Document:

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                            ASSET PURCHASE AGREEMENT

                                  BY AND AMONG
                              AURA CERAMICS, INC.,
                             AURA SYSTEMS, INC. AND
                              ALPHA CERAMICS, INC.

                                February 29, 2000

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THE  OBLIGATION  OF THE  BUYER TO PAY,  AND THE  RIGHTS  OF THE  SELLER  AND THE
STOCKHOLDER TO RECEIVE, THE DEFERRED PURCHASE PRICE AND THE INSTALLMENT PAYMENTS
WITH RESPECT THERETO PURSUANT TO ARTICLE 2.4 HEREOF ARE EXPRESSLY SUBJECT TO THE
PROVISIONS   OF  (1)  THAT   CERTAIN   SUBORDINATION   AGREEMENT   DATED  AS  OF
_______________, 2000, BY AND BETWEEN BUYER, SELLER, STOCKHOLDER AND EXCEL BANK,
AND (2) THAT CERTAIN SUBORDINATION  AGREEMENT DATED AS OF ______________,  2000,
BY AND AMONG BUYER, SELLER, STOCKHOLDER AND LANDLORD.

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                                        i

                                    Schedules

Schedules

2.3               Assumed Liabilities
2.5               Allocation of Purchase Price
3.1               Seller's Disclosure Schedule
3.5               Seller's Financial Statements

<PAGE>

8

                            ASSET PURCHASE AGREEMENT

         Asset Purchase  Agreement (the  "Agreement"),  dated as of February 29,
2000, by and among Alpha Ceramics,  Inc., a Minnesota corporation (the "Buyer"),
having its  principal  place of  business  at 5121  Winnetka  Avenue,  New Hope,
Minnesota  55428;  Aura Ceramics,  Inc., a Delaware  corporation (the "Seller"),
having its  principal  place of  business  at 5121  Winnetka  Avenue,  New Hope,
Minnesota 55428;  and, Aura Systems,  Inc., a Delaware  corporation,  having its
principal place of business at 2335 Alaska Avenue, El Segundo,  California 90245
(the "Stockholder").

         This Agreement sets forth the terms and conditions upon which the Buyer
will  purchase  from  the  Seller,  and  the  Seller  will  sell  to the  Buyer,
substantially  all the assets of the Seller (other than the Retained Assets,  as
hereinafter   defined)  and  the  business   and   goodwill   constituting   the
manufacturing  business of the Seller as a going concern,  for the consideration
provided herein.

         In  consideration  of  the  foregoing,   the  mutual   representations,
warranties  and  covenants  set forth  herein,  and for other good and  valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
parties to this Agreement hereby agree as follows:

                                    ARTICLE I
                                   DEFINITIONS

         Definitions.  For the purposes of this Agreement, all capitalized terms
used in this  Agreement  (including the Schedules and Exhibits  annexed  hereto)
shall have the meanings specified in Exhibit 1.1.

                                   ARTICLE II
                           PURCHASE AND SALE OF ASSETS

         Purchase  of  Assets.  Upon the terms  and  subject  to the  conditions
contained  in this  Agreement,  at the Closing,  the Seller shall sell,  assign,
transfer  and convey to the Buyer,  and the Buyer  shall  purchase,  acquire and
accept  from the Seller,  the  business  of the Seller as a going  concern  (the
"Business"),  including all of the Seller's assets of every kind and description
(the "Purchased Assets") including, without limitation, the following assets and
properties:

(a)      all tangible personal  property owned by the Seller including,  without
         limitation,  all inventories  wherever  located,  raw materials,  goods
         consigned to vendors or subcontractors, work in process, finished goods
         and goods in transit, all machinery, equipment, fixtures and furniture;

(b) All of Seller's  cash,  bank  accounts,  prepayments  and deposits as of the
Closing Date;

(c)      all  rights  and  interests  of the  Seller  in  and to any  contracts,
         including, without limitation, contracts for the purchase of materials,
         supplies and services and the sale of products and services,  equipment
         leases;

(d)      all of the Seller's books, records and other data;

(e)      all of the Seller's  goodwill,  dealer and customer lists and all other
         sales  and  marketing   information,   and  all  patents,   trademarks,
         copyrights  and  other  intellectual  property,  know-how,  technology,
         drawings, engineering specifications,  bills of materials, software and
         other intangible assets of the Seller;

(f)      all right, title and interest in and to the name "Aura Ceramics,  Inc."
         and all variants thereof as applicable solely to the ceramics business;

(g)      all permits,  licenses,  orders,  ratings and approvals of all federal,
         state,  local or foreign  governmental  or  regulatory  authorities  or
         industrial  bodies which are held by the Seller, to the extent the same
         are transferable;

(h) all  notes  receivable,  prepaid  expenses,  accounts  receivable  and other
similar current assets;

(i)      all investment securities held by Seller including, without limitation,
         all proceeds  thereof and all rights to cash or non-cash  dividends and
         voting rights associated therewith;

(j)      all rights with respect to leasehold interests and subleases and rights
         thereunder relating to real property;

(k) all rights of the Seller to causes of action,  lawsuits,  judgments,  claims
and demands of any nature; and

(l)      all other items of property, real or personal,  tangible or intangible,
         including   without   limitation  all  securities,   corporate   names,
         restrictive and negative covenant agreements with employees and others,
         and computer  programs owned, used by or accruing to the benefit of the
         Seller.

2.2 Retained  Assets.  The Seller will retain  ownership  only of the  following
assets (collectively, the "Retained Assets"):

(a)      the Seller's rights under this Agreement;

(b)      all of the Seller's Plans.

2.3 Liabilities.  The Buyer is not assuming or agreeing,  nor shall it be deemed
to have assumed or agreed,  to pay,  perform or discharge any of the obligations
of the Seller  other than those  expressly  set forth on Schedule  2.3  attached
hereto   (collectively   the   "Assumed   Liabilities").   Seller  shall  remain
unconditionally  liable for all  obligations,  liabilities  and  commitments  of
Seller,  presently existing or contingent arising out of events or circumstances
occurring on or prior to the Closing Date of the Seller,  other than the Assumed
Liabilities (collectively, the "Retained Liabilities").

2.4 Purchase Price. (a) The purchase price (the "Purchase  Price") to be paid by
the Buyer to the Seller or its  assignee  (including,  without  limitation,  the
Stockholder)  for the Purchased  Assets shall be $3,500,000,  plus assumption by
Buyer of the Assumed  Liabilities as set forth in Schedule 2.3 attached  hereto.
The Purchase Price shall be payable as follows:

(i)               On the  Closing  Date the Buyer shall pay to the Seller or its
                  assignee (including,  without limitation,  the Stockholder) an
                  amount equal to $800,000 (the "Closing Cash Payment"); and

(ii) The  principal  amount of Two  Million  Five  Hundred  Thousand  and 00/100
     Dollars ($2,500,000), together with interest on the unpaid balance accruing
     thereon  as of and from the date  hereof at a rate  equal to eight  percent
     (8%) per annum (calculated on the basis of actual days elapsed in a year of
     365  days),  shall  be due  and  payable  in  (A)  forty-seven  (47)  equal
     consecutive  monthly  payments of  principal  and interest in the amount of
     $31,000  each,  commencing  on the first  (1st) day of the  calendar  month
     following the Closing Date (as defined in Article 2.6 below) and continuing
     -----------  on the same day of each calendar  month  thereafter  until and
     including  September  1,  2007;  and (B) one (1) final  installment  due on
     September 30, 2007, equal to the then outstanding principal balance of such
     $2,500,000 plus accrued but unpaid interest thereon.

(iii)             The  principal  amount of $200,000  shall be due and  payable,
                  without  interest,  on  September  30,  2007.  (The  principal
                  amounts  due  pursuant  to  subsections  (ii)  and  (iii)  are
                  referred to herein as the "Deferred Purchase Price".)

(b)  The payment of the Deferred Purchase Price shall be and hereby is expressly
     subordinated  to the  payment  of (A)  the  $1,000,000  term  loan  and the
     $200,000  revolving line of credit  obtained on or prior to the date hereof
     by the Buyer from Excel Bank to acquire the assets from Seller  pursuant to
     this  agreement  and provide  Buyer with working  capital;  (B) any and all
     other  indebtedness  of the  Buyer  for  money  borrowed  from  any  banks,
     financial  institutions  or other  institutional  lenders  to (i)  purchase
     equipment in the future,  and (ii) provide for any additional capital needs
     of the  Buyer;  (C) any and all loans and lines of credit  obtained  by the
     Buyer to refinance all or any part of the indebtedness  referred to in (A),
     (B) above; and (D) the amounts due and payable to the Landlord by the Buyer
     under and  pursuant to the Lease (as those terms are defined in Section 4.4
     hereof);  provided,  however,  that the Seller  shall only be  required  to
     subordinate  payment  of the  Deferred  Purchase  Price to the  payment  of
     indebtedness  under  (A),  (B) and (C) above up to an  aggregate  principal
     amount outstanding at any one time of $2,000,000.  The Seller shall execute
     and  deliver  subordination  agreements  in favor of such  lenders  and the
     Landlord at the request of the Buyer.

(c)      If an  Event  of  Default,  as  defined  below,  has  occurred  and  is
         continuing,  the outstanding principal balance of the Deferred Purchase
         Price and interest  accrued  thereon shall become  immediately  due and
         payable,  upon ten (10) days  written  notice and  demand  given by the
         Seller to the Buyer.  An Event of Default shall mean the  occurrence of
         any one or more of the following:

(i)               Buyer  shall fail to pay,  when due,  any  installment  of the
                  Deferred  Purchase  Price and such failure shall  continue for
                  sixty (60) days after  written  notice  given by the Seller to
                  the Buyer; or

(ii)              Buyer  shall  file or have  filed  against  it a  petition  in
                  bankruptcy  or for an  arrangement  pursuant to any present or
                  future  state or  federal  bankruptcy  act or under a  similar
                  federal or state law,  or shall be  adjudicated  a bankrupt or
                  insolvent,  or shall make a general assignment for the benefit
                  of creditors, or shall be unable to pay its debts generally as
                  they become due, or any  property of the Buyer shall be levied
                  upon or attached in any proceeding; or

(iii) Buyer shall be or become  insolvent  (whether in the equity or  bankruptcy
sense); or

(iv)     the dissolution of the Buyer;

(d)      Payment of the Deferred  Purchase  Price and the  installment  payments
         with  respect  thereto  are  specifically  subject  to  the  terms  and
         conditions  of Buyer's  "Right of Set Off" as set forth in Article  8.5
         herein.  Such  right of set off  shall  continue  to be  effective  and
         available  to  Buyer   notwithstanding  the  assignment  by  Seller  to
         Stockholder  of  Seller's  right and  entitlements  pursuant to Article
         2.4(e) hereof or the liquidation of the Seller.

(e)      Seller hereby sells, transfers,  conveys and assigns to Stockholder any
         and all rights and  entitlements  of Seller  under,  pursuant to and by
         virtue and  arising  out of this  Agreement  the payment of any and all
         monies to be paid to Seller.  Buyer is hereby directed therefore to pay
         to Stockholder  the portion of the Purchase  Price payable  pursuant to
         subsection (a) above.  Buyer hereby agrees that Stockholder  shall have
         the same rights  hereunder  as the Seller by virtue of such  assignment
         notwithstanding the subsequent liquidation of Seller.

2.5 Allocation of Purchase  Price.  The Purchase Price shall be allocated  among
the Purchased  Assets for purposes of Section 1060 of the Internal  Revenue Code
of 1986, as amended (the "Code"),  as set forth in Schedule 2.5 attached hereto.
The Seller and the Buyer agree to be bound by such  allocations  and to complete
and attach  Internal  Revenue Form 8594 to their  respective  federal income tax
returns to reflect such allocations.

2.6 Time and Place of Closing. The closing of the transactions  described herein
(the  "Closing")  shall take place  simultaneously  with the  execution  of this
Agreement. The date and time at which the Closing actually occurs is hereinafter
referred to as the "Closing Date."

2.7 Execution and Delivery of Documents of Title by the Seller.  At the Closing,
the Seller  shall  execute  and  deliver to the Buyer a bill of sale in form and
substance acceptable to Buyer, (the "Bill of Sale") and such deeds, conveyances,
certificates  of  title,  assignments,  assurances  and  other  instruments  and
documents  as the  Buyer may  reasonably  request  in order to effect  the sale,
conveyance,  and transfer of the Purchased  Assets from the Seller to the Buyer.
Such  instruments  and documents shall be sufficient to convey to the Buyer good
and marketable title in all of the Purchased Assets.  The Seller will, from time
to time after the Closing  Date,  take such  additional  actions and execute and
deliver such further  documents as the Buyer may reasonably  request in order to
more effectively sell, transfer and convey the Purchased Assets to the Buyer and
to place the Buyer in  position  to operate  and  control  all of the  Purchased
Assets.

