======     =======    =======      =======
LIABILITIES AND SHAREHOLDERS' EQUITY
  CURRENT LIABILITIES
    Short-term credit and current maturities of
      long-term loans................................   (10D)    $ 1,199     $ 4,093    $ 3,333        3,055
    Trade payables...................................              1,368       3,329      3,178        2,968
    Other current liabilities........................    (9)       2,594       2,765      2,463        2,102
                                                                 -------     -------    -------      -------
      Total current liabilities......................              5,161      10,187      8,974        8,125
                                                                 -------     -------    -------      -------
  LONG-TERM LIABILITIES
    Loans, net of current maturities.................    (10)      1,321       2,463      4,751        4,715
    Severance pay....................................    (11)        886       1,209      1,064        1,028
                                                                 -------     -------    -------      -------
      Total long-term liabilities....................              2,207       3,672      5,815        5,743
                                                                 -------     -------    -------      -------
  COMMITMENTS AND LIENS..............................    (12)
  SHAREHOLDERS' EQUITY...............................    (13)
    Ordinary shares of NIS .01 par value:
      Authorized--3,750,000 shares as of December 31,
      1999 and 2000, 7,500,000 shares as of December
      31, 2001 and March 31, 2002; Issued and
      outstanding--2,168,843, 2,246,670, 2,364,420
      and 2,364,420 shares as of December 31, 1999,
      2000, 2001 and March 31, 2002, respectively....                 44          45         47           47
    Additional paid-in capital.......................             37,645      42,322     44,833       44,917
    Deferred compensation............................               (306)       (860)      (551)        (499)
    Other comprehensive income-currency translation
      adjustments....................................                 --           9         37           34
    Accumulated deficit..............................             (9,070)    (16,795)   (28,692)     (29,929)
                                                                 -------     -------    -------      -------
  Total shareholders' equity.........................             28,313      24,721     15,674       14,570
                                                                 -------     -------    -------      -------
  Total liabilities and shareholders' equity.........            $35,681     $38,580    $30,463      $28,438
                                                                 =======     =======    =======      =======

The accompanying notes to the consolidated financial statements form an integral part thereof.

F-3

ON TRACK INNOVATIONS LTD.

CONSOLIDATED STATEMENTS OF OPERATIONS

In thousands of U.S. Dollars, except share and per share data

                                                             YEAR ENDED                  THREE MONTHS ENDED
                                                            DECEMBER 31,                      MARCH 31,
                                                ------------------------------------   -----------------------
                                        NOTE       1999         2000         2001         2001         2002
                                      --------  ----------   ----------   ----------   ----------   ----------
                                                             (AUDITED)                       (UNAUDITED)
REVENUES
  Products..........................    (17)    $    3,892   $   13,389   $   18,217   $    3,719   $    3,588
  Nonrecurring engineering..........                 1,405          590          500           --          305
  Licensing and transaction fees....                    86        1,095        1,527          302          410
  Customer services and technical
    support.........................                    --          428          676           49          118
                                                ----------   ----------   ----------   ----------   ----------
    Total revenues..................                 5,383       15,502       20,920        4,070        4,421
COST OF REVENUES
  Products..........................                 2,122        7,031       10,727        2,097        2,109
  Nonrecurring engineering..........                    73           89           20           --           50
  Licensing and transaction fees....                    --           --           --           --           --
  Customer services and technical
    support.........................                    --          332          491           33           67
                                                ----------   ----------   ----------   ----------   ----------
    Total cost of revenues..........                 2,195        7,452       11,238        2,130        2,226
                                                ----------   ----------   ----------   ----------   ----------
    Gross profit....................                 3,188        8,050        9,682        1,940        2,195
                                                ----------   ----------   ----------   ----------   ----------
OPERATING EXPENSES
  Research and development..........                 2,101        4,913        6,737        1,935        1,242
  Less--participation by the Office
    of the Chief Scientist..........                   645        1,031          599           --          206
                                                ----------   ----------   ----------   ----------   ----------
  Research and development, net.....                 1,456        3,882        6,138        1,935        1,036
  Marketing and selling.............                 2,066        7,437        6,592        1,778          974
  General and administrative........                 1,839        3,755        5,159        1,617        1,193
  Amortization of intangible
    assets..........................                    --          465        1,112          278           20
  Other expenses....................   (14A)            --          599          340           --           --
                                                ----------   ----------   ----------   ----------   ----------
    Total operating expenses........                 5,361       16,138       19,341        5,608        3,223
                                                ----------   ----------   ----------   ----------   ----------
    Operating loss..................                (2,173)      (8,088)      (9,659)      (3,668)      (1,028)
Interest on convertible loan........   (13A)          (250)          --           --           --           --
Financing income....................                   459        1,300          520          281          381
Financing expenses..................                  (141)        (491)        (471)        (151)        (240)
Other income (expenses), net........   (14B)            --           --       (1,081)         500          (22)
                                                ----------   ----------   ----------   ----------   ----------
    Loss before income taxes........                (2,105)      (7,279)     (10,691)      (3,038)        (909)
Tax benefit (taxes on income).......    (15)           (82)          58           47          (25)         (22)
                                                ----------   ----------   ----------   ----------   ----------
                                                    (2,187)      (7,221)     (10,644)      (3,063)        (931)
Minority interest...................                    81          250           37          (11)         (19)
Equity in losses of an affiliated
  company...........................                    (2)        (754)      (1,290)        (642)        (287)
                                                ----------   ----------   ----------   ----------   ----------
    Net loss........................            $   (2,108)  $   (7,725)  $  (11,897)  $   (3,716)  $   (1,237)
                                                ==========   ==========   ==========   ==========   ==========
Basic and diluted net loss per
  share.............................            $    (1.17)  $    (3.48)  $    (5.11)  $    (1.56)  $    (0.52)
                                                ==========   ==========   ==========   ==========   ==========
Weighted average number of shares
  outstanding--basic and diluted....             1,806,977    2,220,741    2,326,599    2,382,020    2,364,420
                                                ==========   ==========   ==========   ==========   ==========

The accompanying notes to the consolidated financial statements form an integral part thereof.

F-4

ON TRACK INNOVATIONS LTD.
CONSOLIDATED STATEMENTS OF
SHAREHOLDERS' EQUITY

In thousands of U.S. Dollars, except share data

                                                                                         OTHER
                                                                                     COMPREHENSIVE
                                                        ADDITIONAL                  INCOME-CURRENCY                     TOTAL
                                NUMBER OF     SHARE      PAID-IN       DEFERRED       TRANSLATION     ACCUMULATED   SHAREHOLDERS'
                                  SHARES     CAPITAL     CAPITAL     COMPENSATION     ADJUSTMENT        DEFICIT        EQUITY
                                ----------   --------   ----------   ------------   ---------------   -----------   -------------
BALANCE AS OF DECEMBER 31,
  1998........................   1,583,759     $34       $ 9,216       $  (286)          $ --          $ (6,962)       $ 2,002
Issuance of shares, net of
  issuance costs of $125......      91,084       2         3,220            --             --                --          3,222
Exercise of options...........      14,000      --            --            --             --                --             --
Shares issued in initial
  public offering, net of
  issuance costs of $4,177....     480,000       8        24,493            --             --                --         24,501
Deferred compensation.........          --      --           414          (414)            --                --             --
Amortization of deferred
  compensation................          --      --            52           394             --                --            446
Beneficial conversion feature
  on convertible loan.........          --      --           250            --             --                --            250
Net loss......................          --      --            --            --             --            (2,108)        (2,108)
                                ----------     ---       -------       -------           ----          --------        -------

BALANCE AS OF DECEMBER 31,
  1999........................   2,168,843      44        37,645          (306)            --            (9,070)        28,313
Issuance of shares in
  consideration for equity
  interest in subsidiaries,
  net of issuance costs of
  $60.........................      59,807       1         3,562            --             --                --          3,563
Exercise of options...........      18,020      --           145            --             --                --            145
Deferred compensation.........          --      --           960          (960)            --                --             --
Amortization of deferred
  compensation................          --      --            10           406             --                --            416
Currency translation
  adjustment..................          --      --            --            --              9                --              9
Net loss......................          --      --            --            --             --            (7,725)        (7,725)
                                ----------     ---       -------       -------           ----          --------        -------

BALANCE AS OF DECEMBER 31,
  2000........................   2,246,670      45        42,322          (860)             9           (16,795)        24,721
Issuance of shares in
  consideration for equity
  interests in subsidiaries,
  net of issuance costs of
  $84.........................     117,750       2         2,511            --             --                --          2,513
Amortization of deferred
  compensation................          --      --            --           309             --                --            309
Currency translation
  adjustment..................          --      --            --            --             28                --             28
Net loss......................          --      --            --            --             --           (11,897)       (11,897)
                                ----------     ---       -------       -------           ----          --------        -------
BALANCE AS OF DECEMBER 31,
  2001........................   2,364,420      47        44,833          (551)            37           (28,692)        15,674
Deferred compensation.........          --      --            84           (84)            --                --             --
Amortization of deferred
  compensation................          --      --            --           136             --                --            136
Currency translation
  adjustment..................          --      --            --            --             (3)               --             (3)
Net loss......................          --      --            --            --             --            (1,237)        (1.237)
BALANCE AS OF MARCH 31, 2002
  (UNAUDITED).................   2,364,420     $47       $44,917       $  (499)          $ 34          $(29,929)       $14,570
                                ==========     ===       =======       =======           ====          ========        =======

The accompanying notes to the consolidated financial statements form an integral part thereof.

F-5

ON TRACK INNOVATIONS LTD.
CONSOLIDATED STATEMENTS OF
SHAREHOLDERS' EQUITY (CONTINUED)
In thousands of U.S. Dollars

                                                        YEAR ENDED               THREE MONTHS ENDED
                                                       DECEMBER 31,                  MARCH 31,
                                                  ----------------------       ----------------------
                                                    2000          2001           2001          2002
                                                  --------      --------       --------      --------
                                                        (AUDITED)                   (UNAUDITED)
COMPREHENSIVE LOSS:
  Net loss......................................  $ (7,725)     $(11,897)      $ (3,716)     $ (1,237)
  Currency translation adjustment...............         9            28            (16)           (3)
                                                  --------      --------       --------      --------
                                                  $ (7,716)     $(11,869)      $ (3,732)     $ (1,240)
                                                  ========      ========       ========      ========

The accompanying notes to the consolidated financial statements form an integral part thereof.

F-6

ON TRACK INNOVATIONS LTD.

CONSOLIDATED STATEMENTS OF CASH FLOWS
In thousands of U.S. Dollars

                                                                         YEAR ENDED              THREE MONTHS ENDED
                                                                        DECEMBER 31,                  MARCH 31,
                                                              --------------------------------   -------------------
                                                                1999        2000        2001       2001       2002
                                                              ---------   ---------   --------   --------   --------
                                                                          (AUDITED)                  (UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss....................................................  $ (2,108)   $ (7,725)   $(11,897)  $ (3,716)  $ (1,237)
Adjustments to reconcile net loss to net cash used in
  operating activities:
  Amortization of deferred compensation.....................       446         416         309         82        136
  Loss (gain) on sale of fixed assets.......................        --          --          (6)        --         22
  Gain on sale of investment in subsidiary..................        --          --        (500)      (500)        --
  Amortization of intangible assets.........................        --         465       1,112        278         20
  Assets write-down.........................................        --          --         340         --         --
  Depreciation..............................................       210         593         988        208        173
  Amortization of debt discount.............................       250          --          --         --         --
  Provision for severance pay...............................       248          61        (416)       (94)       (11)
  Minority interest.........................................       (81)       (218)        (15)        11         19
  Equity in losses of an affiliated company and others......        --         754       1,290        642        287
  Translation adjustment and others.........................        67          12         (62)       (29)        --
Changes in operating assets and liabilities
  Decrease (Increase) in short-term investments, net........   (11,554)     10,376         (61)       (34)       275
  Decrease (Increase) in trade receivables..................    (1,083)       (770)      1,245      1,861       (108)
  Decrease (Increase) in other receivables and prepaid
    expenses................................................      (283)     (1,073)      1,192       (418)      (215)
  Decrease (Increase) in inventories........................       (85)     (1,507)        112       (569)       (98)
  Increase (Decrease) in trade payables.....................       267          81         (83)       138       (210)
  Increase (Decrease) in other current liabilities..........       759        (787)       (270)       (50)      (361)
                                                              --------    --------    --------   --------   --------
    Net cash provided by (used in) operating activities.....   (12,947)        678      (6,722)    (2,190)    (1,308)
                                                              --------    --------    --------   --------   --------
CASH FLOWS FROM INVESTING ACTIVITIES
Investment in subsidiaries and affiliates...................        --      (1,332)     (1,334)      (334)      (307)
Proceed from sale of fixed assets...........................        --          --          14         --         10
Purchase of plant and equipment.............................      (513)     (2,627)     (2,639)      (541)      (275)
                                                              --------    --------    --------   --------   --------
    Net cash used in investing activities...................      (513)     (3,959)     (3,959)      (875)      (572)
                                                              --------    --------    --------   --------   --------
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of shares and exercise of options..................    26,773         145          --         --         --
Convertible loans received..................................       750          --          --         --         --
Increase (decrease) in short-term credit....................        --       1.551        (582)      (797)      (227)
Long-term loans received....................................       849       2,528       3,952      2,190        372
Repayment of long-term loans................................      (632)     (1,660)     (2,257)      (316)      (429)
                                                              --------    --------    --------   --------   --------
    Net cash provided by (used in) financing activities.....    27,740       2,564       1,113      1,077       (284)
                                                              --------    --------    --------   --------   --------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS............  $ 14,280    $   (717)   $ (9,568)  $ (1,988)  $ (2,164)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD............     2,035      16,315      15,598     15,598      6,030
                                                              --------    --------    --------   --------   --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD..................  $ 16,315    $ 15,598    $  6,030   $ 13,610   $  3,866
                                                              ========    ========    ========   ========   ========
NON-CASH TRANSACTIONS
Issuance of shares in consideration for equity interest in
  subsidiaries..............................................        --    $  3,563    $  2,513   $  3,375         --
Long-term loan received in consideration for equity interest
  in subsidiaries...........................................        --          --    $    562         --         --
Convertible loan converted into shares of the Company.......  $    700          --          --         --         --
Conversion of EasyPark shares into shares of the Company....  $    300          --          --         --         --
Convertible loan converted into shares of the Company.......  $    250          --          --         --         --

The accompanying notes to the consolidated financial statements form an integral part thereof.

F-7

ON TRACK INNOVATIONS LTD.

CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
In thousands of U.S. Dollars

                                                               YEAR ENDED
                                                              DECEMBER 31,
                                                                  2000
                                                              ------------
                                                               (AUDITED)
ACQUISITION OF SUBSIDIARIES
Assets and liabilities of subsidiaries upon acquisition:
Working capital (excluding cash and cash equivalents).......    $  (123)
Fixed assets................................................       (896)
Intangibles.................................................     (3,861)
Long-term liabilities.......................................      1,083
Minority interests in investee companies upon acquisition...        (16)
Fair value of Company shares issued.........................      3,623
                                                                -------
                                                                $  (190)
                                                                =======

The accompanying notes to the consolidated financial statements form an integral part thereof.

F-8

ON TRACK INNOVATIONS LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
In thousands of U.S. Dollars

NOTE 1--GENERAL

A. On Track Innovations Ltd. (the "Company" or "OTI") was founded in 1990, in Israel. The Company and its subsidiaries are principally engaged in the field of design and development of contactless microprocessor-based smart card systems. On August 31, 1999, the Company completed an initial public offering of its ordinary shares on the Neuer Markt, Frankfurt and raised approximately $24,500.

B. The financial statements of the Company have been prepared in U.S. dollars, as the currency of the primary economic environment in which the operations of the Company are conducted is the U.S. dollar. Substantially all of the Company's sales are in U.S. dollars. Most purchases of materials and components and most marketing costs are denominated in U.S. dollars. Therefore, the functional and reporting currency of the Company is the U.S. dollar.

Transactions and balances denominated in dollars are presented at their original amounts. Transactions and balances in other currencies are remeasured into U.S. dollars in accordance with the principles set forth in Financial Accounting Standards Board of the United States ("FASB") Statement of Accounting Standards ("SFAS") No. 52, Foreign Currency Translation. Accordingly, items have been remeasured as follows:

* Monetary Items--At the exchange rate in effect on the balance sheet date.

* Nonmonetary Items--At historical exchange rates.

* Revenue and Expense Items--At the exchange rates in effect as of the date of recognition of those items (excluding depreciation and other items deriving from nonmonetary items).

All exchange gains and losses from the abovementioned remeasurement (which are immaterial for all periods presented) are reflected in the consolidated statements of operations. The representative rate of exchange as of December 31, 1999, 2000, 2001 and March 31, 2002 was U.S. $1.00 to NIS 4.15, NIS 4.04, NIS 4.42 and NIS 4.67 respectively.

C. Subsidiaries and Affiliated Companies

The functional currency of the majority of the subsidiaries is the US dollar.

The functional currency of InterCard GmbH Kartensysteme and InterCard GmbH Systemelectronic is the Euro and the functional currency of the affiliated company e-Smart Systems Inc. is the Hong Kong dollar. The financial statements of these companies are translated into US dollars in accordance with SFAS No. 52, using the period end exchange rate for assets and liabilities, and average rates for revenues and expenses. Translation adjustments are included as a component of comprehensive loss.

F-9

ON TRACK INNOVATIONS LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In thousands of U.S. Dollars

NOTE 2--SIGNIFICANT ACCOUNTING POLICIES

The financial statements have been prepared in accordance with accounting principles generally accepted in the United States. The significant accounting policies followed in the preparation of the financial statements, applied on a consistent basis, are:

A. Principles of Consolidation

The consolidated financial statements include the accounts of the Company and its subsidiaries. The Company's principal subsidiaries are InterCard GmbH Kartensysteme (Germany), InterCard GmbH Systemelectronic (Germany), OTI Africa Ltd. (South Africa), SoftChip Technologies (3000) Ltd. (Israel), SoftChip Israel Ltd. (Israel), OTI America, Inc. (U.S.A.), Easy Park Ltd. ("EasyPark") (Israel) and Easy Park Israel Ltd. (Israel). Significant intercompany transactions and balances have been eliminated.

B. Cash and Cash Equivalents

Cash equivalents are highly liquid investments with original maturities of less than ninety days.

C. Short-Term Investments

These securities are classified as "trading" and stated at market value. Gains and losses are included in financing income in accordance with the principles set forth in Statement SFAS No. 115.

D. Long-Term Investments

OTI's investments in 20% to 50% owned companies in which it has the ability to exercise significant influence over operating and financial policies are accounted for using the equity method. Accordingly, OTI's share of the earnings and losses of these companies is included in consolidated net loss. OTI has a 50% interest in the e-Smart joint venture, which is accounted for under the equity method.

E. Allowance for Doubtful Accounts

Allowance for doubtful accounts is computed for specific debts, the collectibility of which is doubtful based upon the Company's experience.

F. Inventories

Inventories are valued at the lower of cost or market. Cost is determined as follows:

Raw materials--first in, first out ("FIFO") method.

Finished products and work in progress--on the basis of manufacturing costs, including materials, labor, direct and indirect production expenses using the FIFO method.

G. Property, plant and equipment

These assets are stated at cost less accumulated depreciation. Depreciation is calculated by the straight-line method over the estimated useful lives of the assets.

F-10

ON TRACK INNOVATIONS LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In thousands of U.S. Dollars

NOTE 2--SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

H. Intangible Assets

The excess of the purchase price over the fair value of the identifiable net assets acquired has been recorded as intangibles, which is presently being amortized over periods of between five to seven years on a straight-line basis. The amortization periods are evaluated by management on a continuing basis, and will be adjusted if events and circumstances warrant revised estimates of useful lives.

I. Revenue Recognition

Revenues from products are recognized upon delivery provided there is persuasive evidence of an agreement, the fee is fixed or determinable and collection of the related receivable is probable. In the case of nonrecurring engineering, delivery is deemed to occur on completion of testing and approval of the customization of the product by the customer.

Technology license revenues are recognized at the time the technology and license is delivered to the customer, collection is probable, no significant obligation remains under the sale or licensing agreement and no significant customer acceptance requirements exist after delivery of the technology.

Transaction fees are recognized as earned based on usage.

Revenues relating to customer services and technical support are recognized as the services are rendered.

Amounts billed where the revenue recognition criteria have not been fully met, and thus the revenue is not yet earned, are reflected as deferred revenue, which is netted off against the related receivable. If amounts billed and classified as deferred revenues are collected, the amounts are included in liabilities. Deferred revenues in respect of sales to equity subsidiaries are netted off against the related investment in the balance sheet.

The United States Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin (SAB) No. 101, Revenue Recognition in Financial Statements. In terms of this new accounting guidance, the Company has adopted the guidance SAB No. 101 during the fourth quarter of 2000. The effect of the adoption of this guidance was to reduce revenues in the amount of $517 in 2000. In addition, the Company has recorded deferred revenues as of December 31, 2000 in the amount of $2,067 to be recognized ratably over the following two years, which have been netted off against the related investment.

J. Research and Development Costs

Research and development costs, net of royalty bearing participation by the Government of Israel through the Ministry of Industry and Trade Office of the Chief Scientist, are charged to operations as incurred. The participation by the Government of Israel are recognized on an accrual basis.

F-11

ON TRACK INNOVATIONS LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In thousands of U.S. Dollars

NOTE 2--SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

K. Stock-based Compensation

The FASB issued SFAS No. 123, "Accounting for Stock-Based Compensation," in October 1995. This accounting standard permits the use of either a fair value based method of accounting or the method prescribed in Accounting Principles Board ("APB") Opinion 25, "Accounting for Stock Issued to Employees" to account for stock-based compensation arrangements. In accordance with APB Opinion 25 deferred compensation is recorded if there is a difference between the exercise price and the fair market value of the ordinary share on the date of the grant. Companies that elect to employ the method prescribed by APB Opinion 25 are required to disclose the pro forma net income (loss) that would have resulted from the use of the fair value based method. The Company has elected to account for its share-based compensation arrangements under the provisions of APB Opinion 25, including the FASB issued interpretation No. 44, "Accounting for Certain Transaction Involving Stock Compensation--an interpretation of APB Opinion 25," and accordingly, has included in Note 13 the pro forma disclosures required under SFAS No. 123. Options granted to non-employees are recognized at their fair market value at date of grant in accordance with SFAS No. 123.

L. Basic and Diluted Net Loss Per Share

The Company computes net loss per share in accordance with Statement of Financial Accounting Standards No. 128 ("SFAS No. 128"), "Earnings Per Share". Under the provisions of SFAS No. 128, basic net loss per share is computed by dividing the net loss for the period by the weighted-average number of common shares outstanding during the period. Diluted net loss per share is computed by dividing the net loss for the period by the weighted-average number of common and common equivalent shares outstanding during the period. However, as the company generated net losses in all periods presented, common equivalent shares, composed of incremental common shares issuable upon the exercise of warrants and stock options, are not reflected in diluted net loss per share because such shares are antidilutive. The total number of shares related to the outstanding options, excluded from the calculations of diluted net loss per share was 30,120, 123,669, 242,103 and 254,478 as of December 31, 1999, 2000, 2001 and as of March 31, 2002, respectively.

M. Comprehensive Loss

As of January 1, 1998, the Company adopted SFAS No. 130, which requires the disclosure of all components of comprehensive loss.

N. Fair Value of Financial Instruments

The carrying amount of cash and cash equivalents, trade receivables, other receivables, credit from banks and others, liabilities to suppliers and others are equivalent to, or approximate their fair value due to the short-term maturity of these instruments.

The carrying amount of long-term loans are equivalent to or approximate their fair value as they bear interest at approximate market rates.

O. Use of Estimates

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from these estimates.

F-12

ON TRACK INNOVATIONS LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In thousands of U.S. Dollars

NOTE 2--SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

P. New Accounting Standards

(1) In July 2001, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards No. 141, "Business Combinations" ("SFAS 141") and No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"). SFAS 141 requires all business combinations initiated after June 30, 2001, to be accounted for using the purchase method. Under SFAS 142, goodwill and intangible assets with indefinite lives are no longer amortized but are reviewed annually (or more frequently if impairment indicators arise) for impairment. All other intangible assets will continue to be amortized over their estimated useful lives. The amortization provisions of SFAS 142 apply to goodwill and intangible assets acquired after June 30, 2001. With respect to goodwill and intangible assets acquired prior to June 1, 2001, the Company is required to adopt SFAS 142 effective January 1, 2002.

On January 1, 2002, the Company adopted SFAS 142. In accordance with the provisions of SFAS 142, the Company evaluated its existing intangible assets and has concluded that the purchase cost assigned to assembled workforce as part of the SoftChip Group acquisition in January 2000 may no longer be recognized separately as an intangible asset, and has therefore been reclassified as goodwill as of January 1, 2002, and that the purchase cost assigned to the sales force as part of the InterCard group acquisition in 2000 and 2001 does not meet the criteria for separate recognition as an intangible asset, and has therefore been reclassified as goodwill as of January 1, 2002.

As of January 1, 2002, the Company therefore has unamortized goodwill in the amount of $5,314. In connection with SFAS No. 142's transitional goodwill impairment evaluation, the Company is performing an assessment of whether there is an indication that the goodwill is impaired as of January 1, 2002. To accomplish this, the Company must identify its reporting units and determine the carrying value of each reporting unit by assigning assets and liabilities, including existing goodwill and intangible assets, to those reporting units as of January 1, 2002. The Company has until June 30, 2002, to determine the fair value of each reporting unit and compare it to the reporting unit's carrying amount. To the extent a reporting unit's carrying amount exceeds its fair value, an indication exists that the reporting unit's goodwill may be impaired and the Company must perform the second step of the transitional impairment test. In the second step, the Company must compare the implied fair value of the reporting unit's goodwill, determined by allocating the reporting unit's fair value to all of its assets (recognized and unrecognized) and liabilities, in a manner similar to a purchase price allocation, to its carrying amount, both of which would be measured as of January 1, 2002. This second step is required to be completed by December 31, 2002. Any transitional impairment loss will be recognized as the cumulative effect of a change in accounting principle as of January 1, 2002, in the Company's statement of income.

The annual amortization expense relating to intangibles is estimated to be approximately $80 for each of the three years ending December 31, 2004, approximately $45 for each of the two years ending December 31, 2006, and approximately $15 for the year ended December 31, 2007.

F-13

ON TRACK INNOVATIONS LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In thousands of U.S. Dollars, except per share data

NOTE 2--SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

The following transitional information is presented to reflect net loss and loss per share for all prior periods adjusted to exclude amortization of goodwill.

                                                                               FOR THE THREE
                                                          FOR THE               MONTHS ENDED
                                                         YEAR ENDED              MARCH 31,
                                                        DECEMBER 31,       ----------------------
                                                            2001             2001          2002
                                                        ------------       --------      --------
Reported net loss...................................      $(11,897)        $(3,716)      $(1,237)
Goodwill amortization...............................         1,032             258            --
                                                          --------         -------       -------
Adjusted net loss...................................      $(10,865)        $(3,458)      $(1,237)
                                                          --------         -------       -------

Loss per share
  Reported net loss.................................      $  (5.11)        $ (1.56)      $ (0.52)
  Goodwill amortization.............................          0.44            0.11            --
                                                          --------         -------       -------
  Adjusted net loss.................................      $  (4.67)        $ (1.45)      $ (0.52)
                                                          ========         =======       =======

As of the date of these financial statements, the Company is unable to estimate whether it will be required to recognize any transitional impairment losses.

(2) In August 2001, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards No. 144. Accounting for the Impairment or Disposal of Long-Lived Assets ("SFAS 144"). Although SFAS 144 supersedes FASB Statement No. 121, it retains the requirements of SFAS 121 regarding recognition of impairment loss for long-lived assets to be held and used (based on undiscounted cash flows) and resolves certain implementation issues. Also, the accounting model used in SFAS 121 for long-lived assets to be disposed for by sale (lower of carrying amount of fair value less cost to sell) is broadened by SFAS 144 to include discontinued operations and supersedes APB Opinion No. 30. Therefore, discontinued operations will no longer be measured on a net realizable value basis and future operating losses will no longer be recognized before they occur. SFAS 144 also broadens the presentation of discontinued operations to include a component of an entity (rather than a segment of a business). The provisions of SFAS 144 are effective for financial statements issued for fiscal years beginning after December 15, 2001, and interim periods within those years. The Company believes that the adoption of SFAS 144 will not have material impact on the Company's financial statement.

NOTE 3--CASH AND CASH EQUIVALENTS

                                                         DECEMBER 31,
                                                ------------------------------      MARCH 31,
                                                  1999       2000       2001          2002
                                                --------   --------   --------      ---------
Cash in banks................................   $ 1,262    $   945     $  192        $  157
Bank deposits in U.S. dollars (2002--bearing
  annual interest rate of 2%)................    12,536     13,703      5,749         3,618
Bank deposits in Euro (2002--bearing annual
  interest rate of 2%).......................     2,011        555         49            52
Bank deposits in NIS (2002--bearing annual
  interest rate of 3%).......................       506        395         40            39
                                                -------    -------     ------        ------
                                                $16,315    $15,598     $6,030        $3,866
                                                =======    =======     ======        ======

F-14

ON TRACK INNOVATIONS LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In thousands of U.S. Dollars

NOTE 4--SHORT-TERM INVESTMENTS

                                                         DECEMBER 31,
                                                ------------------------------      MARCH 31,
                                                  1999       2000       2001          2002
                                                --------   --------   --------      ---------
Bank deposits in U.S. dollars................   $10,188    $    --     $   --        $   --
Marketable bonds of the State of Israel
  (2002--bearing annual interest rate of
  6.5%)......................................     2,064      1,885      1,946         1,671
                                                -------    -------     ------        ------
                                                $12,252    $ 1,885     $1,946        $1,671
                                                =======    =======     ======        ======

NOTE 5--OTHER RECEIVABLES AND PREPAID EXPENSES

                                                         DECEMBER 31,
                                                ------------------------------      MARCH 31,
                                                  1999       2000       2001          2002
                                                --------   --------   --------      ---------
Government institutions......................   $   541    $   762     $  279        $  495
Prepaid expenses.............................        29        897        163           183
Other receivables............................       206        646        649           628
                                                -------    -------     ------        ------
                                                $   776    $ 2,305     $1,091        $1,306
                                                =======    =======     ======        ======

NOTE 6--INVENTORIES

                                                         DECEMBER 31,
                                                ------------------------------      MARCH 31,
                                                  1999       2000       2001          2002
                                                --------   --------   --------      ---------
Raw materials................................   $ 1,255    $ 2,758     $2,165        $2,256
Work in progress.............................       441      1,610      1,433         1,580
Finished products............................       238        957      1,400         1,260
                                                -------    -------     ------        ------
                                                $ 1,934    $ 5,325     $4,998        $5,096
                                                =======    =======     ======        ======

NOTE 7--ACQUISITIONS

A. City Smart Ltd.

On December 30, 1999, the Company completed its merger with City Smart Ltd. ("City Smart"), the Company's representative and system integrator in Hong Kong, in which City Smart became a wholly owned subsidiary of the Company. The Company exchanged 10,029 ordinary shares for all the outstanding common stock of City Smart. The merger was accounted for under the pooling of interests method of accounting.

Net revenues and net income of the Company and City Smart for the periods prior to the merger that are included in the restated financial statements are as follows:

                                                            FOR THE YEAR ENDED
                                                           DECEMBER 31, 1999(*)
                                                         ------------------------
                                                         COMPANY       CITY SMART
                                                         --------      ----------
Net revenues...........................................   $4,150         $1,233
Net income (loss)......................................   (2,481)           373


(*) Inter company revenues and profits of $46 and $0 respectively were eliminated in the financial statements for the year ended December 31, 1999.

F-15

ON TRACK INNOVATIONS LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In thousands of U.S. Dollars

NOTE 7--ACQUISITIONS (CONTINUED)

B. SoftChip Technologies (3000) Ltd. / SoftChip Israel Ltd.

On January 28, 2000, the Company acquired two Israeli companies; SoftChip Israel Ltd. and SoftChip Technologies (3000) Ltd. (the "SoftChip Group"), after which the SoftChip Group became a wholly owned subsidiary of the Company. The Company exchanged 18,178 of its publicly traded ordinary shares valued at approximately $1,259, for all the outstanding shares of the SoftChip Group. The SoftChip Group is a designer of microprocessors and operating systems for smart cards.

The acquisition was accounted for as a purchase and the Company has allocated the purchase price (in excess of net tangible assets acquired) of approximately $1,171 to intangibles being mainly assembled work force which up to December 31, 2001 were amortized over a period of five years on a straight-line basis.

The results of operations of the SoftChip Group have been included in the consolidated financial statements as from January 1, 2000.

The Company granted the chief executive officer of the SoftChip Group, options to purchase 15,000 shares of the Company at a price of $20.00 per share. The options vest in five equal annual instalments commencing February 2001.

C. InterCard GmbH Kartensysteme/InterCard GmbH Systemelectronic

In May 2000, the Company acquired a 51% equity interest in InterCard GmbH Kartensysteme and InterCard GmbH Systemelectronic (the "InterCard Group") in consideration for 41,615 ordinary shares of the Company having a fair value of DM5 million. The InterCard Group is a systems integrator and manufacturer of electronic devices.

The acquisition was accounted for as a purchase, and the Company has allocated the purchase price (in excess of tangible assets acquired) of approximately $2,690 to intangibles being mainly the sales force which up to December 31, 2001 were amortized over seven years on a straight line basis.

The results of operations of the InterCard Group have been included in the consolidated financial statements as from May 1, 2000.

In January 2001, the minority shareholders of the InterCard Group exercised a put option to sell the remaining 49% interest in the InterCard Group to the Company in consideration for a loan and 117,750 ordinary shares of the Company having in total fair value of DM 7 million. The acquisition was accounted for as a purchase, and the Company has allocated the purchase price (in excess of tangible assets acquired) of approximately $3,380 being mainly the sales force which up to December 31, 2001 were amortized over seven years on a straight line basis. Approximately $595 of the purchase price was granted by the sellers to the Company as a loan, to be repaid over 3 years and bearing interest at 6% per annum. As security for payment of the loan, the Company has pledged 18% of its shares in the InterCard group to the Sellers.

D. e-Smart Systems Inc. (formerly OTI Asia Pacific Ltd.)

In February 2000, the Company and Cheung Kong Holdings Ltd. ("CK") established a cooperative joint venture, e-Smart Systems Inc. ("e-Smart"), which will purchase and distribute the Company's products to the Asia Pacific region. The Company and CK each invested $3,600 in e-Smart. The Company's $3,600 contribution comprised $3,100 in cash and a deferred payment of $500. The Company granted the joint venture an option to buy CitySmart from the Company in consideration for $500.

F-16

ON TRACK INNOVATIONS LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In thousands of U.S. Dollars

NOTE 7--ACQUISITIONS (CONTINUED)

During the first quarter of 2001, e-Smart exercised its option to transfer the operations of CitySmart from the Company to e-Smart. The Company recorded a profit on the exercise of the option in the amount of $500, of which 50% has been netted off against equity in losses of an affiliated company. The Company does not have control over the joint venture, and accordingly, the investment in e-Smart is accounted for under the equity method.

On February 2, 2000, the Company granted e-Smart exclusive distribution rights for the Company's products in 18 countries in the Asia Pacific region in consideration for $3,600 pursuant to a distribution agreement, which has an unspecified term. This amount is receivable in installments, of which $3,100 was received during the year ended December 31, 2000. The Company has recognized 50% of this amount as revenue over three years, being the estimated useful life of the technology which is subject to the distribution rights and 50% of this amount as a return of capital. Deferred revenues have been netted off against the investment.

The Company has agreed to provide a guarantee of up to $2,000 of borrowings under a line of credit that CK has undertaken to provide to e-Smart.

E. Pro Forma information

The following unaudited pro forma consolidated financial information gives pro forma effect to the InterCard Group and the SoftChip Group acquisitions as if they had been completed on December 31, 1998. For the year ended December 31, 2000, pro forma adjustments relate only to the InterCard Group, as the SoftChip Group's results are included in the consolidated statement of operations for the year ended December 31, 2000. These pro forma results have been prepared for comparative purposes only and do not purport to be indicative of the results of operations that actually would have resulted had the acquisitions occurred on the date indicated, or that may result in the future:

                                                              YEAR ENDED
                                                             DECEMBER 31,
                                                        ----------------------
                                                          1999          2000
                                                        --------      --------
                                                             (UNAUDITED)
Revenues..........................................      $ 17,805      $ 17,515
Net loss..........................................        (2,299)       (7,838)
Net loss per ordinary share-basic and diluted.....         (1.27)        (3.53)

F. Other Assets, Net

                                                             DECEMBER 31,
                                                        ----------------------      MARCH 31,
                                                          2000          2001          2002
                                                        --------      --------      ---------
Intangibles.......................................      $  3,861      $  7,238       $   490
  Less--accumulated amortization..................           465         1,577           163
                                                        --------      --------       -------
                                                           3,396         5,661           327
Goodwill..........................................            --            --         5,314
                                                        --------      --------       -------
                                                        $  3,396      $  5,661       $ 5,641
                                                        ========      ========       =======

Intangibles are being amortized over five years and seven years for the SoftChip Group and the InterCard Group acquisitions, respectively (see note 2P(1)).

F-17

ON TRACK INNOVATIONS LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In thousands of U.S. Dollars

NOTE 8--PROPERTY, PLANT AND EQUIPMENT, NET

                                       ESTIMATED            DECEMBER 31,
                                         USEFUL    ------------------------------      MARCH 31,
                                          LIFE       1999       2000       2001          2002
                                       ----------  --------   --------   --------      ---------
COST
  Land...............................              $     --   $     71    $   71        $    71
  Leasehold land (1).................                   214        263       263            263
  Building on leasehold land (1).....  49 years         660        678       678            678
  Buildings..........................                    --        244       244            244
  Building under construction (1)....                    --      1,374     3,491          3,701
  Computers, software and
     manufacturing equipment.........  3-5 years        832      3,358     3,264          3,287
  Office furniture and equipment.....  5-16 years       591      1,392     1,393          1,414
  Motor vehicles.....................  6 years          366        460       443            461
                                                   --------   --------    ------        -------
     Total cost......................              $  2,663   $  7,840    $9,847        $10,119
                                                   ========   ========    ======        =======
ACCUMULATED DEPRECIATION
  Building on leasehold land.........              $     63   $     84    $  236        $   282
  Buildings..........................                    --         61        68             69
  Computers, software and
     manufacturing equipment.........                   348      1,372     1,688          1,810
  Office furniture and equipment.....                   114      1,234     1,104          1,127
  Motor vehicles.....................                   192        212       249            262
     Total accumulated
     depreciation....................              $    717   $  2,963    $3,345        $ 3,550
                                                   --------   --------    ------        -------
     Net book value..................              $  1,946   $  4,877    $6,502        $ 6,569
                                                   ========   ========    ======        =======

Depreciation expenses for the years ended December 31, 1999, 2000, 2001 and for the three months ended March 31, 2002, was $210, $593, $988 and $173, respectively.

(1) The leasehold land consists of two plots owned by the Israel Lands Administration. Rights to leasehold land on the first plot extend over the original period of 49 years ending in the year 2041 and on the second plot for a period of 49 years, which will end in the year 2047 with an option to extend for a further 49 years. The Company commenced the construction of the building on this plot of land in 2000. The amount includes payments on account of land development and payments of the capitalization of leasing payments. The rent for the initial 49-year term of each of these leases was prepaid in its entirety at the beginning of the lease terms as is customary in Israel for leases of property for industrial purposes from the Israel Lands Authority.

(2) The net book value of property, plant and equipment located in Israel was $1,843, $3,272, $5,110 and $5,290 as of December 31, 1999, 2000, 2001 and as of March 31, 2002, respectively.

(3) Liens--See Note 12B.

F-18

ON TRACK INNOVATIONS LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In thousands of U.S. Dollars

NOTE 9--OTHER CURRENT LIABILITIES

                                                         DECEMBER 31,
                                                ------------------------------   MARCH 31,
                                                  1999       2000       2001       2002
                                                --------   --------   --------   ---------
Employees and related expenses...............   $  1,210   $  1,180   $  1,309    $1,036
Accrued expenses.............................        373        555        639       473
Customers' advances..........................        155        202        334       412
Other current liabilities....................        856        828        181       181
                                                --------   --------   --------    ------
                                                $  2,594   $  2,765   $  2,463    $2,102
                                                ========   ========   ========    ======

NOTE 10--LOANS:

A. Composition of long-term loans:

                                                         DECEMBER 31,
                                                ------------------------------   MARCH 31,
                                                  1999       2000       2001       2002
                                                --------   --------   --------   ---------
Long-term loans..............................   $  2,520   $  4,129   $  6,264    $6,177
Less--current maturities.....................      1,199      1,666      1,513     1,462
                                                --------   --------   --------    ------
                                                $  1,321   $  2,463   $  4,751    $4,715
                                                ========   ========   ========    ======

As of March 31, 2002, most of the loans are from banks, denominated primarily in US dollars ($4,586), euro ($987), and NIS ($604) and bear interest of approximately 4.3%--10.8% per annum.

B. Repayments of long-term loans dates subsequent to balance sheet date:

                                                                MARCH 31,
                                                                   2002
                                                               ------------
First year (current maturities).............................      $1,462
Second year.................................................       1,345
Third year..................................................         918
Fourth year.................................................         706
Fifth year and thereafter...................................       1,746
                                                                  ------
                                                                  $6,177
                                                                  ======

C. In 1998, EasyPark received a convertible loan in the sum of $700. The loan had an option of conversion either to EasyPark shares or to OTI's shares at $40.00 per share. The loan bears interest at 5% and is linked to the Israeli Consumer Price Index. In February 1999, the convertible loan and the lenders' previous investment in EasyPark in the sum of $300 were converted into 25,000 OTI shares.

D. Composition of short-term credit and current maturity of short term loans:

                                                  DECEMBER 31,
                                         ------------------------------   MARCH 31,
                                           1999       2000       2001       2002
                                         --------   --------   --------   ---------
Short term credit.....................   $     --   $  2,427    $1,820     $1,593
Current maturities of long-term
loans.................................      1,199      1,666     1,513      1,462
                                         --------   --------    ------     ------
                                         $  1,199   $  4,093    $3,333     $3,055
                                         ========   ========    ======     ======

As of March 31, 2002, short term credit denominated primarily in euro ($1,431) and NIS ($162) bears interest of approximately 8.2%-10.3% per annum and is repayable within one year.

E. Liens for short-term and long-term borrowings--see note 12B.

F-19

ON TRACK INNOVATIONS LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In thousands of U.S. Dollars

NOTE 11--SEVERANCE PAY

Under Israeli law and labor agreements, the Company is required to make severance payments to dismissed employees in certain circumstances, which are funded mainly by the purchase of insurance policies. The Company's unfunded severance pay liability to its employees is reflected by the balance sheet accrual. Severance pay expense for the years ended December 31, 1999, 2000, 2001 and for the three months ended March 31, 2002 amounted to approximately $363, $257, $262 and $58, respectively.

NOTE 12--COMMITMENTS AND LIENS

A. Commitments and contingencies:

The Company and its Israeli subsidiary, EasyPark, have entered into several research and development agreements, pursuant to which the Company is obligated to pay royalties to the Government of Israel at a rate of 3%--5% of sales of products in which the Government of Israel has participated in financing the research and development, up to the amounts granted (with annual interest at LIBOR as of the date of approval, for programs approved from 1999 and thereafter). The total amount of grants received, net of royalties paid, as of March 31, 2002 was approximately $2.6 million.

B. Liens

There is a floating charge over the Company's motor vehicles, pledged to a bank and leasing companies to secure loans received.

Short-term investments and leasehold land are pledged in favor of a bank in relation to both long-term and short-term borrowings, and the Company has recorded a floating charge on all of its tangible assets.

The manufacturing facility has been pledged as security in respect of a loan received from a bank.

NOTE 13--SHAREHOLDERS' EQUITY

A. Share capital

On August 31, 1999, the Company raised $24,501 (net of $4,177 issuance expenses) in an initial public offering ("IPO") of 480,000 Ordinary shares. The shares are registered for trading on the Neuer Markt in Frankfurt, Germany. On February 29, 2000, the balance of the Company's shares were registered for trading on the Neuer Markt.

On July 23, 1999, the Company received a convertible loan in the amount of $750. A total of $500 was repaid from the proceeds of the IPO. The remaining $250 was converted into 9,534 ordinary shares in September 1999. The 1999 financial statements have been restated to record a debt discount of $250, representing the value of the beneficial conversion feature on the issuance of the convertible loan. The beneficial conversion feature was calculated at the issuance date based on the difference between the conversion price and the estimated fair value of the ordinary shares at that date. Upon conversion of the loan, the debt discount was amortized to interest on convertible loan in the consolidated statement of operations for the year ended December 31, 1999. The effect of this restatement was in increase in net loss in the amount of $250 for the year ended December 31, 1999. Basic and diluted loss per share increased by $0.14 for the year ended December 31, 1999.

F-20

ON TRACK INNOVATIONS LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In thousands of U.S. Dollars

NOTE 13--SHAREHOLDERS' EQUITY (CONTINUED)

On July 15, 1999, the Company issued an investor 19,265 ordinary shares for $1,075 at the price of $55.8 per share. In addition, the investor was granted an option to purchase 6,535 ordinary shares at their par value within 14 days from the date of the IPO. The option was recorded at its fair market value and is included in additional paid-in capital. In September 1999 the investor exercised the option.

In June 1999, a bank exercised options to acquire 30,750 shares in consideration for $1,322. When these options were granted they were attributed a fair market value of approximately $280, using the Black-Scholes option pricing model, which was recorded within additional paid-in capital.

Subsequent to the first quarter of 2002, on May 15, 2002, the Board of Directors of the Company approved a ten to one reverse split of the Company's ordinary shares, such that each ten ordinary shares of NIS 0.01 per value shall become one share of NIS 0.1 par value. The above reverse share split was approved by a meeting of the shareholders on June 14, 2002. The reverse share split will be effective as of June 27, 2002.

Subject to certain conditions, the Board of Directors will also approve the issuance of bonus shares in the form of a stock dividend to all its existing shareholders in a ratio of one bonus share per two ordinary shares (after the ten to one reverse split) and an increase in the reserve of shares under the Company's option plan by 39,000. In addition, the Board of Directors shall grant 36,000 fully vested options to certain directors and officers at an exercise price equal to the average market price of the shares at the time of the grant and will issue certain investment banks up to 100,000 ordinary shares and warrants to purchase the same amount of shares at the prevailing market value.

All share and per share amounts in these financial statements have been adjusted to reflect the reverse share split and the issuance of bonus shares as if all relevant approvals were obtained and all conditions were met.

B. Stock option plans

The Company's board of directors approved a stock option plan, under which up to 67,500 share options are to be granted to the Company's employees, directors and consultants. In July 1998, the board of directors expanded the plan for an additional 30,000 share options to be granted. In November 1999, the board of directors resolved to expand the plan with an additional 52,500 share options to be granted. In August 2000, the board of directors resolved to expand the plan with an additional 112,500 share options to be granted and to approve establishing an employee option plan for a subsidiary, OTI America, Inc. The Company has ceased to grant options from this plan which has been superceded by an additional option plan as detailed below.

In February 2001, the Company's board of directors approved an additional option plan, under which up to 112,500 share options are to be granted to the Company's employees, directors and consultants. In February 2002, the Company's board of directors increased the number of available options by 225,000.

The vesting period for the options ranges from immediate vesting to ratable vesting over a ten year period. The exercise price of options under the plan is at varying prices ranging from $0 to market value at the date of the grant.

In 2001, the company established an Employee Share Purchase Plan pursuant to which 101,250 shares have been reserved for employees including the Company's subsidiaries who have been employed for at least six months. The purchse price of the shares will be 85% of the trading price on the date of purchase.

F-21

ON TRACK INNOVATIONS LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In thousands of U.S. Dollars

NOTE 13--SHAREHOLDERS' EQUITY (CONTINUED)

In February 2002, our Board resolved to approve a plan by which, inter alia, the Company may pay, during a 12 month period, the salaries of certain of its employees who agree to participate in the plan, by way of grant of options. All such options are to be held by a trustee, for the benefit of each such employee. The trustee shall exercise such options and sell them, in accordance with instructions given to it by the relevant employee. The proceeds mentioned above will be released on a monthly basis by the trustee to the relevant employee (net of deductions required by law) to the maximum extent necessary for payment of such monthly salary to such employee. The Company undertook to pay from its own sources any and all differences between the relevant monthly salary and such proceeds. The agreement is subject to the Company, the employees and the trustee's signatures on a detailed agreement and necessary ancillary document.

The CEO of OTI America, Inc. is entitled to an additional option to purchase up to 7,500 ordinary shares at a price of $30.00 per share, in an amount equal to 0.5% of any funds invested in OTI America, Inc. by third parties as a result of his efforts.

Options to purchase 3,000 shares have been issued a non-employee. The Company has accounted for these options in accordance with SFAS No. 123 utilizing the Black-Scholes option pricing model with the following assumptions: (1) life of 1 year, (2) no dividend yield, (3) volitility of 44% and (4) risk free interest rate of 6%. The aggregate value of the non-employee options was approximately $266.67.

Transactions related to this plan during the years ended December 31, 1999, 2000, 2001 and for the three months ended March 31, 2002 are summarized in the following table:

                                                    WEIGHTED AVERAGE   WEIGHTED AVERAGE
                                      OUTSTANDING    EXERCISE PRICE     FAIR VALUE OF
                                        OPTIONS        PER SHARE       OPTIONS GRANTED
                                      -----------   ----------------   ----------------
Outstanding--December 31, 1997.....       42,210         $1.00
  Options granted..................       14,411         14.60              $26.07
  Options exercised................      (21,800)           --
                                      ----------         -----
Outstanding--December 31, 1998.....       34,821          7.27
  Options granted..................        9,300            --              $40.00
  Options exercised................      (14,000)           --
                                      ----------         -----
Outstanding--December 31, 1999.....       30,121          8.33
  Options granted..................      114,434         47.67              $27.53
  Options forfeited................       (2,865)        39.40
  Options exercised................      (18,020)         8.07
                                      ----------         -----
Outstanding--December 31, 2000.....      123,670         44.07
  Options granted..................      131,901         18.87              $11.00
  Options forfeited................      (11,268)        35.93
  Options exercised................       (2,200)         0.67
                                      ----------         -----
Outstanding--December 31, 2001.....      242,103         31.13
  Options granted..................       13,125          0.07              $ 7.27
  Options forfeited................         (750)        19.87
                                      ----------         -----
Outstanding -- March 31, 2002......      254,478         29.53
                                      ==========         =====

F-22

ON TRACK INNOVATIONS LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In thousands of U.S. Dollars

NOTE 13--SHAREHOLDERS' EQUITY (CONTINUED)

The following table summarizes information about options outstanding and exercisable as of March 31, 2002:

                                   OPTIONS OUTSTANDING                           OPTIONS EXERCISABLE
                   ----------------------------------------------------   ---------------------------------
                       NUMBER                                                 NUMBER
    WEIGHTED       OUTSTANDING AT   WEIGHTED-AVERAGE   WEIGHTED-AVERAGE   OUTSTANDING AT   WEIGHTED-AVERAGE
    AVERAGE          MARCH 31,         REMAINING           EXERCISE         MARCH 31,          EXERCISE
 EXERCISE PRICE         2002        CONTRACTUAL LIFE        PRICES             2002             PRICES
----------------   --------------   ----------------   ----------------   --------------   ----------------
  $   0.0-0.07          18,825            0.91           $   0.0-0.07         18,825            $0.07
   12.00-26.00         126,418            5.56            12.00-26.00         56,191            20.00
   40.00-48.07          76,557            2.15            40.00-48.07         59,518            40.13
         68.60          32,678            4.94                  68.60          9,814            68.53
                     ---------                                               -------
                       254,478                                               144,348
                     =========                                               =======

The amounts of deferred compensation recognized arising from the difference between the exercise price and the fair market value on the date of the grant of approximately $414, $960, $0 and $84 for options granted in the years ended December 31, 1999, 2000, 2001 and the three months ended March 31, 2002, respectively, are included in shareholders' equity and are being amortized over the vesting periods of the respective options in accordance with APB 25. Under APB 25, compensation expense for the years ended December 31, 1999, 2000, 2001 and for the three months ended March 31, 2002 amounted to approximately $446, $406, $309 and $136, respectively.

If compensation had been determined under the alternative fair value accounting method provided for under SFAS No. 123, the Company's net loss and net loss per share would have been increased to the following pro forma amounts:

                                                     YEAR ENDED             THREE MONTHS
                                                    DECEMBER 31,                ENDED
                                           ------------------------------     MARCH 31,
                                             1999       2000       2001         2002
                                           --------   --------   --------   -------------
Net loss:

  As reported...........................   $ (2,108)  $ (7,725)  $(11,897)     $(1,237)
Pro forma...............................     (2,114)    (8,052)   (13,052)      (1,556)
Net loss per share:
  As reported...........................   $  (1.17)  $  (3.48)  $  (5.11)     $ (0.52)
Pro forma...............................      (1.17)     (3.63)     (5.61)       (0.60)

Under SFAS No. 123, the fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model and the minimum value method was utilized until the Company became publicly traded in August 1999 with the following weighted-average assumptions used for grants for the years ended December 31, 1999, 2000 and 2001 and for the three months ended March 31, 2002: (1) expected life of the options of 3.37 years; (2) no dividend yield; (3) expected volatility of 0% for the year ended December 31, 1999, 64% for the years ended December 31, 2000, 2001 and 117% for the three months ended March 31, 2002; and (4) risk-free interest rate of 3.49%.

In May 2000, OTI America Inc. granted its employees 219 Incentive Stock Options (ISO) and 91 Non-qualifying Stock Options (NQSO) at an exercise price of $20 per share, vesting annually

F-23

ON TRACK INNOVATIONS LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In thousands of U.S. Dollars

NOTE 13--SHAREHOLDERS' EQUITY (CONTINUED)

over a four year period. The ISO options will automatically convert into 6,570 shares of OTI and the NQSO options may elect to convert into 2,730 shares of OTI, if OTI becomes a publicly traded company in the United States. The exercise price of these options in OTI will be $103.33 per share, the fair market value of the Company's shares as of the grant date. The option plan has been accounted for as a variable plan. In August 2000, OTI America Inc. granted a further 27 ISO options and 10 NQSO options at the same terms and conditions. The converted options will be exercisable at a price of $106.67 per share in the Company. Compensation as of December 31, 2000 and 2001 in respect of options granted under this plan is negligible.

Subsequent to March 31, 2002, the Company granted employees options to purchase 808,195 shares of the Company at the fair market value at the date of the grant.

NOTE 14--OTHER EXPENSES, NET

A. In 2000, the Company recorded an expense in connection with a dispute with a distributor. During the third quarter of 2000, the dispute was settled by the London Court of International Arbitration in favor of the Company. In 2001, the Company recorded a provision of $340,000 in respect of the dissolution of a subsidiary.

B. During the first quarter of 2001, the Company recorded a gain on the sale of the activities of CitySmart in the amount of $500.

During 2001, the Company incurred costs in respect of a share offering which did not materialize during the year.

NOTE 15--INCOME TAX

A. The Company's investment programs in buildings, equipment and production facilities have been granted the status of "Approved Enterprise" under the Law for the Encouragement of Capital Investments, 1959. The Company elected to adopt the "Alternative Benefits Program" status. This status entitles a certain exemption from tax on income derived therefrom a period of 10 years starting in the year in which the Company first generates taxable income, but not later than 14 years from the date of approval (the last of which was received in February 2000). In the event of a distribution of a cash dividend out of tax-exempt income, the Company will be liable to corporate tax at a rate of 25% in respect of the amount distributed. As the Company has not yet reported any taxable income, the benefit period has not yet commenced. The Company's policy is to reinvest tax exempt earnings and not to distribute such earnings as dividends.

Final approvals in respect of certain investment programs have not yet been received. The entitlement to the above benefits is conditional upon the Company's fulfilling the conditions stipulated by the law, regulations published thereunder and the letters of approval.

The Company's subsidiary, EasyPark, has also been granted the status of an "Approved Enterprise" for its program plan establishment of a production facility. EasyPark also elected to adopt the "Alternative Benefits Program" status for its investment programs.

B. The Company is subject to the Income Tax Law (Inflationary Adjustments), 1985 measuring income on the basis of changes in the Israeli Consumer Price Index.

C. As of December 31, 2001, the net operating loss carryforwards for tax purposes amounted to approximately $18,300. Such net operating losses may be carried forward indefinitely and be offset against future taxable income. The Company expects that during the period in which these tax losses are utilized its income would be substantially tax exempt. Due to the uncertainty of realizing the benefit of the loss carryforwards, a valuation allowance for the entire deferred asset has been recorded. Deferred taxes in respect of other temporary differences are immaterial.

