Edgar Filing: AROTECH CORP

SCHEDULE 14A INFORMATION

PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES EXCHANGE ACT OF 1934

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AROTECH CORPORATION
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[AROTECH LOGO] AROTECH CORPORATION

250 West 57th Street, Suite 310
New York, New York 10107
Tel: (212) 258-3222 Fax: (212) 258-3281
http://www.arotech.com
Nasdaq National Market: ARTX
Writer's e-mail: ehrlich@arotech.com
ROBERT S. EHRLICH
CHAIRMAN, PRESIDENT AND CHIEF EXECUTIVE OFFICER

May 7, 2004

Dear Stockholder:

It is our pleasure to invite you to the 2004 Annual Meeting of
Stockholders of Arotech Corporation, a Delaware corporation, to be held on
Monday, June 14, 2004 at 10:00 a.m. local time in the Ballroom of the Shelburne
Murray Hill Hotel, 303 Lexington Avenue, New York, New York.

Whether or not you plan to attend and regardless of the number of
shares you own, it is important that your shares be represented at the meeting.
You are accordingly urged to carefully review the enclosed proxy materials and
to mark, date, sign and return the enclosed proxy card as promptly as possible
in the postage-prepaid envelope provided, or vote electronically through the
Internet (at http://www.voteproxy.com) or by telephone if you hold your shares
in your own name, to ensure your representation and the presence of a quorum at
the annual meeting. If you submit your proxy and then decide to attend the
annual meeting to vote your shares in person, you may still do so. Your proxy is
revocable in accordance with the procedures set forth in the Proxy Statement.

Sincerely,

/s/ Robert S. Ehrlich

Robert S. Ehrlich
Chairman of the Board of Directors

[AROTECH LOGO]
250 WEST 57TH STREET, SUITE 310
NEW YORK, NEW YORK 10107

---------------------------------------------------
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON JUNE 14, 2004
---------------------------------------------------

To our Stockholders:

Our Annual Meeting of Stockholders will be held in the Ballroom of the
Shelburne Murray Hill Hotel, 303 Lexington Avenue, New York, New York, on
Monday, June 14, 2004 at 10:00 a.m. local time, and thereafter as it may be
postponed or adjourned from time to time, for the following purposes:

1. To fix the number of Class III directors at three and to elect
three Class III directors for a three-year term ending in 2007 and
continuing until their successors are duly elected and qualified
(beginning on page 3).

2. To consider and act upon a proposal to ratify the appointment of
Kost, Forer, Gabbay & Kassierer, independent certified public
accountants in Israel and a member firm of Ernst & Young
International, as our independent accountants for the fiscal year
ending December 31, 2004 (beginning on page 6).

3. To consider and act upon a proposal to amend our Amended and
Restated Certificate of Incorporation to increase our authorized
common stock from 100,000,000 shares to 250,000,000 shares
(beginning on page 7).

4. To consider and act upon a proposal to amend the terms of our 1995
Non-Employee Director Stock Option Plan to increase initial grants
to new non-employee directors from 25,000 options to 50,000
options, and to increase annual grants to non-employee directors
from 10,000 options to 35,000 options (beginning on page 10).

5. To consider and act upon a proposal to approve and adopt the 2004
Stock Option and Restricted Stock Purchase Plan (beginning on page
12).

6. To act upon all other business that may properly come before the
meeting or any postponements or adjournments thereof.

Our Board of Directors has fixed the close of business on April 16,
2004 as the record date for determining which stockholders are entitled to
notice of the meeting and to vote at the meeting and any postponements or
adjournments thereof. If you are unable to be present at the meeting personally,
please mark, date, sign and return the enclosed proxy card as promptly as
possible in the postage-prepaid envelope provided, or vote electronically
through the Internet (at http://www.voteproxy.com) or by telephone if you hold

your shares in your own name. Any stockholder who grants a proxy may revoke it
at any time prior to its exercise. Also, whether or not you grant a proxy, you
may vote in person if you attend the meeting.

BY ORDER OF THE BOARD OF DIRECTORS,

/s/ Yaakov Har-Oz

Yaakov Har-Oz
New York, New York Vice President, General Counsel and Secretary
May 7, 2004

================================================================
YOUR VOTE IS IMPORTANT! PLEASE SIGN, DATE AND RETURN
YOUR PROXY FORM IN THE ENCLOSED STAMPED, SELF-
ADDRESSED ENVELOPE AS SOON AS POSSIBLE.
================================================================

[AROTECH LOGO]
250 WEST 57TH STREET, SUITE 310
NEW YORK, NEW YORK 10107

ANNUAL MEETING OF THE STOCKHOLDERS
OF AROTECH CORPORATION
TO BE HELD ON JUNE 14, 2004

----------------------
PROXY STATEMENT
----------------------

The accompanying proxy is solicited by and on behalf of the Board of
Directors of Arotech Corporation, for use at our Annual Meeting of Stockholders
and any postponements and adjournments thereof. The meeting is currently planned
to be held in the Ballroom of the Shelburne Murray Hill Hotel, 303 Lexington
Avenue, New York, New York, on Monday, June 14, 2004 at 10:00 a.m. local time,
and thereafter as it may be postponed or adjourned from time to time, for the
purposes described in the accompanying Notice of Annual Meeting of Stockholders.

Stockholders of record at the close of business on April 16, 2004 will
be entitled to vote at the annual meeting. As of April 16, 2004, there were
63,656,843 shares of our common stock outstanding held of record by 308
stockholders. Each holder of common stock is entitled to one vote per share on
each matter that comes before the annual meeting.

This proxy statement and the enclosed form of proxy to stockholders
will be mailed commencing on or about May 7, 2004. We are also mailing our
annual report for the fiscal year ended December 31, 2003 to our stockholders
along with this proxy statement.

VOTING PROCEDURES AND VOTE REQUIRED

Proxies that are properly marked, dated, and signed, or submitted
electronically via the Internet or by telephone by following the instructions on
the proxy card, and not revoked will be voted at the annual meeting in
accordance with any indicated directions. If no direction is indicated, proxies
will be voted FOR the fixing of the number of Class III directors at three and
the election of the nominees for director set forth below, FOR ratification of
the appointment of Kost, Forer, Gabbay & Kassierer, independent certified public
accountants in Israel and a member firm of Ernst & Young International, as our
independent accountants for the fiscal year ending December 31, 2004, FOR
amending our certificate of incorporation to increase our authorized share
capital from 100 million shares of common stock to 250 million shares of common
stock, FOR amending our 1995 Non-Employee Director Stock Option Plan to increase
initial grants to new directors from 25,000 options to 50,000 options, and to
increase annual grants to directors from 10,000 options to 35,000 options, FOR
approving and adopting the 2004 Employee Stock Option and Restricted Stock
Purchase Plan, and IN THE DISCRETION OF THE HOLDERS OF THE PROXIES with respect
to any other business that properly comes before the annual meeting and all
matters relating to the conduct of the annual meeting. If a broker indicates on
the enclosed proxy or its substitute that it does not have discretionary

authority as to certain shares to vote on a particular matter ("broker
non-votes"), those shares will not be considered as voting with respect to that
matter. We believe that the tabulation procedures to be followed by the
Inspector of Elections are consistent with the general requirements of Delaware
law concerning voting of shares and determination of a quorum.

You may revoke your proxy at any time before it is voted by delivering
to the Secretary of our company a written revocation or a duly executed proxy
bearing a later date than the date of the proxy being revoked (including a proxy
voted over the Internet or by telephone). Any record stockholder attending the
annual meeting in person may revoke his or her proxy and vote his or her shares
at the annual meeting.

Votes cast by proxy or in person at the annual meeting will be
tabulated by the Inspector of Elections, with the assistance of our transfer
agent. The Inspector of Elections will also determine whether or not a quorum is
present at the annual meeting. The presence of a quorum is required to transact
the business proposed to be transacted at the annual meeting. The presence in
person or by proxy of holders of a majority of the outstanding shares of our
common stock entitled to vote will constitute a quorum for the transaction of
business at the annual meeting. Abstentions and broker non-votes (as defined
above) will be counted for purposes of determining the presence or absence of a
quorum.

Directors will be elected by a plurality of the votes cast by the
holders of our common stock voting in person or by proxy at the annual meeting.
Abstentions and broker non-votes will have no effect on the vote for election of
directors.

In order to be adopted, the proposal to amend our Amended and Restated
Certificate of Incorporation to increase our authorized share capital will
require the affirmative vote of a majority of ALL OUTSTANDING SHARES OF OUR
COMMON STOCK ENTITLED TO VOTE ON THIS PROPOSAL. As a result, abstentions and
broker non-votes will have the same practical effect as a negative vote on this
proposal. The adoption of all other proposals will require the affirmative vote
of a majority of the shares present, either in person or by proxy, and entitled
to vote with respect to such proposals. Abstentions and broker non-votes will
each be counted as present for purposes of determining the presence of a quorum;
abstentions will have the same practical effect as a negative vote on these
proposals, and broker non-votes will not have any effect on the outcome of these
proposals.

The solicitation of proxies will be conducted by mail and we will bear
all attendant costs. These costs will include the expense of preparing and
mailing proxy solicitation materials for the annual meeting and reimbursements
paid to brokerage firms and others for their expenses incurred in forwarding
solicitation materials regarding the annual meeting to beneficial owners of our
common stock. We may conduct further solicitation personally, telephonically or
by facsimile through our officers, directors and employees, none of whom will
receive additional compensation for assisting with the solicitation.

We are not aware of any matters other than those described in this
proxy statement that will be acted upon at the annual meeting. In the event that
any other matters do come before the annual meeting for a stockholder vote, the

persons named as proxies in the form of proxy being delivered to you along with
this proxy statement will vote in accordance with their best judgment on those
matters.

At least ten days before the annual meeting, we will make a complete
list of the stockholders entitled to vote at the meeting open to the examination
of any stockholder for any purpose germane to the annual meeting. The list will
be open for inspection during ordinary business hours at our offices at 250 West
57th Street, Suite 310, New York, New York 10107, and will also be made
available to stockholders present at the annual meeting.

PROPOSAL NUMBER 1

ELECTION OF DIRECTORS

The annual meeting will consider the election of three Class III
directors for three-year terms that expire in 2007. Our four other directors
have terms that end in either 2005 or 2006, as indicated below. Unless
instructions are given to the contrary, each of the persons named as proxies
will vote the shares to which each proxy relates FOR the election of each of the
nominees listed below for a term of three years expiring at the annual meeting
of stockholders to be held in 2007, and until the nominee's successor is duly
elected and qualified or until the nominee's earlier death, removal or
resignation. The three nominees named below are presently serving as directors
and all of them are anticipated to be available for election and able to a
serve. However, if they should become unavailable, the proxy will be voted for
substitute nominee(s) designated by the Board. The three nominees who receive
the greatest number of votes properly cast for the election of directors will be
elected.

Our by-laws provide for a Board of one or more directors, and the
number of directors currently is fixed at seven. Our Board is composed of three
classes of similar size. The members of each class are elected in different
years, so that only one-third of the Board is elected in any single year.

Mr. Ehrlich, Mr. Wasserman (who was appointed to fill a vacancy in the
Board) and Mr. Borey (who was appointed to fill a vacancy in the Board) are
designated as Class III directors. Their term expires in 2004. Dr. Eastman and
Mr. Esses are designated as Class I directors. Their term expires in 2006.
Messrs. Rosenfeld and Miller are designated as Class II directors. Their term
expires in 2005.

The following table contains information concerning the nominees for
Class III directors and the other incumbent directors:

NAME AGE POSITION WITH AROTECH CLASS DIRECTOR SINCE
---- --- --------------------- ----- --------------

Robert S. Ehrlich (3)...... 66 Chairman of the Board, President and Chief Executive Officer III May 1991
Bert W. Wasserman(1)(2).... 71 Director III February 2003
Edward J. Borey............ 53 Director III December 2003
Dr. Jay M. Eastman(2)(4)... 59 Director I October 1993
Steven Esses(3)............ 40 Executive Vice President, Chief Operating Officer and Director I July 2002
Jack E. Rosenfeld(1)(2)(4). 65 Director II October 1993
Lawrence M. Miller(1)(3)(4) 57 Director II November 1996

----------
(1) Member of the Audit Committee.
(2) Member of the Compensation Committee.
(3) Member of the Executive Committee.
(4) Member of the Nominating Committee.

NOMINEES FOR ELECTION AS CLASS III DIRECTORS

ROBERT S. EHRLICH has been our Chairman of the Board since January 1993
and our President and Chief Executive Officer since October 2002. From May 1991
until January 1993, Mr. Ehrlich was our Vice Chairman of the Board, and from May
1991 until October 2002 he was our Chief Financial Officer. Mr. Ehrlich was a
director of Eldat, Ltd., an Israeli manufacturer of electronic shelf labels,
from June 1999 to July 2003. From 1987 to June 2003, Mr. Ehrlich served as a
director of PSC Inc. ("PSCX"), a manufacturer and marketer of laser diode bar
code scanners, and, between April 1997 and June 2003, Mr. Ehrlich was the
chairman of the board of PSCX. PSCX filed a voluntary petition for relief under
Chapter 11 of the Bankruptcy Code in November 2002; its pre-negotiated plan of
reorganization was confirmed by the Bankruptcy Court in June 2003. Mr. Ehrlich
received a B.S. and J.D. from Columbia University in New York, New York.

BERT W. WASSERMAN was added to the Board in February 2003. Mr.
Wasserman served as Executive Vice President and Chief Financial Officer of Time
Warner, Inc. from 1990 until his retirement in 1995 and served on the Board of
Directors of Time Warner, Inc. and its predecessor company, Warner
Communications, Inc. from 1981 to 1995. He joined Warner Communications, Inc. in
1966 and had been an officer of that company since 1970. Mr. Wasserman is
director of several investment companies in the Dreyfus Family of Funds and of
Informedix Holdings Inc. Mr. Wasserman is a certified public accountant; he
holds a B.A. from Baruch College in New York City and an LL.B from Brooklyn Law
School.

EDWARD J. BOREY was added to the Board in December 2003. From December
2000 to September 2003, Mr. Borey served as President, Chief Executive Officer
and a director of PSCX. PSCX filed a voluntary petition for relief under Chapter
11 of the Bankruptcy Code in November 2002; its pre-negotiated plan of
reorganization was confirmed by the Bankruptcy Court in June 2003. Prior to
joining the Company, Mr. Borey was President and CEO of TranSenda (May 2000 to
December 2000). Previously, Mr. Borey held senior positions in the automated
data collection industry. At Intermec Technologies Corporation (1995-1999), he
was Executive Vice President and Chief Operating Officer and also Senior Vice
President/General Manager of the Intermec Media subsidiary. Mr. Borey holds a
B.S. in Economics from the State University of New York, College of Oswego, an
M.A. in Public Administration from the University of Oklahoma, and an M.B.A. in
Finance from Santa Clara University.

CLASS I DIRECTORS

DR. JAY M. EASTMAN has been one of our directors since October 1993.
Since November 1991, Dr. Eastman has served as President and Chief Executive
Officer of Lucid, Inc., which is developing laser technology applications for
medical diagnosis and treatment. Dr. Eastman is also a director of Dimension
Technologies, Inc., a developer and manufacturer of 3D displays for computer and
video displays, and Centennial Technologies Inc., a manufacturer of PCMCIA
cards. From 1981 until January 1983, Dr. Eastman was Director of the University
of Rochester's Laboratory for Laser Energetics, where he was a member of the
staff from September 1975 to 1981. Dr. Eastman holds a B.S. and a Ph.D. in
Optics from the University of Rochester in New York.

STEVEN ESSES has been one of our directors since July 2002, our
Executive Vice President since January 2003 and our Chief Operating Officer
since February 2003. From 2000 until 2002, Mr. Esses was a principal with
Stillwater Capital Partners, Inc., a New York-based investment research and
advisory company (hedge fund) specializing in alternative investment strategies.
During this time, Mr. Esses also acted as an independent consultant to new and
existing businesses in the areas of finance and business development. From 1995
to 2000, Mr. Esses founded Dunkin' Donuts in Israel and held the position of
Managing Director and CEO. Prior thereto, he was Director of Retail Jewelry
Franchises with Hamilton Jewelry, and before that he served as Executive
Director of Operations for the Conway Organization, a major off-price retailer
with 17 locations.

CLASS II DIRECTORS

JACK E. ROSENFELD has been one of our directors since October 1993.
Since April 1998, Mr. Rosenfeld has been President and Chief Executive Officer
of Potpourri Collection Inc., a specialty catalog direct marketer. Mr. Rosenfeld
was President and Chief Executive Officer of Hanover Direct, Inc., formerly Horn
& Hardart Co., which operates a direct mail marketing business, from September
1990 until December 1995, and had been President and Chief Executive Officer of
its direct marketing subsidiary since May 1988. Mr. Rosenfeld holds a B.A. from
Cornell University in Ithaca, New York and an LL.B. from Harvard University in
Cambridge, Massachusetts.

LAWRENCE M. MILLER was elected to the Board in November 1996. Mr.
Miller has been a senior partner in the Washington D.C. law firm of Schwartz,
Woods and Miller since 1990. From August 1993 through May 1996, he served as a
member of the board of directors of The Phoenix Resource Companies, Inc., a
publicly traded energy exploration and production company, and as a member of
the Audit and Compensation Committee of that board. That company was merged into
Apache Corporation in May 1996. Mr. Miller holds a B.A. from Dickinson College
in Carlisle, Pennsylvania and a J.D. with honors from George Washington
University in Washington, D.C. He is a member of the District of Columbia bar.

VOTE REQUIRED

determining the presence of a quorum, but will have no effect on the vote for
election of directors.

THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR FIXING THE
NUMBER OF CLASS III DIRECTORS AT THREE AND FOR ELECTION
OF THE CLASS III NOMINEES DESCRIBED ABOVE

PROPOSAL NUMBER 2

RATIFICATION OF APPOINTMENT OF INDEPENDENT ACCOUNTANTS

Kost, Forer, Gabbay & Kassierer, independent certified public
accountants in Israel and a member firm of Ernst & Young International, have
served as our independent accountants since January 2000. The Audit Committee
has selected Kost, Forer, Gabbay & Kassierer as our independent accountants for
the fiscal year ending December 31, 2004 and has further directed that
management submit the selection of independent accountants for ratification by
the stockholders at the Annual Meeting.

Kost, Forer, Gabbay & Kassierer served as the Company's independent
accountants during the fiscal year ended December 31, 2003. Kost, Forer, Gabbay
& Kassierer's report on the financial statements for the years ended December
31, 2003 and 2002 did not contain an adverse opinion or disclaimer of opinion,
and were not qualified or modified as to uncertainty, auditing scope or
accounting principles. We do not anticipate that a representative of Kost,
Forer, Gabbay & Kassierer will be present at the Annual Meeting.

Stockholder ratification of the selection of Kost, Forer, Gabbay &
Kassierer as our independent accountants is not required by our by-laws or
otherwise. However, we are submitting the selection of Kost, Forer, Gabbay &
Kassierer to the stockholders for ratification as a matter of good corporate
practice. If the stockholders fail to ratify the selection, the Audit Committee
will reconsider whether or not to retain Kost, Forer, Gabbay & Kassierer. Even
if the selection is ratified, the Audit Committee in its discretion may direct
the appointment of a different independent accounting firm at any time during
the year if it is determined that such a change would be in the best interests
of the Company and its stockholders.

VOTE REQUIRED

The affirmative vote of a majority of the votes cast at the meeting at
which a quorum representing a majority of all outstanding shares of our common
stock is present and voting, either in person or by proxy, is required for
approval of this proposal. Abstentions and broker non-votes will each be counted
as present for purposes of determining the presence of a quorum; abstentions
will have the same practical effect as a negative vote on this proposal, and
broker non-votes will not have any effect on the outcome of this proposal.

THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR RATIFICATION OF
KOST, FORER, GABBAY & KASSIERER AS OUR INDEPENDENT ACCOUNTANTS.

PROPOSAL NUMBER 3

PROPOSED AMENDMENT TO ARTICLE FOUR OF
OUR AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
TO INCREASE THE AUTHORIZED COMMON STOCK OF THE COMPANY
FROM 100,000,000 SHARES TO 250,000,000 SHARES.

GENERAL

The Board has approved a proposed amendment to Article Four of our
Amended and Restated Certificate of Incorporation to increase the number of
shares of common stock that we are authorized to issue from 100,000,000 to
250,000,000. The Board has directed that the proposed amendment be submitted to
a vote of our stockholders at the annual meeting.

Our Amended and Restated Certificate of Incorporation currently
authorizes 101,000,000 shares of capital stock consisting of 100,000,000 shares
of common stock, $0.01 par value, and 1,000,000 shares of preferred stock, $0.01
par value. The proposed amendment would increase the authorized common stock to
250,000,000 shares. The holders of common stock are entitled to (i) one vote for
each share of common stock registered in the name of such holder, (ii) receive
dividends on their shares of stock when and as declared by the Board, and (iii)
in the event of liquidation, dissolution or the winding up of our affairs, share
pro rata in the net assets available for distribution to holders of common stock
after satisfaction of the prior claims of the holders of preferred stock of any
series or any shares of any other class of capital stock ranking senior to the
common stock as to assets, in accordance with the Amended and Restated
Certificate of Incorporation.

As of April 16, 2004, 63,656,843 shares of common stock were issued and
outstanding. In addition: 18,720,040 shares of common stock are reserved for
issuance upon the exercise of warrants, 4,898,801 shares of common stock are
reserved for issuance upon the conversion of debentures, 7,576,041 shares of
common stock are reserved for issuance upon the exercise of options that have
previously been granted under our various stock option plans (not including
1,351,612 options that have been granted contingent on stockholder approval of
the adoption of our 2004 Stock Option and Restricted Stock Purchase Plan - see
"Proposal Number 5," below), and 600,000 shares of common stock are available
for grant upon the exercise of stock options to be granted under our various
stock option plans (not including up to 7,500,000 options that would become
available for grant upon stockholder approval of the adoption of our 2004 Stock
Option and Restricted Stock Purchase Plan - see "Proposal Number 5," below). The
total potential common stock issuable upon the warrants, debentures and stock
options plans above is 31,794,882, totaling 95,451,725 shares including the
shares issued and outstanding.

The Board believes that it is in our best interests to increase the
authorized number of shares of common stock to 250,000,000 shares, which would
make available for issuance under our stock option plans as well as for issuance
in the future for other valid corporate purposes, including without limitation
future acquisitions, without further authorization of the stockholders (except
as may be required by applicable law or regulation). The Board believes that the

proposed amendment to Article Four will provide several long-term advantages to
us and our stockholders. The Board has frequently utilized options as a form of
non-cash compensation to employees and consultants. In addition, increased costs
related to our sales and marketing activities and potential acquisition
opportunities may require us to seek additional financing over the next several
years. An increase in our authorized shares would enable us to raise cash assets
through sales of common stock or other debt or equity securities convertible
into common stock to public and private investors without the need to seek
stockholder authorization at that time, which could significantly delay any such
financing. Finally, the passage of this proposal would also enable management,
with the approval of the Board, to pursue acquisitions or enter into
transactions or other business combinations which management believes provide
the potential for growth and profit.

CERTAIN EFFECTS, ADVANTAGES AND DISADVANTAGES OF THE PROPOSED AMENDMENT

The proposal, if approved, would strengthen the position of management
and might make the removal of management more difficult, even if such removal
would be generally beneficial to our stockholders. The authorization to issue
the additional shares of common stock would provide management with a capacity
to negate the efforts of unfriendly tender offerors through the issuance of
securities to others who are friendly or desirable to management. Moreover, we
currently have in place certain provisions which have an anti-takeover effect.
Under the terms of our Amended and Restated Certificate of Incorporation,
directors are elected for a term of three years, and the Board is composed of
three classes of similar size, each elected in a different year, so that only
one-third of the Board is up for election in any single year. Additionally our
Amended and Restated Certificate of Incorporation provides for blank check
preferred stock. Moreover, certain provisions of our Amended and Restated
Certificate of Incorporation permit the directors, in exercising their fiduciary
duties, including without limitation, evaluating a tender offer or exchange
offer for our stock or any merger or consolidation or any sale, lease, exchange
or transfer of all or substantially all of our assets, the acquisition of
securities of a third party or any reclassification, recapitalization or
reorganization of Arotech or any of its securities, to consider various factors,
including, among others, other constituencies such as employees, creditors,
customers and the economy. As a result of these provisions, a potential
purchaser of Arotech may be discouraged from attempting to acquire us, thereby
possibly depriving our stockholders of certain opportunities to sell or
otherwise dispose of their securities at above market prices as part of those
transactions. However, we have elected not to be governed by the provisions of
Section 203 of the General Corporation Law of the State of Delaware, an
anti-takeover statute which prohibits certain business combinations between a
Delaware corporation like us and an "interested stockholder," which is defined
as a person who, together with any of its affiliates and/or associates,
beneficially owns, directly or indirectly, 15% or more of the outstanding voting
shares of a Delaware corporation.

This Proposal is not the result of the Board's knowledge of any
specific effort to obtain control of Arotech by means of a merger, tender offer,
proxy solicitation in opposition to management or otherwise. We are not
submitting this proposal to enable us to frustrate any efforts by another party
to acquire a controlling interest in us or to seek Board representation. The
submission of this proposal is not a part of any plan by our management to adopt

a series of amendments to the Amended and Restated Certificate of Incorporation
or By-laws so as to render the takeover of Arotech more difficult.

Other than with respect to the issuance of shares in connection with
our stock option plans, including if approved by the stockholders, the Amended
and Restated Non-Employee Directors Plan, we currently have no specific plans or
proposals for the use of the additional shares, the authorization of which is
sought hereby. However, we could determine to issue additional shares at any
time. We have acquired four companies since June 2002, some of which involved
issuances of stock as part of the consideration for the acquisition and others
of which were financed in part through stock issuances, and from time to time we
evaluate proposals for further acquisitions. In the event this proposal is
passed, stockholder approval of the issuance of the 150,000,000 additional
shares of common stock will not be sought prior to the issuance of additional
securities unless such issuances relate to an increase in shares under certain
stock option plans, or to mergers, consolidations, issuances of more than 20% of
our outstanding stock under certain circumstances, or other transactions that
require stockholder approval pursuant to law, the SEC's regulations or the
Nasdaq's rules.

TEXT OF THE AMENDMENT

If this Proposal is adopted, the amended portion of Article Four of the
Amended and Restated Certificate of Incorporation will read as follows:

FOUR: The total number of shares of all classes of stock which
the Corporation shall have authority to issue is two hundred fifty-one
million (251,000,000) consisting of two classes of shares designated as
follows:

A. Two hundred fifty million (250,000,000) shares of common
stock, $0.01 par value, (the "Common Stock"); and

B. One million (1,000,000) shares of preferred stock, $0.01
par value, (the "Preferred Stock").

VOTE REQUIRED

The affirmative vote of the holders of a majority of ALL OUTSTANDING
SHARES OF OUR COMMON STOCK ENTITLED TO VOTE ON THIS PROPOSAL will be required
for approval of this proposal. As a result, abstentions and broker non-votes
will have the effect of votes against the proposal.

THE BOARD OF DIRECTORS RECOMMENDS THE APPROVAL OF PROPOSED AMENDMENT TO
ARTICLE FOUR OF THE COMPANY'S AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION TO INCREASE THE
AUTHORIZED COMMON STOCK OF THE COMPANY
FROM 100,000,000 SHARES TO 250,000,000 SHARES.

PROPOSAL NUMBER 4

APPROVAL OF AN AMENDMENT TO THE AMENDED AND RESTATED
1995 NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN

GENERAL

We believe that stock-based awards are a key component to our ability
to retain and attract high quality directors to manage our business and affairs.
Our Amended and Restated 1995 Non-Employee Director Stock Option Plan (the "1995
Plan") advances our interests by enhancing our ability to attract and retain
directors who are in a position to make significant contributions to our success
and to reward such directors for such contributions through ownership of shares
of our common stock.

The Plan currently provides that non-employee directors receive an
initial grant of options to purchase 25,000 shares of common stock upon the
effective date of the 1995 Plan or upon their election as a director.
Thereafter, these directors receive options to purchase 10,000 shares of common
stock per year of service on the Board.

The Board believes that in order to retain and attract new and existing
Board members it is necessary to increase the number of shares initially granted
to new board members and to increase the annual grant.

The Board's proposal is to increase the initial grant of options to
purchase shares of common stock to 50,000. Thereafter, non-employee directors
will receive options to purchase 35,000 shares of common stock per year of
service on the Board.

DESCRIPTION OF THE 1995 NON-EMPLOYEE DIRECTOR PLAN

The following description of the principal terms of the 1995 Plan is a
summary and is qualified in its entirety by the full text of the plan.

Administration. The 1995 Plan is administered by the Compensation
Committee. The Committee's responsibilities in respect of this plan include
adopting, amending and rescinding rules and regulations for the administration
of the 1995 Plan, interpreting the 1995 Plan, deciding any questions and
settling all controversies and disputes that may arise in connection with the
1995 Plan. Subject to the limitations of the 1995 Plan and applicable securities
laws, the Committee may waive compliance by a non-employee director with any
obligation to be performed by him under an option and waive any condition or
provision of an option. Because the 1995 Plan is a "formula" plan under the
Securities Exchange Act of 1934, non-employee directors may be members of the
committee administering the 1995 Plan. Accordingly, options to non-employee
directors are granted solely under the 1995 Plan and not under our regular stock
award plans. Each director who is not an employee of Arotech or any of its
subsidiaries will be eligible to receive options under the 1995 Plan.

Term of 1995 Plan. The 1995 Plan was approved by the Board on September
28, 1995 and was later amended on March 25, 1996. No options may be awarded

under the 1995 Plan after September 28, 2005, but the 1995 Plan shall continue
thereafter while previously awarded options remain subject to the 1995 Plan.

Shares Subject to 1995 Plan. Subject to adjustments set forth in the
1995 Plan, the aggregate number of shares of common stock available for issuance
in connection with options granted under the 1995 Plan shall be 500,000, subject
to customary adjustments for stock splits, stock dividends or similar
transactions. If any option granted under the 1995 Plan terminates without
having been exercised in full, the number of shares of common stock as to which
such option was not exercised shall be available for future grants within
certain limits under the 1995 Plan.

Terms and Conditions of Options. The 1995 Plan currently provides that
non-employee directors will receive an initial grant of options to purchase
25,000 shares of common stock upon the effective date of the 1995 Plan or upon
their election as a director. Thereafter, these directors will receive options
to purchase 10,000 shares of common stock per year of service on the Board. The
Board's proposal is to increase the initial grant of options to purchase shares
of common stock to 50,000. Thereafter, non-employee directors will receive
options to purchase 35,000 shares of common stock per year of service on the
Board.

The exercise price of each option shall be 100% of the fair market
value on the date of the grant which shall equal the closing price of the common
stock as reported on The Nasdaq National Market. The latest date on which an
option may be exercised is ten years from the date of the grant. Each grant of
options shall become exercisable in three equal installments on each of the
first, second and third anniversaries of the grant. The exercise price of
options granted under the 1995 Plan must be paid in cash, or by certified check,
bank draft or money order payable to our order, through the delivery of shares
of common stock, or by a combination of the above.

All outstanding options shall become exercisable prior to the
consummation of a merger or consolidation involving Arotech, any liquidation or
dissolution of Arotech, any sale of substantially all of our assets or any other
transaction or series of related transactions as a result of which a single
person or several persons acting in concert own a majority of our then
outstanding common stock. The Committee shall determine the exercise period for
these outstanding options, which shall not be less than 20 days prior to the
consummation of the merger, consolidation or other event. The Committee may also
accelerate the exercisability of such options in accordance with applicable
securities law, in which case, all then outstanding options not so exercised
shall terminate and cease to be exercisable. These options shall not become
exercisable in the event that (a) the holders of common stock prior to the
consummation retain or acquire securities constituting a majority of the
outstanding voting common stock of the acquiring or surviving corporation or
other entity and (b) no single person owns more than half of the voting common
stock of the acquiring or surviving corporation or other entity.

Miscellaneous. Neither adoption of the 1995 Plan nor the grant of
options to an eligible director shall confer upon any person any right to
continued status as a director with us or any subsidiary of ours or affect in
any way our right to terminate a director relationship at any time or shall

affect our right to grant to such director options that are not subject to the
1995 Plan, to issue to such directors common stock as a bonus or otherwise, or
to adopt other plans or arrangements under which common stock may be issued to
directors.

FEDERAL INCOME CONSEQUENCES

Please refer to the description of the federal income tax consequences
associated with the grant and exercise of nonstatutory stock options under
"Proposal Number 5," below.

VOTE REQUIRED

THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR AMENDMENT OF
THE AMENDED AND RESTATED 1995 NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN.

PROPOSAL NUMBER 5

APPROVAL OF THE 2004 STOCK OPTION
AND RESTRICTED STOCK PURCHASE PLAN

GENERAL

On February 9, 2004, the Board of Directors adopted the 2004 Stock
Option and Restricted Stock Purchase Plan (the "2004 Plan"), subject to the
approval of the stockholders of Arotech.

The general purpose of the 2004 Plan is to provide an incentive to our
employees and consultants, including our executive officers and employees and
consultants of our subsidiaries, by enabling them to share in the future growth
of our business. The Board of Directors believes that the granting of stock
options promotes continuity of management and increases incentive and personal
interest in the welfare of Arotech by those who are primarily responsible for
shaping and carrying out our long range plans and securing our growth and
financial success.

The Board believes that the 2004 Stock Option and Restricted Stock
Purchase Plan will advance our interests by enhancing our ability to (a) attract
and retain employees and consultants who are in a position to make significant
contributions to our success; (b) reward employees and consultants for these
contributions; and (c) encourage employees and consultants to take into account
our long-term interests through ownership of our shares.

DESCRIPTION OF THE 2004 STOCK OPTION AND RESTRICTED STOCK PURCHASE PLAN

The following description of the principal terms of the 2004 Plan is a
summary and is qualified in its entirety by the full text of the 2004 Plan,
which is attached as Appendix A hereto.

Administration. The 2004 Plan will be administered by the Compensation
Committee. The Committee may grant options and make purchase grants for shares
of common stock to eligible employees and consultants, determine the terms and
conditions of each option or purchase grant and adopt, amend and rescind rules
and regulations for the administration of the 2004 Plan. The 2004 Plan grants
the Committee the authority to grant options (both incentive stock options and
nonstatutory options) and make purchase grants to eligible employees and
consultants. Subject to the limitations of the 2004 Plan and applicable
securities laws, the Committee may waive compliance by any recipient with
respect to any obligation to be performed by such recipient. The Committee may
also exercise any right of repurchase with respect to common stock issued under
the 2004 Plan pursuant to a purchase grant. The 2004 Plan was adopted by the
Board, subject to stockholder approval, on February 9, 2004. No awards may be
made under this Plan after February 9, 2014, but the 2004 Plan shall continue
thereafter while previously granted awards remain subject to the 2004 Plan.

Employees and Consultants Eligible to Receive Options or Purchase
Grants Under the 2004 Plan. Persons eligible to receive options or purchase
grants under the 2004 Plan are those employees and consultants of Arotech and
its subsidiaries who, in the opinion of the Committee, are in a position to make
a significant contribution to our success. Directors who are not employees are
not eligible to receive awards under the 2004 Plan.

