EXHIBIT 4.1



                          SECURITIES PURCHASE AGREEMENT

                  This Securities Purchase Agreement (this "AGREEMENT") is dated
as of  September  30,  2003,  by  and  among  Arotech  Corporation,  a  Delaware
corporation  (the  "COMPANY"),  and the  purchasers  identified on the signature
pages hereto (each, a "PURCHASER" and collectively, the "PURCHASERS").

                  WHEREAS:

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

                  B. The  Company  has  authorized  a new  series of 8%  secured
convertible  debentures of the Company in the form attached  hereto as Exhibit A
(together  with any  convertible  debentures  issued in  replacement  thereof in
accordance  with the terms  thereof,  the "INITIAL  DEBENTURES"),  which Initial
Debentures  shall be convertible  into shares of the Company's  Common Stock (as
converted, the "INITIAL UNDERLYING SHARES"), in accordance with the terms of the
Initial Debentures;

                  C. The  Company  has  authorized  a new  series of 8%  secured
convertible  debentures of the Company in the form attached  hereto as Exhibit A
(together  with any  convertible  debentures  issued in  replacement  thereof in
accordance with the terms thereof, the "ADDITIONAL  DEBENTURES" and collectively
with the Initial  Debentures,  the  "DEBENTURES"),  which Additional  Debentures
shall be  convertible  into  shares  of the  Common  Stock  (as  converted,  the
"ADDITIONAL  UNDERLYING  SHARES" and  collectively  with the Initial  Underlying
Shares, the "UNDERLYING SHARES"), in accordance with the terms of the Additional
Debentures;

                  D. Each Purchaser  wishes to purchase,  and the Company wishes
to sell,  upon the  terms and  conditions  stated  in this  Agreement,  (i) that
aggregate principal amount ("INVESTMENT AMOUNT") of Initial Debentures set forth
on such Purchaser's  signature page hereto (which aggregate principal amount for
all Purchasers shall be $5,000,000) and (ii) warrants, in substantially the form
attached  hereto as  Exhibit B (the  "INITIAL  WARRANTS"),  to acquire up to 250
shares of Common Stock for each $1,000 of principal amount of Initial Debentures
purchased (as exercised, collectively, the "INITIAL WARRANT SHARES");

                  E.  Subject  to the  terms  and  conditions  set forth in this
Agreement,  each  Purchaser  shall have the right to  purchase,  and the Company
shall be required to sell (i) up to the aggregate  principal amount ("ADDITIONAL
INVESTMENT  AMOUNT")  of  Additional  Debentures  which  is equal to 120% of the
Investment  Amount  (which  aggregate  Additional  Investment  Amounts  for  all
Purchasers shall be up to $6,000,000) and (ii) warrants,  in  substantially  the
form attached hereto as Exhibit B (the "ADDITIONAL  WARRANTS" and,  collectively

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with the  Initial  Warrants,  the  "WARRANTS"),  to acquire 250 shares of Common
Stock for each $1,000 of principal amount of Additional Debentures purchased (as
exercised,  collectively, the "ADDITIONAL WARRANT SHARES" and, collectively with
the Initial Warrant Shares, the "WARRANT SHARES"); and

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

                  NOW,  THEREFORE,  IN  CONSIDERATION  of the  mutual  covenants
contained in this Agreement,  and for other good and valuable  consideration the
receipt  and  adequacy  of which are hereby  acknowledged,  the  Company and the
Purchasers agree as follows:

                                   ARTICLE I.
                                   DEFINITIONS

                  Section 1.1  Definitions.  In  addition  to the terms  defined
elsewhere in this Agreement,  for all purposes of this Agreement,  the following
terms shall have the meanings indicated in this Section 1.1:

                  "ACTION" means any action, suit, inquiry, notice of violation,
proceeding   (including  any  partial   proceeding  such  as  a  deposition)  or
investigation pending or threatened in writing against or affecting the Company,
any  Subsidiary or any of their  respective  properties  before or by any court,
arbitrator,   governmental  or  administrative   agency,   regulatory  authority
(federal,  state,  county,  local or foreign),  stock market,  stock exchange or
trading facility.

                  "AFFILIATE"  means any Person  that,  directly  or  indirectly
through one or more  intermediaries,  controls or is  controlled  by or is under
common control with a Person, as such terms are used in and construed under Rule
144.

                  "BUSINESS DAY" means any day except  Saturday,  Sunday and any
day  which  shall  be  a  federal  legal  holiday  or a  day  on  which  banking
institutions in the State of New York are authorized or required by law or other
governmental action to close.

                  "COMMISSION" means the Securities and Exchange Commission.

                  "COMMON STOCK" means the common stock of the Company, $.01 par
value per share,  and any securities  into which such common stock may hereafter
be reclassified.

                  "COMMON STOCK EQUIVALENTS" means any securities of the Company
or any  Subsidiary  which entitle the holder  thereof to acquire Common Stock at
any time,  including  without  limitation,  any debt,  preferred stock,  rights,
options,  warrants or other  instrument that is at any time  convertible into or
exchangeable  for, or otherwise  entitles the holder thereof to receive,  Common


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Stock or other  securities  that  entitle  the holder to  receive,  directly  or
indirectly, Common Stock.

                  "COMPANY COUNSEL" means Yaakov Har-Oz, Esq.

                  "EFFECTIVE DATE" means the date that the initial  Registration
Statement  required  by the  Registration  Rights  Agreement  is first  declared
effective by the Commission.

                  "EXCHANGE ACT" means the  Securities  Exchange Act of 1934, as
amended.

                  "IES ELECTRONICS" means IES Electronics Industries Ltd.

                  "IES  SECURITY  AGREEMENTS"  means the  Pledge,  Security  and
Escrow  Agreement,  granting  to  IES  Electronics  a  secured  second  priority
interest,  dated  as of  August  2,  2002  made by the  Company  in favor of IES
Electronics relating to the shares of I.E.S. Defense Services, Inc., as modified
by the letter  agreement  between the Company and IES  Electronics,  dated as of
December 31, 2002, and the Security Agreement dated as of March 17, 2003 made by
the  Company  in  favor  of  IES  Electronics  relating  to  the  shares  of IES
Interactive Training,  Inc., I.E.S. Defense Services, Inc. and M.D.T. Protective
Industries, Ltd.

                  "INDEBTEDNESS" shall mean the principal amount of, premium, if
any,  profit  participation,  if any, and accrued and unpaid interest on and all
other  amounts  and costs  payable  in  respect  of (a)  indebtedness  for money
borrowed from others; (b) indebtedness  guaranteed,  directly or indirectly,  in
any  manner,  or in effect  guaranteed,  directly or  indirectly,  in any manner
through an agreement,  contingent  or  otherwise,  to supply funds to, or in any
other manner invest in the debtor, or to purchase  indebtedness,  or to purchase
and pay for  property if not  delivered  or pay for  services if not  performed,
primarily  for the  purpose  of  enabling  the  debtor  to make  payment  of the
indebtedness or to assure the owners of the  indebtedness  against loss; (c) all
indebtedness secured by any mortgage,  lien, pledge, charge or other encumbrance
upon property owned by the Company;  (d) all indebtedness of such Person created
or arising under any conditional sale, lease (intended  primarily as a financing
device) or other title retention or security  agreement with respect to property
acquired  by the  Company  even  though the rights and  remedies  of the seller,
lessor or lender under such  agreement or lease in the event of a default may be
limited to repossession or sale of such property;  and (e) renewals,  extensions
and refundings of any such Indebtedness.

                  "INTELLECTUAL   PROPERTY   SECURITY   AGREEMENT"   means   the
Intellectual   Property  Security  Agreement  by  and  among  the  Company,  the
subsidiaries  of the Company party thereto,  and the holders of the  Debentures,
pursuant  to which the  obligations  of the  Company  under the  Debentures  are
secured by the intellectual  property of the Company and the subsidiaries  party
thereto, such agreement in the form of Exhibit F attached hereto.

                  "LIEN" means any lien, charge, encumbrance, security interest,
right of first refusal or other restrictions of any kind.


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                  "PERSON"  means an  individual  or  corporation,  partnership,
trust,  incorporated  or  unincorporated  association,  joint  venture,  limited
liability company, joint stock company,  government (or an agency or subdivision
thereof) or other entity of any kind.

                  "PROCEEDING" means an action,  claim,  suit,  investigation or
proceeding   (including,   without  limitation,   an  investigation  or  partial
proceeding, such as a deposition), whether commenced or threatened.

                  "PURCHASER PERCENTAGE" means, with respect to a Purchaser, the
percentage equal to the product of (x) a fraction,  the numerator of which shall
be the Investment  Amount paid by such Purchaser on the Initial Closing Date and
the  denominator of which shall be the aggregate  Investment  Amount paid by all
Purchasers on the Initial Closing Date times (y) 100.

                  "REGISTRATION   STATEMENT"  means  a  registration   statement
meeting the  requirements  set forth in the  Registration  Rights  Agreement and
covering the resale by the Purchasers of the  Underlying  Shares and the Warrant
Shares.

                  "RULE  144"  means  Rule  144  promulgated  by the  Commission
pursuant to the  Securities  Act, as such Rule may be amended from time to time,
or any similar rule or regulation  hereafter  adopted by the  Commission  having
substantially the same effect as such Rule.

                  "SECURITIES" means the Debentures,  the Underlying Shares, the
Warrants and the Warrant Shares.

                  "SECURITIES ACT" means the Securities Act of 1933, as amended.

