Document:

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                                                                   EXHIBIT 10.19

                               PURCHASE AGREEMENT

      This Purchase Agreement (the "Agreement") is made as of the 19th day of
January, 2005, by and among Arbor Realty Mortgage Securities Series 2004-1,
Ltd., an exempted company incorporated with limited liability under the laws of
the Cayman Islands (the "Issuer"), Arbor Realty Mortgage Securities Series
2004-1 LLC, a Delaware limited liability company (the "Co-Issuer" and, together
with the Issuer, the "Co- Issuers") and Wachovia Capital Markets, LLC ("WCM" or
the "Initial Purchaser").

                              W I T N E S S E T H:

      WHEREAS, the Co-Issuers intend to issue (a) the U.S. $182,910,000 Class A
Senior Secured Floating Rate Term Notes, Due 2040 (the "Class A Notes"), (b) the
U.S. $51,590,000 Class B Second Priority Floating Rate Term Notes, Due 2040 (the
"Class B Notes"), (c) the U.S. $50,417,000 Class C Third Priority Floating Rate
Term Notes, Due 2040 (the "Class C Notes") and (d) the U.S. $20,402,000 Class D
Fourth Priority Floating Rate Term Notes, Due 2040 (the "Class D Notes" and
together with the Class A Notes, the Class B Notes and the Class C Notes, the
"Notes") pursuant to an indenture, dated as of January 19, 2005 (the
"Indenture"), by and among the Issuer, the Co-Issuer, LaSalle Bank National
Association, as trustee, paying agent, calculation agent, transfer agent,
custodial securities intermediary and notes registrar (together with any
successor trustee permitted under the Indenture, the "Trustee") and Arbor Realty
SR, Inc., as advancing agent;

      WHEREAS, pursuant to its organizational documents, corporate resolutions
and a preferred shares paying agency agreement, the Issuer also intends to issue
the U.S. $163,707,380 aggregate notional amount preferred shares (the "Preferred
Shares");

      WHEREAS, the Initial Purchaser is a securities firm engaged in the
business of selling securities directly to purchasers or through other
securities dealers;

      WHEREAS, Arbor Realty Collateral Management, LLC ("ARCM") shall act as
collateral manager (the "Collateral Manager") of the Issuer's assets in
accordance with the terms of a collateral management agreement dated as of
January 19, 2005, between the Collateral Manager and the Issuer (the "Collateral
Management Agreement");

      WHEREAS, the Initial Purchaser hereby acknowledges that it has received
good and valuable consideration from the Co-Issuers.

      NOW, THEREFORE, the parties agree as follows:

      1. Defined Terms. All capitalized terms used and not otherwise defined
herein shall have the same meanings ascribed to such terms in the Indenture.

      2. Sale and Purchase of the Notes.

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      (a) Subject to the terms and conditions herein, each of the Issuer and the
Co-Issuer hereby agrees to sell on the Closing Date all of the Notes, as
applicable, to the Initial Purchaser as provided hereinafter, and the Initial
Purchaser agrees to purchase on the Closing Date from the Issuer and Co-Issuer,
as applicable, the Notes in the amount set forth opposite the Initial
Purchaser's name on Schedule A hereto at the price (the "Purchase Price") set
forth under the respective Notes on the Closing Date.

      (b) The Purchase Price of the Notes shall be payable to the Issuer or the
Co- Issuer, as applicable, as they direct by wire transfer in United States
Dollars in immediately available funds on the Closing Date.

      (c) Prior to or at the time that the Notes are first issued or delivered,
the conditions precedent in Section 7 herein shall have been satisfied.

      3. Offer of the Notes. Each of the Issuer and the Co-Issuer understands
that the Initial Purchaser intends to offer the Notes as soon after this
Agreement has become effective as is advisable in the judgment of the Initial
Purchaser. The Issuer and Co-Issuer confirm that they have authorized the
Initial Purchaser, subject to the restrictions set forth below, to distribute
copies of the Offering Memorandum in connection with the offering of the Notes.

      4. Representations, Warranties and Covenants of each of the Co-Issuers.
Each of the Issuer or the Co-Issuer, as applicable, represents and warrants
(with respect to itself only) to the Initial Purchaser as of the Closing Date,
and agrees with the Initial Purchaser that:

      (a) it has not, directly or indirectly, solicited any offer to buy or
offered to sell, and shall not, directly or indirectly, solicit any offer to buy
or offer to sell, in the United States or to any United States citizen or
resident, any security which is or would be integrated with the sale of the
Notes in a manner that would require the Notes to be registered under the
Securities Act of 1933, as amended (the "Securities Act");

      (b) the Notes are not of the same class as any notes of the Issuer or
Co-Issuer listed on a national securities exchange registered under Section 6 of
the United States Securities Exchange Act, as amended (the "Exchange Act"), or
quoted in a United States automated interdealer quotation system;

      (c) the Offering Memorandum dated as of January 14, 2005 and the marketing
materials dated December 7, 2004 and the related asset summaries (together, the
"Offering Materials") have been prepared by the Issuer and the Co-Issuer, as
applicable, in connection with the offering of the Notes. The Offering Materials
and any amendments or supplements thereto did not and shall not, as of their
respective dates, and, as amended or supplemented through the Closing Date,
shall not as of the Closing Date, contain an untrue statement of a material fact
or omit to state a material fact necessary in order to make the statements
therein, in light of the circumstances under which they were made, not
misleading except that the representations and warranties set forth in this
Section 4(c) do not apply to statements or omissions that are made in reliance
upon and in conformity with information relating to the Initial Purchaser
furnished to the Issuer by the Initial Purchaser expressly for use in the
Offering Materials or any amendment or supplement thereto. It is hereby
acknowledged that the

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statements set forth in the second paragraph under the caption "Subscription and
Sale" constitute the only written information furnished to the Seller by the
Initial Purchasers expressly for use in the Offering Circular (or any amendment
or supplement thereto).

      (d) since the respective dates as of which information is given in the
Offering Materials, except as contemplated or set forth in the Offering
Memorandum, it has not carried on any business other than as described in the
Offering Materials relating to the issue of the Notes;

      (e) the Issuer does not have any subsidiaries and the Co-Issuer does not
have any subsidiaries;

      (f) the Issuer is an exempted company incorporated with limited liability
that has been duly and validly incorporated and is existing and in good standing
under the laws of the Cayman Islands; the Issuer is duly licensed and duly
qualified to do business as a foreign limited liability company and is in good
standing in all jurisdictions in which the ownership of its assets or in which
the conduct of its business requires or shall require such qualification; the
Issuer has full power and authority to own its assets and conduct its business
as described in the Offering Materials and to enter into and perform its
obligations under this Agreement, the Indenture, each Collateral Debt Securities
Purchase Agreement, each Hedge Agreement and the Collateral Management Agreement
and to enter into and consummate all the transactions in connection therewith as
contemplated by such agreements and in the Offering Materials;

      (g) the Co-Issuer is a limited liability company that is in good-standing
under the laws of the State of Delaware and is duly licensed and duly qualified
to do business as a limited liability company and is in good standing in all
jurisdictions in which the ownership of its assets or in which the conduct of
its business requires or shall require such qualification; the Co-Issuer has
full power and authority to own its assets and conduct its business as described
in the Offering Materials and to enter into and perform its obligations under
this Agreement and the Indenture and to enter into and consummate all the
transactions in connection therewith as contemplated by such agreements and in
the Offering Materials;

      (h) the Issuer has the authorized share capital as set
forth in the Offering Memorandum and all of the issued ordinary shares of the
Issuer have been duly and validly authorized and issued and are fully paid and
nonassessable and all of the issued ordinary shares of the Issuer shall be held
by ARMS 2004-1 Equity Holdings LLC, relating to such ordinary shares;

      (i) the Co-Issuer has the authorized capitalization as set forth in the
Offering Memorandum and all of the membership interests of the Co-Issuer have
been duly and validly authorized and issued and all of the issued membership
interests of the Co-Issuer shall be held by Arbor Realty SR, Inc.;

      (j) the Notes have been duly authorized by the Co-Issuer, and when issued
and delivered and when appropriate entries have been made in the Note Register
pursuant to this Agreement and the Indenture against payment therefor, shall
have been duly executed, authenticated, issued and delivered and shall
constitute valid and legally binding obligations of the Co-Issuer, enforceable
against the Co-Issuer in accordance with their terms and entitled to

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the benefits provided by the Indenture, subject, as to enforcement, to
bankruptcy, insolvency, reorganization and other laws of general applicability
relating to or affecting creditors' rights and to general equity principles;

      (k) the Notes have been duly authorized by the Issuer and, when issued and
delivered and when appropriate entries have been made in the Note Register
pursuant to this Agreement and the Indenture against payment therefor, shall
have been duly executed, authenticated, issued and delivered and shall
constitute valid and legally binding obligations of the Issuer, enforceable
against the Issuer in accordance with their terms and entitled to the benefits
provided by the Indenture, subject, as to enforcement, to bankruptcy,
insolvency, reorganization and other laws of general applicability relating to
or affecting creditors' rights and to general equity principles;

      (l) each of the Indenture and this Agreement have been duly authorized by
the Co-Issuer and, when executed and delivered by the parties thereto, shall
constitute a valid and legally binding instrument, enforceable in accordance
with their respective terms, subject, as to enforcement, to bankruptcy,
insolvency, reorganization and other laws of general applicability relating to
or affecting creditors' rights and to general equity principles;

      (m) each of the Indenture, the Collateral Management Agreement, this
Agreement, each Collateral Debt Securities Purchase Agreement and each Hedge
Agreement has been duly authorized by the Issuer and, when executed and
delivered by the parties thereto, shall constitute a valid and legally binding
instrument, enforceable in accordance with its terms under the laws of the State
of New York and all other relevant laws, subject, as to enforcement, to
bankruptcy, insolvency, reorganization and other laws of general applicability
relating to or affecting creditors' rights and to general equity principles;

      (n) except as may be required under state securities laws, no filing with,
or authorization, approval, consent, license, order, registration, qualification
or decree of, any court or governmental authority or agency is necessary or
required for the performance by the Co-Issuer of its obligations hereunder, in
connection with the offering, issuance or sale of the Notes hereunder or the
consummation of the transactions contemplated by or for the due execution,
delivery or performance of this Agreement, the Indenture or any other agreement
or instrument entered into or issued or to be entered into or issued by the
Co-Issuer in connection with the consummation of the transactions contemplated
herein and in the Offering Materials (including the issuance and sale of the
Notes and the use of the proceeds from the sale of the Notes as described in the
Offering Memorandum under the caption "Use of Proceeds");

