Exhibit
      10.38

     

    FOURTH
      AMENDED AND RESTATED EMPLOYMENT AGREEMENT

     

    THIS
      AGREEMENT
      (“Agreement”) is entered into on the 15th
      day of
      April, 2007 by and among Arotech Corporation, a Delaware corporation
      (“Arotech”), and Electric Fuel (E.F.L.) Limited, an Israeli company (“EFL” and
      together with Arotech, the “Companies”), and Mr. Robert S. Ehrlich, Israel I.D.
      Number 303673487 (the “Executive”).

     

    WHEREAS,
      the
      Companies and the Executive entered into an Amended and Restated Employment
      Agreement dated as of October 1, 1996, a Second Amended and Restated Employment
      Agreement dated as of January 1, 2000, as extended, and a Third Amended and
      Restated Employment Agreement effective as of January 1, 2005 (together, the
      “Original Agreement”) formalizing the terms of the Executive’s employment with
      the Companies;

     

    WHEREAS,
      the
      Executive is within one year of the minimum age set forth in his existing
      employment agreement for retirement;

     

    WHEREAS,
      the
      Companies and the Executive now wish to extend the Executive’s employment and to
      amend and restate the Original Agreement in its entirety in accordance with
      the
      terms of this Agreement;

     

    NOW,
      THEREFORE,
      in
      consideration of the respective agreements of the parties contained herein,
      the
      parties agree as follows:

     

    1. Term.

     

    The
      term
      of the Executive’s employment under this Agreement shall be for the period
      commencing on the date hereof, and ending on December 31, 2009 (the “Term”). The
      provisions of this Agreement shall apply to the relationship between the parties
      hereto retroactively as if this Agreement were signed on the commencement of
      the
      Term.

     

    2. Employment.

     

    
      	
              (a)

            	
              The
                Executive shall be employed as the Chairman of the Board and Chief
                Executive Officer of Arotech. The Executive shall perform the duties,
                undertake the responsibilities and exercise the authority customarily
                performed, undertaken and exercised by persons situated in a similar
                executive capacity in publicly-held United States corporations and
                their
                Israeli subsidiaries. The Executive shall exercise his authority
                in a
                reasonable manner and shall report to the Board of Directors of each
                Company (each a “Board”).

            


    

     

    
      	
              (b)

            	
              Excluding
                periods of vacation and sick leave to which the Executive shall be
                entitled, the Executive agrees to devote the attention and time to
                the
                businesses and affairs of the Companies required to discharge the
                responsibilities assigned to the Executive hereunder. The Executive’s
                duties shall be in the nature of management duties that demand a
                special
                level of loyalty and accordingly the Israeli Law of Work Hours and
                Rest,
                5711 - 1951 shall not apply to this
                Agreement.

            


    

     

    
      	
              (c)

            	
              While
                the Executive is employed by the Companies hereunder, Arotech shall
                use
                its best efforts to cause the Executive to be elected to, and if
                so
                elected the Executive shall serve on, the Board of Arotech as a member
                of
                such Board, and shall cause the Executive to be elected to, and the
                Executive shall serve on, the Board of EFL as a member of such Board.
                

            


    

     

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

     

    
      	
              (d)

            	
              Each
                Company will use its reasonable best efforts to obtain, and to keep
                in
                place at all times that the Executive is a director or officer of
                either
                Company, a directors and officers liability policy covering the Executive
                in an amount and otherwise containing terms and conditions consistent
                with
                past practices.

            


    

     

    
      	
              (e)

            	
              The
                Executive agrees to serve on the board of directors of such subsidiaries
                of the Companies as the Board may reasonably
                request.

            


    

     

    3. Base
      Salary, Bonus and Financial Planning Allowance.

     

    
      	
              (a)

            	
              The
                Companies agree to pay or cause to be paid to the Executive a monthly
                base
                salary at the rate of US $33,333 per month, payable in U.S. Dollars
                or in
                the currency of Israel (as determined by the Representative Rate
                of the
                U.S. Dollar published by the Bank of Israel immediately prior to
                the date
                of payment of each installment thereof), or such larger amount as
                the
                Board may in its sole discretion determine following a review which
                shall
                be conducted by the Board by not later than March 31 of each year,
                such
                larger amount to take effect retroactively to the January 1 immediately
                preceding such review (hereinafter referred to as the “Base Salary”).
                Notwithstanding such review, on each anniversary of the effective
                date of
                this Agreement, the Base Salary shall be adjusted upward in an amount
                equal to the official anticipated net Israeli inflation rate as published
                by the Israeli Central Bureau of Statistics in the month of December
                immediately preceding such anniversary, in each case for the year
                immediately following such anniversary, as adjusted for any changes
                in the
                value of the New Israeli Shekel against the U.S. Dollar.
                

            


    

     

    
      	(b)	
              The
                Company will grant to the Executive a retention bonus of 200,000
                shares of
                restricted stock, vesting 66,667 on December 31, 2007, 66,667 on
                December
                31, 2008, and 66,666 on December 31, 2009, with each such vesting
                being
                contingent on the Executive being employed by the Company on the
                scheduled
                vesting date. Additionally, the Companies agree to pay or cause to
                be paid
                to the Executive on each anniversary of this Agreement or as soon
                thereafter as may be possible in order to determine the relevant
                results
                of the Companies, an annual bonus, as
                follows:

            


    

     

    
      	 	
              (i)

            	
              If,
                as of such anniversary, the Company shall have attained 90% of the
                Company’s Budgeted Number (as defined below) for the year preceding such
                anniversary, then Executive’s bonus shall be equal to 35% of Executive’s
                gross annual Base Salary as then in effect for the year preceding
                such
                anniversary;

            


    

     

    
      	 	
              (ii)

            	
              If,
                as of such anniversary, the Companies shall have attained 120% of
                the
                Companies’ Budgeted Number (as defined below) for the year preceding such
                anniversary, then Executive’s bonus shall be equal to 75% of Executive’s
                annual Base Salary as then in effect for the year preceding such
                anniversary;

