ex4_1.htm


    
      

    

    Exhibit
4.1

     

    SECURITIES
PURCHASE AGREEMENT

     

    SECURITIES PURCHASE AGREEMENT
(the "Agreement"), dated
as of August 14, 2008, by and among Arotech Corporation, a Delaware corporation,
with headquarters located at 1229 Oak Valley Drive, Ann Arbor Michigan 48108
(the "Company"),
and the investors listed on the Schedule of Buyers attached hereto
(individually, a "Buyer"
and collectively, the "Buyers").

     

    WHEREAS:

     

    A.           The
Company and each Buyer is executing and delivering this Agreement in reliance
upon the exemption from securities registration afforded by Section 4(2) of the
Securities Act of 1933, as amended (the "1933 Act"), and Rule 506 of
Regulation D ("Regulation D") as
promulgated by the United States Securities and Exchange Commission (the "SEC") under the 1933
Act.

     

    B.           
The Company has authorized a new series of senior convertible notes of the
Company, which Notes shall be convertible into the Company's common stock, par
value $0.01 per share (the "Common Stock"), in accordance
with the terms of the Notes.

     

    C.           
Each Buyer wishes to purchase, and the Company wishes to sell, upon the terms
and conditions stated in this Agreement, (i) that aggregate principal amount of
Notes, in substantially the form attached hereto as Exhibit A (the "Notes"), set forth opposite
such Buyer's name in column (3) on the Schedule of Buyers (which aggregate
principal amount for all Buyers shall be $5,000,000) (as converted,
collectively, the "Conversion
Shares") and (ii) a warrant, in substantially the form attached hereto as
Exhibit B
(collectively, the "Warrants"), to acquire that
number of shares of Common Stock set forth opposite such Buyer's name in column
(4) on the Schedule of Buyers (as exercised, collectively, the "Warrant Shares").

     

    D.           Contemporaneously
with the execution and delivery of this Agreement, the parties hereto are
executing and delivering a Registration Rights Agreement, substantially in the
form attached hereto as Exhibit C (the "Registration Rights
Agreement"), pursuant to which the Company has agreed to provide certain
registration rights with respect to the Conversion Shares and the Warrant Shares
under the 1933 Act and the rules and regulations promulgated thereunder, and
applicable state securities laws.

     

    E.           
The Notes, Warrants, Warrant Shares and the Conversion Shares, collectively are
referred to herein as the "Securities".

     

    F.           
The Notes will be subordinated to the Senior Indebtedness (as hereinafter
defined), but will rank senior to all other outstanding and future indebtedness
of the Company and its Subsidiaries.

     


    
      
         


      

      
         


        
          

        

      

      
         


      

    

     

    NOW, THEREFORE, the Company
and each Buyer hereby agree as follows:

     

    
      	
               
      

            	
              1.

            	
              PURCHASE AND SALE OF
      NOTES AND WARRANTS.

            


    

     

    
      	
               
      

            	
              (a)

            	
              Purchase of Notes and
      Warrants.

            


    

     

    (i)          Notes and
Warrants.  Subject to the satisfaction (or waiver) of the
conditions set forth in Sections 6 and 7 below, the Company shall issue and sell
to each Buyer, and each Buyer severally, but not jointly, agrees to purchase
from the Company on the Closing Date (as defined below), (A) a principal amount
of Notes as is set forth opposite such Buyer's name in column (3) on the
Schedule of Buyers and (B) a warrant to acquire that number of shares of Common
Stock set forth opposite such Buyer's name in column (4) on the Schedule of
Buyers (the "Closing").

     

    (ii)         Closing.  The
date and time of the Closing (the "Closing Date") shall be 10:00
a.m., New York City time, on the date hereof (or such later date as is mutually
agreed to by the Company and each Buyer) after notification of satisfaction (or
waiver) of the conditions to the Closing set forth in Sections 6 and 7 below at
the offices of Schulte Roth & Zabel LLP, 919 Third Avenue, New York, New
York 10022, subject to notification of satisfaction (or waiver) of the
conditions to the Closing set forth in Sections 6 and 7 below.

     

    (iii)        Purchase
Price.

     

    (1)         The
aggregate purchase price for the Notes and the Warrants to be purchased by each
Buyer at the Closing (the "Purchase Price") shall be the
amount set forth opposite such Buyer's name in column (5) of the Schedule of
Buyers.  Each Buyer shall pay $1.00 for each $1.00 of principal amount
of Notes and related Warrants to be purchased by such Buyer at the
Closing.

     

    (2)         The
Buyers and the Company agree that the Notes and the Warrants constitute an
"investment unit" for purposes of Section 1273(c)(2) of the Internal Revenue
Code of 1986, as amended (the "Code").  The Buyers
and the Company mutually agree that the allocation of the issue price of such
investment unit between the Notes and the Warrants in accordance with Section
1273(c)(2) of the Code and Treasury Regulation Section 1.1273-2(h) shall be an
aggregate amount of $10,000 allocated to the Warrants and the balance of the
Purchase Price allocated to the Notes, and neither the Buyers nor the Company
shall take any position inconsistent with such allocation in any tax return or
in any judicial or administrative proceeding in respect of taxes.

     

    (iv)        Form of
Payment.  On the Closing Date, (i) each Buyer shall pay its
Purchase Price to the Company for the Notes and the Warrants to be issued and
sold to such Buyer at the Closing, by wire transfer of immediately available
funds in accordance with the Company's written wire instructions and
(ii) the Company shall deliver to each Buyer (A) the Notes (in the
principal amounts as such Buyer shall request) which such Buyer is then
purchasing, and (B) the Warrants (in the amounts as such Buyer shall request)
such Buyer is purchasing, in each case duly executed on behalf of the Company
and registered in the name of such Buyer or its designee.

     

    
      
        
           


        

        
           


          
            

          

        

        
           


        

      

    

     

    
      	
               
      

            	
              2.

            	
              BUYER'S
      REPRESENTATIONS AND
WARRANTIES.

            


    

     

    Each
Buyer represents and warrants with respect to only itself that:

     

    (a)           Organization;
Authority.  Such Buyer is an entity duly organized, validly
existing and in good standing under the laws of the jurisdiction of its
organization with the requisite power and authority to enter into and to
consummate the transactions contemplated by this Agreement and otherwise to
carry out its obligations hereunder.  The execution, delivery and
performance by such Buyer of the transactions contemplated by this Agreement and
the Registration Rights Agreement have been duly authorized by all necessary
action on the part of such Buyer and no further action is required by such Buyer
or any of its composite entities (such as a board of directors, management
committee, partners or stockholders) in connection herewith.  Each of
this Agreement and the Registration Rights Agreement have been duly executed by
such Buyer, and when delivered by such Buyer in accordance with the terms
hereof, will constitute the valid and legally binding obligation of such Buyer,
enforceable against it in accordance with its terms, except (a) as such
enforceability may be limited by bankruptcy, insolvency, reorganization or
similar laws affecting creditors' rights generally, (b) as enforceability of any
indemnification and contribution provisions may be limited under the federal and
state securities laws and public policy, and (c) that the remedy of specific
performance and injunctive and other forms of equitable relief may be subject to
equitable defenses and to the discretion of the court before which any
proceeding therefor may be brought.

     

    (b)           No Public Sale or
Distribution.  Such Buyer is (i) acquiring the Notes and
Warrants, (ii) upon conversion of the Notes will acquire the Conversion Shares
issuable upon conversion of the Notes and (iii) upon exercise of the Warrants
(other than pursuant to a Cashless Exercise (as defined in the Warrants)) will
acquire the Warrant shares issuable upon exercise of the Warrants, as principal
for its own account and not with a view towards, or for resale in connection
with, the public sale or distribution thereof, except pursuant to sales
registered or exempted under the 1933 Act; provided, however, that by
making the representations herein, such Buyer does not agree to hold any of the
Securities for any minimum or other specific term and reserves the right to
dispose of the Securities at any time in accordance with or pursuant to a
registration statement or an exemption under applicable federal and state
securities laws.  Such Buyer is acquiring the Securities hereunder in
the ordinary course of its business.  Such Buyer is not a
broker-dealer registered with the SEC under the 34 Act or entity engaged in a
business that would require it to be so registered.  Such Buyer does
not presently have any agreement or understanding, directly or indirectly, with
any Person to distribute any of the Securities.

     

    (c)           Accredited Investor Status;
General Solicitation.  Such Buyer is an "accredited investor"
as that term is defined in Rule 501(a) of Regulation D.  Such Buyer,
either alone or together with its representatives, has such knowledge,
sophistication and experience in business and financial matters so as to be
capable of evaluating the merits and risks of the prospective investment in the
Securities, and has so evaluated the merits and risks of such
investment.  Such Buyer is able to bear the economic risk of an
investment in the Securities and, at the present time, is able to afford a
complete loss of such investment. Such Buyer is not purchasing the Securities as
a result of any advertisement, article, notice or other communication regarding
the Securities published in any newspaper, magazine or similar media or
broadcast over television or radio or presented at any seminar.

     

    
      
        
           


        

        
           


          
            

          

        

        
           


        

      

    

     

    (d)           Reliance on
Exemptions.  Such Buyer understands that the Securities are
being offered and sold to it in reliance on specific exemptions from the
registration requirements of United States federal and state securities laws and
that the Company is relying in part upon the truth and accuracy of, and such
Buyer's compliance with, the representations, warranties, agreements,
acknowledgments and understandings of such Buyer set forth herein in order to
determine the availability of such exemptions and the eligibility of such Buyer
to acquire the Securities.

     

    (e)           Information.  Such
Buyer and its advisors, if any, have been furnished with or has otherwise had
access to all materials relating to the business, finances and operations of the
Company and materials relating to the offer and sale of the Securities which
have been requested by such Buyer.  Such Buyer and its advisors, if
any, have been afforded the opportunity to ask questions of the
Company.  Neither such inquiries nor any other due diligence
investigations conducted by such Buyer or its advisors, if any, or its
representatives shall modify, amend or affect such Buyer's right to rely on the
Company's representations and warranties contained herein.  Such Buyer
understands that its investment in the Securities involves a high degree of
risk.  Such Buyer has sought such accounting, legal and tax advice as
it has considered necessary to make an informed investment decision with respect
to its acquisition of the Securities.

     

    (f)           
No Governmental
Review.  Such Buyer understands that no United States federal
or state agency or any other government or governmental agency has passed on or
made any recommendation or endorsement of the Securities or the fairness or
suitability of the investment in the Securities nor have such authorities passed
upon or endorsed the merits of the offering of the Securities.

     

    (g)           Transfer or
Resale.  Such Buyer understands that except as provided in the
Registration Rights Agreement: (i) the Securities have not been and are not
being registered under the 1933 Act or any state securities laws, and may not be
offered for sale, sold, assigned or transferred unless (A) subsequently
registered thereunder, (B) such Buyer shall have delivered to the Company an
opinion of counsel, in a generally acceptable form, to the effect that such
Securities to be sold, assigned or transferred may be sold, assigned or
transferred pursuant to an exemption from such registration, or (C) such Buyer
provides the Company with reasonable assurance that such Securities can be sold,
assigned or transferred pursuant to Rule 144 or Rule 144A promulgated under the
1933 Act, as amended (or a successor rule thereto) (collectively, "Rule 144"); (ii) any sale of
the Securities made in reliance on Rule 144 may be made only in accordance with
the terms of Rule 144 and further, if Rule 144 is not applicable, any resale of
the Securities under circumstances in which the seller (or the Person (as
defined in Section 3(e)) through whom the sale is made) may be deemed to be an
underwriter (as that term is defined in the 1933 Act) may require compliance
with some other exemption under the 1933 Act or the rules and regulations of the
SEC thereunder; and (iii) neither the Company nor any other Person is under any
obligation to register the Securities under the 1933 Act or any state securities
laws or to comply with the terms and conditions of any exemption
thereunder.

     

    (h)           Legends.  Such
Buyer understands that the certificates or other instruments representing the
Notes and the Warrants and, until such time as the resale of the Conversion
Shares and the Warrant Shares have been registered under the 1933 Act as
contemplated by the Registration Rights Agreement, the stock certificates
representing the Conversion Shares and the Warrant Shares, except as set forth
below, shall bear any legend as required by the "blue sky" laws of any state and
a restrictive legend in substantially the following form (and a stop-transfer
order may be placed against transfer of such stock
certificates):


    
      
         


      

      
         


        
          

        

      

      
         


      

    

     

    [NEITHER THE ISSUANCE AND SALE
OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE NOR THE SECURITIES INTO WHICH
THESE SECURITIES ARE CONVERTIBLE [EXERCISABLE] HAVE BEEN][THE SECURITIES REPRESENTED
BY THIS CERTIFICATE HAVE NOT BEEN] REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES
LAWS.  THE SECURITIES MAY NOT BE OFFERED FOR SALE, SOLD, TRANSFERRED
OR ASSIGNED (I) IN THE ABSENCE OF (A) AN EFFECTIVE REGISTRATION STATEMENT FOR
THE SECURITIES UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR (B) AN OPINION
OF COUNSEL, IN A GENERALLY ACCEPTABLE FORM, THAT REGISTRATION IS NOT REQUIRED
UNDER SAID ACT OR (II) UNLESS SOLD PURSUANT TO RULE 144 OR RULE 144A UNDER SAID
ACT.  NOTWITHSTANDING THE FOREGOING, THE SECURITIES MAY BE PLEDGED IN
CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR OTHER LOAN OR FINANCING
ARRANGEMENT SECURED BY THE SECURITIES.