      (o) except as may be required under state securities laws, no filing with,
or authorization, approval, consent, license, order, registration, qualification
or decree of, any court or governmental authority or agency is necessary or
required for the performance by the Issuer of its obligations hereunder, in
connection with the offering, issuance or sale of the Notes hereunder or the
consummation of the transactions contemplated by or for the due execution,
delivery or performance of this Agreement, the Indenture, the Notes, each
Collateral Debt Securities Purchase Agreement, the Collateral Management
Agreement, each Hedge Agreement or any other agreement or instrument entered
into or issued or to be entered into or issued by the Issuer in connection with
the consummation of the transactions contemplated herein and in the Offering

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Materials (including the issuance and sale of the Notes and the use of the
proceeds from the sale of the Notes as described in the Offering Memorandum
under the caption "Use of Proceeds");

     (p)   the statements set forth in the Offering Memorandum under the
captions "Description of the Securities," "Security for the Notes," "The
Collateral Management Agreement," "Hedge Agreements," "The Issuer" and "The
Co-Issuer" insofar as they purport to constitute a description of the Issuer or
the Co-Issuer or a summary of the terms of the Notes, the Indenture, the Hedge
Agreements and the Collateral Management Agreement and under the captions
"Income Tax Considerations," "ERISA Considerations" and "Subscription and Sale,"
insofar as they purport to describe the provisions of the laws and documents
referred to therein, are correct in all material respects;

     (q)   the issue and sale of the Notes and the compliance by the Issuer or
the Co-Issuer as applicable, with all of the provisions of the Indenture, each
Collateral Debt Securities Purchase Agreement, the Notes, each Hedge Agreement,
the Collateral Management Agreement and this Agreement and the consummation of
the transactions herein and therein contemplated shall not conflict with or
result in a breach or violation of any of the terms or provisions of, or
constitute a default under, any other agreement or instrument to which the
Issuer or the Co-Issuer is a party or by which the Issuer or the Co-Issuer is
bound, nor shall such action result in any violation of the provisions of the
Governing Documents of each of the Issuer or the Co-Issuer or any statute or any
order, rule or regulation of any court or governmental agency or body having
jurisdiction over the Issuer or the Co-Issuer or each of their assets; and, no
consent, approval, authorization, order, registration or qualification of or
with any court or governmental agency or body is required for the issue and sale
of the Notes or the consummation of the transactions by the Issuer and the
Co-Issuer contemplated by this Agreement, the Indenture, each Collateral Debt
Securities Purchase Agreement, each Hedge Agreement or the Collateral Management
Agreement, (other than any governmental or other consents that have already been
obtained by either the Issuer or the Co-Issuer and that were in full force and
effect);

     (r)   the Trustee shall have a perfected security interest in the Pledged
Obligations and the Issuer's rights under the Collateral Management Agreement,
each Hedge Agreement and each Collateral Debt Securities Purchase Agreement for
the benefit and security of the holders of the Notes subject to the priorities
set forth in the Indenture;

     (s)   there are no legal or governmental proceedings, inquiries or
investigations pending to which the Issuer or the Co-Issuer is a party or of
which any property of the Issuer or Co-Issuer is the subject; and, no such
proceedings are threatened or contemplated by governmental authorities or
threatened by others;

     (t)   on the Closing Date, there shall not exist any default by any of the
Issuer or the Co-Issuer or any condition, event or act, which, with notice or
lapse of time or both, would constitute an Event of Default by the Issuer or the
Co-Issuer under the Indenture;

     (u)   none of the Issuer, the Co-Issuer or any persons acting on their
behalf (other than the Initial Purchaser as to whom the Co-Issuers make no
representation) has engaged or shall engage in any directed selling efforts as
defined in Rule 902 of Regulation S under the

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Securities Act with respect to the Notes, and none of the foregoing persons has
offered or sold any of the Notes except to the Initial Purchaser pursuant to
this Agreement,

      (v) neither the Issuer nor the Co-Issuer has entered into contractual
arrangements (other than this Agreement) with any Person other than the Initial
Purchaser with respect to the distribution of the Notes;

      (w) no stamp or other issuance or transfer taxes or duties and no capital
gains, income, withholding or other taxes are payable by or on behalf of the
Initial Purchaser to the government of the Cayman Islands or any political
subdivision or taxing authority thereof or therein in connection with the
issuance, sale and delivery by the Issuer and the Co-Issuer or the sale and
delivery by the Initial Purchaser outside the Cayman Islands of the Notes to the
investors thereof; provided, that Cayman Islands stamp duty will be payable if
any of the Notes or Transaction Agreements are executed in, or after execution,
brought into the Cayman Islands;

      (x) none of the Issuer or the Co-Issuer has offered or sold the Notes by
means of any form of general solicitation or general advertising and none of the
foregoing persons shall offer to sell, offer for sale or sell the Notes by means
of any advertisement, article, notice or other communication published in any
newspaper, magazine or similar medium or broadcast over television or radio, or
any seminar or meeting whose attendees have been invited by any general
solicitation or general advertising;

      (y) assuming compliance by the Initial Purchaser with the offer and sale
restrictions set forth herein and compliance by the purchaser with the
Subscription Agreement, neither the Issuer nor the Co-Issuer is required to be
registered as an "investment company" and neither the Issuer nor the Co-Issuer
shall be required to register as an investment company under the Investment
Company Act as a result of the conduct of its business in the manner
contemplated by the Offering Memorandum;

      (z) assuming compliance by the Initial Purchaser with the offer and sale
restrictions set forth herein and compliance by the purchaser with the
Subscription Agreement, no registration of the Notes under the Securities Act is
required for the offer and sale of the Notes in the manner contemplated by this
Agreement and the Offering Memorandum and no qualification of an indenture under
the Trust Indenture Act of 1939, as amended, is required for the offer and sale
of the Notes in the manner contemplated by this Agreement and the Offering
Memorandum;

      (aa) each of the Issuer and the Co-Issuer shall make available to the
Initial Purchaser such number of copies of the Offering Memorandum and any
amendment or supplement thereto as the Initial Purchaser shall reasonably
request;

      (bb) neither the Issuer nor the Co-Issuer has offered and neither the
Issuer nor the Co-Issuer shall offer the Notes except pursuant to this
Agreement;

      (cc) each of the Issuer and the Co-Issuer shall immediately notify the
Initial Purchaser, and confirm such notice in writing, of (A) any filing made by
the Co-Issuers of information relating to the offering of the Notes with any
securities exchange or any other regulatory body in the United States or any
other jurisdiction, and (B) prior to the completion of

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the purchase of the Notes by the Initial Purchaser, any material changes in or
affecting the earnings, business affairs or business prospects of either the
Issuer or the Co-Issuer which (i) make any statement in the Offering Materials
false or misleading in any material respect or (ii) are not disclosed in the
Offering Memorandum. In such event or if during such time any event shall occur
or condition shall exist as a result of which it is necessary, in the opinion of
any of the Issuer, the Co-Issuer, their counsel, the Initial Purchaser or its
counsel, to amend or supplement the Offering Materials in order that the final
Offering Materials not include any untrue statement of a material fact or omit
to state a material fact necessary in order to make the statements therein not
misleading in the light of the circumstances then existing, each of the Issuer
and the Co-Issuer shall forthwith amend or supplement the final Offering
Materials by preparing and furnishing to the Initial Purchaser an amendment or
amendments of, or a supplement or supplements to, the final Offering Materials
(in form and in substance satisfactory in the opinion of counsel for the Initial
Purchaser) so that, as so amended or supplemented, the final Offering Materials
shall not include an untrue statement of a material fact or omit to state a
material fact necessary in order to make the statements therein, in light of the
circumstances existing at the time it is delivered to an investor, not
misleading;

      (dd) each of the Issuer and the Co-Issuer shall advise the Initial
Purchaser promptly of any proposal to amend or supplement the Offering Materials
and shall not effect such amendment or supplement without the consent of the
Initial Purchaser, which shall not be unreasonably withheld or delayed. Neither
the consent of the Initial Purchaser to, nor the Initial Purchaser's delivery
of, any such amendment or supplement, shall constitute a waiver of any of the
conditions set forth in Section 7 hereof;

      (ee) each of the Issuer and the Co-Issuer agrees that it shall not make
any offer or sale of Notes of any class if, as a result of the doctrine of
"integration" referred to in Rule 502 promulgated under the Securities Act, such
offer or sale would render invalid (for the purpose of (i) the sale of the Notes
to the Initial Purchaser or (ii) the resale of the Notes by the initial
investors to others) the exemption from the registration requirements of the
Securities Act provided by Section 4(2) thereof or by Rule 144A or by Regulation
S thereunder;

      (ff) each of the Issuer and the Co-Issuer agrees that, in order to render
the Notes eligible for resale pursuant to Rule 144A under the Securities Act,
while any of the Notes remain outstanding, they shall make available, upon
request, to any holder of the Notes or prospective purchasers of the Notes
designated by any Holder the information specified in Rule 144A(d)(4), unless
each of the Issuer and the Co-Issuer furnishes information to the United States
Securities and Exchange Commission (the "Commission") pursuant to Section 13 or
15(d) of the Exchange Act (such information, whether made available to holders
or prospective purchasers or furnished to the Commission, is hereinafter
referred to as "Additional Information");

      (gg) until the expiration of two years after the original issuance of the
Notes, each of the Issuer and the Co-Issuer shall not resell any Notes which are
"restricted securities" (as such term is defined under Rule 144(a)(3) under the
Securities Act) that have been re-acquired by any of them and shall immediately
upon any purchase of any such Notes submit such Notes to the Trustee for
cancellation;

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      (hh)  each of the Issuer and the Co-Issuer shall use the net proceeds
received by them from the sale of the Notes in the manner specified in the
Offering Memorandum under "Use of Proceeds";

      (ii)  during a period of 180 days from the date of the Offering
Memorandum, neither the Issuer nor the Co-Issuer shall, directly or indirectly,
issue, sell, offer to sell grant any option for the sale of, or otherwise
dispose of, any debt securities or guarantees of debt securities of the Issuer
or the Co-Issuer, as applicable, or any securities convertible or exchangeable
into or exercisable for any debt securities or guarantees of debt securities of
the Issuer or the Co-Issuer, as applicable, or any securities convertible or
exchangeable into or exercisable for any debt security or guarantee of debt
securities of the Issuer or Co-Issuer, except as described in the Offering
Memorandum;

      (jj)  the Co-Issuers shall use all reasonable efforts in cooperation with
the Initial Purchaser to permit the Notes to be eligible for clearance and
settlement through DTC;

      (kk)  each certificate representing a Note shall bear the legend contained
in the Offering Memorandum for the time period and upon the other terms stated
in the Offering Memorandum;

      (ll)  the Co-Issuers shall have no debt other than as indicated in or
contemplated by the Offering Memorandum (including, without limitation, expenses
incurred in connection with the offering of the Notes);

      (mm)  the application of the proceeds of the sale of the Notes shall not
be in violation of Regulations T, U or X of the Board of Governors of the
Federal Reserve System, as amended and in effect on the Closing Date;

      (nn)  The Issuers have taken all necessary steps to ensure that any
Bloomberg screen containing information about the Notes represented by Rule 144A
Global Notes includes the following (or similar) language:

      (i)   the "Note Box" on the bottom of the "Security Display" page
   describing the Rule 144A Global Notes shall state: "Iss'd Under 144A/3c7";

      (ii)  the "Security Display" page shall have flashing red indicator "See
   Other Available Information"; and

      (iii) the indicator shall link to the "Additional Security Information"
   page, which shall state that the securities "are being offered in reliance on
   the exemption from registration under Rule 144A of the Securities Act to
   persons who are both (i) qualified institutional buyers (as defined in Rule
   144A under the Securities Act) and (ii) qualified purchasers (as defined
   under Section 3(c)(7) under the 1940 Act)."