Shares Subject to the 2004 Plan. Subject to adjustments set forth in
the 2004 Plan, the aggregate number of shares of common stock available for
issuance in connection with options granted under the 2004 Plan will be
7,500,000, subject to customary adjustments for stock splits, stock dividends or
similar transactions. If any option granted under the 2004 Plan terminates
without having been exercised in full, the number of shares of common stock as
to which such option was not exercised shall be available for future grants
within certain limits under the 2004 Plan. Except as may be otherwise determined
by the Board, no employee or consultant may receive awards of or relating to
more than 1,000,000 shares of Arotech's common stock in the aggregate in any
year.

Terms and Conditions of Options. The Committee determines the exercise
price of options granted under the 2004 Plan. The Committee may determine the
exercise price of nonstatutory options at the time of grant. The exercise price
of incentive stock options, however, must be at least equal to the fair market
value per share of common stock (or 110% of fair market value in the case of
incentive options granted to a ten-percent stockholder) issuable upon exercise
of the option at the time the incentive option was granted. No option may be
exercisable for more than ten years (five years in the case of an incentive
option granted to a ten-percent stockholder) from the date of grant. Options
issued under the 2004 Plan will be exercisable at such time or times as the
Committee prescribes at the time of grant.

In the event of a consolidation or merger in which Arotech is not the
surviving corporation or which results in the acquisition of substantially all
Arotech's outstanding stock by a single person or entity or by a group of
persons and/or entities acting in concert, or in the event of the sale or
transfer of substantially all Arotech's assets, the 2004 Plan provides all
outstanding options will become exercisable unless the successor entity assumes
such options.

Generally, the option price may be paid (a) in cash or by certified
check, bank draft or money order, (b) through delivery of shares of common stock
having a fair market value equal to the purchase price, (c) through delivery of
a promissory note acceptable to the Committee or (d) a combination of these
methods. The Committee is also authorized to establish a cashless exercise
program.

No option may be transferred other than by will or by the laws of
descent and distribution, and during a recipient's lifetime an option may be
exercised only by the recipient. Options that are exercisable at the time of a
recipient's termination of service with Arotech will continue to be exercisable
for three months, unless, in the opinion of the Committee, the reasons for the
termination of employment justify terminating the recipient's exercisable
options.

Terms and Conditions of Purchase Grants. The purchase price of common
stock purchased pursuant to a restricted stock purchase grant made under the
2004 Plan must be at least equal to the fair market value of the common stock at
the time the purchase grant was made (or 110% of the fair market value in the
case of purchase grants made to ten-percent stockholders). Recipients receiving
purchase grants under the 2004 Plan may purchase the common stock subject to the
purchase grant at any time within 60 days after the purchase grant is made.

In the event of a consolidation or merger in which Arotech is not the
surviving corporation or which results in the acquisition of substantially all
Arotech's outstanding stock by a single person or entity or by a group of
persons and/or entities acting in concert, or in the event of the sale or
transfer of substantially all Arotech's assets, the 2004 Plan provides all
outstanding purchase grants will become exercisable unless the successor entity
assumes such grants.

Common stock purchased pursuant to a purchase grant may be paid for (a)
in cash, (b) by certified check, (c) by bank draft or money order, or (d) by a
promissory note. If the recipient pays for the common stock with a promissory
note, the note must meet the conditions specified in the 2004 Plan, in addition
to any other conditions which the Board may establish.

No purchase grant may be transferred other than by will or by the laws
of descent and distribution, and during a recipient's lifetime a purchase grant
may be exercised only by the recipient. Unexercised purchased grants held by a
recipient terminate upon the death of the recipient. If a recipient's employment
or consulting relationship terminates for any reason other than death, all
purchase grants held by the recipient will automatically terminate.

The Board may at any time amend the 2004 Plan for the purpose of
satisfying the requirements of the Internal Revenue Code of 1986, as amended, or
other applicable law or regulation or for any other legal purpose, provided
that, without the consent of our stockholders, the Board may not (a) increase
the number of shares available under the 2004 Plan, (b) change the group of
individuals eligible to receive options and/or purchase grants, (c) reduce the
price at which incentive options may be granted, (d) extend the time within
which options may be granted or purchase grants made, (e) alter the 2004 Plan
such that "incentive" options and purchase grants would not qualify under the
applicable provisions of the Code, or (f) adversely affect the rights of a
recipient under any option or purchase grant previously granted or made.

Special Provisions for Plan Participants Who Are Israeli Residents.
Pursuant to current Israeli tax law, each option and purchase grant, and shares
issued pursuant to each option and purchase grant made under the 2004 Plan, are
issued to, and held in trust for the benefit of the grantee by, a trustee
designated by the Board, who holds these shares in trust for a minimum of two
years. Prior to releasing any securities from the trust, the trustee must ensure
that the recipient remits an amount of money that is sufficient and necessary
for the discharge of the recipient's tax obligations with respect to such
securities, if any. Upon the sale of any securities held by the trust for the
benefit of a recipient, we must withhold from the proceeds of such sale all
applicable taxes and remit the amount withheld to the appropriate Israeli tax
authority. Each recipient who has shares held by the trust is entitled to
receive dividends with respect thereto and to vote those shares of common stock.

FEDERAL INCOME CONSEQUENCES

Following is a summary of the federal income tax consequences of option
grants under the 2004 Plan. Optionees and recipients of other awards granted
under the 2004 Plan are advised to consult their personal tax advisors before
exercising an option or award or disposing of any stock received pursuant to the
exercise of an option or award. In addition, the following summary is based upon
an analysis of the Internal Revenue Code of 1986, as amended (the "Code") as
currently in effect, existing laws, judicial decisions, administrative rulings,
regulations and proposed regulations, all of which are subject to change and
does not address state, local or other tax laws.

TREATMENT OF OPTIONS

The Code treats incentive stock options and nonstatutory stock options
differently. However, as to both types of options, no income will be recognized
to the optionee at the time of the grant of the options under the 2004 Plan, nor
will Arotech be entitled to a tax deduction at that time.

Generally, upon exercise of a nonstatutory stock option, an optionee
will recognize ordinary income tax on the excess of the fair market value of the
stock on the exercise date over the option price. Arotech will be entitled to a
tax deduction in an amount equal to the ordinary income recognized by the
optionee in the fiscal year which includes the end of the optionee's taxable
year. Arotech will be required to satisfy applicable withholding requirements in
order to be entitled to a tax deduction. In general, if an optionee, in

exercising a nonstatutory stock option, tenders shares of common stock of
Arotech in partial or full payment of the option price, no gain or loss will be
recognized on the tender. However, if the tendered shares were previously
acquired upon the exercise of an incentive stock option and the tender is within
two years from the date of grant or one year after the date of exercise of the
incentive stock option, the tender will be a disqualifying disposition of the
shares acquired upon exercise of the incentive stock option.

For incentive stock options, there is no taxable income to an optionee
at the time of exercise. However, the excess of the fair market value of the
stock on the date of exercise over the exercise price will be taken into account
in determining whether the "alternative minimum tax" will apply for the year of
exercise. If the shares acquired upon exercise are held until at least two years
form the date of grant and more than one year from the date of exercise, any
gain or loss upon the sale of such shares, if held as capital assets, will be
long-term capital gain or loss (measured by the difference between the sales
price of the stock and the exercise price). Under current federal income tax
law, a long-term capital gain will be taxed at a rate which is less than the
maximum rate of tax on ordinary income. If the two-year and one year holding
period requirements are not met (a "disqualifying disposition"), an optionee
will recognize ordinary income in the year of disposition in an amount equal to
the lesser of (i) the fair market value of the stock on the date of exercise
minus the exercise price or (ii) the amount realized on disposition minus the
exercise price. The remainder of the gain will be treated as long-term capital
gain, depending upon whether the stock has been held for more than a year. If an
optionee makes a disqualifying disposition, Arotech will be entitled to a tax
deduction equal to the amount of ordinary income recognized by the optionee.

In general, if an optionee, in exercising an incentive stock option,
tenders shares of common stock in partial or full payment of the option price,
no gain or loss will be recognized on the tender. However, if the tendered
shares were previously acquired upon the exercise of another incentive stock
option and the tender is within two years from the date of grant or one year
after the date of exercise of the other option, the tender will be a
disqualifying disposition of the shares acquired upon exercise of the other
option.

As noted above, the exercise of an incentive stock option could subject
an optionee to the alternative minimum tax. The application of the alternative
minimum tax to any particular optionee depends upon the particular facts and
circumstances which exist with respect to the optionee in the year of exercise.
However, as a general rule, the amount by which the fair market value of the
common stock on the date of exercise of an option exceeds the exercise price of
the option will constitute an item of "adjustment" for purposes of determining
the alternative minimum taxable income on which the alternative tax may be
imposed. As such, this item will enter into the tax base on which the
alternative minimum tax is computed, and may therefore cause the alternative
minimum tax to become applicable in any given year.

POTENTIAL LIMITATION ON COMPANY DEDUCTIONS

Code Section 162(m) denies a deduction to any publicly held corporation
for compensation paid to certain "covered employees" in a taxable year to the
extent that compensation exceeds $1 million for a covered employee. It is
possible that compensation attributable to stock options granted in the future

under the 2004 Plan, when combined with all other types of compensation received
by a covered employee from Arotech, may cause this limitation to be exceeded in
any particular year. Certain kinds of compensation, including qualified
"performance-based compensation," are disregarded for purposes of the deduction
limitation. In accordance with Treasury regulations issued under Code Section
162(m), compensation attributable to stock options will qualify as
performance-based compensation, provided that: (i) the stock award plan contains
a per-employee limitation on the number of shares for which stock options may be
granted during a specified period; (ii) the per-employee limitation is approved
by the stockholders; (iii) the award is granted by a compensation committee
comprised solely of "outside directors"; and (iv) the exercise price of the
award is no less than the fair market value of the stock on the date of grant.

TAX WITHHOLDING

Arotech, as and when appropriate, shall have the right to require each
optionee purchasing shares of common stock to pay any federal, state or local
taxes required by law to be withheld.

OPTIONS GRANTED UNDER THE 2004 PLAN SUBJECT TO STOCKHOLDER APPROVAL

The 2004 Plan was adopted by the Board of Directors on February 9,
2004, subject to stockholder approval. An aggregate of 1,351,612 stock options
have been granted under the 2004 Plan at an average exercise price of $1.25 per
share, based on the then-prevailing fair market value of our stock. None of
these options was granted to executive employees. These grants were made subject
to stockholder approval of the 2004 Plan.

The following table sets forth information with respect to these
options:

OPTION GRANTS UNDER THE 2004 PLAN

WEIGHTED POTENTIAL REALIZABLE VALUE
NUMBER OF AVERAGE OF ASSUMED ANNUAL RATES
SECURITIES EXERCISE OF STOCK PRICE APPRECIATION
UNDERLYING OR BASE FOR OPTION TERM(1)
OPTIONS PRICE ----------------------------
NAME GRANTED ($/SH) 5% ($) 10% ($)
-------------------------------------- ----------- ----------- ------------- ------------

All employees who are not executive
officers, as a group............... 1,351,612 $1.25 $ 466,782 $1,031,466

----------
(1) Calculated by multiplying the exercise price by an annual appreciation rate
of 5% and 10%, respectively (and compounded for the term of the options),
subtracting the exercise price per share and multiplying the gain per share
by the number of shares covered by the options. The 5% and 10% rates of
appreciation are mandated by the rules of the Securities and Exchange
Commission and do not represent our estimate or projection of future
increases in the price of our stock. There can be no assurance that the
amounts reflected in this table will be achieved, and unless the market
price of our common stock appreciates over the option term, no value will
be realized from the option grants made to the executive officers.

Future grants under the 2004 Plan have not yet been determined.

VOTE REQUIRED

THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR
ADOPTION OF THE 2004 STOCK OPTION AND RESTRICTED STOCK PURCHASE PLAN.

CORPORATE GOVERNANCE

We operate within a corporate governance plan for the purpose of
defining responsibilities, setting high standards of professional and personal
conduct, and assuring compliance with such responsibilities and standards. We
monitor developments in the area of corporate governance. The Board has
initiated actions consistent with the Sarbanes-Oxley Act of 2002, the Securities
and Exchange Commission and The Nasdaq Stock Market.

In the fiscal year ending December 31, 2003, the Board held nine
meetings. All directors attended at least 75% of the aggregate number of
meetings of the Board and meetings of the committees of the Board on which such
director serves.

As of January 1, 2004, members of the Board of Directors satisfy the
applicable independent director requirements of both the Securities and Exchange
Commission and Rule 4200 of The Nasdaq Stock Market. Our non-management
directors meet regularly in executive session separate from management.

It is our policy that each of our directors is invited and encouraged
to attend our annual meeting of stockholders. All of our directors attended our
2003 annual meeting of stockholders.

Our board of directors has an Audit Committee, a Compensation
Committee, a Nominating Committee and an Executive Committee. The composition of
the various committees of the board of directors is as follows (the name of the
chairman of each committee appears in italics):

AUDIT COMMITTEE COMPENSATION COMMITTEE NOMINATING COMMITTEE EXECUTIVE COMMITTEE
--------------- ---------------------- -------------------- -------------------

Bert W. Wasserman Jay M. Eastman Jack E. Rosenfeld Robert S. Ehrlich
Lawrence M. Miller Jack E. Rosenfeld Lawrence M. Miller Steven Esses
Jack E. Rosenfeld Bert W. Wasserman Jay M. Eastman Lawrence M. Miller

EXECUTIVE COMMITTEE

The Executive Committee, created in July 2001, exercises the powers of
the Board during the intervals between meetings of the Board, in the management
of our property, business and affairs (except with respect to certain
extraordinary transactions).

The Executive Committee consists of Messrs. Ehrlich (Chair), Miller and
Esses.

The Executive Committee held three meetings during the fiscal year
ending December 31, 2003.

AUDIT COMMITTEE

Created in December 1993, the purpose of the Audit Committee is to
review with management and our independent auditors the scope and results of the
annual audit, the nature of any other services provided by the independent
auditors, changes in the accounting principles applied to the presentation of
our financial statements, and any comments by the independent auditors on our
policies and procedures with respect to internal accounting, auditing and
financial controls. The Audit Committee was established in accordance with
Section 3(a)(58)(A) of the Securities Exchange Act of 1934, as amended. In
addition, the Audit Committee is charged with the responsibility for making
decisions on the engagement, compensation, retention and oversight of the work
of our independent auditors.

The Audit Committee consists of Messrs. Wasserman (Chair), Miller and
Rosenfeld. Each member of the Audit Committee is an "independent director," as
that term is defined in Rule 4200(a)(14) of the listing standards of the
National Association of Securities Dealers (NASD) and under Item 7(d)(3)(iv) of
Schedule 14A of the proxy rules under the Exchange Act. All Audit Committee
members possess the required level of financial literacy. Mr. Wasserman has been
designated as the "Audit Committee's Financial Expert." The Audit Committee
operates under a formal charter that governs its duties, which charter is
publicly available through a hyperlink located on the investor relations page of
our website, at http://www.arotech.com/compro/investor.html.

The Audit Committee held six meetings during the fiscal year ending
December 31, 2003.

COMPENSATION COMMITTEE

The Compensation Committee was established in December 1993. The duties
of the Compensation Committee are to recommend compensation arrangements for our
executive officers and review annual compensation arrangements for all other
officers and significant employees.

The Compensation Committee consists of Dr. Eastman (Chairman) and
Messrs. Rosenfeld and Wasserman. Each member of the Compensation Committee is an
independent director as that term is defined in the NASD listing standards.

The Compensation Committee held six meetings during the fiscal year
ending December 31, 2003.

NOMINATING COMMITTEE

The Nominating Committee, created in February 2003, identifies and
proposes candidates to serve as members of the Board of Directors. Proposed
nominees for membership on the Board of Directors submitted in writing by

stockholders to Arotech's Secretary will be brought to the attention of the
Nominating Committee.

The Nominating Committee held no meetings during the fiscal year ending
December 31, 2003.

The Nominating Committee consists of Mr. Rosenfeld (Chair), Mr. Miller
and Dr. Eastman. Each member of the Nominating Committee is an independent
director as that term is defined in the NASD listing standards. The Nominating
Committee makes recommendations to the Board of Directors regarding new
directors to be selected for membership on the Board of Directors and its
various committees. The Nominating Committee operates under a formal charter
that governs its duties. The Nominating Committee's charter is publicly
available through a hyperlink located on the investor relations page of our
website, at http://www.arotech.com/compro/investor.html.

POLICIES REGARDING DIRECTOR QUALIFICATIONS

The Board has adopted policies regarding director qualifications. To be
considered for nomination as a director, any candidate must meet the following
minimum criteria:

a. Ability and willingness to undertake a strategic governance
role, clear and distinct from the operating role of management.

b. High-level leadership experience in business, government, or
other major complex professional or non-profit organizations that would
have exposed the individual to the challenges of leadership and governance
in a dynamic and highly competitive marketplace.

c. Highly accomplished in their respective field, with superior
credentials and recognition.

d. Demonstrated understanding of the elements and issues relevant
to the success of a large publicly-traded company in the current volatile
business, legal and governance environment.

e. Demonstrated business acumen and creative/strategic thinking
ability.

f. Personal Characteristics:

>> Ability and willingness to contribute special
competencies to the Board in a collaborative manner.
The areas of expertise required at any point in time
may vary, based on the existing composition of the
Board. They may include, but would not be limited to,
capabilities honed as a CEO or a senior functional
leader in operations, finance, information technology,
marketing, organizational development, and experience
making step change to transform a business.

>> Personal integrity and highest ethical character.
Absence of any conflicts of interest, either real or
perceived.

>> Willingness to apply sound and independent business
judgment, enriching management and Board proposals or
challenging them constructively as appropriate.