F-24

ON TRACK INNOVATIONS LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In thousands of U.S. Dollars

NOTE 15--INCOME TAX (CONTINUED)

D. Income tax expense (benefit) presented in the statement of operations are derived from foreign subsidiaries.

E. The Company and its subsidiary, EasyPark, have received final tax assessments for periods up to and including the tax year 1997.

NOTE 16--RELATED PARTY BALANCES AND TRANSACTIONS

A. Balances with related parties consisted of the following:

                                                           DECEMBER 31,
                                                  ------------------------------    MARCH 31,
                                                    1999       2000       2001         2002
                                                  --------   --------   --------   ------------
Trade receivables..............................   $     --   $    759   $    103      $   96
Trade payables.................................         24         26         15          12
Other current liabilities......................         --        442        182         182

B. Transactions with related parties consisted of the following:

                                                            YEAR ENDED             THREE MONTHS
                                                           DECEMBER 31,               ENDED
                                                  ------------------------------    MARCH 31,
                                                    1999       2000       2001         2002
                                                  --------   --------   --------   ------------
Revenues.......................................   $     --   $  1,706   $  2,865      $  283
Costs and expenses.............................        142        575        214          32

NOTE 17--SEGMENT REPORTING

In accordance with SFAS No. 131 "Disclosures About Segments of an Enterprise and Related Information", the Company is organized and operates as one business segment, the design and development of contactless microprocessor-based smart card systems.

                                                                                 THREE MONTHS
                                                   YEAR ENDED DECEMBER 31,          ENDED
                                                ------------------------------    MARCH 31,
                                                  1999       2000       2001         2002
                                                --------   --------   --------   ------------
REVENUES BY GEOGRAPHICAL AREAS
North America................................   $  2,322   $  2,980   $  1,704      $  234
Far East.....................................      1,422      2,772      2,955         606
Africa.......................................        714      1,047      1,171         367
Europe.......................................        695      8,281     14,284       2,949
South America................................         99         53         87          19
                                                --------   --------   --------      ------
     Total export............................      5,252     15,133     20,201       4,175
Domestic (Israel)............................        131        369        719         246
                                                --------   --------   --------      ------
                                                $  5,383   $ 15,502   $ 20,920      $4,421
                                                ========   ========   ========      ======
FIXED ASSETS BY GEOGRAPHICAL AREA--see Note 8(2).
REVENUES FROM A SINGLE CUSTOMER EXCEEDING 10%
Customer A...................................         13%        (*)        (*)         (*)
Customer B...................................         (*)        --         (*)         (*)
Customer C...................................         10%        (*)        (*)         (*)
Customer D...................................         29%        15%        (*)         (*)
Customer E...................................         13%        (*)        (*)         (*)
Customer F...................................         --         11%        14%         (*)


(*) Less than 10%.

F-25



YOU SHOULD RELY ON THE INFORMATION CONTAINED IN THIS DOCUMENT OR TO WHICH WE HAVE REFERRED YOU. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION THAT IS DIFFERENT. THE INFORMATION IN THIS DOCUMENT MAY ONLY BE ACCURATE ON THE DATE OF THIS DOCUMENT. THIS DOCUMENT MAY BE USED ONLY WHERE IT IS LEGAL TO SELL THESE SECURITIES.

UNTIL , 2002, ALL DEALERS THAT BUY, SELL OR TRADE OUR ORDINARY SHARES, WHETHER OR NOT PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS REQUIREMENT IS IN ADDITION TO THE DEALERS' OBLIGATION TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.





* ORDINARY SHARES

O T I
ON TRACK INNOVATIONS LTD.


PROSPECTUS

, 2002




PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

Item 13. Other Expenses of Issuance and Distribution

The following are the estimated expenses, other than underwriting discounts and commissions expected to be incurred by On Track Innovations Ltd. in connection with the issuance and distribution of the securities registered under this registration statement.

SEC registration fee........................................  $     *
NASD filing fee.............................................        *
Nasdaq Market filing fee....................................        *
Printing and engraving expenses.............................        *
Transfer agents' fees and expenses..........................        *
Legal fees and expenses.....................................        *
Accounting fees and expenses................................        *
Miscellaneous expenses......................................        *
                                                              --------
          Total.............................................  $
                                                              ========
* To be filed by amendment.

Item 14. Indemnification of Directors and Officers.

Under the Companies Law, an Israeli company may indemnify an office holder in respect of certain liabilities either in advance of an event or following an event provided a provision authorizing such indemnification is inserted in its articles of association. Advance indemnification of an office holder must be limited to foreseeable liabilities and reasonable amounts determined by the board of directors. A company may indemnify an office holder against the following liabilities incurred for acts performed as an office holder:

* a financial liability imposed on him in favor of another person pursuant to a judgment, settlement or arbitrator's award approved by court; and

* reasonable litigation expenses, including attorneys' fees, incurred by the office holder or imposed by a court in proceedings instituted against him by the company, on its behalf or by a third party, in connection with criminal proceedings in which the officer holder was acquitted or as a result of a conviction for a crime that does not require proof of criminal intent.

A company may insure an office holder against the following liabilities incurred for acts performed as an office holder:

* a breach of duty of loyalty to the company, to the extent that the office holder acted in good faith and had a reasonable basis to believe that the act would not prejudice the company;

* a breach of duty of care to the company or to a third party; and

* a financial liability imposed on the office holder in favor of a third party.

An Israeli company may not indemnify or insure an office holder against any of the following:

* a breach of duty of loyalty, except to the extent that the office holder acted in good faith and had a reasonable basis to believe that the act would not prejudice the company;

* a breach of duty of care committed intentionally or recklessly;

* an act or omission committed with intent to derive illegal personal benefit; or

* a fine levied against the office holder.

II-1


Under the Companies Law, indemnification and insurance of office holders must be approved by our audit committee and our board of directors and, in specified circumstances, by our shareholders.

Our articles of association provide that we may indemnify and insure our office holders to the fullest extent permitted by the Companies Law.

Item 15. Recent Sales of Unregistered Securities

The following is a summary of transactions during the preceding three fiscal years involving sales of our securities that were not registered under the Securities Act.

(a) On June 24, 1999, we issued 205,000 ordinary shares to Hapoalim Nechasim (Menayot) Ltd. in consideration for a cash payment in the amount of $1,322,250 pursuant to the exercise of a warrant issued on July 24, 1998.

(b) On June 29, 1999, we issued (i) 80,000 ordinary shares to each of Oded Bashan and Ronnie Gilboa in consideration for the surrender by each of them of two management shares, and (ii) 20,000 ordinary shares to each of Astra Technological Investments Ltd., B.A.S. Trust Ltd. and Gury Jacobs in consideration for the surrender by each of them of the remaining three management shares. Each management share permitted the holder to appoint one director to our board of directors.

(c) On June 29, 1999, we issued 128,435 ordinary shares to Pre IPO AG at a price of $8.37 per share in consideration for a cash payment of $1,075,000. In addition, we granted Pre IPO AG an option to purchase an additional 43,565 ordinary shares at an exercise price of NIS 0.1 per share within 14 days of the completion of our initial public offering on the Neuer Markt of the Frankfurt Stock Exchange.

(d) On August 12, 1999, we issued 3,200,000 ordinary shares (through Deutsche Borse Clearing AG) for an aggregate purchase price of $27.2 in an initial public offering on the Neuer Markt. The underwriters of this offering were M.M. Warburg & CO Kommanditgesellschaft auf Aktien, Vereins-und Westbank AG, Baden-Wurttembergische Bank AG, SchmidtBank KGaA, net.IPO AG and Banque CPR. In connection with this offering the underwriters received aggregate underwriting commissions of $2,242,500.

(e) On September 1, 1999, we issued 63,558 ordinary shares (through Deutsche Borse Clearing AG) to net.IPO AG upon conversion of a convertible loan in the amount of $250,000 that it had provided to us on July 15, 1999.

(f) On September 5, 1999, we issued 43,565 ordinary shares (through Deutsche Borse Clearing AG) to Pre IPO AG pursuant to the exercise of the option described in (e) above in consideration for payment of NIS 436.

(g) On December 29, 1999, we issued an aggregate of 66,860 ordinary shares (through Clearstream Banking AG) valued at $459,997 at the time of issuance to Wong Ching Shan and City Smart (Australia) PTY Ltd. as consideration for the transfer to us of the entire issued and outstanding share capital of City Smart Ltd.

(h) On January 27, 2000, we issued an aggregate of 121,184 ordinary shares (through Clearstream Banking AG) valued at $1,222,747 at the time of issuance to Michael Cohen and Yael Cohen as consideration for the transfer to us of the entire issued and outstanding share capital of SoftChip Israel Ltd. and SoftChip Technologies (3000) Ltd.

II-2


(i) On June 1, 2000, we issued 393,171 ordinary shares to a trustee (through Clearstream Banking AG) in connection with our acquisition of 51% of the issued share capital of each of InterCard GmbH Kartensysteme and InterCard GmbH Systemelectronic.

(j) On January 3, 2001, we issued 785,000 ordinary shares to a trustee (through Clearstream Banking AG) in connection with our acquisition of 49% of the issued share capital of InterCard GmbH Kartensysteme and Intercard GmbH Systemelectronic.

(k) On June , 2002, we issued ordinary shares in connection with our bonus issuance (see "Bonus Share Issuance").

(l) Since January 1, 1997, options for the purchase of a total of 5,163,105 of our ordinary shares have been granted to our directors, employees and consultants. Since that date, we have issued a total of 474,069 ordinary shares pursuant to the exercise of options. A total of 4,584,813 employee share options are currently outstanding.

We believe that the issuances of securities described in paragraphs (a) through (k) above were exempt from registration under the U.S. Securities Act because they were made pursuant to Regulation S thereunder or pursuant to exemptions from registration provided under Section 4(2) of the Securities Act or because no sales for value were effected.

We believe that the issuances of securities described in paragraph (l) above were exempt from registration under the Securities Act because they were made pursuant to Regulation S thereunder or pursuant to exemptions from registration provided under Section 4(2) of the Securities Act and/or Rule 701 and the regulations promulgated thereunder.

II-3


Item 16. Exhibits and Financial Statement Schedules

(a) Exhibits

EXHIBIT
 NUMBER                                   EXHIBIT DESCRIPTION
--------                                  -------------------
 3.1        --        Memorandum of Association, dated as of February 14, 1990 and
                      Certificate of Change of Name, dated as of July 22, 1998.
 3.2        --        Amended Articles of Association dated as of June 14, 2002.
 4.1        --        Specimen share certificate.
 5.1        --        Form of opinion of Zysman Aharoni Gayer & Co. Law Offices,
                      Israeli counsel to the Registrant, as to the validity of the
                      ordinary shares (including consent).
 8.1        --        Form of opinion of Zysman Aharoni Gayer & Co. Law Offices,
                      Israeli counsel to the Registrant, as to Israeli tax matters
                      relating to the ordinary shares (including consent).
 8.2        --        Form of opinion of Z.A.G/S&W, U.S. counsel to the
                      Registrant, as to United States tax matters relating to the
                      ordinary shares (including consent).
 8.3        --        Form of opinion of FPS Fritze Paul Schmitt German counsel to
                      the Registrant, as to German tax matters relating to the
                      ordinary shares (including consent).
 10.1       --        Original Section 102 Share Option Plan of the Registrant.*
 10.5       --        Stock Compensation Program and Stock Award Agreement of OTI
                      America, Inc.
 10.6       --        Employment Agreement, dated as of July 1, 1999, by and
                      between Oded Bashan and the Registrant.*
 10.7       --        Employment Agreement, dated as of July 1, 1999, by and
                      between Ronnie Gilboa and the Registrant.*
 10.8       --        Employment Agreement, dated as of June 4, 2000, by and
                      between Guy Shafran and the Registrant.*
 10.9       --        Employment Agreement, dated as of July 1, 1999, by and
                      between Moshe Aduk and the Registrant.*
 10.10      --        Employment Agreement, dated as of July 1, 1999, by and
                      between Nehemya Itay and the Registrant.*
 10.13      --        Employment Agreement, dated as of August 23, 1998, by and
                      between Ohad Bashan and OTI America, Inc.*
 10.14      --        PC 3 SCOS License Agreement, dated as of July 3, 1995, by
                      and between Personal Computer Card Corporation and the
                      Registrant, as amended on November 1, 1997, August 24, 1998
                      and March 17, 1999, and extended by letter agreement dated
                      September 12, 2000.*
 10.15      --        Software Escrow Agreement, dated as of March 16, 1999, by
                      and among Personal Cipher Card Corporation, Fort Knox Escrow
                      Services, Inc. and OTI America, Inc.*
 10.16      --        License and Cooperation Agreement, dated as of May 18, 1998,
                      between Samsung Electronics Co. Ltd. and the Registrant.*
 10.17      --        Acquisition Agreement, dated as of December 29, 1999, by and
                      among City Smart Ltd., Wong Ching Shan, City Smart
                      (Australia) PTY Ltd. and the Registrant.*
 10.18      --        Shareholders Agreement, dated as of February 2, 2000, by and
                      among Ocean Wonder Ltd., Sailor Group Ltd., Cheung Kong
                      Infrastructure Holdings Ltd. and the Registrant.

II-4


EXHIBIT
 NUMBER                                   EXHIBIT DESCRIPTION
--------                                  -------------------
 10.19      --        Acquisition Agreement, dated as of January 28, 2000, by and
                      among Softchip Israel Ltd., Softchip Technologies (3000)
                      Ltd., Yael Cohen, Michael Cohen and the Registrant.*
 10.20      --        Acquisition Agreement, dated as of June 15, 2000, by and
                      among Manfred Weise, Dennis Robert Weise, Patrick Norbert
                      Weise, a civil partnership and the Registrant.*
 10.21      --        Put Option Agreement, dated as of June 15, 2000, by and
                      among Manfred Weise, Dennis Robert Weise, Patrick Norbert
                      Weise, a civil partnership and the Registrant.*
 10.22      --        Call Option Agreement, dated as of June 15, 2000, by and
                      among Manfred Weise, Dennis Robert Weise, Patrick Norbert
                      Weise, a civil partnership and the Registrant.*
 10.23      --        Share Pledge Agreement, dated as of June 15, 2000, by and
                      among Manfred Weise, Dennis Robert Weise, Patrick Norbert
                      Weise, a civil partnership and the Registrant.*
 10.24      --        Escrow Agreement with Respect to the Share Purchase
                      Agreement, dated as of June 15, 2000, by and among Manfred
                      Weise, Dennis Robert Weise, Patrick Norbert Weise, a civil
                      partnership and the Registrant.*
 10.25      --        Escrow Agreement with Respect to the Option Agreements,
                      dated as of June 15, 2000, by and among Manfred Weise,
                      Dennis Robert Weise, Patrick Norbert Weise, a civil
                      partnership and the Registrant.*
 10.26      --        General Term and Conditions of Sale of OTI.
 10.27      --        Lease, dated as of June 27, 1995, by and between the Israel
                      Lands Authority and the Registrant.*
 10.28      --        Development Agreement, dated as of December 7, 1998, by and
                      between the Israel Lands Authority and the Registrant.*
 10.29      --        Distribution agreement, dated as of February 2, 2000,
                      between e-Smart System Inc. (formerly Sailor Group Limited)
                      and the Registrant.
 10.30      --        2001 Employee Share Purchase Plan of the Registrant.
 10.31      --        2001 Employee Share Option Plan of the Registrant.
 10.32      --        Amendment dated September 20, 2001 to Put Option Agreement,
                      dated as of June 15, 2000, by and among Manfred Weise,
                      Dennis Robert Weise, Patrick Norbert Weise, a civil
                      partnership, and the Registrant.*
 10.33      --        Consulting Agreement dated as of March, 2002 between the
                      Registrant and Dionysos Investments Ltd.
 10.34      --        Long Term Lease Agreement, dated as of March 6, 2002 by and
                      between the Israel Lands Authority and the Registrant.
 21.1       --        List of subsidiaries of the Registrant.
 23.1       --        Consent of Luboshitz Kasierer, independent accountants.
 23.2       --        Consent of Zysman Aharoni Gayer & Co. Law Offices, Israeli
                      counsel to the Registrant (included in Exhibits 5.1 and
                      8.1).
 23.3       --        Consent of Z.A.G/S&W, U.S. counsel to the Registrant
                      (included in Exhibit 8.2).
 23.4       --        Consent of FPS Fritze Paul Schmitt, German counsel to the
                      Registrant (included in Exhibit 8.3).
 24.1       --        Powers of Attorney (included in signature page to
                      Registration Statement).


*           To be filed by amendment.

II-5


(b) Financial Statement Schedules.

Schedules are omitted because they are either not required, are not applicable or because equivalent information has been included in the financial statements, the notes thereto or elsewhere herein.

Item 17. Undertakings

(a) The undersigned Registrant hereby undertakes:

(1) To file during any period in which offers or sales are being made, a post-effective amendment to this Registration Statement:

(i) to include any prospectus required by Section 10(a)(3) of the Securities Act;

(ii) to reflect in the prospectus any facts or events arising after the effective date of the Registration Statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the Registration Statement;

(iii) to include any material information with respect to the Plan of Distribution not previously disclosed in the Registration Statement or any other material change to such information in the Registration Statement.

Provided, however, that paragraphs (a)(1)(i) and (a)(1)(ii) do not apply if the information required to be included in a post-effective amendment by those paragraphs is contained in periodic reports filed with or furnished to the Commission by the Registrant pursuant to Section 13 or
Section 15(d) of the Exchange Act that are incorporated by reference in the Registration Statement.

(2) That, for the purpose of determining any liability under the 1933 Act, each such post-effective amendment shall be deemed to be a new Registration Statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.

(3) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering.

(4) To file a post-effective amendment to the registration statement to include any financial statements required by Rule 3-19 of this chapter at the start of any delayed offering or throughout a continuous offering. Financial statements and information otherwise required by Section 10(a)(3) of the Securities Act need not be furnished, provided that the Registrant includes in the prospectus, by means of a post-effective amendment, financial statements required pursuant to this paragraph (a)(4) and other information necessary to ensure that all other information in the prospectus is at least as current as the date of those financial statements. Notwithstanding the foregoing, with respect to registration statements on Form F-3, a post-effective amendment need not be filed to include financial statements and information required by Section 10(a)(3) of the Securities Act or Rule 3-19 of this chapter if such financial statements and information are contained in periodic reports filed with or furnished to the Commission by the Registrant pursuant to Section 13 or
Section 15(d) of the Exchange Act that are incorporated by reference in the Form F-3.

II-6


(b) Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers or controlling persons of the Registrant pursuant to the provisions described in Item 14 hereof, or otherwise, the Registrant has been advised that in the opinion of the U.S. Securities and Exchange Commission, such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than any payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue.

II-7


SIGNATURES

Pursuant to the requirement of the Securities Act of 1933, the Registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form F-1 and has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized in Rosh Pina, Israel, on June 13, 2002.

ON TRACK INNOVATIONS LTD.

By:  /s/ Oded Bashan
--------------------------------------

    Name: Oded Bashan
    Title: Chief Executive Officer
           and Chairman


By:  /s/ Ronnie Gilboa
--------------------------------------

    Name: Ronnie Gilboa
    Title: Vice President, Projects

Pursuant to the requirements of the Securities Act of 1933, this registration statement has been signed by each of the following persons in the capacities indicated on June 13, 2002.

KNOW ALL MEN BY THESE PRESENTS, that each director and executive officer of On Track Innovations Ltd. whose signature appears below constitutes and appoints Oded Bashan and Ronnie Gilboa, and each of them, with full power to act without the other, his true and lawful attorneys-in-fact and agents, with full and several power of substitution, for him and in his name, place and stead, in any and all capacities, to sign any or all amendments, including post-effective amendments, and supplements to this Registration Statement (and any registration statement relating to the same offering and filed pursuant to Rule 462 under the Securities Act of 1933), and to file the same, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as they might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or any of them, or their or his substitutes, may lawfully do or cause to be done by virtue hereof.

                   NAME                                         TITLE                               DATE
                   ----                                         -----                               ----
              /s/ Oded Bashan                 Chairman of the Board of Directors,               June 13, 2002
------------------------------------------      President, and Chief Executive Officer
               Oded Bashan                      (Principal Executive Officer)

             /s/ Guy Shafran                  Chief Financial Officer (Principal                June 13, 2002
------------------------------------------      Financial and Accounting Officer)
               Guy Shafran

II-8


                   NAME                                         TITLE                               DATE
                   ----                                         -----                               ----

             /s/ Ohad Bashan                  United States Representative                      June 13, 2002
------------------------------------------
               Ohad Bashan

            /s/ Ronnie Gilboa                 Director                                          June 13, 2002
------------------------------------------
              Ronnie Gilboa

          /s/ Shulamith Shiffer               Director                                          June 13, 2002
------------------------------------------
            Shulamith Shiffer

           /s/ Felix Goedhart                 Director                                          June 13, 2002
------------------------------------------
              Felix Goedhart

            /s/ Raanan Ellran                 Director                                          June 13, 2002
------------------------------------------
              Raanan Ellran

II-9


EXHIBIT 3.1

The Companies Ordinance
A Company Limited by Shares
Memorandum of Association of

Debug Hadshanut Be'am [in Hebrew]
Debug Innovation Ltd. [in English]

1. The company's name is: Debug Hadshanut Be'am - Debug Innovation Ltd.

2. The objectives for which the company is founded are:

a. To engage in all matters relating to innovations and inventions in the fields of science and technology.

b. The company shall be qualified for any right, obligation and legal act.

3. The members liability is limited.

4. The company's share capital is 1,110 shares, as follows:

Divided into 100 Ordinary Class A shares of NIS 1 each; And 10 Management Shares of NIS 1 each; And 1,000 Ordinary Class B shares of 1 shekel each.

We, the persons whose names and addresses are entered hereunder, wish to be incorporated as a company in accordance with this memorandum of association, and do hereby agree to take the number of shares in the company's fund as entered beside our respective names.

Names and addresses of signatories   I.D. Number        No. of shares taken              Signature
----------------------------------   -----------        -------------------              ---------
Oded Bashan          Manager         0587752            1 ordinary class A share         (-)
Carmiel                                                 1 management share

Roni Gilboa          Engineer        05429957           1 ordinary class A share         (-)
Beit Hilel                                              1 management share

[Stamp of Efrat Koversky, Adv.]

(-)

Witness to signature February 14, 1990

(-Emblem of the State of Israel-)

MINISTRY OF JUSTICE REGISTRAR OF COMPANIES

STATE OF ISRAEL

THE COMPANIES ORDINANCE [NEW VERSION], 5743-1983

CERTIFICATE OF CHANGE OF NAME

I hereby certify that pursuant to a special resolution and in accordance with Article 37 of the Companies Ordinance [New Version], 5743-1983, the Company


Debug Innovation Ltd.

has changed its name and shall, as of this day, be named


On Track Innovations Ltd.

and the amended name as aforesaid has been recorded in the Register of Companies.

To which I have hereto set my hand in Jerusalem this     8th day of July, 1991
                                                         26th day of Tamuz, 5751

Company No. 51-145625-3

                                                       July 22, 1998

Registrar of Companies
(-)

[ Stamp of the Ministry of Justice,
Registrar of Companies ]

[ Income stamps ]


EXHIBIT 3.2

THE COMPANIES ORDINANCE (NEW VERSION)
COMPANY LIMITED BY SHARES
ARTICLES OF ASSOCIATION
OF
ON TRACK INNOVATIONS LTD.

SCHEDULE II EXCLUDED

1. The Regulations in Schedule II to the Companies Ordinance (New Version) shall not apply to the Company.

INTERPRETATION

2. In these Articles, unless inconsistent with the subject matter or context, the following terms shall bear the meanings assigned to them below:-

TERMS                  MEANINGS
"these Articles"       These Articles of Association as originally
                       adopted or as altered from time to time by
                       Special Resolution.
"the Board"            The Board of Directors of the Company.
"the Company"          The above-named Company.
"the Directors"        The Directors for the time being of the Company.
"the Memorandum"       the Memorandum of Association
"Month"                Gregorian Month.
"the Office"           The registered office for the time being of the
                       Company.
"Officer"              A Director, the general manager, the head
                       business manager, the general manager's deputy,
                       other manager directly subject to the general
                       manager, and any such other officer of the
                       Company, even if his title is different.
"Ordinary Shares"      ordinary shares of NIS 0.1 each in the capital
                       of the Company.
"the Register"         the Register of members of the Company
                       administered  in accordance with Section 61 of
                       the Statutes.
"the Seal"             The Common Seal of the Company.
"the Secretary"        the Secretary of the Company nominated under
                       Article 93 below.
"the                   Statutes" The Companies Ordinance (New Version),
                       5743-1983, and every amendment thereto and every
                       other statute for the time being in force
                       concerning limited companies and affecting the
                       Company or the shares in any stock exchange in
                       which they are traded.


Writing shall include printing and lithography and any other mode or modes of representing or reproducing words in a visible form.

Words importing the singular number only shall include the plural number, and vice versa.

Words importing the masculine gender shall include the feminine gender, and words importing persons shall include corporations and any other legal entity.

Subject as aforesaid, any words or expressions defined in the Statutes shall, unless inconsistent with the subject matter or context, bear the same meanings in these Articles.

PUBLIC COMPANY

3. The Company is a public company, and accordingly, it shall not have less than seven members.

BUSINESS

4. The Board shall be entitled to undertake at such time or times as they shall think fit any branch or kind of business which, according to the Memorandum of Association of the Company or these Articles, the Company is authorised, expressly or impliedly, to undertake, and the Board may suspend or terminate any such business, whether such branch or kind of business may actually have been commenced or not, so long as the Board may deem it expedient not to commence or proceed with such branch or kind of business.

OFFICE

5. The Office shall be located at a place as the Board shall from time to time approve.

SHARES

6. The authorised share capital of the Company is NIS 500,000 divided into 5,000,000 Ordinary Shares.

7. The Ordinary Shares shall be equally ranked with each other pari passu, and shall vest in their holders the following rights:-

7.1. The right to receive invitations to the general meetings of the Company (annual and extraordinary meetings), and to participate and vote in these meetings.

7.2. The right to participate in the distribution of dividends, bonus shares, assets or any other distribution of the Company.

7.3. The right to receive the nominal value thereof upon liquidation of the Company and after payment of all other debts of the Company.

8. The shares taken by the subscribers to the Memorandum of Association shall be duly issued by the Board. Subject as aforesaid, the shares shall be under the control of the Board, which may allot and issue the same to such persons, on such terms and conditions, in such manner and at such times as the Board shall deem fit.


9. The Company may pay commission at a rate not exceeding ten percent of the price at which the shares are issued to any person in consideration of his subscribing or agreeing to subscribe (whether absolutely or conditionally) for any shares in the Company or procuring or agreeing to procure subscriptions (whether absolute or conditional) for any shares in the Company.

10. When any shares are issued for the purpose of raising money to defray the expenses of the construction of any works or buildings or the provision of any plant which cannot be made profitable for a lengthy period, the Company may, subject to the conditions and restrictions mentioned in Section 140 of the Statutes, pay interest on so much of such share capital as is for the time being paid up for the period, and may charge the sum so paid by way of interest to capital as part of the cost of the construction of the work or building or the provision of a plant.

11. If two or more persons are registered as joint holders of any share, any one of such persons may give valid and effectual receipts for any dividends or other moneys in respect of such share.

12. No person shall be recognized by the Company as holding any share upon any trust, and the Company shall not be bound by or required to recognize any equitable, contingent, future, or partial interest in any share or any right whatsoever in respect of any share other than an absolute right to the entirety thereof by the registered holder.

13. Every member shall be entitled without payment to receive within two months after allotment or registration of transfer (unless the conditions of issue provide for a longer interval) one certificate under the Seal for all the shares registered in his name, specifying the number and denoting the numbers of the shares in respect of which it is issued and the amount paid up thereon. In the case of joint holders the Company shall not be bound to issue more than one certificate to all the joint holders, and delivery of such certificate to any one of them shall be sufficient to all. Every certificate shall be signed by two directors or by one Director and countersigned by the Secretary or some other person nominated by the Board for that purpose.

14. If any share certificate shall be defaced, worn out, destroyed, or lost, it may be renewed on such evidence being produced, and such indemnity (if any) being given as the Board shall require and (in case of defacement or wearing out) upon delivery of the old certificate, and in any case on payment of such sum as the Board may from time to time require.


LIEN

15. Deleted.

16. Deleted.

17. Deleted.

18. Deleted.

CALLS FOR PAYMENT ON SHARES

19. The Board may, subject to the provisions of these Articles, from time to time call upon the members respecting all moneys unpaid on their shares as the Board think fit, provided that at least fourteen days' notice is given prior to each call, and each member shall be liable to pay the amount of every call made upon him, by instalments (if any) and at the times and places appointed by the Board.

20. No member shall be entitled to receive any dividend or to exercise any privileges as a member until he shall have paid all calls for the time being due and payable on every share held by him, whether alone or jointly with any other person, together with interest, linkage differentials and expenses (if any).

21. A call shall be deemed to have been made at the time when the resolution of the Board authorising such a call was passed.

22. The joint holders of a share shall be jointly and severally liable for the payment of all calls and instalments in respect thereof.

23. If a call or instalment payable in respect of a share is not paid on or before the date appointed for payment, the holder, or allottee, of the share shall pay linkage differentials and interest on the amount of the call or instalment at such rate as the Board shall fix from the day appointed for payment thereof to the time of actual payment, provided that, the Board may waive payment of such interest and or linkage differentials, wholly or in part.

24. Any sum, which by the terms of allotment of a share is made payable upon allotment or at any fixed date, whether on account of the amount of the share or by way of premium, shall, for the purposes of these Articles, be deemed to be a call duly made, and payable on the date appointed for payment, and in the event of non-payment the provisions of these Articles as to payment of interest, linkage differentials and expenses, forfeiture and the like, and all other relevant provisions of these Articles shall apply as if such sum were a call duly made and notice in respect of such call had been given in the manner provided for in Article 19 above.

25. The Board may from time to time make arrangements on the issue of shares that differentiate between the holders of such shares in the amount of calls to be paid and in the time of payment of such calls.

26. The Board may, if they think fit, receive from any member willing to advance the same, all or any part of the moneys due upon his shares before payment of such amount has been called for, and may pay to such member such interest and linkage differentials (as may be agreed between the Board and such member) in respect of such advance payment until the date on which such payment would have been due if it had not been paid in advance, in addition to the dividends, if any, payable upon such shares in respect of which such advance has been made.


TRANSFER OF SHARES

27. Subject to the Statutes and without prejudice to the possibility to transfer Ordinary Shares through the clearance system applicable to the Stock Exchange in which the Ordinary Shares are traded at any time, shares shall be transferable, by means of the delivery of a document in the usual common form, or in such other form as the Board shall from time to time approve, to the Office, together with the certificate of the shares to be transferred, and such other evidence (if any) as the Board may require to prove the title of the intending transferor.

28. The instrument of transfer of a share shall be executed both by the transferor and the transferee and the transferor shall be deemed to remain the holder of the share until the name of the transferee is entered in the Register in respect thereof.

29. A fee, as determined by the Board from time to time, may be charged for registration of a transfer.

30. The Register shall be closed during the fourteen days immediately preceding every Ordinary General Meeting of the Company and at such other times (if any) and for such period as the Board may from time to time determine, provided always that it shall not be closed for more than thirty days in a calendar year.

31. In the case of the death of a Member, the surviving holder or holders, where the deceased was a joint holder, and the executors or administrators of the deceased where he was a sole or only surviving holder, shall be the only persons recognized by the Company as having any title to his shares, but nothing herein contained shall release the estate of a deceased joint holder from any liability in respect of any share jointly held by him.

32. Any person becoming entitled to a share in consequence of the death or bankruptcy of any Member, may, upon producing such evidence of title as the Board shall require, with the consent of the Board be himself registered as holder of the share, or subject to the provisions as to transfers herein contained, transfer the same to some other person.

33. A person entitled to a share by transmission shall be entitled to receive, and may give a discharge for, any dividends or other moneys payable in respect of the share, but he shall not be entitled in respect of it to receive notices of, or to attend or vote at meetings of the company or, save as aforesaid, to exercise any of the rights or privileges of a member unless and until he shall become a member in respect of the share.

34. Any Shareholder whose holdings increase above 1%, and thereafter each 5% threshold (i.e., 5%, 10%, 15%, 20% etc.) of the Company's then outstanding share capital is obliged to notify the Company, in writing, of such a change within ten days of the date of such change. Shareholders complying with the filing requirements of Sections 13(d) and 13(g) of the U.S. Securities Exchange Act 1934 and the regulations promulgated thereunder will not be subject to this requirement.


35. A shareholder who failed to comply with the provisions of Article 34 will be denied of his voting rights in the General Meeting in respect of the number of shares exceeding the threshold of which crossing was not reported for a period determined by the Board in its sole discretion, which period shall be of no less than 6 months and no more than 24 months. Unless the circumstances otherwise require, the length of such period shall be determined by the Board while taking into consideration the scope of the violation of Article 34 and the length of the delay in notice thereunder, or the lack of such notice.

FORFEITURE OF SHARES

36. If any member fails to pay the whole or any part of any call or instalment of a call on or before the day appointed for the payment thereof, the Board may at any time thereafter, during such time as the call or instalment or any part thereof remains unpaid, serve a notice on him or on the person entitled to the share by transmission requiring him to pay such call or instalment, or such part thereof as remains unpaid, together with interest at such rate and linkage differentials as the Board shall determine, and any expenses that may have accrued by reason of such non-payment.

37. If the requirements of any such notice as aforesaid are not complied within the seven day period, then any share in respect of which such notice has been given may at any time thereafter (but before the payment required by the notice has been made), be forfeited by a resolution of the Board to that effect. A forfeiture of shares shall include all dividends in respect of the shares not actually paid before the forfeiture, notwithstanding that they shall have been declared.

38. When any share has been forfeited in accordance with these Articles notice of the forfeiture shall forthwith be given to the holder of the share or to the person entitled to the share by transmission, as the case may be, and an entry of such notice having been given, and of the forfeiture with the date thereof, shall forthwith be made in the Register opposite to the share, but the provisions of this Article are directory only and no forfeiture shall in any manner be invalidated by any omission or neglect to give such notice or to make such entry aforesaid.

39. Notwithstanding any such forfeiture as aforesaid, the Board may, at any time before the forfeited share has otherwise been disposed of, annul the forfeiture upon the terms of payment of all calls, linkage differentials and interest due upon and expenses incurred in respect of the shares and upon such further terms (if any) as they shall see fit.

40. Every share which shall be forfeited shall thereupon become the property of the Company and may be cancelled or sold or reallotted or otherwise disposed of either to the person who was the holder thereof prior to the forfeiture or was entitled thereto, or to any other person, upon such terms and in such manner as the Board shall think fit.


41. A shareholder whose shares have been forfeited shall, notwithstanding such forfeiture, be liable to pay to the Company all calls made and not paid on such shares at the time of forfeiture, as well as linkage differentials and interest thereon to the date of payment, in the same manner in all respects as if the shares had not been forfeited and to satisfy all the claims and demands (if any) which the Company might have enforced in respect of the shares at the time of forfeiture, without any deduction or allowance for the value of the shares at the time of forfeiture.

42. The forfeiture of a share shall involve the extinction at the time of forfeiture of all interest in and all claims and demands against the Company in respect of the share, and all other rights and liabilities incidental to the share as between the shareholder whose share is forfeited and the Company, save only for those rights and liabilities as are expressly saved by these Articles, or as are imposed or granted by the Statutes in respect of past members.

43. A sworn declaration in writing that the declarant is a Director of the Company, and that a share has been duly forfeited in pursuance of these Articles and stating the date upon which it was forfeited shall, as against all persons claiming to be entitled to the share adversely to the forfeiture thereof, be conclusive evidence of the facts therein stated, and such declaration, together with the receipt of the Company for the consideration (if any) given for the share on the sale or disposition thereof, and a certificate of proprietorship of share under the Seal delivered to the person to whom the same is sold or disposed of, shall constitute a good title to the share ,and such person shall be registered as the holder of the share and shall be discharged from all call made prior to such sale or disposition, and shall not be bound to see to the application to the purchase money (if any) nor shall his title to the share be affected by any act, omission or irregularity relating to or connected with the proceedings in relation to the forfeiture, sale, re-allotment or disposal of the share.

ALTERATIONS OF CAPITAL

44. The Company may from time to time by special resolution:-

44.1. consolidate and divide all or any of its share capital into shares of larger amounts than its existing shares, or

44.2. cancel any shares not taken or agreed to be taken by any person, or

44.3. divide its share capital or any part thereof into shares of smaller amounts than is fixed by its Memorandum by sub-division of its existing shares or any of them, subject nevertheless to the provisions of the Statutes, so that as between the resulting shares, one or more of such shares may by the resolution by which sub-division is effected, be given any preference or advantage as regards dividend, capital, voting or otherwise over the others or any other of such shares, or

44.4. reduce its share capital and any capital redemption reserve fund in any way that may be considered expedient and in particular exercise any or all of the powers conferred by Section 151 of the Statutes, or any statutory modification thereof.


INCREASE OF CAPITAL

45. The Company may from time to time by Special Resolution, whether all the shares for the time being authorised shall have been issued or all the shares for the time being issued shall have been fully paid-up or not, increase its share capital by the creation of new shares, such new capital to be of such amount and to be divided into shares of such respective amounts and (subject to any special rights for the time being attached to any existing class of shares) to carry such preferential, deferred or other special rights (if any) or to be subject to such conditions or restrictions (if any) in regard to dividends, return of capital, voting or otherwise as the General Meeting resolving upon such increase directs.

46. Except so far as otherwise provided by the Statutes or pursuant to these Articles or by the conditions of issue, any new share capital shall be considered as part of the original share capital of the Company, and shall be subject to the same provisions with reference to the payment of calls, lien, transfer, transmission, forfeiture and otherwise as are applicable to the original share capital.

MODIFICATION OF CLASS RIGHTS

47. If at any time the share capital is divided into different classes of shares, the rights attached to any class (unless otherwise provided by the terms of issue of the shares of that class) may be varied with the consent in writing of the holders of three-fourths of the issued shares of that class, or with the sanction of an extraordinary resolution passed at a separate General Meeting of the holders of the shares of that class. The provisions of these Articles relating to the General Meetings shall mutatis mutandis apply to every such separate General Meeting, save that the necessary quorum shall be at least two persons holding, or representing by proxy, one-third of the issued shares of the class and that any holder of shares of the class present in person or by proxy may demand a poll.

GENERAL MEETINGS

48. General Meetings shall be held at least once in every calendar year at such time, not being more than fifteen months after the holding of the last preceding General Meeting, and at such place as may be determined by the Board. Such General Meetings shall be called "Ordinary Meetings" and all other meetings of the Company shall be called "Extraordinary Meetings".

49. The Board may, whenever they think fit, and they shall upon such requisition in writing as provided by Section 109 of the Statutes, convene an Extraordinary Meeting. Any such requisition shall state the objects for which the meeting is to be called, shall be signed by the requisitioners, and must be deposited at the office of the Company. Such requisition may consist of several documents in like form, each signed by one or more requisitioners. If the Board do not within twenty-one days from the date of the deposit of such requisition proceed to convene a meeting, the requisitioners, or any of them representing more than one-half of the total voting rights of all of the total voting rights of all of the requisitioners, may themselves convene the meeting, but any meeting so convened shall not be held after three months from the date on which the requisition was deposited, as aforesaid, at the office of the Company.


50. Subject to the provisions herein relating to Special Resolutions, not less than fourteen days' notice, specifying the place, the day and the hour of an Ordinary or Extraordinary Meeting, and in the case of special business the general nature of such business, shall be given in the manner hereinafter mentioned to such members as are under the provisions of these Articles entitled to receive notices from the Company.

51. Whenever it is proposed to pass a Special Resolution twenty-one days' notice of the General Meeting convened to pass such resolution shall be given; provided that the accidental omission to give such notice to, or the non-receipt of such notice by, any member shall not invalidate any resolution passed or proceedings at any such meeting, and, with the consent of all the members for the time being entitled to receive notices of meetings, a meeting may be convened upon a shorter notice or without notice and generally in such manner as such members may approve.

PROCEEDINGS AT GENERAL MEETINGS

52. The business at an Ordinary Meeting shall be to elect the Directors, to appoint the auditors of the Company (the "Auditors"), to receive and consider the profit and loss account, the balance sheet, and the ordinary reports of the Board and Auditors, and to fix the remuneration of the Board and Auditors. All other business shall be deemed special and shall be transacted at an Extraordinary Meeting provided that it shall be permitted to consider any special matter at the Ordinary Meeting, when the required notice of such matter has been included in the notice of such Ordinary Meeting.

53. Any member entitled to be present and to vote at a meeting may submit to any General Meeting any resolution which is relevant to the objects for which the meeting is convened, provided that within the prescribed time before the day appointed for the meeting he shall have served upon the company a notice in writing signed by him containing the proposed resolution, and stating his intention to submit the same. The aforementioned prescribed time shall be such that, between the date on which the notice is served or deemed to be served, and the day appointed for the meeting, there shall be not less than four and not more than fourteen intervening days.

54. Upon receipt of any such notice as set out in the immediately preceding Article, the Secretary, or if no Secretary has been appointed, the person authorised by the Board so to act, shall, in any case where the notice of intention is received before the notice of the meeting is dispatched to the members, include it in the notice of the meeting and shall, in any other case, issue, as quickly as possible, to the members entitled to notice of the meeting, notice that such a resolution will be proposed.


55. No business shall be transacted at any General Meeting unless a quorum is present when the meeting proceeds to business. The quorum at a General Meeting (whether an Ordinary Meeting or an Extraordinary Meeting) shall be two members present in person or by proxy holding at least 25% of the issued and outstanding Ordinary Shares of the Company; provided, however that as long as the Company is listed on National Association of Securities Dealers Automated Quotation System ("NASDAQ"), the quorum at such General Meeting (whether an Ordinary Meeting or an Extraordinary Meeting) shall be two members present in person or by proxy holding at least 33 1/3% of the issued and outstanding Ordinary Shares of the Company or such higher percentage as NASDAQ may impose on listed companies from time to time so long as such higher percentage is in effect.

56. If within half an hour from the time appointed for the holding of a General Meeting a quorum is not present, the meeting, if convened on the requisition of members, shall be dissolved. In any other case it shall stand adjourned to the same day in the next week (or the business day following such a day, if such a day is not a business day) at the same time and place and if at such adjourned meeting a quorum is not present within half an hour from the time appointed for holding the meeting, the members then present at such adjourned meeting shall constitute a quorum.

57. The Chairman (if any) of the Board shall preside at every General Meeting, but if there shall be no such Chairman or if at any meeting he shall not be present within fifteen minutes after the time appointed for holding the same, or shall be unwilling to act as Chairman, the members present shall choose one Director present at the aforesaid General Meeting or if no Director be present, or if all the Directors present decline to take the chair, they shall choose some members present at the aforesaid General Meeting to be Chairman of the meeting.

58. The Chairman, may, with the consent of any meeting at which a quorum is present and shall if so directed by the meeting, adjourn any meeting from time to time and from place to place as the meeting shall determine. Whenever a meeting is adjourned for ten days or more, notice of the adjourned meeting shall be given in the same manner as in the case of an original meeting. Save as aforesaid, no member shall be entitled to any notice of an adjournment or of the business to be transacted at an adjourned meeting. No business shall be transacted at any adjourned meeting other than the business which might have been transacted at the meeting from which the adjournment took place.

59. At all General Meetings a resolution put to the vote of the meeting shall be decided on a show of hands unless before or upon the declaration of the result of the show of hands a poll be demanded in writing by the Chairman (being a person entitled to vote) or by at least two members present, or by a holder or holders in person or by proxy of at least a one-twentieth part of the issued Ordinary Share capital of the Company, and, unless a poll be so demanded, a declaration by the Chairman of the Meeting that a resolution has been carried, or has been carried unanimously or by a particular majority, or lost, or not carried by a particular majority, shall be conclusive, and an entry to that effect in the minute book of the Company shall be conclusive evidence thereof, without proof of the number of proportion of the votes recorded in favour of or against such resolution.


60. If a poll be demanded in the manner aforesaid, it shall be taken forthwith, and the result of the poll shall be deemed to be the resolution of the meeting at which the poll was demanded.

61. The demand of a poll shall not prevent the continuance of a meeting for the transaction of any business other than the question on which a poll has been demanded.

62. In the case of an equality of votes either on a show of hands or a poll, the Chairman of the meeting shall not be entitled to a further or casting vote.

VOTES OF MEMBERS

63. Subject and without prejudice to any special privilege or restrictions for the time being affecting any special class of shares for the time being forming part of the capital of the Company, every member shall have one vote for every Ordinary Share of which he is the holder, whether on a show of hands or a poll.

64. If any member be of unsound mind or legally incompetent, he may vote through his custodian, guardian (natural or legal), receiver, administrator or other legal curator and such last-mentioned persons may give their votes either personally or by proxy.

65. If two or more persons are jointly entitled to a share, then in voting upon any question the vote of the senior who tenders a vote, whether in person or by proxy, shall be accepted to the exclusion of the votes of the other registered holders of the share, and for this purpose seniority shall be determined by the order in which the names stand in the Register.

66. Votes, whether on a show of hands or a poll, may be given either personally or by proxy. A proxy need not be a member of the Company.

67. The instrument appointing a proxy shall be in writing under the hand of the appointor or of his attorney duly authorised in writing, or if such appointor is a corporation, under its common seal, if any, and if none, then under the hand of some officer duly authorised in that regard.

68. A vote given in accordance with the terms of an instrument of proxy shall be valid notwithstanding the previous death or legal incompetence of the principal or revocation of the proxy or transfer of the share in respect of which the vote is given unless a notice in writing of the death, legal incompetence, revocation or transfer shall have been received at the Office before the meeting. Provided that if a poll shall be directed, a notice in writing revoking an instrument of proxy shall be effective if such notice shall be under the hand of the appointor and shall be received at the office not later than one hour before the commencement of the poll.

69. The instrument appointing a proxy, together with the power of attorney or other authority (if any) under which it is signed or a notarially certified copy, or a copy certified by a lawyer of such power of attorney, shall be deposited at the Office or at such other place or places, whether in Israel or elsewhere, as the Board may, from time to time, either generally or in a particular case of class of cases, prescribe, at least forty-eight hours before the time appointed for holding the meeting or adjourned meeting at which the person named in such instrument proposes to vote, failing which the person so named shall not be entitled to vote in respect thereof, provided that (unless a longer period for its validity is specified therein), no instrument appointing a proxy shall be valid after the expiration of twelve months from the date of its execution.


70. Any instrument appointing a proxy (whether for a specified meeting or otherwise) shall be in the following form or as near thereto as circumstances will admit:-

"I, the undersigned, of __________, a member of __________ and entitled to _ votes hereby appoint __________ of __________, and failing him of _ to vote for me and on my behalf at the (Ordinary, Extraordinary or Adjourned, as the case may be) General Meeting of the Company to be held on the _____ day of _____ and at every adjournment thereof.
As Witness my hand this _____ day of _______ 19__."

71. Subject to the provisions of the Statutes, a resolution in writing signed by the holder or holders of all the shares of the Company for the time being issued and entitled to vote in respect thereof at General Meetings of the Company shall be as valid and effectual for all purposes as a resolution passed at a General Meeting of the Company duly convened, held and constituted for the purpose of passing such resolution. Such a resolution may consist of several documents in identical form, each signed by one or more of the members.

DIRECTORS

72. Subject to the Statutes, the Board shall not consist at any time of more than seven (7) members, of which a majority shall be non-executive directors. The Directors shall be appointed, removed or replaced by a majority vote of the Shareholders of the Company present (in person or by proxy) in the General Meeting of the Company. Each group of Shareholders holding in aggregate 20% (twenty percent) or more of the Company's outstanding share capital shall be entitled to admit a written list of candidates for the appointment, removal or replacement of the Company's Directors (the "Lists"), during a General Meeting. The voting on such an appointment, removal or replacement of the Company's Directors shall by made on the Lists (at each List's entirety), unless Shareholders holding at least 20% (twenty percent) of the Company's outstanding share capital then present in the meeting, demand that the voting shall be per Director's name and not per List. Subject to the Statutes and Article 74, each Director shall hold office until the first General Meeting of the Company to be held following termination of the twenty four (24) month period commencing on such Director's appointment, provided however that until December 31, 2004, the Founders may not be replaced or removed unless by an affirmative vote of 75% (seveny five percent) of the Company's shareholders entitled to vote and voting in person or by proxy, at a General Meeting of which notice was duly given. Subject to the Statutes, a Director may be elected for consecutive terms. In this Article, the term Founders shall mean Oded Bashan and Ronnie Gilboa.


73. Subject to contracts (if any) between the Company and the Directors or any of them and the Statutes, the remuneration of the Directors shall be such sum (if any) as shall from time to time be decided by the Company in General Meeting, and such remuneration shall be divided amongst the Directors as the Company in General Meeting shall determine, or failing agreement, equally. The Directors and their alternates and proxies shall also be entitled to reimbursement of all reasonable travelling and hotel expenses (local or overseas and including airfare) incurred by them respectively in or about the performance of their duties as Directors, including their expenses of travelling to and from Board Meetings.

If by any arrangement with the Board, any Director shall perform or render any special duties or services outside his ordinary duties as a Director, the Board may pay him special remuneration, in addition to his ordinary remuneration, and such special remuneration may be by way of salary, commission, participation in profits, or otherwise as may be arranged, as the Board shall determine all subject to the provisions of the Statutes with regard to such matters.

74. Subject as herein otherwise provided or to the terms of any subsisting agreement, the office of a Director shall be vacated:-

74.1. Unless otherwise stated in Article 72 above, in the first General Meeting following 24 months from his appointment, unless he is reelected in such meeting.

74.2. if he becomes bankrupt or suspends payment or compounds with his creditors.

74.3. if he be found to be of unsound mind or becomes legally incompetent.

74.4. If he was found guilty of a criminal offence with moral turpitude, by a competent court of law.

74.5. if by notice in writing given to the Company he resigns his office.

74.6. if he be removed by the General Meeting in accordance with Article 72 above.

75. Subject at all times to the requirements of the Statutes, a Director may hold any other office or place of profit under the Company (except that of Auditor) in conjunction with his office of Director, and on such terms as to remuneration and otherwise as the Board shall approve.

MANAGING DIRECTOR

76. Subject at all times to the requirements of the Statutes, the Board may from time to time appoint any one or more of the Directors to be Managing Director or Managing Directors for such period and upon such terms as they think fit, and such powers may be made exercisable for such period or periods and upon such conditions and subject to such restrictions and generally upon such terms as to remuneration and otherwise as they may determine. The remuneration of a Managing Director may be by way of salary or commission or participation in profits, or by any or all of these modes as the Board may determine.


POWERS AND DUTIES OF DIRECTORS

77. The business of the Company shall be managed by the Board who may pay all such expenses of and preliminary and incidental to the promotion, formation, establishment and registration of the Company as they think fit, and may exercise all such powers of the Company and perform on behalf of the Company all such acts as may be exercised and performed by the Company and as are not by the Statutes or by these Articles required to be exercised or performed by the Company in General Meeting, subject, nevertheless, to the provisions of the Statutes and of these Articles and to such regulations (being not inconsistent with the aforesaid provisions) as may be prescribed by the Company in General Meeting; but no regulation made by the Company in General Meeting shall invalidate any prior act of the Board which would have been valid if such regulation had not been made.

78. Subject to Statutes and to the provision of contracts, if such will exist, between the Company and the Board or any Director thereof, no Director or any other Officer in the Company will be considered unqualified, due to his office, to enter into contracts with the Company, whether as a vendor, a buyer, or in any other way, and such a contract or any other contract or arrangement made by the Company or in its name in which a Director is or will be interested directly or indirectly will not be void.

ALTERNATE DIRECTORS

79. A Director may from time to time by writing under his hand appoint a person to act as alternate in his place at any meeting of the Board (or of a Committee of which such appointor is a member) at which he is not personally present and such appointment shall be valid. Every such appointee while he holds office as an alternate shall be entitled to notice of meetings of the Board and of such Committee as aforesaid, and to attend and vote thereat accordingly, provided that not more than one alternate appointed to act in place of a Director exercising this power may attend or vote at the same meeting. Any alternate appointed by this Article may exercise all powers and privileges of the Director appointing him at any meeting at which he attends in place of such Director, but he shall ipso facto vacate his office if and when the Director appointing him vacates office as a Director or removes such alternate from office by writing under his hand. Alternates shall not be entitled to receive any remuneration from the Company. However, in a written accord between them and their appointor, a copy of which will be delivered to the Company, they may receive, in place of their appointor, the remuneration or expenses the appointor would have received in the period of alternation, and this payment will replace the payment to the appointor.

79A. External Directors are not permitted to appoint an alternate.

DIRECTORS' PROXIES

80. A Director and any alternate may attend and vote by proxy at any meeting of the Board or of a committee of Directors provided that such proxy has been appointed in writing under the hand of his appointor and such appointment may be general or for any particular meeting or meetings. A proxy so appointed shall not be entitled to vote in place of his appointor at any meeting of the Board or of a Committee at which the Director appointing him is present in person, represented by his own alternate or (in the case of a proxy appointed by an alternate) at which the alternate Director by whom he is appointed is present or at which the Director by whom he is appointed is present or at which the Director by whom such alternate was appointed is either present in person or represented by his alternate.


PROCEEDINGS OF DIRECTORS

81. The Directors may meet together for the dispatch of business, adjourn and otherwise regulate their meetings as they think fit. A quorum for the Board's meetings will be two Directors attending themselves or represented by alternates or proxies. A Board's meeting can be effected by a telephonic conference-call between all Directors, which will be approved in a protocol written by the meeting's chairman. Questions arising at any meeting shall be decided by a majority of votes. For the purpose of this Article two or more Directors or alternates may be represented by the same proxy and any such representatives shall be entitled to a separate vote for each Director or alternate whom he represents in addition to any vote to which he may be entitled in his own right (if he has such right).

82. The board may from time to time elect a Chairman (who shall preside the meetings of the Board) and determine the period for which he is to hold office. If no such Chairman shall be elected, or if at any meeting the Chairman shall not be present within five minutes after the time appointed for holding the same, the Directors present shall choose someone of their number to be the Chairman of such meeting.

83. The Chairman of any meeting of the Board shall not have a second or casting vote.

84. A Director may, at any time, summon a meeting of the Directors.

85. The Board may delegate any of its powers to committees consisting of such member or members as the Board may decide, provided that the majority members of such committee shall be Directors. Any committee so formed shall in the exercise of the powers so delegated conform to any regulations that may be imposed on it by the Board.

86. A committee may elect a Chairman to its meetings. If no such Chairman is elected, or if at any meeting the Chairman is not present within five minutes after the time appointed for holding the same, the committee members present may choose one of their number to be the Chairman of the meeting.

87. A committee may meet and adjourn as the committee members think proper. Questions arising at any meeting shall be determined by a majority of votes of the committee members present, and in case of an equality of votes, the chairman shall not have a second or casting vote.

88. All acts carried out bona fide by any meeting of the Board or of a committee or by any person acting as a Director or alternate or as a proxy for a Director or alternate shall notwithstanding that it may afterwards be discovered that there are some defect in the appointment of any such Director or person acting as aforesaid, or that they or any of them were disqualified, be as valid as if every such person had been duly appointed and was qualified to be a Director or alternate or proxy as the case may be. The Board may ratify any act the performance of which at the time of the ratification was within the scope of the authority of the Board. The General Meeting shall be entitled to ratify any act done by the Board of Directors and/or any committee of the Board without authority, or acting ultra vires its authority, or which was tainted by some other defect. From the time of the ratification, every act ratified as aforesaid, shall be treated as though lawfully performed from the outset.


89. The Board shall cause proper minutes to be made of all General Meetings of the Company and also of all appointments of Officers, and of the proceedings of all meetings of the Board, and committees, and of the attendances thereat, and all business transacted at such meetings, and any such minute of any meeting, if purporting to be signed by the Chairman of such meeting, or by the Chairman of the next succeeding meeting, shall be conclusive evidence without any further proof of the facts therein stated.

90. A resolution in writing signed by all the Directors, their alternates or proxies (or as the case may be, all the members of a committee) entitled to participate in such meeting and vote in the matter brought to a decision shall be as effective for all purposes as a resolution passed at a meeting of the Board or committee, duly convened, held and constituted. Such resolution may consist of several documents (including facsimile, telex or cable) in identical form, each signed by one or more Directors (and as the case may be one or more committee members). Every notice of a Board or committee meeting may be given orally, by telex, facsimile, letter, cable or telephone call, provided that such notice is given at least 24 hours prior to the time of the meeting, save when all the Directors (or as the case may be all the committee members) shall agree to a shorter period of notice.