     

    The
legend set forth above shall be removed and the Company shall issue a
certificate without such legend to the holder of the Securities upon which it is
stamped or issue to such holder by electronic delivery at the applicable balance
account at DTC, if, unless otherwise required by state securities laws, (i) such
Securities are registered for resale under the 1933 Act and are thereafter sold
in compliance with said Act, (ii) in connection with a sale, assignment or other
transfer, such holder provides the Company with an opinion of counsel, in a
generally acceptable form, to the effect that such sale, assignment or transfer
of the Securities may be made without registration under the applicable
requirements of the 1933 Act and that such legend may be removed, or (iii) such
holder provides the Company with reasonable assurance, reasonably acceptable to
the Company's registrar and transfer agent, that the Securities can be sold,
assigned or transferred pursuant to Rule 144 or Rule 144A.

     

    (i)           
No
Conflicts.  The execution, delivery and performance by such
Buyer of this Agreement and the Registration Rights Agreement and the
consummation by such Buyer of the transactions contemplated hereby and thereby
do not and will not (i) conflict with or violate the organizational documents of
such Buyer or (ii) except as set forth on Schedule 3(d), conflict with, or
constitute a default (or an event which with notice or lapse of time or both
would become a default) under, or give to others any rights of termination,
amendment, acceleration or cancellation of, any agreement, indenture or
instrument to which such Buyer is a party, or (iii) result in a violation of any
law, rule, regulation, order, judgment  or decree (including federal
and state securities laws) applicable to such Buyer, except in the case of
clauses (ii) and (iii) above, for such conflicts, defaults, rights or violations
which would not, individually or in the aggregate, reasonably be expected to
have a material adverse effect on the ability of such Buyer to perform its
obligations hereunder.

     

    
      
        
           


        

        
           


          
            

          

        

        
           


        

      

    

     

    (j)           
Residency.  Such
Buyer is a resident of that jurisdiction specified below its address on the
Schedule of Buyers.

     

    (k)           Agent
Fees.  That no fees, commissions, or other payments are or will
be payable to any broker, finder, placement agent, or intermediary acting on
behalf of such Buyer for actions relating to or arising out of the transactions
contemplated by this Agreement, including, without limitation, any fees or
commissions payable to such Buyer's agents.

     

    (l)           
Certain Trading
Activities.  Neither such Buyer nor its affiliates has directly
or indirectly engaged in any Short Sales involving the Company's securities
since the time that such Buyer was first contacted by the Company with respect
to the transactions contemplated hereby.  "Short Sales" include, without
limitation, all "short sales" as defined in Rule 200 promulgated under
Regulation SHO under the 1934 Act and all types of direct and indirect stock
pledges, forward sale contracts, options, puts, calls, short sales, swaps and
similar arrangements (including on a total return basis), and sales and other
transactions through non-US broker dealers or foreign regulated
brokers.  Notwithstanding the foregoing, in the case of a Buyer that
is or is part of a multi-managed investment vehicle (a "Fund") whereby separate
portfolio managers manage separate portions of such Fund's assets and the
portfolio managers have no direct knowledge of the investment decisions made by
the portfolio managers managing other portions of such Fund's assets, the
representation set forth above shall solely apply with respect to the portion of
assets of such Buyer or its affiliates, as applicable, managed by the portfolio
manager that made the investment decision to purchase the Securities covered by
this Agreement.  Such Buyer hereby covenants and agrees not to, and
shall cause its affiliates not to, engage, directly or indirectly, in any
transactions in the securities of the Company or involving the Company's
securities during the period from the date hereof until such time as (i) the
transactions contemplated by this Agreement are first publicly announced as
described in Section 4(h)  hereof or (ii) this Agreement is terminated
in full pursuant to Section 8 hereof.  Notwithstanding the foregoing,
for avoidance of doubt, nothing contained herein shall constitute a
representation or warranty, or preclude any actions, with respect to the
identification of the availability of, or securing of, available shares to
borrow in order to effect short sales or similar transactions in the
future.

     

    The
Company acknowledges and agrees that each Buyer does not make or has not made
any representations or warranties with respect to the transactions contemplated
hereby other than those specifically set forth in this Section 2.

     

    
      	
               
      

            	
              3.

            	
              REPRESENTATIONS AND
      WARRANTIES OF THE COMPANY.

            


    

     

    The
Company hereby makes the following representations and warranties to each
Buyer:

     

    (a)           Subsidiaries.  There
is no entity in which the Company, directly or indirectly, owns capital stock or
holds an equity or similar interest other than those listed in Schedule 3(a) ("Subsidiaries").  Except
as disclosed in Schedule 3(a), the
Company owns, directly or indirectly, all of the capital stock of each
Subsidiary free and clear of any and all liens, charges, encumbrances, security
interests, rights of first refusal or other restrictions of any kind ("Liens"), and all the issued
and outstanding shares of capital stock of each Subsidiary are validly issued
and are fully paid, non-assessable and free of preemptive and similar
rights.  As of the Closing Date, none of Arotech Security Corp., a
Delaware corporation, I.E.S. Defense Services, Inc., a Delaware corporation,
Summit Training International, Inc., a Delaware corporation and Electric Fuel
Transportation Corp., a Delaware corporation (each an "Inactive Subsidiary") owns or
possesses any material property or assets.

     

    
      
        
           


        

        
           


          
            

          

        

        
           


        

      

    

     

    (b)           Organization and
Qualification.  Except as set forth on Schedule 3(b) hereto,
(1) each of the Company and each Subsidiary is an entity duly organized, validly
existing and in good standing under the laws of the jurisdiction of its
incorporation or organization (as applicable), with the requisite power and
authority to own and use its properties and assets and to carry on its business
as currently conducted, (2) neither the Company nor any Subsidiary is in
violation of any of the provisions of its respective certificate or articles of
incorporation, bylaws or other organizational or charter documents, and (3) each
of the Company and each Subsidiary is duly qualified to conduct business and is
in good standing as a foreign corporation or other entity in each jurisdiction
in which the nature of the business conducted or property owned by it makes such
qualification necessary, except where the failure to be so qualified or in good
standing, as the case may be, could not, individually or in the aggregate, have
or reasonably be expected to result in (i) an adverse effect on the legality,
validity or enforceability of any Transaction Document (as hereinafter defined),
(ii) a material and adverse effect on the results of operations, assets,
business or financial condition of the Company and the Subsidiaries, taken as a
whole, or (iii) an adverse impairment to the Company's ability to perform on a
timely basis its obligations under any Transaction Document (any of (i), (ii) or
(iii), a "Material Adverse
Effect").

     

    (c)           Authorization;
Enforcement.  The Company has the requisite corporate power and
authority to enter into and to consummate the transactions contemplated by each
of this Agreement, the Notes, the Warrants, the Registration Rights Agreement,
the Irrevocable Transfer Agent Instructions (as defined in Section 5(b)), the
Lock-Up Agreements (as defined below) and any other documents or agreements
executed in connection with the transactions contemplated hereunder
(collectively, the "Transaction
Documents") and otherwise to carry out its obligations hereunder and
thereunder and to issue the Securities in accordance with the terms hereof and
thereof.  The execution and delivery of each of the Transaction
Documents by the Company and the consummation by it of the transactions
contemplated hereby and thereby, including, without limitation, the issuance of
the Notes and Warrants, the reservation for issuance and the issuance of the
Conversion Shares issuable upon conversion
of the Notes and the Warrant Shares issuable upon exercise of the Warrants, have
been duly authorized by all necessary action on the part of the Company and no
further action is required by the Company, its Board of Directors or its
stockholders in connection herewith and therewith (other than (i) the filing
with the SEC of one or more Registration Statements in accordance with the
requirements of the Registration Rights Agreement), (ii) the Company obtaining
Stockholder Approval (as hereinafter defined) and (iii) filings that have been
made pursuant to applicable state securities laws and post-sale filings pursuant
to applicable state and federal securities laws and/or any other notices
required thereby and (iv) the filing of an application with the Principal Market
(as hereinafter defined) for the inclusion of the Conversion Shares and the
Warrant Shares for trading on the Principal Market with respect to the offering
contemplated by the Transaction Documents.  Each Transaction Document
has been (or upon delivery will have been) duly executed by the Company and,
when delivered in accordance with the terms hereof, will constitute the valid
and binding obligation of the Company enforceable against the Company in
accordance with its terms, except (a) as such enforceability may be limited by
bankruptcy, insolvency, reorganization or similar laws affecting creditors'
rights generally, (b) as enforceability of any indemnification and contribution
provisions may be limited under the federal and state securities laws and public
policy, and (c) that the remedy of specific performance and injunctive and other
forms of equitable relief may be subject to equitable defenses and to the
discretion of the court before which any proceeding therefor may be
brought.

     

    
      
        
           


        

        
           


          
            

          

        

        
           


        

      

    

     

    (d)           No
Conflicts.  The execution, delivery and performance of the
Transaction Documents by the Company and the consummation by the Company of the
transactions contemplated hereby and thereby including, without limitation, the
issuance of the Notes and the Warrants reservation for issuance and issuance of
the Conversion Shares and the Warrant Shares) do not and will not (i) conflict
with or violate any provision of the Company's or any Subsidiary's certificate
or articles of incorporation, any certificate of designations, preferences and
rights of any outstanding series of preferred stock, bylaws or other
organizational or charter documents, or (ii) conflict with, or constitute a
default (or an event that with notice or lapse of time or both would become a
default) under, or give to others any rights of termination, amendment,
acceleration or cancellation (with or without notice, lapse of time or both) of,
any agreement, credit facility, debt or other instrument (evidencing a Company
or Subsidiary debt or otherwise) or other understanding to which the Company or
any Subsidiary is a party or by which any property or asset of the Company or
any Subsidiary is bound or affected, or (iii) subject to the Company obtaining
Stockholder Approval, result in a violation of any law, rule, regulation, order,
judgment, injunction, decree or other restriction of any court or governmental
authority to which the Company or a Subsidiary is subject (including federal and
state securities laws and regulations of whichever of the New York Stock
Exchange, Inc., the American Stock Exchange, The NASDAQ Global Market (the
"Principal Market") or
The NASDAQ Global Select Market, The NASDAQ Capital Market or the OTC Bulletin
Board that the Common Stock is listed or quoted for trading on the date in
question (any of the foregoing, a "Trading Market"), or by which
any property or asset of the Company or a Subsidiary is bound or affected;
except in the case of each of clauses (ii) and (iii), such as could not,
individually or in the aggregate, have or reasonably be expected to result in a
Material Adverse Effect.

     

    (e)           Filings, Consents and
Approvals.  Neither the Company nor any Subsidiary is required
to obtain any consent, waiver, authorization or order of, give any notice to, or
make any filing or registration (collectively, "Consents") with, any court or
other federal, state, local or other governmental authority or any regulatory or
self-regulatory agency or other  individual or corporation,
partnership, trust, incorporated or unincorporated association, joint venture,
limited liability company, joint stock company, government (or an agency or
subdivision thereof) or other entity of any kind (a "Person") in connection with
the execution, delivery and performance by the Company of the Transaction
Documents other than (i) filing a Current Report on Form 8-K with the SEC, (ii)
filing with the SEC of one ore more registration statements in accordance with
the Registration Rights Agreement, (iii) filing applications for the listing of
additional shares with the Principal Market, (iv) obtaining those Consents set
forth in Schedule
3(e), which Consents have been obtained on or prior to the date hereof;
(v) the Stockholder Approval (as defined below) and (vi) filings that have been
or will be made pursuant to applicable state securities laws and post-sale
filings pursuant to applicable state and federal securities laws and/or any
other notices required thereby.

     

    
      
        
           


        

        
           


          
            

          

        

        
           


        

      

    

     

    (f)          
 Issuance of
Securities.  The issuance of the Notes have been duly
authorized and, upon issuance in accordance with the terms hereof and payment
therefor, will be duly and validly issued, fully paid and nonassessable, free
from all taxes, Liens and charges with respect to the issue
thereof.  As of the Closing, the Company shall have reserved from its
duly authorized capital stock not less than 130% of the sum of (i) of the
maximum number of shares of Common Stock issuable upon conversion of the Notes
issuable at the Closing (assuming for purposes hereof, that the Notes are
convertible at the initial Conversion Price and without taking into account any
limitations on the conversion of the Notes set forth in the Notes) and (ii) the
maximum number of shares of common Stock issuable upon exercise of the
Warrants.  Upon conversion in accordance with the Notes, the
Conversion Shares, and upon exercise and payment in accordance with the
Warrants, the Warrant Shares will be validly issued, fully paid and
nonassessable and free from all preemptive or similar rights, taxes, Liens and
charges with respect to the issue thereof, with the holders being entitled to
all rights accorded to a holder of Common Stock.  Assuming the
accuracy of the representations and warranties contained in Sections 2(b)
through 2(f), inclusive, above as they relate to all of the Buyers in the
aggregate, the offer and issuance by the Company of the Securities is exempt
from registration under the 1933 Act.

     

    (g)           Capitalization.  The
number of shares and type of all authorized, issued and outstanding capital
stock of the Company is set forth in Schedule
3(g).  Except as set forth in Schedule 3(g), no
securities of the Company are entitled to preemptive or similar rights, and no
Person has any right of first refusal, preemptive right, right of participation,
or any similar right to participate in the transactions contemplated by the
Transaction Documents.  Except as a result of the purchase and sale of
the Securities and except as disclosed in Schedule 3(g), there
are no outstanding options, warrants, scrip rights to subscribe to, calls or
commitments of any character whatsoever relating to, or securities, rights or
obligations convertible into or exchangeable for, or giving any Person any right
to subscribe for or acquire, any shares of Common Stock, or contracts,
commitments, understandings or arrangements by which the Company or any
Subsidiary is or may become bound to issue additional shares of Common Stock, or
securities or rights convertible or exchangeable into shares of Common
Stock.  Except as set forth in Schedule 3(g), the
issue and sale of the Securities will not, immediately or with the passage of
time, obligate the Company to issue shares of Common Stock or other securities
to any Person (other than the Buyers) and will not result in a right of any
holder of Company securities to adjust the exercise, conversion, exchange or
reset price under such securities.  The Company has furnished or made
available to the Buyer true, correct and complete copies of the Company's
Certificate of Incorporation, as amended and as in effect on the date hereof
(the "Certificate of
Incorporation"), and the Company's Bylaws, as amended and as in effect on
the date hereof (the "Bylaws").