      (oo)  The Issuers shall instruct The Depository Trust Company ("DTC") to
take these or similar steps with respect to the Notes represented by Rule 144A
Global Notes:

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      (i) the DTC 20-character security descriptor and 48-character additional
   descriptor shall indicate with marker "3c7" that sales are limited to
   Qualified Institutional Buyers/Qualified Purchasers;

      (ii) where the DTC deliver order ticket sent to purchasers by DTC after
   settlement is physical, it shall have the 20-character security descriptor
   printed on it. Where the DTC deliver order ticket is electronic, it shall
   have a "3c7" indicator and a related user manual for participants, which
   shall contain a description of the relevant restriction;

      (iii) DTC shall send an "Important Notice" outlining the 3(c)(7)
   restrictions applicable to the Rule 144A Global Notes to all DTC participants
   in connection with the initial offering; and

     (iv) DTC shall include the Co-Issuers in the Reference Directory which is
   distributed by DTC to its participants on the list of all issuers who have
   advised DTC that they are 3(c)(7) issuers.

      (pp) The Co-Issuers, have confirmed that CUSIP has established a "fixed
field" attached to the CUSIP numbers for the Notes represented by Rule 144A
Global Notes containing "3c7" and "144A" indicators.

      5. Representations, Warranties and Covenants of the Initial Purchaser. The
Initial Purchaser hereby represents and warrants to the Issuer and the Co-Issuer
as of the Closing Date and agrees with the Issuer and the Co-Issuer that:

      (a) The Initial Purchaser is a QIB and a Qualified Purchaser, with such
knowledge and experience in financial and business matters as are necessary in
order to evaluate the merits and risks of an investment in the Notes.

      (b) The Initial Purchaser understands that (i) the Notes have not been and
shall not be registered under the Securities Act, and (ii) the Issuer and the
Co-Issuer are not, and shall not be, registered as investment companies under
the Investment Company Act.

      (c) The Initial Purchaser shall offer and sell the Notes only to persons
(i) who are "qualified purchasers" as defined in Section 2(a)(51) of the
Investment Company Act ("Qualified Purchasers") that such Initial Purchaser
reasonably believes are "qualified institutional buyers" as defined in Rule 144A
under the Securities Act ("Rule 144A") and whom the seller has informed that the
reoffer, resale, pledge or other transfer is being made in reliance on Rule 144A
or (ii) such Initial Purchaser reasonably believes are not U.S. Persons or U.S.
residents for purposes of the Investment Company Act and that the sale, reoffer,
resale, pledge or other transfer is being made in compliance with Regulation S
under the Securities Act; terms used in this paragraph have the meanings given
to them by Regulation S or Rule 144A, as applicable.

      (d) The Initial Purchaser shall not invite the public in the Cayman
Islands to subscribe for the Notes.

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      (e) The Initial Purchaser acknowledges that purchases and resales of the
Notes are restricted as described under "Transfer Restrictions" in the Offering
Memorandum.

      (f) (i) The Initial Purchaser has not offered or sold and will not offer
or sell any Notes to persons in the United Kingdom prior to the expiry of the
period of six months from the Closing Date except to persons whose ordinary
activities involve them in acquiring, holding, managing or disposing of
investments (as principal or agent) for the purposes of their business or
otherwise in circumstances which have not resulted and will not result in an
offer to the public in the United Kingdom within the meaning of the Public
Offers of Securities Regulations 1995 (as amended); (ii) the Initial Purchaser
has only communicated or caused to be communicated and will only communicate or
cause to be communicated any invitation or inducement to engage in investment
activity (within the meaning of Section 21 of the Financial Services and Markets
Act 2000 (the "FSMA") received by it in connection with the issue or sale of any
Notes in circumstances in which section 21(1) of the FSMA does not apply to the
Issuer; and (iii) the Initial Purchaser has complied and will comply with all
applicable provisions of the FSMA with respect to anything done by it in
relation to the Notes in, from or otherwise involving the United Kingdom.

      (g) The Initial Purchaser represents and agrees that the Notes offered and
sold in reliance on Regulation S have been and will be offered and sold only in
offshore transactions. In connection therewith, the Initial Purchaser agrees
that it has not offered or sold and will not offer or sell the Notes in the
United States or to, or for the benefit or account of, a U.S. Person (other than
a distributor), in each case, as defined in Rule 902 under the Securities Act
(i) as part of its distribution at any time and (ii) otherwise until 40 days
after the later of the commencement of the offering of the Notes pursuant hereto
and the Closing Date, other than in accordance with Regulation S of the
Securities Act or another exemption from the registration requirements of the
Securities Act.

      (h) No form of general solicitation or general advertising has been or
will be used by the Initial Purchaser or any of its representatives in
connection with the offer and sale of any of the Notes, including, but not
limited to, articles, notices or other communications published in any
newspaper, magazine, or similar medium or broadcast over television or radio, or
any seminar or meeting whose attendees have been invited by any general
solicitation or general advertising.

Terms used in this Section 5 that have meanings assigned to them in Regulation S
are used herein as so defined.

      6. Fees and Expenses. The proceeds of the offering of the Notes shall be
used to pay all expenses incurred in connection with the offering of the Notes,
including the preparation and printing of the preliminary and final offering
memorandum, the preparation, issuance and delivery of the Notes to the Initial
Purchaser, any fees charged by the Rating Agencies in rating the Notes and the
fees of counsel to the Issuer and Co-Issuer, the Initial Purchaser, the fees of
the Collateral Manager, the Trustee and all reasonable out-of-pocket expenses of
the Initial Purchaser.

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<PAGE>

      7. Conditions Precedent to the Purchase of the Notes. The obligations of
the Initial Purchaser hereunder are subject to the accuracy of the
representations and warranties of each of either the Issuer or the Co-Issuer
contained in Section 4 hereof or in certificates of any of the respective
officers of the Issuer or Co-Issuer delivered pursuant to the provisions hereof,
to the performance by the Issuer and the Co-Issuer of their covenants and other
obligations hereunder, and to the following further conditions precedent:

      (a) On the Closing Date, the Initial Purchaser shall have received the
opinions, dated as of the Closing Date specified in Sections 3.1(d), (e), (f),
(l), (m), (n) and (o) of the Indenture.

      (b) On the Closing Date, (i) the Offering Materials, as amended or
supplemented, shall not contain an untrue statement of a material fact or omit
to state a material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading; (ii) there shall not have been, since the date hereof or since
the respective dates as of which information is given in the Offering Materials,
any material adverse change or prospective material adverse change with respect
to the Issuer, the Co-Issuer or the Collateral; (iii) each of the Issuer and the
Co-Issuer shall have complied with all agreements and satisfied all conditions
on their part to be performed or satisfied pursuant to this Agreement on or
prior to Closing Date; and (iv) the representations and warranties of the Issuer
and Co-Issuer in Section 4 shall be accurate and true and correct as though
expressly made on and as of the Closing Date except as specifically set forth
therein.

      (c) On the Closing Date, the Initial Purchaser shall have received a
certificate of an authorized officer of ARCM, dated as of the Closing Date,
substantially in the form attached hereto as Exhibit A.

      (d) On the Closing Date, the Initial Purchaser shall have received from
KPMG LLP a letter, dated as of the Closing Date in form and substance
satisfactory to the Initial Purchaser, with respect to certain financial,
statistical and other information contained in the Offering Memorandum.

      (e) The Co-Issuer shall have duly authorized, executed and delivered the
Indenture and this Agreement.

      (f) The Issuer shall have duly authorized, executed and delivered the
Indenture, the Collateral Management Agreement, each Collateral Debt Securities
Purchase Agreement, and each Hedge Agreement.

      (g) ARCM shall have duly authorized, executed and delivered the Collateral
Management Agreement.

      (h) Each Seller shall have duly authorized, executed and delivered the
applicable Collateral Debt Securities Purchase Agreement;

      (i) Each Hedge Counterparty shall have duly authorized, executed and
delivered the applicable Hedge Agreement;

                                     - 11 -
<PAGE>

      (j) The Notes shall have been executed by the Issuer and Co-Issuer, as
applicable, and authenticated by the Trustee and the conditions precedent
thereto, as set forth in the Indenture, shall have been satisfied.

      (k) Prior to the initial purchase of the Notes hereunder, the Issuer and
Co-Issuer, as applicable, shall have obtained letters from Moody's Investors
Service, Inc. ("Moody's"), Fitch, Inc. ("Fitch") and Standard & Poor's Rating
Services, a division of The McGraw-Hill Companies ("S&P") that the Class A Notes
have been rated "Aaa" by Moody's and "AAA" by S&P and Fitch, that the Class B
Notes have been rated at least "Aa2" by Moody's and "AA" by S&P and Fitch, that
the Class C Notes have been rated at least "A3" by Moody's and "A-" by S&P and
Fitch, that the Class D Notes have been rated at least "Baa2" by Moody's and
"BBB" by S&P and Fitch and shall deliver copies of such letters to the Initial
Purchaser. The ratings assigned by the Rating Agencies to the Class A Notes, the
Class B Notes, the Class C Notes, and the Class D Notes address the ultimate
payment of interest and principal as provided under the Indenture. The ratings
assigned by Moody's are based on the risk of loss posed to the holders of each
Class of the Notes relative to the timing of the payments of principal of and
interest on each such Class of Notes.