            


    

     

    
      	 	
              (iii)

            	
              If,
                as of such anniversary, the Companies shall have attained more than
                90%
                but less than 120% of the Companies’ Budgeted Number (as defined below),
                then Executive’s bonus shall be calculated as
                follows:

            


    

     

    
      
        
        

      

      
        -2-

        
          

        

      

      
        
        

      

    

     

    B
      =
 (S
      x 35%)
      + (N-75)/30 x (S x 40%)

     

    Where:

     

    B
      =
 The
      amount of Executive’s annual bonus, as a percentage of Executive’s Base Salary;
      and

     

    N
      = The
      percentage of the Budgeted Number (as defined below) that was attained by the
      Companies in the immediately preceding fiscal year; provided,
      however,
      that N
      is more than 90 and less than 120;

     

    S
      = Executive’s
      Base Salary.

     

    For
      the
      purposes of this Section 3(b), the Budgeted Number shall be the budgeted results
      of the Companies as mutually agreed by the Boards and Executive prior to the
      end
      of each fiscal year for the fiscal year designated in such budget.

     

    
      	
              (c)

            	
              In
                addition, the Companies shall pay Executive an amount of $10,000
                on each
                anniversary of this Agreement to cover Executive’s tax and financial
                planning expenses. The Companies acknowledge that the Executive is
                owed an
                amount of $20,197 in connection with tax and financial planning expenses
                from previous years.

            


    

     

    
      	
              (d)

            	
              To
                the maximum extent permitted by law, all payments to the Executive
                hereunder shall be paid in U.S. Dollars. Subject to the immediately
                preceding sentence, and subject to the approval of the Executive,
                which
                shall not be unreasonably withheld, the Companies, in order to reflect
                the
                different duties of the Executive with respect to each of them, may
                allocate between themselves their obligations to make the payments
                and
                provide the benefits specified in this Agreement. The amount paid
                to the
                Executive hereunder by EFL shall be referred to hereinafter as the
“EFL
                Base Salary”; provided,
                that in no event shall the EFL Base Salary in any year be greater
                than the
                Base Salary for that year. 

            


    

     

    4. Employee
      Benefits.

     

    The
      Executive shall be entitled to the following benefits:

     

    
      	
              (a)

            	
              Manager’s
                Insurance.
                The Companies will pay to an insurance company of the Executive’s choice,
                as premiums for manager’s insurance for the Executive, an amount equal to
                13.33% of each monthly payment of the Base Salary together with 2.5%
                of
                the Base Salary for disability, and will deduct from each monthly
                payment
                of the Base Salary and pay to such insurance company an amount equal
                to 5%
                of each monthly payment of the Base Salary, which shall constitute
                the
                Executive’s contribution to such premiums. Upon the termination of the
                Executive’s employment with the Companies for whatever reason, including
                without limitation termination for Cause or the resignation by the
                Executive, the right to receive the manager’s insurance benefits shall be
                automatically assigned to the Executive.


            


    

     

    
      	
              (b)

            	
              Education
                Fund (Keren Hishtalmut).
                The Companies will contribute to an education fund of the Executive’s
                choice an amount equal to 7.5% of each monthly payment of the Base
                Salary,
                and will deduct from each monthly payment of the Base Salary and
                contribute to such education fund an additional amount equal to 2.5%
                of
                each such monthly payment of the Base Salary. Upon the termination
                of the
                Executive’s employment with the Companies for whatever reason, including
                without limitation termination for Cause or the resignation by the
                Executive, the right to receive any amounts in such fund shall be
                automatically assigned to the Executive. All education fund contributions
                or imputed income made under this Section in excess of the statutory
                exemption shall be tax-effected such that the amount of contribution
                net
                of any taxes and withholding (including such amounts in respect of
                payments pursuant to this sentence) equals the percentages specified
                herein.

            


    

     

    
      
        
        

      

      
        -3-

        
          

        

      

      
        
        

      

    

     

    
      	
              (c)

            	
              Vacation.
                The Executive shall be entitled to an annual vacation at full pay
                equal to
                24 work days.

            


    

     

    Vacation
      days may be accumulated and may, at the Executive’s option or automatically upon
      termination, be converted into cash payments in an amount equal to the
      proportionate part of the Base Salary for such days; provided,
      however,
      that if
      the Executive accumulates more than two (2) times his then current annual
      entitlement of vacation days, such excess shall be automatically converted
      into
      the right to receive such a cash payment in respect of such excess. Payments
      to
      which the Executive is entitled pursuant to this Section 4(c) shall be made
      promptly after the Executive’s request therefor.

     

    
      	
              (d)

            	
              Sick
                Leave.
                The Executive shall be entitled to up to 30 days of fully paid sick
                leave
                annually; provided,
                however,
                that the Executive shall not be entitled to sick leave payment to
                the
                extent he is already covered by manager’s insurance. Sick leave may be
                accumulated and at the conclusion of this Agreement for all reasons
                other
                than Cause, up to 30 days of accumulated but unused sick leave shall
                be
                converted into a cash payment to the Executive in an amount equal
                to the
                proportionate part of the Base Salary for such
                days.

            


    

     

    
      	
              (e)

            	
              Automobile.
                The Companies shall make an automobile available to the Executive
                during
                the term of this Agreement. Such automobile shall be of a high quality
                comparable to, but not less than, that of a Volvo S-80, and shall
                be
                subject to the approval of the Executive, which shall not be unreasonably
                withheld. The Executive shall be entitled to use the automobile for
                his
                personal and business needs, so long as he does not allow anyone
                who would
                not be covered by the Companies’ insurance to drive it. The Companies
                shall pay all expenses of maintaining and operating the automobile.
                All
                expense reimbursements or imputed income made under this Section
                shall be
                tax-effected such that the amount of reimbursement received by the
                Executive net of any taxes and withholdings (including such amounts
                in
                respect of payments pursuant to this sentence) equals the expense
                incurred.