THE SEAL AND SIGNATURES BINDING THE COMPANY

91. The Seal of the Company shall be affixed only by authority of a resolution of the Board and in the presence of such person or persons as the Board shall designate by such resolution. The Board shall have power to appoint from time to time a person or persons whose signature or signatures, together with the rubber stamp of the Company shall be binding upon the Company; and that could be applied always or concerning only a certain matter or certain matters, as the Board shall decide from time to time.

BRANCH REGISTERS

92. Subject to and in accordance with the provisions of the Statutes, the Company shall be at liberty to cause to be kept in any other country to which the said provisions may be extended, a branch register or registers of members resident in such other country as aforesaid, and to exercise all the other powers mentioned in the Statutes relating to such branch registers.


SECRETARY

93. The Board may appoint a Secretary of the Company on any terms they think proper. The Board may from time to time, by resolution, appoint a temporary substitute for the Secretary who shall be deemed to be the Secretary during the term of his appointment.

DIVIDENDS, FUNDS AND CAPITALISATION OF FUNDS AND PROFITS

94. The Board may, before proposing any dividend, set aside and carry to reserve such sums out of the Profits of the Company, as it deems expedient. All sums carried shall, at the discretion of the Board, be applicable for any needs, or for equalizing dividends, or for special dividends, or for repairing, maintaining, improving or substitution of any properties of the Company or for any other purpose. The term dividend as used herein shall have the meaning ascribed to it in the Companies Law 5759-1999.

95. The Board shall be entitled to invest sums that were set apart as stated in Article 94 herein above in such investments as they deem fit, and to take care of such investments or vary them from time to time or to use such sums for other purposes, as they deem fit, and may divide the reserves into different special reserve funds, as they deem fit, and to use any fund or part thereof in the Company's business without it being necessary to hold them separately from the Company's other assets.

96. Subject to Article 97 below, and if the Board will not decide otherwise, the Company will distribute yearly its profits available for dividends. No dividends shall be paid save fromfunds legally available for dividends.

97. The authority to declare and pay dividends or distribute bonus shares, whether interim or final, shall be with the Board only.

98. Dividend will be paid or distributed, as the case may be, to the members according to the sum of their nominal and paid up capital or the sum considered as paid up capital for their shares, without consideration of any premium paid upon them. However, a sum that was paid up on the account of a share before its payment was demanded or before its pay date and the Company pays for it interest or linkage differentials will not be considered for the sake of this Article as a sum paid up on the account of a share.

99. The Board may from time to time, in its discretion, pay to the members on account of the next forthcoming dividend such interim dividends as is in its judgment justified having regard to the profits of the Company.

100. Except if the rights attached to any shares or their conditions of issue state otherwise, all the dividends, of shares that were not fully paid up in a certain period for which the dividends are paid, will be paid according to the sums that were paid up or credited as paid up on the shares' nominal value for any part of the said period on a "Pro Rata Temporis" basis.

101. Dividends or other benefits in regard to shares will not carry interest or linkage differentials.


102. The Board may deduct from all dividends or other benefits due to any member, any debt or liability owed by such a member to the Company in regard to the relevant shares in respect of which such dividend or other benefit is payable, whether due for payment or not.

103. The Board may retain any dividends or bonus Shares or other benefits on which the Company has a lien and may apply the same in or towards satisfaction of the debts, liabilities or engagements in respect of which the lien exists.

104. Following the Board's recommendation, the General Meeting may decide that dividends will be paid fully or partially in the way of specific partition of the Company's assets, including fully paid shares, debentures or a series of debentures of the Company and of any other company, or in one or several of these ways.

105.

105.1. The Company in General Meeting may, on the recommendation of the Board, at any time and from time to time, pass a resolution that any of the sums for the time being standing to the credit of the Company's reserve fund or the fund of premiums received on the issue of shares, or capital redemption fund or funds created on an equitable basis from the profits of a subsidiary, or from a valuation of the property of such subsidiaries or from any other funds being capitalized, and that such sum be set free for distribution, subject to these Articles of Association and according to them, amongst the shareholders in the proportions to which they are entitled according to these Articles of Association in condition that they will not be paid in cash but will be used for the full payment, whether by their nominal value or in addition of a premium, that will be decided by the Company - of shares that were not yet issued or of the Company's debentures that will be allotted and distributed by the same Members in the said proportion as shares or debentures that were fully paid-up, and the Board should apply such a resolution.

105.2. The Board may decide that bonus shares will be the same kind of shares that provide their holders the right to participate in the distribution, or decide that bonus shares will be of another kind.

106.

106.1. In any case that the Company will issue bonus shares by way of capitalizing profits or funds on a date in which securities issued by the Company and providing their holders rights to convert them to shares in the Company's share capital or options to purchase shares in the Company's capital will be in circulation (and these aforesaid conversion rights or options will be hereinafter called "the Rights"), the Board may (in the case that the Rights or any part of them will not be accorded in any other way according to their issuance terms) transfer to a special fund which will be designated for distribution of future bonus shares (referred to by any name which the Board shall deem fit, hereinafter called "the Special Fund") a sum equal to the indicated sum that those entitled for all or part of the Rights would have received due to the issuance of bonus shares if they would have taken advantage of their Rights before the date fixing the right to receive bonus shares, including Rights to fractions of bonus shares, and in the case of a second or other distribution of bonus shares - of which the Company acts according to this Article - including a right created by any preceding distribution of bonus shares.


106.2. In the case of the allotment of shares by the Company due to the exploitation of the Rights by their owners in cases in which the Board enacted a transfer to the Special Fund according to these Rights, and according to the aforesaid Article 106.1 above, the Company will allot a shareholder as stated above, in addition to the shares for which he is entitled due to his exploitation of his Rights, such a number of fully paid-up shares, that their nominal value will be equal to the sum transferred to the Special Fund due to his Rights, and that, through the capitalization of a fitting sum from the Special Fund, and the Board may decide upon the way to treat the Rights for fractions of shares as they deem fit.

106.3. If after the performance of any transfer to the Special Fund, the Rights will have expired or the period for exploitation of the Rights for which the transfer was made will expire without such exploitation having occurred, then any sum that was transferred to the Special Fund due to the aforesaid unexploited rights will be set free, and the Company will be able to treat the aforesaid free sum in any way it could have treated it if it was not transferred to the Special Fund.

107. For the purpose of performing any resolution on the distribution of shares or debentures by way of capitalizing profits as stated above, the Board may:-

107.1. Settle as it deems expedient any difficulty that arises in respect to the distribution and realize all the actions they deem fit to overcome such a difficulty.

107.2. Issue fractional certificates or decide that fractions in an amount less than the amount that shall be decided by the Board will not be taken into consideration for the adjustment of the Rights of the shareholders, or to sell share fractions and pay the net consideration to those entitled.

107.3. Sign or appoint any person to sign on behalf of the shareholders such contract or any other document that would be needed to make the distribution valid, and they may especially sign or appoint any person who will be capable of signing and delivering a contract in accordance with Section 130 of the Statutes.

107.4. To make any arrangement or settlement that will be needed at the Board's discretion to enable the distribution.

108. The Board may, as they deem fit, appoint trustees or nominees for the holders of the shares' certificates that for a period, as the Board shall decide, did not apply to the Company receiving dividends, shares or debentures from the capital, or other benefit rights, and for the shareholders who did not notify the Company that their address has been changed, and did not apply to the Company to receive dividends, shares or debentures from the capital, or other benefit rights, in the aforesaid period. These trustees or nominees will be appointed for the realization, collection or acceptance of dividends, shares or debentures from the capital and rights, and for signing on pre-issued shares proposed to the shareholders, but they may not transfer the shares for which they were appointed or to vote on their power. In all the terms of trust or appointment of nominees, the trustees or the nominees will be obliged to return to the same shareholder the share in question and all the other rights held in trust by them for him (all according to the matter). Every activity and arrangement that will be done by these nominees or trustees and any agreement between the Board and these nominees or trustees will be valid and will bind all those concerned.


109. The Board may fix from time to time the mode of payment of dividend or distribution of bonus shares, and the related arrangements. Notwithstanding the generality of the aforesaid, the Board may pay any dividend or amounts due and payable to shareholders by cheque sent through the post to the registered address of the member or person entitled. Every such despatch of a cheque shall be made at the shareholder's risk.

110. In such cases that the Board will fix the payment of dividends, shares or debentures from the capital, or rights to sign on pre-issued shares that are proposed to shareholders, against the delivery of the suitable coupon attached to any share certificate, this payment, distribution or donation of a signing right against the coupon to him who holds such a coupon, will be a good discharge to the Company of all that is related to this action towards him who claims right for such payment, distribution or donation of a signing right, as the matter is.

111. If two or more people are registered as joint holders of a share, each of them may issue a value receipt for any dividend, shares or debentures from the capital, and for other sums of money or benefit rights related to the share.

ACCOUNTS

112. The Board shall cause true accounts to be kept of:-

112.1. The assets and liabilities of the Company.

112.2. All sums of money received and expended by the Company and the matters in respect of which such receipts and expenditure take place.

112.3. All sales and purchases of goods by the Company.

113. The books of account shall be kept at the Office or at such other place as the Board shall think fit and shall always be open to the inspection of the Directors.

114. The Board shall from time to time determine whether, in any particular case or class of cases or generally, and to what extent and at what times and places and under what conditions or regulations the accounts and books of the Company, or any of them, shall be open to the inspection of members, and no member (not being a Director) shall have any right of inspection of any account or book or document of the Company, except as conferred by the Statutes or authorized by the Board, or by a resolution of the Company in General Meeting.

115. At least once in every calendar year the Board shall lay before the Company in General Meeting a profit and loss account for the period since the preceding account or (in the case of the first account) since the incorporation of the company, made up to a date not earlier than the date of the meeting by more than twelve months in accordance with the Statutes in that regard, a balance sheet in respect of the date of the profit and loss report shall have attached thereto the Auditor's report and shall be accompanied by a report of the Board as to the state of the Company's affairs, and the amount (if any) which it recommends to be paid by way of dividend and the amount (if any) which it recommends to carry to reserve.


NOTICES

116. A notice required hereunder or any other document may be served by the Company either (i) to all members personally or (ii) by sending it through the post in a prepaid letter addressed to all members at their registered addresses as appearing in the register of members or (iii) to all memebers by facsimile (with a certificate of proper transmission) according to the facsimile number as appearing in the register of members, or (iv) by the sole manner of publishing such notice according to the laws applicable to the Company.

117. All notices directed to be given to the members shall with respect to any shares to which persons are jointly entitled, be given to whichever of such person is named first in the register of members and any notice so given shall be sufficient notice to the holders of such share.

118. Any member described in the Register by an address whether within or outside Israel, shall be entitled to have served upon him at such address any notice to which he would be entitled under these Articles, but save as aforesaid, no member other than a member described in the Register by an address shall be entitled to receive any notice from the Company.

119. A notice may be given by the Company to the persons entitled to any share, in consequence of the death or bankruptcy of a member by sending it through the post in a prepaid letter addressed to them by name or by the titles of representatives or trustees of such deceased or bankrupt member, at the address (if any) supplied for the purpose by such persons as aforesaid or (until such address has been supplied) by giving the notice in the manner in which the same would have been given if the death or bankruptcy had not occurred.

120. Any notice or other document if served or sent by post shall be deemed to have been served or delivered at the time of postage, and in proving such services or sending it shall be sufficient to prove that the letter containing the notice or document was properly addressed and put into the post office as a prepaid letter. Any entry made in the ordinary course in any postal book of the Company shall be prima facie evidence of such posting therein recorded.

121. Where a given number of days' notice or notice extending over any period is required to be given, the day of service shall be counted in such number or other period.

RECONSTRUCTION

122. On any sale of the undertaking of the Company, the Board or the liquidators on a winding-up may, if authorized by special resolution of the Company, accept fully paid or partly paid up shares, debentures or securities of any other company, whether Israeli or foreign, either than existing or to be formed for the purchase in whole or in part of the property of the Company, and the Board (if the profits of the Company permit), or the liquidators (on a winding-up), may distribute such shares or security, or any other property of the Company amongst the members without realization, or vest the same in trustees for them, and any special resolution may provide for the distribution and appropriation of the cash, Shares, or other securities, benefits, or property, otherwise than in accordance with the strict legal rights of the members or contributors of the Company, and for the valuation of any such securities or property or in such manner as the meeting may approve, and all holders of shares shall be bound to accept and shall be bound by any valuation or distribution so authorized, and waive all rights in relation thereto, save only in the event that the Company is proposed to be or is in the course of being wound-up, for such statutory rights (if any) under the provisions or the Statutes as are incapable of being varied or excluded hereby.


INSURANCE AND INDEMNIFICATION

123. Subject to the provisions of the Statutes with regard to such matters:-

123.1. The Company may enter into a contract for the insurance of the liability, in whole or in part, to the fullest extent permitted by the Companies Law, of any of its Officers with respect to any of the following:-
(1) A breach of duty of care to the Company or to any other person;
(2) A breach of fiduciary duty to the Company provided that the Officer has acted in good faith and that he had reasonable grounds to assume that the act would not injure the good of the Company;
(3) A financial liability which shall be imposed on such Officer in favour of any other person, in respect of an act performed by him by virtue of his being an officer of the Company.

123.2. The Company may indemnify an Officer of the Company, to the fullest extent permitted by the Companies Law, with respect to any of the following:-
(1) A financial liability imposed on him in favour of any other person by any judgment, including a judgment given as a result of a settlement or an arbitrator's award which has been confirmed by a court, in respect of an act performed by him by virtue of his being an Officer of the Company.
(2) Reasonable litigation costs, including lawyer's fees, expended by an Officer or which were imposed on an officer by a court in proceedings filed against him by the Company or in its name or by any other person or in a criminal charge on which he was acquitted, in respect of an act performed by him by virtue of his being an Officer of the Company.

123.3. The Company may exculpate an officer holder in advance, in whole or in part, to the fullest extent permitted by the Companies Law, for a breach of Duty of Care.


LIQUIDATION

124. If the Company shall be liquidated voluntarily, the liquidators may, with the sanction of an Extraordinary Resolution, divide among the members any part of the assets of the Company, and may with the like sanction vest any part of the assets in trustees upon such trusts for the benefit of the members as the liquidators with the like sanction shall think fit.

125. Merger transactions may be approved by a simple majority of the shareholders present, in person or by proxy, at the General Meeting of the Shareholders.

126. A shareholders resolution to amend the Articles of Association requires the approval a simple majority of the holders of issued and outstanding Ordinary Shares of the Company, present in person or by proxy, at a General Meeting of the Shareholders duly convened for such purposes.

127. Vacancies on the Board of Directors may be filled by the vote of a majority of the directors then in office. Any directors so appointed shall vacate their office at the next General Meeting of shareholders at which directors are being appointed, unless re-appointed at such meeting.


EXHIBIT 4.1

SHARES: ____________ No. ____________

OTI
ON TRACK INNOVATIONS LTD.

GLOBAL SHARE CERTIFICATE

Authorized Capital: N.I.S. ________________ divided into 5,000,000 Ordinary Shares of NIS 0.01 n.v. each.

This is to certify that ________________________________________________________

of _____________________________________________________________________________

Is the registered holder of ________ Ordinary Shares of 0.1 N.I.S. each

fully paid numbered ________ to ________ inclusive, of the Company, subject to

the Memorandum and Articles of Association of the Company.

Given under the common Seal of the Company on the ________ day of ______________



Director Director/Secretary

EXHIBIT 5.1

[FORM OF ZAG OPINION]

June , 2002

ON TRACK INNOVATIONS LTD.
Z.H.R. Industrial Zone
P.O. Box 32
Rosh Pina
Israel 12000

RE: REGISTRATION STATEMENT ON FORM F-1

Ladies and Gentlemen:

We have acted as Israeli counsel for On Track Innovations Ltd., an Israeli company (the "Company"), in connection with the preparation of a registration statement on Form F-1 (Reg. No. 333-[ ]) (the "Registration Statement") pursuant to the United States Securities Act of 1933, as amended (the "Act") to be filed with the United States Securities and Exchange Commission (the "SEC") in connection with a proposed public offering of [ ] Ordinary Shares, nominal value NIS 0.1 per share of the Company (the "Shares").

You have asked us to render our opinion as to the matters hereinafter set forth herein.

We have examined originals and copies, certified or otherwise identified to our satisfaction, of all such agreements, certificates, and other statements of corporate officers and other representatives of the Company, and other documents as we have deemed necessary as a basis for this opinion. In our examination we have assumed the genuineness of all signatures, the authenticity of all documents submitted to us as originals, and the conformity with the originals of all documents submitted to us as copies. We have, when relevant facts material to our opinion were not independently established by us, relied to the extent we deemed such reliance proper upon written or oral statements of officers and other representatives of the Company.

In giving the opinion expressed herein, no opinion is expressed as to the laws of any jurisdiction other than the State of Israel. Based upon and subject to the foregoing, we are of the opinion that insofar as Israeli law is concerned:

1) The Company is a corporation duly organized and validly existing under the laws of Israel.

2) The Shares to be issued and sold by the Company have been duly authorized and, when issued and sold against payment therefor as described in the Registration Statement, will be legally issued, fully paid and nonassessable.

This opinion is intended solely for the benefit and use of OTI and other persons who are entitled to rely on the prospectus made part of the Registration Statement, and is not to be used, released, quoted, or relied upon by anyone else for any purpose (other than as required by law), without our prior written consent.

We hereby consent to the filing of this opinion with the Securities and Exchange Commission as Exhibit 5.1 to the Registration Statement, and to the use of our name wherever appearing in the Registration Statement in connection with Israeli Law. In giving such consent, we do not thereby admit that we are in the category of persons whose consent is required under Section 7 of the Act.

Very truly yours,


EXHIBIT 8.1

ON TRACK INNOVATIONS LTD.
Z.H.R. Industrial Zone
Rosh Pina
Israel

RE: REGISTRATION STATEMENT ON FORM F-1

Ladies and Gentlemen:

We have acted as Israeli counsel to On Track Innovations Ltd., an Israeli company (the "Company"), in connection with the issuance by the Company of
[ ] ordinary shares, nominal value NIS 0.1, of the Company. We are herewith rendering our opinion concerning the principal Israeli tax consequences regarding the issuance of the shares. In connection therewith, we reviewed copies of the Registration Statement relating to the shares (Reg. No 333-[ ]) (the "Registration Statement"), [as well as the underwriting agreement, a form of which is filed as Exhibit 1.1 to the Registration Statement].

Our opinion is based on the Income Tax Ordinance, as amended, and such other Israeli legislation mentioned in the Registration Statement under the caption "Israeli Tax considerations", the regulations issued thereunder, and administrative and judicial interpretations thereof, in each case, as in effect and available on the date hereof (collectively, the "Israeli Tax Law"). No assurance can be given that the Israeli Tax Law will not change. In preparing discussions with respect to Israeli Tax Laws matters in the section of the prospectus that is part of the Registration Statement captioned "Israeli Tax Considerations," we have made certain assumptions and expressed certain conditions and qualifications therein, all of which assumptions, conditions and qualifications are incorporated herein by reference. With respect to all questions of fact on which our opinions are based, we have assumed the initial and continuing truth, accuracy and completeness of: (i) the information set forth in the Registration Statement and in the documents incorporated therein by reference; and (ii) representations made to us by officers of the Company or contained in the Registration Statement, in each such instance without regard to qualifications such as "to the best knowledge of" or "in the belief of."

We have relied upon, but not independently verified, the foregoing assumptions. If any of the foregoing assumptions are inaccurate or incomplete for any reason, or if the transactions described in the Registration Statement are consummated in a manner that is inconsistent with the manner contemplated therein, our opinions as expressed below may be adversely affected and may not be relied upon.

We assume that the operative documents for the shares described in the prospectus forming a part of the Registration Statement to which this opinion is filed as an exhibit will be performed in accordance with the terms described therein. We have, when relevant facts material to our opinion were not independently established by us, relied to the extent we deemed proper upon written or oral statement of officers and other representatives of the Company. In doing so, we have assumed the genuineness of all signatures, the legal capacity of natural persons, the authenticity of all documents submitted to us as originals, the conformity to original documents of all documents submitted to us as certified or photostatic copies, and the authenticity of the originals of such documents.

In giving the opinion expressed herein, no opinion is expressed as to the laws of any jurisdiction other than the state of Israel. Based on the foregoing and subject to the assumptions, qualifications, and limitations contained therein, we hereby confirm that the statements in the Registration Statement under the caption "Israel Tax Considerations", to the extent that they describe matters of Israeli income tax or legal conclusions with respect thereto, are correct in all material respects.


We hereby consent to the filing of this opinion as Exhibit 8.1 to the Registration Statement and the reference to us under the caption "Israeli Tax Considerations" in the Registration Statement. In giving such consent, we do not thereby admit that we are in the category of persons whose consent is required under Section 7 of the Securities Act of 1933, as amended.

Very truly yours,


EXHIBIT 8.2

June , 2002

ON TRACK INNOVATIONS LTD.
Z.H.R. Industrial Zone
P.O. Box 32
Rosh Pina
Israel

Re: Registration Statement on Form F-1

Ladies and Gentlemen:

On Track Innovations Ltd., a corporation organized under the laws of Israel ("OTI"), will offer 400,000 ordinary shares, nominal value NIS 0.1 per share of OTI, and existing shareholders of OTI will offer ordinary shares, and in connection therewith, OTI has filed a registration statement on Form F-1 (the "Registration Statement") with the Securities and Exchange Commission (the "Commission") pursuant to the Securities Act of 1933, as amended (the "Securities Act").

We have acted as special United States tax counsel to OTI in connection with the above and are herewith rendering our opinion concerning United States federal income tax consequences regarding the offer of the Shares. The following opinion is furnished to you to be filed as Exhibit 8.2 to the Registration Statement.

We have examined copies of the Registration Statement relating to the Shares (Registration No. 333- ). We have also examined originals or copies, certified or otherwise identified to our satisfaction, of corporate records, certificates and statements of officers and accountants of OTI and of public officials, and such other documents as we have considered relevant and necessary in order to furnish the opinions hereinafter set forth. In doing so, we have assumed the genuineness of all signatures, the legal capacity of natural persons, the authenticity of all documents submitted to us as originals, the conformity to original documents of all documents submitted to us as certified or photostatic copies, and the authenticity of the originals of such documents.

The opinions set forth below are based upon the Internal Revenue Code of 1986, as amended, the Treasury Regulations issued thereunder, published administrative interpretations thereof, and judicial decisions with respect thereto, all as of the date hereof (collectively, the "U.S. Tax Laws"). No assurance can be given that the U.S. Tax Laws will not change. In preparing discussions with respect to U.S. Tax Laws matters in the section of the prospectus that is part of the Registration Statement captioned "United States Federal Income Taxation," we have made certain assumptions and expressed certain conditions and qualifications therein, all of which assumptions, conditions and qualifications are incorporated herein by reference. With respect to all questions of fact on which our opinions are based, we have assumed the initial and continuing truth, accuracy and completeness of: (i) the information set forth in the Registration Statement and in the documents incorporated therein by reference; and (ii) representations made to us by officers of OTI or contained in the Registration Statement, in each such instance without regard to qualifications such as "to the best knowledge of" or "in the belief of."

We have relied upon, but not independently verified, the foregoing assumptions. If any of the foregoing assumptions are inaccurate or incomplete for any reason, or if the transactions described in the Registration Statement are consummated in a manner that is inconsistent with the manner contemplated therein, our opinions as expressed below may be adversely affected and may not be relied upon.

Based on and subject to the foregoing, we hereby confirm that the statements in the Registration Statement under the caption "United States Federal Income Taxation," to the extent


On Track Innovations Ltd.
June , 2002

Page 2

they describe matters of United States federal income tax law or legal conclusions with respect thereto, are accurate in all material respects, and we further confirm that the opinions of counsel referred to under such caption are our opinions.

Our opinions above are limited to the matters specifically covered hereby, and we have not been asked to address, nor have we addressed, any other matters or any other transactions. We express no opinion herein as to the laws of any jurisdiction other than the federal laws of the United States of America. Further, we disclaim any undertaking to advise you of any subsequent changes of the matters stated, represented or assumed herein or any subsequent changes in the U.S. Tax Laws.

This opinion is intended solely for the benefit and use of OTI and other persons who are entitled to rely on the prospectus made part of the Registration Statement, and is not to be used, released, quoted, or relied upon by anyone else for any purpose (other than as required by law) without our prior written consent. We hereby consent to the filing of this opinion as an exhibit to the Registration Statement and to the references to our firm made therein under the captions of "United States Federal Income Taxation" and "Legal Matters." In giving such consent, we do not thereby admit that we come within the category of persons whose consent is required under Section 7 of the Securities Act or the Rules and Regulations of the Commission promulgated thereunder.

Very truly yours, Z.A.G/S&W


FPS FRITZE PAUL SCHMITT SEELIG & PREU, BOHLIG
Rechtsanwalte Notare Rechtsanwalte, Wirtschaftsprufer, Steuerberater

Eschersheimer Landstrasse 27 Seestr.13 60322 Frankfurt am Main 80802 Munchen Germany Germany

ON TRACK INNOVATIONS LTD.

Z.H.R. Industrial Zone
P.O.Box 32
Rosh Pina
12000 Israel

June [__], 2002

Ladies and Gentlemen:

We have acted as German counsel for On Track Innovations Ltd., an Israeli company (the "COMPANY"), in connection with the filing of the Company's Registration Statement on Form F-1 (Reg. No 333-[ ]) (the "REGISTRATION STATEMENT") with the Securities and Exchange Commission, covering the registration under the Securities Act of 1933, as amended (the "SECURITIES ACT"), of [ ] ordinary shares, nominal value NIS 0.1, of the Company, of which up to 500,000 will be issued by the Company (the "NEW SHARES") and of which [ ] are expected to be sold by selling shareholders (the "EXISTING SHARES") (the New Shares and the Existing Shares collectively referred to as the "SHARES"). We are herewith rendering our opinion concerning the principal German tax consequences regarding the issuance of the Shares. In connection therewith, we reviewed a copy of the Registration Statement relating to the Shares.

Our opinion is based on the German Income Tax Law, the German Corporation Tax Law, each as amended, and such other German legislation mentioned in the Registration Statement under the caption "German Taxation Considerations", the regulations issued thereunder, and administrative and judicial interpretations thereof, in each case, as in effect and available on the date hereof. We have assumed that the operative documents for the shares described in the prospectus forming a part of the Registration Statement to which this opinion is filed as an exhibit will be performed in accordance with the terms described therein. We have, when relevant facts material to our opinion were not independently established by us, relied to the extent we deemed proper upon written or oral statements of officers and other representatives of the Company.

In giving the opinion expressed herein, no opinion is expressed as to the law of any jurisdiction other than the Federal Republic of Germany. Based on the foregoing and subject to the assumptions, qualifications, and limitations contained therein, we are of the opinion that the statements in the Registration Statement under the caption "German Taxation Considerations", to the extent that they describe matters of German income tax law or legal conclusions with respect thereto, are correct in all material respects.

We hereby consent to the filing of this opinion as Exhibit 8.3 to the Registration Statement and the reference to us under the caption "German Taxation Considerations" in the Registration Statement. In giving such consent, we do not thereby admit that we are in the category of persons whose consent is required under Section 7 of the Securities Act.


FPS/S&PB Legal Opinion Page 2

This opinion is intended solely for the benefit and use of the Company and other persons who are entitled to rely on the prospectus made part of the Registration Statement, and may not be used, released, quoted or relied upon or referred to, by anyone else for any purpose (other than required by law) without our prior written consent in each instance. This opinion is rendered as of the date hereof and is limited by the facts, circumstances, and laws in effect on such date and we undertake no obligation to update our opinion or to advise you with respect to any changes herein.

Sincerely,

FPS Fritze Paul Schmitt Rechtsanwalte Notare


By:

Seelig & Preu, Bohlig Rechtsanwalte, Wirtschaftsprufer, Steuerberater


By:

EXHIBIT 10.5

OTI AMERICA, INC.
STOCK COMPENSATION PROGRAM

1. PURPOSE. The purpose of the OTI America, Inc. Stock Compensation Program ("Program") is to increase stockholder value and to advance the interests of OTI America, Inc. (a Delaware Corporation) and its subsidiaries (collectively, the "Company") by providing a variety of economic incentives designed to attract, retain, and motivate officers and other key employees and by strengthening the mutuality of interest between such employees and the Company's stockholders. As used in this Program, the term "subsidiary" means any business, whether or not incorporated, in which the Company has a direct or indirect ownership interest.

2. ADMINISTRATION.

2.1 Administration by Committee. The Program will be administered by the committee (the "Committee") appointed by the Board of the Company from among its members provided, however, that if the common shares of the Company (the "Common Shares") are at any time registered under the Securities Exchange Act of 1934, members of the Committee must qualify as non-employee directors within the meaning of Securities and Exchange Commission Regulation ss. 240.16b-3 and, to the extent necessary, Section 162(m) of the Internal Revenue Code of 1986, as amended (the "Code"). Except as so limited, the entire Board or the Compensation Committee thereof may, if the Board so elects, act as the Committee. In addition the Company may exercise any or all authority otherwise delegated to the Committee under the terms of the Program with respect to the grant or administration of incentives made to or held by persons who, at the time of the exercise of such authority, are not subject to Section 16(a) of the Exchange Act. The Committee is authorized, subject to the provisions of the Program, to establish such rules and regulations as it deems necessary for the proper administration of the Program and to make such determinations and interpretations and to take such action in connection with the Program and any Awards granted hereunder as it deems necessary or advisable. All determinations and interpretations made by the Committee shall be binding and conclusive on all Participants and their legal representatives. Subject to the provisions of the Program, the Committee shall also have the authority to (a) grant Awards (as defined in Section 4.1) under the Program, in such forms and amounts and subject to such terms and conditions as it deems appropriate, including, without limitation, Awards which are made in combination with or in tandem with other Awards (whether or not contemporaneously granted) or compensation or in lieu of current or deferred compensation and (b) modify the terms of, cancel and reissue, or repurchase Awards; provided, however, that in no event shall the Committee cancel any outstanding stock option for the purpose of reissuing an option to the option holder at a lower exercise price. The Committee shall comply with all applicable law in administering the Program. No member of the Board, no member of the Committee and no employee of the Company shall be liable for any act or failure to act hereunder, by any other member or employee or by any agent to whom duties in connection with the administration of this Program have been delegated or, except in circumstances involving his bad faith, gross negligence or fraud, for any act or failure to act by the member or employee.


3. PARTICIPATION. Subject to the terms and conditions of the Program, the Committee shall designate from time to time the officers and key employees of the Company who shall receive Awards under the Program ("Participants"). Participation, the grant of Awards and any related performance goals for persons subject to Section 16(a) of the Exchange Act must be determined by the Committee. Designation of a Participant in any year shall not require the Committee to designate such person to receive an Award in any other year or, once designated, to receive the same type or amount of Awards as granted to the Participant in any year. The Committee shall consider such factors as it deems pertinent in selecting Participants and in determining the type and amount of their respective Awards.

4. SHARES SUBJECT TO THE PROGRAM.

4.1 Types of Stock Options and Number of Shares Reserved. Incentives under the Program may be granted in any one or a combination of (a) Stock Options, including Incentive Stock Options (as described in Section 422 of the Code) and non-qualified stock options, (b) Stock Appreciation Rights,
(c) Restricted Stock, all as described below (each an "Award and, collectively, all being the "Awards"). Subject to adjustment in accordance with subsections 4.2 and 4.3, the aggregate number of shares of "Common Stock" available for Stock Options or Restricted Stock under the Program shall be 1,500 shares, or 15% of the existing number of authorized shares as of the date hereof.

4.2 Reissuance of Shares.

(a) In the event of the exercise or termination (by reason of forfeiture, expiration, cancellation, surrender, or otherwise) of any Stock Option under the Program, that number of shares of Common Stock that was subject to the Stock Option but not delivered shall be available again for Awards under the Program.

(b) In the event that shares of Common Stock are delivered under the Stock Options or Restricted Stock granted under the Program and are thereafter forfeited or reacquired by the Company pursuant to rights reserved upon the stock grant thereof, such forfeited or reacquired shares shall be available again for issuance under the Program.

4.3 Adjustments to Shares Reserved. In the event of any merger, consolidation, reorganization, recapitalization, spinoff, stock dividend, stock split, reverse stock split, exchange, or other distribution with respect to shares of Common Stock or other change in the corporate structure or capitalization affecting the Common Stock (including an increase in the number of shares if the Common Stock is registered under the Securities Act of 1933, the type and number of shares of stock which are or may be subject to Awards under the Program and the terms of any outstanding Awards (including the price at which shares of stock may be issued pursuant to an outstanding incentive) shall be equitably adjusted by the Committee, in its sole discretion, to preserve the value of incentives awarded or to be awarded to Participants under the Program.

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5. STOCK OPTIONS.

5.1 Awards. Subject to the terms and conditions of the Program, the Committee shall designate the individuals to whom incentive stock options or non-qualified stock options ("Stock Options") to purchase shares of Common Stock are to be awarded under the Program and shall determine the number, type, and terms of the Stock Options to be awarded to each of them. No Incentive Stock Option shall be awarded later than 10 years after the earlier of the date the Program is approved by the Company or its shareholders. Each Stock Option granted hereunder shall have such per-share exercise price as the Committee may determine at the date of grant provided, however, that the per-share exercise price for Incentive Stock Options shall not be less than 100% of the Fair Market Value of the Common Shares on the date the option is granted. Each Stock Option awarded under the Program shall be a "Nonqualified Stock Option" for tax purposes unless the Stock Option satisfies all of the requirements of Section 422 of the Code, and the Committee designates such Stock Option as an "Incentive Stock Option". Incentive Stock Options may only be granted to employees of the Company.

5.2 Exercise Period. Stock Options granted under the Program shall be exercisable at such times and subject to such terms and conditions as shall be determined by the Committee. In addition, Nonqualified Stock Options shall be exercisable not later than twenty (20) years after the date they are granted and Incentive Stock Options shall be exercisable not later than ten (10) years after the date they are granted. All Stock Options shall terminate at such earlier times and upon such conditions or circumstances as the Committee shall in its discretion set forth in such option at the date of grant.

5.3 Manner of Exercise. A Stock Option may be exercised by notice to the Company specifying the number of shares of Common Stock to be purchased and shall be accompanied by payment of the option price by check or, in the discretion of the Committee, by the delivery of shares of Common Stock then owned by the Participant or certification of such ownership. In the discretion of the Committee, payment may also be made by delivering a properly executed exercise notice to the Company, together with a copy of irrevocable instructions to a broker to deliver promptly to the Company the amount of sale or loan proceeds to pay the exercise price.

5.4 Dividend Equivalents. The Committee may grant dividend equivalents in connection with any Stock Option granted under this Program. Such dividend equivalents may be payable in cash or in shares of Common Stock upon such terms and conditions as the Committee in its sole discretion deems appropriate.

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5.5 Limitations on Incentive Stock Options. Incentive Stock Options may be granted only to Participants who are employees of the Company or one of its subsidiaries (within the meaning of Section 424(f) of the Code) at the date of grant. The aggregate Fair Market Value (determined as of the time the option is granted) of the Common Shares with respect to which Incentive Stock Options are exercisable for the first time by a Participant during any calendar year (under all option Programs of the Company) shall not exceed $100,000. Incentive Stock Options may not be granted to any Participant who, at the time of grant, owns stock possessing (after the application of the attribution rules of Section 424(d) of the Code) more than 10% of the total combined voting power of all classes of stock of the Company, unless the option price is fixed at not less than 110% of the Fair Market Value of the Common Shares on the date of grant and the exercise of such option is prohibited by its terms after the expiration of five
(5) years from the date of grant of such option.

5.6 Redesignation as Nonqualified Stock Options. Options designated as "incentive stock options" that fail to continue to meet the requirements of Section 422 of the Code shall be redesignated as nonqualified options for Federal income tax purposes automatically without further action by the Committee on the date of such failure to continue to meet the requirements of Section 422 of the Code.

5.7 Limitation of Rights in Shares. The recipient of a Stock Option shall not be deemed for any purpose to be a shareholder of the Company with respect to any of the shares subject thereto except to the extent that the Stock Option shall have been exercised and, in addition, a certificate shall have been issued and delivered to the Participant.

6. STOCK APPRECIATION RIGHTS AND PHANTOM STOCK.

6.1 Grant of SARs. Subject to the terms and conditions of the Program, the Committee shall designate the employees to whom stock appreciation rights ("SARs") are to be awarded under the Program and shall determine the number, type and terms of the SARs to be awarded to each of them. An SAR may be granted in tandem with a Stock Option granted under the Program, or the SAR may be granted on a free-standing basis. Tandem SARs may be granted either at or after the date of a stock option's grant (up to 6 months prior to its expiration), provided that, in the case of an Incentive Stock Option a tandem SAR may be granted only at the date of the grant of such option.

6.2 Entitlement to Appreciation. Each SAR will entitle the holder to elect to receive the appreciation in the Fair Market Value of the shares subject thereto up to the date the right is exercised. In the case of a right issued in relation to a Stock Option, such appreciation shall be measured from not less than the option price.

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6.3 Exercise of Tandem SARs. Tandem SARs may be exercised for all or part of the shares subject to the related option upon the surrender of the right to exercise the equivalent portion of the related option. A tandem SAR shall terminate and no longer be exercisable upon termination or exercise of the related stock option. A tandem SAR may be exercised only with respect to the shares for which its related option is then exercisable.

6.4 Exercise of Free-Standing SARs. Free-standing SARs may be exercised upon such terms and conditions as the Committee, in its sole discretion, determines.

6.5 Reduction of Shares Issuable. Exercise of an SAR shall reduce the number of shares issuable under the Program (and the related option, if any) by the number of shares with respect to which the right is exercised.

6.6 Term of SARs. The term of an SAR granted under the Program shall be determined by the Committee in its sole discretion; provided, however, that such term shall not exceed the option term in the case of a tandem SAR, or twenty (20) years in the case of a free-standing SAR.

6.7 Payment of SAR Amount. Upon exercise or settlement of a Participant's SARs, the Participant shall be entitled to receive payment from the Company in an amount determined by multiplying:

(a) The excess of the Fair Market Value of a share of Common Stock on the date of exercise or settlement over the Fair Market Value of one share of Common Stock as of the date the SARs were awarded

by

(b) The number of SARs exercised or settled.

At the discretion of the Committee, the payment to be made upon the exercise or settlement of the SARs may be in cash, by a promissory note issued by the Company, in shares of Common Stock of equivalent value, or in some combination thereof, but Payment of such appreciation shall be made in cash or in Common Shares, or a combination thereof, but payment of such appreciation shall be made in cash or in Common Shares, or a combination thereof, as determined in the sole discretion of the Committee at the time of payment or as set forth in the award, but no SAR shall entitle the holder to receive, upon exercise thereof, more than the number of Common Shares (or cash of equal value) with respect to which the right is granted.

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7. RESTRICTED STOCK.

7.1 Awards. Subject to the terms and conditions of the Program, the Committee shall designate the employees to whom shares of Common Stock, subject to transfer and forfeiture restrictions (as more fully described below ("Restricted Stock")), shall be awarded or sold under the Program and determine the number of shares and the terms and conditions of each such award.

7.2 Restrictions. All shares of Restricted Stock shall be subject to such restrictions as the Committee may determine, including, without limitation, any of the following:

(a) a prohibition against the sale, assignment, transfer, pledge, hypothecation, or other encumbrance of the shares of Restricted Stock for a specified period;

(b) a requirement that the holder of shares of Restricted Stock forfeit (or in the case of shares sold to a Participant, resell to the Company at his or her cost) such shares in the event of termination of his or her employment during any period in which such shares are subject to restrictions; or

(c) a prohibition against employment of the holder by any competitor of the Company or against such holder's dissemination of any confidential information belonging to the Company.

All restrictions shall expire at such time as the Committee shall specify.

7.3 Stockholder Rights. Shares of Restricted Stock shall be registered in the name of the Participant. Each Participant who has been awarded shares of Restricted Stock shall have such rights of a stockholder with respect to such shares as the Committee may designate at the time of the award, including the right to vote such shares and the right to receive dividends paid on such shares. Unless otherwise provided by the Committee, stock dividends or non-cash dividends and any other securities distributed with respect to Restricted Stock shall be subject to the same restrictions and other terms and conditions as the Restricted Stock to which they are attributable.

7.4 Lapse of Restrictions. Shares of Restricted Stock will be delivered free of all restrictions to the Participant (or to the Participant's legal representative, beneficiary, or heir) when the shares are no longer subject to forfeiture or restrictions on transfer.

8. GENERAL.

8.1 Effective Date. The Program will become effective upon its approval by the Company's stockholders.

8.2 Duration. The Program shall remain in effect until all Awards granted under the Program have been satisfied by the issuance of shares of Common Stock, lapse of restrictions or the payment of cash, or have been terminated in accordance with the terms of the Program or the grant thereof. No Incentive Stock Option may be granted under the Program after the tenth anniversary of its effective date.

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8.3 Non-transferability of Awards. Each Award granted under the Program to a Participant shall not be transferable by him otherwise than by law or by will or the laws of descent and distribution, and shall be exercisable, during his lifetime, only by him. In the event of the death of a Participant while the Participant is rendering services to the Company, each Stock Option or SAR theretofore granted to him shall be exercisable during such period after his death as the Committee shall in its discretion set forth in such option or right at the date of grant (but not beyond the stated duration of the option or right) and then only:

(a) by the executor or administrator of the estate of the deceased Participant or the person or persons to whom the deceased Participant's rights under the Stock Option or SAR shall pass by will or the laws of descent and distribution; and

(b) to the extent that the deceased Participant was entitled to do so at the date of his death.

Notwithstanding anything stated in the immediately preceding paragraph, in the discretion of the Committee, Awards granted hereunder may be transferred to members of the Participant's immediate family (which for purposes of this Program shall be limited to the Participant's children, grandchildren and spouse), or to one or more trusts for the benefit of such family members or partnerships in which such family members and/or trusts are the only partners, but only if the Award expressly so provides.

8.4 Compliance with Applicable Law and Withholding.

(a) Awards under the Program may also be subject to such other provisions (whether or not applicable to any other Awards under the Program) as the Committee determines appropriate, including without limitation, provisions for the installment purchase of Common Shares under Stock Options, provisions for the installment exercise of Stock Appreciation Rights, provisions to assist the Participant in financing the acquisition of Common Shares, provisions for the forfeiture of, or restrictions on resale or other disposition of Shares acquired under any form of Award, provisions for the acceleration of exercisability or vesting of Awards in the event of a change of control of the Company, provisions for the payment of the value of Awards to Participants in the event of a change of control of the Company, provisions for the forfeiture of, or provisions to comply with Federal and state securities laws, or understandings or conditions as to the Participant's employment in addition to those specifically provided for under the Program.

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(b) If, at any time, the Company, in its sole discretion, determines that the listing, registration, or qualification of any type of incentive, or the shares of Common Stock issuable pursuant thereto, is necessary on any securities exchange or under any federal or state securities or blue sky law, or that the consent or approval of any governmental regulatory body is necessary or desirable, the issuance of shares of Common Stock pursuant to any incentive, or the removal of any restrictions imposed on shares subject to an incentive, may be delayed until such listing, registration, qualification, consent, or approval is effected.

(c) All payments or distributions made pursuant to the Program shall be net of any amounts required to be withheld pursuant to applicable federal, state and local income and/or employment tax withholding requirements. If the Company proposes or is required to distribute Common Shares pursuant to the Program, it may require the recipient to remit to it an amount sufficient to satisfy such tax withholding requirements prior to the delivery of any certificates for such Common Shares. The Committee may, in its discretion and subject to such rules as it may adopt, permit an optionee or award or right holder to pay all or a portion of the federal, state and local withholding taxes arising in connection with (a) the exercise of a Nonqualified Stock Option or a Stock Appreciation Right, (b) the receipt or vesting of Stock Awards, or (c) the receipt of Common Shares, by electing to have the Company withhold Common Shares having a Fair Market Value equal to the amount of taxes required to be withheld.

8.5 No Continued Employment. A Participant's right, if any, to continue to serve the Company as an officer, employee, or otherwise, shall not be enlarged or otherwise affected by his designation as a Participant under the Program, nor shall this Program in any way interfere with the right of the Company, subject to the terms of any separate employment agreement to the contrary, at any time to terminate such employment or to increase or decrease the compensation of the Participant from the rate in existence at the time of the grant of an Award.

8.6 Treatment as a Stockholder. No Award granted to a Participant under the Program shall create any rights in such Participant as a stockholder of the Company until shares of Common Stock related to the Award are registered in the name of the Participant.

8.7 Duration, Amendment and Termination of the Program. No Award shall be granted after __________, 2010; provided, however, that the terms and conditions applicable to any Award granted prior to such date may thereafter be amended or modified by mutual agreement between the Company and the Participant or such other persons as may then have an interest therein. Also, by mutual agreement between the Company and a Participant, under this Program or under any other present or future Program of the Company, Awards may be granted to such Participant in substitution and exchange for, and in cancellation of, any Awards previously granted such Participant under this Program, or any other present or future Program of the Company. The Board of Directors may amend the Program from time to time or terminate the Program at any time, subject to any requirement of stockholder approval required by applicable law, rule or regulation. The Board of Directors may amend, suspend, or discontinue the Program at any time; provided, however, that no amendment, suspension or discontinuance shall adversely affect any outstanding benefit and if any law, agreement or exchange on which Common Stock of the Company is traded requires stockholder approval for an amendment to become effective, no such amendment shall become effective unless approved by vote of the Company's stockholders.

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8.8 Acceleration of Incentives. Notwithstanding any provision in this Program to the contrary or the normal terms of vesting in any Award, (a) the restrictions on all shares of Restricted Stock shall lapse immediately, (b) all outstanding Stock Options and SAR's will become exercisable immediately, and (c) all performance goals shall be deemed to be met and payment made immediately if a Change in Control occurs. For purposes of this Program, a "Change in Control" shall have occurred if:

(1) any "Person", as such term is used in Section 13(d) and 14(d) of the Exchange Act (other than the Company, any corporation owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership of stock of the Company, and any trustee or other fiduciary, holding securities under an employee benefit Program of the Company or such proportionately owned corporation), is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing [20%] or more of the combined voting power of the Company' then outstanding securities;

(2) during any period of not more than 24 months, individuals who at the beginning of such period constitute the Board of Directors of the Company, and any new director (other than a director designated by a Person who has entered into an agreement with the Company to effect a transaction described in paragraph (1), (3), or (4) of this subsection 13.8) whose election by the board or nomination for election by the Company' stockholders was approved by a vote of at least two-thirds of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously so approved, cease for any reason to constitute at least a majority thereof;

(3) the stockholders of the Company approve a merger or consolidation of the Company with any other corporation, other than (A) a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) more than [60%] of the combined voting power of the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation, or (B) a merger or consolidation effected to implement a recapitalization of the Company (or similar transaction) in which no Person acquires more than [20%] of the combined voting power of the Company' then outstanding securities; or

9

(4) the stockholders of the Company approve a Program of complete liquidation of the Company or an agreement for the sale or disposition by the Company of all or substantially all of its assets (or any transaction having a similar effect).

The Committee may also determine, in its discretion, that a sale of a substantial portion of the Company' assets or one of its businesses constitutes a "Change of Control" with respect to incentives held by Participants employed in the affected operation.

8.9 Definition of Fair Market Value. For purposes of this Program and any Awards hereunder, the Fair Market Value of Common Shares shall be the mean between the highest and lowest sale prices for the Company's Common Shares as reported on the NASDAQ National Market System (or such other consolidated transaction reporting system on which such Common Shares are primarily traded) on the date of calculation (or on the next preceding trading date if Common Shares were not traded on the date of calculation), provided, however, that for so long as the Company's Common Shares are not readily tradable on a national securities exchange or other market system, Fair Market Value shall mean its value as determined by an independent financial advisor under the principals outlined by IRS Rev. Rul. 59-60, and shall ignore any restrictions unless they will never lapse.

9. GOVERNING LAW. This Program and actions taken in connection herewith shall be governed and construed in accordance with the laws of the State of Delaware.

10. APPROVAL. The Program is adopted by the Board of Directors on ______________.


OTI AMERICA, INC.

STOCK OPTION AWARD AGREEMENT

THIS STOCK OPTION AWARD AGREEMENT (the "Agreement") is made this 4th of August 2000, (the "Award Date") by OTI America, Inc., a Delaware corporation (the "Company") to _________(the "Participant").

WHEREAS, the Board of Directors of the Company is of the opinion that the interests of the Company and its shareholders will be advanced by encouraging and enabling those officers, key employees and directors of the Company and its subsidiaries, upon whose judgment, initiative and efforts the Company is largely dependent for the successful conduct of the business of the Company to acquire a proprietary interest in the Company or increase their proprietary interest in the Company, thus providing them with a more direct stake in the Company's welfare and assuring a closer identification of their interests with those of the Company; and

WHEREAS, the Board believes that the acquisition of such an interest in the Company will stimulate the efforts of such persons during their association with the Company;

WHEREAS, this agreement is the memorialization of the agreement entered into between the Company and the Participant on the Award Date;

NOW, THEREFORE, in consideration of the premises and of the services required under Section 3, the Company hereby grants these options to the Participant on the terms hereinafter expressed:

1. ISO Option Grant. The Company grants to the Participant, as of the Award Date, an incentive stock option to purchase a total of 12 shares of common stock of the Company ("Common Stock") at the option price of $20.00 per share, which is not less than the fair market value of the Common Stock on the Award Date. This option is intended to qualify as an incentive stock option within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended.

2. NQSO Option Grant. The Company grants to the Participant, as of the Award Date, a non-qualified stock option ("NQSO") to purchase a total of 5 shares of common stock of the Company ("Common Stock") at the option price of $20.00 per share.

3. Time of Exercise. Either the ISO or the NQSO may be exercised (in the manner provided in Section 4 hereof) in whole or in part, from time to time after the date hereof, subject to the following limitations:

(a) Provided that the Participant has not incurred an event described in (c) below, the Participant may exercise one-fourth (1/4) of the options granted under paragraph (1) or (2) above after each of the first four anniversaries of the Award Date.

(b) Notwithstanding Section 3(a) hereof, the ISO and the NQSO shall immediately become exercisable (to the extent not previously exercised) as to 100% of the total shares covered by these options upon the occurrence of a Change in Control of the Company (as defined in the Program).


(c) The ISO may not be exercised (and shall then forever lapse) if any of the following occurs before the ISO is exercised:

(i) 90 days has elapsed from the termination of the Participant's employment by the Company or one of its subsidiaries for any reason other than death or Permanent Disability (as defined in
Section 3(d) below) (and then only to the extent the Participant could have exercised this option on the date of such termination);

(ii) one year has elapsed from the termination of the Participant's employment by the Company or one of its subsidiaries due to death or Permanent Disability; or

(iii) ten (10) years have elapsed from the Award Date.

(d) For purposes of the ISO, the Participant will be considered to have experienced a Permanent Disability if the Participant is unable to perform her duties with the Company or one of its subsidiaries by reason of illness, accident or other incapacity and does not engage in any occupation or employment for wage or profit for which the Participant is reasonably qualified by education, training, or experience.

(e) These options shall not be affected by leaves of absence approved in writing by the President of the Company or by any change of duties so long as the Participant continues to be an employee of the Company or one of its subsidiaries. Nothing in this option shall confer on the Participant any right to continue any relationship with the Company or to interfere with the right of the Company, subject to the terms of any separate contract to the contrary, to terminate the Participant's employment at any time.

4. Exercise of Options.

(a) Subject to the provisions of Section 3 above, these options may be exercised by (and only by) appropriate notice in writing delivered to the Secretary of the Company at its corporate headquarters (or such other place as the Company may later locate its headquarters) and accompanied by:

(i) The full purchase price of the shares purchased payable by
(1) a certified or cashier's check payable to the order of the Company and/or, (2) a promissory note which is then acceptable to the Company;

(ii) An executed Stock Transfer Restriction Agreement between the Company and the Participant or her successor in interest, whether determined by will or the laws of descent and distribution or otherwise; and

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(iii) Such other documents or representations as the Company may reasonably request in order to comply with securities, tax or other laws then applicable to the exercise of the option.

(b) Payment of the option exercise price hereunder may, in the sole discretion of the Company, be made by delivering (or certifying as to ownership) certificates for shares of Common Stock of the Company which have been held by the Participant for at least six months (or such longer period as may be required to avoid a charge to earnings for financial reporting purposes) which are equal in value (based on their Fair Market Value on the date of surrender) to such purchase price or the portion thereof so paid. In addition, in the event Common Shares of the Company are registered under the Securities Exchange Act of 1934, payment of the option exercise price hereunder may, in the sole discretion of the Company, also be made by delivering a properly executed exercise notice to the Company together with a copy of irrevocable instructions to a broker to promptly deliver to the Company the amount of sale or loan proceeds to pay the exercise price. To facilitate the foregoing, the Company may enter into agreements for coordinated procedures with one or more brokerage firms. If an automatic conversion of the ISO occurs under Section 9, these provisions shall also apply to Parent.

(c) The exercise of an option is conditioned upon the Participant making arrangements satisfactory to the Company (or Parent) relating to any required withholding taxes attributable to such exercise. The Company (or Parent) may, in its sole discretion and subject to such rules and procedures as it may adopt, permit the Participant to satisfy any tax withholding obligation, in whole or in part, by electing to have the Company (or Parent) withhold shares of Common Stock received in connection with the exercise of this option having a Fair Market Value equal to the amount required to be withheld.

5. Nontransferability of ISO. Except as provided in Section 6, the ISO is not transferable by the Participant otherwise than by will or the laws of descent and distribution, and is exercisable, during the Participant's lifetime, only by him or her.

6. Death or Disability of the Participant. If the Participant dies or becomes Permanently Disabled while in the employ of the Company, this option may be exercised in whole or in part and from time to time, in the manner described in Section 4 hereof, in the case of death by her estate or the person to whom the option passes by will or the laws of descent and distribution or in the case of Permanent Disability by the person's legal representative or guardian, but only to the extent that the Participant could have exercised it on the date of her death or disability, and only within a period of (a) twelve months next succeeding the Participant's termination of employment due to death or Permanent Disability, or (b) ten years from the date hereof, whichever period is shorter.

7. Delivery of Certificates. If at any time during the option period the Company shall be advised by its counsel that shares deliverable upon exercise of the option are required to be registered under the Federal Securities Act of 1933, as amended, or under applicable state securities laws, or that delivery of the shares must be accompanied or preceded by a prospectus meeting the requirements of the Act or of any applicable state securities laws, delivery of shares by the Company may be deferred until registration is effected or a prospectus available or an appropriate exemption from registration is secured. The Optionee shall have no interest in the shares covered by this option unless and until certificates for the shares are issued following the exercise of this option.

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8. Adjustment Provisions.

If the Company shall at any time change the number of shares of its Common Stock without new consideration to the Company (such as by stock dividends or stock splits), the total number of shares then remaining subject to purchase hereunder shall be changed in proportion to such change in issued shares and the option price per share shall be adjusted so that the total consideration payable to the Company upon the purchase of all shares not theretofore purchased shall not be changed. Pursuant to Section 4.3 of the Program, the Committee may such other adjustments to the terms hereof in its sole discretion, as it believes are equitable.

9. Automatic Conversion of ISO for Shares of On Track Innovations, Ltd. If the parent corporation of OTI, On Track Innovations, Ltd. ("Parent"), becomes a listed security traded on any major U.S. stock exchange, the ISO granted under Section 1 hereof shall automatically become an ISO to purchase shares of common stock of Parent. Subject to the provisions of Section 8, in determining the number of shares of Parent which are acquired by exercise, the number of shares of the Company remaining subject to the grant under Section 1 shall be multiplied by 200, and the exercise price per share of Parent shall be sixteen dollars (US $16), the fair market value per share of Parent on the Grant Date. If such automatic conversion occurs, the provisions of this Agreement shall continue to apply after the Participant holds an ISO to acquire shares of Parent and Parent shall have all rights of the Company under this Agreement.

10. Election on Conversion of NQSO for Shares of Parent. If Parent becomes a listed security traded on any major U.S. stock exchange, the Participant may elect, within 90 days after such listing, to modify the NQSO to provide that he or she will acquire shares of common stock of Parent upon exercise. Subject to the provisions of Section 8, in determining the number of shares of Parent which are acquired by exercise, the number of shares of the Company remaining subject to the grant under Section 2 shall be multiplied by 200, and the exercise price shall be sixteen dollars (US$ 16), the fair market value per share of parent on the Grant Date. If the Participant makes the election under this Section 10, the provisions of this Agreement shall continue to apply after the Participant holds a NQSO to acquire shares of Parent and Parent shall have all rights of the Company under this Agreement.