     

    (h)           SEC Reports; Financial
Statements.  The Company has filed all reports permitted or
required to be filed by it under the 1933 Act and the Securities Exchange Act of
1934, as amended (the "1934
Act"), including pursuant to Section 13(a) or 15(d) thereof, for the two
years preceding the date hereof (or such shorter period as the Company was
required by law to file such reports) (the foregoing materials, including any
amendments thereto filed with the SEC prior to the date hereof, being
collectively referred to herein as the "SEC Reports" and, together
with the Schedules to this Agreement, the "Disclosure Materials") on a
timely basis or has received a valid extension of such time of filing and has
filed any such SEC Reports prior to the expiration of any such
extension.  The Company has delivered to the Buyers a copy of all SEC
Reports not available on the EDGAR system.  Except as set forth on
Schedule 3(h),
as of their respective dates, the SEC Reports complied in all material respects
with the requirements of the 1933 Act and the 1934 Act applicable thereto and
the rules and regulations of the SEC promulgated thereunder, and none of the SEC
Reports, when filed, contained any untrue statement of a material fact or
omitted to state a material fact required to be stated therein or necessary in
order to make the statements therein, in the light of the circumstances under
which they were made, not misleading.  Except as set forth in Schedule 3(h), the
Company is in material compliance with the Sarbanes-Oxley Act of 2002, and the
rules and regulations promulgated thereunder by all government and regulatory
authorities and agencies.  The financial statements of the Company
included in the SEC Reports comply in all material respects with applicable
accounting requirements and the rules and regulations of the SEC with respect
thereto as in effect at the time of filing.  Such financial statements
have been prepared in accordance with generally accepted accounting principles
applied on a consistent basis during the periods involved ("GAAP"), except as may be
otherwise specified in such financial statements or the notes thereto, and
fairly present in all material respects the financial position of the Company
and its consolidated Subsidiaries as of and for the dates thereof and the
results of operations and cash flows for the periods then ended, subject, in the
case of unaudited statements, to normal, immaterial, year-end audit
adjustments.


    
      
         


      

      
         


        
          

        

      

      
         


      

    

     

    (i)           
Material
Changes.  Since the date of the latest audited financial
statements included within the SEC Reports, except as specifically disclosed in
the SEC Reports and except as set forth on Schedule 3(i)
hereto,(i) there has been no event, occurrence or development that has had or
that could reasonably be expected to result in a Material Adverse Effect, (ii)
the Company has not incurred any liabilities (contingent or otherwise) other
than (A) trade payables and accrued expenses incurred in the ordinary course of
business consistent with past practice and (B) liabilities not required to be
reflected in the Company's financial statements pursuant to GAAP or required to
be disclosed in filings made with the SEC, (iii) the Company has not altered its
method of accounting or the identity of its auditors, (iv) the Company has not
declared or made any dividend or distribution of cash or other property to its
stockholders or purchased, redeemed or made any agreements to purchase or redeem
any shares of its capital stock, (v) the Company has not issued any equity
securities to any officer, director or any Person that, directly or indirectly
through one or more intermediaries, controls or is controlled by or is under
common control with a Person, as such terms are used in and construed under Rule
144 promulgated under the 1933 Act, as amended (or a successor rule thereto)
("Rule 144") (an "Affiliate"), except pursuant
to existing stock option plans of the Company, (vi) the Company has not sold any
assets, individually or in the aggregate, in excess of $250,000 outside of the
ordinary course of business or (vii) the Company has not had capital
expenditures, individually or in the aggregate, in excess of
$250,000.  The Company does not have pending before the SEC any
request for confidential treatment of information.

     

    (j)           
Litigation.  Except
as set forth in the SEC Reports, there is no action, suit, proceeding, inquiry
or investigation which (i) adversely affects or challenges the legality,
validity or enforceability of any of the Transaction Documents or the Securities
or (ii) could, if there were an unfavorable decision, individually or in the
aggregate, have or reasonably be expected to result in a Material Adverse
Effect.  Neither the Company nor any Subsidiary, nor any director or
officer thereof, is or has been the subject of any claim, action or proceeding
involving a claim of violation of or liability under federal or state securities
laws or a claim of breach of fiduciary duty.  There has not been, and
to the knowledge of the Company, there is not pending or contemplated, any
investigation by the SEC involving the Company or any current or former director
or officer of the Company.

     

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

     

    (k)           Labor
Relations.  No material labor dispute exists or, to the
knowledge of the Company, is imminent with respect to any of the employees of
the Company.

     

    (l)          
 Compliance.  Except
as set forth in Schedule 3(l),
neither the Company nor any Subsidiary (i) is in default under or in violation
of (and no event has occurred that has not been waived that, with notice or
lapse of time or both, would result in a default by the Company or any
Subsidiary under), nor has the Company or any Subsidiary received notice of a
claim that it is in default under or that it is in violation of, any indenture,
loan or credit agreement or any other agreement or instrument to which it is a
party or by which it or any of its properties is bound (whether or not such
default or violation has been waived), (ii) is in violation of any order of any
court, arbitrator, governmental body, or regulatory or self-regulatory authority
or (iii) is or has been in violation of any statute, rule or regulation of any
governmental authority, including without limitation all foreign, federal, state
and local laws relating to taxes, environmental protection, occupational health
and safety, product quality and safety and employment and labor matters, except
in each case as could not, individually or in the aggregate, have or reasonably
be expected to result in a Material Adverse Effect.

     

    (m)           Regulatory
Permits.  The Company and the Subsidiaries possess all
certificates, authorizations and permits issued by the appropriate federal,
state, local or foreign regulatory authorities necessary to conduct their
respective businesses as described in the SEC Reports, except where the failure
to possess such permits would not, individually or in the aggregate, have or
reasonably be expected to result in a Material Adverse Effect ("Material Permits"), and
neither the Company nor any Subsidiary has received any notice of proceedings
relating to the revocation or modification of any Material Permit.

     

    (n)           Title to
Assets.  The Company and the Subsidiaries have good and
marketable title in fee simple to all real property owned by them that is
material to their respective businesses and good and marketable title in all
personal property owned by them that is material to their respective businesses,
in each case free and clear of all Liens, except as set forth in Schedule 3(n) and
except for Liens as do not materially affect the value of such property and do
not materially interfere with the use made and proposed to be made of such
property by the Company and the Subsidiaries. Any real property and facilities
held under lease by the Company and the Subsidiaries are held by them under
valid, subsisting and enforceable leases of which the Company and the
Subsidiaries are in compliance in all material respects.

     

    (o)           Patents and
Trademarks.  The Company and the Subsidiaries have, or have
rights to use, all patents, patent applications, trademarks, trademark
applications, service marks, trade names, copyrights, licenses and other similar
rights that are necessary or material for use in connection with their
respective businesses as described in the SEC Reports and which the failure to
so have could, individually or in the aggregate, have or reasonably be expected
to result in a Material Adverse Effect (collectively, the "Intellectual Property
Rights").  The Company does not have any knowledge of any
infringement by the Company or its Subsidiaries of Intellectual Property Rights
of others.  There is no claim, action or proceeding being made or
brought, or to the knowledge of the Company, being threatened, against the
Company or its Subsidiaries regarding its Intellectual Property
Rights.

     

    
      
        
           


        

        
           


          
            

          

        

        
           


        

      

    

     

    (p)           Insurance.  The
Company and the Subsidiaries are insured by insurers of recognized financial
responsibility against such losses and risks and in such amounts as are prudent
and customary in the businesses in which the Company and the Subsidiaries are
engaged.  The Company has no reason to believe that it or its
Subsidiaries will not be able to renew its existing insurance coverage as and
when such coverage expires or to obtain similar coverage from similar insurers
as may be necessary to continue its business without a significant increase in
cost, other than anticipated increases in the market price of officers' and
directors' liability insurance generally.

     

    (q)           Foreign Corrupt
Practices.  Neither the Company nor any direct director,
officer or employee acting on behalf of the Company or any of its Subsidiaries
has, in the course of its actions for, or on behalf of, the Company (i) used any
corporate funds for any unlawful contribution, gift, entertainment or other
unlawful expenses relating to political activity; (ii) made any direct or
indirect unlawful payment to any foreign or domestic government official or
employee from corporate funds; (iii) violated or is in violation of any
provision of the U.S. Foreign Corrupt Practices Act of 1977, as amended; or (iv)
made any unlawful bribe, rebate, payoff, influence payment, kickback or other
unlawful payment to any foreign or domestic government official or
employee.

     

    (r)           Transactions With Affiliates
and Employees.  Except as set forth in the SEC Reports on Schedule 3(r), none
of the officers or directors of the Company and, to the knowledge of the
Company, none of the employees of the Company is presently a party to any
transaction with the Company or any Subsidiary (other than for services as
employees, officers and directors), including any contract, agreement or other
arrangement providing for the furnishing of services to or by, providing for
rental of real or personal property to or from, or otherwise requiring payments
to or from any officer, director or such employee or, to the knowledge of the
Company, any entity in which any officer, director, or any such employee has a
substantial interest or is an officer, director, trustee or
partner.

     

    (s)           Tax
Status.  The Company and each of its Subsidiaries (i) has made
or filed all federal and state income and all other tax returns, reports and
declarations required by any jurisdiction to which it is subject, (ii) has paid
all taxes and other governmental assessments and charges that are material in
amount, shown or determined to be due on such returns, reports and declarations,
except those being contested in good faith and (iii) has set aside on its books
provision reasonably adequate for the payment of all material taxes for periods
subsequent to the periods to which such returns, reports or declarations
apply.  There are no unpaid taxes in any material amount claimed to be
due by the taxing authority of any jurisdiction, and the officers of the Company
know of no basis for any such claim.

     

    
      
        
           


        

        
           


          
            

          

        

        
           


        

      

    

     

    (t)          
 Internal
Accounting Controls.  Except as set forth on Schedule 3(t), the
Company and the Subsidiaries maintain a system of internal accounting controls
which the audit committee of the board of directors reasonably believes is
sufficient to provide reasonable assurance that (i) transactions are executed in
accordance with management's general or specific authorizations, (ii)
transactions are recorded as necessary to permit preparation of financial
statements in conformity with generally accepted accounting principles and to
maintain asset accountability, (iii) access to assets is permitted only in
accordance with management's general or specific authorization, and (iv) the
recorded accountability for assets is compared with the existing assets at
reasonable intervals and appropriate action is taken with respect to any
differences.

     

    (u)           Solvency.  Based
on the financial condition of the Company as of the  date hereof and
as of the Closing Date, (i) the Company's fair saleable value of its assets
exceeds the amount that will be required to be paid on or in respect of the
Company's existing debts and other liabilities (including known contingent
liabilities) as they mature; (ii) the Company's assets do not constitute
unreasonably small capital to carry on its business for the current fiscal year
as now conducted and as proposed to be conducted including its capital needs
taking into account the particular capital requirements of the business
conducted by the Company, and projected capital requirements and capital
availability thereof; and (iii) the current cash flow of the Company, together
with the proceeds the Company would receive, were it to liquidate all of its
assets, after taking into account all anticipated uses of the cash, would be
sufficient to pay all amounts on or in respect of its debt when such amounts are
required to be paid.  The Company does not intend to incur debts
beyond its ability to pay such debts as they mature (taking into account the
timing and amounts of cash to be payable on or in respect of its
debt).

     

    
      	
               
      

            	
              (v)

            	
              Reserved.

            


    

     

    (w)           Application of Takeover
Protections; Rights Agreement.  The Company and its board of
directors have taken all necessary action, if any, in order to render
inapplicable any control share acquisition, business combination, poison pill
(including any distribution under a rights agreement) or other similar
anti-takeover provision under the Certificate of Incorporation or the laws of
the jurisdiction of its formation which is or could become applicable to any
Buyer as a result of the transactions contemplated by this Agreement, including,
without limitation, the Company's issuance of the Securities and any Buyer's
ownership of the Securities.  The Company has not adopted a
stockholder rights plan or similar arrangement relating to accumulations of
beneficial ownership of Common Stock or a change in control of the
Company.

     

    (x)           No General Solicitation;
Placement Agent's Fees.  Neither the Company, nor any of its
affiliates, nor any Person acting on its or their behalf, has engaged in any
form of general solicitation or general advertising (within the meaning of
Regulation D) in connection with the offer or sale of the
Securities.  The Company shall be responsible for the payment of any
placement agent's fees, financial advisory or consultancy fees, brokers'
commissions or finder's fee (other than for persons engaged by any Buyer or its
investment advisor) relating to or arising out of the transactions contemplated
hereby, which fees shall not exceed 2% of the aggregate Purchase Price and 50%
of which shall be allocated to charity.  The Company shall pay, and
hold each Buyer harmless against, any liability, loss or expense (including,
without limitation, attorney's fees and out-of-pocket expenses) arising in
connection with any such claim; provided, that the Company shall not be
responsible for the payment of any amounts under this Agreement resulting from a
breach of the representation by any Buyer set forth in Section
2(k).  The Company acknowledges that it has engaged Olympus
Securities, LLC, as placement agent (the "Agent") in connection with the
sale of the Securities.  Other than the Agent, neither the Company nor
any of its Subsidiaries has engaged any placement agent or other agent in
connection with the sale of the Securities.