      (l) The Initial Purchaser shall have received such further information,
certificates, documents and opinions as the Initial Purchaser may have
reasonably requested.

      (m) All of the Preferred Shares shall have been purchased by ARMS 2004-1
Equity Holdings LLC on the Closing Date.

      8. Indemnification and Contribution.

      (a) Subject to the Priority of Payments set forth in Section 11.1 of the
Indenture, the Co-Issuers shall indemnify and hold harmless the Initial
Purchaser and each of its affiliates, respective officers, directors and each
person who controls such Initial Purchaser within the meaning of Section 15 of
the Securities Act or Section 20 of the Exchange Act (each, an "Initial
Purchaser Indemnified Person") against any losses, claims, damages, liabilities
or expenses, joint or several, as the same are incurred, to which such Initial
Purchaser Indemnified Person may become subject insofar as such losses, claims,
damages, liabilities or expenses (or actions in respect thereof) (1) arise out
of or are based upon an untrue statement or alleged untrue statement of a
material fact contained in the Offering Materials or any amendment or supplement
thereto or arise out of or are based upon the omission or alleged omission to
state in the Offering Materials a material fact necessary to make the statements
therein, in the light of the circumstances under which they are made, not
misleading, other than the Initial Purchaser Information (as defined below) or
(2) are based upon any breach by the Co-Issuers of any of its representations,
warranties or agreements contained in this Agreement, and shall periodically
reimburse the Initial Purchaser for any and all legal or other expenses
reasonably incurred by the Initial Purchaser and each other Initial Purchaser
Indemnified Person in connection with investigating or defending, settling,
compromising or paying any such losses, claims, damages, liabilities, expenses
or actions as such expenses are incurred; provided, however, that the foregoing
indemnity with respect to any untrue statement contained in or any statement
omitted from any Offering Materials (as the same may be amended or supplemented)
shall not inure to the benefit of the Initial Purchaser (or any Person
controlling the Initial Purchaser), if (x) such

                                     - 12 -
<PAGE>

loss, liability, claim, damage or expense resulted from the fact that the
Initial Purchaser sold Notes to a Person to whom there was not sent or given, at
or prior to the written confirmation of such sale, a copy of the Offering
Memorandum, as then amended or supplemented, (y) the Issuer shall have
previously and timely furnished sufficient copies of the Offering Memorandum, as
so amended or supplemented, to the Initial Purchaser in accordance with this
Agreement and (z) the Offering Memorandum, as so amended or supplemented, would
have corrected such untrue statement or omission.

      (b) The Initial Purchaser shall indemnify and hold harmless the Issuer and
the Co-Issuer, each of their respective affiliates, their respective officers,
directors, managers and each person controlling the Issuer and Co-Issuer within
the meaning of Section 15 of the Securities Act or Section 20 of the Exchange
Act, against any losses, claims, damages, liabilities or expenses, joint or
several, as the same are incurred, to which the Issuer or the Co-Issuer may
become subject insofar as such losses, claims, damages, liabilities or expenses
(or actions in respect thereof) arise out of or are based upon any untrue
statement or alleged untrue statement of a material fact contained in the
statements set forth in the Initial Purchaser Information with respect to such
Initial Purchaser or acts or omissions thereof or arise out of or are based upon
the omission or alleged omission to state in such paragraphs a material fact
necessary with respect to such Initial Purchaser or acts or omissions thereof to
make the statements in such paragraphs, in the light of the circumstances under
which they are made, not misleading. The parties acknowledge that the only
information provided by the Initial Purchaser is in the Offering Memorandum on
the cover page in the first sentence of the fourth paragraph and in the Section
entitled "Subscription and Sale" in the first sentence of the first paragraph,
third and fifth paragraphs, second sentence of the sixth paragraph, seventh and
eighth paragraphs and twelfth paragraphs (collectively, the "Initial Purchaser
Information");

      (c) Promptly after receipt by an indemnified party under subsection (a) or
(b) above of notice of the commencement of any action, such indemnified party
shall, if a claim in respect thereof is to be made against the indemnifying
party under such subsection, notify the indemnifying party in writing of the
commencement thereof; but the omission so to notify the indemnifying party shall
not relieve it from any liability which it may have to any indemnified party
otherwise under such subsection except to the extent it has been materially
prejudiced by such failure. In case any such action shall be brought against any
indemnified party and it shall notify the indemnifying party of the commencement
thereof, the indemnifying party shall be entitled to participate therein and, to
the extent that it may elect, jointly with any other indemnifying party
similarly notified, to assume the defense thereof, with counsel reasonably
satisfactory to such indemnified party; provided, however, that if the
defendants in any such action include both the indemnified party and the
indemnifying party and the indemnified party shall have reasonably concluded
that there may be legal defenses available to it and/or other indemnified
parties which are different from or additional to those available to the
indemnifying party, the indemnified party or parties shall have the right to
select separate counsel to assert such legal defenses and to otherwise
participate in the defense of such action on behalf of such indemnified party or
parties. Upon receipt of notice from the indemnifying party to such indemnified
party of its election so to assume the defense of such action and approval of
counsel by the indemnified party, the indemnifying party shall not be liable to
such indemnified party under this Section 8 for any legal or other expenses
subsequently incurred by such indemnified party in connection with the defense
thereof unless (i) the indemnified party shall have employed

                                     - 13 -
<PAGE>

separate counsel in connection with the assertion of legal defenses in
accordance with the proviso to the immediately preceding sentence (it being
understood, however, that the indemnifying party shall not be liable for the
expenses of more than one separate counsel (in addition to local counsel) for
the indemnified party), (ii) the indemnifying party shall not have employed
counsel satisfactory to the indemnified party at the expense of the indemnifying
party to represent the indemnified party within a reasonable time after notice
of commencement of the action or (iii) the indemnifying party has authorized the
employment of counsel for the indemnified party at the expense of the
indemnifying party; and except that, if clause (i) or (iii) is applicable, such
liability shall be only in respect of the counsel referred to in such clause (i)
or (iii).

      (d) If the indemnification provided for in this Section 8 is unavailable
to or insufficient to hold harmless an indemnified party under subsection (a) or
(b) above in respect of any losses, claims, damages, liabilities or expenses (or
actions in respect thereof) referred to therein, then each indemnifying party
shall contribute to the amount paid or payable by such indemnified party as
incurred as a result of such losses, claims, damages, liabilities or expenses
(or actions in respect thereof) in such proportion as is appropriate to reflect
the relative benefits received by the Co-Issuers and the Initial Purchaser from
the offering of the Notes. If, however, the allocation provided by the
immediately preceding sentence is not permitted by applicable law, then each
indemnifying party shall contribute to such amount paid or payable by such
indemnified party in such proportion as is appropriate to reflect not only such
relative benefits but also the relative fault of the Co-Issuers on the one hand
and the Initial Purchaser on the other in connection with the statements or
omissions or breaches of representations, warranties or agreements which
resulted in such losses, claims, damages, liabilities or expenses (or actions in
respect thereof), as well as any other relevant equitable considerations. The
relative benefits received by the Co-Issuers and WCM shall be in the same
proportion as the total proceeds to the Co-Issuers from the sale of Notes and
the discounts and commissions received by WCM bear to each other. The relative
fault shall be determined by reference to, among other things, whether the
indemnified party failed to give the notice required under subsection (c) above,
including the consequences of such failure, and whether any such untrue or
alleged untrue statement of a material fact or omission or alleged omission to
state a material fact relates to information supplied by the Co-Issuers on the
one hand or by the Initial Purchaser on the other and the parties' relative
intent, knowledge, access to information and opportunity to correct or prevent
such statement, omission or breach. The Co-Issuers and the Initial Purchaser
agree that it would not be just and equitable if contribution pursuant to this
subsection (d) were determined by pro rata allocation or by any other method of
allocation which does not take account of the equitable considerations referred
to above in this subsection (d). The amount paid or payable by an indemnified
party as a result of the losses, claims, damages, liabilities or expenses (or
actions in respect thereof) referred to above in this subsection (d) shall be
deemed to include any legal or other expenses reasonably incurred by such
indemnified party in connection with investigating or defending any such action
or claim (which shall be limited as provided in subsection (c) above if the
indemnifying party has assumed the defense of any such action in accordance with
the provisions thereof). Notwithstanding the provisions of this subsection (d),
the Initial Purchaser shall not be required to contribute any amount in excess
of the amount by which the amount of the discounts and commissions received by
such Initial Purchaser exceeds the amount of any damages which such Initial
Purchaser has otherwise been required to pay by reason of such untrue or alleged
untrue statement or omission or alleged omission. No person guilty of

                                     - 14 -
<PAGE>

fraudulent misrepresentation shall be entitled to a contribution from any person
who was not guilty of such fraudulent misrepresentation.

      9. Duration, Termination and Assignment of this Agreement.

      (a) This Agreement shall become effective as of the date first written
above and shall remain in force until terminated as provided in this Section 9.

      (b) This Agreement may be terminated by WCM at any time without the
payment of any penalty by the Initial Purchaser, if there is a breach of any of
the representations, warranties, covenants or agreements of the Issuer or the
Co-Issuer hereunder or if any of the conditions set forth in Section 7 have not
been satisfied.

      (c) This Agreement may be terminated by WCM in the event that on or after
the date hereof, there shall have occurred any of the following: (i) a
suspension or material limitation in trading in securities generally on the New
York Stock Exchange or in trading of the securities of the Collateral Manager or
any affiliate of the Collateral Manager on any exchange or over-the-counter
market; (ii) a general moratorium on commercial banking activities declared by
either federal or New York State authorities; or (iii) the outbreak or
escalation of hostilities involving the United States or the declaration by the
United States of a national emergency or war, or other calamity or crisis, if
the effect of any such event specified in this clause (iii) in the judgment of
WCM makes it impracticable or inadvisable to proceed with the offering or
delivery of the Notes on the terms and in the manner contemplated by this
Agreement and in the Offering Memorandum.

      (d) The Issuer shall pay all fees and expenses in connection with the
offering and sale of the Notes from amounts standing to the credit of the
Expense Account immediately following the termination of this Agreement pursuant
to Section 9(c) hereof.

      (e) This Agreement is not assignable by any party hereto; provided,
however, that the Initial Purchaser may assign this Agreement, or any of its
rights or obligations hereunder, in writing to any of its affiliates, provided,
that the rights of the Issuer or Co-Issuer shall not be affected by such
assignment. Upon an assignment by the Initial Purchaser pursuant to this Section
9(e), such Initial Purchaser shall cause the assignee to assume in writing all
of the obligations and liabilities of the Initial Purchaser hereunder and shall
notify the Issuer and the Co-Issuer of such assignment.