11. Applicable Plan. These options are granted under and are subject to the terms and conditions of the Program. Any capitalized terms not defined herein shall be subject to the definitions set forth in the Program. If there are any inconsistencies between the terms of this agreement and the Program, the terms of the Program will govern.

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IN WITNESS WHEREOF, the Company has caused these options to be granted on the date first above written.

OTI AMERICA, INC. ON TRACK INNOVATIONS, LTD.

By:______________________________ By:______________________________

ACCEPTED:_________________________________

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EXHIBIT 10.18

THIS SHAREHOLDERS AGREEMENT is made as of the day of February 2000

BETWEEN:-

1. OCEAN WONDER LIMITED, a company incorporated in the British Virgin Islands whose registered office is situate at P.O. Box 957, Offshore Incorporations Centre, Road Town, Tortola, British Virgin Islands ("CK-X");

2. ON TRACK INNOVATIONS LTD., a company incorporated in the State of Israel whose registered office is situate at Z.H.R. Industrial Zone, Rosh Pina 12000, Israel ("OTI"),

(CK-X AND OTI ARE TOGETHER HEREINAFTER REFERRED TO AS THE
"SHAREHOLDERS" AND EACH A "SHAREHOLDER");

3. SAILOR GROUP LIMITED (to be renamed OTI ASIA PACIFIC LTD.), a company incorporated in the British Virgin Islands whose registered office is at, P.O. Box 957, Offshore Incorporations Centre, Road Town, Tortola, British Virgin Islands (the "COMPANY"); and

4. THE PERSONS LISTED IN SCHEDULE A HERETO (HEREINAFTER TOGETHER REFERRED TO AS THE "CONTROLLING PARTIES" AND EACH A "CONTROLLING PARTY").

RECITALS:-

(A) The Company has at the date hereof an authorised share capital of US$50,000 divided into 50,000 shares of US$1 each of which 2 shares have been issued and are legally and beneficially held by CK-X and OTI.

(B) The Shareholders have agreed to enter into this Agreement for the purpose of regulating the relationship between the Shareholders as shareholders of the Company, to set out the basis on which the business and affairs of the Company and all members of the Group (as defined below) would be managed and controlled and to provide for their rights and duties between themselves and other matters herein set out.

(C) The Controlling Parties have agreed to enter into this Agreement to procure and ensure that CK-X and OTI shall comply with the terms and conditions of this Agreement respectively insofar as such terms and conditions relate to CK-X and OTI.

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NOW IT IS HEREBY AGREED AS FOLLOWS:-

1. DEFINITIONS AND INTERPRETATION

1.1 In this Agreement, unless the context otherwise requires, the following words and expressions shall have the respective meanings attributed to

  them below:-

  "AGREEMENT"            this agreement (which expression shall be deemed
                         to include the Recitals and Schedules hereto) as
                         amended and/or supplemented from time to time in
                         accordance with the provisions herein;

  "ARTICLES"             the Articles of Association of the Company in
                         their present form, and as may be amended and/or
                         supplemented from time to time thereafter;

  "ANNUAL BUSINESS PLAN" the annual business plan of the Company
                         described in Clause 4.14;

  "AUDITED ACCOUNTS"     the consolidated audited accounts of Smartco and
                         its subsidiaries prepared up to 31st December
                         1999, to be delivered by OTI to CK-X;

  "AUDITORS"             the auditors for the time being of the Company;

  "BOARD"                the board of Directors for the time being of the
                         Company;

  "BUSINESS DAY"         a day (not being a Saturday) on which banks are
                         officially open for business in Hong Kong and in
                         Israel;

  "CK GROUP"             the group of companies consisting of CHEUNG KONG
                         (HOLDINGS) LIMITED (a company incorporated under
                         the laws of Hong Kong) and HUTCHISION WHAMPOA
                         LIMITED (a company incorporated under the laws
                         of Hong Kong) together with their respective
                         subsidiaries from time to time;

  "CK GROUP PROPRIETARY  all the property, rights, title and interests of
                         CK Group in and to:-

                               A-2

                         (a) all information of whatever kind or nature
                             on the policies, methodologies, procedures
                             and systems of operation devised for or
                             adopted in, any business or activity of CK-X
                             or any member of CK Group, whether in
                             tangible or documented form or communicated
                             orally and whether marked or identified in
                             an adequate manner as being proprietary or
                             under the control of CK-X or CK Group and
                             includes, without limitation, proprietary
                             information relating to strategic planning,
                             organisation and development, administration
                             and governance, business relations, planning
                             and budgeting, staffing, finance and
                             accounting, investment, procurement, sale,
                             marketing and products; and

                         (b) all names, logos or marks for the time being
                             and from time to time used by CK-X or any
                             member of CK Group in relation to the
                             business of the Group, whether or not
                             applied for registration (whether as a
                             service mark or trade mark);

  "COMPANIES ORDINANCE"  COMPANIES ORDINANCE (CAP.32 OF THE LAWS OF HONG
                         KONG);

  "DILUTING LOAN"        shall have the meaning given to that expression
                         in Clause 7.4.3(a);

  "DIRECTOR"             a director of the Company from time to time
                         appointed to the Board under the provisions of
                         this Agreement (and "DIRECTORS" shall be
                         construed accordingly);

"DISTRIBUTION AGREEMENT" the agreement to be entered into between OTI
                         and the Company (in substantially the form as
                         set out in SCHEDULE B) and as may be amended
                         and/or supplemented from time to time in
                         accordance with the provisions therein;

  "ENCUMBRANCE"          includes mortgages, charges, lien or any
                         encumbrance;

  "EVENT OF DEFAULT"     shall have the meaning given to that expression
                         in Clause 8.1;

  "EXCLUSIVE TERRITORY"  the countries and areas listed in ANNEX C to the
                         Distribution Agreement where the Company shall
                         be appointed exclusive distributor and retain
                         exclusive distribution rights under the
                         Distribution Agreement;

  "FAIR MARKET VALUE"    shall have the meaning given to that expression
                         in Clause 10.1;

                               A-3

  "FISCAL YEAR"          the twelve calendar month fiscal period of the
                         Company commencing on 1st January and ending on
                         31st December of each year, as such Fiscal Year
                         may from time to time be changed in accordance
                         with the direction from the Board or the
                         Articles and applicable law;

  "GAAP"                 accounting principles generally accepted in Hong
                         Kong at the relevant time;

  "GROUP"                the group of companies consisting of the Company
                         and the Subsidiaries and "MEMBER OF THE GROUP"
                         shall be construed accordingly;

  "HONG KONG"            the Hong Kong Special Administrative Region of
                         the People's Republic of China;

  "LIBOR"                the rate per annum equal to the arithmetic mean
                         (rounded up if necessary to the next 1/16 per
                         cent) of the respective offered quotations for
                         deposits in US$ for twelve months which appear
                         on the relevant display page on the Reuters
                         Monitor Money Rates Service for the purpose of
                         displaying London inter-bank offered rates of
                         leading banks in respect of US$ at or about 11
                         a.m. (London time) on the rate fixing day;
                         provided that if no such offered quotation
                         should appear on the relevant display page as
                         aforesaid, LIBOR shall be the rate as determined
                         and quoted by Citibank, N.A., Hong Kong Branch;

  "LISTING"              shall have the meaning given to that expression
                         in Clause 12.2;

  "MANAGEMENT COMMITTEE" shall have the meaning given to that expression
                         in Clause 5.2;

  "MCA"                  a mutual confidentiality agreement in the form
                         as set out in SCHEDULE D;

  "MEMORANDUM"           the Memorandum of Association of the Company in
                         its present form, and as may be amended and/or
                         supplemented from time to time thereafter;

"OFFICER" OR "OFFICERS" shall have the meaning given to that expression in Clause 5.2;

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"OPTION" shall have the meaning given to that expression in Clause 4.17.1;

"OTI INTELLECTUAL PROPERTY" all the property, rights, title and interests of

                       OTI in and to:-

                       (a) all the applications for patents and rights
                           of a similar nature and granted patents,
                           short particulars of which are set out in
                           PART 1 of SCHEDULE C;

                       (b) all the proprietary know-how, technologies
                           and/or trade secrets, whether in the form of
                           information, knowledge, formula, processes,
                           methodologies, data, plans and designs from
                           time to time owned by OTI and summarised on
                           the date hereof in PART 2 of SCHEDULE C and
                           all copyright in any written materials,
                           plans, designs, manuals or other works and
                           all designs, whether or not registered or
                           protected by copyright, devised, acquired or
                           held by OTI relating thereto;

                       (c) all names, logos or marks for the time being
                           and from time to time used by OTI in
                           relation to the OTI Products, whether or not
                           applied for registration (whether as a
                           service mark or trade mark) including,
                           without limitation, applications, the
                           particulars of which are set out in PART 3
                           of SCHEDULE C; and

                       (d) all industrial and intellectual property
                           rights relating to all the foregoing and
                           subsisting therein;

"OTI PRODUCTS"         means the products set out in ANNEX A to the
                       Distribution Agreement and includes products
                       manufactured by or by the order of OTI or its
                       related companies pursuant to or by applying or
                       utilizing the OTI Intellectual Property or any
                       part thereof;

"PERSON"               includes an individual, a corporate body,
                       partnership or any entity or body of persons;

"QUARTER"              a Gregorian calendar quarter (i.e., one of the
                       four periods of three consecutive months each,
                       beginning on the first day of January, April,
                       July and October of each Fiscal Year, as the
                       case may be);

                             A-5

"SHARES"               the shares of US$1 each in the issued share
                       capital of the Company from time to time and
                       "SHARE" shall be construed accordingly;

"SHAREHOLDER'S LOAN"   in relation to a Shareholder, a loan to the
                       Company or any member of the Group now or at any
                       time hereinafter made or procured to be made by
                       that Shareholder and for the time being
                       outstanding and due and owing from the Company
                       or the member of the Group (as the case may be)
                       (and together with interest, if any, thereon)
                       and the expression "SHAREHOLDERS' LOANS" in
                       relation to all or some of the Shareholders
                       shall be construed accordingly;

"SMARTCO"              CITY SMART LIMITED, a company incorporated in
                       Hong Kong and wholly-owned by OTI prior to the
                       execution of this Agreement;

"SUBSIDIARY"           any of the subsidiaries for the time being of
                       the Company;

"SUBSIDIARY"           or "HOLDING COMPANY" shall mutatis mutandis have
                       the respective meanings given to such
                       expressions in the Companies Ordinance of Hong
                       Kong;

"US$" or
"UNITED STATES DOLLARS" the lawful currency of the United States of

                       America;

"VALUATION DATE"       in respect of the determination of the Fair
                       Market Value for the purposes of Clause 7, the
                       date of the Relevant Resolution, and for the
                       purposes of Clause 8, the date of the written
                       notice of the Non-Defaulting Shareholder to the
                       Defaulting Shareholder as described therein, and
                       for the purposes of Clause 9, the Transfer
                       Notice Date.

1.2 References to any statute or statutory provisions shall, where the context so admits or requires, be construed as references to those provisions as respectively amended, consolidated, extended, or re-enacted from time to time, and shall, where the context so admits or requires, be construed as including reference to the corresponding provisions of any earlier legislation (whether repealed or not) directly or indirectly amended, consolidated, extended, or replaced thereby or re-enacted therein, which may be applicable to any relevant tax year or other period, and shall include any orders, regulations, instruments or other subordinate legislation made under the relevant ordinance.

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1.3 Headings in this Agreement are for convenience only and shall not affect the construction of this Agreement or any part thereof.

1.4      Unless the context otherwise requires:-

         1.4.1    words importing the singular only shall include the plural and
                  vice versa;

         1.4.2    words importing natural person shall include individuals,
                  companies, corporations, firms, partnerships, consortiums,
                  joint ventures, associations, organisations, and
                  un-incorporated bodies of persons, trusts, any government or
                  state or any instrumentality, agency or political sub-division
                  thereof or authority, board or body created or constituted
                  thereby (in each case, whether or not having separate legal
                  personality) and vice versa; and

         1.4.3    words importing the masculine gender only shall include the
                  feminine gender and the neuter gender and vice versa.

1.5 Save as otherwise expressly provided herein, references to Clauses and Schedules are to clauses of and schedules to this Agreement and references to sub-clauses and paragraphs are to sub-clauses of the Clauses and paragraphs of the sub-clauses in which they respectively appear, and the Schedules shall be deemed to form part of this Agreement.

2. SHARE CAPITAL

2.1 Within 7 Business Days after the execution of this Agreement, CK-X and OTI shall subscribe in cash (save and except that for OTI, US$500,000, being part of the subscription by OTI (the "DEFERRED AMOUNT"), shall become due and payable on the earlier of the date which is twelve months after the execution of this Agreement and the date of exercise of the Option by the Company under Clause 4.17.1(a) when the Deferred Amount shall be paid by OTI or (as the case may be) satisfied by way of a set-off against the Exercise Price set out in Clause 4.17.1(a) and payable by the Company to OTI upon the exercise by the Company of the Option) for and hold Shares in such numbers and at such subscription prices respectively provided in the third and fourth columns below (as the case may be) set opposite to its name so that, immediately after the allotment of Shares to CK-X and OTI, the aggregate number of Shares held by each of CK-X and OTI shall be as stated in the fifth column below and their respective proportions (expressed in terms of percentage) of shareholding in the Company shall be as stated in the sixth column below:-

                   NUMBER OF         NUMBER OF                        NUMBER OF
                   SHARES BEFORE     SHARES TO      SUBSCRIPTION      SHARES AFTER    PROPORTION OF
SHAREHOLDER        SUBSCRIPTION      BE ALLOTTED    PRICE             ALLOTMENT       SHAREHOLDING
-----------        -------------     -----------    ------------      ------------    -------------
CK-X                  1                 24,999      US$3,600,000        25,000             50%
OTI                   1                 24,999      US$3,600,000        25,000             50%
-----------           ---               ------      ------------        ------            ----
Total :               2                 49,998      US$7,200,000        50,000            100%

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2.2 Each Shareholder warrants and undertakes to the other Shareholder that it has acquired and shall subscribe for and hold the Shares for its own absolute beneficial ownership and not on behalf of any other person.

2.3 Decisions of the Shareholders may be made by written resolutions or by resolutions passed on a poll in meetings. All written resolutions of the Shareholders shall be signed by all Shareholders in order to be valid and subsisting.

2.4 The Shareholders shall have a Chairman for the meetings of the Shareholders. Such Chairman shall be nominated and appointed by CK-X. Questions arising at any meeting of the Shareholders shall be decided by a majority of votes.

3. BUSINESS OF THE GROUP

3.1      The business of the Group shall be:-

         3.1.1    the implementation of the Distribution Agreement;

         3.1.2    the purchase, marketing, distribution, sale, applications and
                  after-sale maintenance and support of the OTI Products in
                  connection with the Distribution Agreement or products
                  complementary and, subject to the provisions of Clause 4.13,
                  similar to the OTI Products which may be supplied by
                  manufacturers or obtained through sources (other than from or
                  through OTI) upon terms that are more competitively priced or
                  favourable than the OTI Products;

         3.1.3    the incorporation or establishment of any subsidiary or joint
                  venture company by the Company for the purposes of developing,
                  promoting, enhancing or improving the efficiency and cost
                  effectiveness of the business of the Group;

         3.1.4    such other business as may be decided by the Board from time
                  to time; and

         3.1.5    the doing of such acts, matters and things as may be
                  consistent with, necessary for or incidental to the attainment
                  of the objects set out above.

For the avoidance of doubt, unless otherwise agreed between the parties in writing, the distribution, sale, applications and after-sale maintenance and support of the Group's products shall be limited to the Exclusive Territory.

3.2 Save as otherwise herein provided, the business and affairs of the Company shall be managed by the Board in accordance with this Agreement and without any obligation to seek approval from the Shareholders. The Shareholders shall exercise their voting rights and powers of control in relation to the Company (and therefore indirectly in relation to the Group) and in the respective boards of the members of the Group so as to ensure that:-

A-8

3.2.1    the members of the Group shall carry on and conduct its
         business and affairs in a proper and efficient manner;

3.2.2    full effect shall be given to the terms and conditions of this
         Agreement (including, where appropriate, the carrying into
         effect of such terms and conditions as if they were embodied
         in the Memorandum and Articles and in the respective
         memorandum and articles of association, bye-laws or analogous
         constitution of the members of the Group); and

3.2.3    the business and affairs of the Group shall be carried on
         pursuant to policies laid down from time to time by the Board.

4. BOARD OF DIRECTORS AND RELATED MATTERS

4.1      Composition

         4.1.1    The Company shall have a Board of Directors and at all times
                  whilst this Agreement remains in force and subject to any
                  contrary agreement in writing of the Shareholders, the Company
                  shall have a Board of six (6) Directors and each Shareholder
                  shall procure by a written notice to the Company (with a copy
                  to the other Shareholder) that (subject as otherwise expressly
                  provided in this Agreement) CK-X shall be entitled to appoint,
                  remove or replace 3 Directors and OTI shall be entitled to
                  appoint, remove or replace 3 Directors.

         4.1.2    Notwithstanding Clause 4.1.1, if, at any time before Listing,
                  the proportion of the number of Shares legally and
                  beneficially owned by:-

(a) CK-X; or

(b) OTI

in the entire issued share capital of the Company is reduced (otherwise than as a result of a transfer of Shares permitted under Clause 9.2.1) by a portion representing an integral twenty percent (20%) (such portion being called the "THRESHOLD PORTION") of the entire issued share capital of the Company held by the relevant party as above-mentioned in Clauses 4.1.2(a) or 4.1.2(b) (as the case may be) immediately prior to such reduction, then:-

(a) CK-X; or

(b) OTI (as the case may be)

in relation to every Threshold Portion and upon notice being given by the other party to which the Threshold Portion does not relate, shall cease to be entitled to nominate and appoint one Director under Clause 4.1.1 and one Officer under Clause 5.2 and if such Director or Officer is appointed it shall be removed from office forthwith.

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         4.1.3    To the extent that the right originally exercisable by a
                  Shareholder under Clause 4.1.1 to appoint, remove or replace a
                  Director is extinguished under Clause 4.1.2, it shall become
                  exercisable by such new Shareholder which has acquired the
                  Threshold Portion. To the extent that the right originally
                  exercisable by a Shareholder under Clause 5.2 to appoint,
                  remove or replace an Officer is extinguished under Clause
                  4.1.2, it shall become exercisable by such Shareholder which
                  holds the largest proportion of the issued share capital of
                  the Company immediately after the application of Clause 4.1.2.

4.2      Quorum

         4.2.1    The quorum necessary for the transaction of business in a
                  meeting of the Board shall be four (4) Directors, of which
                  (unless the Shareholders otherwise agree in writing in any
                  particular case) one of whom shall be a Director appointed by
                  CK-X and the other one shall be a Director appointed by OTI
                  under Clause 4.1.1. No decision may be made or right exercised
                  by the Board otherwise than at a meeting of the Board at which
                  a quorum is present throughout.

         4.2.2    If at any meeting of the Board the quorum necessary for the
                  transaction of business is not present, the meeting shall
                  stand adjourned to the same day in the following week (or the
                  next following Business Day if that day is a non-Business
                  Day), at the same time and place (the "ADJOURNED MEETING") and
                  if at the Adjourned Meeting a quorum is not present within
                  half an hour from the time appointed for the meeting any two
                  Directors present (notwithstanding all of the Directors
                  present are nominated by the same Shareholder) shall be a
                  quorum.

4.3      Voting

Subject to Clauses 4.12 and 4.13, questions arising at any meeting of the Board shall be determined by a majority of votes.

4.4 Chairman and Deputy Chairman

The Chairman of the Board shall be nominated and appointed by CK-X. The Deputy Chairman of the Board shall be nominated and appointed by OTI. Such Chairman and Deputy Chairman shall be counted in calculating the number of Directors to be appointed by CK-X and OTI under Clause 4.1.1.

4.5      Alternate

         4.5.1    Subject to the approval in writing of the nominating
                  Shareholder, any Director may at any time and from time to
                  time by a notice in writing to the Company (with a copy to the
                  other Shareholder) (both to be received not less than 48 hours
                  prior to the relevant Board meeting provided that where there
                  is a force majeure event or emergency beyond the reasonable
                  control of the Director, such notice may be given in other
                  possible mode and time as permitted by the prevailing
                  circumstances) appoint any person (who should be competent,
                  possess relevant business knowledge, qualifications and
                  experience and be eligible to be so appointed under the
                  Articles and all applicable laws) to be his alternate Director
                  and, where appropriate, to be the acting Chairman or the
                  acting Deputy Chairman, as the case may be, in his place and
                  may at any time terminate such appointment from the time
                  stated in the notice (which shall not be earlier than the time
                  when such notice is lodged with the Company) or, if no such
                  time is stated, from the time such notice is so lodged. The
                  appointment of an alternate Director, the acting Chairman or
                  the acting Deputy Chairman shall terminate on the termination
                  of office of the Director, the Chairman or the Deputy
                  Chairman, as the case may be, who appointed him. A Director or
                  his alternate can act as alternate of one or more other
                  Directors.
                                      A-10

         4.5.2    The alternate Director shall (except as regards the power to
                  appoint an alternate Director pursuant to this Clause 4.5) be
                  subject in all respects to the terms and conditions existing
                  with reference to the other Directors of the Company. Every
                  alternate Director shall be entitled to receive any notice of
                  meeting of the Directors, to attend and vote as a Director and
                  perform the functions of a Director at any such meeting at
                  which the Director appointing him is not personally present,
                  to sign any resolution in writing of the Board and otherwise
                  to generally perform the functions of a Director in the place
                  of the Director appointing him.

         4.5.3    For the purpose of reckoning a quorum under Clause 4.2, an
                  alternate Director shall be regarded as being nominated by the
                  Shareholder which has under Clause 4.1 nominated the Director
                  for whom he acts as his alternate Director for the time being
                  and in case such alternate is also a Director he shall be
                  regarded as participating in any Board meeting on his own
                  behalf and on behalf of any other Director for whom he is
                  appointed as alternate.

4.6 Convening a meeting

The Board shall meet at such place or time as the business of the Company requires or as the Directors think fit. Any Board meeting may be convened by the Chairman or the Deputy Chairman. Not less than 7 Business Days' prior written notice of each meeting of the Board specifying the date, time and place of the meeting and the business to be transacted thereat shall be given to each Director (other than a meeting reconvened following an adjournment, in respect of which no further notice shall be required), unless short notice is consented to or notice is waived by such Director.

4.7 Written resolutions

A resolution in writing or by telecopier approved or signed as all the Directors shall unanimously agree in writing, shall be effective for all purposes as a resolution duly passed at a meeting of the Board duly constituted. Any such resolution may be approved or signed in counterpart.

4.8 Minutes

Minutes of all meetings of the Board together with the relevant Board papers shall be sent to each Director as soon as practicable after the holding of the relevant meeting whether or not such Director was present thereat. The minutes of any Board meeting shall be approved at the next Board meeting.

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4.9      Subsidiary

         The provisions contained in Clauses 4.1 to 4.8 (inclusive) shall apply
         mutatis mutandis to and in relation to the board of directors of each
         Subsidiary.

4.10     Shareholders' actions

         Each of the Shareholders undertakes to each other of them that
         notwithstanding any other provisions herein, it will procure or vote to
         remove any person nominated by it as Director, if such nominee shall
         become liable to be removed or disqualified as Director in accordance
         with the provisions of this Agreement, the Articles or the applicable
         laws. The provisions of this Clause 4.10 shall not be interpreted as
         derogating from a Shareholder's right to appoint a Director in place of
         the removed or disqualified Director in accordance with the terms of
         this Agreement.

4.11     Delegation

         Subject to Clause 5, the Board may, by a resolution adopted by at least
         two Directors respectively nominated by CK-X and OTI (subject to Clause
         4.2.2), from time to time delegate any of their powers to such persons
         or committees consisting of such one or more members of the Board as
         they think fit. Any committee so formed shall in the exercise of the
         powers so delegated conform to such regulations and limits of authority
         as may from time to time be set by the Board.

4.12     Casting vote by Chairman

         In the case of equality of votes on any of the following matters or
         issues requiring determination at a Board meeting and while CK-X
         (including for this purpose its permitted assign under Clause 9.2.1)
         remains the beneficial owner of not less than 50% of the entire issued
         share capital of the Company, the Chairman shall have a casting vote
         which will be applied in good faith:-

         4.12.1   the approval or alteration of the Annual Business Plan in
                  accordance with the scope of the business of the Group;

         4.12.2   the creation of any Encumbrance over any part of the
                  undertaking, property or assets of the Group (excluding the
                  Distribution Agreement), the borrowing of any monies by the
                  Group from any person, or the giving of any guarantee or
                  indemnity by the Company or any member of the Group to secure
                  the liabilities or obligations of any person; and

         4.12.3   the taking of any action or measure to avoid, amend or nullify
                  any action taken or to be taken by the Group which deviates,
                  has deviated or may deviate from the approved Annual Business
                  Plan or is, has been, or may be detrimental to the interest of
                  CK-X.

                                      A-12

         The Chairman shall not exercise his casting vote unless the parties
         have discussed the relevant matters and issues at least 7 Business Days
         before such exercise. For the avoidance of doubt, it is hereby agreed
         that the casting vote of the Chairman shall not apply to Clauses 3.1.4,
         6 and 7.4.3(b) and accordingly any other business of the Group (other
         than those contemplated in Clause 3.1.1, 3.1.2, 3.1.3 and 3.15) and
         additional investment by the Company and the Shareholders in connection
         with such other business, and any issue of Shares pursuant to Clause 6
         or 7.4.3(b) shall be subject to the unanimous approval of the
         Shareholders.

4.13     Veto by Deputy Chairman

         In the event that the Board should consider the use or implementation
         by the Group of any smart card technology other than that adopted by
         OTI or other products similar to the OTI Products and while OTI
         (including for this purpose its permitted assign under Clause 9.2.1)
         remains the beneficial owner of not less than 50% of the entire issued
         share capital of the Company, the Deputy Chairman shall be entitled to
         veto any resolution passed by the Board on such use or implementation
         of such other smart card technology or other products similar to the
         OTI Products by the Group (such veto right shall be applied in good
         faith) provided that the validity and effectiveness of such veto right
         shall be conditional upon OTI being able to in a timely manner

         4.13.1   provide to the Group such other smart card technology or other
                  products similar to the OTI Products at competitive prices; or

         4.13.2   obtain for the Group such other smart card technology or
                  purchase such other products similar to the OTI Products from
                  any other source or manufacturer and re-sell the same to the
                  Group at a price determined in accordance with the following
                  formula:

                  (a)      at direct cost price of the products plus 7.5%
                           thereof (or such other percentage as may be agreed
                           between OTI and the Company in writing) plus US$0.10
                           as handling cost per product, if the direct cost
                           price is US$3.00 or more; and

                  (b)      at direct cost price of the products plus 9.5%
                           thereof (or such other percentage as may be agreed
                           between OTI and the Company in writing) without the
                           additional handling cost, if the direct cost price is
                           less than US$3.00.

         The Deputy Chairman shall not exercise his veto right unless the
         parties have discussed the relevant matters and issues at least 7
         Business Days before such exercise.

4.14     Annual Business Plan

         4.14.1   The Board shall procure the first draft Annual Business Plan
                  to be prepared and approved as soon as practicable after the
                  execution of this Agreement. The financial portions of the
                  draft Annual Business Plan shall be prepared in accordance
                  with GAAP and shall contain a detailed monthly financial
                  budget. Such budget shall at least be accompanied by a review
                  of the projected business, a statement of all capital and
                  recurrent expenditure to be incurred, an estimate of the
                  working capital requirements of the Company incorporated
                  within a cashflow statement and prudent transfers of
                  distributable profits to reserve during such Fiscal Year
                  together with a projected profit and loss account, and shall
                  be supported by explanations, notes and information upon which
                  the projections underlying such Annual Business Plan have been
                  based.

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         4.14.2   The draft Annual Business Plan shall become the Annual
                  Business Plan for such Fiscal Year on approval by the Board.
                  In the event that the Board is unable to settle and approve
                  the draft Annual Business Plan in whole or in part prior to
                  the commencement of a Fiscal Year, the expenditure programme
                  contained in the existing Annual Business Plan shall mutatis
                  mutandis continue to apply until a complete Annual Business
                  Plan is approved by the Board.

         4.14.3   The framework of the projected Annual Business Plan of the
                  Company for the Fiscal Years 2000-2003, inclusive, is attached
                  as SCHEDULE E for reference.

4.15     Corporate Distributions

         4.15.1   Subject to Clauses 4.15.2 and 4.16, the audited consolidated
                  net profits after taxation of the Company (including, for
                  clarification purpose, all Subsidiaries) in any Fiscal Year
                  (the "DISTRIBUTABLE PROFITS") may be distributed by way of
                  dividend or other means deemed by the Board as distributions
                  for the purposes of this Clause 4.15 (collectively referred to
                  as the "DISTRIBUTIONS") in such proportion and on such basis
                  as is determined by the Board to be in the best interests of
                  the Company provided that whatever the form of Distribution,
                  it shall be made in accordance with the proportionate interest
                  of each Shareholder.

         4.15.2   Subject to the availability of cashflow in the Company and any
                  transfer to reserve according to prudent business practice and
                  other budgeted investment set out in the Annual Business Plan
                  or unless otherwise decided by the Board, not less than 50% of
                  Distributable Profits will be paid to the Shareholders as
                  Distributions and Distributions shall, where possible, be made
                  at least annually.

         4.15.3   Subject to the provisions of this Agreement and applicable
                  law, the Shareholders shall vote their Shares and take all
                  other actions in a manner consistent with the determinations
                  of the Board in matters relating to Distributions. The policy
                  with respect to distributions from the Subsidiaries to the
                  Company shall be that as set out in this Clause 4.15.

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4.16     Payment prior to Distributions

         The Board shall procure that the following payments will be made in
         priority to any distribution of the Distributable Profits under Clause
         4.15 and any repayment of the Shareholders' Loans:

         4.16.1   conditional upon the payment by CK-X of the full subscription
                  price in accordance with Clause 2.1, in the event that the
                  Company's annual gross profit (as defined in SCHEDULE F) in
                  any Fiscal Year shall exceed US$750,000, CK-X shall be
                  entitled to receive from the Company yearly management fees
                  for that Fiscal Year, free of any taxation, in an amount equal
                  to 20% of the Company's annual gross profit in that Fiscal
                  Year, up to an aggregate maximum of US$5,050,000;

         4.16.2   conditional upon the payment by OTI of the full subscription
                  price partly by cash under Clause 2.1 and partly by a set-off
                  of the Exercise Price against the Deferred Amount on a
                  transfer of the entire issued share capital or assets of
                  Smartco under Clause 4.17.1 or payment of the Deferred Amount
                  in accordance with Clause 2.1 and in consideration of the
                  granting by it of the distribution rights and limited use
                  rights of the OTI Products to the Company pursuant to the
                  Distribution Agreement, OTI shall be entitled to receive from
                  the Company the amount of US$1,550,000 at the end of the first
                  Quarter of the Fiscal Year 2000, the amount of US$1,550,000 at
                  the end of the second Quarter of the Fiscal Year 2000 and an
                  amount of US$170,000 at the end of each of the Fiscal Years
                  2001, 2002 and 2003.

4.17     The Option and Related Matters

         4.17.1   In consideration of HK$1.00 paid by the Company to OTI
                  (receipt thereof is hereby acknowledged by OTI), OTI hereby:-

                  (a)      irrevocably grants to the Company the option (the
                           "OPTION") which may be exercisable within a six-month
                           period commencing on the date which is 6 months from
                           the date hereof (the "OPTION PERIOD") at the exercise
                           price of US$500,000 (the "EXERCISE PRICE") which
                           shall be settled upon the exercise of the Option by
                           the Company by way of a set-off against the Deferred
                           Amount due from OTI to the Company as set out in
                           Clause 2.1 to either:-

                           (i)      acquire from OTI the entire issued,  paid-up
                                    and voting share capital of Smartco; or

                           (ii)     require OTI to procure Smartco and its
                                    subsidiaries to sell to the Company all the
                                    assets of Smartco and its subsidiaries
                                    (including without limitation all rights,
                                    titles, interests and benefits in the
                                    software, hardware, tangible assets,
                                    intellectual property rights and other
                                    properties all free from Encumbrances).

                           The Option shall be exclusively exercisable by CK-X
                           on behalf of the Company at its discretion.
                           Completion of such acquisition of the shares in
                           Smartco or sale of the assets of Smartco and its
                           subsidiaries (the "COMPLETION") shall be on a date
                           (the "COMPLETION DATE") within 1 month from the date
                           on which the Company serves a notice in writing on
                           OTI within the Option Period specifying the
                           Completion Date, a place in Hong Kong at which
                           Completion shall take place and the businesses to be
                           conducted at Completion;

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         (b)      agrees to procure each of Smartco and its
                  subsidiaries (the "SMARTCO GROUP") to account to and
                  hold in trust for the Company all income and proceeds
                  to be received by the Smartco Group arising out of
                  any contracts for supply of goods and/or services to
                  which any member of the Smartco Group is a party on
                  and after the date hereof (and in respect of any
                  prepayments to the Smartco Group for income and
                  proceeds arising on and after the date hereof, a pro
                  rata amount thereof to be paid by the Smartco Group
                  to the Company) and for such purpose to execute an
                  assignment in favour of the Company in the form as
                  attached as SCHEDULE G provided that the Company will
                  after such assignment pay the Smartco Group at the
                  end of each month an amount by way of management fees
                  which equal the aggregate amount of operating,
                  administrative and office expenses of the Smartco
                  Group (comprising payroll expenses, rental and
                  management charges for office premises, utility
                  charges, advertising and all other reasonable office
                  expenses) for the relevant month and accepted by the
                  Company; and

         (c)      undertakes and agrees that it shall procure the
                  Smartco Group and its management and employees to act
                  in accordance with the instructions and directions of
                  the Company on all aspects of its businesses and
                  operations, it being agreed that on and after the
                  date hereof:-

                  (i)      the Smartco Group will no longer take on any
                           new business, and will refer any new
                           business to the Company;

                  (ii)     its existing employees will be transferred
                           to the Company in a manner to be agreed
                           between CK-X and OTI;

                  (iii)    all existing employees of the Smartco Group
                           and employees transferred to the Company
                           under sub-paragraph those (ii) above may be
                           deployed by the Company to work primarily on
                           the businesses and operations of the
                           Company, but they may also be assigned by
                           the Company to work on the existing business
                           of the Smartco Group until the latter has
                           been fully performed, all in such manner as
                           directed by the Company.

4.17.2   In consideration of CK-X procuring the Company to accept and
         the Company accepting the grant of the Option by OTI, OTI
         hereby represents, warrants and undertakes to the other
         parties in this Agreement that:-

         (a)      OTI shall deliver and procure Smartco to deliver the
                  Audited  Accounts to CK-X on or before 31st March
                  2000;

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                  (b)      the Audited Accounts are true, accurate and correct
                           and represent the true financial position of Smartco
                           as at the date of such accounts in all material
                           respects;

                  (c)      in the event of the exercise of the Option by the
                           Company under 4.17.1(a)(i), there has been no and
                           will not be any material adverse change in the
                           financial position of the Smartco Group between the
                           date of Audited Accounts and the date of transfer of
                           Smartco to the Company under Clause 4.17.1(a)(i) save
                           and except for the arrangement set out in Clause
                           4.17.1(b) and any changes arising under the
                           provisions of this Agreement.

         4.17.3   In the event the Company exercises the Option, the Company
                  agrees that any source code being the subject matter of the
                  Option shall be jointly owned and may be used by any of the
                  Company and OTI for their respective businesses. For the
                  avoidance of doubt, it is agreed that:-

                  (a)      OTI shall not use or permit the use of the source
                           code for the manufacture of any products in or
                           shipment or sale of any products into the Exclusive
                           Territory;

                  (b)      the Company shall not use or permit the use of the
                           source code for the manufacture of any products in or
                           shipment or sale of any products into any place other
                           than the Exclusive Territory;

                  (c)      OTI shall in its use of the source code change its
                           user interface to differentiate it from the original;

                  (d)      neither the Company nor OTI shall transfer, or
                           license the use of, the source code to any person.

4.18     Indemnities relating to Smartco

         4.18.1   Subject to Clause 4.18.2, OTI will indemnify and keep CK-X and
                  the Company (acting for itself and the Smartco Group for this
                  purpose) fully indemnified against all losses, damages, costs
                  and expenses arising in connection with any claims, demands,
                  actions, proceedings and liabilities that may be made against,
                  suffered or incurred by the Smartco Group, CK-X or the Company
                  in respect of any event or matter arising or accruing prior to
                  the date of this Agreement or any contract for supply of goods
                  or services to the Smartco Group's customers which was entered
                  into by the Smartco Group before the date of acquisition of
                  Smartco by the Company under Clause 4.17.1(a)(i) (all such
                  contracts being the "SMARTCO CONTRACTS").

         4.18.2   No claim shall be brought by CK-X or the Company against OTI
                  under Clause 4.18.1 unless notice in writing of any such claim
                  (specifying in reasonably sufficient detail the nature of the
                  claim and so far as practicable the amount claimed in respect
                  thereof) has been given to OTI (a) on or prior to the date
                  being two (2) years after the date of this Agreement; or (b)
                  where such claim relates to any of the Smartco Contracts, on
                  or prior to the expiry of such contract if such contract
                  expires and is renewed by the Company in consideration of a
                  fee to be paid by the relevant customer to the Company before
                  the end of the said 2-year period from the date of this
                  Agreement; or (c) where such claim relates to any of the
                  Smartco Contracts, on or prior to the expiry of such contract
                  if such contract expires after the end of the said 2-year
                  period from the date of this Agreement (the last date on which
                  any claim is to be brought against OTI under Clause 4.18.2 is
                  hereinafter called the "CLAIM DATE").

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         4.18.3   Any claim under Clause 4.18.1 which has been made against OTI
                  on or before the Claim Date shall, if it has not been
                  previously satisfied, settled or withdrawn, be deemed to have
                  been withdrawn and become fully barred and unenforceable on
                  the expiry of the period of one (1) year commencing on the
                  Claim Date unless legal proceedings in respect thereof shall
                  have been commenced against OTI and for this purpose
                  proceedings shall not be deemed to have been commenced unless
                  they shall have been issued and served upon OTI.

4.19     After the execution of this Agreement,

         4.19.1   CK-X shall as soon as is practicable conduct and complete all
                  appropriate and satisfactory legal, accounting and financial
                  due diligence review of Smartco;

         4.19.2   OTI shall as soon as is practicable deliver to CK-X and the
                  Company but in any event no later than 28th February 2000a
                  legal opinion acceptable to CK-X issued by a firm of lawyers
                  qualified to practise in Germany (to be instructed at OTI's
                  cost), confirming, among other things, the arrangement set out
                  in Clause 4.17.1(b), the proposed transfer of the entire
                  issued share capital or the assets of Smartco pursuant to the
                  Option do not result in any breach of any German law or
                  requirements under or in connection with the Neuer Markt of
                  the Frankfurt Stock Exchange. In the event that the Company
                  has exercised the Option and acquired the shares of Smartco
                  pursuant to Clause 4.17.1(a)(i) but CK-X is not satisfied with
                  any of the matters set out in Clauses 4.19.1 to 4.19.2, CK-X
                  may require the Smartco Group to be liquidated at the cost of
                  OTI in such manner as will cause the minimal disruption to the
                  business of the Group and allow an orderly transfer of the
                  assets, business and employees of the Smartco Group to any
                  other subsidiary of the Group notwithstanding any other
                  provisions in this Agreement.

5. MANAGEMENT OF THE GROUP

5.1 Immediately following the execution of this Agreement, the Board will hold one or more meetings to settle all organisational matters relating to the Group including the Group's day to day operations, management (including the terms of employment of the Officers) and accounting procedures, duties and responsibilities of the Officers, and appointment of the Management Committee as referred to in Clause 5.2.

5.2      5.2.1    Immediately after the execution of this Agreement, the Board
                  will procure that the Management Committee is constituted and
                  the Officers are appointed.

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         5.2.2    The Management Committee (the "MANAGEMENT COMMITTEE") shall
                  comprise 4 members (individually a "COMMITTEE MEMBER" and
                  collectively "COMMITTEE MEMBERS"). As long as the proportion
                  of shareholding of CK-X and OTI in the Company remains as
                  provided in Clause 2.1, each of CK-X and OTI shall be entitled
                  to appoint two Committee Members. Only Directors and Officers
                  are eligible to be appointed Committee Members.

         5.2.3    The following Officers shall be appointed and act in
                  accordance with the directions of the Management Committee:

                  (a)      the President ("PRESIDENT");

                  (b)      the Chief Executive Officer ("CEO");

                  (c)      the Chief Operating Officer ("COO"); and

                  (d)      the Chief Financial Officer ("CFO"),

                  (the President, CEO, COO and CFO being collectively called the
                  "OFFICERS" and each an "OFFICER").

         5.2.4    Subject to Clause 4.1.3, OTI shall be entitled to appoint,
                  remove or replace the President and the CEO while CK-X shall
                  be entitled to appoint, remove or replace the COO and the CFO
                  as long as the proportion of shareholding of OTI and CK-X in
                  the Company remains as provided in Clause 2.1. Each
                  Shareholder shall effect any appointment or removal of any of
                  its relevant Officer by sending written notice to the other
                  and a copy thereof to the Company. Each Officer should be
                  competent, possess all relevant knowledge, qualifications and
                  business experience and be eligible to be so appointed under
                  the Articles and all applicable laws.

5.3 The Management Committee shall meet at such regular intervals as are required or it may determine from time to time. Any of the Committee Members may convene a meeting of the Management Committee provided that not less than 3 Business Days' notice of each meeting, specifying the business to be transacted thereat, shall be given to each Committee Member, unless waived by that Committee Member.

5.4 The quorum for each Management Committee meeting shall be 2 with at least 1 from OTI and 1 from CK-X. If a meeting is not quorate within 30 minutes of the time for which it was convened and due to commence, it shall be deemed to be adjourned automatically to the same time and place on the next Business Day following and no further notice is required for such adjourned meeting. At such adjourned meeting any Committee Member present shall comprise the quorum. No decision may be made or right exercised by the Management Committee otherwise than at a meeting of the Management Committee at which a quorum is present throughout.

5.5 The CFO (if he is a Committee Member, but otherwise any Committee Member appointed by CK-X) shall act as the meeting co-ordinator and shall prepare an agenda for each meeting to which each Committee Member shall have the right to add. Such agenda and related papers shall be sent to each Committee Member at least 2 Business Days before the meeting. Matters and proposals arising at any meeting shall be decided by a majority vote of the Committee Members present. Each Committee Member shall have the right to appoint another Committee Member to represent him at the meeting. Each Committee Member at the Management Committee meeting shall have one vote and such number of votes corresponding to the number of other Committee Members he may have been authorised to represent. If a deadlock as to any matter which requires decision arises at any meeting of the Management Committee, it shall be referred to the Board for resolution.

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5.6 The business of the Management Committee may be conducted either at a meeting or in any manner approved by the Management Committee which (except as herein otherwise expressly provided) shall have full authority to fix its own rules and procedures. The minutes of meeting of the Management Committee shall be kept in a file which is available for inspection at all times by authorised representatives of any Shareholder. The minutes of a meeting shall be prepared and copies delivered to all Committee Members within 5 Business Days of that meeting. The minutes of any Management Committee meeting shall be approved at the next Management Committee meeting.

5.7      The functions of the Management Committee shall be as follows:-

         5.7.1    to prepare a draft Annual Business Plan for each Fiscal Year
                  for consideration by the Board no later than one calendar
                  month prior to the beginning of such Fiscal Year;

         5.7.2    to procure the preparation of monthly written reports on the
                  business and performance of the Group (each including
                  management financial statements of the Group and a financing
                  plan stating the times and accounts of the Group's cash and
                  financing requirements for the next 2 months) within 10
                  Business Days from the end of the month in question for
                  despatch to each Shareholder;

         5.7.3    to oversee the carrying on of the business of the Group within
                  the scope of the Annual Business Plan as approved (subject to
                  any adjustment of 10% thereto on an annual basis);

         5.7.4    to arrange for or enter into any interim financing or credit
                  facilities to be extended to the Group and/or to provide any
                  indemnity, guarantee or undertaking in respect thereof within
                  the scope of the applicable Annual Plan or as approved by the
                  Board;

         5.7.5    to procure each member of the Group to keep timely and
                  accurate books of accounts and records relating to the
                  business of the Group and to provide each Officer and Director
                  access thereto; and

         5.7.6    to determine the terms of employment of any executive or
                  senior employee (other than the Officers).

The Management Committee may from time to time refer any matter to the Board for advice.

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5.8 Each of the Shareholders shall procure that the Committee Members appointed by it shall exercise their voting rights in good faith for the implementation of the Group's business and in the interests of the due performance of the provisions of this Agreement. No Director or Officer shall be personally responsible for acting bona fide and in good faith in respect of any of his acts or omissions.

5.9 The Management Committee may, at its absolute discretion and on the basis of its opinion on the requirements of the business and affairs of the Group, nominate and appoint such persons as the Management Committee considers to be appropriate to provide services in relation to the business and affairs of the Group and the services of such persons may be made available in any or both of the following modes:-

         5.9.1    employed by any member of the Group which shall pay salary
                  directly to such employee, and/or

         5.9.2    seconded by CK-X or any party within the CK Group to any
                  member of the Group to provide services to the Group in
                  consideration of which the member of the Group shall pay to
                  CK-X or such party within the CK Group (as the case may be) an
                  appropriate fee within the scope of the applicable Annual Plan
                  or as approved by the Management Committee and in accordance
                  with invoices issued to the member of the Group,

         and such persons as referred to above may provide the services either
         on a full-time or part-time basis. The services of the Officers shall
         be paid for by the Group and their remuneration shall be considered and
         recommended by the Management Committee and determined by the Board.
         For the Fiscal Years 2000 and 2001, the Shareholders shall agree a
         budget for the remuneration (including salaries and benefits under any
         bonus and option plan) payable to the Officers. In the event that the
         remuneration payable to any Officer shall exceed the amount as provided
         in the said agreed budget, the amount in excess shall be borne by and
         may be deducted from any dividend declared and payable by the Company
         or amounts payable under Clause 4.16 to the relevant Shareholder
         appointing that Officer.

5.10     It is hereby agreed and acknowledged by the parties hereto that all the
         operations of the Company and of all other members of the Group
         (including, without limitation, the production, marketing, sale and
         other operational activities) shall be under the direction of the
         Management Committee which may from time to time be given if considered
         expedient by the Management Committee, and the Directors and the
         parties hereto shall procure and ensure that the operations of the
         Company and other members of the Group shall be conducted in accordance
         with such direction of the Management Committee.

5.11     The Auditors of the Company shall be MESSRS. DELOITTE TOUCHE TOHMATSU,
         Certified Public Accountants, or such other firm of certified public
         accountants as may from time to time be appointed by the Board.

5.12     All bank accounts of and contracts to be concluded by any member of the
         Group shall be operated or signed by two Officers jointly, one of whom
         shall be an Officer appointed by OTI and the other shall be an Officer
         appointed by CK-X.

                                      A-21

5.13     In the event that any Director or Officer nominated by any Shareholder
         commits any misconduct or default or acts in any manner not conducive
         to the interests of the Group, the other Shareholder may require the
         nominating Shareholder to replace the Director or Officer.

6.       PROPORTIONAL ISSUE OF NEW SHARES

         The Shareholders shall exercise their respective voting rights for the
         time being in the Company or in any other member of the Group and shall
         take all such other steps as for the time being lie within their
         respective powers to procure that, save for the Shares to be allotted
         pursuant to Clause 2 or otherwise subject to the provisions of this
         Agreement, the Company shall not allot or issue any Shares without the
         unanimous approval of the Shareholders and without first offering to
         each Shareholder which is for the time being a member of the Company
         that proportion of the Shares ("PROPORTIONAL SHARES") to be issued as
         will enable such Shareholder (if it so accepts such offer within 3
         Business Days from the date of such offer) to maintain its percentage
         holding (measured in nominal value) of the issued share capital of the
         Company in the same proportion as existing immediately prior to such
         offer provided that if any Shareholder refuses to accept the offer to
         it of the Proportional Shares pursuant to this Clause, such unaccepted
         Proportional Shares shall then be offered to the other Shareholders (in
         the proportion that the number of Shares then held by each such other
         Shareholder bears to the aggregate number of Shares held by all such
         other Shareholders) which shall be entitled (but not obliged) to accept
         such offer in addition to the offer of the Proportional Shares
         originally offered to it pursuant to this Clause. The procedure, timing
         and manner of any such offer and issue shall from time to time be
         determined by the Board.

7.       FUNDING ARRANGEMENT AND POSSIBLE DILUTION

7.1      CK-X shall or procure any third party to make available up to the end
         of Fiscal Year 2002 a revolving credit facility of up to US$4,000,000
         to the Company to meet its working capital requirements. Such facility
         shall attract interest payable by the Company at the rate of LIBOR plus
         1% per annum and may be used by the Company only upon the approval of
         the Board. Repayment of the loan drawn under the facility shall be
         subject to the order of priority set out in Clause 7.5. If and to the
         extent required, each of CK-X and OTI shall provide its own corporate
         guarantee for up to half (50%) of any such facility used by the
         Company.

7.2      The Shareholders acknowledge and agree that if, subject to Clause 7.1,
         the Company requires additional finance for the business and affairs of
         the Group or for further lending by it to any Subsidiary for the
         business and affairs of such Subsidiary, such additional finance shall
         be met as far as practicable and based on reasonable endeavours by the
         Company by borrowings from banks, financial institutions and other
         similar sources on terms as to interest, repayment and security
         reasonably obtainable in the market and in relation to a borrower
         having similar standing as the Company.

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7.3      7.3.1    If in the opinion of the Board borrowings from a bank,
                  other financial institution or outside source are not
                  available to the Company or not appropriate or feasible on
                  terms and for the purposes as provided in Clause 7.2, the
                  Board may pass a resolution (the "RELEVANT RESOLUTION") for
                  the purpose of this Clause 7.3.1 that the business and affairs
                  of the Company requires additional funds from the Shareholders
                  as additional Shareholders' Loans in any amount (the
                  "ADDITIONAL AMOUNT") specified in such resolution.

         7.3.2    In such event provided in Clause 7.3.1, the Additional Amount
                  shall be allocated by the Board amongst the Shareholders in
                  the proportion that the Shareholders' respective number of
                  Shares then held by the Shareholder bears to the aggregate
                  number of Shares in issue at the relevant time, and subject to
                  Clause 7.4 each Shareholder or its respective nominee shall
                  make loan to the Company in an amount or aggregate amount so
                  allocated (each the "ALLOCATED AMOUNT") in relation to it
                  within 30 days (the "CONTRIBUTION PERIOD") after the Board has
                  passed the Relevant Resolution to make such allocation and/or
                  to call upon the Shareholders to make loans pursuant to this
                  Clause 7.3.2.

7.4 If any Shareholder has any genuine problem in making loan to the Company in the Allocated Amount within the Contribution Period, it may consult and propose any feasible substitute methods of raising finance to such other Shareholders who may consider such methods as they deem appropriate, but this provision shall be without prejudice to the remaining provisions of this Clause 7. Notwithstanding Clause 7.3, if any Shareholder (the "UNWILLING SHAREHOLDER") fails to make loan to the Company in the Allocated Amount pursuant to Clause 7.3, the Shareholder (the "WILLING Shareholder") who is not itself an Unwilling Shareholder shall be entitled at its sole discretion to do any one of the acts respectively described in Clauses 7.4.1, 7.4.2 and 7.4.3:-

7.4.1    to ask the Directors nominated by the Willing Shareholder to
         propose to the Board to cancel the call for the Additional
         Amount altogether; OR

7.4.2    to contribute (by way of loan) the Allocated Amount in
         relation to the Willing Shareholder only or (at the option of
         the Willing Shareholder) to contribute (by way of loan) the
         aggregate of the Allocated Amount in relation to itself and
         all or any of the Allocated Amount in relation to all or any
         of other Unwilling Shareholder(s), and the full amount
         contributed under this Clause 7.4.2 by the Willing
         Shareholder:-

         (a)      shall carry interest at such rate as determined
                  solely by the Willing Shareholder(s) from time to
                  time (but not less than LIBOR plus 2% per annum in
                  any event and not exceeding the interest which would
                  have been chargeable by the banks, other financial
                  institutions or outside sources as if borrowings from
                  such banks, other financial institutions or outside
                  sources had been available and had not been refused
                  by the Board under Clause 7.3.1); and

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(b) shall, together with interest thereon, be called the "NON-DILUTING LOAN"; OR

7.4.3 (a) to contribute (by way of loan)

(i) the Allocated Amount in relation to itself only (which shall carry the same rights and status in all respects as, and be treated as identical in all respects to, the Non-Diluting Loan described in Clause 7.4.2); and

(ii) the Allocated Amount (the "RELEVANT ALLOCATED AMOUNT") (in whole or in part) in relation to any or all of the other Unwilling Shareholder(s) (subject to Clause 7.4.4 in case of competition) (the loans actually contributed by the Willing Shareholder(s) under this paragraph 7.4.3
(a) (ii) is hereinafter called the "DILUTING LOAN"); and

(b) subject to the unanimous approval of the Shareholders, to subscribe for and be issued with such number of new Shares in the Company calculated as "S" in accordance with the following formula (in consideration of and at the par value of such new Shares):-

A
S = ____________________

                                      F x 60%

                  where

                  "A"              means the Diluting Loan;

                  "F"              means the Fair Market Value with the
                                   relevant Valuation Date being the
                                   date of the Relevant Resolution
                                   which leads to the application of
                                   this formula in accordance with
                                   Clauses 7.3 and 7.4; and

7.4.4    In case of competition amongst the Willing Shareholders to
         contribute to the Relevant Allocated Amount, the amount shall
         be allocated amongst the Willing Shareholders in the
         proportion that the number of Shares held by each such Willing
         Shareholder bears to the aggregate number of Shares held by
         the Willing Shareholders respectively at the time immediately
         prior to the Relevant Resolution, and upon such allocation the
         relevant Willing Shareholder shall be entitled to contribute
         its respective share of the Relevant Allocated Amount pursuant
         to and for the purpose of Clause 7.4.3.

7.5 It is hereby agreed and declared between the parties hereto that subject to Clause 4.16, the categories of debts in relation to or arising out of the loans, indebtedness or matters described below shall rank in the following order of priority and their payment or repayment shall follow such order of priority:-

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(a) the Non-Diluting Loan;

(b) the loans made available under Clause 7.1;

(c) any other Shareholders' Loans (including those made under Clause 7.3.2 and the Diluting Loan);

(d) any dividends that may be declared or distributed by the Company.

7.6 The loans made or procured to be made to the Company by each Shareholder pursuant to this Clause 7 shall be in the form of unsecured loans subject to subordination in favour of the bankers or financiers of the Company (if so required by such bankers or financiers) upon such terms and conditions as may reasonably be required from such bankers or financiers and approved by the Board from time to time.

7.7 Subject to Clauses 7.1 and 7.4.2, the loans made to the Company by the Shareholders or their respective nominees pursuant to this Clause 7 shall not carry interest or otherwise shall carry interest from time to time at such rate as shall be agreed between the Company and the Shareholders from time to time.

7.8 Without prejudice and subject to Clause 7.5, the loans made to the Company by the Shareholders or their respective nominees pursuant to this Clause 7 shall be repayable (as to principal and as to interest, where applicable) at such time as the Board may from time to time resolve.

7.9 Until the time for the repayment of the loans made by the Shareholders to the Company under this Clause 7 shall have been determined by the Board, none of the Shareholders or their respective nominees shall have any right to demand or enforce repayment of their respective Shareholders' Loans to the Company made pursuant to this Clause 7.

8. SALE OR PURCHASE IN CASE OF EVENT OF DEFAULT

8.1 Each of the following events shall be an "EVENT OF DEFAULT" in relation to a Shareholder or its Controlling Party if:-

8.1.1    (a)      such Shareholder or Controlling Party commits any
                  material breach of or fails to observe any of its
                  undertakings or obligations in any material respect
                  under any provision of this Agreement and if any such
                  breach or failure is capable of remedy, the same
                  shall not have been fully remedied within 30 days of
                  such Shareholder or Controlling Party (as the case
                  may be) being notified in writing of such breach or
                  failure by any other party to this Agreement; or

         (b)      such Shareholder or Controlling Party stops or
                  suspends payment of its debts to any person or is
                  unable or admits inability to pay its debts to any
                  person as they fall due and such inability of such
                  Shareholder or Controlling Party (as the case may be)
                  has, in the opinion of any other Shareholders, a
                  material adverse effect on the ability of such
                  Shareholder or Controlling Party to perform its
                  obligations or comply with its agreements,
                  undertakings, representations and warranties under
                  this Agreement; or

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8.1.2    such Shareholder or Controlling Party or any other person
         takes any bona fide action or any bona fide legal proceedings
         are commenced or other bona fide steps are taken for:-

         (a)      such Shareholder or Controlling Party to be
                  adjudicated or found bankrupt, wound up or insolvent;
                  or

         (b)      the winding-up, liquidation or dissolution of such
                  Shareholder  or Controlling Party; or

         (c)      the appointment of a liquidator, trustee, receiver,
                  manager, administrator or similar officer of such
                  Shareholder or Controlling Party or of the whole or a
                  material part of the business, undertaking,
                  properties, assets, rights or revenues of such
                  Shareholder or Controlling Party; or

         (d)      any event or circumstance under the law of any
                  relevant jurisdiction in any part of the world having
                  an effect analogous to any matter described in
                  sub-paragraphs (a), (b) or (c) of this Clause 8.1.2,

         and any of such action, legal proceedings or steps is not
         discharged, withdrawn or discontinued within 30 days from the
         taking or commencement thereof.