                                   ARTICLE III
                         REPRESENTATIONS AND WARRANTIES
                        OF THE SELLER AND THE STOCKHOLDER

         The Seller and the Stockholder  hereby jointly and severally  represent
and warrant to the Buyer that the  following  statements  are true and  correct,
except as disclosed on Schedule 3.1 attached hereto.

(a)      Organization  and  Qualification.  The  Seller  is a  corporation  duly
         organized,  validly existing and in good standing under the laws of the
         state of its  incorporation.  The Seller has full  corporate  power and
         authority  to own,  use and lease its  properties  and to  conduct  its
         business as such properties are currently owned,  used or leased and as
         such  business is  currently  conducted.  The Seller is qualified to do
         business  as a  foreign  corporation  and is in good  standing  in each
         jurisdiction  in which the conduct of its business  would  require such
         qualification.

(b)  Authority;  No Violation.  The Seller has all requisite corporate power and
     authority to enter into this  Agreement and each of the Purchase  Documents
     to  which  it is a party  and to carry  out the  transactions  contemplated
     hereby or thereby. The execution, delivery and performance by the Seller of
     this  Agreement  and each of the Purchase  Documents to which it is a party
     have  been  duly and  validly  authorized  and  approved  by all  necessary
     corporate  action.  This  Agreement  and each of the Purchase  Documents to
     which it is a party  constitute  the legal and  binding  obligation  of the
     Seller and the Stockholder, enforceable against each in accordance with its
     terms.  Assuming the accuracy of the  representations and warranties of the
     Buyer hereunder,  the entering into of this Agreement by the Seller and the
     Stockholder   does  not,  and  the  consummation  by  the  Seller  and  the
     Stockholder of the transactions contemplated hereby, including specifically
     the transfer of the Purchased  Assets to the Buyer by the Seller,  will not
     violate the provisions of (i) any  applicable  laws of the United States or
     any other state or jurisdiction in which the Seller does business,  or (ii)
     the Seller's or the Stockholder's Charter or bylaws. 3.2 The Seller and the
     Stockholder hereby jointly and severally represent and warrant that neither
     of them has any actual  knowledge that any of the following  statements are
     not true or  correct  in all  material  respects,  except  as set  forth on
     Schedule  3.1 attached  hereto.  For purposes of this Section 3.2, the term
     "actual knowledge" shall not include the actual knowledge  possessed by any
     of the Aura Ceramics Employees.  Furthermore,  if one or more Aura Ceramics
     Employees  possesses  actual  knowledge of any facts or circumstance  which
     would cause any such  statement to be untrue or incorrect,  then the Seller
     and the Shareholder shall not be deemed to have made any  misrepresentation
     or breach of warranty with respect to such specific statement.

(a)      No Violation. The execution, delivery and performance of this Agreement
         and  each  of the  Purchase  Documents,  and  the  consummation  of the
         transactions contemplated thereby, will not conflict with any provision
         of, or result in a default or  acceleration  of any  obligation  under,
         result in any change in the rights or  obligations  of the Seller under
         or require any consent under, any Lien,  contract  agreement,  license,
         lease,  instrument,  indenture,  order, arbitration award, judgment, or
         decree  to which the  Seller is a party or by which it is bound,  or to
         which  any  property  of the  Seller  is  subject  and  which now has a
         Material Adverse Effect on the Seller.

(b)  Consents.  No consent,  waiver,  approval,  order or  authorization  of, or
     registration,  declaration or filing with, any court, administrative agency
     or  commission  or other  federal,  state,  county,  local or other foreign
     governmental    authority,    instrumentality,    agency   or    commission
     ("Governmental  Entity")  or any  third  party,  including  a party  to any
     agreement with the Seller,  is required by or with respect to the Seller or
     the  Stockholder  in  connection  with the  execution  and delivery of this
     Agreement and any Related Agreements to which the Seller or the Stockholder
     is a party or the consummation of the transactions  contemplated hereby and
     thereby,   except   for  such   consents,   waivers,   approvals,   orders,
     authorizations,  registrations, declarations and filings as may be required
     under applicable securities laws.

(c)  Subsidiaries.  The Seller has never had and, as of the date hereof,  has no
Subsidiaries.

(d)      Financial  Statements.  The financial  statements of Seller  heretofore
         delivered by Seller or Stockholder to Buyer hereto attached as Schedule
         3.5 (the "Financial Statements"), have been prepared in accordance with
         GAAP  applied on a  consistent  basis  throughout  the periods  covered
         thereby,   present  fairly  in  all  material  respects  the  financial
         condition of the Seller as of such dates and the results of  operations
         of the Seller for such  periods,  are  correct  and  complete,  and are
         consistent with the books and records of the Seller.

(e)  Title to the Purchased Assets.  Seller has good and marketable title to, or
     a valid leasehold or license interest in, all of the Purchased Assets, free
     and  clear  of  all  Liens,  and  free  of  any  material   infractions  or
     non-compliance with zoning and building laws (collectively, the "Defects");
     and (ii) the  sale  and  delivery  of the  Purchased  Assets  to the  Buyer
     pursuant  hereto shall vest in the Buyer good and valid title  thereto or a
     valid leasehold or license interest therein,  free and clear of any and all
     Liens or Defects;  and (iii) the Seller owns,  leases or licenses all real,
     personal,  tangible and  intangible  property and assets  necessary for the
     conduct of its business as such  business is presently  conducted,  and all
     such  property  and  assets  are  included  in the  Purchased  Assets.  The
     Stockholder does not own, lease or license any real, personal,  tangible or
     intangible property which is used by Seller in the conduct of its business.

(f)      Leases.  Each lease and  sublease to which  Seller is a party is legal,
         valid,  binding,  enforceable,  and in full  force and  effect and will
         continue to be so on identical terms following the  consummation of the
         transactions  contemplated hereby, and Seller is not in material breach
         or default thereunder.

(g)      Intellectual Property.

(i)               The  Buyer  shall  have  no  obligations  in  respect  of  any
                  royalties,  fees or other  obligations in connection  with the
                  Intellectual  Property  Rights used by the Seller prior to the
                  Closing.

(ii)              Each item of Seller Intellectual Property is free and clear of
                  any  Liens  or  other  encumbrances  and  the  Seller  is  the
                  exclusive  owner of all Seller  Intellectual  Property  (other
                  than  Seller  Intellectual   Property  which  is  Intellectual
                  Property exclusively licensed to the Seller).

(iii)             To  the  extent  that  any  Intellectual   Property  has  been
                  developed  or created  independently  or jointly by any person
                  other than the Seller for which the Seller  has,  directly  or
                  indirectly, paid, the Seller has a written agreement with such
                  person  with  respect  thereto,  and the  Seller  thereby  has
                  obtained ownership of, and is the exclusive owner of, all such
                  Intellectual  Property and  associated  Intellectual  Property
                  Rights by operation of law or by valid assignment.

(iv)              The Seller has not  transferred  ownership  of or granted  any
                  license of or right to use or authorized  the retention of any
                  rights  to  use  any  Intellectual  Property  or  Intellectual
                  Property Rights that is or was Seller  Intellectual  Property,
                  to any other person.

(v)               The  Seller   Intellectual   Property   constitutes   all  the
                  Intellectual Property and Intellectual Property Rights used in
                  and/or  necessary to the conduct of the business of the Seller
                  as  it  currently  is  conducted,  planned  or  is  reasonably
                  contemplated to be conducted,  including,  without limitation,
                  the design, development,  manufacture, use, import and sale of
                  products,   technology  and  services   (including   products,
                  technology or services currently under development).

(vi)              There are no contracts,  licenses or other  agreements,  other
                  than those executed by an Aura Ceramics Employee, to which the
                  Seller is a party with  respect to any  Intellectual  Property
                  and  Intellectual  Property  Rights  and  no  person  who  has
                  licensed Intellectual Property or Intellectual Property Rights
                  to the  Seller  has  ownership  rights  or  license  rights to
                  improvements made by the Seller in such Intellectual  Property
                  which has been licensed to the Seller.

(vii)             There are no  contracts,  licenses or  agreements,  other than
                  those  executed  by an Aura  Ceramics  Employee,  between  the
                  Seller and any other  person  wherein or hereby the Seller has
                  agreed to, or  assumed,  any  obligation  or duty to  warrant,
                  indemnify,  reimburse,  hold  harmless,  guaranty or otherwise
                  assume or incur any obligation or liability or provide a right
                  of   rescission   with   respect   to  the   infringement   or
                  misappropriation  by the  Seller or such  other  person of the
                  Intellectual  Property  Rights of any  person  other  than the
                  Seller.

(viii) The  operation of the business of the Seller as it currently is conducted
     or is reasonably contemplated to be conducted, including but not limited to
     the design, development, use, import, manufacture and sale of the products,
     technology  or  services  (including   products,   technology  or  services
     currently   under   development)   of  the  Seller  does  not  infringe  or
     misappropriate the Intellectual Property Rights of any person,  violate the
     rights  of any  person  (including  rights to  privacy  or  publicity),  or
     constitute  unfair  competition  or trade  practices  under the laws of any
     jurisdiction,  and the  Seller  has not  received  notice  from any  person
     claiming  that such  operation or any act,  product,  technology or service
     (including products, technology or services currently under development) of
     the Seller infringes or misappropriates the Intellectual Property Rights of
     any person or constitutes  unfair  competition or trade practices under the
     laws of any jurisdiction (nor is the Seller or the Stockholder aware of any
     basis therefor).

(ix) Each  item  of  Seller  Registered   Intellectual  Property  is  valid  and
     subsisting, and all necessary registration, maintenance and renewal fees in
     connection with such Seller Registered Intellectual Property have been paid
     and all necessary documents and certificates in connection with such Seller
     Registered  Intellectual Property have been filed with the relevant patent,
     copyright,  trademark or other  authorities in the United States or foreign
     jurisdictions,  as the case may be, for the  purposes of  maintaining  such
     Registered  Intellectual Property.  There are no actions that must be taken
     by the Seller  within sixty (60) days of the Closing  date,  including  the
     payment of any  registration,  maintenance or renewal fees or the filing of
     any  documents,   applications   or   certificates   for  the  purposes  of
     maintaining,   perfecting  or   preserving   or  renewing  any   Registered
     Intellectual  Property.  For each  product,  technology  or  service of the
     Seller that  constitutes or includes a  copyrightable  work, the Seller has
     registered  the copyright in the latest  version of such work with the U.S.
     Copyright  Office.  In each  case in which  the  Seller  has  acquired  any
     Intellectual  Property  rights from any person,  the Seller has  obtained a
     valid and  enforceable  assignment  sufficient to irrevocably  transfer all
     rights  in  such  Intellectual  Property  and the  associated  Intellectual
     Property  Rights  (including the right to seek past and future damages with
     respect  thereto) to the Seller and, to the maximum extent provided for by,
     and in accordance  with,  applicable laws and  regulations,  the Seller has
     recorded each such assignment with the relevant  governmental  authorities,
     including  the  PTO,  the  U.S.   Copyright  Office,  or  their  respective
     equivalents in any relevant foreign jurisdiction, as the case may be.

(x)               There are no  contracts,  licenses or  agreements  between the
                  Seller   and  any  other   person   with   respect  to  Seller
                  Intellectual  property  under which there is any dispute known
                  to the Seller or the  Stockholder  regarding the scope of such
                  agreement,  or performance under such agreement including with
                  respect to any  payments  to be made or received by the Seller
                  thereunder.

(xi)              To the knowledge of the Seller and the  Stockholder  no person
                  is  infringing  or  misappropriating  any Seller  Intellectual
                  Property.

(xii)             The Seller has taken all reasonable steps that are required to
                  protect the Seller's  rights in  confidential  information and
                  trade secrets of the Seller or provided by any other person to
                  the Seller.  Without  limiting the foregoing,  the Seller has,
                  and enforces, a policy requiring each employee, consultant and
                  contractor to execute proprietary information, confidentiality
                  and  assignment  agreements   substantially  in  the  Seller's
                  standard  forms,   and  all  current  and  former   employees,
                  consultants  and  contractors of the Seller have executed such
                  an agreement.