            


    

     

    
      	
              (f)

            	
              Recuperation
                Payments (D’mai Havra-ah).
                The Executive shall be entitled to Recuperation Payments in accordance
                with the Companies’ policies for all of its management employees, but no
                less than required by law.

            


    

     

    
      
        
        

      

      
        -4-

        
          

        

      

      
        
        

      

    

     

    
      	
              (g)

            	
              Benefit
                Plans.
                The Executive shall be entitled to participate in all incentive,
                bonus,
                benefit or other similar plans offered by either of the Companies,
                including without limitation Arotech’s 2004 Stock Option and Restricted
                Stock Purchase Plan, in accordance with the terms thereof and as
                determined by the Boards from time to
                time.

            


    

     

    5. Expenses.

     

    The
      Executive shall be entitled to receive prompt reimbursement of all expenses
      reasonably incurred by him in connection with the performance of his duties
      hereunder. Without limiting the generality of the foregoing, the Companies
      shall
      pay all of the Executive’s expenses in the use of telephones for the Companies’
businesses. The Executive shall be entitled to receive room, board and travel
      reimbursement in connection with the performance of his duties other than at
      the
      principal executive office of either Company, as is customary for senior
      executives in publicly-held United States and Israeli companies. All expense
      reimbursements made under this Section shall be tax-effected such that the
      amount of reimbursement received by the Executive net of any taxes and
      withholdings (including such amounts in respect of payments pursuant to this
      sentence) equals the expense incurred.

     

    6. Termination.

     

    The
      Executive’s employment hereunder shall and/or may be terminated under the
      following circumstances:

     

    
      	
              (a)

            	
              Death.
                This Agreement shall terminate upon the death of the
                Executive.

            


    

     

    
      	
              (b)

            	
              Disability.
                The Companies may terminate the Executive’s employment after having
                established the Executive’s Disability. For purposes of this Agreement,
                “Disability” means a physical or mental infirmity which impairs the
                Executive’s ability to substantially perform his duties under this
                Agreement which continues for a period of at least one hundred and
                eighty
                (180) consecutive days.

            


    

     

    
      	
              (c)

            	
              Cause.
                The Companies may terminate the Executive’s employment for Cause. For
                purposes of this Agreement, termination for “Cause” shall mean and
                include: (i) conviction for fraud, crimes of moral turpitude or other
                conduct which reflects on the Companies in a material and adverse
                manner;
                (ii) a willful failure to carry out a material directive of either
                of the
                Boards, provided
                that such directive concerned matters within the scope of the Executive’s
                duties, was in conformity with Sections 2(a) and 2(b) hereof, would
                not
                give the Executive Good Reason to terminate this Agreement and was
                capable
                of being reasonably and lawfully performed; (iii) conviction in a
                court of
                competent jurisdiction for embezzlement of funds of the Companies;
                and
                (iv) reckless or willful misconduct that is materially harmful to
                either
                of the Companies; provided,
                however,
                that the Companies may not terminate the Executive for Cause unless
                they
                have given the Executive (i) written notice of the basis for the
                proposed
                termination given not more than thirty (30) days after the Companies
                have
                obtained knowledge of such basis (“Companies’ Notice of Termination”) and
                (ii) a period of at least thirty (30) days after the Executive’s receipt
                of such notice in which to cure such
                basis.

            


    

     

    
      	
              (d)

            	
              Good
                Reason.
                The Executive may terminate his employment under this Agreement for
                Good
                Reason. For purposes of this Agreement, “Good Reason” shall mean the
                occurrence of any of the events or conditions described in subsections
                (i)
                through (viii) hereof:

            


    

    
       

      
        	 	
                (i)

              	
                a
                  change in the Executive’s status, title, position or responsibilities
                  which, in the Executive’s reasonable judgment, represents a reduction or
                  demotion in the Executive’s status, title, position or responsibilities as
                  in effect immediately prior
                  thereto;

              


      

       

    

    
      
        
        

      

      
        -5-

        
          

        

      

      
        
        

      

       

    

    
      	 	
              (ii)

            	
              a
                reduction in the Executive’s Base
                Salary;

            


    

     

    
      	 	
              (iii)

            	
              the
                failure by the Companies to continue in effect any material compensation
                or benefit plan in which the Executive is
                participating;

            


    

     

    
      	 	
              (iv)

            	
              the
                insolvency or the filing (by any party, including the Companies)
                of a
                petition for the winding-up of either of the
                Companies;

            


    

     

    
      	 	
              (v)

            	
              any
                material breach by the Companies of any provision of this
                Agreement;

            


    

     

    
      	 	
              (vi)

            	
              any
                purported termination of the Executive’s employment for Cause by the
                Companies which does not comply with the terms of Section 6(c) of
                this
                Agreement;

            


    

     

    
      	 	
              (vii)

            	
              any
                movement of either Company’s principal executive offices from the
                Jerusalem/Tel Aviv area of Israel;
                and

            


    

     

    
      	 	
              (viii)

            	
              any
                movement of the location where the Executive is generally to render
                his
                services to the Companies hereunder from the Jerusalem/Tel Aviv area
                of
                Israel;

            


    

     

    provided,
      however,
      that
      the Executive may not terminate his employment under this Agreement for Good
      Reason unless he has given the Companies (i) written notice of the basis for
      the
      proposed termination given not more than thirty (30) days after the Executive
      has obtained knowledge of such basis (“Executive’s Notice of Termination”) and
      (ii) a period of at least thirty (30) days after the Companies’ receipt of such
      notice in which to cure such basis.