8.2 A Shareholder in respect of which an Event of Default has occurred is hereinafter called the "DEFAULTING SHAREHOLDER" and any of the other Shareholders in respect of which an Event of Default has not occurred is hereinafter called the "NON-DEFAULTING SHAREHOLDER".

8.3 Upon the occurrence of an Event of Default set out in Clause 8.1.2 (and in addition to and without limiting any other rights, claims and remedies of any of the Shareholders under this Agreement, applicable laws or otherwise), then while such Event of Default continues, any Non-Defaulting Shareholder (if it so elects at its discretion) shall have the right, exercisable by notice in writing given by such Non-Defaulting Shareholder to the Defaulting Shareholder and the Company, to purchase from the Defaulting Shareholder all or any of the Shares (the "PURCHASED SHARES") and all or any portion of the Shareholder's Loan together with accrued interest (if any) thereon (together the "PURCHASED LOAN") of the Defaulting Shareholder as may be specified by the Non-Defaulting Shareholder in the notice for a purchase price equal to 70% of the Fair Market Value of the Purchased Shares and 70% of the face value of the total of the Purchased Loan respectively, which purchase shall be completed at the date of completion to be stipulated in the notice (which date shall not be more than 30 days from the date of the notice) and otherwise in accordance with the provisions of Clause 8.4 (provided that, in the exercise of such right given in this Clause and in case of competition amongst the Non-Defaulting Shareholders to purchase from the Defaulting Shareholder the Purchased Shares or the Purchased Loan, the Purchased Shares or the Purchased Loan (as the case may be) shall be allocated amongst the Non-Defaulting Shareholders in the proportions that the number of Shares held by each such Non-Defaulting Shareholder bears to the aggregate number of Shares held by the Non-Defaulting Shareholders) provided that after completion of such purchase, the Non-Defaulting Shareholder shall immediately take all necessary action to change the corporate name of all members of the Group to such names that do not relate to the Defaulting Shareholder.

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8.4 On the date of completion referred to in Clause 8.3, the relevant party required thereunder to sell or transfer (the "TRANSFEROR SHAREHOLDER") the Shares and the Shareholder's Loan shall deliver to the other relevant Shareholder which exercises the right given thereunder (the "TRANSFEREE SHAREHOLDER") duly executed instruments of transfer of its Shares to be sold to the Transferee Shareholder pursuant to Clause 8.3 together with the relevant certificates in respect of those Shares, duly executed contract notes (if required) in respect thereof subject to the full payment of the applicable price made by the Transferee Shareholder in accordance with Clause 8.3 and deliver or procure the delivery of assignments of the Shareholder's Loan to be sold to the Transferee Shareholder pursuant to Clause 8.3 executed by the Transferor Shareholder in favour of the Transferee Shareholder.

8.5 Upon the occurrence of any Event of Default set out in Clause 8.1.1 (and in addition to and without limiting any other rights, claims and remedies of any of the Shareholders under this Agreement, applicable laws or otherwise), the Non-Defaulting Shareholders and the Defaulting Shareholder shall discuss in good faith among themselves with a view to resolving the dispute or difference on the Event of Default provided that if the Shareholders cannot resolve any such dispute or difference within three (3) months of the occurrence of the Event of Default, any of the Non-Defaulting Shareholders shall be entitled to liquidate the Group and the Defaulting Shareholder shall vote at any meeting of the Shareholders and Directors and take such other steps for the liquidation of the Group pursuant to this Clause 8.5.

8.6 In the event that the Distribution Agreement is terminated for any reason whatsoever, the parties shall take steps to liquidate the Group subject to making appropriate provision or taking appropriate steps for fulfilling any outstanding obligations to the Group's customers, and complying with any outstanding obligations or exercising or pursuing any rights and remedies under the Distribution Agreement.

8.7 Each of the Shareholders hereby undertakes to notify the other Shareholders immediately upon the occurrence of an Event of Default or any event which, with the giving of notice and/or the passage of time and/or the fulfilment of any other condition, would be an Event of Default.

8.8 Without prejudice and subject to Clause 7.5, any repayment in respect of each category of Shareholders' Loans made pursuant to Clause 7 shall be made to all Non-Defaulting Shareholders who have not committed or suffered an Event of Default at the time of intended repayment pro rata to the proportion of such advance or loan made by each of such Non-Defaulting Shareholders at the time of repayment, and only thereafter to the Defaulting Shareholders, pro rata among themselves as aforesaid, mutatis mutandis.

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9. NO SALE, DISPOSAL OR CHARGING OF SHARES

9.1 Prior to Listing, no Shareholder may sell, transfer, dispose of, charge, mortgage, encumber, assign or otherwise create or permit to arise or subsist any Encumbrance over or in respect of all or any of the Shares held by it and the relevant Shareholder's Loan granted by it or any loan to any member of the Group made or to be made by it (such Shares, Shareholder's Loan and loan to any member of the Group being collectively called the "INTEREST") or purport to do so, without the prior written consent of the other Shareholder (except by a transfer or assignment pursuant to Clause 8, 9.2.1 or 18).

9.2      9.2.1    Notwithstanding other provisions in this Clause 9,

                  (a)      CK-X may transfer all its Interest to any direct or
                           indirect  subsidiary  of the Controlling Party of
                           CK-X; and

                  (b)      OTI may transfer all its Interest to any direct or
                           indirect subsidiary of OTI (provided that OTI shall
                           hold not less than 75% of the entire issued and
                           voting share capital of that subsidiary).

         9.2.2    Subject to Clauses 9.1 and 9.2.1, in the event that a
                  Shareholder (the "TRANSFEROR") proposes to transfer or dispose
                  of all (but not less than all) its Interest, it shall give a
                  notice in writing (the "TRANSFER NOTICE") to the Company that
                  it desires to transfer or dispose of the same. The Transfer
                  Notice shall constitute the Company the agent of the
                  Transferor for the sale of the Transferor's Interest at the
                  price as hereinafter provided in this Clause 9 during the SALE
                  PERIOD (as hereinafter defined) to the other Shareholder and
                  shall not be revocable except with the consent of the
                  Directors.

         9.2.3    If within 14 days after the date (the "TRANSFER  NOTICE DATE")
                  on which the Transfer Notice was given, the Transferor and the
                  other Shareholder shall have agreed a price as representing
                  the fair value of the relevant Interest or as being acceptable
                  to the Transferor, then such transfer price shall be the price
                  (subject to the deduction therefrom of any dividend or other
                  distribution declared or made after such agreement and to be
                  retained by the Transferor) as agreed. Otherwise the Company
                  shall upon request by any Shareholder procure the Auditors to
                  determine and certify the Fair Market Value as at the Transfer
                  Notice Date.

         9.2.4    If the price for transfer of the Interest was agreed as
                  aforesaid within 14 days of the Transfer Notice Date, the Sale
                  Period shall commence on the date when such agreement was
                  reached and expire 30 days thereafter. If the price was not so
                  agreed, the Sale Period shall commence on the date on which
                  the Auditors shall have notified the Company of their
                  determination of the Fair Market Value and expire 30 days
                  thereafter.

                                      A-28

         9.2.5    The relevant Interest shall, immediately following
                  determination of the Fair Market Value, be offered by the
                  Company by notice in writing to the other Shareholder for
                  purchase at the Fair Market Value. Such offer shall be open
                  for acceptance at any time within the Sale Period.

9.3 If the offer under Clause 9.2.5 shall not be accepted by the other Shareholder or if the other Shareholder shall fail to complete the purchase of the relevant Interest under Clause 9.2.4 otherwise than by reason of the default of the Transferor, then the Transferor for a period of 30 days thereafter shall be at liberty to transfer or dispose of all of the relevant Interest (but not any part thereof) to any person on a bona fide sale at any price not being less than the Fair Market Value or the agreed price pursuant to Clause 9.2.3 (as the case may be) and provided that any such sale shall not include any terms or conditions whether as to the terms of payment or otherwise which are more favourable to the proposed purchaser than the terms contained in the relevant Transfer Notice provided that no such sale shall be effected to any person which is or whose holding company is a competitor of the other Shareholder or its relevant Controlling Party.

9.4 If the other Shareholder does not accept any offer for sale of the Transferor's Interest under Clause 9.2.5, the other Shareholder shall be entitled to serve a written notice within the Sale Period on the Transferor requiring the Transferor to procure an offer for purchase of all of the Interest held by the other Shareholder to be made by any purchaser to whom the Transferor may transfer its Interest under Clause
9.3. The offer for purchase of all of the Interest of the other Shareholder shall be on the same terms and conditions as those offered by the purchaser to the Transferor under Clause 9.3. Within 5 Business Days from the receipt of the written offer for purchase made by the purchaser to the other Shareholder, the other Shareholder shall be entitled to accept the offer in which event the other Shareholder shall be bound to sell its Interest to the purchaser, such sale to be completed simultaneously with the completion of the purchase of the Transferor's Interest by the purchaser. In the event the other Shareholder does not accept or respond to the purchaser's offer for purchase within the said period of 5 Business Days, the Transferor shall be entitled to proceed with the sale of its Interest to the purchaser under Clause 9.3.

10. FAIR MARKET VALUE

10.1     10.1.1   For purpose of this Agreement and subject to Clauses 10.1.2
                  and 10.1.3, "FAIR MARKET VALUE" means the price per Share,
                  determined by the Auditors, or an investment banker (the
                  "INVESTMENT BANK") as may be appointed by the Board pursuant
                  to this Clause as of the relevant Valuation Date and expressed
                  in terms of money or money's worth, that would be received
                  upon a sale of all of the issued and outstanding Shares in a
                  single transaction determined in an open and unrestricted
                  market between prudent parties, acting at arm's length and
                  under no compulsion to act, and having reasonable knowledge of
                  all relevant facts concerning the Company.

         10.1.2   The determination of the Fair Market Value of the Shares shall
                  be made on the basis that the Company is a "GOING CONCERN"
                  (except to the extent that market, financial, economic,
                  business or other conditions shall dictate different criteria
                  in the reasonable judgement of the Auditors or Investment
                  Banker).

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         10.1.3   There shall be no discount for a minority interest or any
                  premium for control. The value of the Shares shall not be
                  diminished because of the fact that the Shares are not
                  publicly traded.

         10.1.4   The Auditors or Investment Banker shall be entitled to employ
                  a chartered surveyor or any appropriate professional person to
                  assist its determination and shall act hereunder as expert and
                  not as arbitrator and its determination shall, in the absence
                  of fraud or manifest error, be final and binding on the
                  parties.

         10.1.5   The costs and expenses of the Auditors or Investment Banker
                  incurred in connection with the determination of the Fair
                  Market Value in accordance with this Clause 10 shall be borne
                  by the Unwilling Shareholder under Clause 7, the Defaulting
                  Shareholder under Clause 8 or the Transferor under Clause 9
                  (as the case may be) unless otherwise agreed by the parties
                  hereto.

10.2     The Shares and the Shareholder's Loan so transferred under this
         Agreement shall be deemed to be sold by the relevant Transferor
         Shareholder, and the relevant Transferor Shareholder shall so transfer
         them or procure their transfer (as the case may be) as beneficial owner
         free from all Encumbrances but with all rights attaching thereto on and
         after the date of such transfer.

10.3     The Shareholders shall procure the passing of Board resolutions
         approving the registration of the transfer of the Shares and
         acknowledging notice of the assignment of the Shareholder's Loan.

11.      REPRESENTATIONS AND UNDERTAKINGS

11.1     Each of the Controlling Parties hereby irrevocably and unconditionally
         undertakes with each of the other parties to this Agreement that such
         Controlling Party shall ensure and procure that the Shareholder whose
         name is set opposite to the name of such Controlling Party in SCHEDULE
         A will duly and punctually perform and observe all agreements,
         conditions and provisions to be performed and observed by such
         Shareholder in this Agreement.

11.2     Each of the Controlling Parties hereby agrees and undertakes with each
         of the other parties of this Agreement that such Controlling Party
         shall not transfer, sell or otherwise dispose of or create any
         Encumbrance to and in favour of any person its beneficial interest or
         rights (in each case whether direct or indirect) in any of its shares
         in CK-X or OTI (as the case may be) or grant any option or enter into
         any agreement, whether conditional or otherwise, to deal with or
         regarding any of its such interests or rights in any of its shares in
         CK-X or OTI (as the case may be) without the prior written consent of
         the parties hereto provided that notwithstanding any provisions in this
         Clause 11.2,

         11.2.1   the Controlling Party of CK-X may transfer all its interest
                  and rights in any of its shares in CK-X to any of its direct
                  or indirect subsidiary; and

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         11.2.2   the Controlling Party of OTI may transfer all its interest and
                  rights in any of its shares in OTI to any of its direct or
                  indirect subsidiary (provided that OTI shall hold not less
                  than 75% of the entire issued and voting share capital of such
                  subsidiary).

11.3     The Controlling Party of CK-X undertakes to OTI that during the
         continuance of this Agreement, CK-X will remain its direct or indirect
         subsidiary, and the Controlling Party of OTI undertakes to CK-X and the
         Controlling Party of CK-X that during the continuance of this
         Agreement, OTI will, subject to the provisions of Clause 11.2.2, remain
         its direct or indirect subsidiary. If CK-X or OTI (as the case may be)
         ceases to be the direct or indirect subsidiary of its respective
         Controlling Party as aforesaid without the prior written consent of the
         other parties hereto (other than as a result of any transfer or
         disposal permitted under the proviso of Clause 11.2), the provisions
         contained in Clause 8 shall be deemed to be applicable as if CK-X or
         OTI (as the case may be) to which such Controlling Party is related had
         committed an Event of Default set out in Clause 8.1.2 and the
         provisions of Clause 8 shall mutatis mutandis apply to CK-X or OTI (as
         the case may be) on the date of such change.

11.4     Each of CK-X, OTI and their respective Controlling Parties (the
         "REPRESENTOR") represents and warrants to the other parties hereto
         that:-

         11.4.1   it is a corporation duly incorporated and validly existing
                  under the laws of its place of incorporation as a company
                  limited by shares, has power to own its property and assets
                  and to carry on its business as such business is now being
                  conducted and has complied with all material legal
                  requirements relative to such business in its place of
                  incorporation, Hong Kong or elsewhere;

         11.4.2   this Agreement constitutes and, when executed, will constitute
                  valid, effective and legally binding obligations of the
                  Representor enforceable in accordance with its terms; and

         11.4.3   the execution and delivery of the performance of its
                  obligations under, and compliance with the provisions of, this
                  Agreement by the Representor will not:-

                  (a)      contravene any existing applicable law, enactment,
                           rule or regulation or any judgment, decree,
                           authorisation or permit to which the Representor is
                           subject or its memorandum and articles of association
                           or any applicable law; or

                  (b)      conflict with, or result in any breach of any of the
                           terms of, or constitute a default under, any
                           agreement or other instrument or document to which
                           the Representor is a party or is subject or by which
                           its or any of its properties or assets is bound.

                                      A-31

12.      LISTING

12.1     Subject to the decision of the Board, so soon as the criteria for
         Listing on a Recognised Stock Exchange have been satisfied, an
         application may be made by the Company or any holding company formed
         for that purpose for Listing of the Company or any part thereof.
         Subject to unanimous decision of the parties hereto, the shareholding
         structure of the Company may be revised and this Agreement terminated
         or varied to facilitate the Listing.

12.2     For the purpose of this Agreement, "LISTING" includes the granting of a
         listing of and permission to deal in securities on a Recognised Stock
         Exchange, and a "RECOGNISED STOCK EXCHANGE" means the Singapore Stock
         Exchange (Foreign Board), The Stock Exchange of Hong Kong Limited
         (including, without limitation, its Growth Enterprise Market), National
         Association of Securities Dealer (commonly called NASDAQ) or such other
         internationally recognised stock exchange as may be approved by the
         parties hereto for trading or dealing in securities.

13.      UNDERTAKINGS

13.1     Each of the Shareholders hereby undertakes to the other Shareholders:-

         13.1.1   to perform and observe and, so far as it is able to do,
                  procure that the Company shall at all times act in accordance
                  with the provisions of this Agreement and any applicable laws;

         13.1.2   to take all necessary steps to give full effect to the
                  provisions of this Agreement and any applicable laws and
                  regulations including, but not limited to, procuring that any
                  Director it has nominated shall act and vote in accordance
                  with such provisions and requirements;

         13.1.3   to vote in relation to the Shares held by it so as to procure
                  that the provisions of this Agreement and any applicable laws
                  and regulations are observed and performed, notwithstanding
                  any provisions in the Articles;

         13.1.4   (without prejudice to the generality of the foregoing) to
                  exercise and procure that every person for the time being
                  representing it shall exercise or refrain from exercising any
                  rights of voting at any meeting of the Shareholders or of the
                  Board so as to ensure the passing of any and every resolution
                  necessary or desirable so as to procure that the affairs of
                  the Group are conducted in accordance with this Agreement and
                  any applicable laws and regulations and otherwise to give full
                  effect to such provisions and requirements and likewise so as
                  to ensure that no resolution is passed which is inconsistent
                  with such provisions and requirements;

         13.1.5   to procure the resignation of any Director nominated by it if
                  such Director does not support and implement any resolution
                  properly passed by the Board or at any general meeting of the
                  Shareholders of the Company for the proper development and
                  conduct of the business of the Company as contemplated in this
                  Agreement and to give full and complete effect in all respects
                  to the terms and conditions of this Agreement; and

A-32

         13.1.6   generally to use its reasonable endeavours to promote the
                  business and the interests of the Group.

13.2     13.2.1   OTI and its Controlling Party jointly and severally undertakes
                  to the other parties hereto that so long as it is directly or
                  indirectly beneficially interested in any Shares of the
                  Company (and, where OTI or its Controlling Party has committed
                  an Event of Default, for a period of 1 year after the
                  termination of this Agreement in connection with such Event of
                  Default or the Distribution Agreement, whichever shall occur
                  later), none of such Shareholder and its Controlling Party
                  will either on its own account or in conjunction with or on
                  behalf of or through any other person, firm, company or
                  organisation and whether in the capacity of a trustee,
                  nominee, beneficiary or principal (as the case may be) carry
                  on or be engaged, concerned or interested in any manner
                  directly or indirectly, whether as owner, partner,
                  shareholder, director, consultant, agent, employee or
                  otherwise, in any business activity which:-

                  (a)      is competitive with or similar to any business
                           carried on in the Exclusive Territory by the Company
                           or any member of the Group at any time and from time
                           to time in respect of the target market in the
                           Exclusive Territory for which the OTI Products are
                           intended; or

                  (b)     engages in manufacturing, marketing, renting, leasing,
                          selling, offering to sell, supplying, transferring,
                          delivering, distributing, accepting or transmitting
                          orders for or dealing in or with in any manner any
                          product which would be sold in or imported into the
                          Exclusive Territory and is competitive with or similar
                          to the OTI Products in respect of the target market in
                          the Exclusive Territory for which the OTI Products are
                          intended,

                  or cause, assist, enable or ensure any of such activities to
                  be carried out by any third party except otherwise pursuant to
                  the Distribution Agreement (other than as holder of not more
                  than five per cent (5%) of the issued shares or debentures of
                  any company listed on any Recognised Stock Exchange).

         13.2.2   (a)      In this Clause 13.2.2:-

                           "OEM AGREEMENT" means an OEM or similar agreement
                           between any member of the OTI Group (excluding the
                           Group) and one or more third parties (any one of such
                           third parties is called an "OEM PARTY") pursuant to
                           which, inter alia, an OEM Party has the right to
                           manufacture products based on the OTI Products ("OEM
                           PRODUCTS");

                           "OTI GROUP" means the group of companies consisting
                           of OTI, its Controlling Party and any subsidiary or
                           related company of such Controlling Party from time
                           to time;

                                      A-33

                           "NET REVENUES" means gross revenues actually received
                           by OTI Group for Sold OEM Products, excluding, for
                           avoidance of doubt, any sales or other taxes, VAT
                           rebates, levies and duties and like payments and
                           after deduction of the costs of goods sold in
                           relation to such Sold OEM Products as calculated in
                           compliance with international accounting standards;
                           and

                           "SOLD OEM PRODUCTS" means OEM Products sold in the
                           Exclusive Territory other than through the Company or
                           a member of the Group.

                  (b)      (i) OTI hereby undertakes that as long as and to the
                               extent that the Company shall have exclusive
                               rights to distribute the OTI Products in the
                               Exclusive Territory under the Distribution
                               Agreement, OTI shall use its best efforts to
                               persuade the OEM Party or any potential OEM Party
                               to establish cooperation with the Company in the
                               distribution of OEM Products in the Exclusive
                               Territory.

                          (ii) If and only if such cooperation shall not be
                               established, OTI shall credit the Company for
                               7.5% of the Net Revenues for Sold OEM Products
                               known to OTI to have been sold in the Exclusive
                               Territory at any time after the date on which any
                               of the parties has become aware of the sale of
                               the Sold OEM Products in the Exclusive Territory.
                               Such payment shall be made at such time and by
                               such method as may be agreed between CK-X and OTI
                               from time to time after reasonably sufficient
                               time has been allowed to OTI to investigate the
                               matter.

                  (c)      Each of OTI, CK-X and the Company shall notify the
                           other parties as soon as it becomes aware that OEM
                           Products are being sold in the Exclusive Territory
                           not through the Company or any member of the Group.
                           In such event the parties shall cooperate to
                           ascertain, as promptly as possible, the relevant
                           details relating to such sale (it being clarified for
                           the avoidance of doubt that it is foreseen that OTI
                           may not, despite all reasonable efforts having been
                           made to obtain information and clarification from the
                           OEM Party, have the knowledge on whether the OEM
                           Products will be sold in any particular territory,
                           including the Exclusive Territory, or if sold, to
                           what extent they are sold).

         13.2.3   Each and every obligation under this Clause 13.2 shall be
                  treated as a separate obligation and shall be severally
                  enforceable as such and in the event of any obligation or
                  obligations being or becoming unenforceable in whole or in
                  part such part or parts as are unenforceable shall be deleted
                  from this Clause 13.2 and any such deletion shall not affect
                  the enforceability of all such parts of this Clause 13.2 as
                  remain not so deleted.

         13.2.4   The restrictions contained in this Clause 13.2 shall survive
                  for a period of one year after the termination of this
                  Agreement or the cessation of any or all of the Shareholders
                  and their respective Controlling Parties from being
                  beneficially interested in any Shares of the Company (except
                  for the restrictions contained in Clause 13.2.1 which shall be
                  governed by the terms in such Clause 13.2.1 accordingly).

                                      A-34

         13.2.5   While the restrictions contained in this Clause 13.2 are
                  considered by the parties to be reasonable in all the
                  circumstances, it is recognised that restrictions of the
                  nature in question may fail for technical reasons unforeseen
                  and accordingly it is hereby agreed and declared that if any
                  of such restrictions shall be adjudged to be void as going
                  beyond what is reasonable in all the circumstances for the
                  protection of the interests of the parties hereto, the Company
                  or any member of the Group but would be valid if part of the
                  wording thereof were deleted or the periods thereof reduced or
                  the range of activities or area dealt with thereby reduced in
                  scope the said restriction shall apply with such modifications
                  as may be necessary to make it valid and effective.

13.3     13.3.1   Without in any way limiting the rights of CK-X and its
                  Controlling Party generally to undertake any business or enter
                  into any arrangement with any other person similar to the
                  transactions contemplated by this Agreement, CK-X and its
                  Controlling Party hereby jointly and severally undertakes to
                  OTI and the Company that it will use its reasonable efforts:-

                  (a)      to assist the Company to market OTI Products to the
                           affiliated companies of the CK Group on mutually
                           beneficial commercial terms and basis;

                  (b)      to procure its subsidiaries (other than those which
                           are publicly listed companies or otherwise prohibited
                           by virtue of any agreement, arrangement or otherwise)
                           to utilise the services of the Company or purchase
                           OTI Products from the Company on mutually beneficial
                           commercial terms and basis if the business of any
                           such subsidiaries involves the marketing,
                           distribution or sale of products similar to the OTI
                           Products;

                  (c)      to persuade any of the affiliated companies of the CK
                           Group to co-operate and not to compete with the
                           Company in the Company's business of marketing,
                           distribution or sale of OTI Products under the
                           Distribution Agreement; and

                  (d)      to provide the Company with system integration
                           services and organisational facilities (such as
                           office space and manpower) on favourable commercial
                           basis.

         13.3.2   Where it comes to the knowledge of the Controlling Party of
                  CK-X that there is competition or likely to be competition by
                  any of the affiliated companies of the CK Group as described
                  in Clause 13.3.1(c), the parties hereto shall consult with
                  each other to seek ways to avoid or minimise such competition
                  or potential competition on mutually beneficial commercial
                  terms and basis. The steps that the parties may consider shall
                  include, without limitation, the exercise of reasonable
                  endeavours by the Controlling Party of CK-X to seek for the
                  Company the opportunity:-

A-35

(a) to supply OTI Products to such affiliated company of the CK Group ; or

(b) to enter into agreements with third parties on the purchase of products similar to OTI Products which are not otherwise manufactured by OTI.

14. ACCOUNTS

The accounts of the Company and the Subsidiaries shall be kept in accordance with GAAP and be audited annually. The audited accounts and report of the Auditors shall be made available to the Shareholders within fifteen days after they are issued by the Auditors.

15. PREVALENCE OVER ARTICLES

If there is any conflict or inconsistency between the terms and conditions of this Agreement and any provisions in the Memorandum and Articles or the memorandum and articles of association (or analogous bye-laws or analogous constitution) of any other member of the Group, the terms and conditions of this Agreement shall prevail, and in such event and upon the request of CK-X or OTI, the Shareholders shall also procure that such provisions of the Memorandum and Articles or the memorandum and articles of association (or analogous bye-laws or analogous constitution) shall be appropriately amended or deleted to remove such conflict or inconsistency.

16. ACCESSION AGREEMENT

16.1     Each Shareholder hereby undertakes that if it shall transfer any Shares
         and Shareholder's Loan pursuant to Clause 9.2 or Clause 9.3 (as the
         case may be), such Shareholder shall procure that the transferee of
         such Shares and Shareholder's Loan shall have entered into an Accession
         Agreement with the Shareholders (other than the transferring
         Shareholder if it no longer holds any Share and Shareholder's Loan),
         the Company and the Controlling Parties.

16.2     In this Agreement, "ACCESSION AGREEMENT" means an agreement between the
         transferee of Shares and Shareholder's Loan, the Shareholders, the
         Company and the Controlling Parties whereby the transferee of Shares
         and the Shareholder's Loan, the Shareholders (other than the
         transferring Shareholder if it no longer holds any Share and
         Shareholder's Loan), the Company and the Controlling Parties of such
         Shareholders shall unconditionally accede to and agree to observe and
         perform and be bound by the terms and conditions of this Agreement and
         the Controlling Parties of the said transferee shall unconditionally
         guarantee and undertake to and in favour of CK-X the observance,
         compliance and performance of (a) this Agreement (as subject to such
         Accession Agreement) and (b) of the Accession Agreement, by the
         Shareholders (other than CK-X) and all the Controlling Parties of such
         Shareholders.

                                      A-36

16.3     It shall be a condition to any transfer of Shares and Shareholder's
         Loan pursuant to Clause 9.2 that the transferee of the Shares and
         Shareholder's Loan and the Controlling Parties of such transferee shall
         have entered into an Accession Agreement with the Shareholders (other
         than the transferring Shareholder if it no longer holds any Share and
         any Shareholder's Loan), the Company and the Controlling Parties of
         such Shareholders.

17.      DURATION OF AGREEMENT

17.1     Subject to the provisions of this Agreement, this Agreement shall
         continue in full force and effect so long as there is more than one
         Shareholder and each of CK-X and OTI (or their respective permitted
         transferees pursuant to Clause 9.2.1) remain as Shareholders in the
         Company or until such time as all of the Shareholders shall agree in
         writing to its termination.

17.2     The termination of this Agreement shall not prejudice or affect any
         rights or liabilities of any party hereto arising under this Agreement
         prior to such termination.

18.      NON-ASSIGNABILITY

         Subject to the provisions of this Agreement, none of the parties hereto
         shall assign or transfer the benefits or the obligations under this
         Agreement but, subject to aforesaid, the benefits and obligations under
         this Agreement shall be binding on and shall enure for the benefit of
         each party's successors and permitted assigns.

19.      NO PARTNERSHIP

         None of the provisions of this Agreement shall be deemed to constitute
         a partnership between the parties hereto or any of them and save as
         provided herein, none of them shall have any authority to bind any of
         the other parties hereto in any way.

20.      NO WAIVER

20.1     No failure or delay by any party hereto in exercising or enforcing any
         right, power or remedy hereunder shall operate as a waiver thereof nor
         shall any single or partial exercise or enforcement of any such right,
         power or remedy preclude the exercise or enforcement of any other
         right, power or remedy.

20.2     The rights, powers and remedies herein provided are cumulative and not
         exclusive of any rights, powers or remedies provided by law.

20.3     The rights of any party shall not be prejudiced or restricted by any
         indulgence or forbearance extended to any other party and, without
         limiting the foregoing, no waiver by any party in respect of any breach
         of any provision hereof shall operate as a waiver in respect of any
         continuing or subsequent breach of that or other provision hereof.

                                      A-37

21.      SEVERABILITY

         All the provisions hereof are severable and distinct from one another
         and the invalidity, illegality or unenforceability of any such
         provision shall not affect or impair the validity, legality or
         enforceability of any of the other provisions hereof and any such
         invalidity, illegality or unenforceability in any jurisdiction shall
         not affect or impair the validity, legality or enforceability thereof
         in any other jurisdiction.

22.      ENTIRE AGREEMENT

         This Agreement sets forth the entire agreement and understanding
         between the parties in connection with the Company and the matters
         referred to in this Agreement and supersedes and cancels all previous
         letters of intent, correspondences, understandings, arrangements,
         agreements and undertakings (if any) between the parties or any of them
         with respect to the Company and such matters referred to herein,
         whether written or oral.

23.      AMENDMENT

         No provision hereof may be amended or terminated except by an
         instrument in writing and signed by all parties hereto. No breach of or
         default under any of the provisions of this Agreement may be waived or
         discharged unless expressly agreed in writing by all parties hereto.

24.      NOTICES

24.1     All notices, requests, demands and other communications required to be
         given or made pursuant to this Agreement or in connection herewith
         shall be given or made to or upon the parties in writing and delivered
         or sent by facsimile transmission, registered prepaid post (airmail if
         outside the sender's country or territory) or by personal delivery to
         the appropriate party at the address or facsimile number set out below
         against its name:-

A-38

         (a)      To         :   CK-X

                  Address    :   c/o Cheung Kong Infrastructure Holdings Limited
                                 12th Floor, Cheung Kong Center,
                                 2 Queen's Road Central,
                                 Hong Kong

                  Fax Number :   (852) 2524 8829
                  Attention  :   Mr. Kam Hing Lam

         (b)      To         :   OTI

                  Address    :   Z.H.R. Industrial Zone
                                 P.O. Box 32
                                 Rosh Pina 1200 Israel

                  Fax Number :   972-6-6938887
                  Attention  :   Mr. Ronnie Gilboa

         (c)      To         :   The Company

                  Address    :   c/o Cheung Kong Infrastructure Holdings Limited
                                 12th Floor, Cheung Kong Center,
                                 2 Queen's Road Central,
                                 Hong Kong

                  Fax Number :   (852) 2524 8829
                  Attention  :   Mr. Kam Hing Lam

          (d)     To         :   Cheung Kong Infrastructure Holdings Limited

                  Address    :   12th Floor, Cheung Kong Center,
                                 2 Queen's Road Central,
                                 Hong Kong

                  Fax Number :   (852) 2524 8829
                  Attention  :   Mr. Kam Hing Lam

24.2     Any such notice or other communication shall be deemed to have been
         duly served (if delivered personally) when left at the addresses
         mentioned in Clause 24.1 or (if sent by facsimile) one Business Day
         after receipt of the correct transmission report or (in the case of
         local post) on the date which is 2 Business Days after posting or (in
         the case of overseas post) 5 Business Days after despatch Provided that
         if any such notice or other communication is delivered or sent by
         facsimile outside usual business hours it will not be deemed to have
         been given until the commencement of the next succeeding Business Day
         and such notice or other communication shall forthwith be confirmed by
         post. The failure of the addressee to receive such confirmation shall
         not invalidate the relevant notice given by facsimile.

                                      A-39

24.3     Each of the parties shall give notice to the other in accordance with
         this Clause 24 of change or acquisition of any address or telephone
         telex fax or similar number as soon as practicable and in any event
         within 48 hours of such change or acquisition.

25.      COSTS

25.1     Each party shall bear its own legal, accountancy and other costs and
         expenses in connection with the negotiations leading to this Agreement
         and the preparation and execution of this Agreement and any related
         documents.

25.2     The stamp duty (if any) payable in connection with any transfer of the
         Shares or the Shareholder's Loan from any Shareholder to any other
         Shareholder in accordance with Clause 8 of this Agreement shall be
         wholly borne by the Transferor Shareholder.

26.      TIME OF THE ESSENCE

         Time shall be of the essence of this Agreement. Any date or period
         mentioned herein may only be varied or extended by agreement in writing
         between the parties hereto.

27.      COUNTERPARTS

         This Agreement may be executed in any number of counterparts, which
         when taken together shall constitute one and the same instrument and is
         binding on each and every party. Each counterpart so executed shall
         thereafter be exchanged and countersigned to provide each party with a
         fully executed copy of this Agreement.

28.      DISCHARGE

         Subject to any other provisions herein to the contrary, upon any
         transfer by any Shareholder of all its Shares and all its Shareholder's
         Loan in accordance with the provisions of this Agreement (but not
         otherwise), such Shareholder and its Controlling Party shall cease to
         be bound by the provisions herein and the rights of the Shareholder and
         its Controlling Party under this Agreement so far as they relate to the
         Company or the Group shall be extinguished, but without prejudice to
         any rights accrued or any liabilities incurred as a result of any
         previous breach of this Agreement by such Shareholder or by its
         Controlling Party.

                                      A-40

29.      CONFIDENTIALITY

29.1     Each of the parties hereto shall at all times use its best endeavours
         to maintain secret and confidential (and to procure that its respective
         subsidiaries, holding company and affiliated companies and its and
         their respective directors, employees, agents and consultants shall
         maintain secret and confidential) all information obtained by it
         pursuant to this Agreement and prior to and in contemplation of it, its
         shareholding in the Company, the existence and contents of this
         Agreement, all trade secrets, technical data, business, financial and
         all other information of a confidential nature and any information
         which it or they may acquire in the course of this Agreement or in
         relation to the Company, the Subsidiaries or in relation to the
         clients, business or affairs of every other party hereto or of the
         Company or of any of the Subsidiaries whether or not expressly
         identified as confidential and shall not use or disclose such
         information except:

         (a)      with the prior written consent of every other party and/or of
                  the Company or the Subsidiary (as appropriate);

         (b)      in accordance with the order of a court of competent
                  jurisdiction;

         (c)      as may be required of any Shareholder pursuant to any rules
                  imposed by or agreements entered into with any relevant stock
                  exchange or the securities commission;

         (d)      to its legal or professional advisers and its employees,
                  officers, agents and representatives (and in turn their
                  respective legal and professional advisers) for the purposes
                  of protecting its rights in or enforcing or performing this
                  Agreement to whom and to the extent that such disclosure is
                  reasonably necessary for the purpose of this Agreement (and
                  which advisers, employees, officers, agents and
                  representatives (and in turn their respective legal and
                  professional advisers) shall be made aware of and required to
                  acknowledge these confidentiality arrangements in writing);

         (e)      where such information is already in the public domain without
                  any breach by any of the parties hereto of this Clause.

29.2     Without prejudice to the aforesaid, upon the signing of this Agreement,
         the parties hereto shall also execute and enter into the MCA. In case
         of direct conflict (but not otherwise) between the provisions of this
         Clause 29 and the MCA in relation to property which forms part of the
         OTI Intellectual Property or the CK Group Proprietary Information and
         Rights, the provisions of the MCA shall prevail.

29.3     Each of the parties may, jointly or individually, issue a press release
         on their cooperation under this Agreement and the Distribution
         Agreement, after consulting with the other parties as to the contents
         of such press release.

30.      GOVERNING LAW AND JURISDICTION

30.1     This Agreement shall be governed by and construed in all respects in
         accordance with the laws of England. Each party hereto irrevocably
         agrees that the courts of Hong Kong shall have non-exclusive
         jurisdiction to hear and determine any suit, action or proceeding, and
         to settle any disputes which may arise out of or in connection with
         this Agreement and for such purposes irrevocably submits to the
         non-exclusive jurisdiction of such courts.

                                      A-41

30.2     Nothing contained in this Clause 30 shall limit the right of any party
         hereto to take legal or other proceedings against any other party in
         any court of competent jurisdiction, nor shall the taking of
         proceedings in one or more jurisdictions preclude the taking of
         proceedings in any other jurisdiction, whether currently or not to the
         extent permitted by the law of such other jurisdiction.

30.3     Each of CK-X and its Controlling Party hereby severally appoints CHEUNG
         KONG CAPITAL LIMITED of 12th Floor, Cheung Kong Center, 2 Queen's Road,
         Central, Hong Kong and each of OTI and its the Controlling Party hereby
         severally appoints FIRMLEY COMPANY LIMITED of 21st Floor, Edinburgh
         Tower, The Landmark, Central, Hong Kong respectively as its or their
         agent to receive and acknowledge on its or their behalf service of any
         writ, summons, order, judgment or other notice of legal process in Hong
         Kong. If for any reason any agent named above (or its respective
         successor) no longer serves as agent of its principal for this purpose
         the relevant Shareholder and Controlling Party shall promptly appoint a
         successor agent and notify the other parties hereto thereof. Each
         Shareholder and Controlling Party agrees that any such legal process
         shall be sufficiently served on it if delivered to its agent for
         service at its address for the time being in Hong Kong whether or not
         such agent gives notice thereof to its principal.

IN WITNESS whereof this Agreement has been executed by the parties the day and year first above written.

The Shareholders

SIGNED  by                                            )
                                                      )
                                                      )
for and on behalf of                                  )
OCEAN WONDER LIMITED                                  )
in the presence of:-                                  )


The Company

SIGNED  by                                            )
                                                      )
                                                      )
                                      A-42

for and on behalf of                                  )
ON TRACK INNOVATIONS LIMITED                          )
 in the presence of:-                                 )


The Controlling Parties

SIGNED  by                                            )
                                                      )
                                                      )
for and on behalf of                                  )
SAILOR  GROUP LIMITED (to be                          )
renamed OTI ASIA PACIFIC LTD.)                        )
in the presence of:-                                  )



SIGNED  by                                            )
                                                      )
                                                      )
for and on behalf of                                  )
ON TRACK INNOVATIONS LIMITED                          )
in the presence of:-                                  )



SIGNED  by                                            )
                                                      )
                                                      )
for and on behalf of                                  )
CHEUNG KONG INFRASTRUCTURE                            )
HOLDINGS LIMITED                                      )
in the presence of:-                                  )

A-43

SCHEDULE A

THE CONTROLLING PARTIES

Name of Controlling Party                            Name of Shareholder

1.       ON TRACK INNOVATIONS                        ON TRACK INNOVATIONS
         LTD. (SEE NOTE)                             LTD. (SEE NOTE)


2.       CHEUNG KONG INFRASTRUCTURE                  OCEAN WONDER LIMITED
         HOLDINGS LIMITED

Note: As long as OTI is a Shareholder, it shall be deemed for the purposes of this Agreement also as its Controlling Party. If OTI shall use its rights under this Agreement to transfer and assign its Interest in the Company to a subsidiary, OTI shall be deemed to be the Controlling Party of such subsidiary.

A-44

SCHEDULE B

FORM OF DISTRIBUTION AGREEMENT

B-1

SCHEDULE C

OTI INTELLECTUAL PROPERTY

PART 1 - PATENT APPLICATIONS AND GRANTED PATENTS

The first group of OTI patents relates to OTI's core technology, specifically the non-contact transmission of data between a station and a portable data carrier (smart card) using matched antenna circuits. Patents have been granted in the United States, Australia, South Africa, Israel, Europe, Canada and Singapore.

Table I: Core OTI Patent--Method for the Non-Contact Transmission of Data

----------------------------------------------------------------------------------------------------------
                                  Filed
                                                             Patent
 Country                 Number            Date              Number             Date          Status
----------------------------------------------------------------------------------------------------------
 U.S.                    903942            6/7/92            5241160            13/8/93       Granted
 Israel                  100451            20/12/91           100451            10/10/96      Granted
 Canada                 2053830            23/12/91          2058330             8/1/99      Allowance
 Singapore             9607564/3           23/12/91         9607564/3           28/9/98       Granted
 Australia              90011/91           24/12/91           640843             8/1/94       Granted
 South Africa           91/10164           27/12/91          91/10164           30/9/92       Granted
 Hong Kong             97101652.1          12/8/97                                            Pending
     EUROPE            91122099.4          23/12/91         0 492 569           4/11/98       Granted
Germany                                       Europe     691-30-447-05-08       04/11/98      Granted
Italy                                         Europe        192090E/99          13/1/99       Granted
Austria                                       Europe        0 492 569            2/2/99       Granted
Denmark                                       Europe        P199801745          21/1/99       Granted
Sweden                                        Europe        0 492 569           26/1/99       Granted
Netherlands                                   Europe        0 492 569           4/11/98       Granted
Greece                                        Europe        990400178           18/1/99       Granted
Switzerland                                   Europe        0 492 569           4/11/98       Granted
Belgium                                       Europe        0 492 569           4/11/98       Granted
Spain                                         Europe      ES 2125860 T3         4/11/98       Granted
France                                        Europe        0 492 569           4/11/98       Granted
UK                                            Europe
Luxembourg                                    Europe
----------------------------------------------------------------------------------------------------------

C-1

EASY PARKTM PATENT Founded in 1991, Easy Park Ltd. is a subsidiary of OTI dedicated to the marketing of parking applications of OTI's technology. At present, OTI owns 92% of Easy ParkTM. Easy ParkTM is also the owner of a series of patents related to the application of OTI's core technology in parking systems. These patents seek protection against the use of other smart card technologies in parking applications. Patents have been granted in the United States, South Africa and Israel.

Table II: Easy ParkTM Patents

--------------------------------------------------------------------------------------------------------
                            PATENT APPLICATION          PATENT
COUNTRY             NUMBER              DATE            NUMBER              DATE           STATUS
--------------------------------------------------------------------------------------------------------
U.S.                916,389             20/7/92         5,339,000           16/8/94        Granted
Europe (EPC)        92 112339.4         20/7/92                                            Pending
Israel              98880               18/7/91         98880               6/10/96        Granted
South Africa        92/5434             20/7/92         925,434             28/4/93        Granted
--------------------------------------------------------------------------------------------------------

PATENTS FILED

MULTICARD - ANTENNA INTERFACE CONTACT AND CONTACTLESS SMART CARD This patent was filed in Israel in December 1996 and to achieve worldwide coverage in December 1997. This technology enables simultaneous contact and contactless bi-directional communication between a smart card with a single microprocessor utilizing a single operating system and reading device. It is the only combined card commercially available today where both contact and contactless modes operate with a single microprocessor sharing an operating system and common security features

Table III: Antenna Interface #1 Patents

--------------------------------------------------------------------------------------------------------
                            PATENT APPLICATION          PATENT
COUNTRY             NUMBER              DATE            NUMBER              DATE           STATUS
--------------------------------------------------------------------------------------------------------
Israel              119943              31/12/96                                           Pending
U.S.                09/001,240          29/12/97                                           Pending
PCT                  PCT/IL97/00436     29/12/97                                           Pending
Canada                  2,276,132       29/12/97                                           Pending
Australia               78930/98        29/12/97                                           Pending
--------------------------------------------------------------------------------------------------------

ANTENNA INTERFACE #2 PATENT This patents was filed in Israel at the end of 1997 describe a means for using a single microprocessor and EEPROM for operation of both a contact and contactless smart card. OTI's EYECON(TM) microprocessor-based MultiCard uses this patent to offer both contact and contactless interfaces in the same card realizing in a unique manner ISO14443 type A and Type B contact less communication protocols

Table IV: Antenna Interface #2 Patents

--------------------------------------------------------------------------------------------------------
                            PATENT APPLICATION          PATENT
COUNTRY             NUMBER              DATE            NUMBER              DATE           STATUS
--------------------------------------------------------------------------------------------------------
Israel              122841              31/12/97                                           Pending
U.S.                09/221160           29/12/98                                           Pending
PCT                 PCT/IL98/00624      28/12/98                                           Pending
--------------------------------------------------------------------------------------------------------

C-2

LONG RANGE CONTACTLESS TECHNOLOGY This patent covers the technology to receive and transmit data within several metres, utilizing an active card which emanates inductive fields. Applications of this patent include hygiene control systems, toll road schemes and remote supervision for car parking.

Table V: Long Range Contact less patents

--------------------------------------------------------------------------------------------------------
                            PATENT APPLICATION          PATENT
COUNTRY             NUMBER              DATE            NUMBER              DATE           STATUS
--------------------------------------------------------------------------------------------------------
Israel              123949              3/4/98                                             Pending
U.S.                09/093,390          9/6/98                                             Pending
PCT                 PCT/IL99/00180      29/3/99                                            Pending
Publication         WO 99/52061         14/10/99                                           Pending
--------------------------------------------------------------------------------------------------------

ANTENNA MODULE This patent describes a mode to transform existing contact smart card technologies into a contactless smart card device. OTI has developed an integrated chip/antenna module of the same dimensions as the chip/contact module used in a contact card and can therefore be inserted in standard contact card cores. This permits the manufacture of contactless cards using existing manufacturing capacity for contact cards, yielding significant cost savings.

Table VI: Antenna Module Patents

--------------------------------------------------------------------------------------------------------
                            PATENT APPLICATION          PATENT
COUNTRY             NUMBER              DATE            NUMBER              DATE           STATUS
--------------------------------------------------------------------------------------------------------
Israel              122250              19/11/97                                           Pending
PCT                 PCT/IL98/00543      9/11/98                                            Pending
--------------------------------------------------------------------------------------------------------

SECURED APPLICATION MODULE ("SAM") The SAM patent covers a method used to separate the key elements of the electronics and information security in a smart card reader from the non-secured part of the reader. The chip is physically secured such that access is prohibited, while the non-secure area of the chip remains accessible to operators for maintenance and upgrading. For example, the chip or SAM is encased in concrete in a bus station, while the rest of the contact/contactless card technology is available for upgrading. It is within the SAM that the data is protected, regardless of theft or damage to the reader.

Table VII: Contact less SAM Patents

--------------------------------------------------------------------------------------------------------
                            PATENT APPLICATION          PATENT
COUNTRY             NUMBER              DATE            NUMBER              DATE           STATUS
--------------------------------------------------------------------------------------------------------
      Israel        124008              8/4/98                                             Pending
        PCT         PCT/IL99/00192      6/4/99                                             Pending
        USA         09/287,117          7/4/99                                             Pending
--------------------------------------------------------------------------------------------------------

"SUPER SMART CARD" - THIN CLIENT SMART CARD This patent describes future generations of smart card technology incorporating input and display mechanisms. This type of smart card would include an internal source of energy.

Table VIII:Super Smart Card Patents

--------------------------------------------------------------------------------------------------------
                            PATENT APPLICATION          PATENT
COUNTRY             NUMBER              DATE            NUMBER              DATE           STATUS
--------------------------------------------------------------------------------------------------------
      Israel        124386              8/5/98                                             Pending
        PCT         PCT/IL99/00220      23/4/99                                            Pending
--------------------------------------------------------------------------------------------------------

C-3

"CAPLESS" FUEL INLET CAP This patent covers the design of a fuel inlet cap that provides for capless operation with OTI's GMS system vehicle tag. The OTI vehicle tag is incorporated into the capless fuel inlet cap, facilitatating do-it-yourself customer installation of the system, which is simply screwed on in place of the existing fuel cap.

Table IX: "Capless" Cap Patents

--------------------------------------------------------------------------------------------------------
                            PATENT APPLICATION          PATENT
      COUNTRY       NUMBER              DATE            NUMBER              DATE           STATUS
--------------------------------------------------------------------------------------------------------
      Israel        124424              11/5/98                                            Pending
        PCT         PCT/IL99/00219      23/4/99                                            Pending
........................................................................................................
        USA         09/306,407          6/5/99                                             Pending
--------------------------------------------------------------------------------------------------------

SMART TAG WRIST The Company has filed for a patent covering applications where OTI contactless technology is embedded in a wrist watch design.

Table X: Smart Tag Wrist

--------------------------------------------------------------------------------------------------------
                            PATENT APPLICATION          PATENT
      COUNTRY       NUMBER              DATE            NUMBER              DATE           STATUS
--------------------------------------------------------------------------------------------------------
      Israel        125613              11/8/98                                            Pending
--------------------------------------------------------------------------------------------------------

PART 2 - DESCRIPTION OF KNOW-HOW, ETC.

Know-how, technologies and/or trade secrets that support multiple contactless and dual interface contact/contactless (for the purpose of transiting to contactless technology described below) smart card applications utilising a multi-functioned microprocessor installed in a card and the process of magnetic field induction for transmission of energy and data between a card and a reader.

At the reader level, OTI's principal technologies enable:-

* a smart transceiver microprocessor based to communicate with a contactless microprocessor based smart card that can be programmed repeatedly and can support multi applications;

* a single reader to support up to eight different antennae, eliminating the need for a costly installation of a large number of readers to support multiple transactions;

* the antenna of a reader, which interfaces on a contactless basis with the smart card, to be installed at a distance of up to 35 meters from the electronic circuitry of the reader, thus reducing maintenance costs, risk of vandalism and electrical interference and providing the ability to implement contactless technology in potentially explosive environments such as gasoline stations;

* communication with the smart card is typically between 2 and 10 cm dependent on antenna parameters and power requirements;

C-4

* a re-configuration of the antennae and cables supporting the smart card system without the need to re-tune the entire system.

At the smart card level, OTI's principal technologies include:-

* a dual interface solution, which enables contact/contactless operation on a single card using the same microprocessor for both the contact and contactless interfaces;

* specialized methods of manufacturing contactless and dual interface contact/contactless smart cards in a manner similar to contact smart cards, thereby reducing the higher cost typically associated with producing contactless cards.

PART 3 - SERVICE MARK AND TRADE MARK

TRADEMARKS Trademark applications have been filed in Israel for the name "OTI" "Easy Park(TM)" and the mark "EYECON(TM)" as well as "OTI Insight". The Company is filing priority applications for use of these trademarks in the United States and Europe.

Table I:OTITM

--------------------------------------------------------------------------------------------------------
                            APPLICATION                 Registered
COUNTRY             NUMBER              DATE            NUMBER              DATE           STATUS
--------------------------------------------------------------------------------------------------------
        USA                                                                                Registered
--------------------------------------------------------------------------------------------------------

Table II: Easy ParkTM

--------------------------------------------------------------------------------------------------------
                            APPLICATION                 Registered
COUNTRY             NUMBER              DATE            NUMBER              DATE           STATUS
--------------------------------------------------------------------------------------------------------
Canada              72844-84                            854249              12/8/99        Granted
--------------------------------------------------------------------------------------------------------

C-5

SCHEDULE D

FORM OF MUTUAL CONFIDENTIALITY AGREEMENT

MUTUAL CONFIDENTIALITY AGREEMENT

Made and signed as of the ______ day of February, 2000

BETWEEN

ON TRACK INNOVATIONS LTD., of Z.H.R. - Industrial Zone, Rosh-Pina 12000 Israel
("OTI")

AND

CHEUNG KONG INFRASTRUCTURE HOLDINGS LIMITED of 12/F, Cheung Kong Center,
2 Queen's Road Central, Hong Kong ("CKI")

AND

SAILOR GROUP LIMITED (to be renamed as OTI ASIA PACIFIC LTD.), of P.O. Box 957,

                       Offshore Incorporations Centre, Road Town,
                       Tortola, British Virgin Islands ("OTIP")

WHEREAS           OTI has developed and is the sole owner of certain proprietary
                  technology relating in particular to contact/contactless and
                  contactless smart cards and readers of which it is the sole
                  owner ("OTI'S TECHNOLOGY") as described in paragraph (c) in
                  the definition of "OTI INTELLECTUAL PROPERTY" in Clause 1.1 of
                  the Shareholders Agreement relating to OTip dated the date
                  hereof (the "SHAREHOLDERS AGREEMENT"); and

WHEREAS           CKI is the sole owner of certain trade secrets relating to its
                  business ("CKI'S TRADE Secrets") as described in the
                  definition of "CK GROUP PROPRIETARY INFORMATION AND RIGHTS" in
                  Clause 1.1 of the Shareholders Agreement; and

WHEREAS           CKI and OTI have established OTip and are its existing
                  shareholders, and OTip has entered into a distribution
                  agreement with OTI dated the date hereof, (the "DISTRIBUTION
                  AGREEMENT") pursuant to which it shall act as a distributor of
                  OTI in the Asia Pacific region; and

WHEREAS           CKI and OTI, as shareholders of OTip shall be exposed to
                  confidential information of OTip, and OTip, as a distributor
                  of OTI, shall be exposed to confidential information of OTI;

D-1

NOW THEREFORE THE PARTIES HAVE AGREED AS FOLLOWS:

1. In this Agreement:

1.1 The term "DISCLOSER" means a party to this Agreement disclosing Confidential Information to any of the other parties.

1.2 The term "RECIPIENT" means any party to this Agreement receiving Confidential Information from any of the other parties.

1.3 The term "CONFIDENTIAL INFORMATION" means any and all information relating to the Discloser's proprietary technology or business made available by the Discloser to the Recipient including, without limitation, information, data, know-how, formulae, tests, drawings, specifications, applications, designs and trade secrets, information and data relating to the Discloser's products, design methodology, engineering and manufacturing processes and related equipment, suppliers, sales, customers, business operations and plans, financial situation, members, employees and investors and any notes, memoranda, summaries, analyses, compilations or any other writings relating thereto prepared by the Discloser or the Recipient or on such party's behalf, provided that such information is in writing or other tangible form and is clearly marked as "proprietary" or "confidential" when disclosed to the Recipient; or if such information is not in tangible form, that (i) such information is identified as "proprietary" or "confidential" when disclosed and summarized in a written document which is marked "proprietary" or "confidential" and is delivered to the Recipient within 30 (thirty) days after date of disclosure; or (ii) is deemed "proprietary" or "confidential" if such information is known or reasonably should be known by the Recipient to be "confidential" or "proprietary". Without derogating from the generality of the above, all information, data and know-how relating to OTI's Technology shall be deemed Confidential Information of OTI, and all information, data and know-how relating to CKI's Trade Secrets shall be deemed Confidential Information of CKI.

2. Recipient undertakes to maintain as secret and fully confidential:

2.1 all the Discloser's Confidential Information obtained by the Recipient pursuant to this Agreement and prior to and in contemplation of it, and not to disclose, divulge or use same, directly or indirectly, save exclusively for the purposes for which it was disclosed to the Recipient.

2.2 OTI's and CKI's shareholding in OTip and the existence of this Agreement or of any other agreement between the parties, or any details relating to the Discloser, its business or its Confidential Information, or the fact that negotiations or discussions between the parties have taken or are taking place, or the terms and conditions on which any possible arrangements or agreements between the parties may take or might have taken place, unless otherwise agreed in writing between the parties.

3. The restrictions of use and disclosure set forth in this Agreement shall not apply to any Confidential Information which, based on proof by the Recipient,

D-2

3.1 the Discloser has approved for disclosure in advance and in writing;

3.2 was already known to the Recipient at the time such information was received from the Discloser;

3.3 was already or became available to the general public, through no breach of any confidentiality undertaking towards the Discloser;

3.4 was at any time lawfully obtained by the Recipient from any other person, firm or company having no obligation not to disclose it.