>> Willing to exert influence through strong influence
skills and constructive teamwork. This is essential to
effective collaboration with other directors as well as
providing constructive counsel to the CEO.

>> Understanding of and full commitment to our governance
principles and the obligation of each director to
contribute to good governance, corporate citizenship,
and corporate image for Arotech.

>> Willingness to devote the time necessary to assume
broad fiduciary responsibility and to participate fully
in Arotech governance requirements with appropriate due
diligence and attention.

In this regard, each nominee will be asked to disclose the boards of
directors on which he or she currently sits, and each current director will be
asked to inform the Nominating Committee of additional corporate board
nominations (both for-profit and non-profit). This notification is to ensure
appropriate dialogue about the impact of the added responsibilities on the
individual's availability to perform thoroughly his or her duties as an Arotech
director.

The Board of Directors will consist of a majority of people who are
active, primarily in business roles, and selected retired individuals. Those
active in the business community will bring the most current business thinking,
and retirees will bring their long experience and seasoned business judgment.
Every effort will be made to achieve diversity in the Board's membership.

From time to time, the particular capabilities needed to round out the
total Board's portfolio of competencies may vary. The Nominating Committee is
empowered to consider the demographics of the total Board as it considers the
requirements for each Board vacancy and to identify particular unique
capabilities needed at that point in time.

POLICIES REGARDING DIRECTOR NOMINATIONS

The Board's Nominating Committee is responsible for the Board of
Director's nomination process. New candidates for the Board of Directors may be
sourced by existing directors, a third party search firm (paid for its
professional services) or may be recommended by stockholders. In considering new
candidates submitted by stockholders, the Nominating Committee will take into
consideration the needs of the Board of Directors and the qualifications of the
candidate. However, all director nominees will be evaluated against the same
standards and in the same objective manner, based on competencies and personal
characteristics listed above, regardless of how they were sourced. To have a

candidate considered by the Nominating Committee, a stockholder must submit the
recommendation in writing and must include the following information:

>> The name of the stockholder and evidence of the person's
ownership of our stock, including the number of shares owned and
the length of time of ownership; and

>> The name of the candidate, the candidate's resume or a listing of
his or her qualifications to be a director of Arotech and the
person's consent to be named as a director if selected by the
Nominating Committee and nominated by the Board of Directors.

The stockholder recommendation and information described above must be
sent to Arotech's Secretary at 250 West 57th Street, Suite 310, New York, New
York 10107, and must be received by Arotech's Secretary not less than 120 days
prior to the anniversary date of our most recent annual meeting of stockholders.

Once a person has been identified by the Nominating Committee as a
potential candidate, the Committee may collect and review publicly available
information regarding the person to assess whether the person should be
considered further. If the Nominating Committee determines that the candidate
warrants further consideration, the Chairman or another member of the Committee
will contact the person. Generally, if the person expresses a willingness to be
considered and to serve on the Board of Directors, the Nominating Committee will
request information from the candidate, review the person's accomplishments and
qualifications, including in light of any other candidates that the Committee
might be considering, and conduct one or more interviews with the candidate. In
certain instances, Committee members may contact one or more references provided
by the candidate or may contact other members of the business community or other
persons that may have greater first-hand knowledge of the candidate's
accomplishments. The Committee's evaluation process does not vary based on
whether or not a candidate is recommended by a stockholder, although, the Board
of Directors may take into consideration the number of shares held by the
recommending stockholder and the length of time that such shares have been held.

CODES OF ETHICS

We have adopted a Code of Ethics, as required by Nasdaq listing
standards and the rules of the SEC, that applies to our principal executive
officer, our principal financial officer, and our principal accounting officer,
as well as a more general code of conduct that applies to our other directors,
officers and employees. The Code of Ethics is publicly available through a
hyperlink located on the investor relations page of our website, at
http://www.arotech.com/compro/investor.html. If we make substantive amendments
to the Code of Ethics or grant any waiver, including any implicit waiver, that
applies to anyone subject to the Code of Ethics, we will disclose the nature of
such amendment or waiver on the website or in a report on Form 8-K in accordance
with applicable Nasdaq and SEC rules.

COMPENSATION AND OTHER MATTERS

DIRECTOR COMPENSATION

Non-employee members of our Board of Directors are paid $2,500 (plus
expenses) for each Board of Directors meeting attended, $2,000 (plus expenses)
for each meeting of the Audit Committee of the Board of Directors attended, and
$1,000 (plus expenses) for each meeting of all other committees of the Board of
Directors attended. In addition, we have adopted a Non-Employee Director Stock
Option Plan pursuant to which non-employee directors receive an initial grant of
options to purchase 25,000 shares of our common stock upon the effective date of
such plan or upon the date of his or her election as a director. Thereafter,
non-employee directors will receive options to purchase 10,000 shares of our
common stock for each year of service on the Board. All such options are granted
at fair market value and vest ratably over three years from the date of the
grant. We are submitting for the approval of our stockholders an amendment to
our 1995 Plan to increase the initial grant to new non-employee directors to
50,000 options and to increase annual grants to non-employee directors to 35,000
options. See "Proposal Number 4," above.

EXECUTIVE OFFICER COMPENSATION

GENERAL

Our Chief Executive Officer and the other highest paid executive
officers (of which there were two) who were compensated at a rate of more than
$100,000 in salary and bonuses during the year ended December 31, 2003
(collectively, the "Named Executive Officers") are Israeli residents, and thus
certain elements of the compensation that we pay them is structured as is
customary in Israel.

During 2003, 2002 and 2001, compensation to our Named Executive
Officers took several forms:

>> cash salary;

>> bonus, some of which was paid in cash in the year in which it was
earned and some of which was accrued in the year in which it was
earned but paid in cash in a subsequent year; >> cash
reimbursement for taxes paid by the Named Executive Officer and
reimbursed by us in accordance with Israeli tax regulations;

>> accruals (but not cash payments) in respect of contractual
termination compensation in excess of the Israeli statutory
minimum;

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

>> stock options, including options issued in exchange for a waiver
of salary under the "options-for-salary" program discussed in
more detail below; and

>> other benefits, primarily consisting of annual statutory holiday
pay.

The specific amounts of each form of compensation paid to each Named
Executive Officer appear in the summary compensation table and the notes thereto
appearing under "Summary Compensation Table," below.

SUMMARY COMPENSATION TABLE

The following table, which should be read in conjunction with the
explanations provided above, shows the compensation that we paid (or accrued),
in connection with services rendered for 2003, 2002 and 2001, to our Named
Executive Officers.

SUMMARY COMPENSATION TABLE(1)

LONG TERM ALL OTHER
ANNUAL COMPENSATION COMPENSATION COMPENSATION
------------------------------------- ------------ -----------------------------------------
CHANGES IN
ACCRUALS FOR
SICK DAYS, PAYMENT TO
SECURITIES VACATION DAYS, PENSION AND
TAX UNDERLYING AND TERMINATION EDUCATION
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS REIMBURSEMENT OPTIONS COMPENSATION FUNDS OTHERS
--------------------------- ---- --------- ----------- ------------- ------------ --------------- ---------- ------------

Robert S. Ehrlich 2003 $ 259,989 $ 99,750(2) $ 27,211 2,035,000 $ 80,713(3) $ 48,228 $ 678
Chairman of the Board, 2002 $ 202,962 $ 99,750 $ 15,232 262,500(4) $ 170,691(5) $ 22,256 $ 654
President, Chief 2001 $ 211,644 $ 84,000 $ 17,201 521,000(6) $ 229,800(7) $ 52,841 $ 87,113(8)
Executive Officer and
director

Steven Esses 2003 $ 0 $ 0 $ 0 1,035,000 $ 0 $ 0 $ 0
Executive Vice President, 2002 $ 0 $ 0 $ 0 0 $ 0 $ 0 $ 120,480(9)
Chief Operating Officer 2001 $ 0 $ 0 $ 0 0 $ 0 $ 0 $ 0
and director*

Avihai Shen 2003 $ 123,988 $ 0 $ 8,653 608,750 $ 6,471(10) $ 23,133 $ 463
Vice President - Finance 2002 $ 93,641 $ 0 $ 18,857 48,935 $ 9,847(11) $ 20,394 $ 6,894(12)
and Chief Financial 2001 $ 82,019 $ 0 $ 8,804 43,749 $ 1,629(13) $ 15,956 $ 674
Officer

----------
* Mr. Esses became an officer in January 2003. His compensation as an officer
during 2003 consisted solely of stock options. Prior to January 2003, Mr.
Esses was a director (from July 2002), in which position he received
certain compensation as a consultant, in addition to the stock options and
per-meeting fees payable to directors generally (which is not reflected
above).

(1) We paid the amounts reported for each named executive officer in U.S.
dollars and/or New Israeli Shekels (NIS). We have translated amounts paid
in NIS into U.S. dollars at the exchange rate of NIS into U.S. dollars at
the time of payment or accrual.

(2) We paid Mr. Ehrlich $67,370 during 2003 in satisfaction of the remainder of
bonuses from 2002 to which he was entitled according to his contract.
Additionally, we accrued $99,750 for Mr. Ehrlich in satisfaction of the
2003 bonus to which he was entitled according to his contract.

(3) Of this amount, $92,075 represents our accrual for severance pay that would
be payable to Mr. Ehrlich upon a "change of control" or upon the occurrence
of certain other events; $3,451 represents the increase of the accrual for
sick leave and vacation redeemable by Mr. Ehrlich; and $(14,813) represents
the decrease of our accrual for severance pay that would be payable to Mr.
Ehrlich under the laws of the State of Israel if we were to terminate his
employment.

(4) Of this amount, 262,500 options were in exchange for a total of $105,000 in
salary waived by Mr. Ehrlich during 2002 pursuant to the options-for-salary
program instituted by us beginning in May 2001. See "Options-for-Salary
Program," below.

(5) Of this amount, $109,935 represents our accrual for severance pay that
would be payable to Mr. Ehrlich upon a "change of control" or upon the
occurrence of certain other events; $17,571 represents the increase of the
accrual for sick leave and vacation redeemable by Mr. Ehrlich; and $43,725
represents the increase of our accrual for severance pay that would be
payable to Mr. Ehrlich under the laws of the State of Israel if we were to
terminate his employment.

(6) Of this amount, 80,000 options were in exchange for a total of $32,000 in
salary waived by Mr. Ehrlich during 2001 pursuant to the options-for-salary
program instituted by us beginning in May 2001. See "Options-for-Salary
Program," below.

(7) Of this amount, $172,360 represents our accrual for severance pay that
would be payable to Mr. Ehrlich upon a "change of control" or upon the
occurrence of certain other events; $50,548 represents the increase of the
accrual for sick leave and vacation redeemable by Mr. Ehrlich; and $6,892
represents the increase of our accrual for severance pay that would be
payable to Mr. Ehrlich under the laws of the State of Israel if we were to
terminate his employment.

(8) Of this amount, $86,434 represents benefit imputed to Mr. Ehrlich upon the
purchase by us of certain of his shares for treasury, and $679 represents
other benefits that we paid to Mr. Ehrlich in 2001. See "Certain
Relationships and Related Transactions - Officer Loans," below.

(9) Represents consulting fees paid in 2002.

(10) Of this amount, $8,369 represents the increase of the accrual for vacation
redeemable by Mr. Shen; and $(1,628) represents the decrease of our accrual
for severance pay that would be payable to Mr. Shen under the laws of the
State of Israel if we were to terminate his employment.

(11) Of this amount, $1,062 represents the increase of the accrual for vacation
redeemable by Mr. Shen; and $8,785 represents the increase of our accrual
for severance pay that would be payable to Mr. Shen under the laws of the
State of Israel if we were to terminate his employment.

(12) Of this amount, $6,500 represents the value of shares issued to Mr. Shen as
a stock bonus and $394 represents other benefits that we paid to Mr. Shen
in 2002.

(13) Of this amount, $(1.099) represents the decrease of the accrual for
vacation redeemable by Mr. Shen; and $2,728 represents the increase of our
accrual for severance pay that would be payable to Mr. Shen under the laws
of the State of Israel if we were to terminate his employment.

EXECUTIVE LOANS

In 1999, 2000 and 2002, we extended certain loans to our Named
Executive Officers. These loans are summarized in the following table, and are
further described under "Certain Relationships and Related Transactions -
Officer Loans," below.

ORIGINAL AMOUNT
PRINCIPAL OUTSTANDING
NAME OF BORROWER DATE OF LOAN AMOUNT OF LOAN AS OF 12/31/03 TERMS OF LOAN
---------------- ------------ -------------- -------------- -------------

Robert S. Ehrlich....... 12/28/99 $ 167,975 $ 201,570 Ten-year non-recourse loan to purchase our
stock, secured by the shares of stock
purchased.
Robert S. Ehrlich....... 02/09/00 $ 789,991 $ 657,146 Twenty-five-year non-recourse loan to
purchase our stock, secured by the
shares of stock purchased.
Robert S. Ehrlich....... 06/10/02 $ 36,500 $ 37,810 Twenty-five-year non-recourse loan to
purchase our stock, secured by the
shares of stock purchased.

OPTIONS-FOR-SALARY PROGRAM

Between May 2001 and December 2002, we conducted an options-for-salary
program designed to conserve our cash and to offer incentives to employees to
remain with us despite lower cash compensation. Under this program, most of our
salaried employees permanently waived a portion of their salaries in exchange
for options to purchase shares of our common stock, at a ratio of options to
purchase 2.5 shares of our stock for each dollar in salary waived. Social
benefits (such as pension) and contractual bonuses for such employees continued
to be calculated based on their salaries prior to reduction. The
options-for-salary program was ended on December 31, 2002.

During 2001, options were accrued quarterly in advance, but since no
employees requested the grant of their options during the third quarter, all
grants were deferred to the beginning of the fourth quarter, during the month of
October. During 2002, options were accrued quarterly in advance for the Named
Executive Officers, and annually in advance for other employees.

During 2001, in exchange for waiver of $265,597 in salary, our
employees other than the Named Executive Officers received a total of 663,992
options, which options were granted based on the lowest closing price of our
common stock during the month of October 2001 ($1.30). Named Executive Officers,
in exchange for waiver of $40,699 in salary, received a total of 101,747 options
during 2001, which options were granted based on the lowest closing prices of
our common stock during the month of October 2001 ($1.30), as set forth in the
table below.

During 2002, in exchange for waiver of $364,209 in salary, our
employees other than the Named Executive Officers received a total of 910,522
options, which options were granted based on the lowest closing price of our
common stock during the month of December 2002 ($0.61). Named Executive
Officers, in exchange for waiver of $119,774 in salary, received a total of
299,435 options during 2002, which options were granted based on the lowest
closing prices of our common stock during each quarter of 2002, as set forth in
the table below.

Following is a table setting forth the number of options that we issued
to each of our Named Executive Officers under the options-for-salary program
during each fiscal quarter in which the program was in effect, and the range of
trading prices for our common stock during each such fiscal quarter:

LOW TRADING CLOSING
FISCAL AMOUNT OF NUMBER OF NUMBER OF AVERAGE PRICE HIGH TRADING PRICE
QUARTER SALARY OPTIONS OPTIONS EXERCISE DURING PRICE DURING ON LAST DAY
NAMED EXECUTIVE OFFICER ENDED WAIVED ACCRUED ISSUED PRICE QUARTER QUARTER OF QUARTER
----------------------- -------- ---------- ---------- --------- -------- ----------- ------------ -----------

Robert S. Ehrlich...... 06/30/01 $ 8,000 20,000 0 -- $2.18 $4.20 $2.54
09/30/01 $ 12,000 30,000 0 -- $1.10 $3.05 $1.48
12/31/01 $ 12,000 30,000 80,000 $1.30 $1.30 $2.48 $1.66
03/31/02 $ 26,250 65,625 65,625 $1.42 $1.35 $2.41 $1.55
06/30/02 $ 26,250 65,625 65,625 $0.73 $0.73 $1.79 $0.91
09/30/02 $ 26,250 65,625 65,625 $0.85 $0.79 $1.70 $1.05
12/31/02 $ 26,250 65,625 65,625 $0.61 $0.61 $1.17 $0.64

Avihai Shen............ 06/30/01 $ 2,174 5,435 0 -- $2.18 $4.20 $2.54
09/30/01 $ 3,262 8,153 0 -- $1.10 $3.05 $1.48
12/31/01 $ 3,262 8,153 21,741 $1.30 $1.30 $2.48 $1.66
03/31/02 $ 3,262 8,153 8,153 $1.42 $1.35 $2.41 $1.55
06/30/02 $ 3,262 8,153 8,153 $0.73 $0.73 $1.79 $0.91
09/30/02 $ 3,262 12,476 12,476 $0.85 $0.79 $1.70 $1.05
12/31/02 $ 3,262 8,153 8,153 $0.61 $0.61 $1.17 $0.64

STOCK OPTIONS

The table below sets forth information with respect to stock options
granted to the Named Executive Officers for the fiscal year 2003.