     

    
      	
              (e)

            	
              Change
                in Control.
                The Executive may terminate this Agreement if there is a “Change in
                Control.” For purposes of this Agreement, a “Change in Control” shall mean
                any of the following events:

            


    

     

    
      	 	
              (i)

            	
              the
                acquisition from Arotech in any public or offering or private placement
                of
                equity or equivalent securities by any person or entity of beneficial
                ownership of fifty (50%) or more of the combined voting power of
                Arotech’s
                then outstanding voting securities;
                or

            


    

     

    
      	 	
              (ii)

            	
              the
                acquisition other than from Arotech in any public or offering or
                private
                placement of equity or equivalent securities by any person or entity
                of
                beneficial ownership of twenty percent (20%) or more of the combined
                voting power of Arotech’s then outstanding voting securities;
                or

            


    

     

    
      
        
        

      

      
        -6-

        
          

        

      

      
        
        

      

    

     

    
      	 	
              (iii)

            	
              individuals
                who, as of January 1, 2007, were members of the Board of Arotech
                (the
                “Original Arotech Board”), together with individuals approved by a vote of
                at least two-thirds (2/3) of the individuals who were members of
                the
                Original Arotech Board and are then still members of the Board of
                Arotech,
                cease for any reason to constitute at least one-third (1/3) of the
                Board
                of Arotech; or

            


    

     

    
      	 	
              (iv)

            	
              approval
                by the shareholders of either of the Companies of a complete winding-up
                of
                such Company or an agreement for the sale or other disposition of
                all or
                substantially all of the assets of either of the
                Companies.

            


    

     

    The
      Executive shall give to the Companies an Executive’s Notice of Termination if
      the Executive desires to terminate his employment because there has been a
      Change in Control, such notice to specify the date of such termination which
      shall be not less than thirty (30) days after such notice is received by the
      Companies. Any such notice, to be effective with respect to any Change in
      Control, must be sent no later than twenty-four (24) months after such Change
      in
      Control.

     

    
      	
              (f)

            	
              Termination
                Date, Etc. “Termination
                Date” shall mean in the case of the Executive’s death, his date of death,
                or in all other cases, the date specified in the Notice of Termination
                subject to the following:

            


    

     

    
      	 	
              (i)

            	
              if
                the Executive’s employment is terminated by the Companies for Cause or due
                to Disability, the date specified in the Companies’ Notice of Termination
                shall be at least thirty (30) days from the date the Notice of Termination
                is given to the Executive, provided
                that in the case of Disability the Executive shall not have returned
                to
                the full-time performance of his duties during such period of at
                least
                thirty (30) days; 

            


    

     

    
      	 	
              (ii)
                

            	
              if
                the Executive’s employment is terminated for Good Reason, or because there
                has been a Change in Control, the Termination Date specified in the
                Executive’s Notice of Termination shall not be more than sixty (60) days
                from the date the Notice of Termination is given to the
                Companies.

            


    

     

    
      	
              (g)

            	
              Termination
                at Will.
                Subject to the other provisions of this Section 6, the Executive
                may
                terminate his employment with the Companies for any reason other
                than the
                other reasons specified in this Section 6 (“Termination at Will”), by
                giving to the Companies written Notice of Termination specifying
                the
                Termination Date, which Termination Date shall be at least one hundred
                and
                twenty (120) days from the date of such Notice of
                Termination.

            


    

     

    7. Compensation
      upon Termination.

     

    Upon
      termination of the Executive’s employment hereunder, the Executive shall be
      entitled to the following benefits:

     

    
      	
              (a)

            	
              If
                the Executive’s employment is terminated by the Companies for Cause or if
                the Executive’s employment is terminated by the Executive other than with
                either Good Reason, because there has been a Change in Control, due
                to
                Termination at Will, or by this Agreement coming to the end of the
                Term,
                then the Companies shall pay the Executive all amounts of Base Salary
                and
                the employee benefits specified in clauses (a), (b) and (c) of Section
                4
                of this Agreement earned or accrued hereunder through the Termination
                Date
                but not paid as of the Termination Date (collectively, “Accrued
                Compensation”).

            


    

     

    
      
        
        

      

      
        -7-

        
          

        

      

      
        
        

      

    

     

    
      	
              (b)

            	
              If
                the Executive’s employment by the Companies shall be terminated (1) due to
                Disability, (2) by the Executive for Good Reason, (3) by the Executive
                because there has been a Change in Control, (4) by the Executive’s death,
                (5) due to Termination at Will, or (6) by this Agreement coming to
                the end
                of the Term, then the Executive shall be entitled to the benefits
                provided
                below (in addition to and not instead of whatever other benefits
                he may be
                entitled to by reason of operation of
                law):

            


    

     

    
      	 	
              (i)

            	
              The
                Companies shall pay the Executive (a) all Accrued Compensation, (b)
                a
                bonus at the rate that would otherwise be payable pursuant to the
                provisions of Section 3(b) above for the year in which the Termination
                Date occurs, of Executive’s annual Base Salary as of the Termination Date,
                pro
                rated
                based on the number of days in such year which occurred prior to
                the
                Termination Date, and (c) the amounts referred to in Sections 4(d)
                and (e)
                above, to the extent earned or accrued hereunder through the Termination
                Date but unpaid as of the Termination
                Date.

            


    

     

    
      	 	
              (ii)

            	
              the
                Companies shall pay into the Account (as defined in Section 7(b)(v)
                below), as a retirement payment (the “Retirement Payment”) and in lieu of
                any further salary for periods subsequent to the Termination Date
                (except
                as provided in Section 7(b)(i) above), a total of $1,625,400 (the
                parties
                acknowledge that $617,240 of this amount has previously been paid
                into the
                Account (the “Pre-Payment”)). Subject to the proviso contained in Section
                7(b)(v) below, the Retirement Payment will vest and be funded into
                the
                Account in installments as provided in Section 7(b)(iii) below, and
                will
                be released from the Account to the Employee as
                follows:

            


    

     

    
      	(a)  	
              In
                the event of termination due to Good Reason, Disability, Change of
                Control, death or any other termination without Cause by the Companies,
                all unvested and/or unfunded installments of the Retirement Payment
                will,
                notwithstanding the provisions of Section 7(b)(iii) below, vest
                immediately and become due and payable on the Termination
                Date.