3.5 is required to be disclosed by the Recipient by applicable law, regulation or court order, or pursuant to any rules imposed by or agreements entered into with any relevant stock exchange or the securities commission; provided that the Recipient shall first give prior prompt written notice to the Discloser of the requirement for such disclosure and co-operate through all reasonable and legal means, at the Discloser's expense, in any attempts by the Discloser to protect or otherwise restrict disclosure of such Confidential Information.

4. In order to secure the confidentiality of the Confidential Information the Recipient shall:

4.1 procure that its respective subsidiaries, holding company and affiliated companies and their directors, employees, agents and consultants shall maintain secret and confidential the Confidential Information of the Discloser;

4.2 safeguard the Confidential Information of the Discloser with at least the same degree of care as it uses for its own Confidential Information, and without derogating from the generality of the above, shall keep the Confidential Information in a safe and separate place;

4.3 limit access to the Confidential Information only to those of the Recipient's directors, employees, agents and consultants to whom disclosure is necessary for the purposes hereof provided that all such directors, employees, agents and consultants which may have access to the Confidential Information are under a confidentiality undertaking towards the Recipient to maintain the Confidential Information as fully confidential and not to disclose, divulge or use same, directly or indirectly, but for the purposes of carrying out their duties towards the Recipient. At the Discloser's request, the Recipient shall provide the Discloser with an accurate list of all of its directors, employees, agents and consultants which had or have access to the Confidential Information. For avoidance of doubt, the Recipient will assume responsibility for any breach of the terms of this Agreement by the Recipient's directors, employees, agents and consultants, to whom disclosure of the Confidential Information is permitted and made by the Recipient under this Agreement.

5. At the Discloser's request, Recipient shall forthwith return to the Discloser all Confidential Information in tangible form and not retain any copies of it, including copies made by electronic forms save and except to the extent where it is necessary for the Recipient to perform its obligations under the Shareholders Agreement and Distribution Agreement.

D-3

6. The disclosure of Confidential Information or its use hereunder shall not be construed in any way as granting any party any right or license with respect to the Confidential Information (or, in particular, to OTI's Technology or CKI's Trade Secrets) other than the right to use Confidential Information strictly for the purposes set forth in the preamble of this Agreement.

7. Each party hereto reserves all rights in any inventions, patents, copyrights, designs, and any other intellectual property invented or devised by it in relation to Confidential Information of such party.

8. This Agreement shall survive the termination of the Shareholders Agreement or Distribution Agreement (whichever shall later occur) and shall be valid for a period of five years after such termination.

9. It is agreed that the unauthorized disclosure or use of any Confidential Information will cause immediate or irreparable injury to the Discloser, and that the Discloser cannot be adequately compensated for such injury in monetary damages. Each party therefore acknowledges and agrees that, in such event, the Discloser shall be entitled to any temporary or permanent injunctive relief necessary to prevent such unauthorized disclosure or use, or threat of unauthorized disclosure or use.

10. No party shall be entitled to assign its rights and obligations hereunder without the other parties' prior written approval.

11. If any condition, term or covenant of this Agreement shall at any time be held to be void, invalid or unenforceable, such condition, covenant or term shall be construed as severable and such holding shall attach only to such condition, covenant or term and shall not in any way affect or render void, invalid or unenforceable any other condition, covenant or term of this Agreement, and this Agreement shall be carried out as if such void, invalid or unenforceable term were not embodied herein.

12. The laws of England shall govern this Agreement.

---------------------------------- ---------------------------------------------
     On Track Innovations Ltd.      CHEUNG KONG INFRASTRUCTURE HOLDINGS LIMITED

 by: __________________             by: __________________
 title: _________________           title: _________________


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

Sailor Group Limited (to be renamed OTI ASIA
PACIFIC LTD.)
by: __________________
title: _________________

D-4

SCHEDULE E

FRAMEWORK OF THE PROJECTED ANNUAL BUSINESS PLAN OF THE COMPANY FOR 2000-2003

See attachment under separate cover

SCHEDULE F

DEFINITION OF GROSS PROFIT


SCHEDULE G

FORM OF ASSIGNMENT

Dated the day of 2000

[ ] LIMITED

and

SAILOR GROUP LIMITED (to be renamed OTI ASIA PACIFIC LTD.)


ASSIGNMENT OF PROCEEDS


WILKINSON & GRIST

SOLICITORS AND NOTARIES

HONG KONG

G-1

THIS ASSIGNMENT is dated the day of 2000

BETWEEN:-

(1) [ ] LIMITED, a company incorporated in Hong Kong whose registered office is at [ ], Hong Kong (the "ASSIGNOR"); and

(2) SAILOR GROUP LIMITED (to be renamed OTI ASIA PACIFIC LTD.), a company incorporated in the British Virgin Islands whose registered office is at P.O. Box 957, Offshore Incorporations Centre, Road Town, Tortola, British Virgin Islands (the "ASSIGNEE").

RECITALS:-

(A) The Assignor is [a] [an indirectly] wholly owned subsidiary of ON TRACK
INNOVATIONS LIMITED ("OTI").

(B) OTI is obliged under a shareholders agreement in relation to the Assignee entered into between OTI, the Assignee and other parties therein dated February 2000 to procure the Assignor to execute in favour of the Assignee an assignment of all monies, income and proceeds (the "PROCEEDS") which the Assignor is entitled to receive under any contracts for supply of goods and/or services to its customers (the "RELEVANT CONTRACTS") to which the Assignor is a party.

NOW THIS ASSIGNMENT WITNESSES AS FOLLOWS:-

1. ASSIGNMENT

1.1 Assignment

In consideration of HK$1.00 paid by the Assignee to the Assignor (receipt thereof is hereby acknowledged by the Assignor), the Assignor as beneficial owner of the Proceeds hereby assigns to the Assignee:-

1.1.1    all its rights, title, interest and benefit to and in the
         Proceeds; and

1.1.2    all other rights and benefits whatsoever accruing (whether now
         or in the future) to the Assignor, in its capacity as a party
         to all Relevant Contracts, whether present or future.

1.2 Notice to the other parties to the Relevant Contracts

The Assignor shall forthwith upon the request of the Assignee give notice of this Assignment in such form as may be required by the Assignee to all relevant parties (the "RELEVANT PARTIES") to the Relevant Contracts who have an obligation thereunder to make payment to the Assignor, and shall pay or procure that the Relevant Party will pay all the Proceeds becoming due to the Assignor thereafter directly to the Assignee or as the Assignee shall direct and if the Assignor shall have received any such Proceeds, the Assignor shall forthwith pay the same to the Assignee or as the Assignee shall direct.

G-2

2. The Assignor represents and warrants to the Assignee that:-

2.1. no charge or other encumbrance exists over or in respect of the Relevant Contracts or the Assignor's rights thereunder; and

2.2 (unless otherwise expressly disclosed to the Assignee) each of the Relevant Contracts currently subsisting is valid and in full force and effect and is not void or voidable.

3. UNDERTAKINGS

3.1 General Undertakings

The Assignor undertakes and agrees with the Assignee throughout the continuance of the Relevant Contracts that the Assignor shall, unless the Assignee otherwise agrees in writing:-

3.1.1    promptly and diligently observe and perform all the
         obligations on its part contained in any Relevant Contract;

3.1.2    take all necessary steps to procure the due performance by the
         Relevant Parties of their respective obligations under the
         Relevant Contracts including the institution and maintaining
         of all such proceedings in respect of breaches by any Relevant
         Party of any provision of the Relevant Contracts as may be
         necessary to ensure that the interests of the Assignee are not
         adversely affected;

3.1.3    take all steps which may be necessary or expedient to keep the
         Relevant Contracts in full force and effect and preserve or
         protect the interests of the Assignor and the Assignee in the
         Proceeds;

3.1.4    do or permit to be done every act or thing which the Assignee
         may from time to time require for the purpose of enforcing the
         rights of the Assignee hereunder, and act and exercise its
         rights under the Relevant Contracts in a manner consistent
         with its obligations hereunder;

3.1.5    not create or attempt or agree to create or permit to arise or
         exist any charge or encumbrance over all or any part of the
         Relevant Contracts or any interest therein or otherwise
         assign, deal with or dispose of all or any part of the
         Relevant Contracts (except under or pursuant to this
         Assignment);

                             G-3

3.1.6    not, without the prior written consent of the Assignee, waive,
         release, settle, compromise or abandon any claim in respect of
         the Proceeds or under the Relevant Contracts or do or omit to
         do any other act or thing whereby the recovery in full of any
         amounts in respect of the Proceeds as and when they become
         payable may be impeded;

3.1.7    not do or cause or permit to be done anything which may in any
         way depreciate, jeopardise or otherwise prejudice the value of
         the Assignee's interest hereunder;

3.1.8    not amend, modify or vary or agree to amend, modify or vary
         any provisions of any Relevant Contract so as to result in an
         adverse effect on the interests of the Assignee under this
         Assignment; and

3.1.9    promptly and diligently notify the Assignee of any default by
         the Assignor or by any Relevant Party under any Relevant
         Contracts.

3.2 Non-Assignment, etc.

The Assignor hereby further undertakes with the Assignee that the Assignor will not without the prior consent in writing of the Assignee:-

3.2.1    assign, transfer, charge, mortgage, pledge or create or permit
         to arise any third party rights or encumbrance whatsoever over
         any rights interest or benefits of the Assignor under any
         Relevant Contract to anyone other than to the Assignee herein;

3.2.2    take or omit to take any action the taking or omission of
         which might result in any alteration or impairment of any
         Relevant Contract or this Assignment or of any of the rights
         created by any Relevant Contract or this Assignment to an
         extent which will adversely affect the interests of the
         Assignee under this Assignment.

4. ASSIGNOR'S LIABILITY

Notwithstanding anything herein contained to the contrary, the Assignor shall remain liable under all Relevant Contracts to perform all the obligations assumed by it thereunder and the Assignee shall not be under any obligation or liability thereunder by reason of this Assignment or anything arising therefrom nor shall the Assignee be required to assume or be under any obligation in any manner to perform or fulfil any obligation of the Assignor under or pursuant to any Relevant Contract or to make any payment thereunder or to enforce against any Relevant Party any term or condition of any Relevant Contract or to make any enquiries as to the nature or sufficiency of any payment received by the Assignee by virtue of this Assignment.

5. GOVERNING LAW

This Assignment shall be governed by and construed in all respects in accordance with the laws of the Hong Kong Special Administrative Region of the People's Republic of China.

G-4

SEALED with the COMMON SEAL of                       )
                                                     )
the Assignor and SIGNED by                           )
                                                     )
                                                     )
                                                     )
for and on its behalf in the presence of:-           )

                                      G-5

                      Dated as of the               day of February 2000.

PARTIES :

1. [OCEAN WONDER LIMITED ("CK-X")

2. ON TRACK INNOVATIONS LTD. ("OTI")

(CK-X AND OTI ARE TOGETHER HEREINAFTER REFERRED
TO AS THE "SHAREHOLDERS" AND EACH A "SHAREHOLDER")

3. SAILOR GROUP LIMITED (TO BE RENAMED OTI ASIA PACIFIC LTD.) (THE "COMPANY")

4. THE PERSONS LISTED IN THE SCHEDULE A HERETO (HEREINAFTER TOGETHER REFERRED TO AS THE "CONTROLLING PARTIES" AND EACH A "CONTROLLING PARTY")


SHAREHOLDERS AGREEMENT

IN RELATION TO

OTI ASIA PACIFIC LTD.


WILKINSON & GRIST                     BACH, ARAD, SCHARF & CO.
    6TH FLOOR                              MICRODAF HOUSE
PRINCE'S BUILDING                         2 HASHALOM ROAD
   CHATER ROAD                             TEL-AVIV 67892
    HONG KONG                                   ISRAEL
MC/ALF/St/C2842-6
SA-3 (02/02/2000)


CONTENTS

CLAUSE NO.   HEADINGS                                                                    PAGE NO.
             Recitals..........................................................................
1.           Definitions and interpretation....................................................
2.           Share Capital.....................................................................
3.           Business of the Group.............................................................
4.           Board of Directors and Related Matters............................................
5.           Management of the Group...........................................................
6.           Proportional issue of new shares..................................................
7.           Funding arrangement and possible dilution.........................................
8.           Sale or Purchase in case of Event of Default .....................................
9.           No Sale, Disposal or Charging of Shares...........................................
10.          Fair Market Value.................................................................
11.          Representations and Undertakings..................................................
12.          Listing...........................................................................
13.          Undertakings......................................................................
14.          Accounts..........................................................................
15.          Prevalence over Articles..........................................................
16.          Accession Agreement...............................................................
17.          Duration of Agreement.............................................................
18.          Non-Assignability.................................................................
19.          No Partnership....................................................................
20.          No Waiver.........................................................................
21.          Severability......................................................................
22.          Entire Agreement..................................................................
23.          Amendment.........................................................................
24.          Notices...........................................................................
25.          Costs.............................................................................
26.          Time of the Essence...............................................................
27.          Counterparts......................................................................
28.          Discharge.........................................................................
29.          Confidentiality...................................................................
30.          Governing Law and Jurisdiction....................................................

SCHEDULE A   The Controlling Parties...........................................................A-1
SCHEDULE B   Form of Distribution Agreement....................................................B-1
SCHEDULE C   OTI Intellectual Property.........................................................C-1
SCHEDULE D   Form of Mutual Confidentiality Agreement..........................................D-1
SCHEDULE E   Framework of the projected Annual Business
             Plan of the Company for 2000-2003.................................................E-1
SCHEDULE F   Definition of Gross Profit........................................................F-1
SCHEDULE G   Form of Assignment................................................................G-1


Dated as of the day of February 2000.

PARTIES :

1. [OCEAN WONDER LIMITED ("CK-X")

2. ON TRACK INNOVATIONS LTD. ("OTI")

(CK-X AND OTI ARE TOGETHER HEREINAFTER REFERRED
TO AS THE "SHAREHOLDERS" AND EACH A "SHAREHOLDER")

3. SAILOR GROUP LIMITED (TO BE RENAMED OTI ASIA PACIFIC LTD.) (THE "COMPANY")

4. THE PERSONS LISTED IN THE SCHEDULE A HERETO (HEREINAFTER TOGETHER REFERRED TO AS THE "CONTROLLING PARTIES" AND EACH A "CONTROLLING PARTY")


SHAREHOLDERS AGREEMENT

IN RELATION TO

OTI ASIA PACIFIC LTD.


SCHEDULE E

FRAMEWORK OF THE PROJECTED ANNUAL BUSINESS PLAN OF THE COMPANY FOR 2000-2003

WILKINSON & GRIST                     BACH, ARAD, SCHARF & CO.
    6TH FLOOR                              MICRODAF HOUSE
PRINCE'S BUILDING                         2 HASHALOM ROAD
   CHATER ROAD                             TEL-AVIV 67892
    HONG KONG                                   ISRAEL
MC/ALF/St/C2842-6
SA-3 (02/02/2000)


EXHIBIT 10.26

GENERAL TERMS & CONDITIONS OF SALE OF OTI

1. ORDERS, PRODUCTS AND SOFTWARE* Unless otherwise stated in a written agreement signed by OTI Asia Pacific Ltd. (hereafter called "VENDOR"), the terms and conditions herein shall apply to sales made by the Vendor. Notwithstanding anything to the contrary stated in Buyer's conditions of purchase, Buyer agrees that Vendor's acceptance in writing or by electronic mail or by EDI (when either system has been agreed by Vendor for the purposes hereof) of Buyer's order constitutes Buyer's acceptance (1) of the conditions set out herein and (2) that none of the Buyer's conditions of purchase shall apply. Where Software is supplied by Vendor to Buyer, whether or not in combination with products, Buyer acknowledges that use of that Software is governed by Vendor or third party software license terms and conditions applicable to that software. All the conditions herein included, except that in Clause 8.1, shall also apply to the supply of software so long as they are not inconsistent with the applicable software license terms and conditions.

2. PRICE AND PACKAGING The price is Ex-Works INyCOTERMS 1990, excluded any applicable tax, customs duty and/or levy imposed by any public authority, all of which Buyer shall additionally be liable to pay to Vendor and any other expenses the Buyer shall pay directly. Prices are based on current economic and financial conditions at the date of quotation of Vendor, they are liable at any time to be adjusted to take account of any fluctuation in such conditions. The cost of non standard packaging is not included. Reasonable instructions of the Buyer concerning non standard packaging, weight and customs shall be abided by Vendor provided that Buyer had given precise instructions with reasonable prior notice. The corresponding additional costs shall be charged to Buyer.

3. DELIVERIES

3.1 Unless otherwise agreed in writing by Vendor, delivery shall be made and transfer of products shall be at Buyer's own risk.

3.2 Any delivery dates quoted for delivery by Vendor are estimates only. Buyer agrees to accept the delivery date for the products as determined by Vendor, in Vendor's order acknowledgment form or equivalent document.

3.3 Vendor reserves the right to allocate production and deliveries among its various customers at Vendor's sole discretion and under any circumstances.

3.4 In the event of any default by Buyer, Vendor may decline to make further shipments or may elect to continue to make shipments notwithstanding such default.

3.5 Orders accepted by the Vendor are firm and non cancelable by the Buyer except (i) upon Vendor's default which shall not have been corrected within 30 days from Buyer's notice to such effect or (ii) upon Vendor's written agreement, which shall only be considered on a case by case basis and shall be subject to appropriate indemnification by Buyer for costs and lost of profit incurred by Vendor.

3.6 Failure to deliver by the due date shall not give Buyer any right to compensation nor impose any responsibility or liability on Vendor

3.7 Any claim regarding non-conformity of product with specifications will be accepted by Vendor only if each of the following three conditions have been met:

3.7.1 The Buyer's claim must be submitted in writing to Vendor within one month after the delivery date. After such one month period has expired, all products shall be deemed accepted. After agreement with Vendor, Buyer shall return the whole batch of non-accepted products. Each allegedly non-conforming batch of products must be accompanied by a written statement of the Buyer containing the precise reason for rejection and the corresponding test report and proof of purchase,

3.7.2 The return must be made at the Buyer's cost; and

3.7.3 Products must not have been modified or damaged or manipulated for any reason whatsoever.


* "Software" means computer programs, software and firmware whether in printed or machine readable form, including software on magnetic tape, disc or in a ROM forming part of the product.

3.8 The provisions of paragraph 3.6 and 3.7 above shall not apply to batches of products accepted by Buyer in Vendor's factory.

4. PRODUCTS SPECIFICATIONS Specifications for products shall be Vendor's specifications as existing in the published data sheet at the time of the order acknowledgment, except if particular specifications are given by Buyer and accepted by Vendor.

Except as otherwise specifically agreed in writing by Vendor, Vendor reserves the right to change at any time the specifications of any product manufactured by Vendor (including all statements and data appearing in Vendor's catalogues, data sheets and advertisements) without notice.

5. CONDITIONS OF PAYMENT

Payment shall be made by Buyer for products cash upon receipt of invoice except as otherwise agreed in writing. Failure to pay an invoice in the stipulated period shall permit Vendor without further notice and without prejudice to any other rights it may have, to cancel any discount which may have been granted to Buyer on the said invoice, as well as to charge interest equal to the maximum allowed by the applicable laws, for the full duration of the payment delay. Vendor reserves the right at any time to require full or partial payment in advance of delivery.

6. FORCE MAJEURE

Neither party shall be responsible or liable for any delay or failure in performance arising as a result of any occurrence or contingency beyond its reasonable control, including but not limited to, capacity constraints, accident, act of God, acts of the public enemy, earthquake, fire, flood, labor disputes, strikes, riots, civil commotion, war (declared or not) unanticipated manufacturing problems, novelty of products, requirements or acts of any government or agency thereof, judicial action, inability to secure materials on a timely basis (except if such inability results from negligence of Vendor) and failure or delays in transportation. The delayed party shall send written notice of the delay and the reason therefor to the other party as soon as possible after the party delayed knew of the cause of delay in question.

7. RESERVATION OF TITLE

TITLE IN THE PRODUCTS SHALL REMAIN WITH VENDOR UNTIL IT HAS RECEIVED FULL PAYMENT FOR SUCH PRODUCTS NOTWITHSTANDING DELIVERY TO BUYER. Upon Buyer's failure to make payment by the due date, Vendor may take back possession of the products delivered and to that end, Buyer hereby grants Vendor or anyone designated by him access to the premises, whereat the products have been stored.

8. WARRANTY

8.1 Subject to the terms hereof, Vendor warrants that its products shall conform to the applicable specifications referred to in Clause 4 for a period of one year from delivery. This warranty is given solely to the Buyer (as opposed to any third parties, including third parties who bought the Vendor's products from Buyer), and shall not apply: (i) if products have been damaged; or
(ii) if defects result from misapplications and/or modifications not authorized by the Vendor which have been made to the products by any one other than the Vendor; or (iii) if products have been submitted to abnormal conditions (mechanical, electrical or thermal) during storage installation of use; or (iv) if products are used in a non-standard environment. A non standard environment is an environment requiring a robustness not documented in the applicable specification such as without limitation, space, military or nuclear environments; or (v) to product supplied at request of Buyer which Vendor has indicated may not conform (risk products) to applicable technical specifications or constitute experimental, developmental or non-qualified products; or (vi) if the non-conformance of products results from excess usage of the maximum values (temperature limit, maximum voltage etc.) defined by Vendor, or from an incorrect choice of application by Buyer or from use other than in accordance with the relevant specification; or
(vii) to those products referred to in clause 8.2; or (viii) to any other default not attributable to Vendor. If Vendor determines the products are non-conforming, Vendor will, at Vendor's option, repair or replace the non-conforming products, or issue a credit or rebate of the purchase price. THE FOREGOING WARRANTY IS IN LIEU OF ALL OTHER WARRANTIES, CONDITIONS OR TERMS EXPRESS OR IMPLIED BY STATUTE OR COMMON LAW (INCLUDING WITHOUT LIMITATION WARRANTIES AS TO MERCHANTABLE QUALITY OR SATISFACTORY QUALITY OR FITNESS FOR A PARTICULAR PURPOSE OR USAGE).

8.2 Vendor's products are not designed nor are they authorized for use in life supporting devices or systems. Vendor expressly disclaims any responsibility for such usage which shall be made at Buyer's sole risk, even if Vendor has been informed in writing of such usage. Buyer shall indemnify Vendor, its officers, employees and affiliates against all claims arising directly or indirectly from Buyer's incorporation of the products in any application or system where failure of the product could lead to death or personal injury.


9. LIMITATION OF LIABILITIES

VENDOR SHALL HAVE NO LIABILITY UNDER THESE GENERAL TERMS AND CONDITIONS OF SALE FOR LOSS ARISING FROM ANY CLAIM MADE AGAINST BUYER, OR FOR INDIRECT INCIDENTAL CONSEQUENTIAL OR PUNITIVE DAMAGES, INCLUDING WITHOUT LIMITATION LOSS OF PROFITS OR LOSS OF USE, BASED ON ANY BREACH OR DEFAULT OF VENDOR, INCLUDING ANY BREACH OR DEFAULT ARISING FROM INFRINGEMENT OR ALLEGED INFRINGEMENT OF ANY PATENT, TRADEMARK COPYRIGHT, MASK WORK RIGHT, OR OTHER INTELLECTUAL PROPERTY RIGHT. BUYER'S SOLE REMEDY AND VENDOR'S SOLE AND TOTAL LIABILITY FOR ANY CAUSE OF ACTION, WHETHER IN CONTRACT (INCLUDING BRACH OF WARRANTY) OR TORT (INCLUDING NEGLIGENCE OR MISREPRESENTATION) OR UNDER STATUTE OR OTHERWISE SHALL BE LIMITED TO AND SHALL NOT EXCEED THE PRICE ALLOCABLE TO THE PRODUCTS AND OR SOFTWARE WHICH GIVES RISE TO THE CLAIMS. BUYER SHALL ALWAYS INFORM VENDOR OF ANY BREACH AND AFFORD IT REASONABLE OPPORTUNITY TO CORRECT THE BREACH.

10. INTELLECTUAL

PROPERTY RIGHTS Because of the complexity of manufacturing techniques for electronic components and of the intellectual property rights pertaining thereto, Vendor is not able to declare that its products do not infringe the intellectual property rights of third parties. In the event that a third party makes a claim alleging that products delivered to Buyer infringe such third party's intellectual property rights, Vendor undertakes at its option and charge to defend the claim or seek a compromise; if an unfavorable and final judgment is rendered against Vendor, it shall at its option take out a license from the above mentioned third party or shall modify the products in such a way as to avoid infringement. If such a solution shall be impracticable for economic and/or technical reasons, Vendor shall accept the return of the product supplied and shall reimburse the Buyer up to a maximum equal to the amount paid by the Buyer for the products deemed to infringe. The preceding indemnification shall only be due by the Vendor provided that Buyer (1) promptly notifies Vendor in writing of the claim of infringement (2) allows Vendor to control and cooperates with Vendor in the defense and any related settlement action. Furthermore, such indemnification does not apply to any claims of infringement involving products made, provided or modified by Vendor in compliance with the requirements or specifications of Buyer, from the combination or use of products supplied with any other product or from any modification to the programming of products made other than by Vendor. Buyer agrees to indemnify Vendor against all damages and costs resulting from any such claims of infringement made against Vendor. The above provisions constitute the entire undertaking of Vendor towards Buyer in the event of any intellectual property right claim of a third party with regard to products supplied by Vendor.

11. JURISDICTION - APPLICABLE LAW

In the case of dispute and in the absence of an amicable settlement, the only competent jurisdiction and the applicable law shall be of the Vendor's country. The UN Convention on Contracts for the International Sale of Goods shall not apply to these General Terms and Conditions of Sale.

12. GENERAL

12.1 SEVERANCE. In the event any one or more of the provisions contained herein shall for any reason be held to be invalid, illegal or unenforceable provision had never been contained herein.

12.2 EXPORT CONTROL LAWS. Buyer undertakes to comply with all applicable laws, regulations, decrees and ordinances, related to the Buyer's use, sale or transfer of the products supplied thereunder.

12.3 WAIVER. A waiver of a breach or default under these General Terms and Conditions of Sale shall not be a waiver of any subsequent default. Failure of Vendor to enforce compliance with any term or condition hereof shall not constitute a waiver of such term or condition.

12.4 SOFTWARE. 1. Title to Software including without limitation copyright, is owned by Vendor or Vendor licensers and no title is transferred to Buyer. 2. Buyer shall not copy, modify, translate, disassemble or decompile the Software. Buyer shall use the Software in connection with the product and not otherwise. The Software may only be transferred when the product to which it relates is transferred. The rights granted in this Clause 12.4 may be terminated in the event of a breach by Buyer of any of the terms of these General Terms and Conditions of Sale.

12.5 NO LICENSES. No license under any intellectual property right of Vendor is granted herein except the right to use or resell any product sold by Vendor to Buyer for the purposes for which it was sold.


EXHIBIT 10.29

DISTRIBUTION AGREEMENT

This agreement ("THIS AGREEMENT") is made and signed as of the day of February, 2000 by and between ON TRACK INNOVATIONS LTD., a company incorporated under the laws of the State of Israel, having its principal place of business at Z.H.R. I.Z., Rosh Pina 12000, Israel ("OTI") and SAILOR GROUP LIMITED (to be renamed as OTI ASIA PACIFIC LTD.), a company incorporated under the laws of the British Virgin Islands having its registered office at P.O. Box 957, Offshore Incorporations Centre, Road Town, Tortola, British Virgin Islands
("DISTRIBUTOR");

WHEREAS           OTI develops and markets various contactless and
                  contact/contactless smart card products, as described in ANNEX
                  A hereto, and is in the process of developing certain
                  additional contactless and contact/contactless smart card
                  products which may from time to time be included in ANNEX A by
                  the agreement of the parties hereto (collectively, the "OTI
                  PRODUCTS"), and OTI is the sole owner of any and all
                  intellectual property rights in and to the OTI Products; and

WHEREAS           The Distributor desires to become a distributor of the OTI
                  Products in the Territory (as defined below), on an exclusive
                  basis, and OTI is willing to appoint the Distributor for such
                  purposes, all subject to the terms and conditions hereinafter
                  set forth in this Agreement;

NOW, THEREFORE, THE PARTIES HAVE DECLARED, AGREED AND STIPULATED AS FOLLOWS:

CHAPTER A - INTERPRETATION, REPRESENTATIONS, APPOINTMENT & TERM

1. INTERPRETATION

1.1      In this Agreement:

         1.1.1      "CUSTOMERS" - means customers (end users) of the OTI
                    Products in the Territory, whether existing or potential, as
                    the case may be.

         1.1.2      "DOCUMENTATION" - means all documents associated with the
                    OTI Products including user's manuals and other printed or
                    visually-perceptible materials describing the use or design
                    of the OTI Products as supplied by OTI to Distributor for
                    Distributor's reference and excludes any documents which
                    accompany the OTI Products for delivery to Customers.

         1.1.3      "OTI PRODUCTS" - means as defined in the preamble above.

         1.1.4      "MONTH" - means calendar month.

         1.1.5      "OTI INTELLECTUAL PROPERTY" - means all of OTI's proprietary
                    rights, copyrights, patents, Trade Marks or other industrial
                    or intellectual property rights relating to the OTI Products
                    and Documentation, and all applications for any of the
                    foregoing, whether or not registered in the Territory at the
                    date hereof or at any later date, all as more particularly
                    defined in the Shareholders Agreement.

         1.1.6      "PRICE LIST" - means the price list attached as ANNEX B
                    hereto, as reviewed by the parties from time to time,
                    subject to the provisions of Section 7.1 below.

         1.1.7      "QUARTER" - means a calendar quarter (i.e., one of the four
                    periods of three consecutive Months each, beginning on the
                    first day of January, April, July and October of each Year,
                    as the case may be).

         1.1.8      "SHAREHOLDERS AGREEMENT" - means the shareholders agreement
                    dated the date hereof and entered into between OTI, the
                    Distributor and other parties stated therein.

         1.1.9      The "TERM OF THIS AGREEMENT" - means as defined in Section 4
                    below.

         1.1.10     "TERRITORY" - means the countries listed in ANNEX C hereto.
                                                                -------

         1.1.11     "THIS AGREEMENT" - means this document together with all the
                    Annexes attached hereto, as may be amended in writing from
                    time to time in terms hereof.

         1.1.12     "TRADE MARKS" - means OTI's trade marks, trade dress and
                    trade names set forth in ANNEX D hereto, and such other
                    trade marks as are used by OTI on or in relation to the OTI
                    Products at any time during this Agreement, whether or not
                    registered in the Territory.

         1.1.13     "YEAR" - means calendar year (save for the first Year of
                    this Agreement which shall commence on the date of this
                    Agreement and end on December 31, 2000).

1.2 The headings in this Agreement are inserted for convenience of reference only and shall not affect its interpretation.

1.3 The Annexes to this Agreement shall form an integral part of this Agreement.

2. DECLARATIONS

2.1      Distributor hereby warrants and declares to OTI that:

         2.1.1      Distributor is a company, duly registered and validly
                    existing in its jurisdiction of organization.

         2.1.2      There is no hindrance, legal, contractual or otherwise, to
                    Distributor in entering into this Agreement and performing
                    its obligations hereunder and Distributor has the full power
                    and authority to (i) own and operate its properties and to
                    conduct its business as presently conducted and as proposed
                    to be conducted and (ii) execute, deliver and perform this
                    Agreement. This Agreement is the legal, valid and binding
                    obligation of Distributor.

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         2.1.3      In relation to this Agreement, no unlawful payments have
                    been or will be made directly or indirectly to: (i) any
                    official or employee of any government, agency or other
                    instrumentality of any government, (ii) any officer,
                    director, employee or agent of Distributor, (iii) OTI or any
                    of its divisions, subsidiaries or affiliates, or, (iv) any
                    person, firm or corporation at the direction of or by
                    arrangement with OTI or any of its divisions, subsidiaries
                    or affiliates.

2.2      OTI hereby warrants and declares to Distributor that:

         2.2.1      subject to the provisions of Section 3.3 below, it is not
                    aware of any rights of any third party which would or might
                    render the sale of and the service relating to the OTI
                    Products by the Distributor in the Territory unlawful;

         2.2.2      to the best of its knowledge the OTI Products (including the
                    OTI Intellectual Property comprised therein) do not infringe
                    any third party's intellectual property rights in the
                    Territory;

         2.2.3      notwithstanding the provisions of Section 3 below and
                    subject to the provisions of Clause 13.2.2 of the
                    Shareholders Agreement, third parties who entered into an
                    OEM, private labeling or similar agreements with OTI, if
                    any, may have rights to sell within the Territory products
                    based on OTI Intellectual Property; and

         2.2.4      it is the beneficial owner of OTI Intellectual Property
                    which is free from any encumbrances.

3. APPOINTMENT & EXCLUSIVITY

3.1 Subject to the terms and conditions hereinafter set forth, OTI hereby appoints Distributor as its distributor of the OTI Products in the Territory for the Term of this Agreement and Distributor hereby accepts such appointment.

3.2 Subject to the terms and conditions set forth herein and in Clause 13.2 of the Shareholders Agreement, the appointment of the Distributor hereunder is exclusive and OTI shall not appoint another distributor for the OTI Products in the Territory during the Term of this Agreement.

3.3 OTI hereby assigns to Distributor OTI's current distribution network in the Territory, including the existing dealership and/or distribution arrangements with entities operating within the Territory, as listed in ANNEX E hereto, subject to Distributor being satisfied as to the terms of such arrangements and assignment. It is acknowledged and agreed by the parties that OTI is currently engaged with an exclusive distributor in the Philippines, and that the assignment of such distribution in the Philippines is subject to the consent of OTI's current exclusive distributor in the Philippines. In the event OTI is not entitled to make any assignment of any specific distribution agreement pursuant to the provisions hereof, it shall see to the prompt termination as soon as possible of such agreement. Any costs relating to any termination of an existing distribution agreement shall be borne by OTI. Any costs relating to the assignment of such agreement and employees of such distributor to the Distributor shall be borne in such manner as may be agreed by OTI and Distributor.

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4. TERM OF AGREEMENT

Subject to the rights of earlier termination of this Agreement as provided for herein below and unless otherwise agreed between the parties in writing, this Agreement will continue as long as the Shareholders Agreement is in force. (the "TERM OF THIS AGREEMENT").

CHAPTER B - ORDERS & DELIVERY

5. ORDERS

5.1 Subject to the terms and conditions of this Agreement, OTI shall supply OTI Products to Distributor in accordance with Distributor's orders as accepted by OTI. The terms of this Agreement shall apply to all orders notwithstanding any inconsistent terms included therein by Distributor, unless specifically approved in writing by OTI.

5.2 All orders made by Distributor hereunder shall include details regarding the quantity ordered, the exact identity (including full name, business address, telephone and facsimile numbers and name of contact man) of the entity for which such order is made and such other details as OTI shall reasonably request. All orders placed hereunder shall be given priority by OTI as it may reasonably give and be subject to written confirmation of OTI and no order shall be deemed to have been accepted unless so confirmed, provided however that OTI shall not refuse to accept any order without first consulting with the Distributor. OTI shall be entitled to confirm part of an order.

5.3 In order to enable OTI to plan its sales, Distributor shall provide OTI, by not later than thirty (30) days following signature hereof a 12 Month rolling forecast of its estimated orders from OTI under this Agreement (the "FORECAST"). Distributor shall update the Forecast prior to the beginning of each Quarter of the Term of this Agreement, provided however, that any Forecast shall be binding in respect of the first Quarter following its submittal, and Distributor shall not be entitled to change or update the quantities set forth in such Forecast in respect of such Quarter, without OTI's prior written consent. In relation to any certain Quarter, OTI shall not be obliged to supply to Distributor OTI Products in a quantity exceeding the quantities set forth for such OTI Product in the Forecast for such Quarter except for any order which has been accepted by OTI under Section 5.2 above.

5.4 All orders supplied by OTI shall be subject to OTI's general terms of sale attached as ANNEX F hereto.

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5.5 In the event that any new or modified product is introduced by OTI, OTI agrees to supply to Distributor for a period of at least two years at competitive prices such new or modified product which shall be compatible with and in all material respects conform to the specifications of the old OTI Product which may have been replaced or modified by the new or modified product.

6. DELIVERY

6.1 Supply and delivery of the OTI Products shall be made within 60 days from Distributor's order, if such order was included in the Forecast, and within 90 days from Distributor's order, if not included in the Forecast, and the supply and delivery schedules shall be established at the time of the confirmation by OTI of the relevant order. OTI shall meet the established supply and delivery schedules.

6.2 Supply of the OTI Products and transfer of risk to Distributor will occur upon delivery of the OTI Products, Ex Works of OTI's premises. Title to the OTI Products (subject, for the avoidance of doubt to the provisions of Section 17.1 below) will transfer to Distributor only upon receipt by OTI of full price for the OTI Products supplied and until then OTI will maintain its exclusive ownership of such OTI Products.

CHAPTER C - CONSIDERATION, AUDIT & TAXES

7. CONSIDERATION

7.1 The Ex Works prices of the OTI Products shall be as set forth in the Price List and subject to its respective terms and conditions (if any) as stated therein. OTI and Distributor may from time to time meet, discuss and review the Ex Works prices of the OTI Products. Unless and until any change in the Ex Works prices of the OTI Products is agreed by both OTI and Distributor in writing, they shall remain unchanged provided always that they shall be comparable to the most favourable prices given to other distributors of similar OTI Products on similar terms of purchase in the countries other than the Territory. Similarly, the Ex Works price of any new product to be introduced by OTI and included as the OTI Products shall be such price which is comparable to the most favourable price given to other distributors of similar OTI Products on similar terms of purchase in the countries other than the Territory and once it is agreed by the parties, it shall form part of the Price List.

7.2 Except as otherwise specifically agreed to in writing by the parties, payment in respect of each order shall be made in United States dollars. Terms of payment of each order shall be agreed between the parties on a case by case basis, it being agreed that for material orders there shall be a reasonable down payment with the order, and the remaining amount shall be secured by irrevocable letter of credit in a form acceptable to OTI, confirmed by a bank acceptable to OTI. Payments for partial delivery shall be allowed. Payment in accordance with the terms agreed shall be a condition precedent to fulfillment by OTI of orders received from Distributor.

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8. REPORTS & AUDITS

The provisions of this Section 8 shall apply only to sub-distributors of Distributor appointed pursuant to Section 13 below. Distributor shall provide in its agreement with any sub-distributor that the sub-distributor shall during the term of the agreement with the sub-distributor and for a period of two Years thereafter:

8.1 keep full, proper and up-to-date separate books and accounts showing clearly all inquiries, transactions and sales relating to the OTI Products purchased and sold by it and provide OTI, at OTI's request and costs, with a copy of such books and accounts;

8.2 permit OTI, at its own expense and at all reasonable times, to inspect and to have such books and accounts audited by a certified public accountant, nominated by OTI for such purpose.

The provisions of this Section 8.2 shall survive the termination of the agreement with the sub-distributor.

9. VAT AND SALE TAXES

Unless otherwise expressly set out in this Agreement, the prices, fees and other amounts set forth in this Agreement are exclusive of VAT or other sales tax payable by OTI at the country or place or manufacture, and to the extent that under any applicable law outside the country or place of manufacture, VAT or other sales tax shall be payable in respect of such prices, fees or amounts, such VAT or other sales tax shall be paid by the Distributor.

CHAPTER D -SUPPORT, TRAINING & WARRANTY

10. UPDATES, SUPPORT, AND TRAINING

10.1     During the Term of this Agreement, OTI shall provide Distributor free
         of charge:

         10.1.1     updates of the software included in the OTI Products, as
                    updated by OTI from time to time provided that the provision
                    of such updates following termination of the Warranty Period
                    (as defined below), may be subject to payment as determined
                    by OTI from time to time; and

         10.1.2     technical assistance by way of telephone, facsimile or
                    e-mail.

10.2     Without derogating from the Distributor's undertakings pursuant to
         Section 12.3 below, OTI shall further provide to the Distributor, at
         the Distributor's request from time to time, and at such prices as set
         forth in the Price List, or as otherwise agreed between the parties
         from time to time, the following services:

         10.2.1     on-site support;

         10.2.2     integration of OTI Products to third parties equipment;

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         10.2.3     engineering services in relation with the adaptation of
                    firmware and software included in the OTI Products to
                    specific applications of the Customers; and

         10.2.4     other consulting and added value services, as shall be
                    agreed between the parties.

10.3     OTI shall further supply free of charge up to 15 training days for
         Distributor's staff, with regard to their role in the distribution,
         marketing and after sales services of the OTI Products. Such training
         shall be held in OTI's premises in Israel, or in Distributor's premises
         in Hong Kong, as shall be agreed by the parties. The Distributor shall
         bear all costs and expenses relating to the travel and accommodation of
         OTI's employees for such training.

11.      WARRANTY

11.1     OTI hereby warrants the OTI Products will be in good working order and
         conform to OTI's official published specifications at the time of their
         delivery to Distributor against any defects due to bad design,
         workmanship or faulty materials. This limited warranty is given to
         Distributor only (as opposed to Customers) and shall not cover any
         failure of the OTI Products due to: (i) any accident, abuse or
         misapplication and/or modifications which have been made to the OTI
         Products by anyone other than OTI or Distributor; (ii) any use in an
         environment not as prescribed in OTI's official published
         specifications at the time of their delivery to Distributor; or (iii)
         any usage in excess of the maximum values (temperature limit, maximum
         voltage etc.) defined in OTI's official published specifications, or
         other relevant specifications of OTI at the time of their delivery to
         Distributor; or (iv) any other default not attributable to OTI. Such
         warranty shall be valid for 12 Months of the date of delivery of the
         OTI Products to Distributor (the "WARRANTY PERIOD"). Subject to
         Sections 2.2 above and 17 below, the warranty and remedies set forth
         herein are exclusive and except for and to the extent expressly
         provided herein and in the OTI's general terms of sale attached hereto,
         OTI makes no other or additional warranty or representation, either
         expressed or implied, with respect to the use or performance of the OTI
         Products, including its quality, performance, merchantability or
         fitness for a particular purpose and that all other warranties given or
         implied by any applicable law including any warranty given to Customers
         by Distributor, shall be the sole responsibility of Distributor,
         without recourse to OTI.

         THE FOREGOING WARRANTY IS IN LIEU OF ALL OTHER WARRANTIES, CONDITIONS
         OR TERMS EXPRESS OR IMPLIED BY STATUTE OR COMMON LAW.

11.2     OTI may extend the Warranty Period in relation to the OTI Products, for
         additional periods of 12 Months each, subject to payment to OTI of such
         amounts as shall be determined by OTI in OTI's Price List (ANNEX B).

11.3     Subject to Sections 2.2 above and 17 below and OTI's general terms of
         sale attached hereto, the parties hereby expressly agree that the
         liability of OTI on the use or performance of the OTI Products will be
         limited to the repair or replacement (including the cost of return) of
         the OTI Products or, at OTI's choice, return of their price, and that
         OTI will bear no other liability toward Distributor, Customers, or any
         third party for any indirect, consequential, incidental, punitive,
         special or exemplary damages or losses arising out of the use or
         performance of the OTI Products, even if it has been advised of the
         possibility thereof.

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          CHAPTER E -MARKETING, SUB DISTRIBUTION, MANUFACTURING RIGHTS

12.      MARKETING AND AFTER SALES SERVICE

12.1     Distributor hereby undertakes to use its best endeavors to promote the
         sale of the OTI Products throughout the Territory.

12.2     It is hereby agreed and recorded that Distributor acknowledges OTI's
         policy to provide Customers with good and efficient after sales
         services, in order to keep Customers satisfied with the OTI Products
         and enable them to properly and efficiently use the OTI Products as
         well as to receive all updates and new versions of the OTI Products.

12.3     Distributor shall be solely responsible for providing installation,
         integration, support and maintenance services to the Customers in
         respect of the OTI Products, by sufficiently competent and experienced
         staff, and for satisfying the requirements of the local licensing
         authorities pertaining to after sales service.

13.      APPOINTMENT OF SUB- DISTRIBUTORS

13.1     Distributor shall be entitled to appoint sub-distributors for the OTI
         Products in the Territory, provided however that each sub-distributor
         shall have signed and delivered to OTI an undertaking towards OTI in
         the form attached as ANNEX G hereto prior to any engagement in the
         distribution of OTI Products. Such undertaking shall contain:

         13.1.1     a confidentiality undertaking by the sub-distributor in the
                    form included in ANNEX G;

         13.1.2     the sub-distributor's agreement to the provisions of
                    Sections 8 and 11 above and Sections 13.2, 15.2, 16, 17, 19
                    and 22 below, to act in accordance therewith, and that such
                    provisions may be enforced against it directly by OTI;

         13.1.3     the sub-distributor's agreement that termination of this
                    Agreement, for any reason, shall cause the immediate
                    termination of any agreement between the Distributor and the
                    sub-distributor in respect of the OTI Products;

         13.1.4     the sub-distributor's agreement that, in any event, OTI
                    shall not be deemed to have any direct contractual
                    relationship with such sub-distributor, and such
                    sub-distributor shall not have any claim or demand or any
                    other right towards OTI in any matter whatsoever.

                                       8

13.2     The Distributor agrees that OTI shall be entitled to request
         Distributor to terminate, the engagement of any sub-distributor of the
         OTI Products, by Distributor sending a 60 days prior written notice to
         such effect to the sub-distributor.

13.3     The Distributor shall not be liable per se to OTI for wrongful acts of
         any sub-distributor.

14.      MANUFACTURING RIGHTS

14.1     Following January 1, 2001, Distributor shall have the right, by sending
         a written notice to OTI to that effect (the "MANUFACTURING RIGHTS
         NOTICE"), to manufacture (or subcontract for manufacture) smart cards
         (for example, the plastic of the multi-card and antennae, if required)
         ("SMART CARDS") utilising any or all of OTI Intellectual Property, to
         the extent it relates to such manufacture, for sale of the Smart Cards
         within the Territory (the "MANUFACTURING Rights"). The Manufacturing
         Rights shall be subject to the use and embeddment in the Smart Cards of
         any one or more of OTI's modules supplied by OTI (such as those set out
         in ANNEX A as the Smart Card Modules). The Manufacturing Rights shall
         be exclusive to Distributor in the Territory and shall continue during
         the Term of this Agreement but shall not in any way limit OTI's right
         to manufacture OTI Products in the Territory which are sold in or
         imported into areas outside the Territory. For avoidance of doubt,
         Distributor shall not be entitled at any time to receive Manufacturing
         Rights of the OTI modules included in the Smart Cards.

14.2     Within thirty (30) days following receipt by OTI of the Manufacturing
         Rights Notice, OTI will deliver to Distributor such information, which
         is necessary for Distributor to manufacture the Smart Cards. Subject to
         the Manufacturing Rights granted to Distributor herein, all right,
         title and interest in all OTI Intellectual Property in the Smart Cards,
         including without limitation, the OTI modules embedded in the Smart
         Cards, shall at all times remain the property of OTI.

14.3     For the purpose of manufacturing the Smart Cards, Distributor shall
         purchase from OTI, and not from any other third party, modules to be
         included in the Smart Cards, for the prices of such modules set forth
         in the Price List.

14.4     In the event that Manufacturing Rights shall be granted hereunder, OTI
         shall have the right to order at any time from Distributor, or, in the
         event that Distributor elects to exercise the Manufacturing Rights by a
         sub-contractor, to order directly from such sub-contractor, Smart Cards
         for sale by OTI or by its other distributors, while abiding
         Distributor's exclusive distribution rights in this Agreement, at
         prices which shall not be higher than the most favorable prices granted
         by Distributor (or such sub-contractor of the Distributor) to Customers
         for similar volume of Smart Cards at the time. Distributor shall abide
         by such OTI orders, subject to reasonable payment terms and delivery
         schedule to be agreed.

14.5     For grant of the Manufacturing Rights hereunder OTI shall be entitled
         to such reasonable royalties at such rates not exceeding market rates
         for similar Smart Cards and as shall be agreed between the parties at
         the time of grant of the Manufacturing Rights.

                                       9

       CHAPTER F- NON COMPETITION & ADDITIONAL UNDERTAKINGS OF DISTRIBUTOR

15.      NON COMPETITION

         Distributor undertakes as follows:

15.1     during the Term of this Agreement and for a period of one (1) year
         after its termination for any reason whatsoever it shall not, without
         OTI's prior written approval, sell, promote the sale, distribute,
         manufacture or develop, or represent or agree to represent in the
         Territory any third party in respect of any products competing with or
         similar to the OTI Products, or technologies competing with or similar
         to OTI Intellectual Property save and except pursuant to this Agreement
         and the Shareholders Agreement;

15.2     during the Term of this Agreement and subject to the provisions of
         Section 14 above, not to obtain or otherwise purchase OTI Products for
         resale from any person, firm or company, other than OTI; and not to
         market or sell OTI Products not directly purchased from OTI.

15.3     During the Term of this Agreement, it will not seek customers,
         establish any branch or maintain any distribution depot for the OTI
         Products in any country which is outside the Territory or perform a
         sale of OTI Products in the Territory knowing that the products shall
         be sold out of the Territory without obtaining OTI's prior written
         consent.

16.      ADDITIONAL UNDERTAKINGS OF DISTRIBUTOR

16.1     Distributor hereby undertakes, at its sole cost and expense and during
         the Term of this Agreement:

         16.1.1     to comply with all legal requirements from time to time
                    relating to the importation, distribution and sale of the
                    OTI Products in the Territory and shall, without limitation,
                    obtain from the relevant local authorities in the Territory
                    any and all licenses, permits and/or approvals, necessary or
                    required, in order to import, distribute and service the OTI
                    Products, maintain and renew such licenses, permits and/or
                    approvals in full force and effect and otherwise fulfill its
                    undertakings in accordance with the provisions of this
                    Agreement;

         16.1.2     to provide OTI within 30 days from signature hereof the
                    Distributor's price list of OTI Products to Customers, and
                    to provide to OTI any amended price list at least 30 days
                    prior to effective date of such amendment;

         16.1.3     to provide OTI, on a regular basis, with Customers'
                    "feedback" on the OTI Products and their use and from time
                    to time consult with OTI's representatives for the purpose
                    of assessing the conditions of the market for the OTI
                    Products in the Territory;

10

         16.1.4     to refrain from any act or omission which might be
                    detrimental to OTI's name and reputation, and to provide the
                    Customers with fair and efficient service relating to the
                    marketing, sale and after sales service of the OTI Products.

16.2     During the Term of this Agreement, Distributor shall not, without
         obtaining OTI's prior written consent:

         16.2.1     incur any liability whatsoever on behalf of OTI, or in any
                    way bind or purport to bind OTI;

         16.2.2     solicit any customer which is outside the Territory and

shall promptly refer to OTI all inquiries concerning the OTI Products received by it from such customers.

CHAPTER G - OTI INTELLECTUAL PROPERTY & CONFIDENTIALITY

17. OTI INTELLECTUAL PROPERTY

17.1     Distributor recognizes and acknowledges that all of OTI Intellectual
         Property, including without limitation, all updates and new versions,
         improvements and development, belong solely to OTI which is and shall
         remain its sole owner, and it is hereby expressly agreed that nothing
         in this Agreement shall constitute or be considered as constituting a
         transfer or license of OTI Intellectual Property or any part thereof by
         OTI to Distributor. The provisions of this Section shall survive the
         termination of this Agreement. For avoidance of doubt it is clarified
         that the sale of OTI Products constitutes a worldwide royalty-free and
         perpetual license to use the OTI Intellectual Property comprised in
         such OTI Products for only such purpose for which such OTI Products
         were purchased by Distributor and/or Customers.

         Distributor shall not challenge OTI's Intellectual Property rights in
         any way, including without limitation, by filing to any court, patent
         or other authority, a claim, opposition or request for cancellation
         against such rights.

17.2     Distributor shall sell the OTI Products under such trade names and
         using such trade marks as shall be agreed between the parties from time
         to time; it being agreed that the Trade Marks shall appear on the OTI
         Products, in the manner as shall be agreed between the parties, from
         time to time. Distributor shall adhere to all reasonable instructions
         given to it by OTI regarding the use of any of the Trade Marks in such
         manner so as to afford reasonable protection of the Trade Marks and
         associated goodwill to OTI.

17.3     Distributor shall forthwith notify OTI in writing of any infringement
         or threatened infringement, unauthorized use, manufacture or sale,
         enjoyment, duplication or replication of the OTI Products and/or OTI
         Intellectual Property in the Territory of which it shall become aware
         at any time during the Term of this Agreement. In such event OTI shall
         be entitled to take any and all legal action it deems appropriate in
         order to protect its rights, and the Distributor shall provide OTI, at
         OTI's cost and expense, with all reasonable assistance required by OTI
         for such purpose.

                                       11

17.4     If any of the events under Section 17.3 above occurs and OTI does not
         take any legal action promptly upon notification by Distributor
         thereunder, Distributor may notify OTI that it wishes to take legal
         action on its part and to join OTI with Distributor in taking steps to
         end such infringement or act including legal proceedings in the
         parties' joint names. The parties may agree, in writing, as to the
         steps and proceedings to be taken and the proportions in which they
         shall share the costs thereof. Failing such agreement, each party shall
         be free to act independently provided it shall notify the other party,
         from time to time of the steps to be taken by it. Irrespective of the
         failure to reach such agreement each party shall give the other party,
         at the other party's request and costs, all reasonable assistance
         required by such other party in respect of the legal steps taken by it.
         In the event of joint proceedings being taken and damages being awarded
         in favour of OTI and Distributor, the costs of the proceedings so far
         as not recoverable in the proceedings shall be shared by the parties in
         the same proportion as they are awarded damages.

17.5     Where the parties differ in their view as to the advisability of
         instituting legal proceedings either party may call for a joint case to
         be put to legal counsel well versed in the laws of the country by which
         any legal proceedings will be determined and also legal counsel well
         versed in the laws of the country in which the infringement is alleged
         and they shall cooperate to provide counsel promptly with all relevant
         ascertainable facts and, where appropriate, a technical expert's
         opinion on the matter. In such event the parties agree to act according
         to the advice of such legal counsel.


18.      CONFIDENTIALITY

18.1     Each party hereby undertakes towards the other party to hold as fully
         confidential and not to disclose to others, and not to use, directly or
         indirectly, any and all Confidential Information of such other party,
         including without limitation, trade secrets, strategic plans and price
         calculations. For the purposes hereof "Confidential Information" shall
         include but not be limited to all information marked by a party as such
         but shall exclude all information which was already or became public
         knowledge through no fault of the using party.

18.2     Not later than the date of signature hereof, the parties shall have
         signed and executed the confidentiality agreement in a form attached as
         ANNEX H hereto, which signature and execution is a condition precedent
         to the coming into force of this Agreement.

18.3     Distributor shall require each of its employees and/or agents employed
         in providing services in relation to the OTI Products to execute an
         undertaking of confidentiality, in a form approved by OTI, and
         incorporating, inter alia, the provisions of this Section 18 and of
         Section 17.1 above.

12

CHAPTER H - INSURANCE & FORCE MAJEURE

19. INSURANCE

19.1     Distributor shall maintain at its own expense, and shall provide OTI,
         at OTI's request, with insurance certificates showing, coverage for
         general liability and for product liability, having reasonable terms
         commonly acceptable in similar cases, insuring against claims arising
         out of or related to this Agreement and Distributor's activities
         pursuant to fulfilling its undertakings in accordance with the terms of
         this Agreement. Each policy shall be maintained with an insurance
         carrier acceptable to OTI and shall provide that it may not be
         cancelled or modified without at least thirty (30) days prior written
         notice from the insurance carrier to both parties at their respective
         addresses.

19.2     Each party agrees to promptly notify the other of any and all product
         liability claims within the Territory relating to the OTI Products
         coming to its attention.

20.      FORCE MAJEURE

         Neither party shall be responsible or liable for any delay or failure
         in performance under this Agreement arising as a result of any
         occurrence or contingency beyond its reasonable control, including but
         not limited to, accident, act of God, acts of the public enemy,
         earthquake, fire, flood, explosion, labor disputes, strikes, riots,
         civil commotion, war (declared or not), requirements or acts of any
         government or agency thereof, and failure or delays in transportation.
         The delayed party shall send written notice of the delay and the reason
         therefor to the other party as soon as possible after the party delayed
         knew of the cause of delay in question. If, however, a circumstance of
         Force Majeure continues over an uninterrupted period of more than three
         Months, then the party against which Force Majeure has been invoked has
         the right, if no other agreement is reached before the end of such
         three Month period, to forthwith terminate this Agreement by delivering
         to the other party a written notice to that effect.