      10. Notices. All communications hereunder shall be in writing and shall be
mailed, hand delivered or faxed and confirmed to the parties as follows:

               If to Wachovia Capital Markets, LLC:

               Wachovia Capital Markets, LLC
               12 East 49th Street, 45th Floor
               New York, New York 10017
               Telephone: (212) 909-0035
               Fax: (212) 909-0047
               Attention: Michelle Tan

                                     - 15 -
<PAGE>

               If to the Issuer:

               Arbor Realty Mortgage Securities Series 2004-1, Ltd.
               c/o Maples Finance Limited
               Walker House
               P.O. Box 1093 GT
               Queensgate House, South Church Street
               George Town, Grand Cayman, Cayman Islands
               Attention: The Directors
               Telephone:  (345) 945-7099
               Fax:  (345) 945-7100

               with a copy to the Collateral Manager:

               Arbor Realty Collateral Management, LLC
               333 Earle Ovington Boulevard, 9th Floor
               Uniondale, New York  11553
               Telephone:  (212) 389-6546
               Fax:  (212) 389-6573
               Attention:  Executive Vice President, Structured Securitization

               If to the Co-Issuer:

               Arbor Realty Mortgage Securities Series 2004-1 LLC
               c/o Puglisi & Associates
               830 Library Avenue, Suite 204,
               Newark, Delaware 19711
               Attention: Donald J. Puglisi
               Telephone: (302) 738-6680
               Fax: (302) 738-7210

               with a copy to the Collateral Manager (as addressed above).

      Any party hereto may change the address for receipt of communications by
giving written notice to the others.

      11. Consent to Jurisdiction. Each of the Issuer and the Co-Issuer (i)
agrees that any legal suit, action or proceeding brought by any party to enforce
any rights under or with respect to this Agreement or any other document or the
transactions contemplated hereby or thereby may be instituted in any federal
court in The City of New York, State of New York, U.S.A.; provided, however,
that if a federal court in the City of New York declines jurisdiction for any
reason, any legal suit, action or proceeding brought by any party to enforce any
rights under or with respect to this Agreement or any other document or the
transactions contemplated hereby or thereby may be instituted in any state court
in the City of New York, State of New York, U.S.A., (ii) irrevocably waives to
the fullest extent permitted by law any objection which it may now or hereafter
have to the laying of venue of any such suit, action or proceeding instituted in
the City of New York, State of New York, U.S.A., (iii) irrevocably waives to the
fullest extent permitted by law any claim that and agrees not to claim or plead
in any court that any such

                                     - 16 -
<PAGE>

action, suit or proceeding brought in a court in the City of New York, State of
New York, U.S.A. has been brought in an inconvenient forum and (iv) irrevocably
submits to the non-exclusive jurisdiction of any such court in any such suit,
action or proceeding or for recognition and enforcement of any judgment in
respect thereof.

      Each of the Issuer and the Co-Issuer hereby irrevocably and
unconditionally designates and appoints CT Corporation System, 111 8th Avenue,
13th Floor, New York, New York 10011, U.S.A. (and any successor entity), as its
authorized agent to receive and forward on its behalf service of any and all
process which may be served in any such suit, action or proceeding in any such
court and agrees that service of process upon CT Corporation shall be deemed in
every respect effective service of process upon it in any such suit, action or
proceeding and shall be taken and held to be valid personal service upon it.
Said designation and appointment shall be irrevocable. Nothing in this Section
11 shall affect the rights of the Initial Purchaser, its affiliates or any
indemnified party to serve process in any manner permitted by law. Each of the
Issuer and the Co-Issuer further agrees to take any and all action, including
the execution and filing of any and all such documents and instruments, as may
be necessary to continue such designation and appointment of CT Corporation in
full force and effect so long as the Notes are outstanding but in no event for a
period longer than five years from the date of this Agreement. Each of the
Issuer and the Co-Issuer hereby irrevocably and unconditionally authorizes and
directs CT Corporation to accept such service on their behalf. If for any reason
CT Corporation ceases to be available to act as such, each of the Issuer and the
Co-Issuer agrees to designate a new agent in New York City on the terms and for
the purposes of this provision reasonably satisfactory to the Initial Purchaser.

      To the extent that either the Issuer or the Co-Issuer has or hereafter may
acquire any immunity from jurisdiction of any court (including, without
limitation, any court in the United States, the State of New York, Cayman
Islands or any political subdivision thereof) or from any legal process (whether
through service of notice, attachment prior to judgment, attachment in aid of
execution, execution or otherwise) with respect to itself or its property or
assets, this Agreement, or any other documents or actions to enforce judgments
in respect of any thereof, it hereby irrevocably waives such immunity, and any
defense based on such immunity, in respect of its obligations under the
above-referenced documents and the transactions contemplated thereby, to the
extent permitted by law.

      12. Judgment Currency. If pursuant to a judgment or order being made or
registered against the either the Issuer or the Co-Issuer, any payment under or
in connection with this Agreement to the Initial Purchaser is made or satisfied
in a currency (the "Judgment Currency") other than in United States Dollars
then, to the extent that the payment (when converted into United States Dollars
at the rate of exchange on the date of payment or, if it is not practicable for
such Initial Purchaser to purchase United States Dollars with the Judgment
Currency on the date of payment, at the rate of exchange as soon thereafter as
it is practicable to do so) actually received by such Initial Purchaser falls
short of the amount due under the terms of this Agreement, the Issuer or the
Co-Issuer, as applicable, shall, to the extent permitted by law, as a separate
and independent obligation, indemnify and hold harmless the Initial Purchaser
against the amount of such short fall and such indemnity shall continue in full
force and effect notwithstanding any such judgment or order as aforesaid. For
the purpose of this Section, "rate of exchange" means the rate at which such
Initial Purchaser is able on the relevant date to

                                     - 17 -
<PAGE>
purchase United States Dollars with the Judgment Currency and shall take into
account any premium and other costs of exchange.

      13. Amendments to this Agreement. This Agreement may be amended by the
parties hereto only if such amendment is specifically approved in writing by the
Issuer, the Co-Issuer and by the Initial Purchaser. The Co-Issuers must provide
notice of any amendment or modification of this Agreement to each Rating Agency
rating the Notes at the time of any such amendment or modification.

      14. Parties. This Agreement shall inure to the benefit of and be binding
upon the Initial Purchaser, the Co-Issuers and their respective successors.
Nothing expressed or mentioned in this Agreement is intended or shall be
construed to give any person, firm or corporation, other than the Initial
Purchaser, the Co-Issuers and their respective successors and the controlling
persons and officers and directors referred to in Section 8, any legal or
equitable right, remedy or claim under or in respect of this Agreement or any
provisions herein contained. This Agreement and all conditions and provisions
hereof are intended to be for the sole and exclusive benefit of the Initial
Purchaser, the Co-Issuers, each of their respective affiliates and their
respective successors, and said controlling persons and officers, directors and
managers and their heirs and legal representatives, and for the benefit of no
other person, firm or corporation. No purchaser of Notes shall be deemed to be a
successor by reason merely of such purchase.

      15. Governing Law. This Agreement shall be construed in accordance with
the internal laws of the State of New York, without giving effect to the choice
of law principles thereof.

      16. Counterparts. This Agreement may be simultaneously executed in several
counterparts, each of which shall be deemed to be an original, and all such
counterparts shall together constitute but one and the same agreement.

      17. Representations, Warranties and Indemnities to Survive Delivery. The
respective representations, warranties and indemnities of the Issuer, the
Co-Issuer, of their respective officers and of the Initial Purchaser set forth
in or made pursuant to, this Agreement, including any warranty relating to the
payment of expenses owed to the Initial Purchaser hereunder shall remain in full
force and effect and shall survive delivery of and payment for the Notes and any
termination of this Agreement.

      18. No Petition Agreement. The Initial Purchaser agrees that, so long as
any Note is outstanding and for a period of one year plus one day or, if longer,
the applicable preference period then in effect after payment in full of all
amounts payable under or in respect of the transaction documents, it shall not
institute against or join or assist any other Person in instituting against, any
of the Issuer or the Co-Issuer any bankruptcy, reorganization, arrangement,
insolvency or liquidation proceedings, or other proceedings under any federal or
state bankruptcy or similar law. This Section shall survive any termination of
this Agreement.

      19. Non Recourse Agreement. Notwithstanding any other provision of this
Agreement, all obligations of the Issuer or the Co-Issuer arising hereunder or
in connection herewith are limited in recourse to the Pledged Obligations and to
the extent the proceeds of the

                                     - 18 -
<PAGE>

Pledged Obligations, when applied in accordance with the Priority of Payments,
are insufficient to meet the obligations of the Issuer or the Co-Issuer
hereunder in full, the Issuer or the Co-Issuer, as applicable, shall have no
further liability in respect of any such outstanding obligations and any claims
against the Issuer or the Co-Issuer, as applicable, shall be extinguished and
shall not thereafter revive. This Section shall survive any termination of this
Agreement.

                                     - 19 -
<PAGE>
      IN WITNESS WHEREOF, the parties hereto have executed and delivered this
Purchase Agreement as of the day and year first above written.