     

    
      
        
           


        

        
           


          
            

          

        

        
           


        

      

    

     

    (y)           No Integrated
Offering.  None of the Company, its Subsidiaries, any of their
Affiliates, and any Person acting on their behalf has, directly or indirectly,
made any offers or sales of any security or solicited any offers to buy any
security, under circumstances that would cause this offering of the Securities
to be integrated with prior offerings by the Company for purposes of any
applicable stockholder approval provisions, including, without limitation, under
the rules and regulations of any exchange or automated quotation system on which
any of the securities of the Company are listed or designated.  None
of the Company, its Subsidiaries, their Affiliates and any Person acting on
their behalf will take any action or steps referred to in the preceding sentence
that would cause the offering of the Securities to be integrated with other
offerings.

     

    (z)           
Ranking of
Notes.  Except as set forth on Schedule 3(z) (the
"Senior Indebtedness"),
no Indebtedness of the Company is senior to or ranks pari passu with the Notes in
right of payment, whether with respect of payment of redemptions, interest,
damages or upon liquidation or dissolution or otherwise.

     

    (aa)          Certain Registration
Matters.  The Company is eligible to register the sale of its
Common Stock under Form S-3 promulgated under the 1933 Act.  Except as
described in Schedule
3(aa) and securities that have been previously registered for resale by
the Company, the Company has not granted or agreed to grant to any Person any
rights (including "piggy-back" registration rights) to have any securities of
the Company registered with the SEC or any other governmental authority that
have not been satisfied.

     

    (bb)          Listing and Maintenance
Requirements.  Except as set forth in the SEC Reports, or as
set forth in Schedule
3(bb), the Company has not, in the two years preceding the date hereof,
received notice (written or oral) from any Trading Market on which the Common
Stock is or has been listed or quoted to the effect that the Company is not in
compliance with the listing or maintenance requirements of such Trading
Market.  The Company is currently in compliance with all such listing
and maintenance requirements. Subject to obtaining the Stockholder Approval to
the extent required by the Principal Market, the issuance and sale of the
Securities hereunder does not contravene the rules and regulations of the
Principal Market and no approval of the stockholders of the Company is required
for the Company to issue and deliver to the Buyers up to 130% of the sum of (i)
the maximum number of shares of Common Stock issuable upon conversion of the
Notes issuable at the Closing (assuming for purposes hereof, that the Notes are
convertible at the initial Conversion Price (including any shares issuable as
amortization payments) and without taking into account any limitations on the
conversion of the Notes set forth in the Notes) and (ii) the maximum number of
shares of Common Stock issuable upon exercise of the Warrants.

     

    
      
        
           


        

        
           


          
            

          

        

        
           


        

      

    

     

    (cc)          Investment
Company.  The Company is not, and is not an Affiliate of, an
"investment company" within the meaning of the Investment Company Act of 1940,
as amended.

     

    (dd)         Bank Holding
Company.  Neither the Company nor any of its Subsidiaries or
Affiliates is subject to the Bank Holding Company Act of 1956, as amended (the
"BHCA") and to
regulation by the Board of Governors of the Federal Reserve System (the "Federal
Reserve").  Neither the Company nor any of its Subsidiaries or
Affiliates owns or controls, directly or indirectly, five percent or more of the
outstanding shares of any class of voting securities or twenty-five percent or
more of the total equity of a bank or any entity that is subject to the BHCA and
to regulation by the Federal Reserve.  Neither the Company nor any of
its Subsidiaries or Affiliates exercises a controlling influence over the
management or policies of a bank or any entity that is subject to the BHCA and
to regulation by the Federal Reserve.

     

    (ee)          U.S. Real Property Holding
Corporation.  The Company is not, nor has ever been, a U.S.
real property holding corporation within the meaning of Section 897 of the
Internal Revenue Code of 1986, as amended, and the Company shall so certify upon
Buyer's request.

     

    (ff)           Shell Company Status.
The Company is not, and has never been, an issuer identified in Rule
144(i)(1).

     

    (gg)         Manipulation of
Price.  The Company has not, and to its knowledge no one acting
on its behalf has, (i) taken, directly or indirectly, any action designed to
cause or to result in the stabilization or manipulation of the price of any
security of the Company to facilitate the sale or resale of any of the
Securities, (ii) other than the Agent, sold, bid for, purchased, or paid any
compensation for soliciting purchases of, any of the Securities, or (iii) other
than the Agent, paid or agreed to pay to any person any compensation for
soliciting another to purchase the Securities.

     

    (hh)          Transfer
Taxes.  On the Closing Date, all stock transfer or other taxes
(other than income or similar taxes) which are required to be paid in connection
with the sale and transfer of the Securities to be sold to each Buyer hereunder
will be, or will have been, fully paid or provided for by the Company, and all
laws imposing such taxes will be or will have been complied with.

     

    (ii)           
OFAC.  Neither
the Company nor, to the knowledge of the Company, any director, officer, agent,
employee or affiliate of the Company is currently subject to any U.S. sanctions
administered by the Office of Foreign Assets Control of the U.S. Treasury
Department ("OFAC"); and
the Company will not, directly or indirectly, use the proceeds of the offering,
or lend, contribute or otherwise make available such proceeds to any Subsidiary,
joint venture partner or other Person, for the purpose of financing the
activities of any person currently subject to any U.S. sanctions administered by
OFAC.

     

    (jj)           Disclosure.  Other
than information regarding the offering contemplated by the Transaction
Documents, the Company confirms that neither it nor any other Person acting on
its behalf has provided any of the Buyers or their agents or counsel with any
information that constitutes material, nonpublic information.  The
Company understands and confirms that each of the Buyers will rely on the
foregoing representations in effecting transactions in securities of the
Company.  All disclosure provided to the Buyers regarding the Company,
its business and the transactions contemplated hereby, furnished by or on behalf
of the Company, including the Schedules to this Agreement, is true and correct
in all material respects and does not contain any untrue statement of a material
fact or omit to state any material fact necessary in order to make the
statements made therein, in the light of the circumstances under which they were
made, in all material respects not misleading.  No event or
circumstance has occurred or information exists with respect to the Company or
any of its Subsidiaries or its or their business, properties, operations or
financial conditions, which, under applicable law, rule or regulation, requires
public disclosure or announcement by the Company but which has not been so
publicly announced or disclosed.

     

    
      
        
           


        

        
           


          
            

          

        

        
           


        

      

    

     

    (kk)           Acknowledgment Regarding
Buyer's Purchase of Securities.  The Company acknowledges and
agrees that each Buyer is acting solely in the capacity of arm's length
purchaser with respect to the Transaction Documents and the transactions
contemplated hereby and thereby, and that no Buyer is an officer or director of
the Company.  The Company further acknowledges that no Buyer is acting
as a financial advisor or fiduciary of the Company (or in any similar capacity)
with respect to the Transaction Documents and the transactions contemplated
hereby and thereby, and any advice given by a Buyer or any of its
representatives or agents in connection with the Transaction Documents and the
transactions contemplated hereby and thereby is merely incidental to such
Buyer's purchase of the Securities.  The Company further represents to
each Buyer that the Company's decision to enter into the Transaction Documents
has been based solely on the independent evaluation by the Company and its
representatives.

     

    
      	
               
      

            	
              4.

            	
              COVENANTS.

            


    

     

    (a)           Reasonable Best
Efforts.  Each party shall use its reasonable best efforts
timely to satisfy each of the covenants and the conditions to be satisfied by it
as provided in this Section 4 and Sections 6 and 7 of this
Agreement.

     

    (b)           Form D and Blue
Sky.  The Company agrees to file a Form D with respect to the
Securities as required under Regulation D and to provide a copy thereof to each
Buyer promptly after such filing.  The Company shall, on or before the
Closing Date, take such action as the Company shall reasonably determine is
necessary in order to obtain an exemption for or to qualify the Securities for
sale to the Buyers at the Closing pursuant to this Agreement under applicable
securities or "Blue Sky" laws of the states of the United States (or to obtain
an exemption from such qualification), and shall provide evidence of any such
action so taken to the Buyers on or prior to the Closing Date.  The
Company shall make all filings and reports relating to the offer and sale of the
Securities required under applicable securities or "Blue Sky" laws of the states
of the United States following the Closing Date.

     

    (c)           Reporting
Status.  Until the date on which the Investors (as defined in
the Registration Rights Agreement) shall have sold all the Conversion Shares and
Warrant Shares and
none of the Notes or Warrants is
outstanding (the "Reporting
Period"), the Company shall file all reports required to be filed with
the SEC pursuant to the 1934 Act, and the Company shall not terminate its status
as an issuer required to file reports under the 1934 Act even if the 1934 Act or
the rules and regulations thereunder would otherwise permit such
termination.

     

    
      
        
           


        

        
           


          
            

          

        

        
           


        

      

    

     

    (d)           Financial
Information.  The Company agrees to send the following to each
Investor (as defined in the Registration Rights Agreement) during the Reporting
Period (i) unless the following are filed with the SEC through EDGAR and are
available to the public through the EDGAR system, within one (1) Business Day
after the filing thereof with the SEC, a copy of its Annual Reports on Form
10-K, any interim reports or any consolidated balance sheets, income statements,
stockholders' equity statements and/or cash flow statements for any period other
than annual, any Current Reports on Form 8-K and any registration statements
(other than on Form S-8) or amendments filed pursuant to the 1933 Act, (ii) on
the same day as the release thereof, facsimile or e-mailed copies of all
material financial press releases issued by the Company, and (iii) unless the
following are filed with the SEC through EDGAR and are available to the public
through the EDGAR system, copies of any notices and other information made
available or given to the stockholders of the Company generally,
contemporaneously with the making available or giving thereof to the
stockholders.

     

    (e)           Listing.  The
Company shall, when and as required under the Registration Rights Agreement,
secure the listing of all of the Registrable Securities (as defined in the
Registration Rights Agreement) upon each national securities exchange and
automated quotation system, if any, upon which the Common Stock is then listed
(subject to official notice of issuance) and shall maintain such listing of all
Registrable Securities from time to time issuable under the terms of the
Transaction Documents.  The Company shall maintain the Common Stock's
authorization for listing on a Trading Market.  Neither the Company
nor any of its Subsidiaries shall take any action which would be reasonably
expected to result in the delisting or suspension of the Common Stock on all
Trading Markets.  The Company shall pay all fees and expenses in
connection with satisfying its obligations under this Section 4(e).

     

    (f)           Fees.  At
the Closing, the Company shall reimburse Highbridge International LLC (a Buyer)
or its designee(s) for all actual reasonable out-of-pocket, third party costs
and expenses incurred in connection with the transactions contemplated by the
Transaction Documents (including all reasonable legal fees and disbursements in
connection therewith, documentation and implementation of the transactions
contemplated by the Transaction Documents and due diligence in connection
therewith), which amount shall be withheld by such Buyer from its aggregate
Purchase Price at the Closing. The Company shall be responsible for the payment
of any placement agent's fees, financial advisory fees, or broker's commissions
(other than for Persons engaged by any Buyer) relating to or arising out of the
transactions contemplated hereby, including, without limitation, any fees or
commissions payable to the Agent.  The Company shall pay, and hold
each Buyer harmless against, any liability, loss or expense (including, without
limitation, reasonable attorney's fees and out-of-pocket expenses) arising in
connection with any claim relating to any such payment.  Except as
otherwise set forth in this Agreement or in the Transaction Documents, each
party to this Agreement shall bear its own expenses in connection with the sale
of the Securities to the Buyers; provided, that the Company shall not be
responsible for the payment of any amounts under this Agreement resulting from a
breach of the representation by any Buyer as set forth in Section
2(k).

     

    
      
         


      

      
         


        
          

        

      

      
         


      

    

     

    (g)           Pledge of
Securities.  The Company acknowledges and agrees that the
Securities may, to the extent permitted by the 1933 Act, be pledged by an
Investor (as defined in the Registration Rights Agreement) in connection with a
bona fide margin agreement or other loan or financing arrangement that is
secured by the Securities.  The pledge of Securities shall not be
deemed to be a transfer, sale or assignment of the Securities hereunder, and no
Investor effecting a pledge of Securities shall be required to provide the
Company with any notice thereof or otherwise make any delivery to the Company
pursuant to this Agreement or any other Transaction Document, including, without
limitation, Section 2(h) hereof; provided that an Investor and its pledgee shall
be required to comply with the provisions of Section 2(h) hereof in order to
effect a sale, transfer or assignment of Securities to such
pledgee.  The Company hereby agrees to execute and deliver such
documentation as a pledgee of the Securities may reasonably request in
connection with a pledge of the Securities to such pledgee by an
Investor.