                       CHAPTER I- TERMINATION AND REMEDIES

21.      TERMINATION AND REMEDIES

21.1     Without prejudice to any remedy or right of either party under this
         Agreement or by law, either party shall have the right to forthwith
         terminate this Agreement by serving the other party with a written
         notice to that effect if:

         21.1.1     the other party commits a breach of its obligations under
                    this Agreement and, in the event such breach is other than
                    the violation of or non-compliance by a party of the
                    provisions of Section 23, fails to remedy such breach within
                    30 days after receipt of a written notice from the
                    non-defaulting party describing such failure, in whole or in
                    part, will entitle the other party to forthwith terminate
                    this Agreement save and except where Distributor fails to
                    pay any price for OTI Products which has become due in
                    accordance with this Agreement, OTI may forthwith terminate
                    this Agreement upon giving Distributor not less than 7 days'
                    prior written notice; or

13

         21.1.2     the other party is placed into liquidation, insolvency or
                    other similar proceedings or a liquidator or receiver is
                    appointed with respect to the other party or a substantial
                    part of its assets or the other party makes any voluntary
                    arrangement with its creditors.

21.2     Upon termination of this Agreement for any reason and without prejudice
         to any remedy or right of either party accrued prior to such
         termination under this Agreement or by law, the following provisions
         shall apply:

         21.2.1     the Distributor shall cease to market and sell the OTI
                    Products and shall return to OTI all Documentation relating
                    to the OTI Products then in possession of the Distributor;

         21.2.2     the Distributor shall, at OTI's request (if made within one
                    month), resell to OTI or to its order all inventory of OTI
                    Products (or any part thereof requested by OTI) then in
                    possession of the Distributor for the price at which they
                    were purchased from OTI in terms hereof and any OTI Products
                    then in possession of the Distributor not resold to OTI
                    pursuant to this Section may be sold by Distributor to any
                    third party in the Territory at any time; and

         21.2.3     if OTI shall be the terminating party pursuant to this
                    Section 21, all Manufacturing Rights shall expire at the
                    date of such termination, and if Distributor shall be the
                    terminating party pursuant to this Section 21, all
                    Manufacturing Rights shall expire at the termination of a
                    six month period commencing upon such termination of this
                    Agreement or such shorter period as may from time to time be
                    notified by Distributor to OTI, all without prejudice to
                    OTI's right to receive royalties in respect of the Smart
                    Cards manufactured under the Manufacturing Rights,

         Provided that notwithstanding any such termination of this Agreement
         and/or expiration of the Manufacturing Rights,

                    (i)    Distributor shall be entitled to retain any inventory
                           of OTI Products and Documentation and/or order and
                           purchase any additional OTI Products from OTI and/or
                           manufacture Smart Cards in order to meet any
                           outstanding commitments, obligations or arrangements
                           to or with Customers or relating to any projects; and

                    (ii)   in relation to such outstanding commitments,
                           obligations or arrangements, the parties shall also
                           to the extent permissible attempt to negotiate in
                           good faith with the Customers a novation thereof on
                           terms mutually satisfactory to the parties and the
                           Customers whereby OTI may assume the obligation to
                           supply OTI Products to and/or manufacture Smart Cards
                           direct for Customers and Distributor be fully
                           discharged from such supply to or manufacture for
                           Customers.

21.4     Any amount owed by one party to the other which is not timely paid
         shall bear default interest at the rate of LIBOR plus 3% (for 6 Month
         loans) for the period of default.

14

CHAPTER J- MISCELLANEOUS

22. NO AGENCY

22.1     OTI and Distributor are acting hereunder as independent contractors and
         it is hereby expressly declared and agreed that this Agreement in no
         way establishes any principal - agent, employer - employee, or
         partnership relationship between the parties.

22.2     Nothing in this Agreement shall be construed as granting either party
         the right, power or authority to act for or on behalf of the other
         party, to create any undertakings on behalf of the other party, or to
         bind or commit the other party in respect to any such undertakings,
         except as set forth herein or as otherwise agreed to in writing between
         the parties prior to such act.

23.      ASSIGNMENTS

23.1     In Section 23.2 below, a person shall be deemed to have "EFFECTIVE
         CONTROL" of the Distributor if he exercises, or is able to exercise or
         is entitled to acquire, control, whether direct or indirect, over the
         Distributor's affairs, and in particular, but without prejudice to the
         generality of the above, if he possesses, or is entitled to acquire, or
         control the voting of at least 50% of the outstanding share capital or
         voting power in the Distributor. Where two or more persons together
         satisfy such condition, they shall be taken to have together Effective
         Control of the Distributor.

23.2     The appointment of the Distributor under this Agreement is personal,
         and except as provided under this Agreement, the Distributor may not
         assign or otherwise transfer or pledge its rights and undertakings
         under this Agreement without the prior written consent of OTI; any
         assignment for which consent was not obtained will not be considered
         valid. A transfer in Effective Control of the Distributor shall be
         deemed an assignment of rights and undertakings under this Section.

23.3     OTI may assign its rights under this Agreement, by serving a written
         notice to the Distributor.

24.      LAW AND JURISDICTION

24.1     This Agreement shall be governed by and construed in all respects in
         accordance with the laws of England. Each party hereto irrevocably
         agrees that the courts of Hong Kong shall have non-exclusive
         jurisdiction to hear and determine any suit, action or proceeding, and
         to settle any disputes which may arise out of or in connection with
         this Agreement and for such purposes irrevocably submits to the
         non-exclusive jurisdiction of such courts.

24.2     Nothing contained in this Section 24 shall limit the right of any party
         hereto to take legal or other proceedings against any other party in
         any court of competent jurisdiction, nor shall the taking of
         proceedings in one or more jurisdictions preclude the taking of
         proceedings in any other jurisdiction, whether currently or not to the
         extent permitted by the law of such other jurisdiction.

                                       15

24.3     OTI hereby appoints FIRMLEY COMPANY LIMITED of21st Floor, Edinburgh
         Tower , The Landmark, Central, Hong Kong (Attention: MR. JOHN WONG) and
         Distributor hereby appoints CHEUNG KONG CAPITAL LIMITED of12th Floor,
         Cheung Kong Center, 2 Queen's Road Central, Hong Kong (Attention: MR.
         KAM HING LAM) respectively as its agent to receive and acknowledge on
         its behalf service of any writ, summons, order, judgment or other
         notice of legal process in Hong Kong. If for any reason any agent named
         above (or its respective successor) no longer serves as agent of its
         principal for this purpose the relevant party shall promptly appoint a
         successor agent and notify the other parties hereto thereof. Each party
         agrees that any such legal process shall be sufficiently served on it
         if delivered to its agent for service at its address for the time being
         in Hong Kong whether or not such agent gives notice thereof to its
         principal.

25.      WHOLE UNDERSTANDING AND AMENDMENTS

25.1     This Agreement and the Annexes hereto constitute the entire
         understanding of the parties and supersede all oral or written
         representations or agreements, privileges or understandings between the
         parties.

25.2     This Agreement may only be modified by an agreement in writing duly
         signed by both parties hereto, or their respective successors or
         assignees.

26.      SEVERABILITY

         If any condition, term or covenant of this Agreement shall at any time
         be held to be void, invalid or unenforceable such condition, covenant
         or term shall be construed as severable and such holding shall attach
         only to such condition, covenant or term and shall not in any way
         affect or render void, invalid or unenforceable any other condition,
         covenant or term of this Agreement, and this Agreement shall be carried
         out as if such void, invalid or unenforceable term were not embodied
         herein.

27.      WAIVER

         The failure at any time of either party to enforce any of the terms or
         conditions or any right or to exercise any option of this Agreement,
         will in no way be construed to be a waiver of such terms, conditions,
         rights or options, or in any way to affect the validity of this
         Agreement.

28.      NOTICES

         Any notice authorized or required to be given in accordance with the
         terms of this Agreement, may be given by facsimile, (with receipt of
         proper transmission) or by registered or certified mail. Such notice
         shall be deemed properly given two business days after having been sent
         by facsimile and ten days after being posted by registered or certified

mail to the address of the parties listed below:

16

If to OTI:             Z.H.R. I.Z., Rosh Pina 12000, Israel
                       fax:    00-972-6-6938887
                       Attention: Mr. Ronnie Gilboa

If to Distributor:     c/o Cheung Kong Infrastructure Holdings Limited,
                       12/F, Cheung Kong Center,
                       2 Queen's Road Central,
                       Hong Kong
                       fax: (852) 2524 8829
                       Attention: Mr. Kam Hing Lam

IN WITNESS WHEREOF, THE PARTIES HAVE SET THEIR SIGNATURES AS OF THE DAY FIRST ABOVE WRITTEN AND HAVE HEREBY CAUSE THIS AGREEMENT TO BE EXECUTED.

-------------------------             ---------------------------------
On Track Innovations Ltd.                    Sailor Group Limited
                                     (to be renamed OTI Asia Pacific Ltd.)

17

LIST OF ANNEXES

A                            OTI Products
B                            Price List
C                            Territory
D                            Trade Marks and Trade Names
E                            Current Distribution Network
F                            General Terms of Sale
G                            Sub-distributor's undertaking
H                            Mutual Confidentiality Agreement

                                       18

                                               AGREEMENT BETWEEN OTI AND OTIP
                                                    DATED FEBRUARY 2000

ANNEX A

OTI PRODUCTS

This Annex is based on the products that are available in January 2000 . The Annex will be updated once every 6 month commencing 1 January 2000.

SMART CARD MODULES:

------------------------------------ ----------------------------------
Type                                 Memory Capacity
------------------------------------ ----------------------------------
Contactless Only                     1K
------------------------------------ ----------------------------------
                                     4K
------------------------------------ ----------------------------------
                                     8K
------------------------------------ ----------------------------------

------------------------------------ ----------------------------------
Contact & Contactless                1K
------------------------------------ ----------------------------------
                                     4K
------------------------------------ ----------------------------------
                                     8K
------------------------------------ ----------------------------------

------------------------------------ ----------------------------------
Antenna Module                       1K
------------------------------------ ----------------------------------
                                     4K
------------------------------------ ----------------------------------
                                     8K
------------------------------------ ----------------------------------

------------------------------------ ----------------------------------
Multi Antenna Module                 1K
------------------------------------ ----------------------------------
                                     4K
------------------------------------ ----------------------------------
                                     8K
------------------------------------ ----------------------------------

------------------------------------ ----------------------------------
Wrist Watch Module                   1K
------------------------------------ ----------------------------------
                                     4K
------------------------------------ ----------------------------------

SMART CARDS:

------------------------------------ ----------------------------------
Contactless Only                     1K
------------------------------------ ----------------------------------
                                     4K
------------------------------------ ----------------------------------
                                     8K
------------------------------------ ----------------------------------

------------------------------------ ----------------------------------
MultiCard                            1K
------------------------------------ ----------------------------------
                                     4K
------------------------------------ ----------------------------------
                                     8K
------------------------------------ ----------------------------------

------------------------------------ ----------------------------------
Combination Module Card              1K
------------------------------------ ----------------------------------
                                     4K
------------------------------------ ----------------------------------
                                     8K
------------------------------------ ----------------------------------

------------------------------------ ----------------------------------
Uni Card                             1K
------------------------------------ ----------------------------------
                                     4K
------------------------------------ ----------------------------------
                                     8K
------------------------------------ ----------------------------------

                                       19

------------------------------------ ----------------------------------
Power Card                           1K
------------------------------------ ----------------------------------
                                     4K
------------------------------------ ----------------------------------
                                     8K
------------------------------------ ----------------------------------

------------------------------------ ----------------------------------
Wrist Watch                          1K
------------------------------------ ----------------------------------
                                     4K
------------------------------------ ----------------------------------

READERS & ACCESSORIES:
[ ] SCI 5 OEM Board
[ ] Int5
[ ] Host Reader
[ ] Multi reader
[ ] SAM for Reader

SOLUTIONS:
[ ] Gasoline Management Solution
[ ] Medical Application Solution
[ ] E-purse for closed campus

20

AGREEMENT BETWEEN OTI AND OTIP
DATED FEBRUARY 2000

ANNEX B

PRICE LIST

---------------------------------------------------------- --------------------------------------------------------
                         PRODUCT                                          PRICE IN US$ (EX FACTORY)
---------------------------------------------------------- --------------------------------------------------------
---------------------------------------------------------- --------------------------------------------------------

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

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

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

SPECIFIC TERMS

Prices of OTI Products shall be comparable to the most favorable prices given to other distributors of similar OTI Products on similar terms of purchase in countries other than the Territory ("MFC TERMS").

PRICE OF SERVICES (SECTION 10.2)

To be determined by agreement of the parties on a case by case basis on MFC Terms

ADDITIONAL WARRANTY CHARGE (SECTION 11)

To be determined by agreement of the parties on a case by case basis but in no event more than 12% of price to customer. Additional warranty shall relate only to Reading Devices

21

AGREEMENT BETWEEN OTI AND OTIP
DATED FEBRUARY 2000

ANNEX C

TERRITORY

1. China

2. Hong Kong

3. Taiwan

4. Singapore

5. Australia

6. South Korea

7. Japan

8. The Philippines

9. Malaysia

10. Indonesia

11. Thailand

12. India

13. Vietnam

14. New Zealand

22

AGREEMENT BETWEEN OTI AND OTIP
DATED FEBRUARY 2000

ANNEX D

TRADE MARKS

TRADEMARKS Trademark applications have been filed in Israel for the name "OTI" "Easy Park(TM)" and the mark "EYECON(TM)" as well as "OTI Insight". The Company is filing priority applications for use of these trademarks in the United States and Europe.

Table I:OTITM

--------------------------------------------------------------------------------------------------------
                                APPLICATION             Registered
COUNTRY             NUMBER              DATE            NUMBER              DATE           STATUS
--------------------------------------------------------------------------------------------------------
        USA                                                                                Registered
--------------------------------------------------------------------------------------------------------

Table II: Easy ParkTM

--------------------------------------------------------------------------------------------------------
                                APPLICATION             Registered
COUNTRY             NUMBER              DATE            NUMBER              DATE           STATUS
--------------------------------------------------------------------------------------------------------
Canada              72844-84                            854249              12/8/99        Granted
--------------------------------------------------------------------------------------------------------

23

AGREEMENT BETWEEN OTI AND OTIP
DATED FEBRUARY 2000

ANNEX E

CURRENT OTI'S DISTRIBUTION AND DEALERSHIP NETWORK IN THE TERRITORY

----------------------------------------------------- ---------------------------------------------------
                     Country                                            DISTRIBUTOR
----------------------------------------------------- ---------------------------------------------------
China                                                 OTI China Ltd.
----------------------------------------------------- ---------------------------------------------------
Hong Kong                                             City Smart Ltd.
----------------------------------------------------- ---------------------------------------------------
Philippines                                           E.L. Enterprises
----------------------------------------------------- ---------------------------------------------------
South Korea                                           Focus Ltd.
----------------------------------------------------- ---------------------------------------------------
India                                                 Pace Automation
----------------------------------------------------- ---------------------------------------------------
Indonesia                                             PT. Triomega
----------------------------------------------------- ---------------------------------------------------
Taiwan                                                Innovision Ltd.
----------------------------------------------------- ---------------------------------------------------

24

AGREEMENT BETWEEN OTI AND OTIP
DATED FEBRUARY 2000

ANNEX F

GENERAL TERMS & CONDITIONS OF SALE OF OTI

1. ORDERS, PRODUCTS AND SOFTWARE*

Unless otherwise stated in a written agreement signed by On Track Innovations Ltd. (hereafter called "VENDOR"), the terms and conditions herein shall apply to sales made by the Vendor. Notwithstanding anything to the contrary stated in Buyer's conditions of purchase, Buyer agrees that Vendor's acceptance in writing or by electronic mail or by EDI (when either system has been agreed by Vendor for the purposes hereof) of Buyer's order constitutes Buyer's acceptance of the conditions set out herein. Where Software is supplied by Vendor to Buyer, whether or not in combination with products, Buyer acknowledges that use of that Software is governed by Vendor or third party software license terms and conditions applicable to that software. All the conditions herein included shall also apply to the supply of Software so long as they are not inconsistent with the applicable third party software license terms and conditions.

2. PRICE AND PACKAGING

The price is Ex-Works, excluding any applicable tax, customs duty and/or levy imposed by any public authority in the Territory, for which Buyer shall be liable directly and additionally be liable to pay to Vendor if Vendor has made payment. The cost of non standard packaging is not included. Reasonable instructions of the Buyer concerning non standard packaging, weight and customs shall be abided by Vendor provided that Buyer has given precise instructions with reasonable prior notice. The corresponding additional costs shall be charged to Buyer.

3. DELIVERIES

3.1 In the event of any default by Buyer, Vendor may decline to make further shipments or may elect to continue to make shipments notwithstanding such default.

3.2 Orders accepted by the Vendor are firm and non cancellable by the Buyer except (1) upon Vendor's default which shall not have been corrected within 7 days from Buyer's notice to such effect and shall be subject to appropriate indemnification by Vendor for costs and loss of profit incurred by Buyer or (2) upon Vendor's written agreement, which shall only be considered on a case by case basis and shall be subject to appropriate indemnification by Buyer for costs and loss of profit incurred by Vendor.

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3.3 Any claim regarding non-conformity of product with specifications will be accepted by Vendor only if each of the following three conditions have been met:

3.3.1    The Buyer's claim must be submitted in writing to Vendor
         within nine months after the delivery date. After such
         nine-month period has expired, all products shall be deemed
         accepted. After submitting the claims to Vendor, Buyer shall
         return the whole batch of non-accepted products. Each
         allegedly non-conforming batch of products must be accompanied
         by a written statement of the Buyer containing the precise
         reason for rejection and the corresponding test report and
         proof of purchase,

3.3.2    The return must be made at the Buyer's cost which shall be
         reimbursed by the Vendor if the Buyer's claim is justified;
         and

3.3.3    Products must not have been modified by the Buyer.

4. PRODUCTS SPECIFICATIONS

Specifications for products shall be Vendor's specifications as existing in the official published data sheet at the time of the order acknowledgment, except if particular specifications are given by Buyer and accepted by Vendor.

Except as otherwise specifically agreed in writing by Vendor, Vendor reserves the right to change at any time the specifications of any product manufactured by Vendor (including all statements and data appearing in Vendor's catalogues, data sheets and advertisements) with 30 days' prior written notice to Buyer which shall then be applicable to products thereafter purchased from Vendor.

5. RESERVATION OF TITLE

TITLE IN THE PRODUCTS SHALL REMAIN WITH VENDOR UNTIL IT HAS RECEIVED FULL PAYMENT FOR SUCH PRODUCTS NOTWITHSTANDING DELIVERY TO BUYER. Upon Buyer's failure to make payment by the due date, Vendor may take back possession of the products delivered and to that end, Buyer hereby grants Vendor or anyone designated by him access to the premises where the products are stored.

6. WARRANTY

Vendor's products are not designed nor are they authorized for use in life supporting devices or systems. Vendor expressly disclaims any responsibility for such usage which shall be made at Buyer's sole risk, even if Vendor has been informed in writing of such usage.

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7. INTELLECTUAL PROPERTY RIGHTS

In the event that a third party makes a claim alleging that products delivered to Buyer infringe such third party's intellectual property rights, Vendor undertakes at its option and charge to defend the claim or seek a compromise; if an unfavorable and final judgment is rendered against Vendor, it shall at its option take out a license from the above mentioned third party or shall modify the products in such a way as to avoid infringement. If such a solution shall be impracticable for economic and/or technical reasons, Vendor shall accept the return of the products supplied and shall indemnify and keep indemnified Buyer and any customer of Buyer from all reasonable loss, liability, damage and claim made by any third party, and cost and expense in connection with any such claim. The preceding indemnification shall only be due by the Vendor provided that Buyer (1) promptly notifies Vendor in writing of the claim of infringement and (2) allows Vendor to control and cooperates with Vendor in the defense and any related settlement action. Furthermore, such indemnification of Vendor does not apply to any claims of infringement involving products made, provided or modified by Vendor in compliance with the requirements or specifications of Buyer, from the combination or use of products supplied with any other products or from any modification to the programming of products made other than by Vendor for which Buyer agrees to indemnify Vendor against all damages and costs resulting from any such claims of infringement made against Vendor. The above provisions constitute the entire undertaking of Vendor towards Buyer in the event of any intellectual property right claim of a third party with regard to products supplied by Vendor.

8. GENERAL

8.1 EXPORT CONTROL LAWS. Buyer undertakes to comply with all applicable laws, regulations, decrees and ordinances, related to the Buyer's use, sale or transfer of the products supplied thereunder.

8.2 SOFTWARE. (1) Title to Software (as referred to in Clause 1) including without limitation copyright, is owned by Vendor or third party licensors and no title is transferred to Buyer. (2) Buyer shall not copy, modify, translate, disassemble or decompile the Software. Buyer or its customer shall have the right to use the Software in connection with any product supplied by Vendor and not otherwise. The right to use the Software may only be transferred when the product to which it relates is transferred.

8.3 NO LICENSES. No license under any intellectual property right of Vendor is granted herein except the right to use or resell any product sold by Vendor to Buyer for the purposes for which it was sold.

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AGREEMENT BETWEEN OTI AND OTIP
DATED FEBRUARY 2000

ANNEX G

SUB -DISTRIBUTOR'S UNDERTAKING

On Track Innovations Ltd.
Z.H.R. I.Z., Rosh Pina 12000
ISRAEL

Gentlemen,

I, the undersigned, wishing to be appointed as sub-distributor of OTI Asia Pacific Ltd. (the "Distributor") of certain OTI Products (the "OTI PRODUCTS") of On Track Innovations Ltd. ("OTI"), do hereby undertake towards OTI as follows:

1. I shall hold as fully confidential and not to disclose to other or others, and not to use, directly or indirectly, all Confidential Information of OTI, including without limitation, technical information, technology and trade secrets, strategic plans and price calculations. For the purposes hereof "Confidential Information" shall include all information marked by OTI as such but shall exclude all information which was already or became public knowledge through no fault of mine.

2. I shall require each of my employees and/or agents employed in providing services in relation to the OTI Products to execute the undertaking of confidentiality set forth in Section 1 above.

3. I am aware of the provisions of Sections 8, 11, 13, 15.2, 16, 17, 19, 22 and 23 of the agreement between OTI and the Distributor (the "DISTRIBUTION AGREEMENT"), which were provided to me by the Distributor. I shall act as if I were the Distributor in accordance therewith mutatis mutandis, and such provisions may be referred against me directly by OTI.

4. I am aware and agree that termination of the Distribution Agreement, for any reason, shall cause the immediate termination of any agreement between me and the Distributor in respect of the OTI Products.

5. I agree that, subject to the provisions of Section 3 above, in any event OTI shall not be deemed to have any direct contractual relationship with me, and I shall not have any claim or demand or any other right towards OTI in any matter whatsoever.

6. I am aware and agree that OTI shall be entitled to terminate forthwith my engagement in the distribution of the OTI Products, by sending a 60 days' prior written notice to such effect to me.

Sincerely yours,

    Signature:       ________________
    Name:            ________________
    Address:         ________________
    Fax No.:         ________________
    Tel. No.:        ________________
    Distributor:     ________________

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AGREEMENT BETWEEN OTI AND OTIP DATED
FEBRUARY 2000

ANNEX H

MUTUAL CONFIDENTIALITY AGREEMENT

Made and signed as of the ______ day of February, 2000

BETWEEN

ON TRACK INNOVATIONS LTD., of Z.H.R. - Industrial Zone, Rosh-Pina 12000 Israel
("OTI")

AND

CHEUNG KONG INFRASTRUCTURE HOLDINGS LIMITED of 12/F, Cheung Kong Center,
2 Queen's Road Central, Hong Kong ("CKI")

AND

SAILOR GROUP LIMITED (to be renamed as OTI ASIA PACIFIC LTD.), of P.O. Box 957,

                   Offshore Incorporations Centre, Road Town,
                    Tortola, British Virgin Islands ("OTIP")

WHEREAS           OTI has developed and is the sole owner of certain proprietary
                  technology relating in particular to contact/contactless and
                  contactless smart cards and readers of which it is the sole
                  owner ("OTI'S TECHNOLOGY") as described in paragraph (c) in
                  the definition of "OTI INTELLECTUAL PROPERTY" in Clause 1.1 of
                  the Shareholders Agreement relating to OTip dated the date
                  hereof (the "SHAREHOLDERS AGREEMENT"); and -

WHEREAS           CKI is the sole owner of certain trade secrets relating to its
                  business ("CKI'S TRADE SECRETS") as described in the
                  definition of "CK GROUP PROPRIETARY INFORMATION AND RIGHTS" in
                  Clause 1.1 of the Shareholders Agreement; and -

WHEREAS           CKI and OTI have established OTip and are its existing
                  shareholders, and OTip has entered into a distribution
                  agreement with OTI dated the date hereof, (the "DISTRIBUTION
                  AGREEMENT") pursuant to which it shall act as a distributor of
                  OTI in the Asia Pacific region; and -

WHEREAS           CKI and OTI, as shareholders of OTip shall be exposed to
                  confidential information of OTip, and OTip, as a distributor
                  of OTI, shall be exposed to confidential information of OTI;

29

NOW THEREFORE THE PARTIES HAVE AGREED AS FOLLOWS:

1. In this Agreement:

1.1 The term "DISCLOSER" means a party to this Agreement disclosing Confidential Information to any of the other parties.

1.2 The term "RECIPIENT" means any party to this Agreement receiving Confidential Information from any of the other parties.

1.3 The term "CONFIDENTIAL INFORMATION" means any and all information relating to the Discloser's proprietary technology or business made available by the Discloser to the Recipient including, without limitation, information, data, know-how, formulae, tests, drawings, specifications, applications, designs and trade secrets, information and data relating to the Discloser's products, design methodology, engineering and manufacturing processes and related equipment, suppliers, sales, customers, business operations and plans, financial situation, members, employees and investors and any notes, memoranda, summaries, analyses, compilations or any other writings relating thereto prepared by the Discloser or the Recipient or on such party's behalf, provided that such information is in writing or other tangible form and is clearly marked as "proprietary" or "confidential" when disclosed to the Recipient; or if such information is not in tangible form, that (i) such information is identified as "proprietary" or "confidential" when disclosed and summarized in a written document which is marked "proprietary" or "confidential" and is delivered to the Recipient within 30 (thirty) days after date of disclosure; or (ii) is deemed "proprietary" or "confidential" if such information is known or reasonably should be known by the Recipient to be "confidential" or "proprietary". Without derogating from the generality of the above, all information, data and know-how relating to OTI's Technology shall be deemed Confidential Information of OTI, and all information, data and know-how relating to CKI's Trade Secrets shall be deemed Confidential Information of CKI.

2. Recipient undertakes to maintain as secret and fully confidential:

2.1 all the Discloser's Confidential Information obtained by the Recipient pursuant to this Agreement and prior to and in contemplation of it, and not to disclose, divulge or use same, directly or indirectly, save exclusively for the purposes for which it was disclosed to the Recipient.

2.2 OTI's and CKI's shareholding in OTip and the existence of this Agreement or of any other agreement between the parties, or any details relating to the Discloser, its business or its Confidential Information, or the fact that negotiations or discussions between the parties have taken or are taking place, or the terms and conditions on which any possible arrangements or agreements between the parties may take or might have taken place, unless otherwise agreed in writing between the parties.

3. The restrictions of use and disclosure set forth in this Agreement shall not apply to any Confidential Information which, based on proof by the Recipient,

3.1 the Discloser has approved for disclosure in advance and in writing;

3.2 was already known to the Recipient at the time such information was received from the Discloser;

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3.3 was already or became available to the general public, through no breach of any confidentiality undertaking towards the Discloser;

3.4 was at any time lawfully obtained by the Recipient from any other person, firm or company having no obligation not to disclose it.

3.5 is required to be disclosed by the Recipient by applicable law, regulation or court order, or pursuant to any rules imposed by or agreements entered into with any relevant stock exchange or the securities commission; provided that the Recipient shall first give prior prompt written notice to the Discloser of the requirement for such disclosure and co-operate through all reasonable and legal means, at the Discloser's expense, in any attempts by the Discloser to protect or otherwise restrict disclosure of such Confidential Information.

4. In order to secure the confidentiality of the Confidential Information the Recipient shall:

4.1 procure that its respective subsidiaries, holding company and affiliated companies and their directors, employees, agents and consultants shall maintain secret and confidential the Confidential Information of the Discloser;

4.2 safeguard the Confidential Information of the Discloser with at least the same degree of care as it uses for its own Confidential Information, and without derogating from the generality of the above, shall keep the Confidential Information in a safe and separate place;

4.3 limit access to the Confidential Information only to those of the Recipient's directors, employees, agents and consultants to whom disclosure is necessary for the purposes hereof provided that all such directors, employees, agents and consultants which may have access to the Confidential Information are under a confidentiality undertaking towards the Recipient to maintain the Confidential Information as fully confidential and not to disclose, divulge or use same, directly or indirectly, but for the purposes of carrying out their duties towards the Recipient. At the Discloser's request, the Recipient shall provide the Discloser with an accurate list of all of its directors, employees, agents and consultants which had or have access to the Confidential Information. For avoidance of doubt, the Recipient will assume responsibility for any breach of the terms of this Agreement by the Recipient's directors, employees, agents and consultants, to whom disclosure of the Confidential Information is permitted and made by the Recipient under this Agreement.

5. At the Discloser's request, Recipient shall forthwith return to the Discloser all Confidential Information in tangible form and not retain any copies of it, including copies made by electronic forms save and except to the extent where it is necessary for the Recipient to perform its obligations under the Shareholders Agreement and Distribution Agreement.

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6. The disclosure of Confidential Information or its use hereunder shall not be construed in any way as granting any party any right or license with respect to the Confidential Information (or, in particular, to OTI's Technology or CKI's Trade Secrets) other than the right to use Confidential Information strictly for the purposes set forth in the preamble of this Agreement.

7. Each party hereto reserves all rights in any inventions, patents, copyrights, designs, and any other intellectual property invented or devised by it in relation to Confidential Information of such party.

8. This Agreement shall survive the termination of the Shareholders Agreement or Distribution Agreement (whichever shall later occur) and shall be valid for a period of five years after such termination.

9. It is agreed that the unauthorized disclosure or use of any Confidential Information will cause immediate or irreparable injury to the Discloser, and that the Discloser cannot be adequately compensated for such injury in monetary damages. Each party therefore acknowledges and agrees that, in such event, the Discloser shall be entitled to any temporary or permanent injunctive relief necessary to prevent such unauthorized disclosure or use, or threat of unauthorized disclosure or use.

10. No party shall be entitled to assign its rights and obligations hereunder without the other parties' prior written approval.

11. If any condition, term or covenant of this Agreement shall at any time be held to be void, invalid or unenforceable, such condition, covenant or term shall be construed as severable and such holding shall attach only to such condition, covenant or term and shall not in any way affect or render void, invalid or unenforceable any other condition, covenant or term of this Agreement, and this Agreement shall be carried out as if such void, invalid or unenforceable term were not embodied herein.

12.      The laws of England shall govern this Agreement.

 --------------------------------   --------------------------------------------
 On Track Innovations Ltd.          Cheung Kong Infrastructure Holdings Limited

 by: __________________             by: __________________
 title: _________________           title: _________________

 Sailor Group Limited (to be renamed
 OTI ASIA PACIFIC LTD.)
 by: __________________
 title: _________________

* "Software" means computer programs, software and firmware whether in printed or machine readable form, including software on magnetic tape, disc or in a ROM forming part of the product.

32

EXHIBIT 10.30

Annex B

On Track Innovations Ltd.
2001 Employee Stock Purchase Plan

1. Purpose

The 2001 On Track Innovations Ltd. Employee Stock Purchase Plan (The "Plan") is intended to provide a method whereby employees of On Track Innovations Ltd., a corporation organized under the laws of the State of Israel, and it's subsidiaries and predecessor corporations, if any (hereinafter collectively referred to, unless the context otherwise requires, the "Company"), will have an opportunity to acquire a proprietary interest in the Company thorough the purchase of Ordinary Shares of the Company. It is the intention of the Company to have the Plan qualify as an "employee stock purchase plan" under
Section 423 of the U.S. Internal Revenue Code of 1986, as amended (the "Code"). The provisions of the Plan shall, accordingly, be construed so as to extend and limit participation in a manner consistent with the requirement of
Section 423 of the Code.

2. Definitions

(a) "Base Pay" means regular straight-time earnings (as the same may be adjusted from time to time) and overtime but excluding payments shift differentials, incentive compensation, sales commissions, bonuses and other special payments.

(b) "Board" means the Company's Board of Directors.

(c) "Committee" means the Compensation Committee of the Company provided, however, that to the extent such committee is not authorized to take action pursuant to section 112 of the Companies Law, 5759 - 1999, the Board shall serve as the administrator of the Plan with respect to such action. Notwithstanding the above, the Board shall automatically have an authority if no committee shall be constitutes or if such committee shall cease to operate for any reason.

(d) "Ordinary Shares" means the ordinary shares of the Company, par value NIS 0.01 per share, or such other class or kind of shares or other securities resulting from the application of Section 423.

(e) "Employee" means any person who is customarily employed for 20 or more hours per week and more than five months in a calendar year by the Company or by a Subsidiary Corporation.


(f) "Fair Market Value" means, as of any date, the value of Ordinary Shares determined as follows:

(i) If the Ordinary Shares are listed on any established stock exchange or a national market system, including without limitation the Neuer Market, Nasdaq National Market system, or The Nasdaq SmallCap Market of the Nasdaq Stock Market , the Fair Market Value shall be the closing sales price for such Shares (or the closing bid, if no sales were reported), as quoted on such exchange or system for the last market trading day prior to time of determination, as reported in any official publication of such stock exchange, including, but not limited, to any official web site, the Wall Street Journal, or such other source as the Board deems reliable (hereinafter: "the closing sale price"). In a case where the Ordinary Shares are listed on more than one stock exchange or a national market system, the Fair Market Value shall be the closing sale price for such shares in the stock exchange or the national market system with the greatest value of trading in the company's stock.

(ii) If the Ordinary Shares are regularly quoted by a recognized securities dealer but selling prices are not reported, the Fair Market Value shall be the mean between the high bid and low asked prices for such shares on the last market trading day prior to the day of determination, or;

(iii) In the absence of an established market for the Shares, the Fair Market Value thereof shall be determined in good faith by the Committee.

(h) "Offering Commencement Date" means the applicable date on which an Offering under the Plan commences pursuant to Paragraph 4.

(g) "Offering Termination Date" means the applicable date on which an Offering under the Plan terminates pursuant to Paragraph 4.

(h) "Subsidiary Corporation" means any present or future corporation which
(i) is a "subsidiary corporation" as that term is defined in Section 424(f) of the Code and (ii) is designated as a participant in the Plan by the Board or Committee described in Paragraph 13.

3. Eligibility

(a) Any Employee who shall have completed six months of employment and shall be employed by the Company on the applicable Offering Commencement Date shall be eligible to participate in the Plan.

(b) Any provision of the Plan to the contrary notwithstanding, no Employee shall be granted an option to participate in the Plan:

2

(i) if, immediately after the grant, such Employee would own shares, and/or hold outstanding options to purchase shares, possessing 5% or more of the total combined voting power or value of all classes of stock of the Company or of any - 2 - Subsidiary Corporation (for purposes of this Paragraph the rules of Section 424(d) of the Code shall apply in determining stock ownership of any employee); or

(ii) which permits his or her right to purchase shares under all employee stock purchase plans maintained by the Company and its subsidiaries to accrue at a rate which exceeds $25,000 of the fair market value of the shares (determined at the time such option is granted) for each calendar year in which such option is outstanding at any time.

4. Offering Dates

The Plan will be composed of 4 offerings (referred to herein collectively as "Offerings" and individually as an "Offering") of a maximum aggregate of 675,000 shares (subject to adjustment as provided in Paragraph 12(a) and 17) of Ordinary Shares, subject to Paragraph 12, 17 and 23 below, as follows:

The first Offering Period during which payroll deductions will be accumulated under the Plan shall commence no later to accur of January 1, 2002 and shall end on June 31, 2002. For the remainder of the duration of the Plan, Offering Periods shall consist of the six months periods commencing on January 1 and July 1 and ending on June 31 and December 31 of each calendar year.

Participation in any one Offering under the Plan shall neither limit, nor require, participation in any other Offering.

5. Participation

All Employees who have completed at least six months of service for the Company or any of its participating subsidiaries, may elect to become participants in an Offering on the applicable Offering Commencement Date by filling out, signing and delivering to the Company an authorization.

(i) Stating the percentage to be deducted regularly from the employee's pay;

(ii) Authorizing the purchase of shares for the employee in each Offering Period in accordance with the terms of the Plan; and,

(iii) Specifying the exact name or names in which Ordinary Shares purchased for the employee are to be issued under this Plan.

3

6. Payroll Deductions

(a) Participants may elect to have amounts withheld from their base pay by completing an authorization for payroll deduction ("Authorization") on the form provided by the Company and by filing it with the Company's principal oofice. At the time a participant files his or her Authorization for a payroll deduction, the participant shall elect to have deductions made from his or her pay on each payday during the time her or she is a participant in an Offering at the - 3 - rate of 0,1,2,3,4,5,6,7,8,9,10,11,12,13,14 or 15% of his or her monthly base pay. If a participant has not filed an Authorization for a the applicable Offering at least ten (10) days prior to the applicable Offering Commencement Date, he or she shall be deemed to have elected not to participate in such Offering Period.

(b) All payroll deductions made for the participant shall be credited to his or her account maintained by the Company under the Plan. A participant may not make any separate cash payment into such account.

(c) Except as provided in Paragraph 8(b) or 10, a participant may only make changes to the rate of deduction from his or her monthly base pay, on not more than one occasion during an Offering, by completing a new Authorization on the form provided by the Company and filing it with the Company's principal office as provided herein. Such new Authorization shall be effective upon the commencement of the first pay period subsequent to its filing. A participant may change his or her Authorization only once during any Offering.

7. Granting of Option

(a) For each of the Offerings, a participant Employee shall be deemed to have been granted an option (the "Option"), on the applicable Offering Commencement Date, to purchase a maximum number of shares of Ordinary Shares equal to an amount determined as follows: the total amount contributed by the Participant Employee shall be divided into $4 (which represents the minimum price per share for purposes of this plan). The result will represent the maximum number of shares the participant is entitled to purchase under the plan. For all purposes of the Plan, the market value of the Company's Ordinary Share shall be determined as provided in subparagraph (b) below.

The result will represent the number of shares the participant is entitled to purchase under the plan.

(b) The purchase price of a share of Ordinary Shares purchased with payroll deductions made during each Offering (the "Option Exercise Price") shall be the lower of:

(i) eighty five percent (85% ) of the Fair Market Value of the Ordinary Shares, on the applicable Offering Commencement Date; or

(ii) eighty five percent (85%) of the Fair Market Value of the Ordinary Shares, on the applicable Offering Termination Date.

4

8. Exercise of Options

With respect to each Offering during the term of the Plan:

(a) Unless a participant gives written notice of withdrawal to the Company as provided in Paragraph 8(b) and 10, his or her option will be deemed to have been exercised automatically on the Offering Termination Date applicable to such Offering, for the purchase of the number of full shares of Ordinary Shares which the accumulated payroll deductions (without interest) in his or her account maintained by the Company under the Plan at that time will purchase at the applicable Option Exercise Price (but not in excess of the number of shares for which Options have been granted to the Employee pursuant to Paragraph 7(a)), and any excess in this or her account at that time will be returned to him or her.

(b) A participant may elect, by written notice to the principle office of the Company at any time prior to the Offering Termination Date applicable to any such Offering, to withdraw all, but not less than all, of the accumulated payroll deductions in his or her account at such time.

(c) Fractional shares will not be issued under the Plan and any accumulated payroll deductions which would have been used to purchase fractional shares shall be returned to an employee without interest promptly following the termination of an Offering.

9. Delivery

As promptly as practicable after the Offering Termination Date of each Offering, the Company will deliver to each participant, as appropriate, a notification of the amount representing the shares of Ordinary Shares purchased upon the exercise of such participant's Option. The Company may elect to deliver share certificates to the Participant representing such purchase of shares or may record such purchase and ownership of shares by any other method that comports with applicable law.

10. Withdrawal

(a) As indicated in Paragraph 8(b), a participant may withdraw payroll deductions credited to his or her account with the Company at any time prior to the applicable Offering Termination Date by giving written notice of withdrawal to the principle office of the Company. All of the participant's payroll deductions credited to his or her account will be paid to the participant promptly after receipt of such notice of withdrawal and no further payroll deductions will be made from his or her pay during such Offering.

5

(b) A participant's withdrawal from any Offering will not have any effect upon his or her eligibility to participate in any succeeding Offering or in any similar Plan which may hereafter be adopted by the Company. However, payroll deductions shall not resume at the beginning of any succeeding Offering Period unless the Participant delivers to the principle office of the Company a new enrollment form within the time periods and in the form specified by the Company.

(c) Upon termination of the participant's employment for any reason, including retirement but excluding death or disability, while in the employ of the Company, the payroll deductions credited to his or her account will be returned to the participant or, in the case of his or her death subsequent to the termination of employment, to the person or persons entitled thereto under Paragraph 14.

(d) Upon termination of the participant's employment because of disability or death, the participant or his or her beneficiary (as defined in Paragraph 14) shall have the right to elect, by written notice given to the Company's principle office prior to the expiration of the commencing with the date of the disability or death of the participant, either.

(i) to withdraw all of the payroll deductions credited to the participant's account under the Plan; or

(ii) to exercise the participant's Options on the next Offering Termination Date following the date of the participant's disability or death for the purchase of the number of full shares of Ordinary Shares which the accumulated payroll deductions in the participant's account at the date of the participant's disability or death will purchase at the applicable Option Exercise Price, and any excess in such account will be returned to the participant or said beneficiary.

If no such written notice of election is received by the principle office, the participant or beneficiary shall automatically be deemed to have elected to withdraw the payroll deductions credited to the participant's account at the date of the participant's disability or death and the same will be paid promptly to the participant or said beneficiary as determined by the Committee prior to each Offering Commencement Dated.

6

11. Interest

No interest shall accrue on any money paid into the Plan credited to the account of any participant.

12. Shares

(a) The maximum number of shares of Ordinary Shares which shall be made available for sale under the Plan shall be 675,000 shares, subject to adjustment upon changes in capitalization of the Company as provided in Paragraph 16. If the total number of shares for which options are exercised in accordance with Paragraph 8 exceeds 675,000 the Company shall make a pro rata allocation of the shares available for delivery and distribution in as nearly a uniform manner as shall be practicable and as it shall determined to be equitable, and the balance of payroll deductions credited to the account of each participant under the Plan shall be returned to him or her as promptly as possible.

(b) The participant will have no interest or voting rights in Ordinary Shares covered by his or her Option until such Option has been exercised.

(c) Ordinary Shares to be delivered to a participant under the Plan will be issued in the name of the participant.

13. Administration

The Plan shall be administrated by the Committee. The interpretation and construction of any provision of the Plan and the adoption of rules and regulations for administering the Plan shall be made by the Committee, subject at all times to the final approval of the Board. Determinations made by the Committee and approved by the Board with respect to any matter or provision contained in the Plan shall be final, conclusive and binding upon the Company and upon all participants, their heirs or legal representatives. Any rule or regulations adopted by the Committee reduced to writing and signed by the majority of the members of the Committee, shall remain in full force and effect unless and until altered, amended or repealed by the Committee or the Board.

The Company will pay all expenses incurred in the administration of the Plan. No member of the Committee shall be personally liable for any action, determination or interpretation made in good faith with respect to the Plan and all members of the Committee shall be fully indemnified by the Company with respect to any such action, determination or interruption.

14. Transferability

Neither payroll deductions credited to a participant's account nor any rights with regard to the exercise of an Option or to receive Shares under the Plan may be assigned, transferred, pledged or otherwise disposed of in any way by the participant otherwise than by will or applicable laws of descent and distribution. Any such attempted assignment, transfer pledge or other disposition shall be without effect, except that the Company may treat such act as an election to withdraw funds in accordance with Paragraph 8(b).

7

15. Use of Funds

All payroll deductions received or held by the Company under this Plan may be used by the Company only after options granted pursuant to those deductions have been exercised for any corporate purpose and the Company shall not be obligated to segregate such payroll deductions.

16. Reports

Individual accounts shall be maintained for each participant in the Plan. Statements of account shall be provided to participating Employees after the end of certain Offering Period, which statements shall set forth the amounts of payroll deductions, the Purchase Price, the number of shares purchased and the remaining cash balance, if any.

17. Effects of Changes of Ordinary Shares

In the event of any changes of outstanding Ordinary Shares by reason of shares dividends, subdivision, combinations and exchanges of shares, recapitalizations, mergers in which the Company is the surviving corporation, consolidations, and the like, the aggregate number of and class of shares available under the Plan and Option Exercise Price per share shall be appropriately adjusted by the Board, whose determination shall be conclusive. Any such adjustments may provide for the elimination of any fractional shares which would otherwise become to any Options.

18. Amendment or Termination

(a) The Board may at any time, and from time to time, for any reason, modify, terminate or amend the Plan in any respect, except that if at any time the approval of the stockholders of the Company is required as to such modification or amendment under (i) Section 423 of the Code, or
(ii) under Rule 16b-3 of the Securities Exchange Act of 1934, as amended, or any successor provision ("Rule 16 b-3") or (iii) under any applicable listing requirements, the Board may not effect such modification or amendment without such approval.

(b) No termination or any modification or amendment of the Plan shall adversely affect the rights of a Participant without his or her consent with respect to Ordinary Shares previously acquired under the Plan. The Board shall have the right to amend or modify the terms and provisions of the Plan and of any Options previously granted under the Plan to the extent necessary to ensure the continued qualification of the Plan under
Section 423 of the Code and Rule 16b-3.

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19. Notices

All notices or other communications by a participant to the Company under or in connection with the Plan shall be deemed to have been duly given when received by the Company's principle office.

20. Merger or Consolidation

If the Company shall at any time merge into or consolidate with another corporation and the Company is the surviving entity, the holder of each Option then outstanding will thereafter be entitled to receive at the next Offering Termination Date upon the automatic exercise of such Option under Paragraph 8(a) (unless previously withdrawn pursuant to Paragraph 10) the securities or property which a holder of one share of the Ordinary Shares was entitled to upon and at the time of such merger or consolidation, and the Board shall take such steps in connection with such merger or consolidated as the Board shall deem necessary to assure that the provisions of Paragraph 17 shall thereafter be applicable, as nearly as reasonably practicable, to such securities or property. In the event of a merger or consolidation in which the Company is not the surviving entity, or of a sale of all or substantially all of the assets of the Company, the Plan shall terminate, and all payroll deductions credited to participants' accounts shall be returned to them; provided, however, that the Board may, in the event of such merger, consolidation or sale, accelerate the Offering Termination Date of the Offering then in effect and permit participants to purchase shares under the Plan at such accelerated Offering Termination Date.

21. Limits on Sale of Shares Purchased Under the Plan

The Plan is intended to provide Ordinary Shares for investment and not for resale. The Company does not, however, intends to restrict or influence any employee in the conduct of his or hers affairs. An employee may, therefore, sell shares purchased under the Plan at any time the employee chooses, subject to compliance with any applicable laws, including but not limited to, applicable securities laws, and subject to any restrictions imposed under any tax laws to ensure that tax withholding obligations are satisfied. The employee assums the risk of any market fluctuations in the price of the shares.

22. Notice to Company of Disqualifying Dispositions

By electing to participate in the Plan, each participant that is subject to federal tax in the United States, agrees to notify the Company in writing immediately after the participant transfers Ordinary Shares acquired under the Plan, if such transfer occurs within two years after the first business day of the Offering Commencement Date in which such Ordinary Shares were acquired. Each such participant further agrees to provide any information about such a transfer as may be requested by the Company or any Subsidiary corporation in order to assist it in complying with the tax laws. Such dispositions generally are treated as "disqualifying dispositions" under Sections 421 and 424 of the Code, which have certain tax consequences to participants and to the Company and its participating subsidiaries. - 9 -

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23. Approval of Stockholders

The Plan shall be submitted to the shareholders of the Company for their approval within twelve (12) months after the adoption of the Plan by the Board. The Plan is conditioned upon the approval of the shareholders of the Company, and failure to receive their approval shall render the Plan and all outstanding Options issued thereunder void and of no effect.

24. Registration and Qualification of the Plan Under Applicable Securities Laws

Notwithstanding anything to the contrary herein, no Option shall be granted under the Plan until such time as the Company has qualified or registered the shares which are subject to the Options under all applicable state and federal securities laws to the extent required by such laws. In the event the shares shall not have been so qualified and registered prior to the date an Offering is scheduled to commence, the Offering Commencement Date shall be the date upon which the registration of the shares and other qualification shall have become effective.

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EXHIBIT 10.31

ANNEX A

ON TRACK INNOVATIONS LTD.
THE 2001 SHARE OPTION PLAN

1. NAME The Plan, as amended from time to time, shall be known as the On Track Innovations Ltd. 2001 Share Option Plan (the "PLAN").

2. PURPOSE The purpose of the Plan is to afford an incentive to officers, directors, employees and consultants of On Track Innovations Ltd. (the "COMPANY"), or any subsidiary of the Company which now exists or hereafter is organized or acquired by the Company, or any affiliate, to acquire a proprietary interest in the Company, to continue as employees, directors and consultants, to increase their efforts on behalf of the Company, to promote the success of the Company's business and to attract new employees, directors or consultants, whose services are considered valuable. All options granted hereunder, whether together or separately, shall be hereinafter referred to as the "OPTIONS".

3. DEFINITIONS As used in this Plan, the following words and phrases shall have the meanings indicated:

(a) "AFFILIATE" of, or person "affiliated" with a person means any person or company or other trade or business that controls, is controlled by or is under common control with such person within the meaning of Rule 405 of Regulations C under the Securities Act, including, without limitation, any Subsidiary.

(b) "BOARD OF DIRECTORS" shall mean the Board of Directors of the company, as constituted from time to time.

(c) "CAUSE" shall mean (i) conviction of any felony involving moral turpitude or affecting the Company; (ii) any refusal to carry out a reasonable directive of the management and/or the Board which was within the scope of the duties of the employee and which involves the business of the Company or its affiliates and was capable of being lawfully performed;
(iii) embezzlement of funds of the Company or its affiliates; (iv) any breach of the Grantee's fiduciary duties or breach in bad faith of his duties of care to the Company; including without limitation disclosure of confidential information of the Company; and (v) breach of the Grantee non-competition undertaking towards the Company (vi) any conduct not in good faith reasonably determined by the Board of Directors to be materially detrimental to the Company.


(d) "COMMITTEE" shall mean the Compensation committee of the Board of Directors as described in Section 3 of the plan.

(e) "COMPANY" shall mean On Track Innovations Ltd.

(f) "DISABILITY" shall mean the inability of a Grantee to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment that can be expected to result in death or that has lasted or can be expected to last for a continuous period of not less than twelve (12) months.

(g) "FAIR MARKET VALUE" per share as of particular date shall be determined as follows:

(i) If the Shares are listed on any established stock exchange or a national market system, including without limitation the Neuer Market, Nasdaq National Market system, or The Nasdaq SmallCap Market of the Nasdaq Stock Market, the Fair Market Value shall be the closing sales price for such Shares (or the closing bid, if no sales were reported), as quoted on such exchange or system for the last market trading day prior to time of determination, as reported in any official publication of such stock exchange, including, but not limited, to any official web site, the Wall Street Journal, or such other source as the Board deems reliable (hereinafter: "THE CLOSING SALE PRICE"). In a case where the shares are listed on more than one stock exchange or a national market system, the Fair Market Value shall be the closing sale price for such shares in the stock exchange or the national market system with the greatest value of trading in the company's stock.

(ii) If the Shares are regularly quoted by a recognized securities dealer but selling prices are not reported, the Fair Market Value shall be the mean between the high bid and low asked prices for the Shares on the last market trading day prior to the day of determination, or;

(iii) In the absence of an established market for the Shares, the Fair Market Value thereof shall be determined in good faith by the Committee.

(h) "GRANTEE" shall mean the individual to whom Options shall be granted.

(i) "OPTION" or "OPTIONS" shall mean a grant to a Grantee of an option or options to purchase shares of Ordinary Shares.

(j) "OPTION AGREEMENT" shall mean an Option Agreement entered between the Company and an Grantee pursuant to this Plan.

(k) "ORDINARY SHARES" shall mean ordinary shares , par value 0.01 NIS per share, of the Company.

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(l) "PARENT" shall mean any company (other than the Company) in an unbroken chain of companies ending with the Company if, at the time of granting an Option, each of the companies other than the Company owns stock possessing fifty percent (50%) or more of the total combined voting power of all classes of stock in one of the other companies in such chain.

(m) "PLAN" shall mean the On Track Innovations Ltd. 2001 Israeli Share Option Plan.

(n) "SUBSIDIARY" shall mean any company (other than the Company) in an unbroken chain of companies beginning with the Company if, at the time of granting an Option, each of the companies other than the last company in the unbroken chain owns stock possessing fifty percent (50%) or more of the total combined voting power of all classes of stock in one of the other companies in such chain.

4. ADMINISTRATION The Plan shall be administered by the committee established by the Board of Directors of the Company. Notwithstanding the above, the Board shall automatically have an authority if no Committee shall be constituted or if such Committee shall cease to operate for any reason.

The Committee shall consist of such number of members (not less than two (2) in number) as may be fixed by the Board. The Committee shall select one of its members as its chairman (the "CHAIRMAN") and shall hold its meetings at such times and places as the Chairman shall determine. The Committee shall keep records of its meetings and shall make such rules and regulations for the conduct of its business as it shall deem advisable.

Any member of such Committee shall be eligible to receive Options under the Plan while serving on the Committee, unless otherwise specified herein and subject to the approval of the Board.

To the extent permitted under any applicable laws, the Committee shall have the authority in its discretion, subject to and not inconsistent with the express provisions of the Plan, to administer the Plan and to exercise all the powers and authorities either specifically granted to it under the Plan or necessary or advisable in the administration of the Plan, including, without limitation, the authority: (i) to grant Options; (ii) to determine the kind of consideration payable (if any) with respect to Options; (iii) to determine the period during which Options may be exercised, and whether in whole or in installments; (iv) to determine the persons to whom, and the time or times at which Options shall be granted (such persons are referred to herein as "Grantees"); (v) to determine the number of shares to be covered by each Option; (vi) to interpret the Plan; (vii) to prescribe, amend and rescind rules and regulations relating to the Plan; (viii) to determine the terms and provisions of the agreements 3 (which need not be identical) entered into in connection with Options granted under the Plan (the "Agreements"); (ix) to cancel or suspend Options, as necessary; (x) to designate the type of Options to be granted to a Grantee ;(xi) to determine the Fair Market Value (as defined above) of the shares; and (xii) to make all other determinations deemed necessary or advisable for the administration of the Plan.

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The Board shall fill all vacancies, however caused, in the Committee. The Board may from time to time appoint additional members to the Committee, and may at any time remove one or more Committee members and substitute others.

Subject to applicable laws, no member of the Board or Committee shall be liable for any action taken or determination made in good faith with respect to the Plan or any Option granted hereunder.

All decisions and selections made by the Committee pursuant to the provisions of the Plan shall be made by a majority of its members except that no member of the Committee shall vote on, or be counted for quorum purposes, with respect to any proposed action of the Committee relating to any Option to be granted to that member. Any decision, made by the Committee, and reduced to writing, shall be executed in accordance with the provisions of the Company's Articles of Association, as same may be in effect from time to time. The interpretation and construction by the Committee of any provision of the Plan or of any Option thereunder shall be final and conclusive unless otherwise determined by the Board.

Subject to the Company's Articles of Association and the Company's decision, and to all approvals legally required, each member of the Board or the Committee shall be indemnified and held harmless by the Company against any cost or expense (including counsel fees) reasonably incurred by him, or any liability (including any sum paid in settlement of a claim with the approval of the Company) arising out of any act or omission to act in connection with the Plan unless arising out of such member's own fraud or bad faith, to the extent permitted by applicable law. Such indemnification shall be in addition to any rights of indemnification the member may have as a director or otherwise under the Company's Articles of Association, any agreement, any vote of shareholders or disinterested directors, insurance policy or otherwise.

5. ELIGIBILITY The persons eligible for participation in the Plan as recipients of Options shall include any employees, directors, consultants and service providers of the Company or of any Subsidiary or Affiliate of the Company. The grant of an Option hereunder shall neither entitle the Grantee to participate nor disqualify him from participating in, any other grant of Options pursuant to the Plan or any other option or stock plan of the Company or any of its affiliates.

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6. SHARES RESERVED FOR THE PLAN The Company shall initially reserve 750,000 authorized but unissued Ordinary Shares(the "SHARES") for purposes of the Plan, subject to adjustment as set forth in SECTION 9 below. Any of such Shares which may remain unissued and which are not subject to outstanding Options at the termination of the Plan shall cease to be reserved for the purpose of the Plan, but until termination of the Plan the Company shall at all times reserve sufficient number of Shares to meet the requirements of the Plan.

If any outstanding Option under the Plan should, for any reason expire, be canceled or be terminated without having been exercised in full, the Shares allocable to the unexercised, canceled or terminated portion of such Option shall (unless the Plan shall have been terminated) become available for subsequent grants of Options under the Plan.