OPTION GRANTS IN LAST FISCAL YEAR

INDIVIDUAL GRANTS
--------------------------
% OF TOTAL POTENTIAL REALIZABLE VALUE
NUMBER OF OPTIONS OF ASSUMED ANNUAL RATES
SECURITIES GRANTED TO EXERCISE OF STOCK PRICE APPRECIATION
UNDERLYING EMPLOYEES OR BASE FOR OPTION TERM(1)
OPTIONS IN FISCAL PRICE EXPIRATION ----------------------------
NAME GRANTED YEAR ($/SH) DATE 5% ($) 10% ($)
---------------------- ---------- ---------- -------- ---------- ----------- -------------

Robert S. Ehrlich..... 1,500,000 27% $0.46 03/14/08 $ 190,634 $ 421,252
500,000 9% $0.85 06/26/08 $ 111,894 $ 247,257
35,000 6% $0.42 01/25/13 $ 9,245 $ 23,428
Steven Esses.......... 600,000 11% $0.43 02/24/08 $ 71,281 $ 157,512
100,000 2% $0.85 07/09/13 $ 53,456 $ 135,468
300,000 5% $1.28 12/31/08 $ 106,092 $ 234,436
35,000 1% $1.28 01/31/13 $ 28,174 $ 71,400
Avihai Shen........... 120,000 2% $0.43 02/24/08 $ 14,256 $ 31,503
120,000 2% $0.85 07/09/13 $ 64,147 $ 162,562
333,750 6% $1.28 07/09/13 $ 268,664 $ 680,847
35,000 1% $0.42 01/25/13 $ 9,245 $ 23,429

----------
(1) The potential realizable value illustrates value that might be realized
upon exercise of the options immediately prior to the expiration of their
terms, assuming the specified compounded rates of appreciation of the
market price per share from the date of grant to the end of the option
term. Actual gains, if any, on stock option exercise are dependent upon a
number of factors, including the future performance of the common stock and
the timing of option exercises, as well as the executive officer's
continued employment through the vesting period. The gains shown are net of
the option exercise price, but do not include deductions for taxes and
other expenses payable upon the exercise of the option or for sale of

underlying shares of common stock. The 5% and 10% rates of appreciation are
mandated by the rules of the Securities and Exchange Commission and do not
represent our estimate or projection of future increases in the price of
our stock. There can be no assurance that the amounts reflected in this
table will be achieved, and unless the market price of our common stock
appreciates over the option term, no value will be realized from the option
grants made to the executive officers.

The table below sets forth information for the Named Executive Officers
with respect to aggregated option exercises during fiscal 2003 and fiscal 2003
year-end option values.

AGGREGATED OPTION EXERCISES AND FISCAL YEAR-END OPTION VALUES

NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
SHARES OPTIONS AT FISCAL YEAR END AT FISCAL-YEAR-END(1)
CQUIRED ON VALUE --------------------------- -------------------------------
NAME A EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
-------------------- ---------- ---------- ----------- ------------- -------------- --------------

Robert S. Ehrlich... -- $ -- 1,905,667 1,000,000 $ 1,826,171 $ 1,185,000
Steven Esses........ 99,860 $ 183,215 416,807 518,333 $ 317,362 $ 655,733
Avihai Shen......... 75,000 $ 143,500 217,304 421,100 $ 119,283 $ 286,046

----------
(1) Options that are "in-the-money" are options for which the fair market value
of the underlying securities on December 31, 2003 ($1.82) exceeds the
exercise or base price of the option.

SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS

The following table sets forth certain information, as of December 31,
2003, with respect to our 1991, 1993, 1995 and 1998 stock option plans, as well
as any other stock options and warrants previously issued by us (including
individual compensation arrangements) as compensation for goods and services:

EQUITY COMPENSATION PLAN INFORMATION

NUMBER OF SECURITIES
REMAINING AVAILABLE
FOR FUTURE ISSUANCE
NUMBER OF SECURITIES UNDER EQUITY
TO BE ISSUED UPON WEIGHTED-AVERAGE COMPENSATION PLANS
EXERCISE OF EXERCISE PRICE OF (EXCLUDING SECURITIES
OUTSTANDING OPTIONS, OUTSTANDING OPTIONS, REFLECTED IN COLUMN
WARRANTS AND RIGHTS WARRANTS AND RIGHTS (a))
PLAN CATEGORY (a)(1) (b) (c)(1)
----------------------- --------------------- -------------------- ---------------------

Equity compensation 6,150,677 $1.38 (352,708)
plans approved by
security holders.....
Equity compensation
plans not approved
by security
holders(2)........... 3,481,236 $1.65 (299,374)

----------
(1) Numbers in parenthesis in column (c), which are included in the number in
column (a), indicate options that have been conditionally granted.

(2) In October 1998, the Board of Directors adopted the 1998 Non-Executive
Stock Option and Restricted Stock Purchase Plan, which under Delaware law
did not require stockholder approval since directors and executive officers
were ineligible to participate in it. Participation in the 1998 Plan is
limited to those of our employees and consultants who are neither executive
officers nor otherwise subject to Section 16 of the Securities Exchange Act
of 1934, as amended, or Section 162(m) of the Internal Revenue Code of
1986, as amended. The 1998 Plan is administered by the Compensation
Committee of our Board of Directors, which determined the conditions of
grant. Options issued under the 1998 Plan generally expire no more than ten
years from the date of grant, and incentive options issued under the 1998
Plan may be granted only at exercise prices equal to the fair market value
of our common stock on the date the option is granted. A total of 4,750,000
shares of our common stock were originally subject to the 1998 Plan, of
which 3,181,862 options are outstanding and 1,568,138 options have been
exercised.

EMPLOYMENT CONTRACTS

Mr. Ehrlich is party to an employment agreement with us effective as of
January 1, 2000. The term of this employment agreement, as extended, expires on
December 31, 2005, and is extended automatically for additional terms of two
years each unless either Mr. Ehrlich or we terminate the agreement sooner.

The employment agreement provides for a base salary of $20,000 per
month, as adjusted annually for Israeli inflation and devaluation of the Israeli
shekel against the U.S. dollar, if any. Additionally, the Board may at its
discretion raise Mr. Ehrlich's base salary. In January 2002, the Board raised
Mr. Ehrlich's base salary to $23,750 per month effective January 1, 2002; Mr.
Ehrlich has elected to waive this increase in his salary and to receive options
instead, under our salary for options program.

The employment agreement provides that if the results we actually
attain in a given year are at least 80% of the amount we budgeted at the
beginning of the year, we will pay a bonus, on a sliding scale, in an amount
equal to a minimum of 35% of Mr. Ehrlich's annual base salary then in effect, up
to a maximum of 90% of his annual base salary then in effect if the results we
actually attain for the year in question are 120% or more of the amount we
budgeted at the beginning of the year.

The employment agreement also contains various benefits customary in
Israel for senior executives, tax and financial planning expenses and an
automobile, and contain confidentiality and non-competition covenants. Pursuant
to the employment agreements, we granted Mr. Ehrlich demand and "piggyback"
registration rights covering shares of our common stock held by him.

We can terminate Mr. Ehrlich's employment agreement in the event of
death or disability or for "Cause" (defined as conviction of certain crimes,
willful failure to carry out directives of our Board of Directors or gross
negligence or willful misconduct). Mr. Ehrlich has the right to terminate his
employment upon a change in our control or for "Good Reason," which is defined
to include adverse changes in employment status or compensation, our insolvency,
material breaches and certain other events. Additionally, Mr. Ehrlich may retire
(after age 68) or terminate his agreement for any reason upon 150 days' notice.
Upon termination of employment, the employment agreement provides for payment of
all accrued and unpaid compensation, and (unless we have terminated the
agreement for Cause or Mr. Ehrlich has terminated the agreement without Good
Reason and without giving us 150 days' notice of termination) bonuses due for

the year in which employment is terminated and severance pay in the amount of
three years' base salary (or, in the case of termination by Mr. Ehrlich on 150
days' notice, a lump sum payment of $520,000). Furthermore, certain benefits
will continue and all outstanding options will be fully vested.

Mr. Esses is not a party to an employment agreement with us. Mr. Shen
has signed our standard employee employment agreement, described below.

Other employees (including Mr. Shen) have entered into individual
employment agreements with us. These agreements govern the basic terms of the
individual's employment, such as salary, vacation, overtime pay, severance
arrangements and pension plans. Subject to Israeli law, which restricts a
company's right to relocate an employee to a work site farther than sixty
kilometers from his or her regular work site, we have retained the right to
transfer certain employees to other locations and/or positions provided that
such transfers do not result in a decrease in salary or benefits. All of these
agreements also contain provisions governing the confidentiality of information
and ownership of intellectual property learned or created during the course of
the employee's tenure with us. Under the terms of these provisions, employees
must keep confidential all information regarding our operations (other than
information that is already publicly available) received or learned by the
employee during the course of employment. This provision remains in force for
five years after the employee has left our service. Further, intellectual
property created during the course of the employment relationship belongs to us.

A number of the individual employment agreements, but not all, contain
non-competition provisions that restrict the employee's rights to compete
against us or work for an enterprise that competes against us. Such provisions
remain in force for a period of two years after the employee has left our
service.

Under the laws of Israel, an employee of ours who has been dismissed
from service, died in service, retired from service upon attaining retirement
age, or left due to poor health, maternity or certain other reasons, is entitled
to severance pay at the rate of one month's salary for each year of service. We
currently fund this obligation by making monthly payments to approved private
provident funds and by its accrual for severance pay in the consolidated
financial statements. See Note 2.r of the Notes to the Consolidated Financial
Statements.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

The Compensation Committee of our board of directors for the 2003
fiscal year consisted until May 8, 2003 of Dr. Jay M. Eastman, Jack E. Rosenfeld
and Lawrence M. Miller; thereafter, the Compensation Committee consisted of Dr.
Jay M. Eastman, Jack E. Rosenfeld and Bert W. Wasserman. None of the members has
served as our officers or employees.

REPORT OF THE COMPENSATION COMMITTEE

Notwithstanding anything to the contrary set forth in any of our previous
filings under the Securities Act of 1933, as amended (the "Securities Act"), or
the Exchange Act which might incorporate future filings, including this Proxy

Statement, in whole or in part, the following report and the Performance Graph
on page 33 shall not be incorporated by reference into any such filings.

OBJECTIVES AND PHILOSOPHY

We maintain compensation and incentive programs designed to motivate,
retain and attract management and utilize various combinations of base
salary, bonuses payable upon the achievement of specified goals,
discretionary bonuses and stock options. Our Chief Executive Officer,
Robert S. Ehrlich, is party to an employment agreement with us. Our Chief
Operating Officer, Mr. Steven Esses, has no formal employment agreement at
present, though one is in negotiation. Our Chief Financial Officer, Mr.
Avihai Shen, is a party to a standard employment agreement that we enter
into with our employees generally.

EXECUTIVE OFFICER COMPENSATION

The employment agreement with Mr. Ehrlich provides that if the results
we actually attain in a given year are at least 80% of the amount we
budgeted at the beginning of the year, we will pay a bonus to Mr. Ehrlich,
on a sliding scale, in an amount equal to a minimum of 35% of his annual
base salary then in effect, up to a maximum of 90% of his annual base
salary then in effect if the results we actually attain for the year in
question are 120% or more of the amount we budgeted at the beginning of the
year. We paid Mr. Ehrlich $67,370 during 2003 in satisfaction of the
remainder of bonuses from 2002 to which he was entitled according to his
contract. Additionally, we accrued $99,750 for Mr. Ehrlich in satisfaction
of the 2003 bonus to which he was entitled according to his contract.

As of December 31, 2003, Messrs. Ehrlich's, Esses's and Shen's total
options represented approximately 6.1%, 2.0% and 1.3%, respectively, of our
outstanding stock, which the Compensation Committee believes is an
appropriate level of options for them considering their positions with
Arotech.

COMPENSATION OF OTHER EMPLOYEES

With respect to employees other than the Named Executive Officers,
compensation is determined not by formula, but based on the achievement of
qualitative and/or quantitative objectives established in advance of each
year by the Chief Executive Officer and Chief Operating Officer, who then,
pursuant to authority delegated by the Compensation Committee, determine
remuneration of our employees based on such objectives.

We seek to promote, including through our compensation plans, an
environment that encourages employees to focus on our continuing long-term
growth. Employee compensation is generally comprised of a combination of
cash compensation and grants of options under our stock option plans. Stock
options are awarded annually in connection with annual bonuses and,
occasionally, during the year on a discretionary basis. Stock options are
intended to offer an incentive for superior performance while basing
employee compensation on the achievement of higher share value, and to
foster the retention of key personnel through the use of schedules which
vest options over time if the person remains employed by us. There is no
set formula for the award of options to individual employees. Factors
considered in making option awards to the employees other than the Named

Executive Officers in 2003 included prior grants to the employees, the
importance of retaining the employees services, the amount of cash bonuses
received by the employees, the employees potential to contribute to our
success and the employees' past contributions to us.

POLICY ON DEDUCTIBILITY OF COMPENSATION

Changes made to the Internal Revenue Code of 1986, as amended (the
"Code") in 1993 limit our ability to deduct, for Federal income tax
purposes, certain compensation in excess of $1,000,000 per year paid to
individuals named in the Summary Compensation Table. This limitation was
effective beginning in 1994. Based on its review of the facts and
circumstances, the Committee has considered the provisions of Section
162(m) of the Code which, except in the case of "performance-based
compensation" and certain other types of compensation (including
compensation received under a stock option plan approved in accordance with
Section 162(m) of the Code), limits to $1,000,000 the amount of Arotech's
federal income tax deduction for the compensation paid to any of the chief
executive officer and the other four most highly paid executive officers.
The Committee believes that our current compensation arrangements, which
are primarily based on performance measures expected to be reflected in
increasing stockholder value over time, are appropriate and in the best
interests of Arotech and its stockholders, without regard to tax
considerations. Thus, in the event of changes in the tax laws or their
interpretation or other circumstances which might render some portion of
the executive compensation paid by us non-deductible for federal tax
purposes, the Committee would not anticipate making significant changes in
the basic philosophy and practices reflected in our executive compensation
program.

SUBMITTED BY THE COMPENSATION COMMITTEE

Dr. Jay M. Eastman
Jack E. Rosenfeld
Bert W. Wasserman

PERFORMANCE GRAPH

The following graph compares the yearly percentage change in our
cumulative total stockholder return on our common stock with the cumulative
total return on the Nasdaq Market Index (Broad Market Index) and a
self-constructed peer group index (the "Peer Group Index") over the past five
years, from December 31, 1998 through December 31, 2003.

The cumulative total stockholder return is based on $100 invested in
our common stock and in the respective indices on December 31, 1998. The stock
prices on the performance graph are not necessarily indicative of future price
performance.

CUMULATIVE TOTAL RETURN THROUGH DECEMBER 31, 2003 AMONG
AROTECH CORPORATION, NASDAQ MARKET INDEX,
AND PEER GROUP INDEX

[TABLE BELOW REPRESENTS A LINE CHART IN THE ORIGINAL REPORT]

12/31/98 12/31/99 12/31/00 12/31/01 12/31/02 12/31/03
-------- -------- -------- -------- -------- --------
AROTECH 100.00 127.27 170.55 60.36 23.27 66.18
PEER GROUP(1) 100.00 62.99 54.83 66.06 61.33 47.30
BROAD MARKET 100.00 185.59 112.67 88.95 60.91 91.37

----------
(1) The Peer Group Index is comprised of the following companies: Bio-Key
International, Inc., Command Security Corporation, Firearms Training
Systems, Inc., Guardian International, Inc. and ICTS International N.V. The
returns of each company have been weighted according to their respective
stock market capitalization for purposes of arriving at a peer group
average.

REPORT OF THE AUDIT COMMITTEE

The Audit Committee of the Board of Directors (the "Audit Committee")
consists of three non-employee directors, Bert W. Wasserman, Lawrence M. Miller,
and Jack E. Rosenfeld, each of whom has been determined to be independent as
defined by the Nasdaq rules and SEC regulations. The Audit Committee operates
under a written charter adopted by the board of directors.

Management is responsible for Arotech's internal controls and the
financial reporting process. The independent accountants are responsible for
performing an independent audit of Arotech's consolidated financial statements
in accordance with generally accepted accounting principles and to issue a
report thereon. The Audit Committee's responsibility is to monitor and oversee
these processes.

In this context the Audit Committee has met and held discussions with
management and the independent accountants. Management represented to the Audit
Committee that Arotech's consolidated financial statements were prepared in
accordance with generally accepted accounting principles, and the Audit
Committee has reviewed and discussed the consolidated financial statements with

management and the independent accountants. The Audit Committee discussed with
the independent accountants matters required to be discussed by Statement on
Auditing Standards No. 61.

Arotech's independent accountants also provided to the Audit Committee
the written disclosure required by Independence Standards Board Standard No. 1,
"Independence Discussions with Audit Committees." The Committee discussed with
the independent accountants that firm's independence and considered whether the
non-audit services provided by the independent accountants are compatible with
maintaining its independence.

Based on the Audit Committee's discussion with management and the
independent accountants, and the Audit Committee's review of the representation
of management and the report of the independent accountants to the Audit
Committee, the Audit Committee recommended that the board of directors include
the audited consolidated financial statements in Arotech's Annual Report on Form
10-K for the year ended December 31, 2003 filed with the Securities and Exchange
Commission.

SUBMITTED BY THE AUDIT COMMITTEE

Bert W. Wasserman
Lawrence M. Miller
Jack E. Rosenfeld

FEES BILLED FOR SERVICES RENDERED BY PRINCIPAL ACCOUNTANT

In accordance with the requirements of the Sarbanes-Oxley Act of 2002
and the Audit Committee's charter, all audit and audit-related work and all
non-audit work performed by our independent accountants, Kost, Forer, Gabbay &
Kassierer, is approved in advance by the Audit Committee, including the proposed
fees for such work. The Audit Committee is informed of each service actually
rendered.

>> Audit Fees. Audit fees billed or expected to be billed to us by
Kost, Forer, Gabbay & Kassierer for the audit of the financial
statements included in our Annual Report on Form 10-K, and
reviews of the financial statements included in our Quarterly
Reports on Form 10-Q, for the years ended December 31, 2002 and
2003 totaled approximately $151,375 and $177,000, respectively.

>> Audit-Related Fees. Kost, Forer, Gabbay & Kassierer billed us
$383 and $34,500 for the fiscal years ended December 31, 2002 and
2003, respectively, for assurance and related services that are
reasonably related to the performance of the audit or review of
our financial statements and are not reported under the caption
"Audit Fees," above.