                                       ARBOR REALTY MORTGAGE SECURITIES
                                          SERIES 2004-1, LTD., as Issuer

                                       By:   /s/ Guy R. Milone, Jr.
                                          -------------------------
                                            Name: Guy R. Milone, Jr.
                                            Title: Authorized Signatory

                                       ARBOR REALTY MORTGAGE SECURITIES
                                          SERIES 2004-1 LLC, as Co-Issuer

                                       By:   /s/ Guy R. Milone, Jr.
                                          -------------------------
                                            Name: Guy R. Milone, Jr.
                                            Title: Authorized Signatory

                                       WACHOVIA CAPITAL MARKETS, LLC

                                       By:   /s/ Michelle Tan
                                          -------------------------
                                                Name: Michelle Tan
                                                Title: VP

<PAGE>

                                    EXHIBIT A

                     ARBOR REALTY COLLATERAL MANAGEMENT, LLC

                              Officer's Certificate

      The undersigned, ____________________, pursuant to Section 7(c) of that
certain Purchase Agreement dated as of January 19, 2005, by and among Arbor
Realty Mortgage Securities Series 2004-1, Ltd., Arbor Realty Mortgage Securities
Series 2004-1 LLC and Wachovia Capital Markets, LLC (the "Purchase Agreement")
does HEREBY CERTIFY that:

      (a) The Collateral Manager (i) has been duly organized, is validly
existing and is in good standing under the laws of the State of Delaware, (ii)
has full power and authority to own the Collateral Manager's assets and to
transact the business in which it is currently engaged, and (iii) is duly
qualified and in good standing under the laws of each jurisdiction where the
Collateral Manager's ownership or lease of property or the conduct of the
Collateral Manager's business requires, or the performance of the Collateral
Management Agreement and the Indenture would require, such qualification, except
for failures to be so qualified that would not in the aggregate have a material
adverse effect on the business, operations, assets or financial condition of the
Collateral Manager or the ability of the Collateral Manager to perform its
obligations under, or on the validity or enforceability of, the Collateral
Management Agreement and the provisions of the Indenture applicable to the
Collateral Manager; the Collateral Manager has full power and authority to
execute, deliver and perform the Collateral Management Agreement and the
Collateral Manager's obligations thereunder and the provisions of the Indenture
applicable to the Collateral Manager; the Collateral Management Agreement has
been duly authorized, executed and delivered by the Collateral Manager and
constitutes a legal, valid and binding agreement of the Collateral Manager,
enforceable against it in accordance with the terms thereof, except that the
enforceability thereof may be subject to (i) bankruptcy, insolvency,
reorganization, moratorium or other similar laws now or hereafter in effect
relating to creditors' rights and (ii) general principles of equity (regardless
of whether such enforcement is considered in a proceeding in equity or at law);

      (b) Neither the Collateral Manager nor any of its Affiliates is in
violation of any Federal or state securities law or regulation promulgated
thereunder that would have a material adverse effect upon the ability of the
Collateral Manager to perform its duties under the Collateral Management
Agreement or the Indenture, and there is no charge, investigation, action, suit
or proceeding before or by any court or regulatory agency pending or, to the
best knowledge of the Collateral Manager, threatened which could reasonably be
expected to have a material adverse effect upon the ability of the Collateral
Manager to perform its duties under the Collateral Management Agreement or the
Indenture;

      (c) Neither the execution and delivery of the Collateral Management
Agreement nor the performance by the Collateral Manager of its duties thereunder
or under the Indenture conflicts with or will violate or result in a breach or
violation of any of the terms or provisions of, or constitutes a default under:
(i) the limited liability company agreement of the Collateral Manager, (ii) the
terms of any indenture, contract, lease, mortgage, deed of trust, note

<PAGE>

agreement or other evidence of indebtedness or other agreement, obligation,
condition, covenant or instrument to which the Collateral Manager is a party or
is bound, (iii) any law, decree, order, rule or regulation applicable to the
Collateral Manager of any court or regulatory, administrative or governmental
agency, body or authority or arbitrator having jurisdiction over the Collateral
Manager or its properties, and which would have, in the case of any of (i), (ii)
or (iii) of this subsection (c), either individually or in the aggregate, a
material adverse effect on the business, operations, assets or financial
condition of the Collateral Manager or the ability of the Collateral Manager to
perform its obligations under the Collateral Management Agreement or the
Indenture;

      (d) No consent, approval, authorization or order of or declaration or
filing with any government, governmental instrumentality or court or other
person is required for the performance by the Collateral Manager of its duties
under the Collateral Management Agreement and under the Indenture, except such
as have been duly made or obtained;

      (e) The Offering Memorandum, as of the date thereof (including as of the
date of any supplement thereto) and as of the Closing Date does not contain any
untrue statement of a material fact and does not omit to state any material fact
necessary in order to make the statements therein, in light of the circumstances
under which they were made, not misleading;

      (f) On the Closing Date, there shall not have been, since the respective
dates as of which information is given in the Offering Materials, any material
adverse change or prospective material adverse change with respect to the
Issuer, the Co-Issuer or the Collateral; and

      (g) The Collateral Manager is subject to a valid exemption from
registration as a registered investment adviser under the Advisers Act.
Capitalized terms not set forth herein shall have the meaning ascribed thereto
in the Indenture.

                                     - 2 -
<PAGE>

      IN WITNESS WHEREOF, the undersigned has hereunto set his hand this 19th
day of January, 2005.

                                      ARBOR REALTY COLLATERAL
                                          MANAGEMENT, LLC

                                      By: _____________________________
                                          Name:
                                          Title:

<PAGE>

                                   SCHEDULE A

<TABLE>
<CAPTION>

               CLASS                   PURCHASE PRICE
               -----                   --------------
               <S>                     <C>
               Class A Notes

               Class B Notes

               Class C Notes

               Class D Notes

</TABLE>EXHIBIT 4.5

 

EXHIBIT 4.5

CHRONIMED INC.

1994 STOCK OPTION PLAN

Article I. Establishment and Purpose

     1.1 Establishment. Cronies Inc., a Minnesota Corporation (“Company”), hereby
establishes a stock option plan for employees and others providing services to the Company, as
described herein, which shall be known as the “1994 STOCK OPTION PLAN” (“Plan”). The Plan permits
the granting of Nonstatutory Stock Options and Incentive Stock Options.

     1.2 Purpose. The purposes of this Plan are to enhance shareholder investment by
attracting, retaining, and motivating key employees and consultants of the Company and to encourage
stock ownership by such employees and consultants by providing them with a means to acquire a
proprietary interest in the Company’s success.

Article II. Definitions

     2.1 Definitions. Unless the context clearly requires otherwise, the following terms
shall have the respective meanings set forth below, and when said meaning is intended, the term
shall be capitalized.

	 	(a)  	“Board” means the Board of Directors of the Company.
	 
	 	(b)  	“Code” means the Internal Revenue Code of 1986, as
amended.
	 
	 	(c)  	“Committee” shall mean the Committee, as specified in
Article IV hereof, appointed by the Board to administer the Plan.
	 
	 	(d)  	“Company” means Cronies Inc., a Minnesota corporation
(including any and all subsidiaries).
	 
	 	(e)  	“Consultant” means any person or entity, including an
officer or director of the company who provides services (other than as
an Employee) to the Company.
	 
	 	(f)  	“Date of Exercise” means the date the Company receives
notice by an Optionee of the exercise of an Option pursuant to section
8.1 of this Plan. Such notice shall indicate the number of shares of
Stock as to which the Optionee intends to exercise an Option.
	 
	 	(g)  	“Employee” means any person, including an officer or
director of the Company, who is employed by the Company.
	 
	 	(h)  	“Exchange Act” means the Securities and Exchange Act of
1934. as amended.

 

 

	 	(i)  	“Fair Market Value” means the closing price of the
Stock as reported by NASDAQ on the applicable day, or if there has been
no sale on that date, on the last preceding date on which a sale
occurred, or such other value of the Stock as shall be specified by the
Board.
	 
	 	(j)  	“Incentive Stock Option” means an Option granted under
this Plan which is designated as an Incentive Stock Option and is
intended to qualify as an “incentive stock option” within the meaning
of Section 422 of the Code.
	 
	 	(k)  	“Insider” means a person who is, at the time of an
Option grant hereunder, an officer, director or holder of more than ten
percent of the outstanding shares of the Stock, as defined in Section
16 of the Exchange Act.
	 
	 	(l)  	“Nonstatutory Option” means an Option granted under
this Plan which is not intended to qualify as an incentive stock option
within the meaning of Section 422 of the Code. Except as otherwise
specified herein, Nonstatutory Options may be granted at such times and
subject to such restrictions as the Board shall determine without
conforming to the statutory rules of Section 422 of the Code applicable
to incentive stock options.
	 
	 	(m)  	“Option” means the right, granted under this Plan, to
purchase Stock of the Company at the option price for a specified
period of time. For purposes of this Plan, an Option may be either an
Incentive Stock Option or a Nonstatutory Option.
	 
	 	(n)  	“Optionee” means a person to whom an Option has been
granted under the Plan.
	 
	 	(o)  	“Parent Corporation” shall have the meaning set forth
in Section 424(e) of the Code with the Company being treated as the
employer corporation for purposes of this definition.
	 
	 	(p)  	“Subsidiary Corporation” shall have the meaning set
forth in Section 424(f) of the Code with the Company being treated as
the employer corporation for purposes of this definition.
	 
	 	(q)  	“Significant Shareholder” means an individual who,
within the meaning of Section 422(b)(6)of the Code, owns Stock
possessing more than ten percent of the total combined voting power of
all classes of stock of the Company or of any Parent Corporation or
Subsidiary Corporation of the Company. In determining whether an
individual is a Significant Shareholder, an individual shall be treated
as owning Stock owned by certain relatives of the individual and
certain Stock owned by corporations in which the

2

 

	 	   	individual is a shareholder, partnerships in which the individual is
a partner, and estates or trusts of which the individual is a
beneficiary, all as provided in Section 424(d) of the Code.
	 
	 	(r)  	“Stock” means the common stock of the Company.

     2.2 Gender and Number. Except when otherwise indicated by the context, any masculine
terminology when used in this Plan also shall include the feminine gender, and the definition of
any term herein in the singular also shall include the plural.

     2.3 Severability. In the event any provision of the Plan shall be held illegal or
invalid for any reason, the illegality or invalidity shall not affect the remaining parts of the
Plan, and the Plan shall be construed and enforced as if the illegal or invalid provision had not
been included.

Article III. Eligibility and Participation

     3.1 Eligibility. All Employees are eligible to participate in this Plan and receive
Incentive Stock Options and/or Nonstatutory Options hereunder. All Consultants are eligible to
participate in this Plan and receive Nonstatutory Options hereunder.

     3.2 Actual Participation. Subject to the provisions of the Plan, the Committee may,
from time to time, select from all Employees and Consultants those to whom Options shall be granted
and shall determine the nature of and number of shares of Stock subject to each such Option.

Article IV. Administration

     4.1 The Committee. The Plan shall be administered by a Committee appointed by the
Board consisting of not fewer than two Directors who shall be appointed from time to time by, and
shall serve at the discretion of, the Board of Directors. No member of the Committee shall receive
any Option pursuant to the Plan or any similar plan of the Company or any of its subsidiaries while
serving on the Committee, or shall have received any such Option at any time within one year prior
to his or her service on the Committee, or, if different, for the time period just necessary to
fulfill the then current Rule 16b-3 requirements under the Exchange Act, except for Options granted
pursuant to a formula plan meeting the conditions of Rule 16b-3(c)(2)(ii). If for any reason the
Committee does not qualify to administer the Plan disinterestedly as contemplated by Rule 16b-3 of
the Exchange Act, or as may be required under applicable tax law to permit a deduction with respect
to certain Options issued under the Plan, the Board of Directors may appoint a new Committee so as
to comply with the disinterested administration requirements of Rule 16b-3 and such tax law.