            


    

     

    
      	(b)  	
              In
                the event of termination due to Non Renewal or Termination at Will,
                the
                Employee will be entitled only to that portion of the Retirement
                Payment
                that shall have vested or shall vest prior to the Termination Date,
                which
                amount will become due and payable on the Termination
                Date.

            


    

     

    
      
        
        

      

      
        -8-

        
          

        

      

      
        
        

      

    

     

    
      	 	
              (iii)

            	
              The
                installments of the Retirement Payment in excess of the Pre-Payment
                will
                vest and (subject to the proviso contained in Section 7(b)(v) below)
                be
                funded as follows: 

            


    

     

    
      	(a)  	
              First
                installment (vests on June 30, 2007): $504,080 in cash;
                and

            


    

     

    
      	(b)  	
              Final
                installment (vests on December 31, 2007): $504,080 in cash.
                

            


    

     

    
      	 	
              (iv)

            	
              For
                thirty-six (36) months after the Executive ceases to be an officer
                of
                either of the Companies, the Companies shall at their expense continue
                to
                provide the Executive with his then-current automobile (the operating
                expenses and tax on such automobile to be borne by the Executive),
                a
                cellular telephone, an e-mail account, and an office if the Company
                or any
                of its subsidiaries otherwise maintains office space in Beit Shemesh,
                Israel, or if not then a home office allowance of $1,000 per month.
                The
                Executive will also be authorized in his discretion to hire a secretary
                at
                a salary of no more than $2,000 per month. The Executive will be
                solely
                responsible for any taxes levied on the above
                benefits.

            


    

     

    
      	 	
              (v)

            	
              The
                Companies have previously established certain accounts owned by the
                Company but maintained for the benefit of the Executive (the “Account”).
                The Companies will fund vested amounts of the Retirement Payment
                into the
                Account as they vest; provided,
                howver,
                that a vested amount will not be funded upon vesting if the CFO,
                the Audit
                Committee and the Compensation Committee of Arotech inform the Executive
                in writing and in good faith that they believe that such funding
                would
                jeopardize the Companies’ cash position; any such deferred amount will be
                funded as soon as the cash position of the Companies permits such
                funding,
                and in any event upon the Termination Date. Even after a payment
                is funded
                into the Account the risk of gain or loss with respect to such payment
                remains with the Company.

            


    

     

    
      	
              (c)

            	
              The
                Companies may procure life insurance on the Executive in order to
                secure
                the payment of its obligations arising in the event of termination
                under
                Section 6(a) hereof. Such insurance shall be payable to the Company,
                which
                shall remain primarily liable for the payment of all such obligations
                to
                the Executive. 

            


    

     

    
      	
              (d)

            	
              All
                stock options that are unvested shall vest on termination (except
                for
                Termination for Cause) and shall be extended for the longer of their
                term
                or the term by which Arotech director options are generally extended
                upon
                a director of Arotech leaving Arotech’s Board of Directors. In the event
                of a termination due to Change of Control, all of the Executive’s stock
                options, whether or not they have yet vested, shall immediately vest
                and
                shall be extended for a period of the later of (x) the expiration
                date
                thereof, and (y) the second anniversary of such Change of Control.
                In the
                event of termination due to any other reason except for Termination
                for
                Cause, the Executive’s stock options shall be extended for a period of the
                earlier of (x) the expiration date thereof, and (y) two years after
                such
                termination.

            


    

     

    
      	
              (e)

            	
              As
                of the date of this Agreement, the Executive holds a total of 440,000
                shares of restricted stock (including the 200,000 shares referred
                to in
                Section 3(b) above) (“Restricted Shares”), which number does not include
                106,071 shares of restricted stock (26,071 granted in August 2004
                and
                80,000 granted in December 2006) the restrictions on which have already
                elapsed as of the date of this Agreement. Pursuant to the terms of
                grant,
                the restrictions on 106,667 of these Restricted Shares elapse on
                December
                31, 2007, the restrictions on 66,667 of these Restricted Shares elapse
                on
                December 31, 2008, and the restrictions on 66,666 of these Restricted
                Shares elapse on December 31, 2009 (these 240,000 Restricted Shares
                are
                hereinafter referred to as the “Non-Performance Restricted Shares”). The
                removal of the restrictions on the remaining 200,000 Restricted Shares
                is
                or may be subject to performance criteria (these 200,000 Restricted
                Shares
                are hereinafter referred to as the “Performance Restricted Shares”). On
                termination (except Termination for
                Cause):

            


    

    
       

      
        	 	
                (i)

              	
                All
                  of the Executive’s 200,000 Performance Restricted Shares shall immediately
                  become unrestricted and freely tradable (subject to applicable
                  securities
                  laws). 

              


      

       

    

    
      
        
        

      

      
        -9-

        
          

        

      

      
        
        

      

       

    

    
      	 	
              (ii)

            	
              Any
                Non-Performance Restricted Shares the restrictions on which shall
                have
                lapsed as of the date of termination (meaning the last day of the
                Executive’s employment under this Agreement) shall continue to be
                unrestricted and freely tradable (subject to applicable securities
                laws).
                

            


    

     

    
      	 	
              (iii)

            	
              Non-Performance
                Restricted Shares the restrictions on which shall not have lapsed
                as of
                the date of termination (meaning the last day of the Executive’s
                employment under this Agreement), as well as all Restricted Shares
                the
                restrictions on which shall not have lapsed as of the date of Termination
                for Cause, shall be returned to the Company for
                cancellation.

            


    

     

    As
      a
      condition to receiving the payments described in this Section 7, the Executive
      shall execute and deliver to the Companies a release in the form attached hereto
      as Exhibit A. 