(xiii)            No Seller Intellectual Property,  Intellectual Property Rights
                  or  service of the  Seller is  subject  to any  proceeding  or
                  outstanding decree, order, judgment,  agreement or stipulation
                  that  restricts  in any manner the use,  transfer or licensing
                  thereof  by the  Seller or may  affect  the  validity,  use or
                  enforceability of such Seller Intellectual Property.

(xiv)             No (A)  product,  technology,  service or  publication  of the
                  Seller,  (B) material  published or distributed by the Seller,
                  or (C) conduct or  statement  of Seller,  constitutes  obscene
                  material,   a  defamatory   statement   or   material,   false
                  advertising or otherwise violates any law or regulation.

(h)      Contracts.  The Seller is not a party to or subject to any  contract or
         agreement other than those executed by an Aura Ceramics Employee.

(i)      Compliance  with  Laws.  Seller  is  not  now  charged  with  or  under
         investigation  with respect to any possible  material  violation of any
         applicable  law,  statute,  ordinance,   regulation,   rule,  order  or
         requirement.

(j)  Taxes.  Seller has filed all Tax Returns that it was required to file.  All
     such Tax Returns were correct and complete in all respects. All Taxes shown
     to be due and payable on such Tax Returns by the Seller have been paid. The
     Seller  has not waived any  statute of  limitations  in respect of Taxes or
     agreed  to any  extension  of time  with  respect  to a Tax  assessment  or
     deficiency.  The Seller is not the  beneficiary  of any  extension  of time
     within  which to file any Tax  Return.  No Claim  has ever  been made by an
     authority  in a  jurisdiction  where the Seller  does not file Tax  Returns
     alleging that it is or may be subject to the  imposition of any Tax by that
     jurisdiction.  The Seller has withheld and paid all Taxes  required to have
     been  withheld  and paid in  connection  with  amounts paid or owing to any
     employee,  consultant,  independent contractor,  creditor,  stockholder, or
     other third party.  Neither the Seller nor the  Stockholder is aware of any
     dispute or Claim  concerning  any  liability  for Taxes of the Seller.  The
     Seller  has not waived any  statute of  limitations  in respect of Taxes or
     agreed  to any  extension  of time  with  respect  to a Tax  assessment  or
     deficiency.  The unpaid  Taxes of the  Seller  (i) did not,  as of the Last
     Balance Sheet Date, exceed the reserve for Tax liabilities set forth on the
     face of the Last Balance Sheet (rather than in any notes  thereto) and (ii)
     do not exceed that  reserve as adjusted for the passage of time through the
     Closing Date in accordance  with the past custom and practice of the Seller
     in filing its Tax Returns.

(k)  Plan.  The Aura  Ceramics  Employees are not covered by any Plan other than
     the 401(k) Plan of Seller.

(l)  Environmental  Matters. The Seller has not received written notice from any
     Person,  (i)  that  it has  been  identified  by the EPA or  similar  state
     authority as a potentially responsible party under CERCLA with respect to a
     site  listed  on the  "National  Priorities  List,"  as in effect as of the
     Closing Date, of hazardous waste sites or any similar state list; (ii) that
     any Hazardous  Materials  which the Seller has generated,  transported,  or
     disposed of has been found at any site at which a person has  conducted  or
     has ordered that the Seller conduct a remedial  investigation,  removal, or
     other response action pursuant to any Environmental  Law; or (iii) that the
     Seller is or shall be a named party to any Environmental Action arising out
     of any person's  incurrence of costs,  expenses,  losses, or damages of any
     kind  whatsoever  in  connection  with the release of Hazardous  Materials.
     There are no underground  fuel or other storage tanks located at any of the
     facilities  of the  Seller.  There  have been no  unpermitted  Releases  of
     Hazardous  Materials by the Seller on, upon,  into, or from the real estate
     or other  assets of the  Seller or any other  property;  there have been no
     unpermitted Releases of Hazardous Materials on, upon, into or from the real
     estate or other assets of the Seller by any other persons;  there have been
     no Releases on, upon,  from, or into any  neighboring  real property which,
     through the soil, groundwater, or surface water, can reasonably be expected
     to come to be located on, upon, or under the real estate or other assets of
     the Seller.

(m)  Employees. Seller is in compliance in all material respects with applicable
     federal,  state and local laws affecting  labor,  employment and employment
     practices,  including  terms and  conditions  of  employment  and wages and
     hours,  and,  there are,  and have been during the past five (5) years,  no
     complaints  against the Seller  pending or, to the  knowledge of the Seller
     and the Stockholder,  threatened  before the National Labor Relations Board
     or any similar state or local agency. Upon termination of the employment of
     any  employee  of the  Seller,  to the  knowledge  of the  Seller  and  the
     Stockholder,  neither the Buyer nor the Purchased Assets will be subject to
     any claim by any such employee for "severance payment" or any other payment
     by reason of anything done by the Seller prior to or after the Closing.

(n)      Litigation.  There are no claims  pending or  threatened  (or any facts
         which could lead to such a Claim) by, or against the Seller or to which
         the  Seller  or  the  Stockholder  or  their   respective   businesses,
         properties or assets, at law or in equity,  before any federal,  state,
         local or  foreign  court or any other  governmental  or  administrative
         agency or tribunal or any  arbitrator  or  arbitration  panel,  and (b)
         there are no judgments, orders, rulings, charges, decrees, injunctions,
         notices of violation or other mandates  against the Seller to which the
         Seller or the  Stockholder  is a party with respect to the  businesses,
         properties or assets of the Seller.

(o)      Brokers.  Neither the Seller nor the  Stockholder  nor anyone acting on
         their behalf has engaged,  retained,  nor incurred any liability to any
         broker,  investment  banker,  finder or agent or has  agreed to pay any
         brokerage fees,  commissions,  finder's fees or other fees with respect
         to this Agreement or the transactions contemplated hereby.

(p)      Disclosure of Material  Information.  There is no fact or  circumstance
         known to the Seller or the  Stockholder  which now or  hereafter  has a
         Material  Adverse Effect on the Seller and which has not been set forth
         in this  Agreement or in any other  document  delivered  in  connection
         herewith.  Without  limiting  the  generality  of  the  foregoing,  the
         Stockholder  has not  heretofore  taken any  actions,  nor is there any
         existing fact or  circumstance  relating to  Stockholder,  which now or
         hereafter has a Material Adverse Effect on Buyer after the consummation
         of the purchase and sale of the Purchased Assets contemplated hereby.

                                   ARTICLE IV
                   REPRESENTATIONS AND WARRANTIES OF THE BUYER

  The Buyer hereby represents and warrants to the Seller as follows:

4.1 Organization and  Qualification.  The Buyer is a corporation duly organized,
validly  existing and in good standing under the laws of the state of Minnesota,
with full corporate  power and authority to own, use or lease its properties and
to conduct its business as such properties are owned, used or leased and as such
business is conducted.

4.2  Authority.  The Buyer has the  requisite  corporate  power and authority to
enter into this  Agreement  and each of the Purchase  Documents and to carry out
the transactions  contemplated  hereby or thereby.  The execution,  delivery and
performance  of this  Agreement and each of the Purchase  Documents by the Buyer
has been duly and validly  authorized  and approved by all  necessary  corporate
action.  This Agreement and each of the Purchase Documents  constitute the legal
and binding obligation of the Buyer, enforceable against the Buyer in accordance
with its  terms,  except  that  the  enforceability  hereof  may be  subject  to
bankruptcy, insolvency, reorganization,  moratorium or other similar laws now or
hereafter in effect relating to creditors'  rights generally and 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 may be brought.

4.3 Brokers. The Buyer has not engaged,  retained,  or incurred any liability to
any  broker,  investment  banker,  finder  or  agent  or has  agreed  to pay any
brokerage  fees,  commissions,  finder's fees or other fees with respect to this
Agreement or the transactions contemplated hereby.

4.4 Lease.  The Buyer shall  assume at the closing  any and all  obligations  of
Seller and  Stockholder  under and pursuant to that certain amended and restated
lease agreement dated as of October 1, 1997, by and between Winnetka Properties,
L.L.C. (the "Landlord") and the Seller (the "Lease") relating to that portion of
the building located at 5121 Winnetka Avenue, New Hope, Minnesota 55428 known as
Winnetka  Properties  which is  currently  being  leased by Seller (the  "Leased
Premises"),  including  but not  limited  to any and all  environmental  cleanup
obligations  with respect to the Leased  Premises  and the  $200,000  collateral
requirements which are set forth and contained in the Lease; provided,  however,
that the  Seller or  Stockholder  shall pay to the  Landlord  the  $100,000  fee
required to be paid to the  Landlord  for its consent to the  assignment  of the
Lease by Seller to Buyer,  the release of Seller  from any  further  obligations
under the Lease,  and the release of Stockholder from its guaranty of the Lease;
provided  further,  however,  that the Buyer  shall  have no  obligation  to the
Seller,  the  Stockholder  or  the  Landlord,  to  pay or  reimburse  Seller  or
Stockholder for such fee.

4.5 Sole  Representations  and Warranties.  The  representations  and warranties
contained in this Article IV are the only representations and warranties made by
the Buyer in connection with the transactions contemplated by this Agreement and
supersede any and all previous  written or oral  statements made by the Buyer to
the Seller or the Stockholder.

                                    ARTICLE V
                                    COVENANTS

         Covenants  of the Seller.  The Seller and the  Stockholders  each shall
keep, perform and fully discharge the following covenants and agreements:

(a)      Transfer of Necessary  Permits.  From and after the Closing  Date,  the
         Seller will use its best efforts to assist the Buyer in  obtaining  all
         of the Necessary  Permits and all other permits,  licenses,  and leases
         which are  associated  with the Business as  presently  conducted on or
         after the Closing  Date,  to the extent the same are by their terms and
         by law transferable.

(b)      Retained  Liabilities.  From and after the  Closing  Date , the  Seller
         agrees  to  pay,  perform  and  fully  discharge  all of  the  Retained
         Liabilities as they come due.

(c)  Non-Disclosure  of  Proprietary  Information.  The  Seller  agrees  to hold
     Proprietary  Information  in confidence  and not disclose it, except to its
     employees or  representative  to whom disclosure is necessary to effect the
     purposes  of this  Agreement  and  who are  similarly  bound  to hold  such
     information  in  confidence.  In  addition,  the Seller  shall use its best
     efforts to prevent inadvertent or unauthorized disclosure,  publication, or
     other  dissemination  of any Proprietary  Information.  For the purposes of
     this Agreement,  "Proprietary  Information"  means  information or material
     included  in the  Purchased  Assets  and  proprietary  to the  Buyer  or is
     designated  as  Proprietary  Information  by the Buyer or is not  generally
     known by  personnel  outside  of the  employment  of the  Buyer  including,
     without  limitation,  financial  information,  applications,  technical and
     business data,  know-how,  formulae,  processes,  models,  designs,  plans,
     drawings,  specifications,   schematics,  samples,  reports,  data  charts,
     customer lists, vendor lists, studies, price lists,  findings,  inventions,
     trade secrets, circuitry, software, programs, source code listings or other
     documentation or designs of such party.

(d)      Tax Matters.  The Seller and  Stockholder  shall be responsible for and
         shall cause to be prepared  and duly filed all Tax Returns  relating to
         Taxes of the Seller.

(e)      Waiver of Compliance  with the Bulk Sales Act. In  connection  with the
         transactions  contemplated  hereby,  the parties shall waive compliance
         with the  provisions of Article 6 of the Uniform  Commercial  Code Bulk
         Transfers  and the Bulk Sales Act,  to the extent  applicable,  and any
         other applicable  United States,  state or provincial bulk sales act or
         statute ("Bulk Sales Acts").

(f)      WARN;  COBRA.  The Seller shall  terminate the employment of all of its
         employees  simultaneously with the Closing and shall be responsible for
         any  notice  required  under or  liability  associated  with the Worker
         Adjustment and  Retraining  Notification  Act (29 U.S.C.  ss.ss.2101 to
         2109), COBRA group health plan continuation  coverage (29 U.S.C. ss.ss.
         601608 and 26 U.S.C.  ss.4980B) and any applicable State or local plant
         closing,  mass  layoff,   relocation,  or  severance,  or  continuation
         coverage laws associated with the employees which takes place or arises
         on or before the Closing Date.

(g) The  Seller  shall  remove  all Liens and  Defects  other  than the  Assumed
Liabilities.