     4.2 Authority of the Committee. The Committee shall have full power except as limited
by law or by the Articles of Incorporation or Bylaws of the Company, and subject to the provisions
herein, to determine the size and types of Options; to determine the terms and conditions of such
Options in a manner consistent with the Plan; to construe and interpret the Plan and any agreement
or instrument entered into under the Plan; to establish, amend, or waive

3

 

rules and regulations for the Plan’s administration; and (subject to the provisions of Article
12 herein) to amend the terms and conditions of any outstanding Option to the extent such terms and
conditions are within the discretion of the Committee as provided in the Plan. Further, the
Committee shall make all other determinations which may be necessary or advisable for the
administration of the Plan. As permitted by law, the Committee may delegate its authorities as
identified hereunder.

     The discretion of the Committee shall be limited to the extent necessary to retain the status
of the Committee members as “disinterested persons” pursuant to Rule 16b-3 of the Exchange Act.

     4.3 Decisions Binding. All determinations and decisions made by the Committee
pursuant to the provisions of the Plan and all related orders or resolutions of the Board of
Directors shall be final, conclusive, and binding on all persons, including the Company, its
shareholders, Employees, Consultants, Optionees, and their respective successors.

Article V. Stock Subject to the Plan

     5.1 Number. Subject to adjustment as provided in Section 5.3 herein, the total number
of shares of Stock hereby made available for grant and reserved for issuance under the Plan shall
be 750,000. The aggregate number of shares of Stock available under this Plan shall be subject to
adjustment as provided in section 5.3. The total number of shares of Stock may be authorized but
unissued shares of Stock, or shares acquired by purchase as directed by the Board from time to time
in its discretion, to be used for issuance upon exercise of Options granted hereunder.

     5.2 Lapsed Options. If an Option shall expire or terminate for any reason without
having been exercised in full, the unpurchased shares of Stock subject thereto shall (unless the
Plan shall have terminated) become available for other Options under the Plan.

     5.3 Adjustment in Capitalization. In the event of any change in the outstanding
shares of Stock by reason of a stock dividend or split, recapitalization, reclassification, or
other similar corporate change, the aggregate number of shares of Stock set forth in section 5.1
shall be appropriately adjusted by the Committee, whose determination shall be conclusive;
provided, however, that fractional shares shall be rounded to the nearest whole share. In any such
case, the number and kind of shares that are subject to any Option (including any Option
outstanding after termination of employment) and the Option price per share shall be
proportionately and appropriately adjusted without any change in the aggregate Option price to be
paid therefor upon exercise of the Option.

Article VI. Duration of the Plan

     6.1 Duration of the Plan. Subject to shareholder approval, the Plan shall be in
effect for ten years from the date of its adoption by the Committee. Any Options outstanding at the
end of said period shall remain in effect in accordance with their terms. The Plan shall terminate

4

 

before the end of said period if all Stock subject to it has been purchased pursuant to the
exercise of Options granted under the Plan.

Article VII. Terms of Stock Options

     7.1 Grant of Options. Subject to section 5.1, Options maybe granted to Employees or
Consultants at any time and from time to time as determined by the Committee; provided, however,
that Consultants may receive only Nonstatutory Options, and may not receive Incentive Stock
Options. The Committee shall have complete discretion in determining the number of shares of Stock
subject to an Option and the number of Options granted to each Optionee. In making such
determinations, the Committee may take into account the nature of services rendered by such
Employees or Consultants, their present and potential contributions to the Company, and such other
factors as the Committee in its discretion shall deem relevant. The Committee also shall determine
whether an Option is to be an Incentive Stock Option or a Nonstatutory Option.

     The aggregate Fair Market Value (determined at the date of grant) of shares of Stock with
respect to which Incentive Stock Options are exercisable for the first time by the Optionee during
any calendar year under all plans of the Company under which Incentive Stock Options may be granted
(and all such plans of any Parent Corporations and any Subsidiary Corporations of the Company)
shall not exceed $100,000.

     Nothing in this Article VII of the Plan shall be deemed to prevent the grant of Options in
excess of the maximums established by the preceding paragraph where such excess amount is treated
as a Nonstatutory Option. In no event, however, shall the number of shares of Stock with respect to
which Nonstatutory Stock Options may be granted to any Employee exceed 250,000 in any fiscal year.

     The Committee is expressly given the authority to issue amended Options with respect to shares
of Stock subject to an Option previously granted hereunder. An amended Option amends the terms of
an Option previously granted and thereby supersedes the previous Option.

     7.2 No Tandem Options. Where an Option granted under this Plan is intended to be an
Incentive Stock Option, the Option shall not contain terms pursuant to which the exercise of the
Option would affect the Optionee’s right to exercise another Option, or vice versa, such that the
Option intended to be an Incentive Stock Option would be deemed a tandem stock option within the
meaning of the regulations under Section 422 of the Code.

     7.3 Option Agreement. As determined by the Committee on the date of grant, each
Option shall be evidenced by an Option agreement (the “Option Agreement”) that includes the
nontransferability provisions of Section 10.2 hereof and specifies: whether the Option is an
Incentive Stock Option or a Nonstatutory Option; the Option price; the duration of the Option; the
number of shares of Stock to which the Option applies; any vesting or serial exercise restrictions
which the Committee may impose; and any other terms or conditions which the Committee may impose.

5

 

     All Option Agreements shall incorporate the provisions of this Plan by reference, with certain
provisions to apply depending upon whether the Option Agreement applies to an Incentive Stock
Option or to a Nonstatutory Option.

     7.4 Option Price. No Incentive Stock Option granted pursuant to this Plan shall have
an Option price that is less than the Fair Market Value of Stock on the date the Option is granted.
Incentive Stock Options granted to Significant Shareholders shall have an Option price of not less
than 110 percent of the Fair Market Value of Stock on the date of grant. The Option price for
Nonstatutory Options shall be equal to the Fair Market Value of Stock on the date the Option is
granted and shall not be subject to the restrictions applicable to Incentive Stock Options.

     7.5 Term of Options. Each Option shall expire at such time as the Committee shall
determine when it is granted, provided however that no Option shall be exercisable later than the
tenth anniversary date of its grant. By its terms, an Incentive Stock Option granted to a
Significant Shareholder shall not be exercisable after five years from the date of grant.

     7.6 Exercise of Options. Options granted under the Plan shall be exercisable at such
times and be subject to such restrictions and conditions as the Committee shall in each instance
approve, which need not be the same for all Optionees. Notwithstanding any other provision of the
Plan, however, in no event may any Option granted under this Plan to an Insider become exercisable
prior to six months following the date of its grant, or following the date upon which the Plan is
ratified, whichever is later.

     7.7 Payment. Payment for all shares of Stock shall be made at the time that an
Option, or any part thereof, is exercised, and no shares shall be issued until full payment
therefor has been made. Payment shall be made (i) in cash, or (ii) if acceptable to the Committee,
in Stock having a Fair Market Value at the time of the exercise equal to the exercise price
(provided that, in the case of an Insider, the Stock that is tendered as payment upon exercise of
the Option has been held by the Optionee for at least six months prior to its tender), or in some
other form, including a combination of the above; provided, however, in the case of an Incentive
Stock Option, that said other form of payment does not prevent the Option from qualifying for
treatment as an “incentive stock option” within the meaning of the Code. In addition, the Company
may establish a cashless exercise program in accordance with Federal Reserve Board Regulation T.

Article VIII. Written Notice, Issuance of Stock Certificates, Shareholder Privileges

     8.1 Written Notice. An Optionee wishing to exercise an Option shall give written
notice to the Chief Financial Officer of the Company, in the form and manner prescribed by the
Committee. Except for approved “cashless exercises,” full payment for the shares exercised pursuant
to the Option must accompany the written notice.

     8.2 Issuance of Stock Certificates. As soon as practicable after the receipt of
written notice and payment, the Company shall deliver to the Optionee or to a nominee of the
Optionee a certificate or certificates for the requisite number of shares of Stock. Such
certificate may bear a legend restricting transfer thereof.

6

 

     8.3 Privileges of a Shareholder. An Optionee or any other person entitled to exercise
an Option under this Plan shall not have shareholder privileges with respect to any Stock covered
by the Option until the date of issuance of a stock certificate for such stock.

Article IX. Termination of Employment

     9.1 Death. If an Optionee’s employment in the case of an Employee, or provision of
services as a Consultant, in the case of a Consultant, terminates by reason of death, the Option
may thereafter be exercised at any time prior to the expiration date of the Option or within 12
months after the date of such death, whichever period is the shorter, by the person or persons
entitled to do so under the Optionee’s will or, if the Optionee shall fail to make a testamentary
disposition of an Option or shall die intestate, the Optionee’s legal representative or
representatives. The Option shall be exercisable only to the extent that such Option was
exercisable as of the date of death.

     9.2 Termination Other Than For Cause Or Due to Death. In the event of an Optionee’s
termination of employment, in the case of an Employee, or termination of the provision of services
as a Consultant, in the case of a Consultant, other than by reason of death or for cause, the
Optionee may exercise such portion of his Option as was exercisable by him at the date of such
termination (the “Termination Date”) at any time within three (3) months of the Termination Date;
provided, however, that where the Optionee is an Employee, and is terminated due to disability
within the meaning of Code Section 422(c)(6), such Optionee may exercise such portion of any Option
as was exercisable by such Optionee on his or her Termination Date within one year of such
Termination Date. In any event, the Option cannot be exercised after the expiration of the term of
the Option. Options not exercised within the applicable period specified above shall terminate.

     In the case of an Employee, a change of duties or position within the Company or an assignment
of employment in a Subsidiary Corporation or Parent Corporation of the Company, if any, or from
such a corporation to the Company, shall not be considered a termination of employment for purposes
of this Plan. The Option Agreements may contain such provisions as the Committee shall approve with
reference to the effect of approved leaves of absence upon termination of employment.

     9.3 Termination for Cause. In the event of an Optionee’s termination of employment,
in the case of an Employee, or termination of the provision of services as a Consultant in the case
of a Consultant, which termination is by the Company for cause, any Option or Options held by such
Optionee under the Plan, to the extent not exercised before such termination, shall terminate
immediately.

Article X. Rights of Optionees

     10.1 Service. Nothing in this Plan shall interfere with or limit in any way the right
of the Company to terminate any Employee’s employment, or any Consultant’s services, at any time,
nor confer upon any Employee any right to continue in the employ of the Company, or upon any
Consultant any right to continue to provide services to the Company.