                  "SECURITY    AGREEMENT"    means   the   security    agreement
substantially  in the form of Exhibit G hereto  granting to the Purchasers (i) a
first  priority,   perfected  security  interest  in  the  stock  of  MDT  Armor
Corporation  and any future  assets  acquired  by or on behalf of the Company in
connection  with an Acquisition (as defined in the Security  Agreement),  (ii) a
second priority  security  interest in the assets of IES  Interactive  Training,
Inc. and stock of other subsidiaries directly or indirectly owned by the Company
(other  than  that of IES  Interactive  Training,  Inc.  and  M.D.T.  Protective
Industries  Ltd.),  subordinate  only to the  security  interest in favor of the
holders of Outstanding  Debentures and (iii) a third priority  security interest
in the stock of M.D.T.  Protective  Industries  Ltd., IES Interactive  Training,
Inc.  and  I.E.S.  Defense  Services,  Inc.,  subordinate  only to the  security
interest  in favor of the holders of  Outstanding  Debentures  and the  security
interest in favor IES Electronics pursuant to the IES Security Agreement.

                  "SUBSIDIARY"  means any entity in which the Company,  directly
or indirectly, owns capital stock or holds an equity or similar interest, all of
which are listed in Schedule 3.1(a).

                  "TRADING  DAY"  means (i) a day on which the  Common  Stock is
traded on a  Trading  Market,  or (ii) if the  Common  Stock is not  listed on a
Trading   Market,   a  day  on  which  the   Common   Stock  is  traded  in  the
over-the-counter  market, as reported by the OTC Bulletin Board, or (iii) if the


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Common Stock is not quoted on the OTC Bulletin  Board, a day on which the Common
Stock is quoted in the  over-the-counter  market as  reported by Pink Sheets LLC
(formerly  the  National   Quotation  Bureau   Incorporated)   (or  any  similar
organization  or  agency  succeeding  to its  functions  of  reporting  prices);
provided, that in the event that the Common Stock is not listed or quoted as set
forth in (i), (ii) and (iii) above, then Trading Day shall mean a Business Day.

                  "TRADING  MARKET"  means  whichever  of  the  New  York  Stock
Exchange,  the American Stock Exchange, the Nasdaq National Market or The Nasdaq
SmallCap  Market  that the Common  Stock is listed or quoted for  trading on the
date in question.

                  "TRANSACTION DOCUMENTS" means this Agreement,  the Debentures,
the Security  Agreement,  the  Intellectual  Property  Security  Agreement,  the
Warrants, the Registration Rights Agreement, the Transfer Agent Instructions and
any other documents or agreements  executed in connection with the  transactions
contemplated hereunder.

                  "TRANSFER  AGENT  INSTRUCTIONS"  means the Company's  Transfer
Agent Instructions in the form of Exhibit D.

                                   ARTICLE II.
                                PURCHASE AND SALE

                  Section 2.1 Purchase and Sale of Debentures and Warrants.

                  (a) (i) Initial  Debentures and Initial  Warrants.  Subject to
the  satisfaction (or waiver) of the conditions set forth in Sections 2.2(a) and
2.3(a)  below,  the  Company  shall issue and sell to each  Purchaser,  and each
Purchaser severally, but not jointly, agrees to purchase from the Company on the
Initial  Closing  Date  (as  defined  below),  a  principal  amount  of  Initial
Debentures  equal to its  Investment  Amount,  along with  Initial  Warrants  to
acquire up to 250 Initial  Warrant  Shares for each $1,000  principal  amount of
Initial Debentures purchased (the "INITIAL CLOSING").

                      (ii)  Additional   Debentures  and  Additional   Warrants.
Subject to the  satisfaction (or waiver) of the conditions set forth in Sections
2.2(b) and 2.3(b) below,  at the option of each Purchaser from time to time, the
Company  shall  issue  and sell to each  Purchaser,  at  multiple  closings,  if
applicable, and each Purchaser severally, but not jointly, may purchase from the
Company on an Additional Closing Date (as defined below),  Additional Debentures
in a principal  amount  equal to up to such  Purchaser's  Additional  Investment
Amount,  along with Additional  Warrants to acquire up to 250 Additional Warrant
Shares for each  $1,000  principal  amount of  Additional  Debentures  purchased
(each, an "ADDITIONAL CLOSING").

                      (iii)  Closings.  The Initial  Closing and the  Additional
Closings collectively are referred to in this Agreement as the "CLOSINGS".  Each
Closing  shall occur on the  applicable  Closing  Date at the offices of Schulte
Roth & Zabel LLP, 919 Third Avenue, New York, New York 10022.


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                      (iv) Purchase Price. The purchase price for each Purchaser
(the "PURCHASE PRICE") of the Debentures and related Warrants to be purchased by
each such  Purchaser at each  Closing  shall be equal to $1.00 for each $1.00 of
principal  amount  of  Debentures  being  purchased  by such  Purchaser  at such
Closing.

                  (b)  Initial  Closing  Date.  The date and time of the Initial
Closing (the "INITIAL  CLOSING DATE") shall be 10:00 a.m., New York Time, on the
date  hereof,  subject  to  notification  of  satisfaction  (or  waiver)  of the
conditions to the Initial  Closing set forth in Sections 2.2(a) and 2.3(a) below
(or such later date as is mutually agreed to by the Company and each Purchaser).

                  (c)  Additional  Closing  Date.  The  date  and  time  of each
Additional Closing (each, an "ADDITIONAL CLOSING Date") shall be 10:00 a.m., New
York Time, on the date specified in the Additional  Debenture Notice (as defined
below), subject to satisfaction (or waiver) of the conditions to each Additional
Closing set forth in Sections 2.2(b) and 2.3(b) and the conditions  contained in
this Section 2.1(c) (or such later date as is mutually  agreed to by the Company
and the applicable  Purchaser).  Subject to the  requirements of Sections 2.2(b)
and 2.3(b) and the  conditions  contained in this Section  2.1(c) each Purchaser
may purchase,  at such Purchaser's option,  Additional  Debentures by delivering
written  notice to the Company (an  "ADDITIONAL  DEBENTURE  NOTICE") at any time
during the period  beginning  after the date hereof and ending on and  including
the date which is the eighteen  month  anniversary of the  effectiveness  of the
Registration  Statement relating to the Initial Debentures and Initial Warrants.
The  Additional  Debenture  Notice shall be delivered at least ten Business Days
prior to the  Additional  Closing  Date set  forth in the  Additional  Debenture
Notice. The Additional Debenture Notice shall set forth (i) the principal amount
of Additional Debentures and related Additional Warrants to be purchased by such
Purchaser at the applicable  Additional  Closing Date,  which principal  amount,
when  added to the  principal  amount of any  Additional  Debentures  previously
purchased  by such  Purchaser,  shall not  exceed  such  Purchaser's  Additional
Investment  Amount,  (ii)  the  aggregate  Purchase  Price  for  the  Additional
Debentures  and  related  Additional  Warrants  to be  purchased  and  (iii) the
Additional Closing Date. As used herein, "BUSINESS DAY" means any day other than
Saturday,  Sunday or other day on which commercial banks in The City of New York
are authorized or required by law to remain closed.

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

                  Section 2.2 Company Closing Deliveries.


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                  (a) At the Initial Closing, the Company shall deliver or cause
to be delivered to each Purchaser the following:

                      (i) this Agreement duly executed by the Company;

                      (ii)  a  Debenture,   registered   in  the  name  of  such
Purchaser,  evidencing  the  principal  amount of  Debentures  purchased by such
Purchaser, which amount is such Purchaser's Investment Amount;

                      (iii) a Warrant, registered in the name of such Purchaser,
pursuant to which such  Purchaser  shall have the right to acquire 250 shares of
Common  Stock  for each  $1,000 of such  Purchaser's  Investment  Amount,  at an
exercise price equal to $1.4375;

                      (iv) the legal opinion of Company Counsel, in agreed form,
addressed to the Purchasers;

                      (v) the Registration Rights Agreement duly executed by the
Company; and

                      (vi) a  Voting  Agreement  substantially  in the  form  of
Exhibit H hereto.

                  (b) At each Additional  Closing,  the Company shall deliver or
cause to be delivered to each Purchaser the following:

                      (i) a Debenture, registered in the name of such Purchaser,
evidencing the principal amount of Debentures purchased by such Purchaser, which
amount is such Purchaser's Additional Investment Amount;

                      (ii) a Warrant,  registered in the name of such Purchaser,
pursuant to which such  Purchaser  shall have the right to acquire 250 shares of
Common Stock for each $1,000 of such Purchaser's  Additional  Investment Amount,
at an exercise price equal to $1.8125;

                      (iii) the legal  opinion  of  Company  Counsel,  in agreed
form, addressed to the Purchasers;

                      (iv)  acknowledgment  from the Company's transfer agent as
to the continuing validity of the Transfer Agent Instructions;

                      (v) certified  copies of UCC search  results,  listing all
effective  financing  statements  which name as debtor the Company or any of its
Subsidiaries  and  which  are  filed in each  jurisdiction  in  which a  secured
creditor of the Company or any of its  Subsidiaries  should have filed since the
previous  Closing  for which such  search  results  were  provided to perfect an
interest  in  any  assets  thereof,  together  with  copies  of  such  financing
statements,  none of  which,  except  as  otherwise  agreed  in  writing  by the
Purchasers,  shall  cover any of the  Collateral  (as  defined  in the  Security
Agreement and the Intellectual  Property Security  Agreement) and the results of


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searches  for any tax Lien and  judgment  Lien filed  against such Person or its
property,  which  results,  except  as  otherwise  agreed to in  writing  by the
Purchasers, shall not show any such Liens; and

                      (vi) a perfection certificate, duly completed and executed
by the Company and each of its Subsidiaries,  in form and substance satisfactory
to the Purchasers.

                  (c) Within two (2) Business Days of the Initial  Closing,  the
Company shall deliver or cause to be delivered to each Purchaser the following:

                      (i) the Security  Agreement  duly  executed by the Company
and the subsidiaries of the Company party thereto; and

                      (ii) the  Intellectual  Property  Security  Agreement duly
executed by the Company and the subsidiaries of the Company party thereto.