5.2 Covenants of Buyer.  The Buyer shall keep,  perform and fully  discharge the
following covenants and agreements:

(a)      The Buyer shall abide by and assume, perform, pay or discharge, any and
         all obligations  under and pursuant to the Lease relating to the Leased
         Premises,  including  but not  limited  to any  and  all  environmental
         cleanup  obligations  with respect to the Leased Premises which are set
         forth and contained in the Lease; provided, however, that the Seller or
         the Stockholder  shall satisfy the collateral  requirement set forth in
         the Lease and any  agreements  and documents  related  thereto,  to the
         satisfaction of the Landlord; provided further, however, that the Buyer
         shall  have  no  obligation  to  the  Seller,  the  Stockholder  or the
         Landlord, to satisfy such collateral requirement.

(b)      On and after the  closing,  Buyer shall  comply with all  environmental
         laws relating to the Leased Premises, obtain any required environmental
         permits with respect to Buyer's operations,  and be responsible for any
         required   cleanup  of  the   Leased   Premises   resulting   from  any
         environmental  action taken with respect to the Leased Premises if such
         action arises.

                                   ARTICLE VI
                  CONDITIONS PRECEDENT TO OBLIGATIONS OF BUYER

         Conditions  Precedent to Obligations of Buyer.  The  obligations of the
Buyer to proceed on the Closing Date shall be subject (as its discretion) to the
satisfaction, on or prior to the Closing, of all of the following conditions:

(a)      The representations and warranties of the Seller and Stockholder herein
         are true in all  material  respects  on the date  hereof  and as of the
         Closing Date, with the same effect as though made at such time.

(b)      Seller and Stockholder have complied with each and all of the covenants
         and  agreements  required to be performed or complied with by either of
         them on or prior to the Closing Date.

(c)      Title to the  Purchased  Assets  shall  have  been  sold,  transferred,
         assigned,  and  conveyed  to  Buyer  free  and  clear  of any  and  all
         mortgages, security interests, liens, and encumbrances whatsoever.

(d)      Buyer shall have closed on the  following  financing  transaction  with
         Excel Bank: (i) a One Million and 00/100 Dollars  ($1,000,000) five (5)
         year term loan,  and (ii) a Two  Hundred  Thousand  and 00/100  Dollars
         ($200,000) working capital line of credit.

(e)      The Landlord  shall have  consented in writing to the Assignment of the
         Lease  by  Seller  to   Buyer;   such   consent   shall   contain   the
         acknowledgement  and  agreement of the Landlord that Buyer shall not be
         responsible  for  satisfying  the  collateral  obligation  described in
         Section 4.4 hereof;  and which consent shall otherwise be acceptable in
         form and substance to the Buyer and Excel Bank.

(f)      The Landlord  shall have  executed  and  delivered to Buyer an estoppel
         certificate  in  customary  form,  which  is  acceptable,  in form  and
         substance, to the Buyer and Excel Bank.

The foregoing  condition  are for the sole benefit of the Buyer and,  therefore,
any or all of such conditions may be waived by the Buyer in its sole discretion.

                                   ARTICLE VII
                  CONDITIONS PRECEDENT TO OBLIGATIONS OF SELLER

7.1 Conditions Precedent to Obligations of Seller. The obligations of the Seller
to proceed on the  Closing  Date shall be  subject  (in its  discretion)  to the
satisfaction, on or prior to the Closing, of all of the following conditions:

(a)      The  representations and warranties of the Buyer herein are true in all
         material  respects on the date  hereof and as of the Closing  date with
         the same effect as though made at such time.

(b)      Buyer has complied with each and all of the  covenants  and  agreements
         required to be  performed  or complied  with on or prior to the Closing
         Date.

The foregoing  conditions are for the sole benefit of the Seller and, therefore,
any or  all  of  such  conditions  may be  waived  by  the  Seller  in its  sole
discretion.

Seller and Stockholder acknowledge and agree that Buyer shall have no obligation
to obtain  from the  Landlord  a  release  of Seller  and  Stockholder  of their
respective  obligations under the Lease and the agreements and documents related
thereto.

                                  ARTICLE VIII
                                 INDEMNIFICATION

         Survival   of   Representations   and   Warranties.   Each  and   every
representation  and  warranty  set forth in this  Agreement  shall  survive  the
Closing without limitation.

8.2      Indemnification.

(a)  The Seller and the  Stockholder  shall,  jointly and severally,  indemnify,
     defend  and hold the  Buyer,  and  their  respective  officers,  directors,
     consultants,  employees,  owners, agents and Affiliates,  harmless from and
     against   any  and  all   damages,   losses,   obligations,   deficiencies,
     liabilities,   claims,   encumbrances,   penalties,  costs,  and  expenses,
     including  reasonable  attorneys' fees and costs ("Losses"),  in connection
     with any Loss which the Buyer may suffer or incur,  resulting from, related
     to  or  arising  out  of  any  of  the  following:  (i)  any  breach  of  a
     representation  or warranty (which  survives  pursuant to Section 5.1 above
     and only for so long as such survival),  (ii) non-fulfillment of any of the
     covenants of the Seller or the Stockholder in this Agreement;  (iii) any of
     the Retained  Liabilities or the Retained Assets;  (iv) fraud,  intentional
     misrepresentation  (which  survives  pursuant to Section 5.1 above and only
     for so long as  such  survival)  on the  part  of  each  of the  Seller  or
     Stockholder;  (v)  any  Taxes  required  to be paid  by the  Seller  or the
     Stockholder or with respect to the Purchased Assets or the Business for any
     period  ending on or before the  Closing  Date;  (vi) any and all  actions,
     suits,  investigations,  proceedings  and claims relating to the conduct of
     the  Business by the Seller on or prior to the Closing Date and any and all
     actions, suits, investigations,  proceedings, demands, assessments, audits,
     judgments and claims arising out of any of the foregoing.

(b)  The Buyer  shall  indemnify,  defend and hold the Seller and its  officers,
     directors, consultants,  employees, owners, agents and Affiliates, harmless
     from and against any and all Losses, in connection with any Loss which such
     indemnitee may suffer or incur,  resulting from,  related to or arising out
     of any of the  following:  (i) any breach of a  representation  or warranty
     (which survives  pursuant to Section 5.1 above and only for so long as such
     survival), (ii) nonfulfillment of any of the covenants of the Buyer in this
     Agreement;  (iii)  fraud,  intentional  misrepresentation  (which  survives
     pursuant to Section 5.1 above and only for so long as such survival) on the
     part  of the  Buyer;  (iv)  any  and all  actions,  suits,  investigations,
     proceedings,  and claims  relating  to the  conduct of the  Business by the
     Buyer after the Closing Date, (v) the Assumed Liabilities,  or (vi) any and
     all liabilities,  actions,  suits,  investigations,  proceedings,  demands,
     assessments,  audits, Liens, judgments and claims arising out of any of the
     foregoing  or out of the  conduct of the  Business  by the Buyer  after the
     Closing.

(c)      For   purposes   of  this   Article   V,   Losses  for  breach  of  any
         representation,  warranty or covenant contained in this Agreement shall
         be determined  without  giving effect to "material,"  "materiality"  or
         "Material Adverse Effect."

(d)      Buyer hereby acknowledges and agrees that the indemnification set forth
         in subsection (b) above shall inure to the benefit of the  Stockholder,
         as  the  assignee  of  Seller   pursuant  to  Article   2.4(e)  hereof,
         notwithstanding the subsequent liquidation of Seller.

8.3 Notice and  Opportunity  to  Defend.  If there  occurs an event for which an
indemnitee  asserts  an  indemnifiable   event  pursuant  to  Section  5.2,  the
indemnitee shall promptly notify the indemnitors. If such event involves (a) any
Claim or (b) the  commencement  of any  action,  suit or  proceeding  by a third
person,  the indemnitee will give the indemnitors  prompt written notice of such
Claim or the commencement of such action, suit or proceeding, provided, however,
that the failure to provide  prompt  notice as provided  herein will relieve the
indemnitors of their obligations  hereunder only to the extent that such failure
prejudices  the  indemnitors  hereunder.  In  case  any  such  action,  suit  or
proceeding  shall be  brought  against  an  indemnitee  and it shall  notify the
indemnitors of the commencement  thereof,  the indemnitors  shall be entitled to
participate  therein and, to the extent that they desire to do so, to assume the
defense thereof,  with counsel  reasonably  satisfactory to the indemnitees and,
after notice from the  indemnitors  to the  indemnitees  of such  election so to
assume  the  defense  thereof,  the  indemnitors  shall  not  be  liable  to the
indemnitees  hereunder for any attorneys'  fees or any other  expenses,  in each
case subsequently incurred by the indemnitees, in connection with the defense of
such action,  suit or proceeding.  The indemnitees each agree to cooperate fully
with the  indemnitors  and their counsel in the defense against any such action,
suit or proceeding.  In any event,  the each indemnitee  shall have the right to
participate  at  its  own  expense  in the  defense  of  such  action,  suit  or
proceeding.  In no event shall the  indemnitors  be liable for any settlement or
compromise  effected  without their prior consent.  If,  however,  an indemnitee
refuses to consent to a bona fide offer of settlement which the indemnitors wish
to accept,  such  indemnitee  may  continue to pursue such  matter,  free of any
participation  by the indemnitors,  at the sole expense of such  indemnitee.  In
such event,  the obligation of the indemnitors to such indemnitee shall be equal
to the lesser of (i) the amount of the offer or settlement which the indemnitors
wish to accept (which must include the unconditional  release of such indemnitee
from all liability  with respect to the Claim at issue),  which such  indemnitee
refused to accept plus the costs and  expenses of such  indemnitee  prior to the
date the  indemnitors  notified the  indemnitees  of the offer of settlement and
(ii) the actual  out-of-pocket  amount such  indemnitee is obligated to pay as a
result of its continuing to pursue such matter.

8.4  Adjustment  for  Insurance  and Taxes.  The amount which an  indemnitor  is
required to pay to, for or on behalf of an indemnitee pursuant to this Article V
shall be adjusted  (including,  without  limitation,  retroactively)  (i) by any
insurance  proceeds  actually  recovered by or on behalf of such  indemnitee  in
reduction of the related  indemnifiable loss (the "Indemnifiable Loss") and (ii)
to take  account of any Tax benefit  realized  as a result of any  Indemnifiable
Loss. Amounts required to be paid, as so reduced, are hereafter sometimes called
an "Indemnity  Payment." If an indemnitee  shall have received or shall have had
paid on its behalf an Indemnity Payment in respect of an Indemnifiable  Loss and
shall  subsequently  receive insurance proceeds in respect of such Indemnifiable
Loss, or realize any Tax benefit as a result of such  Indemnifiable  Loss,  then
the indemnitee shall pay to the indemnitor the amount of such insurance proceeds
or Tax benefit or, if lesser, the amount of the Indemnity Payment.

8.5 Right of Set Off.  Buyer may set off and deduct any and all  amounts  now or
hereafter due and payable by Buyer to Seller or Stockholder (including,  without
limitation  the  Deferred  Purchase  Price  and the  installments  with  respect
thereto)  against any and all payment  obligations  now or  hereafter  due or to
become  due by either  the  Seller or the  Stockholder  to the Buyer  under this
Agreement and any and all other amounts now or hereafter due or to become due by
either Seller or Stockholder  to Buyer.  Such right of set off shall continue to
be effective and available to Buyer  notwithstanding the assignment by Seller to
Stockholder  of Seller's  rights and  entitlements  pursuant  to Article  2.4(e)
hereof or the liquidation of Seller.

8.6 Limited Recourse. Notwithstanding anything to the contrary contained herein,
after the Closing Date the provisions of this Article shall be the sole recourse
of the  parties  hereto,  other than any claims  made by any party for  specific
performance,  and such recourse is explicitly  limited to the dollar amounts and
time limits set forth in this Agreement.

                                   ARTICLE IX
                                  MISCELLANEOUS

         Fees and  Expenses.  Each of the parties  hereto will pay and discharge
its own expenses and fees in connection  with the  negotiation of and entry into
this Agreement and the consummation of the transactions contemplated hereby.

9.2  Notices.  All  notices,  requests,  demands,  consents  and  communications
necessary or required  under this  Agreement or any other  Purchase  Document to
which the Seller is a party  shall be made in the manner  specified,  or, if not
specified,  shall be delivered by hand or sent by registered or certified  mail,
return receipt requested, or by telecopy (receipt confirmed) to:

         if to the Buyer:

         Alpha Ceramics, Inc.
         5121 Winnetka Avenue N.
         Minneapolis, MN 55428
         Attention:  James E. Sloane
         Facsimile Transmission Number:  (612) 535-9655

         With copy to:

         Roger Gordon, Esq.
         Winthrop & Weinstine, P.A.
         3000 Dain Rauscher Plaza
         60 South 6th Street
         Minneapolis, MN 55402
         Facsimile Transmission Number:  (612) 347-0600

         if to the Seller or Stockholder:

         Aura Systems, Inc.
         Aura Ceramics, Inc.
         Michael I. Froch
         Office of the General Counsel
         2335 Alaska Avenue
         El Segundo, California 90245
         Facsimile Transmission Number:  (310) 643-8719

All such notices, requests,  demands, consents and other communications shall be
deemed to have been duly given or sent two (2) days  following the date on which
mailed,  or on the date on which delivered by hand or by facsimile  transmission
(receipt confirmed), as the case may be, and addressed as aforesaid.