     

    (h)           Disclosure of Transactions
and Other Material Information.  The Company shall, on or
before 8:30 a.m., New York City time, on the first Business Day following
the execution and delivery of this Agreement, file a Current Report on Form 8-K
describing the terms of the transactions contemplated by the Transaction
Documents in the form required by the 1934 Act, and attaching the material
Transaction Documents (including, without limitation, this Agreement, the form
of each of the Notes, the Warrants and the Registration Rights Agreement) as
exhibits to such filing (including all attachments, the "8-K Filing").  From
and after the filing of the 8-K Filing, no Buyer shall be in possession of any
material, nonpublic information provided to them by the Company, any of its
Subsidiaries or any of its respective officers, directors, employees or agents,
that is not disclosed in such 8-K Filing.  The Company shall not, and
shall cause each of its Subsidiaries and its and each of their respective
officers, directors, employees and agents, not to, provide any Buyer with any
material nonpublic information regarding the Company or any of its Subsidiaries
from and after the filing of the press release referred to in the first sentence
of this Section without the express written consent of such
Buyer.  Subject to the foregoing, neither the Company nor any Buyer
shall issue any press releases or any other public statements with respect to
the transactions contemplated hereby; provided, however, that the
Company shall be entitled, without the prior approval of any Buyer, to make any
press release or other public disclosure with respect to such transactions (i)
in substantial conformity with the 8-K Filing and contemporaneously therewith
and (ii) as is required by applicable law and regulations, including the
applicable rules and regulations of the Principal Market (provided that in the
case of clause (i) each Buyer shall be consulted by the Company in connection
with any such press release or other public disclosure prior to its
release).  Except as otherwise required by law, without the prior
written consent of any applicable Buyer (which consent shall not be unreasonably
withheld), the Company shall not disclose the name of any Buyer in any filing,
announcement, release or otherwise.

     

    (i)           Use of
Proceeds.  The Company will use the proceeds from the sale of
the Securities to make a loan to DEI Services Corporation ("DEI") in the form of the
$2,500,000 10% Senior Subordinated Convertible Note, in the form attached hereto
as Exhibit I,
issued by DEI to FAAC Incorporated, a wholly-owned Subsidiary of the Company,
with any remaining proceeds used for general corporate and working capital
purposes other than the (A) repayment of any other outstanding Indebtedness of
the Company or its Subsidiaries prior to the final due date thereof or (B)
redemption or repurchase of any of its or its Subsidiaries' equity or
equity-linked Securities.

     

    
      
         


      

      
         


        
          

        

      

      
         


      

    

     

    (j)         
  Restriction on Redemption
and Cash Dividends.  So long as any Notes are outstanding,
without the prior express written consent of the holders of Notes representing
not less than a majority of the aggregate principal amount of the then
outstanding Notes, the Company shall not, directly or indirectly, redeem, or
declare or pay any cash dividend or distribution on, the Common
Stock.

     

    (k)           Additional Notes; Variable
Securities; Dilutive Issuances.  So long as any Notes remain
outstanding, the Company will not issue any Notes (other than to the Buyers as
contemplated hereby) and the Company shall not issue any other securities that
would cause a breach or default under the Notes.  For long as any
Notes remain outstanding, the Company shall not, in any manner, issue or sell
any rights, warrants or options to subscribe for or purchase Common Stock or
directly or indirectly convertible into or exchangeable or exercisable for
Common Stock at a price which varies or may vary, from time to time, with the
market price of the Common Stock, including by way of one or more reset(s) to
any fixed price unless the conversion, exchange or exercise price of any such
security cannot be less than the then applicable Conversion Price (as defined in
the Notes) with respect to the Common Stock into which any Note is convertible
or the then applicable Exercise Price (as defined in the Warrants) with respect
to the Common Stock into which any Warrant is exercisable.  Until the
Stockholder Approval has been obtained, the Company shall not, in any manner,
enter into or affect any Dilutive Issuance (as defined in the Notes) and,
thereafter, for long as any Notes or Warrants remain outstanding, the Company
shall not, in any manner, enter into or affect any Dilutive Issuance (as defined
in the Notes) if the effect of such Dilutive Issuance is to cause the Company to
be required to issue upon conversion of any Note any shares of Common Stock or
exercise of any Warrant any shares of Common Stock in excess of that number of
shares of Common Stock which the Company may issue upon conversion of the Notes
or exercise of the Warrants without breaching the Company's obligations under
the rules or regulations of the Eligible Market (as defined in the
Notes).

     

    (l)           
Corporate
Existence.  So long as any Notes remain outstanding, the
Company shall not be party to any Fundamental Transaction (as defined in the
Notes) unless the Company is in compliance with the applicable provisions
governing Fundamental Transactions set forth in the Notes.

     

    (m)           Reservation of
Shares.  So long as any Notes remain outstanding, the Company
shall take all action necessary to at all times have authorized, and reserved
for the purpose of issuance, no less than 130% of the sum of (i) of the maximum
number of shares of Common Stock issuable upon conversion of the Notes issuable
at the Closing (assuming for purposes hereof, that the Notes are convertible at
the initial Conversion Price and without taking into account any limitations on
the conversion of the Notes set forth in the Notes) and (ii) the maximum number
of shares of Common Stock issuable upon exercise of the Warrants (without taking
into account any limitations on the exercise of the Warrants set forth in the
Warrants).

     

    (n)           Conduct of
Business.  The business of the Company and its Subsidiaries
shall not be conducted in violation of any law, ordinance or regulation of any
governmental entity, except where such violations would not result, either
individually or in the aggregate, in a Material Adverse Effect.

     

    
      
         


      

      
         


        
          

        

      

      
         


      

    

     

    (o)           Stockholder
Approval.  The Company shall provide each stockholder entitled
to vote at a special or annual meeting of stockholders of the Company (the
"Stockholder Meeting"),
which shall be promptly called and held not later than October 31, 2008 (the
"Stockholder Meeting
Deadline"), a proxy statement, substantially in the form which has been
previously reviewed by Schulte Roth & Zabel LLP, at the expense of the
Company, not to exceed $10,000 (which review shall be completed within five (5)
Business Days of such counsel's receipt of the proxy statement and such review
requirement shall be waived if such counsel has not completed its review within
such five (5) Business Day period), soliciting each such stockholder's
affirmative vote at the Stockholder Meeting for approval of resolutions
providing for the Company's issuance of all of the Securities as described in
the Transaction Documents in accordance with applicable law and the rules and
regulations of the Principal Market (such affirmative approval being referred to
herein as the "Stockholder
Approval"), and the Company shall use its reasonable best efforts to
solicit its stockholders' approval of such resolutions  and to cause
the Board of Directors of the Company to recommend to the stockholders that they
approve such resolutions.  The Company shall be obligated to use its
reasonable best efforts to obtain the Stockholder Approval by the Stockholder
Meeting Deadline.  If, despite the Company's reasonable best efforts
the Stockholder Approval is not obtained on or prior to the Stockholder Meeting
Deadline, the Company shall cause an additional Stockholder Meeting to be held
every six (6) months thereafter until such Stockholder Approval is obtained or
the Notes are no longer outstanding.

     

    (p)           Additional Issuances of
Securities.

     

    (i)           
For purposes of this Section 4(p), the following definitions shall
apply.

     

    (1)           "Convertible Securities" means
any stock or securities (other than Options) convertible into or exercisable or
exchangeable for shares of Common Stock.

     

    (2)           "Options" means any rights,
warrants or options to subscribe for or purchase shares of Common Stock or
Convertible Securities.

     

    (3)           "Common Stock Equivalents"
means, collectively, Options and Convertible Securities.

     

    (ii)           From
the date hereof until the date that is ninety (90) calendar days after the
Initial Effective Date (as defined in the Registration Rights Agreement) (the
"Trigger Date"), the
Company will not, directly or indirectly, offer, sell, grant any option to
purchase, or otherwise dispose of (or announce any offer, sale, grant or any
option to purchase or other disposition of) any of its or its Subsidiaries' debt
with no equity component, equity or equity equivalent securities, including
without limitation any debt, preferred stock or other instrument or security
that is, at any time during its life and under any circumstances, convertible
into or exchangeable or exercisable for shares of Common Stock or Common Stock
Equivalents (any such offer, sale, grant, disposition or announcement being
referred to as a "Subsequent
Placement").

     

    
      
        
           


        

        
           


          
            

          

        

        
           


        

      

    

     

    (iii)           From
the Trigger Date until the later of (a) the two year anniversary of the Initial
Effective Date and (b) the date that less than $500,000 in aggregate principal
amount of Notes remain outstanding, the Company will not, directly or
indirectly, effect any Subsequent Placement unless the Company shall have first
complied with this Section 4(p)(iii).

     

    (1)           The
Company shall deliver to each Buyer an irrevocable written notice
(the "Offer
Notice") of any proposed or intended issuance or sale or exchange
(the "Offer") of
the securities being offered (the "Offered Securities") in a
Subsequent Placement, which Offer Notice shall (w) identify and describe the
Offered Securities, (x) describe the price and other terms upon which they
are to be issued, sold or exchanged, and the number or amount of the Offered
Securities to be issued, sold or exchanged, (y) identify the persons or
entities (if known) to which or with which the Offered Securities are to be
offered, issued, sold or exchanged and (z) offer to issue and sell to or
exchange with such Buyers not less than 50% of the Offered Securities allocated
among such Buyers (a) based on such Buyer's pro rata portion of the aggregate
number of Preferred Shares purchased hereunder (the "Basic Amount"), and (b) with
respect to each Buyer that elects to purchase its Basic Amount, any additional
portion of the Offered Securities attributable to the Basic Amounts of other
Buyers as such Buyer shall indicate it will purchase or acquire should the other
Buyers subscribe for less than their Basic Amounts (the "Undersubscription Amount"),
which process shall be repeated until the Buyers shall have an opportunity to
subscribe for any remaining Undersubscription Amount.

     

    (2)           To
accept an Offer, in whole or in part, such Buyer must deliver a written notice
to the Company prior to the end of the tenth (10th)
Business Day after such Buyer's receipt of the Offer Notice (the "Offer Period"), setting forth
the portion of such Buyer's Basic Amount that such Buyer elects to purchase and,
if such Buyer shall elect to purchase all of its Basic Amount, the
Undersubscription Amount, if any, that such Buyer elects to purchase (in either
case, the "Notice of
Acceptance").  If the Basic Amounts subscribed for by all
Buyers are less than the total of all of the Basic Amounts, then each Buyer who
has set forth an Undersubscription Amount in its Notice of Acceptance shall be
entitled to purchase, in addition to the Basic Amounts subscribed for, the
Undersubscription Amount it has subscribed for; provided, however, that if the
Undersubscription Amounts subscribed for exceed the difference between the total
of all the Basic Amounts and the Basic Amounts subscribed for (the "Available Undersubscription
Amount"), each Buyer who has subscribed for any Undersubscription Amount
shall be entitled to purchase only that portion of the Available
Undersubscription Amount as the Basic Amount of such Buyer bears to the total
Basic Amounts of all Buyers that have subscribed for Undersubscription Amounts,
subject to rounding by the Company to the extent its deems reasonably
necessary.

     

    (3)           The
Company shall have ten (10) Business Days from the expiration of the Offer
Period above (i) to offer, issue, sell or exchange all or any part of such
Offered Securities as to which a Notice of Acceptance has not been given by the
Buyers (the "Refused
Securities") pursuant to a definitive agreement(s) (the "Subsequent Placement
Agreement"), but only to the offerees described in the Offer Notice (if
so described therein) and only upon terms and conditions (including, without
limitation, unit prices and interest rates) that are not more favorable to the
acquiring person or persons or less favorable to the Company than those set
forth in the Offer Notice and (ii) to publicly announce (a) the execution of
such Subsequent Placement Agreement, and (b) either (x) the consummation of the
transactions contemplated by such Subsequent Placement Agreement or (y) the
termination of such Subsequent Placement Agreement (unless the Company
determines that the termination of such Subsequent Placement Agreement is not
material and the Buyers are no longer in possession of material non-public
information upon such termination), which shall be filed with the SEC on a
Current Report on Form 8-K with such Subsequent Placement Agreement and any
documents contemplated therein filed as exhibits thereto.

     

    
      
        
           


        

        
           


          
            

          

        

        
           


        

      

    

     

    (4)           In
the event the Company shall propose to sell less than all the Refused Securities
(any such sale to be in the manner and on the terms specified in Section
4(p)(iii)(3) above), then each Buyer may, at its sole option and in its sole
discretion, reduce the number or amount of the Offered Securities specified in
its Notice of Acceptance to an amount that shall be not less than the number or
amount of the Offered Securities that such Buyer elected to purchase pursuant to
Section 4(p)(iii)(2) above multiplied by a fraction, (i) the numerator of which
shall be the number or amount of Offered Securities the Company actually
proposes to issue, sell or exchange (including Offered Securities to be issued
or sold to Buyers pursuant to Section 4(p)(iii)(3) above prior to such
reduction) and (ii) the denominator of which shall be the original amount of the
Offered Securities.  In the event that any Buyer so elects to reduce
the number or amount of Offered Securities specified in its Notice of
Acceptance, the Company may not issue, sell or exchange more than the reduced
number or amount of the Offered Securities unless and until such securities have
again been offered to the Buyers in accordance with Section 4(p)(iii)(1)
above.

     

    (5)           Upon
the closing of the issuance, sale or exchange of all or less than all of the
Refused Securities, the Buyers shall acquire from the Company, and the Company
shall issue to the Buyers, the number or amount of Offered Securities specified
in the Notices of Acceptance, as reduced pursuant to Section 4(p)(iii)(4) above
if the Buyers have so elected, upon the terms and conditions specified in the
Offer.  Notwithstanding anything to the contrary contained in this
Agreement, if the Company does not consummate the closing of the issuance, sale
or exchange of all or less than all of the Refused Securities within ten (10)
Business Days of the expiration of the Offer Period, the Company shall issue to
the Buyers the number or amount of Offered Securities specified in the Notices
of Acceptance, as reduced pursuant to Section 4(p)(iii)(4) above if the Buyers
have so elected, upon the terms and conditions specified in the
Offer.  The purchase by the Buyers of any Offered Securities is
subject in all cases to the preparation, execution and delivery by the Company
and the Buyers of a purchase agreement relating to such Offered Securities
reasonably satisfactory in form and substance to the Buyers and their respective
counsel.

     

    (6)           Any
Offered Securities not acquired by the Buyers or other persons in accordance
with Section 4(p)(iii)(3) above may not be issued, sold or exchanged until they
are again offered to the Buyers under the procedures specified in this
Agreement.

     

    
      
        
           


        

        
           


          
            

          

        

        
           


        

      

    

     

    (7)           The
Company and the Buyers agree that if any Buyer elects to participate in the
Offer, (x) neither the Subsequent Placement Agreement with respect to such Offer
nor any other transaction documents related thereto (collectively, the "Subsequent Placement
Documents") shall include any term or provisions whereby any Buyer shall
be required to agree to any restrictions in trading as to any securities of the
Company owned by such Buyer prior to such Subsequent Placement, and (y) any
registration rights set forth in such Subsequent Placement Documents shall be
similar in all material respects to the registration rights contained in the
Registration Rights Agreement.

     

    (8)           Notwithstanding
anything to the contrary in this Section 4(p) and unless otherwise agreed to by
the Buyers, the Company shall either confirm in writing to the Buyers that the
transaction with respect to the Subsequent Placement has been abandoned or shall
publicly disclose its intention to issue the Offered Securities, in either case
in such a manner such that the Buyers will not be in possession of material
non-public information, by the twentieth (20th)
Business Day following delivery of the Offer Notice.  If by the
twentieth (20th)
Business Day following delivery of the Offer Notice no public disclosure
regarding a transaction with respect to the Offered Securities has been made,
and no notice regarding the abandonment of such transaction has been received by
the Buyers, such transaction shall be deemed to have been abandoned and the
Buyers shall not be deemed to be in possession of any material, non-public
information with respect to the Company.  Should the Company decide to
pursue such transaction with respect to the Offered Securities, the Company
shall provide each Buyer with another Offer Notice and each Buyer will again
have the right of participation set forth in this Section
4(p)(iii).  The Company shall not be permitted to deliver more than
one such Offer Notice to the Buyers in any 60 day period.

     

    (iv)           The
restrictions contained in subsections (ii) and (iii) of this Section 4(p) shall
not apply in connection with the issuance of any (i) Excluded Securities (as
defined in the Notes) and (ii) any securities issued pursuant to any bona fide
firm commitment underwritten public offering which generates gross proceeds to
the Company in excess of $10,000,000 (other than an "at-the-market offering" as
defined in Rule 415(a)(4) under the 1933 Act and "equity lines").

     

    (q)           Public
Information.  At any time during the period commencing from the
six (6) month anniversary of the Closing Date and ending at such time that all
of the Conversion Shares can be sold either pursuant to a registration
statement, or if a registration statement is not available for the resale of all
of the Securities, may be sold without the requirement for the Company to be in
compliance with Rule 144(c)(1) and otherwise without restriction or limitation
pursuant to Rule 144, if the Company shall fail for any reason to satisfy the
current public information requirement under Rule 144(c) (a "Public Information Failure")
then, as partial relief for the damages to any holder of Notes by reason of any
such delay in or reduction of its ability to sell the Conversion Shares (which
remedy shall not be exclusive of any other remedies available at law or in
equity), the Company shall pay to each such holder an amount in cash equal to
one and one-half percent (1.5%) of the aggregate Purchase Price attributable to
the Notes continued to be held by such holder on the day of a Public Information
Failure and on every thirtieth day (pro rated for periods totaling less than
thirty days) thereafter until the earlier of (i) the date such Public
Information Failure is cured and (ii) such time that such public information is
no longer required pursuant to Rule 144.  The payments to which a
holder shall be entitled pursuant to this Section 4(q) are referred to herein as
"Public Information Failure
Payments."  Public Information Failure Payments shall be paid
on the earlier of (I) the last day of the calendar month during which such
Public Information Failure Payments are incurred
and (II) the third Business Day after the event or failure giving rise to the
Public Information Failure Payments is
cured.  In the event the Company fails to make Public Information
Failure Payments in
a timely manner, such Public Information Failure Payments shall bear
interest at the rate of 1.5% per month (prorated for partial months) until paid
in full.

     

    
      
        
           


        

        
           


          
            

          

        

        
           


        

      

    

     

    (r)           Inactive
Subsidiaries.  The Company agrees that each Inactive Subsidiary
shall remain a dormant company until such time as each such Inactive Subsidiary
is dissolved in accordance with the laws of its jurisdiction of
incorporation.  The Company shall not, and shall cause its
Subsidiaries not to, transfer any property or asset to any Inactive
Subsidiary.

     

    (s)           Lock-Up.  Without
the prior written consent of the holders of a majority of the Notes, the Company
shall not amend or waive any provision of any of the Lock-Up Agreements except
to extend the term of the lock-up period.

     

    (t)           Letter of
Credit.

     

    (1)           If
at any time (and from time to time) after the date hereof, the Company or any of
its Subsidiaries consummates a Sale (as defined below), then contemporaneously
with the consummation of such Sale the Company, shall obtain irrevocable letters
of credit (each a "Letter of
Credit", and together the "Letters of Credit") issued in
favor of each of the holders of Notes (each a "Holder", and together the
"Holders"), or increase
each Holder's existing Letter of Credit, as applicable, in the amount of each
Holder's Holder Pro Rata Amount (as defined below) of the proceeds of such Sale
(as increased or decreased pursuant to the terms of this Section 4(t), the
"Holder Letter of Credit
Amount", and collectively, the "Letter of Credit Amount") by a
bank acceptable to the Required Holders (as defined in the Notes) (the "Letter of Credit Bank") and in
form and substance acceptable to the Required Holders.  Each Letter of
Credit, including any renewals, extensions or replacements referred to below,
shall expire not earlier than 91 days after the date the Notes are no longer
outstanding (the "LC Expiration
Date"), unless the applicable Letter of Credit shall have been reduced to
zero in accordance with the terms contained in this Section 4(t) prior to such
date.  As used herein, "Holder Pro Rata Amount" with
respect to any Holder means a fraction (i) the numerator of which is the
principal amount of Notes issued to such Holder on the Closing Date and (ii) the
denominator of which is the aggregate principal amount of all Notes issued to
all Buyers on the Closing Date.  As used herein, "Sale" means any assignment,
conveyance, transfer or other disposition to (including by way of any
assignment, license or granting of rights of such business, technologies and/or
assets), or any exchange of property with, any Person of any of the assets,
property or businesses of the Company or any of its Subsidiaries in one or more
transactions (whether or not such transactions are related) in excess of
$500,000.

     

    
      
        
           


        

        
           


          
            

          

        

        
           


        

      

    

     

    (2)           Upon
the occurrence of an Event of Default (as defined in the Notes) with respect to
any Note, at any time after the Company's receipt of the Holder's Event of
Default Redemption Notice (as defined in the Notes), the Holder shall be
entitled to draw under such Holder's Letter of Credit, including any renewals,
extensions or replacements referred to below, an amount equal to the lesser of
(A) the Holder Letter of Credit Amount and (B) such amount then due and payable
under such Holder's Note.  Upon any other payment becoming due and
payable under the Notes, the Holder to which such payment is due may issue
written instructions to the Letter of Credit Bank, entitling such Holder to draw
under such Holder's Letter of Credit, including any renewals, extensions or
replacements referred to below, an amount equal to the payment due or any
portion thereof.

     

    (3)           The
Company shall obtain such renewals, extensions or replacements of the Letters of
Credit as necessary to ensure that the Letters of Credit shall not expire prior
to the LC Expiration Date (unless the Letters of Credit shall have been reduced
to zero in accordance with the terms contained in this Section 4(t) prior to
such date).  If, at any time, the Company cannot obtain a renewal,
extension or replacement of the Letters of Credit such that the Letters of
Credit will expire prior to the LC Expiration Date (a "Withdrawal Event"), the
Company and the Letter of Credit Bank shall each give the Holders written notice
of the occurrence of a Withdrawal Event at least forty-five (45) days prior to
the then current expiration date of the Letter of Credit.  Following a
Withdrawal Event, each Holder shall be entitled to draw down its Holder Letter
of Credit Amount in its entirety (whether or not an Event of Default shall have
occurred or be continuing under such Holder's Note).

     

    (4)           At
such time that a Holder's outstanding amount of Notes is less than such Holder's
Holder Letter of Credit Amount (the difference between the Holder's Holder
Letter of Credit Amount and such Holder's outstanding amount of Notes at such
time, the Holder's "Reduction
Amount") (a "Reduction
Threshold Event"), the Company may deliver a notice to such Holder (the
"LC Reduction Notice"),
certifying as to the occurrence of the Reduction Threshold Event, that no Event
of Default (or event that with the passage of time or giving of notice would
constitute an Event of Default) has occurred or is pending and the aggregate
amount then outstanding under such Holder's Notes.  Within seven (7)
Business Days after the Holder's receipt of the LC Reduction Notice, unless the
Holder reasonably objects to such LC Reduction Notice, the Holder shall issue a
written instruction to the Letter of Credit Bank to request the reduction of its
Holder Letter of Credit Amount by an amount equal to the Reduction Amount;
provided that the Company shall not deliver any LC Reduction Notice requesting a
reduction of less than $100,000.

     

    
      	
               
      

            	
              5.

            	
              REGISTER; TRANSFER
      AGENT INSTRUCTIONS.

            


    

     

    (a)           Register.  The
Company shall maintain at its principal executive offices (or such other office
or agency of the Company as it may designate by notice to each holder of
Securities), a register for the Notes and the Warrants in which the Company
shall record the name and address of the Person in whose name the Notes and the
Warrants have been issued (including the name and address of each transferee),
the principal amount of Notes held by such Person and the number of Conversion
Shares issuable upon conversion of the Notes and the number of Warrant Shares
issuable upon exercise of the Warrants held by such Person.  The
Company shall keep the register open and available at all times during business
hours for inspection of any Buyer or its legal representatives.

     

    
      
        
           


        

        
           


          
            

          

        

        
           


        

      

    

     

    (b)           Transfer Agent
Instructions.  The Company shall issue irrevocable instructions
to its transfer agent, and any subsequent transfer agent (the "Transfer Agent"), to issue
certificates or credit shares to the applicable balance accounts at The
Depository Trust Company ("DTC"), registered in the name
of each Buyer or its respective nominee(s), for the Conversion Shares issued
upon conversion of the Notes and the Warrant Shares issued upon the exercise of
the Warrants in such amounts as specified from time to time by each Buyer to the
Company upon conversion of the Notes and exercise of the Warrants in the form of
Exhibit D
attached hereto (the "Irrevocable Transfer Agent
Instructions").  The Company warrants that no instruction in
respect of the Securities other than the Irrevocable Transfer Agent Instructions
referred to in this Section 5(b), and stop transfer instructions to give effect
to Section 2(g) hereof, will be given by the Company to the Transfer Agent, and
that the Securities shall otherwise be freely transferable on the books and
records of the Company as and to the extent provided in this Agreement and the
other Transaction Documents.  If a Buyer effects a sale, assignment or
transfer of the Securities in accordance with Section 2(g), the Company shall
permit the transfer and shall promptly instruct the Transfer Agent to issue one
or more certificates or credit shares to the applicable balance accounts at DTC
in such name and in such denominations as specified by such Buyer to effect such
sale, transfer or assignment.  In the event that such sale, assignment
or transfer involves Conversion Shares sold, assigned or transferred pursuant to
an effective registration statement or pursuant to Rule 144, the Company will,
or will use its reasonable efforts to cause the Transfer Agent to issue such
Securities to the Buyer, assignee or transferee, as the case may be, without any
restrictive legend.  The Company acknowledges that a breach by it of
its obligations hereunder will cause irreparable harm to a
Buyer.  Accordingly, the Company acknowledges that the remedy at law
for a breach of its obligations under this Section 5(b) will be inadequate and
agrees, in the event of a breach or threatened breach by the Company of the
provisions of this Section 5(b), that a Buyer shall be entitled, in addition to
all other available remedies, to an order and/or injunction restraining any
breach and requiring immediate issuance and transfer, without the necessity of
showing economic loss and without any bond or other security being required.
Nothing in the foregoing shall be interpreted to require the Company or the
Transfer Agent to effect any transfer or take any other action in violation of
applicable federal or state securities laws.

     

    
      	
               
      

            	
              6.

            	
              CONDITIONS TO THE
      COMPANY'S OBLIGATION TO
SELL.

            


    

     

    The
obligation of the Company hereunder to issue and sell the Notes to each Buyer at
the Closing is subject to the satisfaction, at or before the Closing Date, of
each of the following conditions, provided that these conditions are for the
Company's sole benefit and may be waived by the Company at any time in its sole
discretion by providing each Buyer with prior written notice
thereof:

     


    
      
         


      

      
         


        
          

        

      

      
         


      

    

     

    (i)           Such
Buyer shall have executed each of the Transaction Documents to which it is a
party and delivered the same to the Company.

     

    (ii)           Such
Buyer and each other Buyer shall have delivered to the Company the Purchase
Price (less, in the case of Highbridge International LLC, the amounts withheld
pursuant to Section 4(f)) for the Notes being purchased by such Buyer at the
Closing by wire transfer of immediately available funds pursuant to the wire
instructions provided by the Company.

     

    (iii)           The
representations and warranties of such Buyer shall be true and correct in all
material respects as of the date when made and as of the Closing Date as though
made at that time (except for representations and warranties that speak as of a
specific date), and such Buyer shall have performed, satisfied and complied in
all material respects with the covenants, agreements and conditions required by
this Agreement to be performed, satisfied or complied with by such Buyer at or
prior to the Closing Date.

     

    
      	
               
      

            	
              7.

            	
              CONDITIONS TO EACH
      BUYER'S OBLIGATION TO
PURCHASE.

            


    

     

    The
obligation of each Buyer hereunder to purchase the Notes and Warrants at the
Closing is subject to the satisfaction, at or before the Closing Date, of each
of the following conditions, provided that these conditions are for each Buyer's
sole benefit and may be waived by such Buyer at any time in its sole discretion
by providing the Company with prior written notice thereof:

     

    (i)           
The Company shall have executed and delivered to such Buyer (i) each of the
Transaction Documents and (ii) the Notes (in such principal amounts as such
Buyer shall request) and (iii) the related Warrants (in such amounts as such
Buyer shall request), which are being purchased by such Buyer at the Closing
pursuant to this Agreement.

     

    (ii)           Such
Buyer shall have received the opinions of the Company's in-house counsel, dated
as of the Closing Date, in substantially the form of Exhibit E-1
attached hereto.

     

    (iii)           Such
Buyer shall have received the opinions of Lowenstein Sandler PC, the Company's
outside counsel, dated as of the Closing Date, in substantially the form of
Exhibit E-2
attached hereto.

     

    (iv)           The
Company shall have delivered to such Buyer a copy of the Irrevocable Transfer
Agent Instructions, in the form of Exhibit D
attached hereto, which instructions shall have been delivered to and
acknowledged in writing by the Company's transfer agent.

     

    (v)           The
Company shall have delivered to such Buyer a certificate evidencing the
organization and good standing of the Company in the State of Delaware issued by
the Secretary of State of the State of Delaware, as of a date within 10 days of
the Closing Date.

     

    
      
         


      

      
         


        
          

        

      

      
         


      

    

     

    (vi)          The
Company shall have delivered to such Buyer a certificate evidencing the
Company's qualification as a foreign corporation and good standing issued by the
Secretary of State (or comparable office) of each jurisdiction in which the
Company conducts business, as of a date within 10 days of the Closing
Date.

     

    (vii)         The
Company shall have delivered to such Buyer a certified copy of the Certificate
of Incorporation as certified by the Secretary of State of the State of Delaware
within ten (10) days of the Closing Date.

     

    (viii)        The
Company shall have delivered to such Buyer a certificate, executed by the
Secretary of the Company and dated as of the Closing Date, as to (i) the
resolutions consistent with this transaction as adopted by the Company's Board
of Directors in a form reasonably acceptable to such Buyer, (ii) the Certificate
of Incorporation and (iii) the Bylaws of the Company, each as in effect at the
Closing, in the form attached hereto as Exhibit F.

     

    (ix)           The
representations and warranties of the Company shall be true and correct in all
material respects (other than representations and warranties that are already
qualified by materiality or Material Adverse Effect which shall be true and
correct in all respects) as of the date when made and as of the Closing Date as
though made at that time (except for representations and warranties that speak
as of a specific date, which shall be true and correct as of such specified
date) and the Company shall have performed, satisfied and complied in all
respects with the covenants, agreements and conditions required by the
Transaction Documents to be performed, satisfied or complied with by the Company
at or prior to the Closing Date.  Such Buyer shall have received a
certificate, executed by the Chief Executive Officer of the Company, dated as of
the Closing Date, to the foregoing effect and as to such other matters as may be
reasonably requested by such Buyer in the form attached hereto as Exhibit
G.

     

    (x)            The
Company shall have delivered to such Buyer a letter from the Company's transfer
agent certifying the number of shares of Common Stock outstanding as of a date
within five days of the Closing Date.

     

    (xi)          
The Company's officers shall have entered into a Lock-Up Agreement in the form
attached hereto as Exhibit H (the "Lock-Up
Agreements").

     

    (xii)          The
Common Stock (I) shall be listed on a Trading Market and (II) shall not have
been suspended, as of the Closing Date, by the SEC or a Trading Market from
trading on a Trading Market nor shall suspension by the SEC or a Trading Market
have been threatened, as of the Closing Date, either (A) in writing by the SEC
or a Trading Market or (B) by falling below the minimum listing maintenance
requirements of a Trading Market.

     

    (xiii)         The
Company shall have obtained all governmental, regulatory or third party consents
and approvals, if any, necessary for the sale of the Securities.

     

    (xiv)         The
Company shall have delivered to such Buyer such other documents relating to the
transactions contemplated by this Agreement as such Buyer or its counsel may
reasonably request.

     

    
      
        
           


        

        
           


          
            

          

        

        
           


        

      

    

     

    8.            
TERMINATION.  In
the event that the Closing shall not have occurred with respect to a Buyer on or
before five (5) Business Days from the date hereof due to the Company's or such
Buyer's failure to satisfy the conditions set forth in Sections 6 and 7 above
(and the nonbreaching party's failure to waive such unsatisfied condition(s)),
the nonbreaching party shall have the option to terminate this Agreement with
respect to such breaching party at the close of business on such date without
liability of any party to any other party; provided, however, that if this
Agreement is terminated pursuant to this Section 8, the Company shall remain
obligated to reimburse the non-breaching Buyers for the expenses described in
Section 4(f) above.

     

    
      	
               
      

            	
              9.

            	
              MISCELLANEOUS.

            


    

     

    (a)           
Governing Law;
Jurisdiction; Jury Trial.  All questions concerning the
construction, validity, enforcement and interpretation of this Agreement shall
be governed by the internal laws of the State of New York, without giving effect
to any choice of law or conflict of law provision or rule (whether of the State
of New York or any other jurisdictions) that would cause the application of the
laws of any jurisdictions other than the State of New York.  Each
party hereby irrevocably submits to the exclusive jurisdiction of the state and
federal courts sitting in The City of New York, Borough of Manhattan, for the
adjudication of any dispute hereunder or in connection herewith or with any
transaction contemplated hereby or discussed herein, and hereby irrevocably
waives, and agrees not to assert in any suit, action or proceeding, any claim
that it is not personally subject to the jurisdiction of any such court, that
such suit, action or proceeding is brought in an inconvenient forum or that the
venue of such suit, action or proceeding is improper.  Each party
hereby irrevocably waives personal service of process and consents to process
being served in any such suit, action or proceeding by mailing a copy thereof to
such party at the address for such notices to it under this Agreement and agrees
that such service shall constitute good and sufficient service of process and
notice thereof.  Nothing contained herein shall be deemed to limit in
any way any right to serve process in any manner permitted by
law.  EACH PARTY
HEREBY IRREVOCABLY WAIVES ANY RIGHT IT MAY HAVE, AND AGREES NOT TO REQUEST, A
JURY TRIAL FOR THE ADJUDICATION OF ANY DISPUTE HEREUNDER OR IN CONNECTION WITH
OR ARISING OUT OF THIS AGREEMENT OR ANY TRANSACTION CONTEMPLATED
HEREBY.

     

    (b)           Counterparts.  This
Agreement may be executed in two or more identical counterparts, all of which
shall be considered one and the same agreement and shall become effective when
counterparts have been signed by each party and delivered to the other party;
provided that a facsimile signature shall be considered due execution and shall
be binding upon the signatory thereto with the same force and effect as if the
signature were an original, not a facsimile signature.

     

    (c)        
   Headings.  The
headings of this Agreement are for convenience of reference and shall not form
part of, or affect the interpretation of, this Agreement.

     

    (d)           Severability.  If
any provision of this Agreement is prohibited by law or otherwise determined to
be invalid or unenforceable by a court of competent jurisdiction, the provision
that would otherwise be prohibited, invalid or unenforceable shall be deemed
amended to apply to the broadest extent that it would be valid and enforceable,
and the invalidity or unenforceability of such provision shall not affect the
validity of the remaining provisions of this Agreement so long as this Agreement
as so modified continues to express, without material change, the original
intentions of the parties as to the subject matter hereof and the prohibited
nature, invalidity or unenforceability of the provision(s) in question does not
substantially impair the respective expectations or reciprocal obligations of
the parties or the practical realization of the benefits that would otherwise be
conferred upon the parties.  The parties will endeavor in good faith
negotiations to replace the prohibited, invalid or unenforceable provision(s)
with a valid provision(s), the effect of which comes as close as possible to
that of the prohibited, invalid or unenforceable provision(s).

     

    
      
         


      

      
         


        
          

        

      

      
         


      

    

     

    (e)          
 Entire
Agreement; Amendments.  This Agreement and the other
Transaction Documents supersede all other prior oral or written agreements
between the Buyers, the Company, their Affiliates and Persons acting on their
behalf with respect to the matters discussed herein, and this Agreement, the
other Transaction Documents and the instruments referenced herein and therein
contain the entire understanding of the parties with respect to the matters
covered herein and therein and, except as specifically set forth herein or
therein, neither the Company nor any Buyer makes any representation, warranty,
covenant or undertaking with respect to such matters.  No provision of
this Agreement may be amended other than by an instrument in writing signed by
the Company and the holders of at least a majority of the aggregate number of
Securities such Buyers are obligated to purchase (on an as converted or
exercised basis), or, if prior to the Closing Date, the Company and the Buyers
listed on the Schedule of Buyers as being obligated to purchase at least a
majority of the aggregate number of Securities outstanding on such date (on an
as converted or exercised basis), and any amendment to this Agreement made in
conformity with the provisions of this Section 9(e) shall be binding on all
Buyers and holders of Securities, as applicable.  No provision hereof
may be waived other than by an instrument in writing signed by the party against
whom enforcement is sought.  No such amendment shall be effective to
the extent that it applies to less than all of the holders of the applicable
Securities then outstanding.  No consideration shall be offered or
paid to any Person to amend or consent to a waiver or modification of any
provision of any of the Transaction Documents unless the same consideration also
is offered to all of the parties to the Transaction Documents, holders of
Notes.  The Company has not, directly or indirectly, made any
agreements with any Buyers relating to the terms or conditions of the
transactions contemplated by the Transaction Documents except as set forth in
the Transaction Documents.  Without limiting the foregoing, the
Company confirms that, except as set forth in this Agreement, no Buyer has made
any commitment or promise or has any other obligation to provide any financing
to the Company or otherwise.

     

    (f)          
 Notices.  Any
notices, consents, waivers or other communications required or permitted to be
given under the terms of this Agreement must be in writing and will be deemed to
have been delivered:  (i) upon receipt, when delivered personally;
(ii) upon receipt, when sent by facsimile (provided confirmation of transmission
is mechanically or electronically generated and kept on file by the sending
party); or (iii) one Business Day after deposit with an overnight courier
service, in each case properly addressed to the party to receive the
same.  The addresses and facsimile numbers for such communications
shall be:

     

    
      
         


      

      
         


        
          

        

      

      
         


      

    

     

    If to the
Company:

     

    Arotech
Corporation

    1229 Oak
Valley Drive

    Ann
Arbor, Michigan 48108

    Facsimile
No.:     734-761-5836

    Telephone
No.:  734-761-5368

     

    Attention:
Tom Paup

     

    With a
copy to:

     

    Electric
Fuel (E.F.L.) Ltd.

    One
HaSolela Street, POB 641

    Western
Industrial Park

    Beit
Shemesh 99000, Israel

    Facsimile
No.:     011-972-2-990-6688

    Telephone
No.:  011-972-2-990-6623

    Attention:
General Counsel

     

    With a
copy (for informational purposes only) to:

     

    Lowenstein
Sandler PC

    65
Livingston Avenue

    Roseland,
New Jersey 07068

    Facsimile
No.:     (973) 597-2477

    Telephone
No.:  (973) 597-2500

    Attention:
Steven Skolnick, Esq.

     

    If to the
Transfer Agent:

     

    American
Stock Transfer and Trust Company

    6201
15th
Avenue

    Brooklyn,
New York 11219

    Facsimile
No.:     (718) 234-5001

    Telephone
No.:   (718) 921-8200

    Attention:
Herbert J. Lemmer, Esq., Vice President

     

    If to a
Buyer, to its address and facsimile number set forth on the Schedule of Buyers,
with copies to such Buyer's representatives as set forth on the Schedule of
Buyers,

     

    with a
copy (for informational purposes only) to:

     

    Schulte
Roth & Zabel LLP

    919 Third
Avenue

    New York,
New York  10022

    Telephone:  (212)
756-2000

    Facsimile:     (212)
593-5955

    Attention:    Eleazer
N. Klein, Esq.

     

    
      
         


      

      
         


        
          

        

      

      
         


      

    

     

    or to
such other address and/or facsimile number and/or to the attention of such other
Person as the recipient party has specified by written notice given to each
other party five (5) days prior to the effectiveness of such
change.  Written confirmation of receipt (A) given by the recipient of
such notice, consent, waiver or other communication, (B) mechanically or
electronically generated by the sender's facsimile machine containing the time,
date, recipient facsimile number and an image of the first page of such
transmission or (C) provided by an overnight courier service shall be rebuttable
evidence of personal service, receipt by facsimile or receipt from an overnight
courier service in accordance with clause (i), (ii) or (iii) above,
respectively.

     

    (g)           Successors and
Assigns.  This Agreement shall be binding upon and inure to the
benefit of the parties and their respective successors and assigns, including
any purchasers of the Notes or Warrants.  The Company shall not assign
this Agreement or any rights or obligations hereunder without the prior written
consent of the holders of at least a majority of the aggregate number of
Securities outstanding on such date (on an as converted or exercised basis),
including by way of a Fundamental Transaction (unless the Company is in
compliance with the applicable provisions governing Fundamental Transactions set
forth in the Notes).  A Buyer may assign some or all of its rights
hereunder without the consent of the Company, in which event such assignee shall
be deemed to be a Buyer hereunder with respect to such assigned
rights.