7

 

     10.2 Nontransferability. Except as otherwise determined by the Committee in the case
of Nonstatutory Options, all Options granted under this Plan shall be nontransferable by the
Optionee, other than by will or the laws of descent and distribution, and shall be exercisable
during the Optionee’s lifetime only by the Optionee.

Article XI. Optionee-Employee’s

Transfer or Leave of Absence

     11.1 Optionee-Emplovee’s Transfer or Leave of Absence. For Plan purposes –

	 	(a)  	A transfer of an Optionee who is an Employee from the
Company to a Subsidiary Corporation or Parent Corporation, or from one
such corporation to another, or
	 
	 	(b)  	a leave of absence for such an Optionee (i) which is
duly authorized in writing by the Company, and (ii) if the Optionee
holds an Incentive Stock Option, which qualifies under the applicable
regulations under the Code which apply in the case of incentive stock
options,

shall not be deemed a termination of employment. However, under no circumstances may an Optionee
exercise an Option during any leave of absence, unless authorized by the Committee.

Article XII. Amendment,

Modification, and Termination of the Plan

     12.1 Amendment Modification and Termination of the Plan. The Board may at any time
terminate, and from time to time may amend or modify the Plan, provided, however, that

	 	(a)  	no such action of the Board, without approval of the
shareholders, may –

	 	(i)  	increase the total amount of Stock that may be
purchased through Options granted under the Plan, except as provided
in section 5.1; or

	 	(ii)  	change the class of Employees or Consultants
eligible to receive Options; and

	 	(b)  	without the approval of the shareholders of the Company
(as may be required by the Code, by Section 16 of the Exchange Act, by
any national securities exchange or system on which the Stock is then
listed or reported, or by a regulatory body having jurisdiction with
respect hereto) no such termination, amendment, or modification may:

8

 

	 	(i)  	materially increase the total number of shares
that may be granted to Insiders under this Plan;

	 	(ii)  	materially modify the requirements as to
eligibility for Insiders to participate in the Plan;

	 	(iii)  	materially increase the cost of the Plan
related to Insiders or materially increase the benefits to Insiders;

	 	(iv)  	extend the period during which Options may be
granted to or exercised by Insiders;

	 	(v)  	change the provisions of the Plan regarding
Option price on grants to Insiders; or

	 	(vi)  	modify the Plan or the terms of Options in such
a way that the members of the Committee lose their status as
“disinterested persons” under Rule 16b-3 of the Exchange Act.

     12.2 Options Previously Granted. No amendment, modification, or termination of the
Plan shall in any manner adversely affect any outstanding Option under the Plan without the consent
of the Optionee holding the Option.

Article XIII. Merger, Consolidation or Acceleration Event

     13.1 Merger, Consolidation.

	 	(a)  	Subject to any required action by the shareholders, if
the Company shall be the surviving corporation in any merger or
consolidation, any Option granted hereunder shall pertain to and apply
to the securities to which a holder of the number of shares of Stock
subject to the Option would have been entitled in such merger or
consolidation.

	 	(b)  	A dissolution or a liquidation of the Company or a
merger and consolidation in which the Company is not the surviving
corporation shall cause every Option outstanding hereunder to terminate
as of the effective date of such dissolution, liquidation, merger or
consolidation. However, the Optionee either (i) shall be offered a firm
commitment whereby the resulting or surviving corporation in a merger
or consolidation will tender to the Optionee an option (the “Substitute
Option”) to purchase its shares on terms and conditions both as to
number of shares and otherwise, which will substantially preserve to
the Optionee the rights and benefits of the Option outstanding
hereunder granted by the Company, or (ii) shall have the right
immediately prior to such merger, or consolidation to exercise any
unexercised Options whether or not then exercisable, subject to the
provisions of this Plan. The Board shall have absolute and uncontrolled
discretion to determine whether the Optionee has been offered a firm

9

 

	 	   	commitment and whether the tendered Substitute Option will
substantially preserve to the Optionee the rights and benefits of
the Option outstanding hereunder. In any event, any Substitute
Option for an Incentive Stock Option shall comply with the
requirements of Code Section 424(a).

     13.2 Impact of Acceleration Event. All options granted hereunder will become fully
exercisable and vested in the event of a “Acceleration Event” as defined in Section 13.3 or a
“Potential Acceleration Event” as defined in Section 13.4.

     13.3 Definition of “Acceleration Event.” For purposes of Section 13.2, an
“Acceleration Event” means the happening of any of the following:

	 	(a)  	When any “person” as defined in Section 3(a) (9) of the
Exchange Act and as used in Sections 13(d) and 14(d) thereof, including
a “group” as defined in Section 13(d) of the Exchange Act, but
excluding the Company or any subsidiary or parent or any employee
benefit plan sponsored or maintained by the Company or any subsidiary
or parent (including any trustee of such plan acting as trustee),
directly or indirectly, becomes the “beneficial owner” (as defined in
Rule 13d-3 under the Exchange Act, as amended from time to time), of
securities of the Company representing 30 percent or more of the
combined voting power of the Company’s then outstanding securities;

	 	(b)  	When, during any period of 24 consecutive months during
the existence of the Plan, the individuals who, at the beginning of
such period, constitute the Board (“Incumbent Directors”) cease for any
reason other than death to constitute at least a majority thereof;
provided, however, that a Director who was not a Director at the
beginning of such 24-month period will be deemed to have satisfied such
24-month requirement (and be an Incumbent Director) if such Director
was elected by, or on the recommendation or, or with the approval of,
at least 60% of the Directors who then qualified as Incumbent Directors
either actually (because they were Directors at the beginning of such
24-month period) or by prior operation of this Section 13.3(b); or

	 	(c)  	The approval by the shareholders of any sale, lease,
exchange, or other transfer (in one transaction or a series of related
transactions) of all or substantially all of the assets of the Company
or the adoption of any plan or proposal for the liquidation or
dissolution of the Company.

     13.4 Definition of “Potential Acceleration Event.” For purposes of Section 13.2, a
“Potential Acceleration Event” means the approval by the Board of an agreement by the

10

 

Company the consummation of which would result in an Acceleration Event of the Company as
defined in Section 13.3.

Article XIV. Securities Registration

     14.1 Securities Registration. In the event that the Company shall deem it necessary
or desirable to register under the Securities Act of 1933, as amended, or any other applicable
statute, any Options or any Stock with respect to which an Option may be or shall have been granted
or exercised, or to qualify any such Options or Stock under the Securities Act of 1933, as amended,
or any other statute, then the Optionee shall cooperate with the Company and take such action as is
necessary to permit registration or qualification of such Options or Stock.

     Unless the Company has determined that the following representation is unnecessary, each
person exercising an Option under the Plan may be required by the Company, as a condition to the
issuance of the shares pursuant to exercise of the Option, to make a representation in writing (a)
that he or she is acquiring such shares for his or her own account for investment and not with a
view to, or for sale in connection with, the distribution of any part thereof, (b) that before any
transfer in connection with the resale of such shares, he or she will obtain the written opinion of
counsel for the Company, or other counsel acceptable to the Company, that such shares may be
transferred. The Company may also require that the certificates representing such shares contain
legends reflecting the foregoing.

Article XV. Tax Withholding

     15.1 Tax Withholding. The Company shall have the power and the right to deduct or
withhold, or require an Optionee to remit to the Company, an amount sufficient to satisfy Federal,
state, and local taxes (including the Optionee’s FICA obligation) required by law to be withheld
with respect to any grant, exercise, or payment made under or as a result of the Plan.

     15.2 Share Withholding. With respect to withholding required upon the exercise of
Options, or upon any other taxable event hereunder, Optionees may elect, subject to the approval of
the Committee, to satisfy the withholding requirement, in whole or in part, by having the Company
withhold shares having a Fair Market Value, on the date the tax is to be determined, equal to the
minimum marginal tax which could be imposed on the transaction.

     Share withholding upon the exercise of an Option will be done if the Optionee makes a signed,
written election and either of the following occurs:

	 	(a)  	The Option exercise occurs during a “window period” and
the election to use such share withholding is made at any time prior to
exercise. For this purpose, “window period” means the period beginning
on the third business day following the date of public release of the
Company’s quarterly financial information and ending after the twelfth
business day following such date. An earlier election can be revoked up
until the exercise of the Option during the window period; or

11

 

	 	(b)  	An election to withhold shares is made at least six
months before the Option is exercised. If this election is made, then
the Option can be exercised and shares may be withheld outside of the
window period.

Article XVI. Indemnification

     16.1 Indemnification. To the extent permitted by law, each person who is or shall
have been a member of the Committee or of the Board shall be indemnified and held harmless by the
Company against and from any loss, cost, liability, or expense that may be imposed upon or
reasonably incurred by him or her in connection with or resulting from any claim, action, suit, or
proceeding to which he or she may be a party or in which he or she may be involved by reason of any
action taken or failure to act under the Plan and against and from any and all amounts paid by him
or her in settlement thereof, with the Company’s approval, or paid by him or her in satisfaction of
judgment in any such action, suit, or proceeding against him or her, provided he or she shall give
the Company an opportunity, at its own expense, to handle and defend the same before he or she
undertakes to handle and defend it on his or her own behalf. The foregoing right of indemnification
shall not be exclusive of any other rights of indemnification to which such persons may be entitled
under the Company’s articles of incorporation or bylaws, as a matter of law, or otherwise, or any
power that the Company may have to indemnify them or hold them harmless.

Article XVII. Requirements of Law

     17.1 Requirements of Law. The granting of Options and the issuance of shares of Stock
upon the exercise of an Option shall be subject to all applicable laws, rules, and regulations, and
to such approvals by any governmental agencies or national securities exchanges as may be required.

     17.2 Governing Law. To the extent not preempted by federal law, the Plan, and all
agreements hereunder, shall be construed in accordance with and governed by the laws of the State
of Minnesota.

     17.3 Compliance with the Code. Incentive Stock Options granted hereunder are intended
to qualify as “incentive stock options” under Code Section 422. If any provision of this Plan is
susceptible to more than one interpretation, such interpretation shall be given thereto as is
consistent with Incentive Stock Options granted under this Plan being treated as incentive stock
options under the Code.

Article XVIII. Effective Date of Plan

     18.1 Effective Date. Subject to ratification by an affirmative vote of holders of a
majority of shares present and entitled to vote at the 1994 Annual Meeting, the Plan shall be
effective as of September 29, 1994, the date of its adoption by the Board.

12

 

Article XIX. No Obligation to Exercise Option

     19.1 No Obligation to Exercise. The granting of an Option shall impose no obligation
upon the holder thereof to exercise such Option.

13

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