9.3  Successors  and Assigns.  All  covenants and  agreements  set forth in this
Agreement  and made by or on behalf of any of the parties  hereto shall bind and
inure to the benefit of the successors and assigns of such party, whether or not
so  expressed,  except that  neither  party may assign or transfer  any of their
respective  rights or obligations  under this  Agreement  without the consent in
writing of the other,  except in  connection  with a merger of such party with a
third  party or a sale of all or  substantially  all the assets or stock of such
party to a third party.

9.4 Counterparts;  Descriptive Headings;  Variations in Pronouns. This Agreement
may be  executed  in any number of  counterparts  and by the  different  parties
hereto on separate  counterparts,  each of which when so executed and  delivered
shall be an original,  but all of which  together  shall  constitute one and the
same instrument, and it shall not be necessary in making proof of this Agreement
to produce or account for more than one such  counterpart.  The  headings of the
sections and paragraphs of this Agreement have been inserted for  convenience of
reference  only  and  shall  not be  deemed  to be part of this  Agreement.  All
pronouns and any variations thereof refer to the masculine,  feminine or neuter,
singular or plural, as the identity of the Person or Persons may require.

9.5 Severability;  Entire Agreement.  If any provision  contained herein is held
unenforceable,  the  enforceability of any such provision in every other respect
and of the  remaining  provisions  hereof  shall not be in any way  impaired  or
affected.  This  Agreement,  including the  Schedules  and Exhibits  referred to
herein,  is  complete,  and  all  promises,   representations,   understandings,
warranties and agreements  with reference to the subject matter hereof,  and all
inducements  to the making of this  Agreement  relied upon by any of the parties
hereto,  have been  expressed  herein or in said  Schedules  or  Exhibits.  This
Agreement may not be amended except by an instrument in writing signed on behalf
of the Seller and the Buyer.

9.6  Attorneys'  Fees.  In any  action or  proceeding  brought  to  enforce  any
provision of this Agreement or the other Purchase  Documents to which the Buyer,
on the one hand, and Seller and/or  Stockholder,  on the other hand, is a party,
or where any provision hereof or thereof is validly  asserted as a defense,  the
successful  party  shall be entitled to recover  reasonable  attorneys'  fees in
addition to any other available remedy.

9.7  Course of  Dealing.  No course of  dealing  and no delay on the part of any
party  hereto in  exercising  any  right,  power,  or remedy  conferred  by this
Agreement shall operate as a waiver thereof or otherwise  prejudice such party's
rights, powers and remedies. The failure of any of the parties to this Agreement
to require the  performance of a term or obligation  under this Agreement or the
waiver by any of the parties to this Agreement of any breach hereunder shall not
prevent subsequent  enforcement of such term or obligation or be deemed a waiver
of any subsequent breach hereunder. No single or partial exercise of any rights,
powers or remedies  conferred  by this  Agreement  shall  preclude  any other or
further exercise thereof or the exercise of any other right, power or remedy.

9.8 GOVERNING LAW. THIS AGREEMENT,  INCLUDING THE VALIDITY HEREOF AND THE RIGHTS
AND OBLIGATIONS OF THE PARTIES HEREUNDER,  SHALL BE CONSTRUED IN ACCORDANCE WITH
AND GOVERNED BY THE LAWS OF THE STATE OF MINNESOTA  WITHOUT REGARD TO PRINCIPLES
OF CONFLICTS OF LAWS.

9.9  WAIVER OF JURY  TRIAL.  EACH OF THE BUYER,  THE SELLER AND THE  STOCKHOLDER
HEREBY  EXPRESSLY  WAIVES  ITS OR HIS  RESPECTIVE  RIGHTS TO A JURY TRIAL OF ANY
CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF THIS AGREEMENT,  ANY OTHER
PURCHASE  DOCUMENT TO WHICH THE SELLER IS A PARTY OR THE PURCHASED ASSETS OR ANY
DEALINGS BETWEEN THEM RELATING TO THE SUBJECT MATTER OF THIS AGREEMENT.

                  [Remainder of Page Intentionally Left Blank]

<PAGE>

THE  OBLIGATION  OF THE  BUYER TO PAY,  AND THE  RIGHTS  OF THE  SELLER  AND THE
STOCKHOLDER TO RECEIVE, THE DEFERRED PURCHASE PRICE AND THE INSTALLMENT PAYMENTS
WITH RESPECT THERETO PURSUANT TO ARTICLE 2.4 HEREOF ARE EXPRESSLY SUBJECT TO THE
PROVISIONS   OF  (1)  THAT   CERTAIN   SUBORDINATION   AGREEMENT   DATED  AS  OF
_______________, 2000, BY AND BETWEEN BUYER, SELLER, STOCKHOLDER AND EXCEL BANK,
AND (2) THAT CERTAIN SUBORDINATION  AGREEMENT DATED AS OF ______________,  2000,
BY AND AMONG BUYER, SELLER, STOCKHOLDER AND LANDLORD.

         IN WITNESS  WHEREOF the parties  hereto have  executed  this  Agreement
under seal as of the date first set forth above.

ATTEST:                                    ALPHA CERAMICS, INC.

______________________________           By:
                                           -------------------------------------
                                             Name:  James E. Sloane
                                             Title:  President

ATTEST:                                    AURA CERAMICS, INC.

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

ATTEST:                                AURA SYSTEMS, INC.

______________________________          By:
                                         ---------------------------------------
                                        Name:  Gerald S. Papazian
                                       Title:  President and Chief
                                               Operating Officer

MPL1: 328666-9

<PAGE>

                                  Schedule 1.1

                                   Definitions

         "Affiliate"  means when used with  respect to any  Person,  (a) if such
Person is a  corporation,  any officer or director  thereof and any Person which
is,  directly or indirectly,  the beneficial  owner (by itself or as part of any
group) of more  than  five  percent  (5%) of any  class of any  equity  security
thereof, and, if such beneficial owner is a partnership,  any general or limited
partner  thereof,  or if such  beneficial  owner is a  corporation,  any  Person
controlling,  controlled by or under common control with such beneficial  owner,
or any  officer  or  director  of such  beneficial  owner or of any  corporation
occupying any such control  relationship,  (b) if such Person is a  partnership,
any general or limited partner thereof and (c) any other Person which,  directly
or indirectly, controls or is controlled by or is under common control with such
Person.  For  purposes  of  this  definition,   (i)  "control"   (including  the
correlative  terms  "controlling,"  "controlled  by" and "under  common  control
with"),  with  respect  to  any  Person,  shall  mean  possession,  directly  or
indirectly,  of the power to direct or cause the direction of the management and
policies of such Person,  whether through the ownership of voting  securities or
by contract or otherwise; and (ii) all employees, stockholders,  consultants and
agents of a party and any  stockholder  of such  party  shall be  considered  an
Affiliate of such party.

         "Assignment  of Lease" means the Assignment of Lease by and between the
Seller,  the Buyer and  Winnetka  Properties,  L.L.C.  with  respect to the real
property located at 5121 Winnetka Avenue North, Suite 100, New Hope,  Minnesota,
55428, in form and substance acceptable to both Buyer and Seller.

         "Aura Ceramics Employees" means,  individually or collectively,  as the
context  requires,  (i) David Benson,  Larry Johnson,  Mikhail  Komarov,  Lester
Meissner,  Leonard Oberant, Brian Ziegler, James Bealka, Anthony Erickson,  Neal
Simoneau, Francis Wallenhorst,  Diane Przymus, James Sloane and Madeline Sloane,
and (ii) any previous  employee of Seller who was not been an officer,  director
or employee of Stockholder.

         "Bill of Sale"  means the Bill of Sale of even date  herewith  given by
the Seller to the Buyer in form and substance acceptable to Buyer.

         "Business Day" means any day, excluding Saturday,  Sunday and any other
day on which federally chartered national banks are required by law to close.

         "CERCLA" means the Comprehensive  Environmental  Response  Compensation
and Liability Act of 1980, as amended, and the regulations thereunder, and court
decisions in respect thereof, all as the same shall be in effect at the time.

         "Charter"   means  the  Certificate  of   Incorporation,   Articles  of
Incorporation or Organization or other organizational document of a corporation,
as amended and restated through the date hereof.

         "Claim"  means an action,  suit,  proceeding,  hearing,  investigation,
litigation, charge, complaint, claim or demand.

         "Closing" and "Closing  Date" shall have the meanings  ascribed to such
terms in Section 2.5.

         "Code" means the Internal  Revenue  Code of 1986,  and the  regulations
thereunder,  published Internal Revenue Service rulings,  and court decisions in
respect thereof, all as the same shall be in effect at the time.

         "Defects" shall have the meaning ascribed to such term in Section 3.8.

         "Environmental Action" means any administrative, regulatory or judicial
action,  suit,  demand,   demand  letter,  claim,  notice  of  noncompliance  or
violation, investigation,  request for information, proceeding, consent order or
consent  agreement  relating  in  any  way  to  any  Environmental  Law  or  any
Environmental  Permit,  including,  without  limitation,  (a) any  claim  by any
governmental  or  regulatory  authority  for  enforcement,   cleanup,   removal,
response, remedial or other actions or damages pursuant to any Environmental Law
and  (b)  any  claim  by  any  third  party   seeking   damages,   contribution,
indemnification, cost recovery, compensation or injunctive relief resulting from
Hazardous  Materials,  damage to the  environment or alleged injury or threat of
injury  to  human  health  or  safety  from  pollution  or  other  environmental
degradation.

         "Environmental Law" means any applicable  federal,  state or local law,
statute,  rule,  regulation,  or ordinance  relating to the  environment,  human
health or safety from pollution or other environmental  degradation or Hazardous
Materials,  including, without limitation, CERCLA, the Resource Conservation and
Recovery Act, the Hazardous  Materials  Transportation Act, the Clean Water Act,
the Toxic  Substances  Control Act, the Clean Air Act, the Safe  Drinking  Water
Act, the Atomic Energy Act, the Federal  Insecticide,  Fungicide and Rodenticide
Act and the Occupational  Safety and Health Act, and any similar state and local
laws or bylaws, the rules,  regulations and interpretations  thereunder,  all as
the same shall be in effect from time to time.

         "Environmental  Permit"  means  any  permit,  approval,  identification
number, license or other authorization required under any Environmental Law.

         "ERISA" means the Employee  Retirement Income Security Act of 1974, and
any  similar  or  successor  federal  statute,  and the rules,  regulations  and
interpretations thereunder, all as the same shall be in effect at the time.

         "ERISA  Affiliate"  means, for purposes of Title IV of ERISA, any trade
or business,  whether or not incorporated,  that together with the Seller or any
Subsidiary of the Seller,  would be deemed to be a "single  employer" within the
meaning of Section 4001 of ERISA,  and, for purposes of the Code,  any member of
any group that,  together with the Seller, is treated as a "single employer" for
purposes of Section 414 of the Code.

         "Hazardous  Materials"  means  (a)  petroleum  or  petroleum  products,
natural or synthetic gas, asbestos,  urea formaldehyde foam insulation and radon
gas, (b) any  substances  defined as or included in the definition of "hazardous
substances,"  "hazardous wastes," "hazardous  materials,"  "extremely  hazardous
wastes," "restricted  hazardous wastes," "toxic substances," "toxic pollutants,"
"contaminants"   or  "pollutants,"  or  words  of  similar  import,   under  any
Environmental  Law and (c) any other  substance  exposure to which is  regulated
under any Environmental Law.

         "Intellectual  Property" means any or all of the following (i) works of
authorship  including,  without limitation,  computer programs,  source code and
executable  code,   whether   embodied  in  software,   firmware  or  otherwise,
documentation,  designs,  files,  records,  data and mask works, (ii) inventions
(whether or not patentable), improvements, and technology, (iii) proprietary and
confidential  information,  trade  secrets and know how,  (iv)  databases,  data
compilations and collections and technical data, (v) logos,  trade names,  trade
dress, trademarks and service marks, (vi) domain names, web addresses and sites,
(vii) tools, methods and processes,  and (viii) all embodiments of the foregoing
in any form and instantiated in any media.