                  (d) Within six (6) Business Days of the Initial  Closing,  the
Company shall deliver or cause to be delivered to each Purchaser the following:

                      (i) certified  copies of UCC search  results,  listing all
effective  financing  statements  which name as debtor the Company or any of its
Subsidiaries  and  which  are  filed in each  jurisdiction  in  which a  secured
creditor of the Company or any of its Subsidiaries should have filed in the past
five years to perfect an interest in any assets thereof, together with copies of
such financing statements,  none of which, except as otherwise agreed in writing
by the Purchasers, shall cover any of the Collateral (as defined in the Security
Agreement and the Intellectual  Property Security  Agreement) and the results of
searches  for any tax Lien and  judgment  Lien filed  against such Person or its
property,  which  results,  except  as  otherwise  agreed to in  writing  by the
Purchasers, shall not show any such Liens;

                      (ii) a perfection certificate, duly completed and executed
by the Company and each of its Subsidiaries,  in form and substance satisfactory
to the Purchasers; and

                      (iii) the  Transfer  Agent  Instructions  executed  by the
Company and delivered to and acknowledged by the Company's transfer agent.

                  Section 2.3 Purchaser Closing Deliveries.

                  (a) At the Initial  Closing,  each Purchaser  shall deliver or
cause to be delivered to the Company the following:

                      (i) this Agreement duly executed by such Purchaser;

                      (ii) such Purchaser's  Investment  Amount in United States
dollars  and in  immediately  available  funds,  by wire  transfer to an account
designated in writing by the Company for such purpose; and


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                      (iii) the  Registration  Rights Agreement duly executed by
such Purchaser.

                  (b) Within two (2) Business Days of the Initial Closing,  each
Purchaser shall deliver or cause to be delivered to the Company the following:

                      (i)  the  Security   Agreement   duly   executed  by  such
Purchaser; and

                      (ii) the  Intellectual  Property  Security  Agreement duly
executed by such Purchaser.

                  (c) At each Additional  Closing,  each Purchaser shall deliver
or cause to be delivered to the Company such Purchaser's  Additional  Investment
Amount in United States  dollars and in  immediately  available  funds,  by wire
transfer to an account designated in writing by the Company for such purpose.

                                  ARTICLE III.
                         REPRESENTATIONS AND WARRANTIES

                  Section 3.1 Representations and Warranties of the Company. The
Company  hereby  makes the  following  representations  and  warranties  to each
Purchaser:

                  (a)  Subsidiaries.  The  Company  has no  direct  or  indirect
Subsidiaries other than those listed in Schedule 3.1(a).  Except as disclosed in
Schedule 3.1(a),  the Company owns,  directly or indirectly,  all of the capital
stock of each Subsidiary free and clear of any and all Liens, and all the issued
and  outstanding  shares of capital stock of each  Subsidiary are validly issued
and are fully paid, non-assessable and free of preemptive and similar rights.

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


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                  (c) Authorization;  Enforcement. The Company has the requisite
corporate  power and authority to enter into and to consummate the  transactions
contemplated by each of the Transaction Documents and otherwise to carry out its
obligations  hereunder and  thereunder and to issue the Securities in accordance
with the terms hereof and  thereof.  The  execution  and delivery of each of the
Transaction  Documents  by  the  Company  and  the  consummation  by it  of  the
transactions contemplated hereby and thereby, including, without limitation, the
issuance of the Debentures and the Warrants and the  reservation for issuance of
the  Underlying  Shares and the  Warrant  Shares  issuable  upon  conversion  or
exercise  thereof or in respect of interest  payable on the  Debentures,  as the
case may be, have been duly  authorized by all  necessary  action on the part of
the Company  and no further  action is  required  by the  Company,  its Board of
Directors  or its  stockholders  in  connection  herewith  and  therewith.  Each
Transaction Document has been (or upon delivery will have been) duly executed by
the Company  and,  when  delivered in  accordance  with the terms  hereof,  will
constitute the valid and binding obligation of the Company  enforceable  against
the Company in accordance with its terms,  except (a) as such enforceability may
be limited by bankruptcy,  insolvency,  reorganization or similar laws affecting
creditors' rights generally,  (b) as enforceability of any  indemnification  and
contribution  provisions  may be limited under the federal and state  securities
laws and public  policy,  and (c) that the remedy of  specific  performance  and
injunctive  and other  forms of  equitable  relief may be  subject to  equitable
defenses and to the discretion of the court before which any proceeding therefor
may be brought.

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

                  (e) Filings,  Consents and Approvals.  Neither the Company nor
any Subsidiary is required to obtain any consent, waiver, authorization or order
of,  give any  notice  to,  or make any  filing or  registration  (collectively,
"CONSENTS") with, any court or other federal, state, local or other governmental



                                     - 10 -
<PAGE>

authority  or any  regulatory  or  self-regulatory  agency  or other  Person  in
connection  with the execution,  delivery and  performance by the Company of the
Transaction  Documents,  other than (i) the filing of appropriate  UCC financing
statements with the  appropriate  states and other  authorities  pursuant to the
Security Agreement and the Intellectual  Property Security  Agreement,  (ii) the
filing with the Commission of one or more Registration  Statements in accordance
with  the  requirements  of  the  Registration   Rights  Agreement,   (iii)  the
application(s)  to the Nasdaq  National Market for the listing of the Underlying
Shares, any Interest Shares and the Warrant Shares for trading thereon if and in
the time and manner  required  thereby,  (iv) all filings  required  pursuant to
Section 4.5 hereof,  and (v) those Consents set forth in Schedule 3.1(e),  which
Consents have been obtained prior to the date hereof.

                  (f) Issuance of the  Securities.  The  Debentures and Warrants
are duly  authorized  and, upon  issuance in  accordance  with the terms hereof,
shall be free  from all  taxes,  liens and  charges  with  respect  to the issue
thereof.  The Underlying Shares, any Interest Shares and the Warrant Shares have
been duly  authorized  and,  when  issued  and paid for in  accordance  with the
Transaction  Documents,  will  be  duly  and  validly  issued,  fully  paid  and
nonassessable,  free and clear of all Liens,  taxes and charges  with respect to
the issue  thereof.  The Company has reserved from its duly  authorized  capital
stock the  maximum  number of shares of Common  Stock  issuable  pursuant to the
Debentures  and the  Warrants  in order to issue the full  number of  Underlying
Shares,  any Interest Shares and Warrant Shares as are or may become issuable in
accordance  with the terms of the  Debentures  and the  Warrants.  Assuming  the
accuracy of each of the  representations and warranties set forth in Section 3.2
hereof,   the  issuance  by  the  Company  of  the  Securities  is  exempt  from
registration under the 1933 Act.

                  (g)  Capitalization.  The  number  of  shares  and type of all
authorized,  issued and outstanding capital stock of the Company is set forth in
Schedule 3.1(g).  Except as set forth in Schedule  3.1(g),  no securities of the
Company are  entitled to  preemptive  or similar  rights,  and no Person has any
right of first refusal, preemptive right, right of participation, or any similar
right  to  participate  in the  transactions  contemplated  by  the  Transaction
Documents.  Except as a result of the  purchase and sale of the  Securities  and
except as  disclosed  in  Schedule  3.1(g),  there are no  outstanding  options,
warrants,  scrip rights to subscribe to, calls or  commitments  of any character
whatsoever relating to, or securities, rights or obligations convertible into or
exchangeable  for, or giving any Person any right to  subscribe  for or acquire,
any  shares  of Common  Stock,  or  contracts,  commitments,  understandings  or
arrangements  by which the Company or any  Subsidiary  is or may become bound to
issue additional shares of Common Stock, or securities or rights  convertible or
exchangeable  into  shares of  Common  Stock.  Except  as set forth in  Schedule
3.1(g),  the issue and sale of the Securities will not,  immediately or with the
passage of time,  obligate  the Company to issue shares of Common Stock or other
securities  to any Person (other than the  Purchasers)  and will not result in a
right of any holder of Company  securities to adjust the  exercise,  conversion,
exchange or reset price under such securities.

                  (h) SEC Reports;  Financial Statements.  The Company has filed
all reports required to be filed by it under the Securities Act and the Exchange
Act,  including  pursuant to Section 13(a) or 15(d)  thereof,  for the two years


                                     - 11 -
<PAGE>

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

                  (i)  Material  Changes.  Since the date of the latest  audited
financial  statements  included  within the SEC Reports,  except as specifically
disclosed  in the SEC  Reports,  (i)  there  has been no  event,  occurrence  or
development  that has had or that could  reasonably  be  expected to result in a
Material  Adverse  Effect,  (ii) the Company has not  incurred  any  liabilities
(contingent  or otherwise)  other than (A) trade  payables and accrued  expenses
incurred in the ordinary  course of business  consistent  with past practice and
(B)  liabilities  not  required  to be  reflected  in  the  Company's  financial
statements pursuant to GAAP or required to be disclosed in filings made with the
Commission,  (iii) the Company has not altered its method of  accounting  or the
identity of its auditors, (iv) the Company has not declared or made any dividend
or  distribution  of cash or other  property to its  stockholders  or purchased,
redeemed or made any  agreements to purchase or redeem any shares of its capital
stock,  (v) the Company  has not issued any equity  securities  to any  officer,
director or Affiliate,  except pursuant to existing  Company stock option plans,
(vi) the Company has not sold any assets,  individually or in the aggregate,  in
excess of  $250,000  outside of the  ordinary  course of  business  or (vii) the
Company has not had capital expenditures,  individually or in the aggregate,  in
excess of $250,000.  The Company does not have pending before the Commission any
request for confidential treatment of information.