>> Tax Fees. Kost, Forer, Gabbay & Kassierer billed us an aggregate
of $12,000 and $24,320 for the fiscal years ended December 31,
2002 and 2003, respectively, for tax services, principally advice
regarding the preparation of income tax returns.

>> Other Matters. The Audit Committee of the Board of Directors has
considered whether the provision of the Audit-Related Fees, Tax
Fees and all other fees are compatible with maintaining the
independence of our principal accountant.

Applicable law and regulations provide an exemption that permits
certain services to be provided by our outside auditors even if they are not
pre-approved. We have not relied on this exemption at any time since the
Sarbanes-Oxley Act was enacted.

INFORMATION REGARDING BENEFICIAL OWNERSHIP OF COMMON STOCK

The following table sets forth information regarding the security
ownership, as of April 16, 2004, of those persons owning of record or known by
us to own beneficially more than 5% of our common stock and of each of our Named
Executive Officers and directors, and the shares of common stock held by all of
our directors and executive officers as a group.

SHARES BENEFICIALLY PERCENTAGE OF TOTAL
NAME AND ADDRESS OF BENEFICIAL OWNER(1) OWNED(2)(3) SHARES OUTSTANDING(3)
--------------------------------------- ------------------- ---------------------

Leon S. Gross........................... 3,482,534(4)(13) 5.5%
Robert S. Ehrlich....................... 2,284,213(5)(13) 3.5%
Steven Esses............................ 663,475(6) 1.0%
Avihai Shen............................. 267,804(7) *
Dr. Jay M. Eastman...................... 85,001(8) *
Jack E. Rosenfeld....................... 87,001(9) *
Lawrence M. Miller...................... 533,580(10) *
Bert W. Wasserman....................... 8,334(11) *
Edward J. Borey......................... 40,334(12) *
All of our directors and executive
officers as a group (10 persons**)...... 7,349,935(14) 11.0%

----------

* Less than one percent.

** Includes 3,482,534 shares owned by Mr. Leon Gross that are subject to the
Voting Rights Agreement described in footnote 9, below. Also includes
339,324 shares held of record by Mr. Yehuda Harats that are subject to the
Voting Rights Agreement described in footnote 9, below.

(1) The address of each named beneficial owner other than Leon Gross is in care
of Arotech Corporation, 250 West 57th Street, Suite 310, New York, New York
10107.

(2) Unless otherwise indicated in these footnotes, each of the persons or
entities named in the table has sole voting and sole investment power with
respect to all shares shown as beneficially owned by that person, subject
to applicable community property laws.

(3) Based on 63,656,843 shares of common stock outstanding as of April 16,
2004. For purposes of determining beneficial ownership of our common stock,
owners of options exercisable within sixty days are considered to be the
beneficial owners of the shares of common stock for which such securities
are exercisable. The percentage ownership of the outstanding common stock

reported herein is based on the assumption (expressly required by the
applicable rules of the Securities and Exchange Commission) that only the
person whose ownership is being reported has converted his options into
shares of common stock.

(4) Includes 441,665 shares held by Leon S. Gross and Lawrence M. Miller as
co-trustees of the Rose Gross Charitable Foundation. Mr. Gross's address is
c/o Enterprises Inc., River Park House, 3600 Conshohocken Avenue,
Philadelphia, Pennsylvania 19131.

(5) Includes 50,000 shares held by Mr. Ehrlich's wife (in which shares Mr.
Ehrlich disclaims beneficial ownership), 161,381 shares held in Mr.
Ehrlich's pension plan, 3,000 shares held by children sharing the same
household (in which shares Mr. Ehrlich disclaims beneficial ownership), and
1,905,667 shares issuable upon exercise of options exercisable within 60
days.

(6) Consists of 663,475 shares issuable upon exercise of options exercisable
within 60 days.

(7) Includes 257,304 shares issuable upon exercise of options exercisable
within 60 days.

(8) Consists of 85,001 shares issuable upon exercise of options exercisable
within 60 days.

(9) Includes 85,001 shares issuable upon exercise of options exercisable within
60 days.

(10) Includes 441,665 shares held by Leon S. Gross and Lawrence M. Miller as
co-trustees of the Rose Gross Charitable Foundation, and 80,001 shares
issuable upon exercise of options exercisable within 60 days.

(11) Consists of 8,334 shares issuable upon exercise of options exercisable
within 60 days.

(12) Includes 8,334 shares issuable upon exercise of options exercisable within
60 days.

(13) Messrs. Ehrlich, Leon Gross and Yehuda Harats are parties to a Voting
Rights Agreement pursuant to which each of the parties agrees to vote the
shares of our common stock held by that person in favor of the election of
Messrs. Ehrlich, Harats and Miller until the earlier of December 28, 2004
or our fifth annual meeting of stockholders after December 28, 1999. Mr.
Harats resigned as a director in 2002; however, we believe that Mr. Harats
must continue to comply with the terms of this agreement. As of February
19, 2004, 4,370,004 shares of our common stock were subject to this Voting
Rights Agreement.

(14) Includes 3,093,117 shares issuable upon exercise of options exercisable
within 60 days.

SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

Under the securities laws of the United States, our directors, certain of our
officers and any persons holding more than ten percent of our common stock are
required to report their ownership of our common stock and any changes in that
ownership to the Securities and Exchange Commission. Specific due dates for
these reports have been established and we are required to report any failure to
file by these dates during 2003. Based solely on our review of such reports
furnished to us, we are not aware of any instances during 2003, not previously
disclosed by us, where such "reporting persons" failed to file the required
reports on or before the specified dates, except as follows:

(i) Mr. Borey was required to report his holdings of our securities in
a Form 3 that should have been filed on or prior to December 15,
2003 in connection with his becoming a director on December 4,
2003. Additionally, Mr. Borey was required to file a Form 4 on or
prior to January 2, 2004 in connection with his receipt of 35,000
stock options on December 30, 2003. He reported his holdings and
this transaction in a Form 5 filed on February 17, 2004.

(ii) Mr. Eastman was required to file a Form 4 on or prior to January
2, 2004 in connection with his receipt of 10,000 stock options on
December 30, 2003. He reported this transaction in a Form 5 filed
on February 17, 2004.

(iii) Mr. Ehrlich was required to file a Form 4 on or prior to March 17,
2003 in connection with his receipt of 1,500,000 stock options on
March 14, 2003. He reported this transaction in a Form 4 filed on
August 11, 2003.

(iv) Mr. Ehrlich was required to file a Form 4 on or prior to June 30,
2003 in connection with his receipt of 500,000 stock options on
June 26, 2003. He reported this transaction in a Form 4 filed on
August 11, 2003.

(v) Mr. Ehrlich was required to file a Form 4 on or prior to January
27, 2004 in connection with his receipt of 35,000 stock options on
January 25, 2004. He reported this transaction in a Form 5 filed
on February 17, 2004.

(vi) Mr. Esses was required to file a Form 4 on or prior to February
26, 2003 in connection with his receipt of 600,000 stock options
on February 24, 2003. He reported this transaction in a Form 4
filed on August 8, 2003.

(vii) Mr. Esses was required to file a Form 4 on or prior to July 11,
2003 in connection with his receipt of 100,000 stock options on
July 9, 2003, and a Form 4 on or prior to October 15, 2003 in
connection with his receipt of 335,000 stock options on October
13, 2003. He reported these transactions in a Form 5 filed on
February 17, 2004 (as amended on February 24, 2004).

(viii) Mr. Miller was required to file a Form 4 on or prior to January 2,
2004 in connection with his receipt of 10,000 stock options on
December 30, 2003. He reported this transaction in a Form 5 filed
on February 17, 2004.

(ix) Mr. Rosenfeld was required to file a Form 4 on or prior to January
2, 2004 in connection with his receipt of 10,000 stock options on
December 30, 2003. He reported this transaction in a Form 5 filed
on February 18, 2004 (after the required filing date of February
17, 2004, due to a technical delay in filing with the EDGAR
system).

(x) Mr. Shen was required to file a Form 4 on or prior to February 26,
2003 in connection with his receipt of 120,000 stock options on
February 24, 2003. He reported this transaction in a Form 4 filed
on August 11, 2003.

(xi) Mr. Shen was required to file a Form 4 on or prior to July 11,
2003 in connection with his receipt of 120,000 stock options on
July 9, 2003, and a Form 4 on or prior to October 15, 2003 in
connection with his receipt of 333,750 stock options on October
13, 2003. He reported these transactions in a Form 5 filed on
February 17, 2004 (as amended on February 24, 2004).

(xii) Mr. Wasserman was required to report his holdings of our
securities in a Form 3 that should have been filed on or prior to
March 6, 2003 in connection with his becoming a director on
February 24, 2003. Additionally, Mr. Wasserman was required to
file a Form 4 on or prior to January 2, 2004 in connection with
his receipt of 10,000 stock options on December 30, 2003. He
reported his holdings and this transaction in a Form 5 filed on
February 19, 2004 (after the required filing date of February 17,
2004, due to a technical delay in filing with the EDGAR system).

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

VOTING AGREEMENTS

Pursuant to a securities purchase agreement dated December 28, 1999
between a group of purchasers, including Mr. Gross, and us, Mr. Gross agreed
that for a period of five years, neither he nor his "affiliates" (as such term
is defined in the Securities Act) directly or indirectly or in conjunction with
or through any "associate" (as such term is defined in Rule 12b-2 of the
Exchange Act), will (i) solicit proxies with respect to any capital stock or
other voting securities of ours under any circumstances, or become a
"participant" in any "election contest" relating to the election of our
directors (as such terms are used in Rule 14a-11 of Regulation 14A of the
Exchange Act); (ii) make an offer for the acquisition of substantially all of
our assets or capital stock or induce or assist any other person to make such an
offer; or (iii) form or join any "group" within the meaning of Section 13(d)(3)
of the Exchange Act with respect to any of our capital stock or other voting
securities for the purpose of accomplishing the actions referred to in clauses
(i) and (ii) above, other than pursuant to the voting rights agreement described
below.

Pursuant to a voting rights agreement dated September 30, 1996 and as
amended December 10, 1997 and December 28, 1999, between Mr. Gross, Robert S.
Ehrlich, Yehuda Harats and us, Lawrence M. Miller, Mr. Gross's advisor, is
entitled to be nominated to serve on our Board of Directors so long as Mr.
Gross, his heirs or assigns retain at least 1,375,000 shares of common stock. In
addition, under the voting rights agreement, Mr. Gross and Messrs. Ehrlich and
Harats agreed to vote and take all necessary action so that Messrs. Ehrlich,
Harats and Miller shall serve as members of the board of directors until the
earlier of December 28, 2004 or our fifth annual meeting of stockholders after
December 28, 1999. Mr. Harats resigned as a director in 2002; however, we
believe that Mr. Harats must continue to comply with the terms of this
agreement. As of February 19, 2004, 4,370,004 shares of our common stock were
subject to this Voting Rights Agreement.

OFFICER LOANS

On December 3, 1999, Robert S. Ehrlich purchased 125,000 shares of our
common stock out of our treasury at the closing price of the common stock on
December 2, 1999. Payment was rendered by Mr. Ehrlich in the form of a
non-recourse promissory note due in 2009 in the amount of $167,975, secured by
the shares of common stock purchased and other shares of common stock previously

held by him. As of December 31, 2003, the aggregate amount outstanding pursuant
to this promissory note was $201,570.

On February 9, 2000, Mr. Ehrlich exercised 131,665 stock options. Mr.
Ehrlich paid the exercise price of the stock options and certain taxes that we
paid on his behalf by giving us a non-recourse promissory note due in 2025 in
the amount of $789,991, secured by the shares of our common stock acquired
through the exercise of the options and certain compensation due to Mr. Ehrlich
upon termination. As of December 31, 2003, the aggregate amount outstanding
pursuant to this promissory note was $657,146.

On June 10, 2002, Mr. Ehrlich exercised 50,000 stock options. Mr.
Ehrlich paid the exercise price of the stock options by giving us a non-recourse
promissory note due in 2012 in the amount of $36,500, secured by the shares of
our common stock acquired through the exercise of the options. As of December
31, 2003, the aggregate amount outstanding pursuant to this promissory note was
$37,810.

DIRECTOR CONSULTING AGREEMENTS

Beginning in February 2002, Mr. Steven Esses, who became one of our
directors in July 2002, entered into an oral consulting arrangement with us,
whereby he performed periodic financial and other consulting for us. We paid Mr.
Esses a total of $120,480 in consulting fees in 2002. Beginning in July 2002,
when Mr. Esses became a director, this consulting arrangement ceased.

Beginning in January 2004, Mr. Edward J. Borey, who became one of our
directors in December 2003, entered into a consulting agreement with us pursuant
to which he agreed to aid us in identifying potential acquisition candidates in
exchange for transaction fees in respect of acquisitions in which he plays a
"critical role" (as determined by us in our sole and absolute discretion) in
identifying and/or initiating and/or negotiating the transaction in the amount
of (i) 1.5% of the value of the transaction up to $10,000,000, plus (ii) 1.0% of
the value of the transaction in excess of $10,000,000 and up to $50,000,000,
plus (iii) 0.5% of the value of the transaction in excess of $50,000,000. We
also agreed to issue to Mr. Borey, at par value, a total of 32,000 shares of our
common stock, the value of which is to be deducted from any transaction fees
paid.

STOCKHOLDER COMMUNICATIONS AND PROPOSALS

STOCKHOLDER COMMUNICATIONS WITH THE BOARD OF DIRECTORS

The Board has established a process to receive communications from
stockholders. Stockholders may contact any member (or all members) of the Board
at directors@arotech.com. Non-management directors may be contacted as a group
at nonmanagement-directors@arotech.com. Any Board committee or any chair of any
such committee may be contacted as follows: audit-chair@arotech.com,
compensation-chair@arotech.com, or nominating-chair@arotech.com. If you cannot
send an electronic message, you may contact Board members by mail at: Arotech
Board Members, 250 West 57th Street, Suite 310, New York, New York 10107.

The Arotech Corporation Investor Relations Department is responsible
for forwarding all such communications to the Board of Directors, and where
appropriate, to management. Communications are screened to exclude certain items
that are unrelated to the duties and responsibilities of the Board, such as
spam, junk mail and mass mailings, product complaints, product inquiries, new
product suggestions, job inquiries, surveys, business solicitations or
advertisements, and material that is unduly hostile, threatening, illegal or
similarly unsuitable. Communications that are filtered out are made available to
any director upon request. The Board may involve management in preparing its
responses to stockholder communications.

STOCKHOLDER PROPOSALS

Pursuant to the rules of the Securities and Exchange Commission,
stockholder proposals made in accordance with Rule 14a-8 under the Exchange Act
intended to be included in our proxy material for the next annual meeting must
be received by us on or before February 16, 2005. Any proposals must be received
at our principal executive offices, 250 West 57th Street, Suite 310, New York,
New York 10107, Attention: Corporate Secretary by the applicable date.

Stockholder proposals submitted outside the processes of Rule 14a-8
must be received by our Corporate Secretary in a timely fashion. To be timely,
such notice and information regarding the proposal and the stockholder must be
delivered to or mailed and received by our Corporate Secretary at our principal
executive offices, 250 West 57th Street, Suite 310, New York, New York 10107,
not less than 45 days nor more than 60 days prior to the annual meeting;
provided, however, that in the event that less than 60 days' notice or prior
public disclosure of the date of the annual meeting is given or made to
stockholders, notice by the stockholder to be timely must be received not later
than the close of business on the 7th day following the day on which such notice
of the date of the annual meeting was mailed or such public disclosure was made.

ANNUAL REPORT

Copies of our Annual Report on Form 10-K (including audited financial
statements) filed with the Securities and Exchange Commission may be obtained
without charge by writing to Stockholder Relations, Arotech Corporation, 250
West 57th Street, Suite 310, New York, New York 10107. A request for a copy of
our Annual Report on Form 10-K must set forth a good-faith representation that
the requesting party was either a holder of record or a beneficial owner of our
common stock on April 16, 2004. Exhibits to the Form 10-K will be mailed upon
similar request and payment of specified fees to cover the costs of copying and
mailing such materials.

Our audited financial statements for the fiscal year ended December 31,
2003 and certain other related financial and business information are contained
in our 2003 Annual Report to Stockholders, which is being furnished to our
stockholders along with this proxy statement, but which is not deemed a part of
the proxy soliciting material.

OTHER MATTERS

We are not aware of any other matter that may come before the annual
meeting of stockholders and we do not currently intend to present any such other
matter. However, if any such other matters properly come before the meeting or
any adjournment thereof, the persons named as proxies will have discretionary
authority to vote the shares represented by the accompanying proxy in accordance
with their own judgment.

BY ORDER OF THE BOARD OF DIRECTORS,

/s/ Yaakov Har-Oz

Yaakov Har-Oz
Vice President, General Counsel and Secretary

New York, New York
May 7, 2004

APPENDIX A

AROTECH CORPORATION

2004 STOCK OPTION AND
RESTRICTED STOCK PURCHASE PLAN

1. Purpose.

The purpose of the Arotech Corporation 2004 Stock Option and Restricted
Stock Purchase Plan (the "Plan") is to advance the interests of Arotech
Corporation (the "Company") by enhancing the ability of the Company and its
subsidiaries (a) to attract and retain executives, employees and consultants who
are in a position to make significant contributions to the success of the
Company and its subsidiaries; (b) to reward executives, employees and
consultants for such contributions; and (c) to encourage executives, employees
and consultants to take into account the long-term interests of the Company and
its subsidiaries through ownership of shares of the Company's common stock,
$0.01 par value (the "Stock").

Options granted pursuant to the Plan may, for purposes of the Internal
Revenue Code of 1986, as amended (the "Code"), be incentive stock options as
defined in section 422 of the Code (any option that is intended to qualify as an
incentive stock option being referred to herein as an "incentive option"), or
options that are not incentive options, or both. Options granted pursuant to the
Plan shall be presumed to be non-incentive options unless expressly designated
as incentive options.

The following Plan provisions are subject to the special provisions for
participants in the Plan who are Israeli residents, attached in Addendum I
hereto.

2. Administration.

Awards shall be determined, and the Plan shall be administered, by a
Committee as appointed from time to time by the Board of Directors of the
Company (the "Board") from amongst its members, which Committee shall consist of
not less than two (2) members of the Board. Except as permitted by Rule 16b-3 of
the Securities Exchange Act of 1934, as amended (the "Act"), and by Section
162(m) of the Code (or regulations promulgated thereunder), no member of the
Board may serve on the Committee if such member: (i) is or has been granted or
awarded stock, stock options, stock appreciation rights or any other equity
security or derivative security of the Company or any of its affiliates pursuant
to the Plan or any other plan of the Company or its affiliates either while
serving on the Committee or during the one year period prior to being appointed
to the Committee; (ii) is an employee or former employee of the Company; or
(iii) receives remuneration from the Company, either directly or indirectly, in
any capacity other than as a director.

The Committee shall have authority, not inconsistent with the express
provisions of the Plan, (a) to grant options and make purchase grants to such
eligible employees as the Board may select; (b) to determine the time or times
when options shall be granted or purchase grants made and the number of shares
of Stock subject to each option or purchase grant; (c) to determine the terms
and conditions of each option and purchase grant; (d) to prescribe the form or
forms of any instruments evidencing options and purchase grants and any other
instruments required under the Plan and to change such forms from time to time;
(e) to adopt, amend and rescind rules and regulations for the administration of
the Plan; and (f) to interpret the Plan and to decide any questions and settle
all controversies and disputes that may arise in connection with the Plan.
Subject to Section 8, the Committee shall also have the authority, both
generally and in particular instances, to waive compliance by an executive,

A-1

employee or consultant with any obligation to be performed by him or her under
an option or purchase grant, to exercise any right of repurchase with respect to
Stock issued under the Plan pursuant to a purchase grant, to waive any condition
or provision of an option or purchase grant, and to amend or cancel any option
or purchase grant (and if an any option or purchase grant is canceled, to grant
a new option or purchase grant on such terms as the Committee shall specify).

All such determinations and actions of the Committee shall be
conclusive and shall bind all parties.

3. Effective Date and Term of Plan.

The Plan shall become effective on the date on which the Plan is
approved by the stockholders of the Company. Grants of options and purchase
grants under the Plan may be made prior to that date, subject to approval of the
Plan by such stockholders.

No option shall be granted and no purchase grant made under the Plan
after the completion of ten years from the date on which the Plan was adopted by
the Board, but options previously granted and purchase grants previously made
may extend beyond that date.

4. Shares Subject to the Plan.

(a) Number of Shares. Subject to adjustment as provided in Section
4(c), the maximum aggregate number of shares of Stock that may be delivered upon
the exercise of options and purchase grants granted under the Plan shall be
seven million five hundred thousand (7,500,000). If any option or purchase grant
granted under the Plan terminates without having been exercised in full, or upon
exercise is satisfied other than by delivery of Stock, the number of shares of
Stock as to which such option or purchase grant was not exercised shall be
available for future grants within the limits set forth in this Section 4(a). In
addition, if any shares of Stock issued under the Plan pursuant to purchase
grants are subsequently repurchased by the Company pursuant to Section 7(g),
such shares shall be available for future grants under the Plan.

The maximum number of shares for which options or other awards may be
granted to any individual during any fiscal year of the Company shall be
1,000,000. The per-individual limitation described in this paragraph shall be
construed and applied consistent with the rules and regulations under section
162(m) of the Code.

(b) Shares to be Delivered. Shares delivered under the Plan shall be
authorized but unissued Stock or, if the Board so decides in its sole
discretion, previously issued Stock acquired by the Company and held in
treasury. No fractional shares of Stock shall be delivered under the Plan.

(c) Changes in Stock. In the event of a stock dividend, stock split or
combination of shares, reorganization, recapitalization or other change in the
Company's capital stock, the number and kind of shares of Stock or securities of
the Company subject to options or purchase grants then outstanding or
subsequently granted or made under the Plan, the maximum number of shares or
securities that may be delivered under the Plan, the exercise price and other
relevant provisions shall be appropriately adjusted by the Committee, whose
determination shall be binding on all persons.

A-2

The Committee may also adjust the number of shares subject to
outstanding options, the exercise price of outstanding options and the terms of
outstanding options, to take into consideration material changes in accounting
practices or principles, extraordinary dividends, and, except as described in
Sections 6(i) and 7(h), consolidations, mergers acquisitions or dispositions of
Stock or property or any other event if it is determined by the Committee that
such adjustment is appropriate to avoid distortion in the operation of the Plan;
provided that no such adjustment shall be made in the case of an incentive
option, without the consent of the participant, if it would constitute a
modification, extension or renewal of the incentive option within the meaning of
section 424(h) of the Code.

(d) Replacement Options. The Committee may grant options under the Plan
in substitution for options held by employees of another corporation who
concurrently become employees of the Company or a subsidiary as a result of a
merger or consolidation of the employing corporation with the Company or a
subsidiary or the acquisition by the Company or a subsidiary of property or
stock of the employing corporation. The Committee may direct that the
replacement options be granted on such terms and conditions as the Committee
considers appropriate in the circumstances.

5. Eligibility.

Employees eligible to receive options or purchase grants under the Plan
shall be those executives, employees and consultants of the Company and its
subsidiaries who, in the opinion of the Committee, are in a position to make a
significant contribution to the success of the Company or such subsidiaries. A
subsidiary for purposes of the Plan shall be a corporation in which the Company
owns, directly or indirectly, stock possessing 50% or more of the total combined
voting power of all classes of stock. Receipt of options or purchase grants
under the Plan or of awards under any other employee benefit plan of the Company
or any of its subsidiaries shall not preclude an executive, employee or
consultant from receiving options or purchase grants or additional options or
purchase grants under the Plan.

6. Terms and Conditions of Options.

(a) Exercise Price. The exercise price of each option shall be
determined by the Committee but in the case of an incentive option shall not be
less than 100% (110%, in the case of an incentive option granted to a
ten-percent stockholder) of the fair market value per share of the Stock at the
time the incentive option is granted; nor shall the exercise price of any option
be less, in the case of an original issue of authorized stock, than par value
per share. Notwithstanding the foregoing, to the extent required by the Code,
the purchase price per share under each non-incentive option intended to qualify
as "performance-based compensation" within the meaning of section 162(m)(3) of
the Code) shall not be less than 100% of the fair market value of the Stock at
the time the non-incentive option is granted.

For purposes of the Plan, "fair market value" shall mean the average of
the high and low sales prices of a share of Stock on the New York Stock
Exchange, or if the Common Stock is not listed thereon, on another national
securities exchange or on the Nasdaq National Market System, whichever is
applicable, on the date the option is granted or other relevant date, or if such
sales prices are not available, the average of the over-the-counter bid and
asked prices for a share of the Stock on the date the option is granted or other
relevant date; provided, that if in the opinion of the Committee the trading
activity of the Stock is deemed not to constitute a representative market price,
the Committee shall have the discretion to engage an independent party to
determine fair market value for this purpose.

A-3

(b) In the case of incentive stock options, the aggregate fair market
value (determined at the time the incentive stock option is granted) of the
Stock with respect to which incentive stock options are exercisable for the
first time by an optionee during any calendar year (under all plans of the
Company and any subsidiary) shall not exceed $100,000.

(c) Duration of Options. Options shall be exercisable during such
period or periods as the Committee may specify. In no case shall an option be
exercisable more than ten years from the date the option was granted or such
earlier date as the Committee may specify at the time the option is granted (the
"Final Exercise Date").

(d) Exercise of Options.

(1) Each option shall be made exercisable at such time or
times, whether or not in installments, and upon such conditions as the
Committee shall prescribe at the time an option is granted. In the
event that the option agreement does not provide for a vesting
schedule, the applicable option shall vest and become exercisable as to
40% of the Shares subject to the option on the first anniversary of its
date of grant, and as to 30% of the Shares subject to the option on the
second anniversary of its date of grant, and as to the remaining Shares
subject to the option on the third anniversary of its date of grant.

In the case of an option not immediately exercisable in full,
the Committee may at any time accelerate the time at which all or any
part of the option may be exercised.

(2) Any exercise of an option shall be in writing, signed by
the proper person and delivered or mailed to the Company, accompanied
by (a) the option certificate and any other documents required by the
Committee and (b) payment in full for the number of shares for which
the option is exercised.

(3) The Committee shall have the right to require that the
individual exercising an option remit to the Company an amount
sufficient to satisfy any federal, state, local or foreign withholding
tax requirements (or make other arrangements satisfactory to the
Company with regard to such taxes) prior to the delivery of any Stock
pursuant to the exercise of the option. If permitted by the Committee,
either at the time of the grant of the option or the time of exercise,
the individual may elect, at such time and in such manner as the
Committee may prescribe, to satisfy such withholding obligation by (i)
delivering Stock to the Company (which in the case of Stock acquired
from the Company shall have been owned by the individual for at least
six months prior to the delivery date) having a fair market value equal
to such withholding obligation, or (ii) requesting that the Company
withhold from the shares of Stock to be delivered upon the exercise a
number of shares of Stock having a fair market value equal to such
withholding obligation.

(4) If an option is exercised by the executor or administrator
of a deceased participant, or by the person or person to whom the
option has been transferred by the employee's will or the applicable
laws of descent and distribution, the Company shall be under no
obligation to deliver Stock pursuant to such exercise until the Company
is satisfied as to the authority of the person or persons exercising
the option.

A-4

(e) Payment For and Delivery of Stock. Stock purchased under the Plan
upon the exercise of options shall be paid for as follows: (i) in cash or by
certified check, bank draft or money order payable to the order of the Company,
or (ii) if so permitted by the Committee, through the delivery of shares of
Stock (which, in the case of Stock acquired from the Company, shall have been
held for at least six months prior to delivery) having a fair market value on
the last business day preceding the date of exercise equal to the purchase
price, or (iii) if so permitted by the Committee by a combination of such types
of payment, or (iv) if so permitted by the Committee by delivery of an
unconditional and irrevocable undertaking by a broker to deliver promptly to the
Company sufficient funds to pay the exercise price, or (v) if so permitted by
the terms of the option, by delivery of a promissory note of the employee
containing such terms and conditions, including without limitation, interest
rate and maturity, as the Committee may specify in the option (except that the
option may provide that the rate of interest on the note will be such rate as is
sufficient at all times to avoid the imputation of any interest under the
applicable provisions of the Code or of the Israeli Income Tax Ordinance), or by
a combination of cash (or cash and Stock) and such a promissory note; provided,
that if the Stock delivered upon exercise of the option is an original issue of
authorized Stock, at least so much of the exercise price as represents the par
value of such Stock shall be paid in cash or by a combination of cash and Stock.
The Committee may, in its discretion, establish a cashless exercise program
under the Plan.

An option holder shall not have the rights of a stockholder with regard
to awards under the Plan except as to Stock actually received by him or her
under the Plan.

The Company shall not be obligated to deliver any shares of Stock (a)
until, in the opinion of the Company's counsel, all applicable federal, state
and foreign laws and regulations have been complied with, and (b) if the
outstanding Stock is at the time listed on any stock exchange, until the shares
to be delivered have been listed or authorized to be listed on such exchange
upon official notice of issuance, and (c) until all other legal matters in
connection with the issuance and delivery of such shares have been approved by
the Company's counsel. If the sale of Stock has not been registered under the
Securities Act of 1933, as amended (the "Securities Act") the Company may
require, as a condition to exercise of the option, such representations or
agreements as counsel for the Company may consider appropriate to avoid
violation of such Act and may require that the certificates evidencing such
Stock bear an appropriate legend restricting transfer.

(f) Nontransferability of Options. Except as the Committee may
otherwise determine, no option may be transferred other than by will or by the
laws of descent and distribution, and during an employee's lifetime an option
may be exercised only by him or her.

(g) Death. If an employee's employment or a consultant's consulting
arrangement with the Company and its subsidiaries terminates by reason of death,
each option held by the employee immediately prior to death shall become
immediately exercisable by his or her executor or administrator, or by the
person or persons to whom the option is transferred by will or the applicable
laws of descent and distribution, at any time within the three-year period
ending with the third anniversary of the employee's or consultant's death, but
in no event beyond the Final Exercise Date.

(h) Other Termination of Employment or Service. If an employee's
employment with the Company and its subsidiaries terminates, or the consulting
arrangement of an optionee terminates, for any reason other than death, all
options held by the employee or consultant that are not then exercisable shall
terminate. Options that are exercisable on the date of termination of employment

A-5

or the consulting arrangement shall continue to be exercisable for a period of
three months (subject to Section 6(c)) (or such longer period as the Committee
may determine, but in no event beyond the Final Exercise Date) unless the
employee or consultant was discharged for cause that, in the opinion of the
Committee, casts such discredit on him or her as to justify termination of his
or her options. In any event, if the individual's employment or consulting
contract includes a provision that defines termination for cause, and the
individual was terminated for cause within the meaning of his or her employment
or consulting contract, the Committee may terminate the individual's options.
Furthermore, the Committee may terminate an employee's options upon such
employee's resignation other than following his or her demotion, loss of title
or office or a substantial reduction in his or her salary or a change in his or
her place of employment to a location outside of the general area in which he or
she was employed on the date of the grant. After completion of the three-month
period following termination, options not otherwise previously terminated or
expired shall expire without further action by the Committee. For purposes of
this Section 6(h), employment shall not be considered terminated (i) in the case
of sick leave or other bona fide leave of absence approved for purposes of the
Plan by the Committee, so long as the employee's right to reemployment is
guaranteed either by statute or by contract, or (ii) in the case of a transfer
of employment between the Company and a subsidiary or between subsidiaries, or
to the employment of a corporation (or a parent or subsidiary corporation of
such corporation) issuing or assuming an option in a transaction to which
section 424(a) of the Code applies (e.g., a merger or acquisition).

(i) Mergers, etc. In the event of a consolidation or merger in which
the Company is not the surviving corporation or which results in the acquisition
of substantially all the Company's outstanding Stock by a single person or
entity or by a group of persons and/or entities acting in concert, or in the
event of the sale or transfer of substantially all the Company's assets, all
outstanding options shall thereupon terminate, provided that all outstanding
options shall become exercisable immediately prior to consummation of such
merger, consolidation or sale of assets unless, if there is a surviving or
acquiring corporation, the Company has arranged, subject to consummation of the
merger, consolidation or sale of assets, for the assumption of the options or
the grant to participants of replacement options by that corporation or an
affiliate of that corporation.

7. Terms and Conditions of Purchase Grants.

(a) Purchase Price. The purchase price of Stock purchased pursuant to
purchase grants under the Plan shall be determined in the same manner as the
exercise price for options (subject to appropriate adjustment by the Committee
upon the occurrence of an adjustment made pursuant to Section 4(c), and the
Committee's determination of such matter shall be final and binding).

(b) Purchase of Stock Pursuant to Grants. An employee or consultant
receiving a purchase grant under the Plan may purchase the Stock subject to such
purchase grant at any time within 60 days after the purchase grant is made (or,
in the case of purchase grants made subject to stockholder approval of this
Plan, 60 days after such approval). If a purchase grant is exercised by the
executor or administrator of a deceased employee or consultant, or by the person
or persons to whom the purchase grant has been transferred by the employee's or
consultant's will or the applicable laws of descent and distribution, the
Company shall be under no obligation to deliver Stock pursuant to such exercise
until the Company is satisfied as to the authority of the person or persons
exercising the purchase grant.

A-6

(c) Payment For and Delivery of Stock. Stock purchased pursuant to
purchase grants shall be paid for as follows: (i) in cash or by certified check,
bank draft or money order payable to the order of the Company in an amount not
less than the par value of the Stock being purchased, determined on the date of
purchase, and (ii) by delivery of a nonrecourse promissory note of the employee
in a principal amount equal to the balance of such purchase price and containing
the following terms and conditions together with such other terms and conditions
as the Committee may specify at the time of purchase:

(1) The rate of interest on the note will be such rate as is
sufficient at all times to avoid the imputation of any interest under
the applicable provisions of the Code and the rules and regulations
promulgated thereunder, and of the Income Tax Ordinance of Israel and
the rules and regulations promulgated thereunder, all as from time to
time in effect.

(2) Interest will be payable quarterly, or upon such terms and
conditions as the Committee may specify at the time of the payment
grant, and at the option of the participant, interest which is due and
payable will be treated as a new loan to the participant evidenced by
the same note.

(3) The principal of the note, and all accrued and unpaid
interest, will be due and payable on such date as may be specified by
the Committee at the time of the payment grant, but in no event longer
than ten years from the date of issuance of the note.

(4) The note at all times will be secured by all of the Stock
issued upon exercise of the purchase grant.

(5) Except as stated in (4) above, the note will be without
recourse to the participant or any of his or her assets.

(6) If the participant sells any of the Stock securing the
note, all proceeds from such sale will first be applied, to the extent
necessary therefor, to the payment in full of the principal of, and all
accrued and unpaid interest on, the note.

(7) At any time or from time to time, a participant may
specify that 25%, 50%, 75% or 100% of the original principal amount of
the note delivered upon purchase of the Stock (plus all accrued and
unpaid interest thereon and all accrued interest that has been added to
the principal of the note) shall in the future be with recourse to him
or her and to all of his or her assets, in which event the nonrecourse
note shall be exchanged for a recourse and a nonrecourse note in the
specified amounts, the Stock securing the original nonrecourse note
shall be divided pro rata between the two new notes, and otherwise the
two new notes shall be identical to the old note (except, in the case
of the new recourse note, with respect to recourse to the participant
and his or her other assets).

A purchase grantee shall not have the rights of a stockholder with
regard to awards under the Plan except as to Stock actually purchased and
received by him or her under the Plan.

A-7

The Company shall not be obligated to deliver any shares of Stock (a)
until, in the opinion of the Company's counsel, all applicable federal and state
laws and regulations have been complied with, and (b) if the outstanding Stock
is at the time listed on any stock exchange, until the shares to be delivered
have been listed or authorized to be listed on such exchange upon official
notice of issuance, and (c) until all other legal matters in connection with the
issuance and delivery of such shares have been approved by the Company's
counsel. If the sale of Stock has not been registered under the Securities Act,
the Company may require, as a condition to exercise of the purchase grant, such
representations or agreements as counsel for the Company may consider
appropriate to avoid violation of such Act and may require that the certificates
evidencing such Stock bear an appropriate legend restricting transfer. Upon
delivery, such Stock shall bear a notion in form and substance satisfactory to
the Company.

(d) Nontransferability of Grants. Except as provided in Section 7(b)
hereof, no purchase grant may be transferred, and a purchase grant may be
exercised only by the employee or consultant to whom the grant was made.

(e) Death. If an employee's employment or a consultant's consulting
arrangement with the Company and its subsidiaries terminates by reason of death,
each unexercised purchase grant held by the individual immediately prior to
death shall immediately terminate.

(f) Other Termination of Employment or Service. If an employee's
employment or a consultant's consulting arrangement with the Company and its
subsidiaries terminates for any reason other than death, all purchase grants
held by the individual shall immediately terminate. For purposes of this Section
7(f), employment shall not be considered terminated (i) in the case of sick
leave or other bona fide leave of absence approved for purposes of the Plan by
the Committee, so long as the employee's right to reemployment is guaranteed
either by statue or by contract, or (ii) in the case of a transfer of employment
between the Company and a subsidiary or between subsidiaries.

(g) Call Option. At the time an employee or consultant purchases any
Stock under the Plan, he shall execute and deliver to the Company a Call Option
in substantially the form of Exhibit I hereto. The Committee shall specify the
terms and conditions to be contained as a Call Option related to a particular
purchase grant at the time of such purchase grant.

(h) Mergers, etc. In the event of a consolidation or merger in which
the Company is not the surviving corporation or which results in the acquisition
of substantially all the Company's outstanding Stock by a single person or
entity or by a group of persons and/or entities acting in concert, or in the
event of the sale or transfer of substantially all the Company's assets, all
outstanding purchase grants shall thereupon terminate, provided that all
outstanding purchase grants shall become exercisable immediately prior to
consummation of such merger, consolidation or sale of assets unless, if there is
a surviving or acquiring corporation, the Company has arranged, subject to
consummation of the merger, consolidation or sale of assets, for the assumption
of the purchase grants or the grant to participants of replacement purchase
grants by that corporation or an affiliate of that corporation.

8. Employment and Service Rights.

None of the adoption of the Plan, the grant of options or the making of
purchase grants shall confer upon any employee or consultant any right to
continued in the employ or service of the Company or any parent or subsidiary or
affect in any way the right of the Company or parent or subsidiary to terminate

A-8

the employment of an employee or a consultant's consulting arrangement at any
time. Except as specifically provided by the Committee in any particular case,
the loss of existing or potential profit in options granted or purchase grants
made under this Plan shall not constitute an element of damages in the event of
termination of the employment of an employee or termination of a consultant's
consulting arrangement even if the termination is in violation of an obligation
of the Company to the employee or consultant by contract or otherwise.

9. Effects of Discontinuance, Cancellation, Amendment and Termination.

None of the adoption of the Plan nor the grant of options or the making
of purchase grants to an employee or consultant shall affect the Company's right
to grant to such employee or consultant options that are not subject to the
Plan, to issue to such employees Stock or purchase grants as a bonus or
otherwise, or to adopt other plans or arrangements under which Stock may be
issued to employees or consultants.

The Committee may at any time discontinue granting options and making
purchase grants under the Plan. With the consent of the employee or consultant,
the Committee may at any time cancel an existing option or purchase grant in
whole or in part and grant or make to the employee or consultant another option
or purchase grant for such number of shares as the Committee specifies. The
Committee may at any time or times amend the Plan for the purpose of satisfying
applicable legal requirements or for any other purpose which may at the time be
permitted by law, or may at any time terminate the Plan as to any further grants
of options or purchase grants, provided that (except to the extent expressly
required or permitted herein above) no such amendment shall adversely affect the
rights of any employee or consultant (without his or her consent) under any
option previously granted or purchase grant previously made.

A-9

ADDENDUM I

Special Provisions for Plan Participants who are Israeli Residents.

(a) Anything to the contrary herein notwithstanding, with respect to
employees or consultants who are Israeli residents, the Plan may also be
administered pursuant to the provisions of Section 102 ("Section 102") of the
Israeli Income Tax Ordinance (New Version), 1961 (the "Tax Ordinance"), the
rules promulgated thereunder and the Israeli Companies Law, 5759-1999 or any
substantially similar arrangement under Section 3(tet) of the Tax Ordinance.
Details regarding the terms and conditions of options granted and purchase
grants made pursuant to the provisions of Section 102 in addition to those set
forth herein, will be delivered to the participants who are Israeli residents
along with the remaining terms and conditions.

(b) Anything herein to the contrary notwithstanding, each option and
purchase grant, and each share with respect to which an option or purchase grant
has been exercised by an employee or consultant who is an Israeli resident, may
be issued by the Company to, and held in trust (the "Trust") for the benefit of
such employee or consultant by a trustee (the "Trustee") designated by the Board
of Directors of the Company or its subsidiaries, as appropriate, pursuant to
Section 102. All certificates representing shares issued to the Trustee under
the Plan shall be deposited with the Trustee, and shall be held by the Trustee
until such time that such shares are released from the Trust as herein provided.
The Trustee shall hold the same pursuant to the instructions of Directors of the
Company or its subsidiaries, as appropriate, from time to time. The Trustee
shall not use the voting rights vested in such shares and shall not exercise
such rights in any way whatsoever, except in cases when at its discretion and
after consulting with the Board of Directors of the Company or its subsidiaries,
as appropriate, the Trustee believes that the said rights should be exercised
for the protection of the option holders and purchase grantees as a minority
among the Company's stockholders.

(c) Anything herein to the contrary notwithstanding, no options
granted, purchase grants made or shares purchased pursuant to Section 102 shall
be released from the Trust prior to two years after the grant of the options or
purchase grant to the Trustee on behalf of the employee (the "Release Date"), or
two years from the date of approval of the Plan by the Israeli Income Tax
authorities, whichever is later. Subject to the terms hereof, at any time after
the Release Date with respect to any options, purchase grants or shares, each
employee or consultant may require (but shall not be obligated to require) the
Trustee to release such options, purchase grants or shares, provided that no
securities shall be released from the Trust to the employee unless and until
such employee or consultant shall have deposited with the Trustee an amount of
money which, in the Trustee's opinion, is sufficient and necessary for the
discharge of such employee's or consultant's tax obligations with respect to
such shares, or other arrangement for the payment of tax, satisfactory to the
Trustee, have been made.

(d) Upon sale by an employee or consultant of any securities held in
Trust, the Company shall (or shall cause the Trustee to) withhold from the
proceeds of such sale all applicable taxes, shall remit the amount withheld to
the appropriate Israeli tax authorities, shall pay the balance thereof directly

I-1

to such employee or consultant, and shall report to such employee or consultant
the amount so withheld and paid to said tax authorities.

(e) All shares issued upon the exercise of options or purchase grants
granted under the Plan shall entitle the recipient thereof to receive dividends
with respect thereto, and to vote the same at any meeting of the stockholders of
the Company. For as long as shares issued to the Trustee on behalf of the
employee or consultant are held in the Trust, the cash dividends paid with
respect thereto shall be remitted to the Trustee for the benefit of such
employee or consultant, and the Trustee shall vote all such shares in accordance
with the instructions of such employee.

(f) At the Board's discretion, for purposes of simplicity and in order
to ensure compliance with Israel's tax regulations, the exercise of the options
and the purchases and sales of shares issued upon the exercise of purchase
grants made under the Plan shall be executed by the Company or its subsidiaries,
as appropriate.

(g) With respect to Plan participants who are Israeli residents, the
Plan and all instruments issued thereunder or in connection therewith shall be
governed by, and interpreted in accordance with, the laws of the State of
Israel.

(h) Any tax consequences arising from the grant or exercise of any
options or purchase grants, from the payment for shares covered thereby or from
any other event or act (whether of the option holder or purchase grantee or of
the Company or its subsidiaries) hereunder, shall be borne solely by the option
holder or purchase grantee. Furthermore, such grantee shall agree to indemnify
the corporation that employs or retains the option holder or purchase grantee
and the Trustee and hold them harmless against and from any and all liability
for any such tax or interest or penalty thereon, including without limitation,
liabilities relating to the necessity to withhold, or to have withheld, any such
tax from any payment made to the option holder or purchase grantee.

I-2

ANNUAL MEETING OF STOCKHOLDERS OF

AROTECH CORPORATION

June 14, 2004

Please date, sign and mail
your proxy card in the
envelope provided as soon
as possible

Please detach along perforated line and mail in the envelope provided.

--------------------------------------------------------------------------------

-----------------------------------------------------------------------------------------------------------------------------------
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE ELECTION OF DIRECTORS AND "FOR" PROPOSALS 2, 3, 4 AND 5.
PLEASE SIGN, DATE AND RETURN PROMPTLY IN THE ENCLOSED ENVELOPE. PLEASE MARK YOUR VOTE IN BLUE OR BLACK INK AS SHOWN HERE [X]
-----------------------------------------------------------------------------------------------------------------------------------

1. To fix the number of Class III directors at three FOR AGAINST ABSTAIN
and to elect three Class III directors for a
three-year term ending in 2007 and continuing 2. To ratify the appointment of Kost, [ ] [ ] [ ]
until their successors are duly elected and Forer, Gabbay & Kassierer,
qualified: independent certified public
accountants in Israel and a member
firm of Ernst & Young
NOMINEES: International, as our independent
[ ] FOR ALL NOMINEES o Robert S. Ehrlich accountants for the fiscal year
o Bert W. Wasserman ending December 31, 2004
o Edward J. Borey

[ ] WITHHOLD AUTHORITY FOR 3. To amend our Amended and Restated [ ] [ ] [ ]
ALL NOMINEES Certificate of Incorporation to
increase our authorized common
[ ] FOR ALL EXCEPT stock from 100,000,000 shares to
(See instructions below) 250,000,000 shares

4. To amend the terms of our 1995 [ ] [ ] [ ]
Non-Employee Director Stock Option
Plan to increase initial grants to
new directors from 25,000 options
INSTRUCTION: To withhold authority to vote for to 50,000 options, and to increase
any individual nominee(s), mark annual grants to directors from
"FOR ALL EXCEPT" and fill in the 10,000 options to 35,000 options
circle next to each nominee you
wish to withhold, as shown here: 5. To approve and adopt the 2004 [ ] [ ] [ ]
( ) Stock Option and Restricted Stock
Purchase Plan

PLEASE SIGN, DATE AND RETURN THIS PROXY FORM PROMPTLY USING THE
ENCLOSED ENVELOPE.

The undersigned acknowledges receipt of the Notice of Annual
Meeting of Stockholders and Proxy Statement of Arotech Corporation
dated May 7, 2004 and of Arotech Corporation's Annual Report for
the fiscal year ended December 31, 2003.

----------------------------------------------------------

Mark here if you plan to attend the meeting. [ ]
---------------------------------------------------------
To change the address on your account, please check
the box at right and indicate your new address in
the address space above. Please note that changes
to the registered name(s) on the account may not be
submitted via this method. [ ]
---------------------------------------------------------

------------------------------- -------------- -------------------------------- -------
Signature of Date: Signature of Date:
Stockholder Stockholder
------------------------------- -------------- -------------------------------- -------

NOTE: Please sign exactly as name appears on this Proxy. When shares are held by joint tenants, both should sign. If signing
as attorney, executor, administrator, trustee or guardian, please give full title as such. If you are signing for a
corporation, please sign in the full corporate name by President or other authorized officer. If you are signing for a
partnership, please sign in the partnership name by authorized person.

Proxy Solicited on behalf of the Board of Directors of

AROTECH CORPORATION

FOR ANNUAL MEETING OF STOCKHOLDERS TO BE HELD JUNE 14, 2004

The undersigned, having received the Notice of the Annual Meeting of
Stockholders and the Proxy Statement on behalf of the Board of Directors of
Arotech Corporation (the "Company"), hereby appoint(s) Robert S. Ehrlich and
Yaakov Har-Oz, and each of them, proxies of the undersigned (with full power of
substitution) to attend the Annual Meeting of the Company to be held on Monday,
June 14, 2004 at 10:00 a.m. local time in the Ballroom of the Shelburne Murray
Hill Hotel, 303 Lexington Avenue, New York, New York, and all postponements and
adjournments thereof (the "Meeting"), and there to vote all shares of common
stock of the Company that the undersigned would be entitled to vote, if
personally present, in regard to all matters that may come before the Meeting,
and without limiting the general authorization hereby given, the undersigned
directs that his or her vote be cast as specified in this Proxy.

THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED IN THE MANNER
SPECIFIED HEREIN. IF NO SPECIFICATION IS MADE, THE PROXIES INTEND TO VOTE FOR
THE NOMINEES AND FOR THE OTHER PROPOSALS SET FORTH HEREIN AND DESCRIBED IN THE
BOARD OF DIRECTORS' PROXY STATEMENT. IF ANY OF THE NOMINEES IS NOT AVAILABLE TO
SERVE, THIS PROXY MAY BE VOTED FOR A SUBSTITUTE. THIS PROXY DELEGATES
DISCRETIONARY AUTHORITY WITH RESPECT TO MATTERS NOT KNOWN OR DETERMINED AT THE
TIME OF SOLICITATION OF THIS PROXY. THE UNDERSIGNED HEREBY REVOKES ANY OTHER
PROXY PREVIOUSLY GRANTED TO VOTE THE SAME SHARES OF STOCK FOR SAID MEETING.

SEE REVERSE SIDE. If you wish to vote in accordance with the recommendations of
the Board of Directors, just sign on the reverse side. You need not mark any
boxes.

(CONTINUED AND TO BE SIGNED ON THE REVERSE SIDE)

ANNUAL MEETING OF STOCKHOLDERS OF

AROTECH CORPORATION

June 14, 2004

-------------------------------
PROXY VOTING INSTRUCTIONS
-------------------------------

MAIL - Date, sign and mail your proxy
card in the envelope provided as soon
as possible.

- OR -

TELEPHONE - Call toll-free --------------------------------------
1-800-PROXIES (1-800-776-9437) from COMPANY NUMBER
any touch-tone telephone and follow --------------------------------------
the instructions. Have your proxy card ACCOUNT NUMBER
available when you call --------------------------------------

- OR - --------------------------------------

INTERNET - Access "www.voteproxy.com"
and follow the on-screen instructions.
Have your proxy card available when
you access the web page.

Please detach along perforated line and mail in the envelope provided IF you are not voting via telephone or the Internet.

-----------------------------------------------------------------------------------------------------------------------------------

1. To fix the number of Class III directors at three and FOR AGAINST ABSTAIN
to elect three Class III directors for a three-year
term ending in 2007 and continuing until their 2. To ratify the appointment of Kost, [ ] [ ] [ ]
successors are duly elected and qualified: Forer, Gabbay & Kassierer,
independent certified public
NOMINEES: accountants in Israel and a member
[ ] FOR ALL NOMINEES o Robert S. Ehrlich firm of Ernst & Young International,
o Bert W. Wasserman as our independent accountants for
o Edward J. Borey the fiscal year ending December 31,
2004
[ ] WITHHOLD AUTHORITY FOR
ALL NOMINEES 3. To amend our Amended and Restated [ ] [ ] [ ]
Certificate of Incorporation to
[ ] FOR ALL EXCEPT increase our authorized common stock
(See instructions below) from 100,000,000 shares to
250,000,000 shares
INSTRUCTION: To withhold authority to vote for any
individual nominee(s), mark "FOR ALL 4. To amend the terms of our 1995 [ ] [ ] [ ]
EXCEPT" and fill in the circle next to Non-Employee Director Stock Option
each nominee you wish to withhold, as Plan to increase initial grants to
shown here: ( ) new directors from 25,000 options to
50,000 options, and to increase
annual grants to directors from
10,000 options to 35,000 options

5. To approve and adopt the 2004 Stock [ ] [ ] [ ]
Option and Restricted Stock Purchase
--------------------------------------------------------- Plan

PLEASE SIGN, DATE AND RETURN THIS PROXY FORM PROMPTLY USING THE
ENCLOSED ENVELOPE.

--------------------------------------------------------- The undersigned acknowledges receipt of the Notice of Annual
To change the address on your account, please check the Meeting of Stockholders and Proxy Statement of Arotech
box at right and indicate your new address in the Corporation dated May 7, 2004 and of Arotech Corporation's Annual
address space above. Please note that changes to the Report for the fiscal year ended December 31, 2003.
registered name(s) on the account may not be submitted
via this method. [ ] S
---------------------------------------------------------
Mark here if you plan to attend the meeting. [ ]

------------------------------- -------------- -------------------------------- ----------
Signature of Date: Signature of Date:
Stockholder Stockholder
------------------------------- -------------- -------------------------------- ----------

Note: Please sign exactly as name appears on this Proxy. When shares are held by joint tenants, both should sign. If signing
as attorney, executor, administrator, trustee or guardian, please give full title as such. If you are signing for a
corporation, please sign in the full corporate name by President or other authorized officer. If you are signing for a
partnership, please sign in the partnership name by authorized person.