         "Intellectual Property Rights" means worldwide common law and statutory
rights  associated with (i) patents and patent  applications,  (ii)  copyrights,
copyright registrations and copyright applications and "moral" rights, (iii) the
protection of trade and industrial  secrets and confidential  information,  (iv)
other  proprietary  rights  relating to intangible  intellectual  property,  (v)
trademarks,  trade names and service marks,  (vi) analogous  rights to those set
forth above,  and (vii)  divisions,  continuations,  renewals,  reissuances  and
extensions  of the foregoing (as  applicable)  now existing or hereafter  filed,
issued or acquired.

         "Last Balance Sheet Date" means February 28, 2000.

         "Lien" means,  with respect to any asset, any mortgage,  deed of trust,
pledge, hypothecation, assignment, security interest, lien, charge, restriction,
adverse  claim by a third  party  or title  defect  or  encumbrance  of any kind
(including any conditional sale or other title retention agreement, any lease in
the nature thereof,  any assignment or other  conveyance of any right to receive
income and any assignment of receivables  with recourse against  assignor),  any
filing of any financing statement as debtor under the Uniform Commercial Code or
comparable law of any  jurisdiction and any agreement to give or make any of the
foregoing.

         "Material  Adverse Effect" means, with respect to any Person, an actual
material adverse impact (other than arising in connection with any impact on the
applicable  industry or market generally) on the business,  operations,  assets,
liabilities, or condition (financial or otherwise) of such Person.

         "Person" means any individual, firm, partnership,  association,  trust,
corporation, limited liability company, governmental body or other entity.

     "PBGC" means the Pension Benefit  Guaranty  Corporation,  and any successor
thereto.

         "Plans" means any:

                  (i) "Employee  Pension  Benefit Plan" (as such term is defined
in Section 3(2) of ERISA) which is not a Multiemployer Plan;

                  (ii) "Employee  Welfare Benefit Plan" (as such term is defined
in Section 3(3) of ERISA); and

                  (iii)  Stock  purchase,   option,  or  bonus  plan,   deferred
compensation,  severance pay, incentive,  merit or performance bonus,  vacation,
sick pay or leave,  fringe  benefit plan,  policy,  or  arrangement,  or payroll
practice,  which is  maintained  or  contributed  to by the  Seller or any ERISA
Affiliate, or under which the Seller or any ERISA Affiliate has any liability or
contingent liability.

     "Proprietary  Information" shall have the meaning ascribed to it in Section
4.1(d) herein.

         "Purchase  Documents"  means  this  Agreement,  the Bill of  Sale,  the
Assignment of Lease,  and any other  certificate,  document,  instrument,  stock
power, or agreement executed in connection therewith.

         "Release" means any release, issuance, disposal, discharge,  dispersal,
leaching or migration  into the indoor or outdoor  environment or into or out of
any property,  including the movement of Hazardous  Materials  through or in the
air,  soil,  surface water,  ground water,  or property other than in compliance
with all Environmental Laws and Permits.

         "Seller  Intellectual  Property"  means any  Intellectual  Property and
Intellectual  Property  Rights that are owned by or exclusively  licensed to the
Seller.

         "Seller  Registered  Intellectual  Property"  shall  have  the  meaning
ascribed to it in Section 3.11 herein.

         "Subsidiary"  means,  with  respect to any Person (a) any  corporation,
association  or other  entity of which at least a majority  in  interest  of the
outstanding capital stock or other Equity Securities having by the terms thereof
voting power under ordinary  circumstances to elect a majority of the directors,
managers or trustees thereof, irrespective of whether or not at the time capital
stock  or  other  Equity  Securities  of any  other  class  or  classes  of such
corporation,  association  or other entity shall have or might have voting power
by reason of the  happening  of any  contingency,  is at the time,  directly  or
indirectly,  owned or controlled by such Person, or (b) any entity (other than a
corporation) in which such Person,  one or more  Subsidiaries of such Person, or
such Person and one or more Subsidiaries of such Person,  directly or indirectly
at the date of determination thereof, has at least majority ownership interest.

         "Tax"  means  any  federal,  state,  local  or  foreign  income,  gross
receipts,  license, payroll,  employment,  excise, severance, stamp, occupation,
premium,  windfall  profits,  environmental,   customs  duties,  capital  stock,
franchise, profits, withholding, social security, unemployment, disability, real
property,  personal property, sales, use, transfer,  registration,  value added,
alternative or add on minimum,  estimated,  or other tax of any kind whatsoever,
including any interest, penalty, or addition thereto, whether disputed or not.

         "Tax Return" means any return,  declaration,  report, claim for refund,
or information return or statement relating to Taxes,  including any schedule or
attachment thereto, and including any amendment thereof.

<PAGE>

                                  Schedule 2.3

     Trade Accounts Payable of the Seller as of the date of closing
                 as derived from the books and records of Seller

<PAGE>

                                  Schedule 2.5

                    Purchase Price Allocation for purposes of
                                IRS Section 1060

<PAGE>

                                  Schedule 3.1

                         (Seller's disclosure schedule)

                                  Schedule 3.5

                          Seller's Financial StatementsSUBORDINATION AGREEMENT

         THIS  SUBORDINATION  AGREEMENT,  dated as of May __, 2000,  is made and
given by AURA CERAMICS,  INC., a Delaware corporation and AURA SYSTEMS,  INC., a
Delaware corporation (jointly and severally,  the "Junior Creditor") in favor of
EXCEL BANK, a Minnesota state banking corporation (the "Senior Creditor").

RECITALS:

         A. Alpha Ceramics, Inc., a Minnesota corporation (the "Borrower") is or
may hereafter become indebted to the Junior Creditor  pursuant to Section 2.4 of
that certain Asset Purchase  Agreement,  dated as of February 29, 2000,  between
the Junior  Creditor and the Borrower (the "Asset  Purchase  Agreement")  and/or
pursuant to other  documents or  instruments  executed in  connection  therewith
and/or  by  reason of loans or other  extensions  of  credit or other  financial
accommodations now or hereafter made or to be made by the Junior Creditor to the
Borrower (collectively, the "Subordinated Agreements").

         B. The  Borrower is now, or may  hereafter  be,  indebted to the Senior
Creditor as a result of the advance of monies and other  extensions of credit by
the Senior  Creditor  to the  Borrower  under a  Revolving  Credit and Term Loan
Agreement  dated as of May ___,  2000 (as the same may be  amended,  restated or
otherwise modified from time to time hereafter,  the "Credit Agreement") between
the Borrower and the Senior Creditor and under other  agreements or arrangements
for the extension of financial  accommodations  now,  heretofore or hereafter in
effect.

         C. The Junior Creditor  acknowledges that the loan or advance of monies
or other extensions of any financial  accommodation or credit to the Borrower by
the Senior Creditor is of value to the Junior Creditor.

         NOW, THEREFORE,  for good and valuable consideration,  receipt of which
is hereby acknowledged by the Junior Creditor, and in order to induce the Senior
Creditor to make loans or extend credit or any other financial  accommodation to
or for the  benefit of the  Borrower,  or to grant such  renewals  or  extension
thereof as the Senior  Creditor  may deem  advisable,  and to better  secure the
Senior  Creditor in respect of the foregoing,  the Junior Creditor hereby agrees
as follows:

         Section 1.  Definitions, Rules of Constructions.

                  (a) For purpose of this  Agreement,  the following terms shall
have the following meanings:

                  "Asset  Purchase  Agreement"  shall have the meaning  given to
         that  term in  Recital  A above,  and  shall  include  any  amendments,
         modifications  or restatements  thereto or thereof (but nothing in this
         definition  shall be deemed to waive the provisions of Section 11 below
         requiring the Senior  Creditor's prior written consent to any change in
         the Asset Purchase Agreement).

     "Bankruptcy  Code" shall mean 11 U.S.C.  ss. 101 et seq.,  as amended  from
time to time.

          "Borrower"   shall  mean  Alpha  Ceramics,   Inc.  and  any  successor
     (including a  debtor-in-possession  under the Bankruptcy  Code),  assignee,
     receiver, trustee or estate thereof.

                  "Credit  Agreement"  shall have the meaning given to that term
         in Recital B above, and shall include any amendments,  modifications or
         restatements  thereto or thereof  and any  credit  agreement  hereafter
         entered into in replacement thereof.

                  "Default" shall mean any event which with the giving of notice
         or lapse of time, or both, would become an Event of Default.

                  "Event of  Default"  shall mean (i) any Event of  Default  (as
         therein  defined) under the Credit  Agreement,  (ii) any failure of the
         Borrower  to pay when due  (whether at the date  scheduled  therefor or
         earlier  upon  acceleration),  or when  demanded  (with  respect to any
         obligation  payable on demand),  any item constituting  Senior Debt, or
         (iii) any event shall occur or condition shall exist and shall continue
         for more than the period of grace, if any, applicable thereto and shall
         have the effect of causing,  or permitting  the Senior  Creditor or any
         subsequent  holder of Senior Debt to cause,  any item of Senior Debt to
         become  due  prior  to its  stated  maturity  or to  realize  upon  any
         collateral given as security therefor.

                  "Junior  Creditor" shall mean each of Aura Ceramics,  Inc. and
         Aura   Systems,   Inc.,   and  any  successor   thereto   (including  a
         debtor-in-possession  under the Bankruptcy Code),  assignee,  receiver,
         trustee or estate thereof, jointly and severally.

          "Permitted Payments" shall have the meaning given in Section 3 below.

                  "Person" shall mean an individual,  corporation,  association,
         partnership,  limited partnership,  trust, organization,  individual or
         government  or any  governmental  agency or any  political  subdivision
         thereof.

                  "Senior  Creditor"  shall mean Excel Bank,  and its successors
         and its assignees with respect to any of the Senior Debt.

                  "Senior Debt" shall mean all  liabilities  and  obligations of
         the  Borrower  to the Senior  Creditor  howsoever  created,  arising or
         evidenced,  whether direct or indirect,  absolute or contingent, due or
         to  become  due,  now  existing  or  hereafter   arising  or  incurred,
         including, without limitation, all of the Borrower's obligations to the
         Senior  Creditor  under  the  Credit  Agreement  and any  note or notes
         executed by the Borrower  thereunder,  and all other  obligations under
         any other agreement between the Borrower and the Senior Creditor now or
         hereafter in effect, and also including,  without  limitation,  any and
         all interest  accruing on any of the Senior Debt after the commencement
         of any proceedings referred to in Section 5 below,  notwithstanding any
         provision or rule of law which might  restrict the rights of the Senior
         Creditor,  as against the  Borrower  or anyone  else,  to collect  such
         interest.

                  "Subordinated  Debt" shall mean all  obligations,  liabilities
         and  indebtedness  of the  Borrower to the Junior  Creditor,  howsoever
         arising  or  evidenced,   whether  direct  or  indirect,   absolute  or
         contingent,  due or to become due, now existing or hereafter arising or
         incurred, under any written or unwritten agreement,  including, without
         limitation, the Subordinated Agreements.

                  "Subordinated Agreements" shall have the meaning given to such
         term  in  Recital  A  above,   and  shall   include   any   amendments,
         modifications, substitutions or restatements thereto or thereof and any
         note or agreement  hereafter  entered into in replacement  thereof (but
         nothing in this  definition  shall be deemed to waive the provisions of
         Section 11 below requiring the Senior  Creditor's prior written consent
         to any change in any  instrument or agreement  evidencing  Subordinated
         Debt).

                  (b) In this Agreement,  in the computation of a period of time
         from a  specified  date to a later  specified  date,  unless  otherwise
         stated the word "from" means "from and  including" and the word "to" or
         "until" each means "to but excluding."

                  (c)  Other  terms  may be  defined  in  other  parts  of  this
         Agreement.   All  references  to  agreements   and  other   contractual
         instruments  shall be  deemed  to  include  all  subsequent  amendments
         thereto  or  changes  therein  entered  into in  accordance  with their
         respective  terms,  and all  references  to Persons  shall be deemed to
         include their permitted  successors and assigns.  Unless the context in
         which used herein otherwise  clearly  requires,  "or" has the inclusive
         meaning  represented  by the phrase  "and/or."  All  incorporations  by
         reference of covenants,  terms,  definitions or other  provisions  from
         other  agreements  are  incorporated  into  this  Agreement  as if such
         provisions  were fully set forth  herein,  and  include  all  necessary
         information and related provisions from such other agreements,  and all
         such  covenants,  terms,  definitions  or other  provisions  from other
         agreements  incorporated into this Agreement by reference shall survive
         any termination of such other agreements until the Senior Debt has been
         paid in full and all  financing  arrangements  between the Borrower and
         the Senior Creditor shall have been terminated.

         Section 2. Standby;  Subordination.  The payment and performance of the
Subordinated Debt is hereby  subordinated to the payment and performance in full
of the Senior  Debt,  and,  except as set forth in  Section 3 below,  the Junior
Creditor will not ask, demand, sue for, take or receive from the Borrower or any
other Person  liable for all or any part of the Senior Debt, by setoff or in any
other  manner,  the whole or any part of the  Subordinated  Debt,  or any monies
which may now or hereafter be owing in respect of the Subordinated Debt (whether
such amounts  represent  principal or interest,  or obligations which are due or
not due,  direct  or  indirect,  absolute  or  contingent),  including,  without
limitation,  taking any security for any of the foregoing,  or the taking of any
negotiable  instrument  therefor,  unless and until all of the Senior Debt shall
have been fully paid and satisfied and all  financing  arrangements  between the
Borrower and Senior Creditor have been terminated.  The Junior Creditor warrants
and represents that the  Subordinated  Debt is unsecured and agrees that (a) the
Junior  Creditor  hereafter  will not  accept  any  security  therefor  from the
Borrower,  or from any third Person for the benefit of the Borrower;  and (b) in
the event the Junior  Creditor  does obtain any  security  for the  Subordinated
Debt, (i) all liens and security  interests of the Junior Creditor in any assets
of the  Borrower or any assets  securing the Senior Debt shall be and hereby are
subordinated  to the rights and  interests  of the Senior  Creditor,  if any, in
those assets,  (ii) the Junior Creditor shall have no right to possession of any
such assets or to foreclose upon any such assets,  whether by judicial action or
otherwise,  unless and until all the Senior  Debt shall have been fully paid and
satisfied  and all  financing  arrangements  between  the  Borrower  and  Senior
Creditor have been terminated,  and (iii) at the request of the Senior Creditor,
the Junior  Creditor  shall  execute  and  deliver to the Senior  Creditor  such
termination  statements  and releases as the Senior  Creditor  shall  reasonably
request to release the Junior  Creditor's  security  interest in or lien against
such property.  The Junior Creditor,  prior to the payment in full and discharge
of the Senior Debt and the termination of all financing arrangements between the
Borrower and the Senior Creditor,  shall have no right to enforce any claim with
respect to the Subordinated  Debt, or to take any action against the Borrower or
the property of the  Borrower or of any other Person  liable for all or any part
of the  Senior  Debt  for the  benefit  of the  Borrower.  The  Junior  Creditor
acknowledges  and agrees that,  to the extent the terms and  provisions  of this
Agreement  are  inconsistent  with any  agreement or  understanding  between the
Junior  Creditor and the  Borrower,  such  agreement or  understanding  shall be
subject to this Agreement.

         Section  3.  Permitted  Payments.  Notwithstanding  the  provisions  of
Section 2 above,  until the Senior  Creditor gives the Junior  Creditor  written
notice (in the manner set forth below) of the  occurrence of an Event of Default
or a Default, and provided that:

                  (i)      there  shall  not  then  exist  any  breach  of  this
                           Agreement by the Junior  Creditor  which has not been
                           waived, in writing, by the Senior Creditor,

                  (ii)     at the time of the payment  described  below no Event
                           of Default exists and is continuing,

                  (iii)    the payment  described below, if made, would not give
                           rise to the occurrence of any Event of Default, and

                  (iv)   none of the events described in Section 5 has occurred,

the Borrower may pay to the Junior Creditor,  and the Junior Creditor may accept
from  the  Borrower,   interest  and   principal   payments  when  due  (without
acceleration)  as provided in Section 2.4 of the Asset  Purchase  Agreement (the
"Permitted Payments").

         Section  4.  Subordinated  Debt Owed Only to the Junior  Creditor.  The
Junior  Creditor  warrants  and  represents  that the  Junior  Creditor  has not
previously  assigned any interest in the Subordinated Debt, that no other Person
owns  an  interest  in the  Subordinated  Debt  (whether  as  joint  holders  of
Subordinated Debt,  participants or otherwise) and that the entire  Subordinated
Debt is owing only to the Junior Creditor. The Junior Creditor further covenants
that the entire  Subordinated Debt shall continue to be owing only to the Junior
Creditor  unless it is  assigned  with the prior  written  consent of the Senior
Creditor  to a Person who agrees  with the  Senior  Creditor  to be bound by the
subordination provisions set forth herein.

         Section 5. Priority. In the event of (a) any distribution, division, or
application,  partial or complete, voluntary or involuntary, by operation of law
or  otherwise,  of all or any part of the assets of the Borrower or the proceeds
thereof  to the  creditors  of the  Borrower  or to  their  claims  against  the
Borrower,  or (b) any  readjustment  of the debt or obligations of the Borrower,
whether  by  reason  of  liquidation,  bankruptcy,  arrangement,   receivership,
assignment  for the  benefit  of  creditors  or any other  action or  proceeding
involving the readjustment of all or any part of the Senior Debt or Subordinated
Debt,  or the  application  of the  assets of the  Borrower  to the  payment  or
liquidation  thereof, or (c) the dissolution or other winding up of the business
of the Borrower,  or (d) the sale of all or  substantially  all of the assets of
the Borrower, then, and in any such event, the Senior Creditor shall be entitled
to receive payment in full of all of the Senior Debt prior to the payment of all
or any part of the Subordinated Debt.

          Section 6. Grant of Authority to Senior  Creditor.  In order to enable
the Senior  Creditor  to enforce its rights  hereunder  in any of the actions or
proceedings  described in Section 5, the Senior  Creditor is hereby  irrevocably
authorized  and  empowered,  in its  discretion,  to file and present for and on
behalf  of the  Junior  Creditor  such  proofs of  claims  or other  motions  or
pleadings as the Senior  Creditor may deem  expedient or proper to establish the
Senior  Creditor's  entitlement  of  payment  from,  or on behalf of, the Junior
Creditor with respect to the Subordinated Debt and to vote such proofs of claims
in any such proceeding and to demand,  sue for,  receive and collect any and all
dividends or other payments or  disbursements  made thereon in whatever form the
same may be paid or issued and to apply the same on account of any of the Senior
Debt.  The  Junior  Creditor  irrevocably  authorizes  and  empowers  the Senior
Creditor  to demand,  sue for,  collect  and receive  each of the  payments  and
distributions  described in Section 5 above and give acquittance therefor and to
file claims and take such other actions, in the Senior Creditor's own name or in
the name of the Junior  Creditor or otherwise,  as the Senior  Creditor may deem
necessary or advisable for the enforcement of this Agreement. To the extent that
payments  of  distributions  are made in  property  other than cash,  the Junior
Creditor authorizes the Senior Creditor to sell such property to such buyers and
on such terms as the Senior Creditor,  in its sole discretion,  shall determine.
The Junior  Creditor will execute and deliver to the Senior Creditor such powers
of  attorney,   assignments  and  other  instruments  or  documents,   including
debentures  (together  with  such  assignments  or  endorsements  as the  Senior
Creditor  shall deem  necessary),  as may be reasonably  requested by the Senior
Creditor  in order to enable the Senior  Creditor  to enforce any and all claims
upon or with respect to any or all of the  Subordinated  Debt and to collect and
receive  any  and  all  payments  and  distributions  which  may be  payable  or
deliverable at any time upon or with respect to the  Subordinated  Debt, all for
the Senior Creditor's own benefit.

         Section  7.  Payments  Received  by the  Junior  Creditor.  Except  for
Permitted Payments,  if the Junior Creditor receives any payment or distribution
or  security  or  instrument  or proceeds  thereof  upon or with  respect to the
Subordinated  Debt  prior  to the  payment  in  full  of  the  Senior  Debt  and
termination  of all financing  arrangements  between the Borrower and the Senior
Creditor,  the Junior  Creditor  shall  receive  and hold the same in trust,  as
trustee,  for the benefit of the Senior Creditor and shall forthwith deliver the
same to the Senior  Creditor  in  precisely  the form  received  (except for the
endorsement  or  assignment  by  the  Junior  Creditor  where  necessary),   for
application  on any of the Senior Debt,  due or not due and, until so delivered,
the same shall be held in trust by the Junior  Creditor  as the  property of the
Senior Creditor.  In the event of the failure of the Junior Creditor to make any
such endorsement or assignment to the Senior Creditor,  the Senior Creditor,  or
any of its officers or employees,  is hereby irrevocably  authorized to make the
same.

         Section 8. Continuing Nature of Subordination.  This Agreement shall be
effective and may not be terminated or otherwise  revoked by the Junior Creditor
until  the  Senior  Debt  shall  have been  fully  paid and  discharged  and all
financing  arrangements  between the Borrower and the Senior  Creditor have been
terminated.  This is a  continuing  agreement  of  subordination  and the Senior
Creditor may continue, at any time and without notice to the Junior Creditor, to
extend credit or other  financial  accommodations  and loan monies to or for the
benefit of the Borrower in reliance hereon. No obligation of the Junior Creditor
hereunder shall be affected by the dissolution, liquidation, death or incapacity
of, or written  revocation  by, the Junior  Creditor  or any other  subordinated
party, pledgor, endorser, or guarantor, if any.

         Section 9. Additional  Agreements Between Senior Creditor and Borrower.
The  Senior  Creditor,  at any time and from time to time,  may enter  into such
agreement  or  agreements  with the  Borrower  as the Senior  Creditor  may deem
proper,  increasing the amount of,  extending the time of payment of or renewing
or  otherwise  altering  the terms of all or any of the Senior Debt or affecting
any security  underlying any or all of the Senior Debt, and may exchange,  sell,
release,  surrender or otherwise deal with any such security, without in any way
thereby impairing or affecting this Agreement.

         Section 10.  Bankruptcy  Issues. If the Borrower becomes the subject of
proceedings  under the  Bankruptcy  Code and if the Senior  Creditor  desires to
permit the use of cash collateral or to provide  financing to the Borrower under
either  Section 363 or Section 364 of the Bankruptcy  Code, the Junior  Creditor
agrees  that  adequate  notice of such  financing  to the  Junior  Creditor,  if
required under  applicable  law, shall have been provided if the Junior Creditor
receives notice two (2) business days prior to entry of any order approving such
cash  collateral  usage or financing.  Notice of a proposed  financing or use of
cash  collateral  shall be deemed  given upon the  sending of such notice to the
Junior Creditor in the manner specified in Section 16, below. All allocations of
payments  between the Senior  Creditor and the Junior Creditor shall continue to
be made after the filing of a petition  under the  Bankruptcy  Code on the basis
provided in this  Agreement.  In the event that the Junior  Creditor at any time
acquires any security for the Subordinated  Debt, the Junior Creditor agrees not
to assert any right the Junior Creditor may have to "adequate protection" of the
Junior Creditor's interest in such security in any Bankruptcy proceeding,  or to
seek to have the Junior Creditor's claims in such Bankruptcy  proceeding treated
as "secured  claims" under Section  506(a) of the Bankruptcy  Code,  without the
prior written  consent of the Senior  Creditor.  The Junior  Creditor waives any
claim the Junior  Creditor may now or hereafter have against the Senior Creditor
arising out of the Senior  Creditor's  election,  in any  proceeding  instituted
under  Chapter  11 of  the  Bankruptcy  Code,  of  the  application  of  Section
1111(b)(2) of the Bankruptcy  Code,  and/or any borrowing or grant of a security
interest under Section 364 of the Bankruptcy Code by the Borrower,  as debtor in
possession,  or by a trustee.  To the extent that the Senior  Creditor  receives
payments  on, or  proceeds  of any  collateral  for,  the Senior  Debt which are
subsequently  avoided,  invalidated,  declared to be fraudulent or preferential,
set aside and/or required to be repaid to a trustee, receiver or any other party
under any Bankruptcy law, state or federal law,  common law or equitable  cause,
then,  to the extent of such payment or proceeds  received,  the Senior Debt, or
part  thereof,  intended to be  satisfied  shall be revived and continue in full
force and effect as if such  payments or proceeds  had not been  received by the
Senior Creditor.

         Section  11.   Instrument   Legend;   No  Amendments  to   Subordinated
Instruments.  Any agreement or instrument  evidencing the Subordinated  Debt, or
any portion  thereof,  which has been or is  hereafter  executed by the Borrower
will,  on the date hereof or the date of execution,  be inscribed  with a legend
conspicuously  indicating  that payment thereof is subordinated to the claims of
the Senior Creditor pursuant to the terms of this Agreement. The original of any
such  agreement or instrument  will be delivered to the Senior  Creditor  within
five (5) Business Days after the date hereof or the date of its  execution.  The
Junior  Creditor  will  not  agree  to  any  amendment,   restatement  or  other
modification  of any such  instrument  or  agreement  or any other  agreement or
document evidencing the Subordinated Debt,  including,  without limitation,  the
Asset  Purchase  Agreement and the other  Subordinated  Agreements,  without the
prior written consent of the Senior Creditor.

         Section 12. Waivers.  The Senior Debt shall be deemed to have been made
or incurred in  reliance  upon this  Agreement.  The Junior  Creditor  expressly
waives all notice of the acceptance by the Senior Creditor of the  subordination
and other  provisions of this  Agreement and all other notices not  specifically
required  pursuant  to the terms of this  Agreement  whatsoever,  and the Junior
Creditor expressly waives reliance by the Senior Creditor upon the subordination
and other  agreements as herein  provided.  The Junior  Creditor agrees that the
Senior  Creditor has made no warranties or  representations  with respect to the
due execution, legality, validity,  completeness or enforceability of the Credit
Agreement,  or the  collectability  of the  Senior  Debt,  and that  the  Senior
Creditor shall be entitled to manage and supervise its loans and other financial
accommodations  to the Borrower  without  regard to the  existence of any rights
that the Junior Creditor may now or hereafter have in or to any of the assets of
the Borrower.  The Junior Creditor agrees that the Senior Creditor shall have no
liability  to the Junior  Creditor  for,  and waives any claim  which the Junior
Creditor may now or hereafter have against,  the Senior Creditor  arising out of
any and all  actions  which the Senior  Creditor in good faith takes or omits to
take (including,  without  limitation,  actions with respect to any security for
the Senior Debt,  actions with respect to the occurrence of an Event of Default,
actions with respect to the foreclosure upon, sale, release, or depreciation of,
or failure to realize  upon,  any  security for the Senior Debt and actions with
respect to the  collection  of any claim for all or any part of the Senior  Debt
from any  guarantor  or other  party)  with  respect  to or any other  agreement
related  to any  Senior  Debt or to the  collection  of the  Senior  Debt or the
valuation, use, protection or release of any security for the Senior Debt.

         Section 13. Senior Creditor's  Waivers. No waiver shall be deemed to be
made by the Senior Creditor of any of its rights hereunder unless the same shall
be in writing signed on behalf of the Senior Creditor,  and each waiver, if any,
shall be a waiver only with respect to the specific  instance involved and shall
in no way impair the rights of the Senior  Creditor  or the  obligations  of the
Junior Creditor to the Senior Creditor in any other respect at any other time.

         Section 14.  Financial  Condition  of  Borrower;  Other  Actions by the
Senior Creditor.  The Junior Creditor hereby assumes  responsibility for keeping
informed of the financial  condition of the Borrower,  any and all endorsers and
any and all guarantors of the Subordinated  Debt and of all other  circumstances
bearing upon the risk of nonpayment  of the Senior Debt and/or the  Subordinated
Debt that diligent inquiry would reveal.  The Junior Creditor hereby agrees that
the  Senior  Creditor  shall  have no duty to  advise  the  Junior  Creditor  of
information  known to the Senior  Creditor  regarding such condition or any such
circumstances.  In the  event  the  Senior  Creditor,  in its  sole  discretion,
undertakes, at any time or from time to time, to provide any such information to
the Junior  Creditor,  the Senior  Creditor  shall be under no obligation (i) to
provide any such information to the Junior Creditor on any subsequent  occasion,
(ii) to undertake any  investigation not a part of its regular business routine,
or (iii) to disclose any information which, pursuant to its usual practices, the
Senior  Creditor  wishes to maintain  confidential.  The Junior  Creditor hereby
agrees that all  payments  received by the Senior  Creditor  may be applied,  in
whole or in part, to any of the Senior Debt, as the Senior Creditor, in its sole
discretion,  deems  appropriate  and assents to any extension or postponement of
the time of payment of the Senior Debt or to any other  indulgence  with respect
thereto, to any substitution, exchange or release of collateral which may at any
time secure the Senior Debt and to the  addition or release of any other  Person
primarily or secondarily liable therefor.

         Section  15.  Subrogation.  When the Senior  Debt shall have been fully
paid and discharged and all financing  arrangements between the Borrower and the
Senior Creditor have been terminated, the Junior Creditor shall be subrogated to
the rights of the Senior Creditor to receive  payments or distribution of assets
of the Borrower made on such Senior Debt until the principal of and premium,  if
any,  and  interest  on  (and  any  other  amounts  due  with  respect  to)  the
Subordinated  Debt shall be paid in full. For the purposes of such  subrogation,
no payments or  distributions  to the Senior  Creditor of any cash,  property or
securities  to which the  Junior  Creditor  would be  entitled  except for these
provisions  shall, as between the Borrower,  its creditors other than the Senior
Creditor,  and the Junior Creditor, be deemed to be a payment by the Borrower to
or on account of Senior Debt, it being  understood that these provisions in this
Section are used,  and are  intended,  solely for the  purpose of  defining  the
relative  rights  of the  Junior  Creditor,  on the one  hand,  and  the  Senior
Creditor, on the other hand.

         Section 16. Notices. All communications and notices provided under this
Agreement to any party shall be given in writing by manual  delivery,  facsimile
transmission,  overnight  courier  or United  States  first  class  mail to such
party's  address  shown on the  signature  page hereof,  or to any party at such
other  address  as may be  designated  by such  party in a notice  to the  other
parties.  All  periods of notice  shall be  measured  from the date of  delivery
thereof if  manually  delivered,  from the date of sending if sent by  facsimile
transmission,  from the first  business day after the date of sending if sent by
overnight courier, or from four days after the date of mailing if mailed.

         Section 17. Governing Law and Construction. THE VALIDITY,  CONSTRUCTION
AND  ENFORCEABILITY  OF THIS AGREEMENT SHALL BE GOVERNED BY THE INTERNAL LAWS OF
THE STATE OF MINNESOTA,  WITHOUT  GIVING  EFFECT TO CONFLICT OF LAWS  PRINCIPLES
THEREOF.

         Section  18.  Consent  to  Jurisdiction.  AT THE  OPTION OF THE  SENIOR
CREDITOR, THIS AGREEMENT MAY BE ENFORCED IN ANY FEDERAL COURT OR MINNESOTA STATE
COURT SITTING IN HENNEPIN COUNTY, MINNESOTA; AND THE JUNIOR CREDITOR CONSENTS TO
THE  JURISDICTION AND VENUE OF ANY SUCH COURT AND WAIVES ANY ARGUMENT THAT VENUE
IN SUCH FORUMS IS NOT CONVENIENT. IN THE EVENT THE JUNIOR CREDITOR COMMENCES ANY
ACTION  IN  ANOTHER  JURISDICTION  OR VENUE  UNDER ANY TORT OR  CONTRACT  THEORY
ARISING DIRECTLY OR INDIRECTLY FROM THE RELATIONSHIP  CREATED BY THIS AGREEMENT,
THE SENIOR CREDITOR AT ITS OPTION SHALL BE ENTITLED TO HAVE THE CASE TRANSFERRED
TO ONE OF THE  JURISDICTIONS  AND VENUES  ABOVE-DESCRIBED,  OR IF SUCH  TRANSFER
CANNOT BE ACCOMPLISHED UNDER APPLICABLE LAW, TO HAVE SUCH CASE DISMISSED WITHOUT
PREJUDICE.

         Section 19. Waiver of Jury Trial. THE JUNIOR  CREDITOR,  AND THE SENIOR
CREDITOR BY ITS ACCEPTANCE HEREOF,  IRREVOCABLY WAIVE ANY AND ALL RIGHT TO TRIAL
BY JURY IN ANY ACTION OR  PROCEEDING  TO ENFORCE OR DEFEND ANY RIGHTS UNDER THIS
AGREEMENT OR UNDER ANY AMENDMENT,  INSTRUMENT OR DOCUMENT DELIVERED OR WHICH MAY
IN THE FUTURE BE  DELIVERED  IN  CONNECTION  HEREWITH OR ARISING FROM ANY CREDIT
RELATIONSHIP EXISTING IN CONNECTION WITH THIS AGREEMENT, AND AGREE THAT ANY SUCH
ACTION OR PROCEEDING SHALL BE TRIED BEFORE A COURT AND NOT BEFORE A JURY.

         Section 20.  Severability.  Wherever  possible,  each provision of this
Agreement shall be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Agreement shall be prohibited by or
invalid under  applicable law, such provision shall be ineffective to the extent
of such  prohibition or invalidity,  without  invalidating the remainder of such
provision or the remaining provisions of this Agreement.

         Section 21.  Miscellaneous.

                  (a) This  Agreement and the terms,  covenants  and  conditions
         hereof  shall  inure to the  benefit  of the  Senior  Creditor  and its
         successors and assigns. Nothing contained in this Agreement,  expressed
         or  implied,  is  intended  to confer  upon any  Person  other than the
         parties  hereto  and  thereto  any  rights,  remedies,  obligations  or
         liabilities hereunder or thereunder.

                  (b) This Agreement sets forth the entire  understanding of the
         parties hereto  relating to the subject  matter  hereof,  and all prior
         understandings  and negotiations,  written or oral, are merged into and
         superseded by this Agreement. Any modification,  amendment or waiver of
         this Agreement or any provision herein shall be binding upon the Senior
         Creditor  only if contained in a writing  signed by or on behalf of the
         Senior  Creditor.  No  failure on the part of the  Senior  Creditor  to
         exercise and no delay in exercising any power or right hereunder, shall
         operate as a waiver thereof;  nor shall any single or partial  exercise
         of any power or right preclude any other or further exercise thereof or
         the exercise of any other power or right.  The remedies herein provided
         are cumulative and not exclusive of any remedies provided by law.

                  (c) The Junior  Creditor hereby  acknowledges  that (i) it has
         been advised by counsel in the  negotiation,  execution and delivery of
         this Agreement,  (ii) the Senior Creditor has no fiduciary relationship
         to the Junior  Creditor,  and (iii) no joint venture exists between the
         Junior Creditor and the Senior Creditor.

                  (d) The section  titles  contained in this  Agreement  are and
         shall be without  substantive meaning or content of any kind whatsoever
         and are not a part of the agreement between the parties hereto.

                  (e) All covenants, agreements,  representations and warranties
         made  in  this  Agreement  and  in any  certificates  or  other  papers
         delivered by or on behalf of the Junior Creditor  pursuant hereto shall
         be deemed to have been  relied  upon by the Senior  Creditor  and shall
         survive  the  execution  and  delivery  of this  Agreement,  and  shall
         continue  in full force and effect so long as any Senior  Debt  remains
         outstanding  and  unpaid  or  any  financing  arrangement  between  the
         Borrower and the Senior Creditor  remains in effect.  All statements of
         fact relating to the Junior  Creditor  contained in any  certificate or
         other paper delivered to the Senior Creditor at any time after the date
         hereof by or on behalf of the  Junior  Creditor  pursuant  hereto or in
         connection with the transactions  contemplated  hereby shall constitute
         representations and warranties by the undersigned hereunder.

                  (f)  This   Agreement   may  be  executed  in  any  number  of
         counterparts,  all of which taken together shall constitute one and the
         same  instrument,  and  any of the  parties  hereto  may  execute  this
         Agreement by signing any such counterpart.

                                           (The signature page follows.)

<PAGE>

         IN WITNESS WHEREOF, this Subordination  Agreement has been signed as of
the date first set forth above.

            AURA CERAMICS, INC.

            By_________________________________
                   Its:_____________________________

            AURA SYSTEMS, INC.

            By_________________________________
                   Its:_____________________________

            Address for Notice:

            Aura Systems, Inc.
            Aura Ceramics, Inc.
            Michael I. Froch
            Office of the General Counsel
            2335 Alaska Avenue
            El Segundo, California 90245
            Fax: (310) 643-8719

            EXCEL BANK

            By_________________________________
                   Its:_____________________________

            Address for Notice:

            Excel Bank
            5050 France Avenue South
            Edina, Minnesota 55410
            Attention: Wes Beedon
            Fax: (612) 836-3160

<PAGE>

                          ACCEPTANCE AND ACKNOWLEDGMENT
         The Borrower named above hereby accepts,  and acknowledges receipt of a
copy of, the foregoing  Subordination  Agreement and agrees that it will not pay
any of the "Subordinated Debt" (as defined in the foregoing  Agreement) or grant
any security therefor, except as the foregoing Agreement provides.

                ALPHA CERAMICS, INC.

                By_________________________________
                       Its:_____________________________

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