                  (j) Litigation.  Except as set forth in Schedule 3.1(j), there
is no Action which (i) adversely affects or challenges the legality, validity or
enforceability  of any of the  Transaction  Documents or the  Securities or (ii)
could, if there were an unfavorable decision,  individually or in the aggregate,


                                     - 12 -
<PAGE>

have or reasonably be expected to result in a Material  Adverse Effect.  Neither
the Company nor any Subsidiary,  nor any director or officer thereof,  is or has
been the subject of any Action  involving a claim of  violation  of or liability
under federal or state  securities  laws or a claim of breach of fiduciary duty.
There has not been, and to the knowledge of the Company, there is not pending or
contemplated,  any investigation by the Commission  involving the Company or any
current or former  director or officer of the Company.  The  Commission  has not
issued  any stop  order or  other  order  suspending  the  effectiveness  of any
registration statement filed by the Company or any Subsidiary under the Exchange
Act or the Securities Act.

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

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

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

                  (n) Title to Assets.  The  Company and the  Subsidiaries  have
good and marketable  title in fee simple to all real property owned by them that
is material to their respective  businesses and good and marketable title in all
personal property owned by them that is material to their respective businesses,
in each case free and clear of all Liens, except as set forth in Schedule 3.1(n)
and except for Liens as do not materially  affect the value of such property and
do not  materially  interfere  with the use made and proposed to be made of such
property by the Company and the  Subsidiaries.  Any real property and facilities
held under  lease by the  Company  and the  Subsidiaries  are held by them under
valid,   subsisting  and  enforceable  leases  of  which  the  Company  and  the
Subsidiaries are in compliance in all material respects.


                                     - 13 -
<PAGE>

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

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

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

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

                  (s) Tax Status.  The Company and each of its  Subsidiaries (i)
has made or filed all  federal  and  state  income  and all  other tax  returns,
reports and  declarations  required by any  jurisdiction to which it is subject,
(ii) has paid all taxes and other governmental  assessments and charges that are
material in amount,  shown or determined to be due on such returns,  reports and
declarations, except those being contested in good faith and (iii) has set aside


                                     - 14 -
<PAGE>

on its books provision reasonably adequate for the payment of all material taxes
for  periods  subsequent  to the  periods  to which  such  returns,  reports  or
declarations  apply. There are no unpaid taxes in any material amount claimed to
be due by the taxing  authority  of any  jurisdiction,  and the  officers of the
Company know of no basis for any such claim.

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

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

                  (v) No General  Solicitation;  Placement Agent's Fees. Neither
the Company,  nor any of its  Affiliates,  nor any Person acting on its or their
behalf, has engaged in any form of general  solicitation or general  advertising
(within the meaning of Regulation D) in connection with the offer or sale of the
Securities.  The Company shall be  responsible  for the payment of any placement
agent's fees,  financial advisory or consultancy fees,  brokers'  commissions or
finder's fee (other than for persons  engaged by any Purchaser or its investment
advisor)  relating to or arising out of the  transactions  contemplated  hereby,
which fees are set forth on Schedule  3.1(v).  The Company  shall pay,  and hold
each Purchaser  harmless  against,  any liability,  loss or expense  (including,
without  limitation,  attorney's  fees and  out-of-pocket  expenses)  arising in
connection with any such claim.

                  (w)  No  Integrated   Offering.   None  of  the  Company,  its
Subsidiaries,  any of their  Affiliates,  and any Person  acting on their behalf
has,  directly  or  indirectly,  made any  offers  or sales of any  security  or
solicited any offers to buy any security, under circumstances that would require


                                     - 15 -
<PAGE>

registration of any of the Securities  under the 1933 Act or cause this offering
of the  Securities  to be  integrated  with prior  offerings  by the Company for
purposes  of the 1933 Act or any  applicable  stockholder  approval  provisions,
including,  without limitation,  under the rules and regulations of any exchange
or automated  quotation system on which any of the securities of the Company are
listed or designated.  None of the Company,  its Subsidiaries,  their Affiliates
and any Person acting on their behalf will take any action or steps  referred to
in  the  preceding  sentence  that  would  require  registration  of  any of the
Securities  under the 1933 Act or cause the  offering  of the  Securities  to be
integrated with other offerings.

                  (x) Certain Registration Matters. Assuming the accuracy of the
Purchasers'  representations and warranties set forth in Section 3.2(b)-(f),  no
registration  under the Securities Act is required for the offer and sale of the
Underlying  Shares  and  Warrant  Shares by the  Company  to the  Purchasers  as
contemplated by the Transaction  Documents.  The Company is eligible to register
the  resale of its  Common  Stock for  resale by the  Purchasers  under Form S-3
promulgated  under the Securities Act.  Except as described in Schedule  3.1(x),
the  Company  has not  granted  or  agreed  to grant to any  Person  any  rights
(including  "piggy-back"  registration  rights)  to have any  securities  of the
Company registered with the Commission or any other governmental  authority that
have not been satisfied.

                  (y) Listing and Maintenance Requirements.  Except as set forth
in the SEC Reports or as set forth in Schedule  3.1(y),  the Company has not, in
the two years preceding the date hereof,  received notice (written or oral) from
any Trading  Market on which the Common Stock is or has been listed or quoted to
the effect that the Company is not in compliance with the listing or maintenance
requirements  of such  Trading  Market.  Except for the  maintenance  of the $10
million minimum in  shareholders'  equity (pursuant to the rules and regulations
of the Nasdaq Stock  Market),  the Company is currently in  compliance  with all
such  listing  and  maintenance  requirements.  The  issuance  and  sale  of the
Securities  hereunder  does not  contravene  the  rules and  regulations  of the
Trading  Market and no approval of the  shareholders  of the Company is required
for the Company to issue and  deliver to the  Purchasers  the maximum  number of
shares of Common Stock  contemplated by this  Agreement,  including by reason of
the issuance of shares of Common Stock upon conversion in full of the Debentures
and the issuance of the Warrant Shares upon exercise in full of the Warrants.

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

                  (aa)  Application  of  Takeover  Protections.  The Company has
taken all necessary action, if any, in order to render  inapplicable any control
share acquisition, business combination, poison pill (including any distribution
under a rights  agreement) or other similar  anti-takeover  provision  under the
Company's  Certificate of  Incorporation  (or similar charter  documents) or the
laws of its state of  incorporation  that is or could become  applicable  to the
Purchasers solely as a result of the Purchasers and the Company fulfilling their


                                     - 16 -
<PAGE>

obligations  or  exercising  their  rights  under  the  Transaction   Documents,
including  without  limitation the Company's  issuance of the Securities and the
Purchasers' ownership of the Securities.

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

                  (cc) Disclosure.  The Company confirms that neither it nor any
Person  acting on its behalf has provided any of the  Purchasers or their agents
or counsel with any information that the Company believes constitutes  material,
non-public information. The Company understands and confirms that the Purchasers
will  rely  on  the  foregoing   representations   and  covenants  in  effecting
transactions  in  securities  of the  Company.  All  disclosure  provided to the
Purchasers regarding the Company, its business and the transactions contemplated
hereby,  furnished  by or on  behalf of the  Company  (including  the  Company's
representations and warranties set forth in this Agreement) are true and correct
and do not contain any untrue  statement of a material fact or omit to state any
material fact  necessary in order to make the  statements  made therein,  in the
light of the circumstances under which they were made, not misleading.

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

                  Section 3.2  Representations and Warranties of the Purchasers.
Each Purchaser  hereby,  for itself and for no other  Purchaser,  represents and
warrants to the Company as follows:

                  (a) Organization;  Authority. Such Purchaser is an entity duly
organized,  validly  existing  and  in  good  standing  under  the  laws  of the
jurisdiction of its organization with the requisite power and authority to enter
into  and  to  consummate  the  transactions   contemplated  by  the  applicable
Transaction Documents and otherwise to carry out its obligations thereunder. The
execution,  delivery  and  performance  by such  Purchaser  of the  transactions
contemplated by this Agreement has been duly authorized by all necessary  action
on the part of such Purchaser. Each Transaction Document to which such Purchaser
is a party has been (or upon  delivery  will have  been) duly  executed  by such
Purchaser,  and when  delivered by such  Purchaser in accordance  with the terms


                                     - 17 -
<PAGE>

hereof,  will  constitute  the  valid and  legally  binding  obligation  of such
Purchaser,  enforceable  against it in accordance with its terms,  except (a) as
such enforceability may be limited by bankruptcy, insolvency,  reorganization or
similar laws affecting creditors' rights generally, (b) as enforceability of any
indemnification and contribution provisions may be limited under the federal and
state  securities  laws and public  policy,  and (c) that the remedy of specific
performance and injunctive and other forms of equitable relief may be subject to
equitable  defenses  and to  the  discretion  of  the  court  before  which  any
proceeding therefor may be brought.

                  (b)  Investment  Intent.   Such  Purchaser  is  acquiring  the
Securities as principal for its own account for investment purposes only and not
with a view to or for  distributing  or reselling  such  Securities  or any part
thereof,  without prejudice,  however, to such Purchaser's right at all times to
sell or otherwise  dispose of all or any part of such  Securities  in compliance
with applicable  federal and state  securities  laws.  Nothing  contained herein
shall be deemed a  representation  or  warranty  by such  Purchaser  to hold the
Securities  for any period of time.  Such  Purchaser is acquiring the Securities
hereunder in the ordinary  course of its business.  Such Purchaser does not have
any  agreement  or  understanding,  directly or  indirectly,  with any Person to
distribute any of the Securities.