     

    8. Confidentiality;
      Proprietary Rights; Competitive Activity.

     

    
      	
              (a)

            	
              Confidentiality.
                Executive recognizes and acknowledges that the technology, developments,
                designs, inventions, improvements, data, methods, trade secrets and
                works
                of authorship which the Companies own, plan or develop, including
                without
                limitation the specifications, documentation and other information
                relating to the Companies’ zinc-air battery systems, and businesses and
                equipment related thereto (in each case whether for their own use
                or for
                use by their clients) are confidential and are the property of the
                Companies. Executive also recognizes that the Companies’ technology,
                customer lists, supplier lists, proposals and procedures are confidential
                and are the property of the Companies. Executive further recognizes
                and
                acknowledges that in order to enable the Companies to perform services
                for
                their clients, those clients may furnish to the Companies confidential
                information concerning their business affairs, property, methods
                of
                operation or other data. All of these materials and information will
                be
                referred to below as “Proprietary Information”; provided,
                however,
                that such information shall not include any information known generally
                to
                the public (other than as a result of unauthorized disclosure by
                the
                Executive).

            


    

     

    
      	
              (b)

            	
              Non-Disclosure.
                Executive agrees that, except as directed by the Companies, and in
                the
                ordinary course of the Companies’ businesses, Executive will not during
                Executive’s employment with the Companies and thereafter, disclose to any
                person or entity or use, directly or indirectly for Executive’s own
                benefit or the benefit of others, any Proprietary Information, or
                permit
                any person to examine or make copies of any documents which may contain
                or
                be derived from Proprietary Information; provided,
                however,
                that the Executive’s duties under this Section 8(b) shall not extend to
                (i) any disclosure that may be required by law in connection with
                any
                judicial or administrative proceeding or inquiry or (ii) any disclosure
                which may be reasonably required in connection with any actions or
                proceedings to enforce the Executive’s rights under this Agreement.
                Executive agrees that the provisions of this paragraph shall survive
                the
                termination of this Agreement and Executive’s employment by the
                Companies.

            


    

     

    
      
        
        

      

      
        -10-

        
          

        

      

      
        
        

      

    

     

    
      	
              (c)

            	
              Competitive
                Activity.
                The Executive undertakes not, directly or indirectly (whether as
                owner,
                partner, consultant, employee or otherwise) at any time, during and
                for
                sixty (60) months following termination of his employment with the
                Companies, to engage in or contribute his knowledge to any work or
                activity that involves a product, process, service or development
                which is
                then directly (in any material manner) competitive with the Companies’
                businesses as then constituted. Notwithstanding the foregoing, the
                Executive shall be permitted to engage in the aforementioned proposed
                work
                or activity if the Companies furnishes him with written consent to
                that
                effect signed by an authorized officer of each
                Company.

            


    

     

    
      	
              (d)

            	
              No
                Solicitation.
                During the period specified in 8(c) hereof, Executive will not solicit
                or
                encourage any customer or supplier of either Company or of any group,
                division or subsidiary of either Company, to terminate its relationship
                with either Company or any such group, division or subsidiary, and
                Executive will not, directly or indirectly, recruit or otherwise
                seek to
                induce any employee of either Company or any such group, division
                or
                subsidiary to terminate his or her employment or violate any agreement
                with or duty to either Company or any such group, division or
                subsidiary.

            


    

     

    
      	
              (e)

            	
              Equitable
                Relief.
                The Executive agrees that violations of the material covenants in
                this
                Section 8 will cause the Companies irreparable injuries and agrees
                that
                the Companies may enforce said covenants by seeking injunctive or
                other
                equitable relief (in addition to any other remedies the Companies
                may have
                at law for damages or otherwise) from a court of competent jurisdiction.
                In the event such court declares these covenants to be too broad
                to be
                specifically enforced, the covenants shall be enforced to the largest
                extent as may be allowed by such court for the Companies’ protection.
                Executive further agrees that no breach by the Companies of, or other
                failure by the Companies under this Agreement shall relieve the Executive
                of any obligations under Sections 8(a) and 8(b)
                hereof.

            


    

     

    9. Successors
      and Assigns.

     

    
      	
              (a)

            	
              This
                Agreement shall be binding upon and shall inure to the benefit of
                each
                Company, its successors and assigns and the Companies shall require
                any
                successor or assign to expressly assume and agree to perform this
                Agreement in the same manner and to the same extent that the Companies
                would be required to perform it if no such succession or assignment
                had
                taken place. The term the “Companies” as used herein shall include such
                successors and assigns. The term “successors and assigns” as used herein
                shall mean a corporation or other entity acquiring all or substantially
                all the assets and business of either Company (including this Agreement)
                whether by operations of law or
                otherwise.

            


    

     

    
      
        
        

      

      
        -11-

        
          

        

      

      
        
        

      

    

     

    
      	
              (b)

            	
              Subject
                to Section 16 hereof, neither this Agreement nor any right or interest
                hereunder shall be assignable or transferable by the Executive, his
                beneficiaries or legal representatives, except by will or by the
                laws of
                descent and distribution. This Agreement shall inure to the benefit
                of and
                be enforceable by the Executive’s legal personal
                representative.

            


    

     

    10. Notice.

     

    For
      the
      purposes of this Agreement, notices and all other communications provided for
      in
      the Agreement shall be in writing and shall be deemed to have been duly given
      when personally delivered or sent by registered mail, postage prepaid, addressed
      to the respective addresses set forth below or last given by each party to
      the
      other. All notices and communications shall be deemed to have been received on
      the date of delivery thereof or on the eighth business day after the mailing
      thereof, except that notice of change of address shall be effective only upon
      receipt.