7. TERMS AND CONDITIONS OF OPTIONS Each Option granted pursuant to the Plan shall be evidenced by a written agreement between the Company and the Grantee (the "OPTION AGREEMENT"), in such form as the Committee shall approve from time to time. The Option Agreements shall comply with and be subject to the following terms and conditions specified below:

(a) NUMBER OF SHARES Each Option Agreement shall state the number of Shares to which the Option relates.

(b) TYPE OF OPTION Each Option Agreement shall specifically state the type of Option granted to the Grantee.

(c) PURCHSE PRICE Each Option Agreement shall state the Purchase Price. The purchase price of each Share subject to an Option or any portion thereof shall be determined by the Committee in its sole and absolute discretion in accordance with applicable law, subject to any guidelines as may be determined by the Board from time to time (the "PURCHASE PRICE"). The Purchase Price shall be subject to adjustment as provided in Section 9 hereof.

(d) MEDIUM AND TIME OF PAYMENT. The Purchase Price shall be payable upon the exercise of the Option in a form satisfactory to the Committee, including without limitation, by cash or cheque. The Committee shall have the authority to postpone the date of payment on such terms as it may determine.

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(e) TERM AND EXERCISABILITY OF OPTIONS.
(1) Options shall be exercised by the Grantee by giving written notice to the Company, in such form and method as may be determined by the Company, which exercise shall be effective upon receipt of such notice and the Purchase Price by the Company at its principal office. The notice shall specify the number of Shares with respect to which the Option is being exercised.

(2) Each Option granted under the Plan shall be exercisable following the Vesting Dates and for the number of Shares as shall be provided in Exhibit B to the Option Agreement. However no Option shall be exercisable after the Expiration Date set forth in Exhibit B of the Option Agreement. The vesting provisions of individual options may vary.

(3) Unless otherwise specified in any Appendix of the Plan, Options granted under the Plan and all rights attached thereto shall not be transferable by Grantees other than by will or laws of descent and distribution, and during a Grantee's lifetime shall be exercisable only by that Grantee.

(4) The Options may be exercised by the Grantee in whole at any time or in part from time to time, to the extent that the Options become vested and exercisable, prior to the Expiration Date, and provided that, subject to the provisions of SECTION 8 below, the Grantee is an employee or director or consultant or a service provider of the Company or any of its Subsidiaries, at all times during the period beginning with the granting of the Option and ending upon the date of exercise.

(f) RESTRICTIONS Notwithstanding anything to the contrary contained herein, in connection with any underwritten public offering by the Company of its shares, the Grantee who purchased Shares shall not, directly or indirectly, sell or otherwise transfer, hypothecate, pledge, grant or otherwise dispose of the Options (whether vested or not vested), the exercised Shares, or Shares issued by the virtue of the exercised Shares, whether in accordance with SECTION 9 (Adjustments) of the Plan or as bonus shares, without the prior written consent of the Company or its underwriters. Such restriction shall be in effect for the period as requested by the Company or such underwriters. In order to enforce the above restriction, the Company may impose stoptransfer instructions with respect to the exercised Shares

(g) The terms of each Option agreement may differ from other Option agreement granted under the Plan at the same time, or at any other time. The Committee may also grant more than one Option to a given Grantee during the term of the Plan, either in addition to, or in substitution for, one or more Options previously granted to that Grantee.

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(h) OTHER PROVISIONS. The Option Agreements evidencing Options under the Plan shall contain such other terms and conditions, not inconsistent with the Plan, as the Committee may determine.

8. TERMINATION OF EMPLOYMENT
8.1 Subject to the provisions of SECTION 8.2 below, and unless otherwise provided in the Grantee's Option Agreement, in the event of termination of Grantee's employment or service with the Company or any of its Subsidiaries, all Options granted to him will immediately be expired. A notice of termination of employment or service shall be deemed to constitute termination of employment.

8.2 Notwithstanding anything to the contrary hereinabove, an Option may be exercised after the date of termination of Grantee's employment or service with the Company or any Subsidiary of the Company during an additional period of time beyond the date of such termination, but only with respect to the number of Options already vested at the time of such termination according to the Vesting Periods of the Options set forth in
SECTION 4 of such Grantee's Option agreement, if:

(i) Termination is without Cause, in which event, and unless otherwise provided in the Grantee's Option Agreement, any Options still in force and unexpired may be exercised within a period of THREE (3) MONTHS from the date of such termination,

(ii) Termination is for cause (as defined above), in which event, and unless otherwise provided in the Grantee's Option Agreement, any Option held by such Grantee (whether or not vested) shall terminate immediately upon the Grantee's termination of employment or service (or if earlier, upon the Grantee's receipt of notice of termination "for cause") and the Grantee shall have no further rights to purchase shares of stock pursuant to such Option. Whether a termination of employment, service, or other relationship is to be considered "for cause" for purposes of this Plan shall be determined by the Board, which determination shall be final and conclusive.

(iii) Termination is the result of death or Disability of the Grantee, in which event, and unless otherwise provided in the Grantee's Option Agreement, any Options still in force and unexpired may be exercised within a period of EIGHTEEN (18) months from the date of termination in the event of death, and TWELVE (12) months from the date of termination in the event of disability, or

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(iv) Prior to the date of such termination, the Committee shall authorize an extension of the terms of all or part of the Options beyond the date of such termination for a period not to exceed the period during which the Options by their terms would otherwise have been exercisable.

9. ADJUSTMENTS Unless otherwise provided in the option agreement, upon the occurrence of any of the following described events, Grantee's rights to purchase Shares under the Plan shall be adjusted as hereafter provided:

9.1 In the event of a merger of the Company with or into another corporation (the "SUCCESSOR CORPORATION"), or the sale of all or substantially all of the assets or shares of the Company, or reorganization or the like, where all or substantially all of the shares of the Company are to be exchanged for securities of another company (the "TRANSACTION") while unexercised Options remain outstanding under the Plan, each outstanding Option shall be assumed or substituted for the Shares subject to the unexercised portions of such outstanding Options an appropriate number of shares of each class of shares or other securities of the Successor Corporation (or a parent or subsidiary of the Successor Corporation) which were distributed to the shareholders of the Company in respect of such shares, and appropriate adjustments shall be made in the purchase price per share to reflect such action, all as will be determined by the Committee whose determination shall be final.

9.2 Notwithstanding the above and subject to any applicable law, the Board may determine with respect to certain option agreements that, there shall be a clause instructing that, if in any such Transaction as described in
SECTION 9.1 above, the Successor Corporation (or parent or subsidiary of the Successor Corporation) does not agree to assume or substitute for the Options, the Vesting Periods shall be accelerated so that any unvested Option shall be immediately vested in full as of the date ten days prior to the effective date of such transaction.

9.3 For the purposes of SECTION 9.1 above, the Option shall be considered assumed or substituted if, following the Transaction, the Option confers the right to purchase or receive, for each Share of Optioned Shares immediately prior to the Transaction, the consideration (whether shares, options, cash, or other securities or property) received in the Transaction by share holders for each Share held on the effective date of the Transaction. However, if such consideration received in the merger or acquisition is not solely ordinary shares (or their equivalent) of the Successor Corporation or its parent or subsidiary (the "COMPANIES"), the Committee may, with the consent of the Successor Corporation, provide for the consideration to be received upon the exercise of the Option to be solely ordinary shares (or their equivalent) of the Companies equal in fair market value to the per share consideration received by holders of a majority of the outstanding Shares in the Transaction; and provided further that the Committee may determine, in its discretion, that in lieu of such assumption or substitution of Options for options of the Companies, such Options will be substituted for any other type of asset or property.

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9.4 If the Company is voluntarily liquidated or dissolved while unexercised Options remain outstanding under the Plan, then the Board, in its own discretion, may determine that such outstanding Options may be exercised in full by the Grantees as of the effective date of any such liquidation or dissolution of the Company without regard to the vesting provisions of
SECTION 7(E)(2) of the Plan. In case the Board determines that the outstanding Options may be exercised, then all such outstanding Options may be exercised in full by the Grantees giving notice in writing to the Company of their intention to so exercise.

9.5 If the outstanding shares of the Company shall at any time be changed or exchanged by declaration of a stock dividend (bonus shares), stock split, combination or exchange of shares, recapitalization, or any other like event by or of the Company, and as often as the same shall occur, then the number, class and kind of Shares subject to the Plan or subject to any Options therefore granted, and the purchase prices, shall be appropriately and equitably adjusted so as to maintain the proportionate number of Shares without changing the aggregate purchase price, provided, however, that no adjustment shall be made by reason of the distribution of subscription rights (rights offering) on outstanding stock. Upon happening of any of the foregoing, the class and aggregate number of Shares issuable pursuant to the Plan (as set forth in SECTION 6 hereof), in respect of which Options have not yet been exercised, shall be appropriately adjusted, all as will be determined by the Board whose determination shall be final.

10. SURRENDER AND EXCHANGES OF OPTIONS The Committee may permit the voluntary surrender of all or a portion of any Option granted under the Plan or any option granted under any other plan, program or arrangement of the Company or any subsidiary ("SURRENDERED OPTION"), to be conditioned upon the granting to the Grantee of a new Option for the same number of shares of Ordinary Shares as the Surrendered Option, or may require such voluntary surrender as a condition precedent to a grant of a new Option to such Grantee. Subject to the provisions of the Plan, such new Option shall be exercisable at the price, during such period and on such other terms and conditions as are specified by the Committee at the time the new Option is granted.

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11. DIVIDENDS With respect to all Shares (in contrary to unexercised Options) issued upon the exercise of Options purchased by the Grantee, the Grantee shall be entitled to receive dividends in accordance with the quantity of such Shares, and subject to any applicable taxation on distribution of dividends.

12. PERIOD DURING WHICH OPTIONS MAY BE GRANTED Subject to applicable laws, Options may be granted pursuant to the Plan from time to time within a period of ten (10) years from the date the Plan is adopted by the Board. Upon such Plan termination, all outstanding options on such date shall thereafter continue to have force and effect in accordance with the terms set in the option agreement.

13. ASSIGNABILITY AND SALE OF OPTIONS Unless otherwise provided in the plan and/or in any Appendix of the Plan, no Option, purchasable hereunder, whether fully paid or not, shall be assignable, transferable, given as a gift, pledged or any right with respect to them given to any third party whatsoever, and during the lifetime of the Grantee each and all of such Grantee's rights to purchase Shares hereunder shall be exercisable only by the Grantee. Any such action made directly or indirectly, for an immediate validation or for a future one, shall be void.

Any purported assignment, transfer or pledge of an Option in contradiction to the provision of this section shall cause the option to immediately expire.

14. TAX CONSEQUENCES Any tax consequences arising from the grant or exercise of any Option, from the payment for Shares covered thereby or from any other event or act (of the Company, and/or its Subsidiaries, or the Grantee), hereunder, shall be borne solely by the Grantee. The Company and/or its Subsidiaries, or any other person required by any applicable law, shall withhold taxes according to the requirements under the applicable laws, rules, and regulations, including withholding taxes at source. Furthermore, the Grantee shall agree to indemnify the Company and/or its Subsidiaries and hold them harmless against and from any and all liability for any such tax or interest or penalty thereon, including without limitation, liabilities relating to the necessity to withhold, or to have withheld, any such tax from any payment made to the Grantee, unless the said liability is a result of default of the Company.

The Committee shall not be required to release any Share certificate to a Grantee until all required payments have been fully made.

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15. AMENDMENT AND TERMINATION OF THE PLAN The Board may at any time, amend, alter, suspend or terminate the Plan. No amendment, alteration, suspension or termination of the Plan shall impair the rights of any Grantee (with respect to an outstanding option), unless mutually agreed otherwise between the Grantee and the Committee, which agreement must be in writing and signed by the Grantee and the Company. Termination of the Plan shall not affect the Committee's ability to exercise the powers granted to it hereunder with respect to Options granted under the Plan prior to the date of such termination.

16. RIGHTS AS A SHAREHOLDER The holders of Options shall not have any of the rights or privileges of shareholders of the Company in respect of any Shares purchasable upon the exercise of any Options, nor shall they be deemed to be a class of shareholders or creditors of the Company for purpose of any applicable laws, until the issuance of such Shares by the Company.

17. COMPENSATION PACKAGE Subject to any applicable law, grants of Options are not considered a part of the compensation package and therefore will not be included in any payment made to the employee such as remuneration and compensation for termination of employment.

18. NO RIGHTS TO EMPLOYMENT Nothing in the Plan or in any Option granted or Agreement entered into pursuant hereto shall confer upon any Grantee the right to continue in the employ of the Company or any subsidiary or to be entitled to any remuneration or benefits not set forth in the Plan or such Agreement or to interfere with or limit in any way the right of the Company or any such subsidiary to terminate such Grantee's employment or services. Options granted under the Plan shall not be affected by any change in duties or position of a Grantee as long as such Grantee continues in the employ of the Company or any subsidiary.

19. GOVERNING LAW & JURISDICTION The Plan and all determinations made and actions taken pursuant hereto shall be governed by and construed and enforced in accordance with the laws and jurisdiction as shall be determined in any Appendix of the Plan.

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However, the relationship of the participants as shareholders of the Company, including without limitation all of their rights and duties arising under the Company's Articles of Association, shall be governed by the laws of the State of Israel, and the company and each participant hereby irrevocably submits to the exclusive jurisdiction of the Courts of Israel located in Tel Aviv, in respect of any dispute or matter arising out of or connected with such relationship and the Articles of Association.

20. NON-EXCLUSIVITY OF THE PLAN The adoption of the Plan by the Board shall not be construed as amending, modifying or rescinding any previously approved incentive arrangements or as creating any limitations on the power of the Board to adopt such other incentive arrangements as it may deem desirable, including, without limitation, the granting of stock Options otherwise then under the Plan, and such arrangements may be either applicable generally or only in specific cases. For the avoidance of doubt, prior grant of options to Grantees of the Company under their employment agreements, and not in the framework of any previous option plan, shall not be deemed an approved incentive arrangement for the purpose of this Section.

21. RULES PARTICULAR TO SPECIFIC COUNTRIES Notwithstanding anything herein to the contrary, the terms and conditions of the Plan may be amended with respect to a particular country by means of an addendum to the Plan in the form of an Appendix, and to the extent that the terms and conditions set forth in the Appendix conflict with any provisions of the Plan, the provisions of the Appendix shall govern. Terms and conditions set forth in the Appendix shall apply only to options issued to Grantees under the jurisdiction of the specific country that is subject of the Appendix and shall not be apply to options issued to Grantees not under the jurisdiction of such country. The adoption of any such Appendix shall be subject to the approval of the Board.

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ON TRACK INNOVATIONS LTD.

APPENDIX A - ISRAEL

TO THE 2001 SHARE OPTION PLAN

1. GENERAL

1.1. The provisions specified hereunder shall form an integral part of the 2001 Share Option Plan of On Track Innovations Ltd. (hereinafter: the "PLAN"), which applies to the issuance of Options to purchase Shares of On Track Innovations Ltd. (hereinafter: the "COMPANY"). According to the Plan, Option to purchase the Company's Shares shall be issued to employees, directors, advisors and service providers of the Company and of the Company's designated foreign subsidiaries.

1.2. This Appendix amends the Plan so that it complies with the requirements set by the Israeli Law in general, and in particular with the provisions of Section 102 of the Israeli Income Tax Ordinance (New Version), 1961 (the "ORDINANCE"), and any regulations, rules, orders or procedures promulgated thereunder, including but not limited to the Income Tax Rules ( Tax Benefits in Stock Issuance to Employees) 1989 as may be amended or replaced from time to time (hereinafter: "SECTION 102"). Options containing such terms as shall qualify them for the special tax treatment under Section 102, shall be referred to herein as "102 OPTIONS". Options that do not contain such terms as shall qualify them for the special tax treatment under Section 102, shall be referred to herein as "3(I) OPTIONS".

1.3. The Plan and this Appendix are complimentary to each other and shall be deemed as one. In any case of contradiction, whether explicit or implied, between the provisions of this Appendix and the Plan, the provisions set out in the Appendix shall prevail.

1.4. Any term not specifically defined in this Appendix shall be construed according to the interpretation given to it in the Plan.

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2. ADMINISTRATION

2.1 The Committee shall have the authority in its discretion, subject to and not inconsistent with the express provisions of the Plan, this Appendix, and of any applicable laws, to administer the Plan and to exercise all the powers and authorities either specifically granted to it under the Plan or necessary or advisable in the administration of the Plan, including, without limitation, the authority to recommend to the Board:
(i) to grant Options; (ii) to determine the kind of consideration payable (if any) with respect to Options; (iii) to determine the period during which Options may be exercised, and whether in whole or in installments; (iv) to determine the persons to whom, and the time or times at which Options shall be granted (such persons are referred to herein as "Grantees"); (v) to determine the number of shares to be covered by each Option; (vi) to interpret the Plan; (vii) to prescribe, amend and rescind rules and regulations relating to the Plan; (viii) to determine the terms and provisions of the agreements (which need not be identical) entered into in connection with Options granted under the Plan (the "Agreements"); (ix) to cancel or suspend Options, as necessary; (x) to designate the type of Options to be granted to a Grantee ;(xi) to determine the Fair Market Value (as defined above) of the shares; and (xii) to make all other determinations deemed necessary or advisable for the administration of the Plan.

2.2 The Committee shall not be entitled to grant Options to the Grantees however, it will be authorized to issue shares underlying options which have been granted by the Board and duly exercised pursuant to the provisions hereof all in accordance with Section 112(a)(5) of the Israeli Companies Law 5759-1999, as may be amended and replaced from time to time (the "COMPANIES LAW").

2.3 Subject to the Company's Articles of Association and the Company's decision, and to all approvals legally required, including, but not limited to the provisions of the Israeli Companies Law, as may be amended or replaced from time to time, each member of the Board or the Committee shall be indemnified and held harmless by the Company against any cost or expense (including counsel fees) reasonably incurred by him, or any liability (including any sum paid in settlement of a claim with the approval of the Company) arising out of any act or omission to act in connection with the Plan unless arising out of such member's own fraud or bad faith, to the extent permitted by applicable law.

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Such indemnification shall be in addition to any rights of indemnification the member may have as a director or otherwise under the Company's Articles of Association, any agreement, any vote of shareholders or disinterested directors, insurance policy or otherwise.

3. ISSUANCE OF OPTIONS

3.1 Following ratification of the Plan by the Board, the Company shall issue the 102 Options to a Trustee, as defined in SECTION 4 below, on behalf of the Grantee, as set forth in this Appendix.

3.2 Notwithstanding anything in the Plan to the contrary, all grants of Options to directors and office holders ("Nosei Misra" - as such term is defined in the Israeli Companies Law) shall be authorized and implemented in accordance with the provisions of the Israeli Companies Law or any successor act or regulation, as in effect from time to time.

4. THE TRUSTEE

4.1 102 Options which shall be granted under the Plan and/or any Shares issued upon exercise of such 102 Options and/or other shares received subsequently following any realization of rights, shall be allocated or issued to a Trustee nominated by the Committee, and approved in accordance with the provisions of Section 102 and held for the benefit of the Grantees. The 102 Options and any Shares received subsequently following exercise of 102 Options, shall be held by the Trustee for such period of time as required by Section 102 or any regulations, rules or orders or procedures promulgated thereunder.

4.2 The Company has discretion to place 3(i) options or any shares issued upon exercise of such 3(i) options to a Trustee nominated by the Committee.

4.3 Notwithstanding anything to the contrary, the Trustee shall not release any Options which were not already exercised into Shares by the Grantee or release any Shares issued upon exercise of Options prior to the full payment of the Grantee's tax liabilities arising from Options which were granted to the Grantee and/or any Shares issued upon exercise of such Options.

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4.4 Upon receipt of the Options, the Grantee will sign an undertaking to release the Trustee from any liability in respect of any action or decision duly taken and bona fide executed in relation with the Plan, or any Option or Share granted to the Grantee thereunder.

5. THE OPTIONS

The terms and conditions upon which the Options shall be issued and exercised, including the Vesting Dates and Purchase Price, shall be as specified in the Option Agreement to be executed pursuant to the Plan and to this Appendix as provided in Section 6 below.

6. EXERCISE OF OPTIONS

Options shall be exercised by the Grantee by giving a written notice to the Company, in such form and method as may be determined by the Company and the Trustee and when applicable, in accordance with the requirements of Section 102, which exercise shall be effective upon receipt of such notice and the Purchase Price by the Company at its principal office. The notice shall specify the number of Shares with respect to which the Option is being exercised.

7. ASSIGNABILITY AND SALE OF OPTIONS

7.1. No Option, purchasable hereunder, whether fully paid or not, shall be assignable, transferable, given as a gift, pledged or any right with respect to them given to any third party whatsoever, and during the lifetime of the Grantee each and all of such Grantee's rights to purchase Shares hereunder shall be exercisable only by the Grantee. Any such action made directly or indirectly, for an immediate validation or for a future one, shall be void.

7.2 As long as the Shares are held by the Trustee (as required by Section 102 of the Israeli Tax Ordinance or with regard to 3(i) options according to the discretion of the Company) in favor of the Grantee, than all rights the last possesses over the Shares are personal, can not be transferred, assigned, pledged or mortgaged, other than by will or laws of descent and distribution. Any purported assignment, transfer or pledge of an Option in contradiction to the provision of this section shall cause the option to immediately expire.

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7.3. Notwithstanding the above, if the Israeli Tax Authorities, Israeli law or any other regulation, shall change the current position so that no Trustee shall be legally required to grant Options pursuant to Section 102, such change shall accordingly apply to the Plan and this Appendix.

8. INTEGRATION OF SECTION 102 AND TAX COMMISSIONER'S PERMIT

8.1. The provisions of the Plan and/or of the Option Agreement shall be subject to the provisions of Section 102 and the Income Tax Commissioner's Permit, and the said provisions and Permit shall be deemed and integral part of the Plan and of the Option Agreement.

8.2. To remove doubt, it is hereby clarified that any provision of Section 102 and/or the said Permit which is necessary in order to receive and/or to keep any tax benefit pursuant to Section 102, which is not expressly specified in the Plan or the Option Agreement, shall be considered binding upon the parties to the Plan and/or the Option Agreement.

9. DIVIDEND

With respect to all Shares (in contrary to unexercised Options) issued upon the exercise of Options purchased by the Grantee, the Grantee shall be entitled to receive dividends in accordance with the quantity of such Shares, and subject to any applicable taxation on distribution of dividends. During the period in which Shares issued to the Trustee on behalf of a Grantee are held by the Trustee, the cash dividends paid with respect thereto shall be paid directly to the Grantee.

10. GOVERNING LAW & JURISDICTION

This Appendix shall be governed by and construed and enforced in accordance with the Laws of the State of Israel applicable to contracts made and to be performed therein, without giving effect to the principles of conflict of Laws. The competent courts of Tel- Aviv, Israel, shall have sole jurisdiction in any matters pertaining to this Appendix.

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11. RIGHTS AS A SHAREHOLDERS

The holders of Options shall not have any of the rights or privileges of shareholders of the Company in respect of any Shares purchasable upon the exercise of any Options, nor shall they be deemed to be a class of shareholders or creditors of the Company for purpose of the operation of Sections 350 and 351 of Israeli the Companies Law or any successor to such Sections and/or other applicable laws, until the issuance of such Shares by the Company exercise of the Option in accordance with the provisions of the Plan.

12. TAX CONSEQUENCES

Any tax consequences arising from the grant or exercise of any Option, from the payment for Shares covered thereby or from any other event or act (of the Company, and/or its Subsidiaries, and the Trustee or the Grantee), hereunder, shall be borne solely by the Grantee. The Company and/or its Subsidiaries, and the Trustee shall withhold taxes according to the requirements under the applicable laws, rules, and regulations, including withholding taxes at source. Furthermore, the Grantee shall agree to indemnify the Company and/or its Subsidiaries and/or the Trustee and hold them harmless against and from any and all liability for any such tax or interest or penalty thereon, including without limitation, liabilities relating to the necessity to withhold, or to have withheld, any such tax from any payment made to the Grantee, unless the said liability is a result of default of the Company.

The Committee and/or the Trustee shall not be required to release any Share certificate to a Grantee until all required payments have been fully made. 6

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EXHIBIT 10.33

CONSULTING AGREEMENT

THIS CONSULTING AGREEMENT (this "Agreement") is made effective as of the __ day of March, 2002 (the "Effective Date") by and between On Track Innovations Ltd., a company organized under the laws of the State of Israel (the "Company") and Dionysos Investments Ltd., a company organized under the laws of the State of Israel (the "Consultant").

W I T N E S S E T H:

WHEREAS, the Company is engaged in the business of the development, marketing and sale of contactless microprocessor-based smart card products worldwide (the "Business");

WHEREAS, the Company has authorized ordinary shares (the "Shares") certain of which are listed on the Neuer Markt of the Frankfurt Stock Exchange (the "Neuer Shares") and the Company desires to complete a listing of additional Shares on the NASDAQ Small Cap Market (the "NASDAQ Shares") and may in the future, in its discretion, consider other exchange listings in the United States; and

WHEREAS, in connection with listing the NASDAQ Shares on the NASDAQ Small Cap Market (the "Project"), the Company desires to retain the Consultant to provide the Company with the services described in section 1, below, in accordance with the terms and conditions of this Agreement; and

WHEREAS, the Consultant desires to be retained by the Company to provide such services in accordance with the terms and conditions of this Agreement.

NOW, THEREFORE, in consideration of the above premises and the mutual agreements set forth below and for other good and valuable consideration given by each party to this Agreement to the other, the receipt and sufficiency of which are hereby acknowledged, the parties to this Agreement, intending to be legally bound, hereby agree as follows:

1. Consultant's Services.

1.1. The Company hereby engages the Consultant, and the Consultant hereby agrees to serve, as an independent consultant to the Company, in which capacity the Consultant shall diligently and competently provide the following services (collectively, the "Services") in connection with the Project:

1.1.1. provide complete oversight and management of the documentation process to successfully complete the listing of the NASDAQ Shares on the NASDAQ Small Cap Market, and, if requested by the Company, on such other exchanges in the United States as the Company may, in its discretion, designate, including without limitation, consulting with the Company's management, lawyers and accountants as may be required;

1.1.2. identify and, subject to the Company's approval, secure the agreement of no fewer than three (3) NASDAQ market-makers satisfactory to the Company in its sole discretion (which approval, when given, shall establish the Company's satisfaction with such market-makers), and the Consultant shall use its best efforts to assure that two of such market-makers shall be qualified as market-makers with Level 2 Market Maker Access;

1.1.3. assist and consult the Company in the preparation of a Business Plan;

1.1.4. assist the Company in preparations for the road-show and participate in the road-show at the request of the President of the Company; and


1.1.5. provide such other services related to the Project as the Company may reasonably request from time to time, including, for example but without limitation, responding to inquiries from regulatory bodies and assisting in composing public relations materials.

1.2. The Consultant shall provide the Services by and through Haim Nissenson and such other persons as the Consultant may request and the Company may agree in writing. In the performance of the Services hereunder, the Consultant will report to the President of the Company. The Consultant shall use its best efforts in providing the Services.

1.3. The Consultant shall be available to provide Services no less than 15 hours each week during the Term (as defined below).

1.4. The Consultant shall provide a written report each week during the Term to the President summarizing the status of the Project, tasks to be accomplished to complete the Project and timelines. The Consultant shall provide such other reports to the Company in a timely manner as requested by the Company.

2. Compensation and Expenses. As the sole and complete consideration to the Consultant for entering into this Agreement and for the Services and obligations hereunder during the Term and so long as the Agreement has not been sooner terminated by either party, the Company shall pay the Consultant as follows (all dollars are in United States dollars):

2.1. On the Effective Date, the Company shall pay the Consultant eight thousand dollars (US$8,000.00).

2.2. Forty-five (45) days following the Effective Date, the Company shall pay the Consultant four thousand dollars (US$4,000.00).

2.3. After at least three (3) registered NASDAQ market-makers agree with the Company, upon terms and conditions approved by the Company, to make a market in the NASDAQ Shares, the Company shall pay the Consultant fifteen thousand dollars (US$15,000.00).

2.4. Upon the successful completion of the listing on NASDAQ of all the NASDAQ Shares designated by the Company and commencement of active trading of such NASDAQ Shares (the "Listing Date"), the Company shall pay the Consultant twenty five thousand dollars (US$25,000.00).

2.5. On the ninetieth (90th) day following the Listing Date (the "Issuance Date"), so long as during such ninety (90) day period no de-listing or comparable action has been commenced or threatened, the Company shall pay the Consultant ten thousand dollars (US$10,000.00) and issue to the Consultant twenty two thousand five hundred (22,500) NASDAQ Shares covered by the Registration Statement (as defined below), the Consultant expressly acknowledging that such number of Shares speaks as of the date of this Agreement and such number of Shares will be adjusted equitably to reflect any subdivision or combination of the outstanding shares of the Company, including, without limitation, a proportionate reduction to reflect any reverse stock split, stock dividend, capital reorganization, reclassification, merger, consolidation or similar event prior to the Issuance Date (and such adjustment to include any other bonus or other arrangement provided to other shareholders or optionholders of the Company, as the case may be).

2.6. In addition to the payments and other consideration described in sections 2.1 through 2.5, above, the Consultant shall receive from the Company on the Listing Date the following additional consideration:

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2.6.1. Thirty five thousand (35,000) NASDAQ Shares covered by the Registration Statement, the Consultant expressly acknowledging that such number of Shares speaks as of the date of this Agreement and such number of Shares will be adjusted equitably to reflect any subdivision or combination of the outstanding shares of the Company, including, without limitation, a proportionate reduction to reflect any reverse stock split, stock dividend, capital reorganization, reclassification, merger, consolidation or similar event prior to the Listing Date (and such adjustment to include any other bonus or other arrangement provided to other shareholders or optionholders of the Company, as the case may be);

2.6.2. A Stock Option ("Option I") in form and substance satisfactory to the Company, pursuant to which the Consultant may purchase seventy thousand (70,000) NASDAQ Shares at the Base Price (as defined below) multiplied by 1.25 ("Option I Exercise Price") such Option I to expire on the earlier of (i) the close of business on April 1st, 2005, or (ii) ninety (90) days after the Exercise Trigger Date (as defined below), the Consultant expressly acknowledging that such number of Shares speaks as of the date of this Agreement and such number of Shares will be adjusted equitably to reflect any subdivision or combination of the outstanding shares of the Company, including, without limitation, a proportionate reduction to reflect any reverse stock split, stock dividend, capital reorganization, reclassification, merger, consolidation or similar event (and such adjustment to include any other bonus or other arrangement provided to other shareholders or optionholders of the Company, as the case may be); and

2.6.3. A Stock Option ("Option II"), in form and substance satisfactory to the Company, pursuant to which the Consultant may purchase twenty-five thousand (25,000) NASDAQ Shares at the Base Price multiplied by two
(2), such Option II to expire on the earlier of (i) the close of business on April 1st, 2005 or (ii) ninety (90) days after the Exercise Trigger Date, the Consultant expressly acknowledging that such number of Shares speaks as of the date of this Agreement and such number of Shares will be adjusted equitably to reflect any subdivision or combination of the outstanding shares of the Company, including, without limitation, a proportionate reduction to reflect any reverse stock split, stock dividend, capital reorganization, reclassification, merger, consolidation or similar event (and such adjustment to include any other bonus or other arrangement provided to other shareholders or optionholders of the Company, as the case may be).

2.7. The Company shall reimburse Consultant for its reasonable and necessary expenses incurred in connection with the Services hereunder, provided that, any expense in excess of five hundred (US$500) shall first be approved in writing by the Company.

2.8. As used in this section 2, the following terms shall have the following meanings:

2.8.1. "Exercise Trigger Date" with respect to Option I means the date which is the twentieth (20th) consecutive date the NASDAQ Shares have closed for trading at a price equal to or higher than Option Exercise Price I multiplied by two (2), and with respect to Option II means the date which is the twentieth
(20th) consecutive date on which the NASDAQ Shares have closed for trading at a price equal to or higher than Option Exercise Price II multiplied by two (2);

2.8.2. "Base Price" equals Euro 1.311, (the average trading price of the Neuer Shares for the twenty trading days prior to 15.2.2002); and

2.8.3. "Registration Statement" means the Company's Registration Statement on Form F-1, or such other Form as the Company's counsel may determine is appropriate, filed with the United States Securities and Exchange Commission.

2.9. To all payments made pursuant to this Agreement, including the issuance of Shares and Stock Options, VAT in the amount of 17% shall be added.

2.10. Any and all payments made pursuant to this Agreement shall be made by the Company solely upon the receipt of a legal invoice from the Consultant with respect to each relevant payment.

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2.11. Any and all payments made pursuant to this Agreement are gross payments from which withholding taxes may be withheld provided necessary by law.

2.12. For the avoidance of doubt, the parties acknowledge that compensation paid under this Agreement to the Consultant shall not be deemed payment of any fees or other amounts owing to the market-makers or any government agencies, exchange or self-regulatory organizations.

3. Term and Termination.

3.1. This Agreement shall commence at the later of (i) the Effective Date or (ii) the approval of this Agreement by the Company's Board of Directors, and shall terminate ninety (90) days following the Listing Date (the "Term") unless sooner terminated by either party as set forth in section 3.2, below.

3.2. This Agreement shall terminate with immediate effect as follows:

3.2.1. The Company may terminate this Agreement without cause for any reason upon thirty (30) days' written notice to the Consultant;

3.2.2. The Consultant may terminate this Agreement without cause for any reason upon thirty (30) days' written notice to the Company;

3.2.3. The Company may terminate this Agreement without further action or notice in the event that the Consultant shall have breached a material term of this Agreement and such breach shall continue without cure for thirty (30) days following written notice of such breach;

3.2.4. The Consultant may terminate this Agreement without further action or notice in the event that the Company shall have breached a material term of this Agreement and such breach shall continue without cure for thirty
(30) days following written notice of such breach;

3.2.5. This Agreement shall terminate without further action or notice if the listing of the NASDAQ Shares on the NASDAQ Small Cap Market is denied by NASDAQ or any regulatory authority for any reason or if listing on any other exchange designated by the Company is denied by such exchange or any regulatory authority for any reason, and in each such case such denial is final and not subject to appeal.

3.3. In the event this Agreement is terminated pursuant to sections 3.2.1 or 3.2.4, above, prior to the Listing Date, the Company shall be obligated to comply with sections 2.5 and 2.6 in accordance with their respective terms if the Company completes the listing of the NASDAQ Shares on the NASDAQ Small Cap Market and the Company elects to use any one of the three market-makers identified by the Consultant pursuant to Section 1.1.2 of this Agreement. In the event this Agreement is terminated pursuant to sections 3.2.1 or 3.2.4, above, on or after the Listing Date, the Company shall be obligated to comply with sections 2.5 and 2.6 in accordance with their respective terms.

3.4. In the event this Agreement is terminated pursuant to sections 3.2.2, 3.2.3 or 3.2.5, above, the Company shall have no further obligation to pay any amount to, or issue any NASDAQ Shares or Option I or Option II to, the Consultant, and to the extent any NASDAQ Shares or Option I or Option II shall have been issued to the Consultant prior to such termination, they shall be deemed to be cancelled and forfeited and the Consultant shall return all evidence thereof to the Company without any further action or notice by the Company.

3.5. In the event the Company elects in its discretion to delay the Project but does not elect to terminate this Agreement, and thereafter elects in its discretion to proceed with the Project, the Consultant shall, upon such election to proceed, continue to perform its obligations under and in accordance with this Agreement.

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4. Other Covenants, Representations and Warranties.

4.1. The Consultant represents and warrants that the Services, as contemplated by this Agreement, will not violate, conflict with or infringe upon any other agreement, instrument or document to which he is a party or by which he is bound, or any other right of any entity, or otherwise give rise to any claim of misappropriation or unfair competition.

4.2. The Consultant represents and warrants that it shall not represent itself as an agent of the Company, in general, and in particular shall not represent itself as having the authority to bind the Company in any matter whatsoever.

4.3. The Company and the Consultant each represents and warrants that each has, respectively, the full right and authority to enter into this Agreement.

4.4. The Consultant represents, warrants and covenants that it and Haim Nissenson shall comply with all federal, state and local laws and all rules and regulations of NASDAQ and the NASD in connection with providing Services hereunder and shall not provide any untrue or misleading information about or relating to the Company to any person, including, without limitation, the market-makers. The Consultant represents and warrants that it and Haim Nissenson have all licenses, permits and approvals as may be required and any such laws, rules and regulations to permit them to perform the Services.

5. Indemnification. Consultant shall indemnify, hold harmless and defend the Company and its parents, subsidiaries and affiliates and its and their officers, directors, agents and employees and their successors and assigns (individually and collectively, the "Company Indemnitees") from and against any and all losses, liabilities, costs, damages and expenses, including, without limitation, reasonable attorneys' fees, with respect to which a claim, whether or not frivolous, and whether claiming negligence or otherwise, is made by a third party against any of the Company Indemnitees arising directly out of or in connection with the breach by Consultant of Sections 4.2, 4.4 and 6 of this Agreement. Upon receipt of a claim indemnified hereunder, the Company Indemnitee shall give Consultant notice thereof and shall, at no out-of-pocket expense to the Company Indemnitee, cooperate with the Consultant with respect to the defense of such matter. The Company Indemnitee shall have the right, without affecting its indemnity hereunder, to participate in the administration, defense or settlement of any such matter at its own expense and with counsel of its own choosing. The Consultant shall not settle any claim indemnified hereunder without the consent of the Company Indemnitee unless solely for money and in no event shall any such settlement be made unless the Company Indemnitee is given a full and unconditional release in respect of such matter and any related matters.

6. Confidential Information and Intellectual Property.

The Consultant and the Company acknowledge that they have executed and delivered the Mutual Confidentiality Agreement attached hereto as Exhibit 1, that such Agreement is in full force and effect, that they shall comply with its terms and that a breach by either party of such Agreement shall be a breach by such party of this Agreement.

7. Relationship of the Parties. The Consultant shall at all times be an independent contractor of the Company and, as such, will not by reason of this Agreement be eligible to participate in any of the Company's employee benefits. The Company shall not make deductions or withhold funds from compensation paid under this Agreement either for the purpose of Social Security or Federal Income Tax; however, the Company may be required by law to file information returns with the U.S. Internal Revenue Service or other governmental agencies regarding payment to the Consultant under this Agreement. Nothing contained in this Agreement shall constitute the creation of an employer-employee relationship between the Consultant and the Company. Nothing in this Agreement shall be deemed to authorize the Consultant to act as an agent of the Company or to bind or purport to bind the Company in any matter or manner whatsoever.

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8. Governing Law; Dispute Resolution.

8.1. The construction, interpretation and enforcement of the terms, conditions, rights and liabilities set forth in this Agreement shall be in accordance with the internal laws of the State of Israel, excluding its conflict-of-laws principles.

8.2. Except as set forth in section 6.4 with respect to the availability of injunctive, any controversy or claim arising out of or relating to this Agreement or the breach thereof, whether common law or statutory, including, without limitation, claims asserting violations of the antitrust laws, will be settled exclusively by arbitration in Tel Aviv, before a single arbitrator of the Institute for Business Arbitration.

8.3. The arbitrators will apply the Rules of the Institute for Business Arbitration and the internal law of the State of Israel as set forth in paragraph 8.1, except that the arbitrator will not have the power to alter, modify, amend, add to or subtract from any term or provision of this Agreement, nor to grant injunctive relief, including, without limitation, interim relief, of any nature. Judgment on the award of the arbitrator may be entered by any court in Tel Aviv having jurisdiction to do so, and the parties to this Agreement hereby irrevocably consent and submit to the personal jurisdiction and venue of the Tel Aviv courts. The parties hereby irrevocably waive any and all claims and defenses either might otherwise have in any such action or proceeding in any of such courts based upon any alleged lack of personal jurisdiction, improper venue, forum non conveniens or any similar claim or defense.

8.4. The failure or refusal of the Company or the Consultant to submit to arbitration as required by section 8.1 will constitute a material breach of this Agreement. If judicial action is commenced in order to compel arbitration, and if arbitration is in fact compelled, the party that resisted arbitration will be required to pay to the other party all costs and expenses, including, without limitation, reasonable attorneys' fees, that they incur in compelling arbitration. The prevailing party in arbitration shall be entitled to its reasonable attorneys' fees and costs. All other fees and charges of the Institute of Business Arbitration will be borne as the arbitrator will determine in the award.

9. Entire Agreement. This Agreement, including, without limitation, its recitals, sets forth the entire agreement and understanding of the parties in respect of the subject matter hereof and supersedes all prior agreements, arrangements, presentations and understandings relative to the subject matter hereof, whether written or oral, express or implied. No oral or written statement, representation, warranty or promise made prior to or contemporaneously with the execution of this Agreement shall be binding upon either party with respect to the subject matter hereof or shall otherwise affect the enforceability of this Agreement in accordance with its terms.

10. Amendment and Waiver. This Agreement may be amended or modified only by a written instrument executed by each party hereto. The failure of a party at any time or times to require performance of any provision hereof shall in no manner affect the party's right at a later time to enforce the same. No waiver by any party of the breach of any term contained in this Agreement, in any one or more instances, shall be deemed or construed as a further or continuing waiver of any such breach or of the breach of any other terms of this Agreement. No waiver shall be effective unless in writing, signed by the party waiving compliance.

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11. Notices. All notices required to be made hereunder shall be sent to the respective addresses of the parties set forth below by certified mail, return receipt requested:

If to the Company:    P.O. Box 32 Z.H.R Industrial Zone, Rosh Pina 12000,
                      Israel

If to the Consultant  11A Hamacabee St., Herzelya 46762, Israel

Service of notices shall be deemed complete upon delivery if hand delivered or upon the expiration of the third day after the date of mailing. The Company and the Consultant may change their respective addresses for notices by a notice given in accordance with this section 11.

12. Successors and Assigns. This Agreement shall inure to the benefit of and be binding upon the successors and permitted assigns of the parties hereto. The Consultant may not assign its rights or obligations under this Agreement in whole or in part without the prior written consent of the Company. Any assignment or purported assignment by the Consultant without such consent shall be null and void.

13. Headings. Headings inserted in this Agreement are for the convenience of the parties and shall not govern any conclusion or interpretation of this Agreement or any of its provisions. Plurals shall include the singular and vice versa.

14. Severability. In case any provision or part thereof in this Agreement shall, for any reason, be held invalid, illegal or unenforceable, such invalidity, illegality or unenforceability shall not affect any other provision or part thereof, and this Agreement shall be construed as if such invalid or illegal or unenforceable provision or part thereof had been reformed so that it would be valid, legal and enforceable to the maximum extent permitted.

15. Miscellaneous. (a) References to paragraphs are to paragraphs in this Agreement and in each case include references to all subparagraphs under the referenced paragraph. (b) Words denoting the singular tense or person shall include the plural and vice versa and references to the masculine gender shall, where the context permits, include the feminine and/or neuter genders and vice versa. The words "including," "includes," and "include," mean respectively, "including without limitation," includes without limitation" and "included without limitation;" (c) The obligations of the Company and the Consultant that expressly survive the expiration or termination of this Agreement, or which, by their nature are intended to survive such expiration or termination, shall so survive in accordance with their terms or as is required to give effect to such intention, respectively. (d) This Agreement is the result of negotiation and, accordingly, no presumption or burden of proof will arise with respect to any ambiguity or question of intent concerning this Agreement favoring or disfavoring any party to this Agreement by virtue of the authorship of any provision of this Agreement. (e) This Agreement may be signed in counterparts, each of which shall be deemed an original and all of which shall be deemed one and the same instrument, and may be delivered by facsimile.

IN WITNESS WHEREOF, the undersigned have executed and delivered this Agreement effective on the Effective Date.

ON TRACK INNOVATIONS LTD.

By: ____________________________
Name:
Title: President

DIONYSOS INVESTMENTS LTD.

By: ____________________________
Name:
Title: President

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I, Haim Nissenson do hereby personally guarantee the fulfillment of any and all undertakings of Dionysos Investments Ltd. pursuant to the above agreement with On Track Innovations Ltd.


Haim Nissenson

Date: _____________

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EXHIBIT 10.34

[ Letterhead of the Israel Land Administration ]

File No.: 20784707A Account No.: 352687495

LONG TERM LEASE CONTRACT

(low-rise building, industry, commerce or tourism)

Capitalized

Entered into and signed in Upper Nazareth on the 6th of March, 2002 on the ____ of __________, _______

Between

The Israel Land Administration, which manages the lands of the State of Israel, the Development Authority and the Jewish National Fund (to be referred to hereinafter as the "Lessor"), whose address for the purpose of this contract is: Government Campus, Upper Nazareth, zip code 17105, P.O.B. 80 of the first part;

And

On Track Innovations Ltd. I.D./Company No. 520042862

(hereinafter: the "Lessee"), whose address for the purpose of this contract is: P.O.B. 32, Rosh Pina, of the second part;

Preamble

The preamble to the lease contract constitutes an integral part of the terms and conditions of the lease, and together therewith constitutes the lease contract. The said terms and conditions of the lease have been published in Official Gazette No. 4818 on November 4, 1999.

Whereas           the State of Israel / the Development Authority owns the land
                  specified  in this preamble below (hereinafter: the "Lot");
                  and

Whereas           a building or buildings (hereinafter: the "Buildings") which
                  were erected prior to the effective date of this lease
                  contract, are constructed on the Lot; and

Whereas           insofar as the Buildings have not been constructed to the
                  stage allowing the occupation thereof and/or full use thereof
                  for the purpose of the lease, the Lessee declares that it
                  undertakes to complete the construction of the Buildings so as
                  to render them fit for such intended use, no later than one
                  year after the Administration's signing of this contract, and
                  that it is aware that this undertaking constitutes a
                  fundamental condition of this contract; and

Whereas           the Lessor has agreed to lease the Lot to the  Lessee,
                  including all that is constructed thereon and permanently
                  fixed thereto (hereinafter: the "Fixtures") (the Lot and
                  Fixtures shall be referred to hereinafter as the "Leased
                  Premises"), with the condition-precedent that the Lessee's
                  undertakings - either under a development contract with the
                  Lessor or under another agreement with the Lessor - shall have
                  been fulfilled in full in the period preceding the effective
                  date of this lease contract; and

Whereas           the parties agree that for the sake of convenience only, the
                  Lessee shall sign a copy of this lease contract without such
                  signature binding the Lessor, pending the Lessee's fulfillment
                  of the aforementioned undertakings in full. The parties hereby
                  explicitly agree that the lease contract shall become
                  effective only after the Lessor shall also sign the same, and
                  only if the Lessee shall have fulfilled its foregoing
                  undertakings to the Lessor. So long as the Lessor shall not
                  have signed the lease contract, the terms hereof shall not be
                  binding upon the parties, and the Lessee's signature alone on
                  the lease contract shall confer thereon no right hereunder.
                  The date on which the Lessor shall sign the lease contract
                  shall be deemed as the date of signing hereof; and

Whereas           upon commencement of the lease period, the Administration
                  surrendered the possession of the Leased Premises to the
                  Lessee or to the persons who had lease rights in the Leased
                  Premises before the Lessee, and insofar as the Leased Premises
                  are occupied, the Lessor is subject to no obligation to vacate
                  them and/or to bear the costs of such vacation; and

Whereas           the Lessee hereby declares that it is subject to no limitation
                  with respect to its entering into this contract with the
                  Lessor pursuant to the provisions of Section 19(a)(3) hereof,
                  and that it is aware that the Lessor is prepared to enter into
                  this lease contract therewith only upon this fundamental
                  condition precedent; and

Whereas           pursuant to the provisions of the treaty between the State of
                  Israel and the Jewish National Fund (hereinafter: the "Fund"),
                  published in Official Gazette No. 1456 of Sivan 11, 5728, p.
                  1597, the management of land owned by the Fund, including the
                  leasing thereof and the granting or denial of consent for the
                  transfer of the lease rights therein, shall be made by the
                  Lessor subject to the Fund's memorandum and articles of
                  incorporation, and the Lessee hereby declares that it is aware
                  that if the Lot, in whole or in part, is owned by the Fund, or
                  will be owned by the Fund, it shall be subject to the
                  provisions of such treaty, and that the Lessor is prepared to
                  enter into this lease contract therewith only upon this
                  fundamental condition precedent; and

Whereas           if the purpose of the lease is industry, crafts or tourism
                  then, in addition to the following terms and conditions of the
                  lease, the lease under this contract shall also be subject to
                  the following terms in this preamble:

                  (a)       if the purpose of the lease is industry or crafts,
                            and the Lessee shall ask the Lessor for its consent
                            to change the type of industry or crafts set forth
                            in the Purpose of the Lease, the Lessor shall be
                            entitled to condition its consent therefor, inter
                            alia, on a change in the duration of the term of the
                            lease in accordance with the Lessor's decisions as
                            being from time to time, and on the receipt of a
                            recommendation from the Ministry of Industry and
                            Trade for the requested change in the type of
                            industry or craft and for the duration of the term
                            of the lease recommended thereby for such purpose.

                  (b)       if the purpose of the lease is industry, crafts or
                            tourism, then, in addition and subject to all the
                            other terms and conditions in the followings
                            Sections 9 and 14, the Lessee shall be required to
                            attach to its request to make any of the changes set
                            forth in Section 9 or to transfer rights under this
                            contract as set forth in Section 14, as the case may
                            be, a suitable and valid recommendation from the
                            Ministry of Industry and Trade or the Ministry of
                            Tourism, as the case may be. The Lessor shall not
                            consent to any such request by the Lessee unless the
                            Lessee shall produce such valid recommendation.

                  (c)       The "Ministry of Industry and Trade", the "Ministry
                            of Tourism" - including any other governmental
                            ministry responsible for matters of the type of the
                            Purpose of the Lease; and all in accordance with the
                            decisions of the Israel Land Council or the
                            decisions of the Lessor, and as required from time
                            to time as the case may be. And;

Whereas           the terms used in this contract shall be interpreted in
                  accordance with the following recitals, unless the context of
                  the contract prescribes otherwise:

         "Lot": the lot described in the plan attached to the agreement between
         the Lessee and the housing company or in the plan attached hereto which
         was prepared by the Lessor, the details of which are as follows:

                  Location: Rosh Pina       Area: approximately 8,262 m2

                  Registered block: 13953 Parcels: 57 (in part), 59 (in part),
                  62 (in part), 63 (in part), 65 (in part), 66 (in part), 67 (in
                  part), 68 (in part), 73 (in part)

                  Lot(s) No. 17, part 4, No. 117, No. 118, No. 119 part H
                  pursuant to Detailed  Zoning Plan No. AG/MK/BT/191/003

         "Date of Approval of the Transaction": the date on which the
         transaction contemplated in this contract is approved by the Lessor's
         management.

         "Term of the Lease": 49 years, from the Date of Approval of the
         Transaction, i.e., from September 15, 1998 until September 14, 2047.

         "Additional Term of Lease": 49 years from the end of the Term of the
         Lease.

         "Purpose of the Lease": industry and crafts - high-tech plant.

         "Construction Capacity": ___ % per floor, on 3 floors, totaling ___%,
         constituting ___ rooms/units and amounting to 8,262.0 constructed m2.

         "Rent":

                  Annual rent for the entire Term of the Lease, to be paid to
                  the Lessor in advance, such rent being capitalized according
                  to the Lessor's custom (hereinafter: "Capitalized Rent").

                  The capitalized usage fee deposited with the Lessor prior to
                  the signing of this lease contract, if any, shall be deemed as
                  payment of the Capitalized Rent.

         "Basic Value of the Lot": NIS 946,100.91 (nine hundred forty six
         thousand and one hundred NIS + 91 Ag.) as of the foregoing Date of
         Approval of the Transaction.

         "Basic Index": the latest consumer price index known on the foregoing
         Date of Approval of the Transaction.

         "Designation": industrial zone. And;

    Whereas           if the Lessee comprises more than one person or
                      corporation, the undertakings of the persons or
                      corporations constituting the Lessee shall be joint and
                      several, whereas their rights under this contract shall be
                      joint only; and

    Whereas           in addition to the following terms and conditions of the
                      lease contract, the following special conditions shall

apply:

The entrepreneur is aware that the recommendation of the Ministry of Industry and Trade for an exemption from a tender provides that the minimum main area for construction shall be 2,600 m2.


The construction of 2,600 m2 shall be deemed by the Administration as the fulfillment of the terms and conditions of the development agreement and shall enable the conversion thereof into the lease contract.

All of the foregoing shall be in addition to the fulfillment of the other terms and conditions of the transaction.

***

The allotment based on Plan B/BT/300 which enables maximum utilization at the rate of 100% on 3 floors includes 20% for service areas. And;

Whereas           in addition to the terms and conditions of the lease
                  contract published as aforesaid, special terms and
                  conditions and/or an addendum to the lease contract shall
                  apply at the time of parceling of the Lot, as specified
                  and attached hereunder,

The parties agree that the plan, the special terms and conditions and the 0addendum to the lease contract as aforesaid constitute an integral part of the preamble and of the terms and conditions published as aforesaid.

In witness whereof, the parties have hereto set their hands:

                                          [ Stamp of On Track Innovations Ltd. ]

The Lessor:                                             The Lessee:

1.   Name .....................................         1.    Name Oded Bashan
     Title ....................................               I.D. 00587752-7
     Signature ................................               Signature (-)
                                                              [ Stamp of On
                                                              Track Innovations
                                                              Ltd. ]
2.   Name         SONYA BAR SHALOM
     Title        DISTRICT TRANSACTION COMMISSIONER     2.    Name Roni Gilboa
     Signature    (-)                                         I.D. 054299573
                                                              Signature (-)

Certifier:

I, the undersigned, do hereby certify that I have identified the said Lessee by identification papers presented to me, and that the Lessee has signed this contract in my presence.

Name Hila Hubsch.. Title Attorney Verifier's signature (-)
[ Stamp of Hila Hubsch, Adv. ]


[ Text accompanying physical plan ]

Israel Land Administration

Northern District

Mapping and Surveying Department

================================================================================
                                Work No. 691/113
================================================================================

District:                  NORTH

Division:                  Z'FAT

Town / Village:            ROSH PINA

Local Council:

Regional Council:

Place:                     ROSH PINA

Blocks:                    13953    |        |       |

Parcels:                   57, 59, 62, 63, 65-68, 73

Scale:                     1:1250

Purpose of plan:           ON TRACK INNOVATIONS LTD.
                           LOTS: 17/4, 117, 118, 119H

Area:                      8,262 DUNAM

[ Stamp and signature of M. Strulovitz, Certified Surveyor, License No. 423 [??
- unclear, hidden by signature], District Commissioner of Mapping and Surveying, I.L.A. Northern District ]

[ Stamp and signature: Israel Land Administration, on behalf of the State, on behalf of the Development Authority, on behalf of the Jewish National Fund ]


Comments:

1. The encircled numbers indicate parcels by block.

2. This plan is based on registered block map [unclear word] No. 13953.
This plan is based on plan for registration purposes No. _______ This plan is based on [unclear word] block map No. __________ This plan is based on aerial photo plan __________ This plan is based on detailed zoning plan No. Z/BT/300, effective (in deposit) August 28, 1995.
This plan is based on a surveying plan by Certified Surveyor Pinkas and Son No. 489 of January 13, 1994.
This plan is based on a measurement by the Mapping and Surveying Department of the I.L.A. Northern District dated __________ Certified Surveyor

3. The plan was drawn by Tova A. on September 27, 1995 Checked by __________ on ____________

4.       Changes in the plan:
                                   Change made on August 11, 1998       by Tova,
                                   checked by ______________
                                   Change made on July 30, 2001         by Tova,
                                   checked by ______________
                                   Change made on ____________  by ____,
                                   checked by ______________


EXHIBIT 21.1

LIST OF SUBSIDIARIES OF THE REGISTRANT

                                                                   NAME UNDER WHICH THE
SUBSIDIARY                              STATE OF INCORPORATION     SUBSIDIARY DOES BUSINESS
--------------------------------------  -------------------------  ---------------------------

City Smart Ltd.                         Hong Kong                  --

Easy Park Ltd                           Israel                     --

Easy Park Israel Ltd.                   Israel                     --

InterCard GmbH Systemelectronic         Germany                    InterCard

InterCard GmbH Kartensysteme            Germany                    InterCard

OTI America, Inc.                       Delaware                   --

OTI Africa, Ltd.                        South Africa               --

SoftChip Technologies (3000) Ltd.       Israel                     SoftChip

SoftChip Israel Ltd.                    Israel                     --


EXHIBIT 23.1

Luboshitz Kasierer

CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS

As independent public accountants, we hereby consent to the use of our report dated March 22, 2002 (and to all references to our Firm) included in or made as a part of this registration statement filed on Form F-1 registering Ordinary Shares.

                                                    /s/ Luboshitz Kasierer
                                                        LUBOSHITZ KASIERER

Tel Aviv, June 14, 2002