     

    (h)           No Third Party
Beneficiaries.  This Agreement is intended for the benefit of
the parties hereto and their respective permitted successors and assigns, and is
not for the benefit of, nor may any provision hereof be enforced by, any other
Person.

     

    (i)           
Survival.  Unless
this Agreement is terminated under Section 8, the representations and warranties
of the Company and the Buyers contained in Sections 2 and 3 and the agreements
and covenants set forth in Sections 4, 5 and 9 shall survive the
Closing.  Each Buyer shall be responsible only for its own
representations, warranties, agreements and covenants hereunder.

     

    (j)         
  Further
Assurances.  Each party shall do and perform, or cause to be
done and performed, all such further acts and things, and shall execute and
deliver all such other agreements, certificates, instruments and documents, as
any other party may reasonably request in order to carry out the intent and
accomplish the purposes of this Agreement and the consummation of the
transactions contemplated hereby.

     

    (k)       
    Indemnification.  In
consideration of each Buyer's execution and delivery of the Transaction
Documents and acquiring the Securities thereunder and in addition to all of the
Company's other obligations under the Transaction Documents, the Company shall
defend, protect, indemnify and hold harmless each Buyer and each other holder of
the Securities and all of their stockholders, partners, members, officers,
directors, employees and direct or indirect investors and any of the foregoing
Persons' agents or other representatives (including, without limitation, those
retained in connection with the transactions contemplated by this Agreement)
(collectively, the "Indemnitees") from and against
any and all actions, causes of action, suits, claims, losses, costs, penalties,
fees, liabilities and damages, and expenses in connection therewith
(irrespective of whether any such Indemnitee is a party to the action for which
indemnification hereunder is sought), and including reasonable attorneys' fees
and disbursements (the "Indemnified Liabilities"),
incurred by any Indemnitee as a result of, or arising out of, or relating to (a)
any misrepresentation or breach of any representation or warranty made by the
Company in the Transaction Documents or any other certificate, instrument or
document contemplated hereby or thereby, (b) any breach of any covenant,
agreement or obligation of the Company contained in the Transaction Documents or
any other certificate, instrument or document contemplated hereby or thereby or
(c) any cause of action, suit or claim brought or made against such Indemnitee
by a third party (including for these purposes a derivative action brought on
behalf of the Company) and arising out of or resulting from (i) the execution,
delivery, performance or enforcement of the Transaction Documents or any other
certificate, instrument or document contemplated hereby or thereby, (ii) any
transaction financed or to be financed in whole or in part, directly or
indirectly, with the proceeds of the issuance of the Securities, or (iii) the
status of such Buyer or holder of the Securities as an investor in the Company
pursuant to the transactions contemplated by the Transaction
Documents.  To the extent that the foregoing undertaking by the
Company may be unenforceable for any reason, the Company shall make the maximum
contribution to the payment and satisfaction of each of the Indemnified
Liabilities which is permissible under applicable law.  Except as
otherwise set forth herein, the mechanics and procedures with respect to the
rights and obligations under this Section 9(k) shall be the same as those set
forth in Section 6 of the Registration Rights Agreement.

     

    
      
         


      

      
         


        
          

        

      

      
         


      

    

     

    (l)            
No Strict
Construction.  The language used in this Agreement will be
deemed to be the language chosen by the parties to express their mutual intent,
and no rules of strict construction will be applied against any
party.

     

    (m)           Remedies.  Each
Buyer and each holder of the Securities shall have all rights and remedies set
forth in the Transaction Documents and all rights and remedies which such
holders have been granted at any time under any other agreement or contract and
all of the rights which such holders have under any law.  Any Person
having any rights under any provision of this Agreement shall be entitled to
enforce such rights specifically (without posting a bond or other security), to
recover damages by reason of any breach of any provision of this Agreement and
to exercise all other rights granted by law.  Furthermore, the Company
recognizes that in the event that it fails to perform, observe, or discharge any
or all of its obligations under the Transaction Documents, any remedy at law may
prove to be inadequate relief to the Buyers.  The Company therefore
agrees that the Buyers shall be entitled to seek temporary and permanent
injunctive relief in any such case without the necessity of proving actual
damages and without posting a bond or other security.

     

    (n)           Payment Set
Aside.  To the extent that the Company makes a payment or
payments to the Buyers hereunder or pursuant to any of the other Transaction
Documents or the Buyers enforce or exercise their rights hereunder or
thereunder, and such payment or payments or the proceeds of such enforcement or
exercise or any part thereof are subsequently invalidated, declared to be
fraudulent or preferential, set aside, recovered from, disgorged by or are
required to be refunded, repaid or otherwise restored to the Company, a trustee,
receiver or any other Person under any law (including, without limitation, any
bankruptcy law, foreign, state or federal law, common law or equitable cause of
action), then to the extent of any such restoration the obligation or part
thereof originally intended to be satisfied shall be revived and continued in
full force and effect as if such payment had not been made or such enforcement
or setoff had not occurred.

     

    
      
         


      

      
         


        
          

        

      

      
         


      

    

     

    (o)           Independent Nature of
Buyers' Obligations and Rights.  The obligations of each Buyer
under any Transaction Document are several and not joint with the obligations of
any other Buyer, and no Buyer shall be responsible in any way for the
performance of the obligations of any other Buyer under any Transaction
Document.  Nothing contained herein or in any other Transaction
Document, and no action taken by any Buyer pursuant hereto or thereto, shall be
deemed to constitute the Buyers as a partnership, an association, a joint
venture or any other kind of entity, or create a presumption that the Buyers are
in any way acting in concert or as a group with respect to such obligations or
the transactions contemplated by the Transaction Documents.  Each
Buyer confirms that it has independently participated in the negotiation of the
transaction contemplated hereby with the advice of its own counsel and
advisors.  Each Buyer shall be entitled to independently protect and
enforce its rights, including, without limitation, the rights arising out of
this Agreement or out of any other Transaction Documents, and it shall not be
necessary for any other Buyer to be joined as an additional party in any
proceeding for such purpose.

     

    


    [Signature
Page Follows]

     

    
      
         


      

      
         


        
          

        

      

      
         


      

    

    


    IN WITNESS WHEREOF, each Buyer
and the Company have caused their respective signature page to this Securities
Purchase Agreement to be duly executed as of the date first written
above.

     

     

    
      	 
      	
              COMPANY:

            	 
	 
      	 
      	 
      	 
	 
      	
              AROTECH
      CORPORATION

               

            	 
	 
      	
              By:

            	 	 
	 
      	 
      	
              Name:  Robert
      S. Ehrlich

            	 
	 
      	 
      	
              Title:  Chairman
      and Chief Executive

            	 
	 
      	 
      	
              Officer

            	 


    

    

      
        
           


        

        
           


          
            

          

        

        
           


        

      

    

     

    IN WITNESS WHEREOF, each Buyer
and the Company have caused their respective signature page to this Securities
Purchase Agreement to be duly executed as of the date first written
above.

     

     

    
      	 	BUYERS:	 
	 	 
      	 
      	 
	 	
              HIGHBRIDGE
      INTERNATIONAL LLC

               

            	 
	 	
              By:

            	
              Highbridge
      Capital Management, LLC,

            	 
	 	 
      	
              Its
      Trading Manager

            	 
	 	 
      	 
      	 
	 	 
      	 
      	 
	 	
              By:

            	 
      	 
	 	 
      	
              Name:
      Adam J. Chill

            	 
	 	 
      	
              Title:   Managing
      Director

            	 
	 	 
      	 
      	 


    

     

    
      
        
           


        

        
           


          
            

          

        

        
           


        

      

    

    


    IN WITNESS WHEREOF, each Buyer
and the Company have caused their respective signature page to this Securities
Purchase Agreement to be duly executed as of the date first written
above.

     

     

    
      	 	OTHER
      BUYERS:	 
	 	 
      	 
      	 
	 	CRANSHIRE
      CAPITAL L.P.	 
	 	 
      	 
      	 
	 	 
      	 
      	 
	 	
              By:

            	 	 
	 	 
      	
              Name:

            	 
	 	 
      	
              Title:

            	 


    

    

      
        
           


        

        
           


          
            

          

        

        
           


        

      

    

     

    IN WITNESS WHEREOF, each Buyer
and the Company have caused their respective signature page to this Securities
Purchase Agreement to be duly executed as of the date first written
above.

     

     

    
      	 	OTHER
      BUYERS:	 
	 	 
      	 
      	 
	 	IROQUOIS
      MASTER FUND LTD.	 
	 	 
      	 
      	 
	 	 
      	 
      	 
	 	
              By:

            	 	 
	 	 
      	
              Name:

            	 
	 	 
      	
              Title:

            	 


    


    
      
         


      

      
         


        
          

        

      

      
         


      

    


    SCHEDULE
OF BUYERS

     

     

    
      	
              (1)

            	 	 	
              (2)

            	 	 	
              (3)

            	 	 	
              (4)

            	 	 	
              
              

              (5)

            	 	 	
              (6)

            
	
              
                 

                Buyer

              

            	 	 	
              
                 

                Address
      and Facsimile Number

              

            	 	 	
              
                Aggregate
      Principal Amount of Notes

              

            	 	 	
              
                Aggregate
      Number

                of
      Warrant Shares

              

            	 	 	
              
                Purchase
      Price

              

            	 	 	
              
                Legal
      Representative's

                Address
      and Facsimile Number

              

            
	 
      	 	 	 
      	 	 	 	 	 	 	 	 	 	 	 	 
      
	
              Highbridge

            	 	 	
              c/o
      Highbridge Capital Management,

            	 	 	$	4,450,000	 	 	 	496,652	 	 	$	4,450,000	 	 	
              Schulte
      Roth & Zabel LLP

            
	
              International
      LLC

            	 	 	
              LLC

            	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
              919
      Third Avenue

            
	 
      	 	 	
              9
      West 57th
      Street, 27th
      Floor

            	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
              New
      York, New York  10022

            
	 
      	 	 	
              New
      York, New York  10019

            	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
              Attention:  Eleazer
      Klein, Esq.

            
	 
      	 	 	
              Attention:  Ari
      J. Storch

            	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
              Facsimile:  (212)
      593-5955

            
	 
      	 	 	
              Adam
      J. Chill

            	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
              Telephone:  (212)
      756-2376

            
	 
      	 	 	
              Facsimile:  (212)
      751-0755

            	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
              Email:
      eleazer.klein@srz.com

            
	 
      	 	 	
              Telephone:
      (212) 287-4720

            	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
      
	 
      	 	 	
              Residence:  Cayman
      Islands

            	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
      
	 
      	 	 	
              Email:
      ari.storch@highbridge.com /

            	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
      
	 
      	 	 	
              adam.chill@highbridge.com

            	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
      
	 
      	 	 	 
      	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
      
	
              Cranshire
      Capital L.P.

            	 	 	
              c/o
      Downsview Capital, Inc.

            	 	 	$	300,000	 	 	 	33,482	 	 	$	300,000	 	 	 
      
	 
      	 	 	
              The
      General Partner

            	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
      
	 
      	 	 	
              3100
      Dundee Road,

            	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
      
	 
      	 	 	
              Suite
      703

            	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
      
	 
      	 	 	
              Northbrook,
      IL  60062

            	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
      
	 
      	 	 	
              Attention: 
      Mitchell P. Kopin

            	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
      
	 
      	 	 	
              Facsimile: 
      (847) 562-9031

            	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
      
	 
      	 	 	
              Telephone: 
      (847) 562-9030

            	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
      
	 
      	 	 	
              Residence:
      Illinois

            	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
      
	 
      	 	 	
              Email:
      mkopin@cranshirecapital.com

            	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
      
	 
      	 	 	 
      	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
      
	
              Iroquois
      Master Fund Ltd.

            	 	 	
              Iroquois
      Master Fund Ltd.

            	 	 	$	250,000	 	 	 	27,902	 	 	$	250,000	 	 	 
      
	 
      	 	 	
              641
      Lexington Ave.

            	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
      
	 
      	 	 	
              26th
      Floor

            	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
      
	 
      	 	 	
              New
      York, New York  10022

            	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
      
	 
      	 	 	
              Facsimile:  (646)
      274-1728

            	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
      
	 
      	 	 	
              Telephone:   (212)
      974-3070

            	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
      
	 
      	 	 	
              Attention:  Joshua
      Silverman

            	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
      
	 
      	 	 	
              Residence:  Cayman
      Islands

            	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
      
	 
      	 	 	
              Email:
      JSilverman@icfund.com

            	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
      
	
              Totals

            	 	 	 
      	 	 	$	5,000,000	 	 	 	558,036	 	 	$	5,000,000	 	 	 
      


    

    

      
        
           


        

        
           


          
            

          

        

        
           


        

      

    

     

    EXHIBITS

     

    
      	
              Exhibit
      A

            	 
      	
              Form
      of Notes

            
	
              Exhibit
      B

            	 
      	
              Form
      of Warrant

            
	
              Exhibit
      C

            	 
      	
              Registration
      Rights Agreement

            
	
              Exhibit
      D

            	 
      	
              Irrevocable
      Transfer Agent Instructions

            
	
              Exhibit
      E-1

            	 
      	
              Form
      of In-House Company Counsel Opinion

            
	
              Exhibit
      E-2

            	 
      	
              Form
      of Outside Company Counsel Opinion

            
	
              Exhibit
      F

            	 
      	
              Form
      of Secretary's Certificate

            
	
              Exhibit
      G

            	 
      	
              Form
      of Officer's Certificate

            
	
              Exhibit
      H

            	 
      	
              Form
      of Lock-Up Agreement

            
	
              Exhibit
      I

            	 
      	
              Form
      of DEI 10% Senior Subordinated Convertible
Note