     

    The
      initial addresses of the parties for purposes of this Agreement shall be as
      follows:

     

    
      	 	
              The
                Companies:

            	
              Arotech
                Corporation

            


    

    1229
      Oak
      Valley Drive

    Ann
      Arbor, Michigan 48108

    Attention:
      Steven Esses, President

    
       

      
        	 	
                and

              	
                Electric
                  Fuel Limited

              


      

    

    Western
      Industrial Park

    P.O.
      Box
      461

    Beit
      Shemesh 99000

    Israel

    
       

      
        	 	
                The
                  Executive: 

              	
                Robert
                  S. Ehrlich

              


      

    

    21
      Nahal
      Sorek 

    Ramat
      Beit Shemesh 

    Israel
      

     

    11. Miscellaneous.

     

    No
      provision of this Agreement may be modified, waived or discharged unless such
      waiver, modification or discharge is agreed to in writing and signed by the
      Executive and the Companies. No waiver by either party hereto at any time of
      any
      breach by the other party hereto of, or compliance with, any condition or
      provision of this Agreement to be performed by such other party shall be deemed
      a waiver of similar or dissimilar provisions or conditions at the same or at
      any
      prior or subsequent time. No agreement or representations, oral or otherwise,
      express or implied, with respect to the subject matter hereof have been made
      by
      either party which are not expressly set forth in this Agreement.

     

    12. Governing
      Law; Venue.

     

    This
      Agreement shall be governed by and construed and enforced in accordance with
      the
      laws of Israel without application of any conflicts of laws principles which
      would cause the application of the domestic substantive laws of any other
      jurisdiction. Each of the Executive and the Companies hereby irrevocably waives
      any objection it may now or hereafter have to the laying of venue in the courts
      of the State of Israel for any legal suit or action instituted by any party
      to
      the Agreement against any other with respect to the subject matter
      hereof.

     

    
      
        
        

      

      
        -12-

        
          

        

      

      
        
        

      

    

     

    13. Severability.

     

    The
      provisions of this Agreement shall be deemed severable, and the invalidity
      or
      unenforceability of any provision shall not affect the validity or
      enforceability of the other provisions hereof.

     

    14. Entire
      Agreement.

     

    This
      Agreement constitutes the entire agreement between the parties hereto and
      supersedes all prior agreements, understandings and arrangements, oral or
      written, between the parties hereto with respect to the subject matter hereof
      including, without limitation the Original Agreement.

     

    15. Joint
      and Several Obligations.

     

    The
      obligations and liabilities of each Company hereunder shall be joint and several
      with the obligations and liabilities of the other Company
      hereunder.

     

    16. Registration
      Rights.

     

    
      	
              (a)

            	
              If
                Arotech at any time proposes to register any of its securities under
                the
                Securities Act of 1933, as from time to time in effect (together
                with the
                rules and regulations thereunder, all as from time to time in effect,
                the
                “Securities Act”), for its own account or for the account of any holder of
                its securities, on a form which would permit registration of Common
                Stock
                of Arotech at the time held or obtainable upon the exercise of options,
                warrants or rights, or the conversion of convertible securities,
                at the
                time held by the Executive (“Registrable Securities”), for sale to the
                public under the Securities Act, Arotech will each such time give
                notice
                to the Executive of its intention to do so. Such notice shall describe
                such securities and specify the form, manner and other relevant aspects
                of
                such proposed registration. The Executive may, by written response
                delivered to Arotech within 15 days after the giving of any such
                notice,
                request that all or a specified part of the Registrable Securities
                be
                included in such registration. Arotech will thereupon use its best
                efforts
                as part of its filing of such form to effect the registration under
                the
                Securities Act of all Registrable Securities which Arotech has been
                so
                requested to register by the Executive, to the extent required to
                permit
                the disposition (in accordance with the intended methods thereof
                as
                aforesaid) of the Registrable Securities to be so
                registered.

            


    

     

    
      	(b)  	
              The
                Executive may, by notice to Arotech specifying the intended method
                or
                methods of disposition, given at any time and from time to time after
                Arotech has registered any shares of its Common Stock under the Securities
                Act, request that Arotech effect the registration under the Securities
                Act
                of all or a specified part of the Registrable Securities; provided,
                however,
                that Arotech shall not be required to effect a registration pursuant
                to
                this Section 16(b) unless such registration may be effected on a
                Form S-3
                (or any successor or similar Form); and provided,
                further,
                that each registration pursuant to this Section 16(b) shall cover
                a number
                of Registrable Shares equal to not less than 2% of the aggregate
                number of
                shares of Arotech Common Stock then outstanding. Arotech will then
                use its
                best efforts to effect the registration as promptly as practicable
                under
                the Securities Act of the Registrable Securities which Arotech has
                been
                requested to register by the Executive pursuant to the Section
                16(b).

            


    

     

    
      
        
        

      

      
        -13-

        
          

        

      

      
        
        

      

    

     

    
      	(c)  	
              Notwithstanding
                the provisions of Section 16(b), in the event that Executive has
                requested
                pursuant to Section 16(b) that Arotech effect a registration of
                securities, and (i) the Board of Arotech determines that it would
                be
                seriously detrimental to Arotech to effect a registration pursuant
                to
                Section 16(b), or (ii) the Board of Arotech determines in good faith
                that
                (A) Arotech is in possession of material, non-public information
                concerning an acquisition, merger, recapitalization, consolidation,
                reorganization or other material transaction by or of Arotech or
                concerning pending or threatened litigation and (B) disclosure of
                such
                information would jeopardize any such transaction or litigation or
                otherwise materially harm Arotech, then Arotech shall promptly notify
                Executive of the occurrence of any of the events described in the
                foregoing clauses (i) or (ii). Upon the occurrence of any of the
                events
                described in clauses (i) or (ii) hereof, Arotech shall be allowed
                to defer
                a registration of securities pursuant to Section 16(b) above, and
                if a
                registration statement had already been filed at such time, Executive
                shall not dispose of his Registrable Securities under such registration
                statement until it is so advised in writing by Arotech that the
                registration of securities under 16(b) may be effected or resumed.
                Notwithstanding the foregoing, any such deferment or prohibition
                on
                disposition shall not be in effect for more than 90 days in any 12
                months
                period. 