                  (c) Purchaser  Status.  At the time such Purchaser was offered
the Securities,  it was, and at the date hereof it is, and on each date on which
it  exercises  the Warrants it will be, an  "accredited  investor" as defined in
Rule  501(a)  under the  Securities  Act.  Such  Purchaser  is not a  registered
broker-dealer under Section 15 of the Exchange Act.

                  (d) Experience of such Purchaser. Such Purchaser, either alone
or together with its  representatives,  has such knowledge,  sophistication  and
experience in business and  financial  matters so as to be capable of evaluating
the merits and risks of the prospective investment in the Securities, and has so
evaluated  the merits and risks of such  investment.  Such  Purchaser is able to
bear the economic risk of an investment  in the  Securities  and, at the present
time, is able to afford a complete loss of such investment.

                  (e) General Solicitation. Such Purchaser is not purchasing the
Securities  as  a  result  of  any  advertisement,   article,  notice  or  other
communication  regarding the Securities published in any newspaper,  magazine or
similar media or broadcast over  television or radio or presented at any seminar
or any other general solicitation or general advertisement.

                  (f) Access to Information. Such Purchaser acknowledges that it
has reviewed the Disclosure  Materials and has been afforded (i) the opportunity
to ask such  questions  as it has deemed  necessary  of, and to receive  answers
from,  representatives of the Company concerning the terms and conditions of the
offering  of the  Securities  and the  merits  and  risks  of  investing  in the
Securities;  (ii) access to information  about the Company and the  Subsidiaries
and their  respective  financial  condition,  results of  operations,  business,
properties,  management  and  prospects  sufficient to enable it to evaluate its
investment; and (iii) the opportunity to obtain such additional information that
the Company possesses or can acquire without unreasonable effort or expense that



                                     - 18 -
<PAGE>

is  necessary  to make an  informed  investment  decision  with  respect  to the
investment.  Neither such inquiries nor any other investigation  conducted by or
on behalf of such  Purchaser or its  representatives  or counsel  shall  modify,
amend or  affect  such  Purchaser's  right to rely on the  truth,  accuracy  and
completeness of the Disclosure  Materials and the Company's  representations and
warranties contained in the Transaction Documents.

         The Company  acknowledges  and agrees that each Purchaser does not make
or  has  not  made  any  representations  or  warranties  with  respect  to  the
transactions contemplated hereby other than those specifically set forth in this
Section 3.2.

                                  ARTICLE IV.
                         OTHER AGREEMENTS OF THE PARTIES

                  Section 4.1 Transfer Restrictions.  (a) Securities may only be
disposed of in compliance with state and federal  securities laws. In connection
with  any  transfer  of the  Securities  other  than  pursuant  to an  effective
registration  statement,  to the  Company,  to an Affiliate of a Purchaser or in
connection  with a pledge as  contemplated  in Section  4.1(b),  the Company may
require the  transferor  thereof to provide to the Company an opinion of counsel
selected by the  transferor,  the form and  substance of which  opinion shall be
reasonably  satisfactory  to the Company,  to the effect that such transfer does
not require  registration of such  transferred  Securities  under the Securities
Act.

                  (b)  Certificates  evidencing the Securities  will contain the
following legend, so long as is required by this Section 4.1(b):

                  [NEITHER] THESE  SECURITIES [NOR THE SECURITIES  ISSUABLE UPON
                  [EXERCISE][CONVERSION]  OF THESE  SECURITIES]  HAVE [NOT] BEEN
                  REGISTERED WITH THE SECURITIES AND EXCHANGE  COMMISSION OR THE
                  SECURITIES  COMMISSION  OF  ANY  STATE  IN  RELIANCE  UPON  AN
                  EXEMPTION FROM REGISTRATION  UNDER THE SECURITIES ACT OF 1933,
                  AS AMENDED (THE "SECURITIES ACT"), AND,  ACCORDINGLY,  MAY NOT
                  BE  OFFERED  OR  SOLD   EXCEPT   PURSUANT   TO  AN   EFFECTIVE
                  REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO
                  AN AVAILABLE  EXEMPTION  FROM, OR IN A TRANSACTION NOT SUBJECT
                  TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND IN
                  ACCORDANCE WITH APPLICABLE  STATE SECURITIES LAWS AS EVIDENCED
                  BY A  LEGAL  OPINION  OF  COUNSEL  TO THE  TRANSFEROR  TO SUCH
                  EFFECT, THE SUBSTANCE OF WHICH SHALL BE REASONABLY  ACCEPTABLE
                  TO THE COMPANY.  THESE SECURITIES AND THE SECURITIES  ISSUABLE
                  UPON EXERCISE OF THESE SECURITIES MAY BE PLEDGED IN CONNECTION
                  WITH A BONA FIDE MARGIN  ACCOUNT OR OTHER LOAN SECURED BY SUCH
                  SECURITIES.


                                     - 19 -
<PAGE>

                  The Company  acknowledges and agrees that a Purchaser may from
time to time pledge pursuant to a bona fide margin agreement or grant a security
interest in some or all of the  Securities  and, if required  under the terms of
such arrangement,  such Purchaser may transfer pledged or secured  Securities to
the pledgees or secured parties.  Such a pledge or transfer would not be subject
to approval or consent of the Company and no legal  opinion of legal  counsel to
the pledgee, secured party or pledgor shall be required in connection therewith.
Further,  no  notice  shall  be  required  of such  pledge.  At the  appropriate
Purchaser's  expense,  the Company  will  execute and  deliver  such  reasonable
documentation as a pledgee or secured party of Securities may reasonably request
in  connection  with a  pledge  or  transfer  of the  Securities  including  the
preparation  and  filing  of  any  required  prospectus  supplement  under  Rule
424(b)(3) of the Securities Act or other applicable  provision of the Securities
Act to appropriately amend the list of Selling Stockholders thereunder.

                  (c)  Certificates   evidencing  the  Underlying   Shares,  the
Interest  Shares and Warrant Shares shall not contain any legend  (including the
legend  set  forth  in  Section  4.1(b)):  (i)  while a  registration  statement
(including the  Registration  Statement)  covering the resale of such Underlying
Shares, the Interest Shares and Warrant Shares is effective under the Securities
Act, or (ii) following any sale of such Underlying  Shares,  the Interest Shares
or Warrant Shares pursuant to Rule 144, or (iii) if such Underlying  Shares, the
Interest  Shares or Warrant  Shares are eligible for sale under Rule 144(k),  or
(iv) if  such  legend  is not  required  under  applicable  requirements  of the
Securities Act (including judicial  interpretations and pronouncements issued by
the Staff of the  Commission).  The Company shall cause its counsel to issue the
legal  opinion  included in the Transfer  Agent  Instructions  to the  Company's
transfer  agent on the Effective  Date.  Following the Effective Date or at such
earlier time as a legend is no longer  required for the Underlying  Shares,  the
Interest Shares and Warrant Shares under this Section 4.1(c),  the Company will,
no later than three  Trading Days  following  the delivery by a Purchaser to the
Company or the Company's transfer agent of a certificate representing Underlying
Shares,  the Interest Shares or Warrant Shares containing a restrictive  legend,
deliver or cause to be delivered to such  Purchaser a  certificate  representing
such Underlying  Shares, the Interest Shares or Warrant Shares that is free from
all restrictive and other legends.  The Company may not make any notation on its
records or give  instructions  to any transfer agent of the Company that enlarge
the restrictions on transfer set forth in this Section.

                  Section  4.2  Furnishing  of  Information.   As  long  as  any
Purchaser owns the Securities,  the Company  covenants to timely file (or obtain
extensions in respect  thereof and file within the applicable  grace period) all
reports  required to be filed by the Company  after the date hereof  pursuant to
the Exchange Act. Upon the request of any such Person, the Company shall deliver
to such  Person a  written  certification  of a duly  authorized  officer  as to
whether it has complied  with the preceding  sentence.  As long as any Purchaser
owns Securities, if the Company is not required to file reports pursuant to such
laws, it will prepare and furnish to the Purchasers and make publicly  available
in  accordance  with  Rule  144(c)  such  information  as is  required  for  the
Purchasers to sell the Underlying  Shares and Warrant Shares under Rule 144. The
Company further covenants that it will take such further action as any holder of
Securities may reasonably request,  all to the extent required from time to time


                                     - 20 -
<PAGE>

to enable such Person to sell such Underlying  Shares and Warrant Shares without
registration  under the  Securities  Act within the limitation of the exemptions
provided by Rule 144.

                  Section 4.3 Integration.  The Company shall not, and shall use
its best efforts to ensure that no Affiliate of the Company shall,  sell,  offer
for sale or  solicit  offers to buy or  otherwise  negotiate  in  respect of any
security  (as  defined  in  Section  2 of the  Securities  Act)  that  would  be
integrated  with the  offer or sale of the  Securities  in a manner  that  would
require the registration  under the Securities Act of the sale of the Securities
to the  Purchasers,  or that would be  integrated  with the offer or sale of the
Securities for purposes of the rules and regulations of any Trading Market.

                  Section   4.4   Subsequent    Registrations   and   Subsequent
Placements.

                  (a) Prior to the Effective  Date, the Company shall not file a
registration statement (including any shelf registration statements) (other than
on  Form  S-8 or  pursuant  to  the  Registration  Rights  Agreement)  with  the
Commission  with  respect  to  any  securities  of  the  Company  (other  than a
registration  statement with respect to 126,000 shares of Common Stock issued in
September 2003 to A.G.A.  Means of Protection and Commerce Ltd. or pre-effective
amendments to such registration statement).

                  (b) Prior to the  expiration of the first  anniversary  of the
Effective Date, the Company will not, directly or indirectly, offer, sell, grant
any option to purchase,  or otherwise  dispose of (or announce any offer,  sale,
grant or any option to purchase or other  disposition of) any of Common Stock or
Common  Stock  Equivalents  or any of its  Subsidiaries'  equity or Common Stock
Equivalents,  including without limitation,  pursuant to a private placement, an
equity line of credit or a shelf registration  statement in accordance with Rule
415  under  the  Securities  Act,  (such  offer,  sale,  grant,  disposition  or
announcement  being referred to as a "SUBSEQUENT  Placement"),  unless:  (i) the
Company delivers to each Purchaser a written notice (the  "SUBSEQUENT  PLACEMENT
Notice") of its intention to effect such Subsequent Placement,  which Subsequent
Placement Notice shall describe in reasonable  detail the proposed terms of such
Subsequent  Placement,  the amount of proceeds intended to be raised thereunder,
the Person with whom such Subsequent  Placement is proposed to be effected,  and
attached to which shall be a term sheet or similar document relating thereto and
(ii) such  Purchaser  shall not have notified the Company by 6:30 p.m. (New York
City time) on the seventh  Trading Day after (but not  including) its receipt of
the Subsequent  Placement  Notice of its willingness to provide (or to cause its
designee  to   provide),   subject  to   completion   of   mutually   acceptable
documentation,  all or part of such  financing  to the Company on the same terms
set forth in the Subsequent Placement Notice. If the Purchasers shall fail to so
notify the Company of their willingness to participate in full in the Subsequent
Placement,  the  Company  may effect the  remaining  portion of such  Subsequent
Placement on the terms and to the Persons set forth in the Subsequent  Placement
Notice.  The Company  shall  provide  the  Purchasers  with a second  Subsequent
Placement  Notice and the Purchasers  will again have the right of first refusal
set forth in this Section  4.4(b),  if the Subsequent  Placement  subject to the
initial  Subsequent  Placement  Notice is not  consummated for any reason on the
terms set forth in such Subsequent  Notice within 45 Trading Days after the date


                                     - 21 -
<PAGE>

of the initial  Subsequent  Placement  Notice with the Person  identified in the
Subsequent Placement Notice. If the Purchasers indicate a willingness to provide
financing in excess of the amount set forth in the Subsequent  Placement Notice,
then each  Purchaser  will be  entitled  to provide  financing  pursuant to such
Subsequent  Placement Notice up to an amount equal to such Purchaser  Percentage
of the financing, but the Company shall not be required to accept financing from
the  Purchasers in an amount in excess of the amount set forth in the Subsequent
Placement Notice. For purposes hereof, a Subsequent  Placement shall not include
a bona fide firm  commitment  underwritten  public  offering  with a  nationally
recognized  underwriter  which generates gross proceeds to the Company in excess
of  $30,000,000  (other  than an  "at-the-market  offering"  as  defined in Rule
415(a)(4) under the 1933 Act and "equity lines").

                  (c) The restrictive  period set forth in the first sentence of
Section  4.4(b)  shall be  extended  for the number of Trading  Days during such
period in which (i)  trading in the Common  Stock is  suspended  by any  Trading
Market, or (ii) following the Effective Date, the Registration  Statement is not
effective or the prospectus  included in the  Registration  Statement may not be
used by the Purchasers  for the resale of the Underlying  Shares and the Warrant
Shares.

                  (d) The  restrictions  contained in Sections  4.4(b) shall not
apply to any grant or issuance by the Company of any of the  following:  (i) the
issuance of  securities  upon the  exercise or  conversion  of any Common  Stock
Equivalents issued by the Company prior to the date of this Agreement and listed
on Schedule 3.1(g),  and (ii) the grant of options or warrants,  or the issuance
of  additional  securities,  under any duly  authorized  Company  stock  option,
restricted  stock plan or stock  purchase  plan in existence on the Closing Date
(but not as to any  amendments  or other  modifications  to the number of Common
Stock issuable  thereunder,  the terms set forth therein,  or the exercise price
set forth therein).

                  Section  4.5  Securities  Laws  Disclosure;  Publicity.  On or
before 8:30 a.m., New York Time, on the second Trading Day following the Closing
Date,  the Company shall file a Current  Report on Form 8-K describing the terms
of the  transactions  contemplated  by the  Transaction  Documents  in the  form
required by the 1934 Act,  and  attaching  the  material  Transaction  Documents
(including,  without  limitation,  this  Agreement,  the  form  of  each  of the
Debenturess,  the form of Warrant  and the  Registration  Rights  Agreement)  as
exhibits to such filing (including all attachments,  the "8-K FILING"). From and
after the  filing  of the 8-K  Filing  with the SEC,  no  Purchaser  shall be in
possession of any material, nonpublic information received from the Company, any
of its Subsidiaries or any of its respective officers,  directors,  employees or
agents,  that is not  disclosed  in the 8-K Filing.  The Company  shall not, and
shall  cause  each of its  Subsidiaries  and its and  each of  their  respective
officers,  directors,  employees and agents,  not to, provide any Purchaser with
any  material  nonpublic  information  regarding  the  Company  or  any  of  its
Subsidiaries  from and after the filing of the 8-K Filing  with the SEC  without
the express written consent of such Purchaser. Subject to the foregoing, neither
the Company nor any Purchaser shall issue any press releases or any other public
statements  with  respect to the  transactions  contemplated  hereby;  provided,
however,  that the Company shall be entitled,  without the prior approval of any


                                     - 22 -
<PAGE>

Purchaser,  to make any press release or other public disclosure with respect to
such  transactions  (i) in  substantial  conformity  with  the  8-K  Filing  and
contemporaneously  therewith  and  (ii) as is  required  by  applicable  law and
regulations,  including  the  applicable  rules and  regulations  of the Trading
Market  (provided  that in the  case of  clause  (i)  each  Purchaser  shall  be
consulted  by the  Company in  connection  with any such press  release or other
public disclosure prior to its release).

                  Section 4.6  Indemnification  of Purchasers.  The Company will
indemnify and hold the Purchasers and their directors,  officers,  shareholders,
members,  partners,  employees and agents (each, a "PURCHASER  PARTY")  harmless
from  any and  all  losses,  liabilities,  obligations,  claims,  contingencies,
damages,  costs  and  expenses,   including  all  judgments,   amounts  paid  in
settlements,   court  costs  and  reasonable   attorneys'   fees  and  costs  of
investigation (collectively,  "LOSSES") that any such Purchaser Party may suffer
or incur as a result  of or  relating  to (a) any  misrepresentation,  breach or
inaccuracy, or any allegation by a third party that, if true, would constitute a
breach or inaccuracy,  of any of the representations,  warranties,  covenants or
agreements  made by the Company in any Transaction  Document;  or (b) any Action
brought  or made  against  such  Purchaser  Party and solely  arising  out of or
resulting  from the  execution,  delivery,  performance  or  enforcement of this
Agreement  or  any  of the  other  Transaction  Documents.  In  addition  to the
indemnity  contained herein, the Company will reimburse each Purchaser Party for
its   reasonable   legal  and  other   expenses   (including  the  cost  of  any
investigation,  preparation  and travel in  connection  therewith)  incurred  in
connection therewith, as such expenses are incurred.

                  Section 4.7 Shareholders Rights Plan. No claim will be made or
enforced by the Company or any other Person that any  Purchaser is an "Acquiring
Person" under any  shareholders  rights plan or similar plan or  arrangement  in
effect or  hereafter  adopted by the  Company,  or that any  Purchaser  could be
deemed to trigger the provisions of any such plan or  arrangement,  by virtue of
receiving  the  Securities  under the  Transaction  Documents or under any other
agreement between the Company and the Purchasers.

                  Section 4.8 Non-Public Information.  The Company covenants and
agrees that  neither it nor any other  Person  acting on its behalf will provide
any  Purchaser  or its agents or counsel with any  information  that the Company
believes constitutes material non-public information,  unless prior thereto such
Purchaser shall have executed a written agreement  regarding the confidentiality
and use of such  information.  The Company  understands  and confirms  that each
Purchaser  shall  be  relying  on the  foregoing  representations  in  effecting
transactions in securities of the Company.

                  Section 4.9 Use of  Proceeds.  The  Company  shall use the net
proceeds from the sale of the Securities  hereunder for working capital purposes
and not for the  satisfaction  of any portion of the Company's  debt (other than
payment of trade  receivables and accrued expenses in the ordinary course of the
Company's  business and consistent with prior practices),  to redeem any Company


                                     - 23 -
<PAGE>

equity or equity-equivalent securities or to settle any outstanding litigation.

                  Section 4.10 Secured Obligation. The payment obligations under
the  Debentures  are  secured  pursuant  to  the  Security   Agreement  and  the
Intellectual Property Security Agreement.

                  Section 4.11 Proxy  Statement.  The Company shall provide each
stockholder entitled to vote at a meeting of stockholders of the Company,  which
meeting shall be called and held not later than June 19, 2004 (the  "STOCKHOLDER
MEETING DEADLINE"), a proxy statement, which has been previously reviewed by the
Purchasers  and a single legal  counsel of their  choice,  soliciting  each such
stockholder's  affirmative vote at such stockholder  meeting for approval of the
Company's  issuance of all of the  Securities  as described  in the  Transaction
Documents in accordance with applicable law and the rules and regulations of the
Trading  Market  (such  affirmative  approval  being  referred  to herein as the
"STOCKHOLDER  APPROVAL"),  and the Company shall use its best efforts to solicit
its  stockholders'  approval of such issuance of the Securities and to cause the
Board of Directors of the Company to  recommend  to the  stockholders  that they
approve such proposal.  The Company shall be obligated to obtain the Stockholder
Approval by the Stockholder Meeting Deadline.

                  Section  4.12  Revised  Schedule.  The Company  will deliver a
finalized  Schedule  3.1(g) by the end of the  business  day on October 2, 2003.
Such  final  Schedule  3.1(g)  will  not  be  materially  different,   then  the
preliminary version of such Schedule delivered at the Initial Closing.

                                   ARTICLE V.
                                  MISCELLANEOUS

                  Section 5.1 Fees and  Expenses.  At the  Closing,  the Company
shall  reimburse  Smithfield  Fiduciary LLC (a Purchaser)  for its legal and due
diligence fees and expenses in connection  with the  preparation and negotiation
of the  Transaction  Documents  by  paying up to  $25,000  (in  addition  to any
previously  paid  amounts) to Schulte  Roth & Zabel LLP,  which  amount shall be
withheld by such Purchaser from its Purchase Price to be paid at Closing. Except
as  otherwise  set  forth  in  this  Agreement  or in  the  Registration  Rights
Agreement, each party shall pay the fees and expenses of its advisers,  counsel,
accountants and other experts,  if any, and all other expenses  incurred by such
party  incident  to  the  negotiation,   preparation,  execution,  delivery  and
performance of this  Agreement.  The Company shall pay all stamp and other taxes
and duties levied in connection with the sale of the Securities.

                  Section 5.2 Entire Agreement.  The Transaction Documents,  and
the Security Documents together with the Exhibits and Schedules thereto, contain
the entire  understanding  of the parties  with  respect to the  subject  matter
hereof and supersede all prior agreements and  understandings,  oral or written,
with respect to such  matters,  which the parties  acknowledge  have been merged
into such documents, exhibits and schedules.


                                     - 24 -
<PAGE>

                  Section   5.3   Notices.   Any  and  all   notices   or  other
communications  or  deliveries  required or permitted  to be provided  hereunder
shall be in writing and shall be deemed  given and  effective on the earliest of
(a) the date of  transmission,  if such notice or communication is delivered via
facsimile at the facsimile  number  specified in this Section prior to 6:30 p.m.
(New York City time) on a Trading  Day,  (b) the next Trading Day after the date
of  transmission,  if such notice or communication is delivered via facsimile at
the  facsimile  number  specified in this Section on a day that is not a Trading
Day or later than 6:30 p.m.  (New York City time) on any  Trading  Day,  (c) the
Trading Day following the date of mailing, if sent by U.S. nationally recognized
overnight courier service,  or (d) upon actual receipt by the party to whom such
notice is required to be given. The address for such notices and  communications
shall be as follows:

         If to the Company:                Arotech Corporation
                                           632 Broadway
                                           Suite 1200
                                           New York, New York 10012
                                           Facsimile No.: (646) 654-2187
                                           Telephone No.:  (646) 654-2107
                                           Attn:  Chief Executive Officer

         With a copy to:                   Electric Fuel (E.F.L.) Ltd.
                                           One HaSolela Street, POB 641
                                           Western Industrial Park
                                           Beit Shemesh 99000, Israel
                                           Facsimile No.: 011-972-2-990-6688
                                           Telephone No.:  011-972-2-990-6623
                                           Attn.: General Counsel

         If to a Purchaser:                To the address set forth under such
                                           Purchaser's name on the signature
                                           pages hereof;

or such other  address as may be designated  in writing  hereafter,  in the same
manner, by such Person.

                  Section  5.4  Amendments;   Waivers.   No  provision  of  this
Agreement may be waived or amended except in a written instrument signed, in the
case of an amendment,  by the Company and each of the Purchasers or, in the case
of a waiver, by the party against whom enforcement of any such waiver is sought.
No waiver of any default with respect to any provision, condition or requirement
of this Agreement  shall be deemed to be a continuing  waiver in the future or a
waiver of any subsequent  default or a waiver of any other provision,  condition
or  requirement  hereof,  nor  shall any delay or  omission  of either  party to
exercise  any right  hereunder  in any manner  impair the  exercise  of any such
right.


                                     - 25 -
<PAGE>

                  Section  5.5   Construction.   The  headings  herein  are  for
convenience  only, do not  constitute a part of this  Agreement and shall not be
deemed to limit or affect any of the  provisions  hereof.  The language  used in
this  Agreement  will be deemed to be the  language  chosen  by the  parties  to
express their mutual intent, and no rules of strict construction will be applied
against any party.  This Agreement  shall be construed as if drafted  jointly by
the  parties,  and no  presumption  or burden of proof shall  arise  favoring or
disfavoring  any party by virtue of the  authorship  of any  provisions  of this
Agreement or any of the Transaction Documents.

                  Section 5.6  Successors and Assigns.  This Agreement  shall be
binding  upon and inure to the benefit of the parties and their  successors  and
permitted  assigns.  The Company may not assign this  Agreement or any rights or
obligations  hereunder without the prior written consent of the Purchasers.  Any
Purchaser may assign any or all of its rights under this Agreement to any Person
to whom such  Purchaser  assigns or  transfers  any  Securities,  provided  such
transferee  agrees in  writing  to be bound,  with  respect  to the  transferred
Securities, by the provisions hereof that apply to the "Purchasers."

                  Section 5.7 No  Third-Party  Beneficiaries.  This Agreement is
intended for the benefit of the parties hereto and their  respective  successors
and  permitted  assigns  and is not for the  benefit  of, nor may any  provision
hereof be  enforced  by,  any other  Person,  except as  otherwise  set forth in
Section 4.6.

                  Section 5.8 Liquidated Damages.  The Company's  obligations to
pay any  liquidated  damages  or  other  amounts  owing  under  the  Transaction
Documents  is a  continuing  obligation  of the Company and shall not  terminate
until  all  unpaid   liquidated   damages  and  other  amounts  have  been  paid
notwithstanding  the fact that the instrument or security pursuant to which such
liquidated  damages  or  other  amounts  are due and  payable  shall  have  been
canceled.  Such  liquidated  damages are not to be construed as the sole damages
for remedies  available to the Persons  entitled to the same. The parties hereby
agree that all remedies and damages are cumulative.

                  Section  5.9  Governing  Law.  All  questions  concerning  the
construction,  validity,  enforcement and interpretation of this Agreement shall
be governed by and construed  and enforced in accordance  with the internal laws
of the State of New York,  without  regard to the principles of conflict of laws
thereof. Each party agrees that all Proceedings  concerning the interpretations,
enforcement and defense of the  transactions  contemplated by this Agreement and
any other Transaction  Documents  (whether brought against a party hereto or its
respective affiliates,  directors, officers, stockholders,  employees or agents)
shall be commenced  exclusively  in the state and federal  courts sitting in The
City of New York,  Borough of Manhattan.  Each party hereto  hereby  irrevocably
submits to the exclusive jurisdiction of the state and federal courts sitting in
The City of New York,  Borough of Manhattan for the  adjudication of any dispute
hereunder or in connection herewith or with any transaction  contemplated hereby
or discussed herein (including with respect to the enforcement of the any of the
Transaction Documents),  and hereby irrevocably waives, and agrees not to assert
in  any  Proceeding,  any  claim  that  it is  not  personally  subject  to  the
jurisdiction of any such court, or that such Proceeding has been commenced in an


                                     - 26 -
<PAGE>

improper or  inconvenient  forum.  Each party hereto hereby  irrevocably  waives
personal  service of process and  consents to process  being  served in any such
Proceeding  by  mailing a copy  thereof  via  registered  or  certified  mail or
overnight  delivery  (with evidence of delivery) to such party at the address in
effect for notices to it under this Agreement and agrees that such service shall
constitute good and sufficient  service of process and notice  thereof.  Nothing
contained  herein shall be deemed to limit in any way any right to serve process
in any manner permitted by law. Each party hereto hereby irrevocably  waives, to
the fullest  extent  permitted by applicable  law, any and all right to trial by
jury in any legal proceeding arising out of or relating to this Agreement or the
transactions  contemplated  hereby.  If any party shall commence a Proceeding to
enforce any provisions of a Transaction  Document,  then the prevailing party in
such  Proceeding  shall be  reimbursed  by the other  party  for its  reasonable
attorney's  fees  and  other  actual  costs  and  expenses   incurred  with  the
investigation, preparation and prosecution of such Proceeding.

                  Section  5.10  Survival.   The  representations,   warranties,
agreements  and  covenants  contained  herein  shall  survive the  Closing,  the
conversion  of the  Debentures  and exercise of the Warrants and the delivery of
the Underlying Shares and Warrant Shares, as applicable.

                  Section 5.11 Execution.  This Agreement may be executed in two
or more  counterparts,  all of which when taken together shall be considered one
and the same agreement and shall become  effective when  counterparts  have been
signed by each party and delivered to the other party, it being  understood that
all parties need not sign the same counterpart.  In the event that any signature
is delivered by facsimile transmission,  such signature shall create a valid and
binding  obligation of the party executing (or on whose behalf such signature is
executed)  with the same force and effect as if such  facsimile  signature  page
were an original thereof.

                  Section 5.12 Severability.  If any provision of this Agreement
is  held to be  invalid  or  unenforceable  in any  respect,  the  validity  and
enforceability of the remaining terms and provisions of this Agreement shall not
in any way be affected or impaired thereby and the parties will attempt to agree
upon a valid and enforceable provision that is a reasonable substitute therefor,
and upon so  agreeing,  shall  incorporate  such  substitute  provision  in this
Agreement.

                  Section 5.13 Rescission and Withdrawal Right.  Notwithstanding
anything  to the  contrary  contained  in  (and  without  limiting  any  similar
provisions of) the  Transaction  Documents,  whenever any Purchaser  exercises a
right,  election,  demand or option under a Transaction Document and the Company
does not timely  perform its  related  obligations  within the  periods  therein
provided,  then such Purchaser may rescind or withdraw,  in its sole  discretion
from time to time upon  written  notice to the  Company,  any  relevant  notice,
demand or election in whole or in part without  prejudice to its future  actions
and rights.

                  Section 5.14 Replacement of Securities.  If any certificate or
instrument  evidencing any Securities is mutilated,  lost,  stolen or destroyed,
the Company shall issue or cause to be issued in exchange and  substitution  for
and upon cancellation  thereof, or in lieu of and substitution  therefor,  a new


                                     - 27 -
<PAGE>

certificate  or  instrument,  but  only  upon  receipt  of  evidence  reasonably
satisfactory to the Company of such loss, theft or destruction and customary and
reasonable  indemnity,  if requested.  The applicants  for a new  certificate or
instrument under such  circumstances  shall also pay any reasonable  third-party
costs  associated  with  the  issuance  of  such  replacement  Securities.  If a
replacement certificate or instrument evidencing any Securities is requested due
to a  mutilation  thereof,  the Company may require  delivery of such  mutilated
certificate  or  instrument  as a  condition  precedent  to  any  issuance  of a
replacement.

                  Section  5.15  Remedies.  In  addition  to being  entitled  to
exercise all rights  provided  herein or granted by law,  including  recovery of
damages,  each of the  Purchasers  and the Company  will be entitled to specific
performance  under the  Transaction  Documents.  The parties agree that monetary
damages may not be adequate  compensation for any loss incurred by reason of any
breach of obligations  described in the foregoing  sentence and hereby agrees to
waive in any action for specific  performance of any such obligation the defense
that a remedy at law would be adequate.

                  Section 5.16 Payment Set Aside. To the extent that the Company
makes a  payment  or  payments  to any  Purchaser  pursuant  to any  Transaction
Document or a Purchaser  enforces or exercises its rights  thereunder,  and such
payment or payments or the proceeds of such  enforcement or exercise or any part
thereof are subsequently invalidated, declared to be fraudulent or preferential,
set aside,  recovered from, disgorged by or are required to be refunded,  repaid
or otherwise  restored to the Company,  a trustee,  receiver or any other person
under any law  (including,  without  limitation,  any  bankruptcy  law, state or
federal law, common law or equitable cause of action), then to the extent of any
such  restoration  the  obligation  or part  thereof  originally  intended to be
satisfied  shall be revived  and  continued  in full force and effect as if such
payment had not been made or such enforcement or setoff had not occurred.

                  Section 5.17 Independent Nature of Purchasers' Obligations and
Rights.  The obligations of each Purchaser  under any  Transaction  Document are
several  and not  joint  with the  obligations  of any other  Purchaser,  and no
Purchaser shall be responsible in any way for the performance of the obligations
of any other Purchaser under any Transaction Document.  Nothing contained herein
or in any Transaction  Document,  and no action taken by any Purchaser  pursuant
hereto  or  thereto,   shall  be  deemed  to  constitute  the  Purchasers  as  a
partnership,  an  association,  a joint venture or any other kind of entity,  or
create a presumption  that the Purchasers are in any way acting in concert or as
a group with respect to such obligations or the transactions contemplated by the
Transaction  Documents.  Each  Purchaser  confirms  that  it  has  independently
participated in the negotiation of the transactions contemplated hereby with the
advice of its own  counsel and  advisors.  Each  Purchaser  shall be entitled to
independently  protect and enforce its rights,  including without limitation the
rights arising out of this Agreement or out of the other Transaction  Documents,
and it shall  not be  necessary  for any  other  Purchaser  to be  joined  as an
additional party in any proceeding for such purpose.

                  Section  5.18  Action by  Purchasers.  Any action  required or
permitted under any of the Transaction  Documents to be taken by or on behalf of
the Purchasers  shall, for such action to be valid,  require the approval of the


                                     - 28 -
<PAGE>

Majority-in-Interest  prior  to the  taking  of  such  action.  If the  consent,
approval or disapproval  of the Purchasers is required or permitted  pursuant to
any of the Transaction  Documents,  such consent,  approval or disapproval shall
only be valid if given by the Majority-in-Interest. "MAJORITY-IN-INTEREST" means
the Purchaser or Purchasers (as the case may be) holding in excess of a majority
of the outstanding  aggregate principal amount under the Debentures,  determined
on a cumulative basis.


                   [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK
                             SIGNATURE PAGES FOLLOW]



                                     - 29 -
<PAGE>




                  IN WITNESS  WHEREOF,  the  parties  hereto  have  caused  this
Securities Purchase Agreement to be duly executed by their respective authorized
signatories as of the date first indicated above.

                                         AROTECH CORPORATION


                                         By:
                                            ------------------------------------
                                              Name:
                                              Title:


                   [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK
                      SIGNATURE PAGES OF PURCHASERS FOLLOW]




                                     - 30 -
<PAGE>



                  IN WITNESS  WHEREOF,  the  parties  hereto  have  caused  this
Securities Purchase Agreement to be duly executed by their respective authorized
signatories as of the date first indicated above.

                                    SMITHFIELD FIDUCIARY LLC

                                    By:
                                       --------------------------------------
                                    Name:
                                    Title:

                                    Investment Amount:             $1,750,000

                                    Address for Notice:

                                    c/o Highbridge Capital Management, LLC
                                    9 West 57th Street, 27th Floor
                                    New York, New York  10019
                                    Attention:  Ari J. Storch / Adam J. Chill
                                    Facsimile No.:  (212) 751-0755
                                    Telephone No.:  (212) 287-4720

                                    With a copy to:

                                    Schulte Roth & Zabel LLP
                                    919 Third Avenue
                                    New York, New York  10022
                                    Facsimile No.:  (212) 593-5955
                                    Telephone No.:  (212) 756-2376
                                    Attention:  Eleazer Klein, Esq.




                                     - 31 -
<PAGE>



                  IN WITNESS  WHEREOF,  the  parties  hereto  have  caused  this
Securities Purchase Agreement to be duly executed by their respective authorized
signatories as of the date first indicated above.

                                    OMICRON MASTER TRUST

                                    By:
                                       --------------------------------------
                                    Name:
                                    Title:

                                    Investment Amount:               $500,000

                                    Address for Notice:

                                    c/o Omicron Capital L.P.
                                    810 Seventh Avenue
                                    39th Floor
                                    New York, New York 10019
                                    Attention:  Olivier Morali
                                    Facsimile:  (212) 803-5269
                                    Telephone:  (212) 803-5262






                                     - 32 -
<PAGE>



         IN WITNESS  WHEREOF,  the parties  hereto  have caused this  Securities
Purchase   Agreement  to  be  duly  executed  by  their  respective   authorized
signatories as of the date first indicated above.

                                    PORTSIDE GROWTH AND OPPORTUNITY FUND

                                    By:
                                       ------------------------------
                                    Name:
                                    Title:

                                    Investment Amount:        $750,000

                                    Address for Notice:

                                    c/o Ramius Capital Group, L.L.C.
                                    666 Third Avenue, 26th Floor
                                    New York, New York 10006
                                    Facsimile No.: (212) 845-7999
                                    Telephone No.:  (212) 845-7917
                                    Attention:   Jeffrey Solomon
                                                 Jeffrey Smith





                                     - 33 -
<PAGE>



                  IN WITNESS  WHEREOF,  the  parties  hereto  have  caused  this
Securities Purchase Agreement to be duly executed by their respective authorized
signatories as of the date first indicated above.

                                    MAINFIELD ENTERPRISES INC.

                                    By:
                                       -------------------------------------
                                    Name:
                                    Title:

                                    Investment Amount:              $750,000

                                    Address for Notice:

                                    c/o Cavallo Capital Corp.
                                    660 Madison Avenue, 18th Floor
                                    New York, New York  10021
                                    Attention:  Mor Sagi
                                    Facsimile:  (212) 651-9010
                                    Telephone:  (212) 651-9005





                                     - 34 -
<PAGE>



                  IN WITNESS  WHEREOF,  the  parties  hereto  have  caused  this
Securities Purchase Agreement to be duly executed by their respective authorized
signatories as of the date first indicated above.

                                    CRANSHIRE CAPITAL L.P.

                                    By:
                                       -------------------------------------
                                    Name:
                                    Title:

                                    Investment Amount:              $750,000

                                    Address for Notice:

                                    c/o Downsview Capital, Inc.
                                    The General Partner
                                    666 Dundee Road, Suite 1901
                                    Northbrook, IL  60062
                                    Attention:  Mitchell D. Kopin
                                    Facsimile:  (847) 562-9031
                                    Telephone:  (847) 562-9030






                                     - 35 -
<PAGE>




                  IN WITNESS  WHEREOF,  the  parties  hereto  have  caused  this
Securities Purchase Agreement to be duly executed by their respective authorized
signatories as of the date first indicated above.

                                    CLEVELAND OVERSEAS LTD.



                                    By:
                                       ---------------------------------
                                    Name:
                                    Title:

                                    Investment Amount:          $500,000


                                    Address for Notice:

                                    ----------------
                                    ----------------
                                    ----------------
                                    Facsimile No.:   (___) ___-____
                                    Telephone No.: (___) ___-____
                                    Attention:  ______________






                                     - 36 -
<PAGE>



                                    EXHIBITS
                                    --------

Exhibit A         Form of Debentures
Exhibit B         Form of Warrants
Exhibit C         Form of Registration Rights Agreement
Exhibit D         Form of Irrevocable Transfer Agent Instructions
Exhibit E         Form of Company Counsel Opinion
Exhibit F         Intellectual Property Security
Exhibit G         Security Agreement
Exhibit H         Voting Agreement


                                    SCHEDULES
                                    ---------

Schedule 3.1(a)            Subsidiaries
Schedule 3.1(e)            Consents
Schedule 3.1(g)            Capitalization
Schedule 3.1(j)            Litigation
Schedule 3.1(x)            Registration Rights
Schedule 3.1(y)            Listing and Maintenance Requirements Exceptions
Schedule 3.1(bb)           Ranking