            


    

     

    
      	
              (d)

            	
              Arotech
                shall not be obligated to effect any registration of Registrable
                Securities under Section 16(a) hereof incidental to the registration
                of
                any of its securities in connection with mergers, acquisitions, exchange
                offers, dividend reinvestment plans or stock option or other employee
                benefit plans.

            


    

     

    
      	
              (e)

            	
              Arotech
                hereby agrees to pay, or cause to be paid, all legal, accounting,
                printing
                and other expenses (other than the fees and expenses of the Executive’s
                own counsel and other than underwriting discounts and commissions
                attributable to the Registrable Securities) in connection with each
                registration of Registrable Securities pursuant to this Section
                16.

            


    

     

    
      	
              (f)

            	
              In
                connection with each registration of Registrable Securities pursuant
                to
                this Section 16, Arotech and the Executive will enter into such
                agreements, containing such terms and conditions, as are customary
                in
                connection with public offerings, such agreements to contain, without
                limitation, customary indemnification provisions, representations
                and
                warranties and opinions and other documents to be delivered in connection
                therewith, and to be, if requested, with
                underwriters.

            


    

     

    
      	
              (g)

            	
              The
                provisions of this Section 16 shall be subject to any agreement entered
                into by Arotech, in good faith, with any underwriter of Arotech’s
                securities or any person or entity providing financing to Arotech,
                in each
                case containing reasonable limitations on the Executive’s rights and
                Arotech’s obligations hereunder.

            


    

     

    
      	
              (h)

            	
              The
                provisions of this Section 16 shall survive the termination of the
                other
                provisions of this Agreement. The rights of the Executive under this
                Section 16 are assignable, in whole or in part, by the Executive
                to any
                person or other entity acquiring securities of Arotech from the
                Executive.

            


    

     

    
      
        
        

      

      
        -14-

        
          

        

      

      
        
        

      

    

     

    
      	
              (i)

            	
              Notwithstanding
                anything in the foregoing to the contrary, the Executive shall not
                demand
                a registration during the 180 days following an underwritten public
                offering of the Common Stock of the
                Company.

            


    

     

    
      	
              (j)

            	
              Without
                the prior written consent of the underwriters managing any public
                offering, for a period beginning ten days immediately preceding the
                effective date of any registration statement filed by the Company
                under
                the Securities Act of 1933, as amended, and ending on the earlier
                of (i)
                180 days after the effective date of such registration statement
                and (ii)
                the end of the shortest period generally applicable to any “affiliate” (as
                defined in the Securities Act of 1933, as amended) of Arotech who
                is a
                selling shareholder pursuant to such registration statement or who
                is
                otherwise subject to a lockup provision, the Executive (whether or
                not a
                selling shareholder pursuant to such registration statement) shall
                not
                sell or otherwise transfer any securities of Arotech except pursuant
                to
                such registration statement.

            


    

     

    
      	
              17.

            	
              Taxes.

            


    

     

    All
      sums
      referred to herein are gross, not net.

     

    IN
      WITNESS WHEREOF,
      the
      Companies have caused this Agreement to be executed by its duly authorized
      officer and the Executive has executed this Agreement as of the day and year
      first above written.

    


    AROTECH
      CORPORATION

    
      	 	 	 	 	 
	By:	 	 	 	 
	Its: 	
              
President
              and COO	 	 	
            


    

     

    ELECTRIC
      FUEL (E.F.L.) LIMITED

     

    
      	 	 	 	 	 
	By:	 	 	 	 
	Its:	
              
President
              and CEO	 	 	
              
Executive


    

     

    
      
        
        

      

      
        -15-

        
          

        

      

      
        
        

      

    

     

    Exhibit
      A

     

    FORM
      OF MUTUAL RELEASE

     

    This
      mutual release is executed and delivered by and between the undersigned employee
      of Arotech Corporation, a Delaware corporation (“Arotech”) and Electric Fuel
      (E.F.L.) Limited (“EFL”) and the undersigned’s successors, assigns, executors,
      estates and personal representatives (collectively, the “Executive”), on the one
      hand, and Arotech and EFL and each of their respective affiliates, agents,
      successors and assigns (collectively, the “Companies”), on the other hand. For
      and in consideration of the Executive receiving the compensation referred to
      in
      Section 7 of the Fourth Amended and Restated Employment Agreement dated April
      15, 2007 and other good and valuable consideration, the adequacy and receipt
      of
      which are hereby acknowledged by the Executive and the Companies, the Executive
      hereby remises, releases and forever discharges the Companies, and the Companies
      hereby remise, release and forever discharge the Executive, of and from any
      and
      all manner of action and actions, cause and causes of actions, suits, debts,
      dues, sums of money, accounts, reckonings, bonds, bills, covenants, contracts,
      controversies, executions, claims and demands of any kind and nature whatsoever
      in law or in equity, known or unknown, against the other party which ever
      existed prior to the date hereof, or may ever have on and after the date hereof
      with respect to matters arising, and dealings with the other party occurring,
      prior to the date hereof; provided,
      however,
      that
      nothing contained herein shall be construed to release the Executive from any
      obligations to the Companies pursuant to the Employment Agreement nor to release
      the Companies from any of their obligations to the Executive pursuant to the
      Employment Agreement.

     

    IN
      WITNESS WHEREOF, the Executive and the Companies have each caused this Release
      to be executed as of __________________.

     

    
      	 	 	 
	 	EXECUTIVE
	 	 	 
	 	  	 
	 	
              
Name: Robert
              S. Ehrlich


    

     

    
      	 	 	 
	 	AROTECH
              CORPORATION
	 
 	 
 	 
 
	 	By:  	 
	 	
              
Title:


    

    


    
      	 	 	 
	 	ELECTRIC
              FUEL
              (E.F.L.) LTD.
	 
 	 
 	 
 
	 	By:  	 
	 	
              
Title: