Document:

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                                                                  EXECUTION COPY

                         SECURITIES PURCHASE AGREEMENT
                         -----------------------------

     SECURITIES PURCHASE AGREEMENT (this "Agreement"), dated as of November 17,
2000, between Electric Fuel Corporation, a corporation organized under the laws
of the State of Delaware (the "Company"), and the purchaser (the "Purchaser")
set forth on the execution page hereof (the "Execution Page").

     WHEREAS:

     A.  The Company desires to sell, and the Purchaser desires to purchase,
upon the terms and conditions stated in this Agreement, (i) 1,000,000 shares of
the Company's Common Stock (the "Common Shares"), (ii) a warrant to purchase
666,667 shares of Common Stock in the form attached hereto as Exhibit A (the
                                                              ---------
"Series A Warrants"); and (iii) a warrant to purchase 333,333 shares of Common
Stock in the form attached hereto as Exhibit B (the "Series B Warrants" and
                                     ----------
together with the Series A Warrants, the "Warrants"). The shares of Common Stock
issuable upon exercise of or otherwise pursuant to the Warrants are referred to
herein as the "Warrant Shares." The Common Shares, the Warrants and the Warrant
Shares are collectively referred to herein as the "Securities" and each of them
may individually be referred to herein as a "Security."

     B.  On November 9, 2000, the Company filed with the United States
Securities and Exchange Commission (the "SEC") a Registration Statement on Form
S-3 File No. 333- 49628 in the form attached hereto as Exhibit C (the
                                                       ---------
"Registration Statement") to register under Section 5 of the Securities Act of
1933, as amended (the "Securities Act") the sale by the Company of the Company's
common stock, par value $.01 per share (the "Common Stock") and warrants to
purchase Common Stock. The Registration Statement was declared effective by the
SEC on November 15, 2000. On November 17, 2000 the Company filed a supplement to
the Registration Statement in the form attached hereto as Exhibit D (the
                                                          ---------
"Supplement") to cover the issuance and sale of the Initial Securities (as
defined below) to the Purchaser pursuant to the terms of this Agreement and the
issuance of the Warrant Shares to the Purchaser upon exercise of the Warrants.

     NOW, THEREFORE, the Company and the Purchaser hereby agree as follows:

1.   PURCHASE AND SALE OF INITIAL SECURITIES.
     ---------------------------------------

     (a) Purchase of Initial Securities. On the Closing Date (as defined below),
         -------------------------------
subject to the satisfaction (or waiver) of the conditions set forth in Section 6
and Section 7 below, the Company shall issue and sell to the Purchaser, and the
Purchaser shall purchase from the Company, such number of Common Shares, Series
A Warrants and Series B Warrants (collectively the "Initial Securities") as is
set forth on the Purchaser's Execution Page attached hereto. The aggregate
purchase price (the "Purchase Price") to be paid by the Purchaser for the
Initial Securities shall be

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Eight Million Three Hundred Seventy-Five Thousand Dollars ($8,375,000).

     (b) Form of Payment. On the Closing Date, the Purchaser shall pay the
         ---------------
aggregate Purchase Price for the Initial Securities set forth on the Purchaser's
Execution Page on the Closing Date in United States dollars by wire transfer of
immediately available funds in accordance with the Company's written wiring
instructions attached as Schedule 1, against delivery of duly executed
certificates representing the Common Shares and duly executed Warrants being
purchased by the Purchaser and the Company shall deliver such certificates and
Warrants to the Purchaser against delivery of such aggregate Purchase Price.

     (c) Closing Date. Subject to the satisfaction (or waiver) of the conditions
         ------------
thereto set forth in Section 6 and Section 7 below, the date and time of the
issuance and sale of the Initial Securities to the Purchaser pursuant to this
Agreement (the "Closing") shall be 12:00 noon, New York City time, on November
17, 2000, or such other time as may be mutually agreed upon by the Company and
the Purchaser (the "Closing Date"). The Closing shall occur at the offices of
Wolf, Block, Schorr and Solis-Cohen LLP, 22nd Floor, 1650 Arch Street,
Philadelphia, PA 19103.

2.   PURCHASER'S REPRESENTATIONS AND WARRANTIES
     ------------------------------------------

     The Purchaser represents and warrants to the Company as follows:

     (a) Information. The Purchaser represents that the specific information
         -----------
about the Purchaser set forth in the Supplement is true and correct.

     (b) Governmental Review. The Purchaser understands that no United States
         -------------------
federal or state agency or any other government or governmental agency has
passed upon or made any recommendation or endorsement of the Securities.

     (c) Authorization; Enforcement. This Agreement has been duly and validly
         --------------------------
authorized, executed and delivered on behalf of the Purchaser and is a valid and
binding agreement of the Purchaser enforceable against the Purchaser in
accordance with its terms.

     (d) Residency. The Purchaser is a resident of the jurisdiction set forth
         ---------
under the Purchaser's name on the Execution Page hereto executed by the
Purchaser.

     (e) Accredited Investor. The Purchaser is an "accredited investor" as
         -------------------
defined in Rule 501of Regulation D promulgated by the SEC under the Securities
Act.

     (f) Purchase for Its Own Account, etc. The Purchaser is purchasing the
         ----------------------------------
Securities for its own account and has no intention to engage in any special
selling efforts with respect to the Securities.

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3.   REPRESENTATIONS AND WARRANTIES OF THE COMPANY.
     ---------------------------------------------

     The Company represents and warrants to the Purchaser as follows:

     (a) Organization and Qualification. The Company and each of its
         ------------------------------
subsidiaries is a corporation duly organized and existing in good standing under
the laws of the jurisdiction in which it is incorporated (to the extent that
good standing is a recognized concept in such jurisdictions), and has the
requisite corporate power to own its properties and to carry on its business as
now being conducted. The Company and each of its subsidiaries is duly qualified
as a foreign corporation to do business and is in good standing in every
jurisdiction in which the nature of the business conducted by it makes such
qualification necessary (to the extent that good standing is a recognized
concept in such jurisdictions) and where the failure so to qualify would be
reasonably likely to have a Material Adverse Effect. "Material Adverse Effect"
means any material adverse effect on (i) the validity of, and the ability of the
Company to issue, the Securities, (ii) the ability of the Company to perform its
obligations hereunder or under the Warrants or (iii) the business, operations,
properties or financial condition of the Company and its subsidiaries, taken as
a whole.

     (b) Authorization; Enforcement. (i) The Company has the requisite corporate
         --------------------------
power and authority to enter into and perform its obligations under this
Agreement and the Warrants to issue and sell the Initial Securities in
accordance with the terms hereof and to issue the Warrant Shares upon exercise
of the Warrants in accordance with the terms of such Warrants; (ii) the
execution, delivery and performance of this Agreement and the Warrants by the
Company and the consummation by it of the transactions contemplated hereby and
thereby (including, without limitation, the issuance of the Common Shares and
Warrants and the issuance and reservation for issuance of the Warrant Shares)
have been duly authorized by the Company's Board of Directors and no further
consent or authorization of the Company, its Board of Directors, any or
committee of the Board of Directors is required, and (iii) upon execution and
delivery of this Agreement in accordance with its terms, this Agreement will
constitute, and, upon execution and delivery by the Company of the Warrants, in
accordance with the terms of this Agreement, such instruments will constitute,
valid and binding obligations of the Company enforceable against the Company in
accordance with their respective terms, except as such enforceability may be
limited by applicable bankruptcy, insolvency, reorganization, moratorium,
liquidation or similar laws relating to, or affecting generally the enforcement
of creditors' rights and remedies or by other equitable principles of general
application.

     (c) Stockholder Authorization. Neither the execution, delivery or
         -------------------------
performance by the Company of this Agreement or the Warrants nor the
consummation by the Company of the transactions contemplated hereby or thereby
(including, without limitation, the issuance of the Initial Securities or the
issuance or reservation for issuance of the Warrant Shares) requires any consent
or authorization of the Company's stockholders, including but not limited to
consent under Rule 4460(i) promulgated by the National Association of Securities
Dealers, Inc. (the "NASD") or any similar rule.

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     (d) Capitalization. The capitalization of the Company as of the date
         --------------
hereof, including the authorized capital stock, the number of shares issued and
outstanding, the number of shares issuable and reserved for issuance pursuant to
the Company's stock option plans, the number of shares issuable and reserved for
issuance pursuant to securities (other than the Warrants) exercisable or
exchangeable for, or convertible into, any shares of capital stock and the
number of shares reserved for issuance upon the exercise of the Warrants is set
forth on Schedule 3(d). All of such outstanding shares of capital stock have
         -------------
been, or upon issuance in accordance with the terms of any such warrants,
options or preferred stock, will be, validly issued, fully paid and non-
assessable. No shares of capital stock of the Company (including the Common
Shares and the Warrant Shares) are subject to preemptive rights or any other
similar rights of the stockholders of the Company or any liens or encumbrances.
Except for the Securities and as set forth on Schedule 3(d), as of the date of
                                              -------------
this Agreement, (i) there are no outstanding options, warrants, scrip, rights to
subscribe to, calls or commitments of any character whatsoever relating to, or
securities or rights convertible into or exercisable or exchangeable for, any
shares of capital stock of the Company or any of its subsidiaries, or
arrangements by which the Company or any of its subsidiaries is or may become
bound to issue additional shares of capital stock of the Company or any of its
subsidiaries, nor are any such issuances or arrangements contemplated, and (ii)
there are no agreements or arrangements under which the Company or any of its
subsidiaries is obligated to register the sale of any of its or their securities
under the Securities Act. Schedule 3(d) sets forth all of the Company issued
                          -------------
securities or instruments containing antidilution or similar provisions that
will be triggered by, and all of the resulting adjustments that will be made to
such securities and instruments as a result of, the issuance of the Securities
in accordance with the terms of this Agreement, or the Warrants. The Company has
furnished to the Purchaser true and correct copies of the Company's Certificate
of Incorporation as in effect on the date hereof ("Certificate of
Incorporation"), the Company's By-laws as in effect on the date hereof (the "By-
laws"), and all other instruments and agreements governing securities
convertible into or exercisable or exchangeable for capital stock of the
Company.

     (e) Issuance of Shares. The Common Shares are duly authorized and, upon
         ------------------
issuance thereof by the Company and payment therefor by the Purchaser in
accordance with the terms of this Agreement, will be validly issued, fully paid
and non-assessable, and free from all taxes, liens, claims and encumbrances
(other than any that are the result of any action or inaction of the Purchaser
and that are not the result of any action or inaction on the part of the
Company) and will not be subject to preemptive rights, rights of first refusal
or other similar rights of stockholders of the Company and will not impose
personal liability on the holders thereof. The Warrant Shares are duly
authorized and reserved for issuance, and, upon exercise of the Warrants and
payment therefor in accordance with the terms thereof, will be validly issued,
fully paid and non-assessable, and free from all taxes, liens, claims and
encumbrances (other than any that are the result of any action or inaction on
the part of the Purchaser and that are not the result of any action or inaction
on the part of the Company) and will not be subject to preemptive rights, rights
of first refusal or other similar rights of stockholders of the Company and will
not impose personal liability upon the holder thereof.

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     (f) No Conflicts. The execution, delivery and performance of this Agreement
         ------------
and the Warrants by the Company and the consummation by the Company of the
transactions contemplated hereby and thereby (including, without limitation, the
issuance and reservation for issuance, as applicable, of the Common Shares,
Warrants and Warrant Shares) will not (i) result in a violation of the
Certificate of Incorporation or By-laws or (ii) conflict with, or constitute a
default (or an event that with notice or lapse of time or both would become a
default) under, or give to others any rights of termination, amendment
(including, without limitation, the triggering of any anti-dilution provisions),
acceleration or cancellation of, any agreement, indenture or instrument to which
the Company or any of its subsidiaries is a party, or result in a violation of
any law, rule, regulation, order, judgment or decree (including United States
federal and state securities laws and regulations and rules or regulations of
any self-regulatory organizations to which either the Company or its securities
are subject) applicable to the Company or any of its subsidiaries or by which
any property or asset of the Company or any of its subsidiaries is bound or
affected (except, with respect to clause (ii), for such conflicts, defaults,
terminations, amendments, accelerations, cancellations and violations that would
not, individually or in the aggregate, be reasonably likely to have a Material
Adverse Effect). Neither the Company nor any of its subsidiaries is in violation
of its Certificate of Incorporation, By-laws or other organizational documents
and neither the Company nor any of its subsidiaries is in default (and the
Company is not aware of any event that has occurred which, with notice or lapse
of time or both, would put the Company or any of its subsidiaries in default)
under, nor to the knowledge of the Company has there occurred any event giving
others (with notice or lapse of time or both) any rights of termination,
amendment, acceleration or cancellation of, any agreement, indenture or
instrument to which the Company or any of its subsidiaries is a party, except
for actual or possible violations, defaults or rights that would not,
individually or in the aggregate, have a Material Adverse Effect. The businesses
of the Company and its subsidiaries are not being conducted, and shall not be
conducted so long as the Purchaser owns any of the Securities, in violation of
any law, ordinance or regulation of any governmental entity, except for possible
violations the sanctions for which either singly or in the aggregate would not
be reasonably likely to have a Material Adverse Effect. Except as specifically
contemplated by this Agreement, the Company is not required to obtain any
consent, approval, authorization or order of, or make any filing or registration
with, any court or governmental agency or any regulatory or self regulatory
agency in order for it to execute, deliver or perform any of its obligations
under this Agreement or the Warrants in each case in accordance with the terms
hereof or thereof. The Company is not in violation of the listing requirements
of the Nasdaq National Market ("Market/Exchange") and does not reasonably
anticipate that the Common Stock will be delisted by the Market/Exchange for the
foreseeable future except as a result of a possible decline in the market price
of the Common Stock.

     (g) SEC Documents, Financial Statements. Since December 31, 1998, the
         -----------------------------------
Company has timely filed (within applicable extension periods) all reports,
schedules, forms, statements and other documents required to be filed by it with
the SEC pursuant to the reporting requirements of the Securities Exchange Act of
1934, as amended (the "Exchange Act") (all of the foregoing filed prior to the
date hereof, and the Registration Statement, as supplemented by the Supplement,
and all exhibits included therein and financial statements and schedules thereto
and documents incorporated by reference therein, being hereinafter referred to
herein as the "SEC Documents"). To the extent

                                      -5-
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that any SEC Document is available under the SEC's EDGAR filing system, such SEC
Document shall be deemed to have been delivered to the Purchaser. The Company
has delivered to the Purchaser true and complete copies of the SEC Documents. As
of their respective dates, the SEC Documents complied in all material respects
with the requirements of the Exchange Act or the Securities Act, as the case may
be, and the rules and regulations of the SEC promulgated thereunder applicable
to the SEC Documents, and none of the SEC Documents, at the time they were filed
with the SEC, contained any untrue statement of a material fact or omitted to
state a material fact required to be stated therein or necessary in order to
make the statements therein, in light of the circumstances under which they were
made, not misleading. None of the statements made in any such SEC Documents is,
or has been, required to be amended or updated under applicable law (except for
such statements as have been amended or updated in or by subsequent filings made
prior to the date hereof). As of their respective dates, the financial
statements of the Company included in the SEC Documents complied as to form in
all material respects with applicable accounting requirements and the published
rules and regulations of the SEC applicable with respect thereto. Such financial
statements have been prepared in accordance with U.S. generally accepted
accounting principles ("GAAP"), consistently applied, during the periods
involved (except (i) as may otherwise be indicated in such financial statements
or the notes thereto, or (ii) in the case of unaudited interim statements, to
the extent they may not include footnotes or may be condensed or summary
statements) and fairly present in all material respects the consolidated
financial position of the Company and its consolidated subsidiaries as of the
dates thereof and the consolidated results of their operations and cash flows
for the periods then ended (subject, in the case of unaudited statements, to
immaterial year-end audit adjustments). Except as set forth in the financial
statements of the Company included in the SEC Documents filed prior to the date
hereof, the Company has no liabilities, contingent or otherwise, other than (i)
liabilities incurred in the ordinary course of business subsequent to the date
of such financial statements and (ii) obligations under contracts and
commitments incurred in the ordinary course of business and not required under
GAAP to be reflected in such financial statements, which liabilities and
obligations referred to in clauses (i) and (ii), individually or in the
aggregate, are not material to the financial condition or operating results of
the Company.

     (h) Absence of Certain Changes. Since December 31, 1999, there has been no
         --------------------------
material adverse change and no material adverse development in the business,
properties, operations, financial condition or results of operations of the
Company and its subsidiaries, taken as a whole, except as disclosed in the SEC
Documents filed prior to the date hereof.

     (i) Absence of Litigation. Except as disclosed in the SEC Documents filed
         ---------------------
prior to the date hereof, there is no action, suit, proceeding, inquiry or
investigation before or by any court, public board, government agency, self-
regulatory organization or body, including, without limitation, the SEC or the
Market/Exchange, pending or, to the knowledge of the Company or any of its
subsidiaries, threatened against or affecting the Company, any of its
subsidiaries, or any of their respective directors or officers in their
capacities as such. There are no facts which, if known by a potential claimant
or governmental authority, could give rise to a claim or proceeding which, could
reasonably be expected to have a Material Adverse Effect.

                                      -6-
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     (j) Intellectual Property. Each of the Company and its subsidiaries owns or
         ---------------------
is licensed to use all patents, patent applications, trademarks, trademark
applications, trade names, service marks, copyrights, copyright applications,
domain names, licenses, permits, inventions, discoveries, processes, scientific,
technical, engineering and marketing data, object and source codes, know-how
(including trade secrets and other unpatented and/or unpatentable proprietary or
confidential information, systems or procedures) and other similar rights and
proprietary knowledge (collectively, "Intangibles") necessary for the conduct of
its business as now being conducted. To the knowledge of the Company, neither
the Company nor any subsidiary of the Company infringes or is in conflict with
any right of any other person with respect to any Intangibles. Neither the
Company nor any of its subsidiaries has received written notice of any pending
conflict with or infringement upon such third party Intangibles. Neither the
Company nor any of its subsidiaries has entered into any consent agreement,
indemnification agreement, forbearance to sue or settlement agreement with
respect to the validity of the Company's or its subsidiaries' ownership or right
to use its Intangibles and, to the best knowledge of the Company, there is no
reasonable basis for any such claim to be successful. The Intangibles owned by
the Company are valid and enforceable and no registration or patent relating
thereto has lapsed, expired or been abandoned or canceled or is the subject of
cancellation or other adversarial proceedings, and all applications therefor are
pending and in good standing. The U.S. patents obtained and owned by the Company
or its subsidiaries and which have expired for failure to pay the necessary
maintenance fees are not necessary for the conduct of the business of the
Company or its subsidiaries as it is now being conducted. To the knowledge of
the Company, the Intangibles licensed by the Company from others are valid and
enforceable and no registration relating thereto has lapsed, expired or been
abandoned or canceled or is the subject of cancellation or other adversarial
proceedings, and all applications therefor are pending and in good standing. The
Company and its subsidiaries have complied, in all material respects, with their
respective contractual obligations relating to the protection of the Intangibles
used pursuant to licenses. To the knowledge of the Company, the Intangibles
licensed by the Company from others do not infringe nor are they in conflict
with any right of any other person with respect to any Intangibles. Except as
set forth in Schedule 3(j), to the knowledge of the Company, no person is
             -------------
infringing on or violating the Intangibles owned or used by the Company or its
subsidiaries.

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

     (l) Disclosure. All information relating to or concerning the Company set
         ----------
forth in this Agreement or provided by or on behalf of the Company to the
Purchaser in connection with the transactions contemplated hereby is true and
correct in all material respects and the Company has not

                                      -7-
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omitted to state any material fact necessary in order to make the statements
made herein or therein, in light of the circumstances under which they were
made, not misleading. No event or circumstance has occurred or exists with
respect to the Company or its subsidiaries or their respective businesses,
properties, operations or financial conditions, which has not been publicly
disclosed but, under applicable law, rule or regulation, would be required to be
disclosed by the Company in a registration statement filed on the date hereof by
the Company under the Securities Act with respect to the primary issuance of the
Company's securities.

     (m) Acknowledgment Regarding Purchaser's Purchase of the Initial
         ------------------------------------------------------------
Securities. The Company acknowledges and agrees that the Purchaser is not acting
----------
as a financial advisor or fiduciary of the Company (or in any similar capacity)
with respect to this Agreement or the transactions contemplated hereby, the
relationship between the Company and the Purchaser is "arms-length" and any
statement made by the Purchaser or any of its representatives or agents in
connection with this Agreement and the transactions contemplated hereby (other
than representations, warranties and covenants of the Purchaser made herein) is
merely incidental to the Purchaser's purchase of Securities and has not been
relied upon by the Company, its officers or directors in any way.

     (n) Listing. The Company has secured the listing of the Common Shares and
         -------
Warrant Shares upon each national securities, exchange or automated quotation
system upon which shares of Common Stock are currently listed (subject to
official notice of issuance).

     (o) Registration; Blue Sky. The Company has filed the Registration
         ----------------------
Statement and the Supplement with the SEC. The Registration Statement was
declared effective by the SEC on November 15, 2000. The Registration Statement
covers the sale of up to 3,250,000 shares of Common Stock and 1,750,000 warrants
to purchase Common Stock. The Registration Statement, as supplemented by the
Supplement, covers the issuance and sale of the Initial Securities to the
Purchaser pursuant to the terms of this Agreement and the issuance of the
Warrant Shares upon the exercise of the Warrants. Assuming the accuracy of the
Purchaser's representations, the Company is not required to take any action to
qualify the Securities for sale to the Purchaser pursuant to this Agreement
under the "blue sky" laws of any states of the United States. No stop order
suspending the effectiveness of the Registration Statement has been issued and
no proceeding therefor has been initiated or threatened by the SEC. Any request
by the SEC for inclusion of additional information in the Registration Statement
or otherwise has been complied with or withdrawn by the SEC. Except for the
filing of the Supplement, the Company has not filed with the SEC any amendment
or supplement to the Registration Statement.

     (p) Intentionally Omitted.

     (q) No Integrated Offering. Neither the Company, nor any of its affiliates,
         ----------------------
nor any person acting on its or their behalf, has directly or indirectly made
any offers or sales of any security or solicited any offers to buy any security
under circumstances that would cause this offering of Securities to be
integrated with any prior offering of securities of the Company for purposes of
any

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applicable stockholder approval provisions, including, without limitation, Rule
4460(i) of the NASD or any similar rule.

     (r) No Brokers. Except as provided in the following sentence, the Company
         ----------
has taken no action which would give rise to any claim by any person for
brokerage commissions, finder's fees or similar payments by the Purchaser
relating to this Agreement or the transactions contemplated hereby. The Company
is responsible for all brokerage commissions, finder's fees or similar payments
relating to this Agreement and the transactions contemplated hereby which are
required to be paid to Josephthal & Co. Inc.

     (s) Acknowledgment Regarding Securities. The Company's executive officers
         -----------------------------------
have studied and fully understand the nature of the Securities being sold
hereunder. The Company acknowledges that its obligation to issue Warrant Shares
upon exercise of the Warrants in accordance with the terms of the Warrants is
absolute and unconditional, regardless of the dilution that such issuance may
have on the ownership interests of other stockholders. Taking the foregoing into
account, the Company's Board of Directors has determined in its good faith
business judgment that the issuance of the Common Shares and Warrants hereunder
and the consummation of the other transactions contemplated hereby are in the
best interests of the Company and its stockholders.

     (t) Title. The Company and its subsidiaries have good and marketable title
         -----
in fee simple to all real property and good and merchantable title to all
personal property owned by them that is material to the business of the Company
and its subsidiaries, in each case free and clear of all liens, encumbrances and
defects except such as do not materially affect the value of such property and
do not materially interfere with the use made and proposed to be made of such
property by the Company and its subsidiaries. Any real property and facilities
held under lease by the Company and its subsidiaries are held by them under
valid, subsisting and enforceable leases with such exceptions as are not
material and do not materially interfere with the use made and proposed to be
made of such property and buildings by the Company and its subsidiaries.

     (u) Tax Status. Except as set forth in the SEC Documents, the Company and
         ----------
each of its subsidiaries has made or filed all foreign, U.S. federal, state and
local income and all other tax returns, reports and declarations required by any
jurisdiction to which it is subject (unless and only to the extent that the
Company and each of its subsidiaries has set aside on its books provisions
reasonably adequate for the payment of all unpaid and unreported taxes) and has
paid all taxes and other governmental assessments and charges that are material
in amount, shown or determined to be due on such returns, reports and
declarations, except those being contested in good faith and has set aside on
its books provisions reasonably adequate for the payment of all taxes for
periods subsequent to the periods to which such returns, reports or declarations
apply. There are no unpaid taxes in any material amount claimed to be due by the
taxing authority of any jurisdiction, and the officers of the Company know of no
basis for any such claim. The Company has not executed a waiver with respect to
any statute of limitations relating to the assessment or collection of any
federal, state or local tax. The Company has received no notice that any of its
tax returns is presently being audited by any taxing authority.

                                      -9-
<PAGE>

     (v) Key Employees. Each of the Company's directors, officers and any Key
         -------------
Employee (as defined below) is currently serving the Company in the capacity
disclosed in the SEC Documents. No Key Employee, to the best of the knowledge of
the Company and its subsidiaries, is, or is now expected to be, in violation of
any material term of any employment contract, confidentiality, disclosure or
proprietary information agreement, non-competition agreement, or any other
contract or agreement or any restrictive covenant, and the continued employment
of each Key Employee does not subject the Company or any of its subsidiaries to
any liability with respect to any of the foregoing matters. Except as provided
in Schedule 3(v), no Key Employee has, to the best of the knowledge of the
   -------------
Company and its subsidiaries, any intention to terminate or limit his employment
with, or services to, the Company or any of its subsidiaries, nor is any such
Key Employee subject to any constraints which would cause such employee to be
unable to devote his full time and attention to such employment or services.
"Key Employee" means the persons listed on Schedule 3(v) and any individual who
-------------                              -------------
assumes or performs any of the duties of a Key Employee. The employment
agreements for each of Robert S. Ehrlich and Yehuda Harats have been extended
until December 31, 2002, and the Company has delivered to the Purchaser, true
and correct copies of such employment agreements as so extended.

     (w) Insurance. The Company has in force fire, casualty, product liability
         ---------
and other insurance policies, with extended coverage, sufficient in amount to
allow it to replace any of its material properties or assets which might be
damaged or destroyed or sufficient to cover liabilities to which the Company may
reasonably become subject and which would be reasonably likely to have a
Material Adverse Effect, and such types and amounts of other insurance with
respect to its business and properties, on both a per occurrence and an
aggregate basis, as are customarily carried by persons engaged in the same or
similar business as the Company. No default or event has occurred that could
give rise to a default under any such policy.

     (x) Environmental Matters. The Company has received no notice of any
         ---------------------
environmental litigation or other environmental proceeding pending or threatened
by any governmental regulatory authority or others with respect to the current
or any former business of the Company or any partnership or joint venture
currently or at any time affiliated with the Company. No state of facts exists
as to environmental matters or Hazardous Substances (as defined below) that
involves the reasonable likelihood of a material capital expenditure by the
Company or that may otherwise have a Material Adverse Effect. The Company has
not treated, stored or disposed of, or otherwise deposited, in or on the
properties owned or leased by the Company or by any partnership or joint venture
currently or at any time affiliated with the Company any Hazardous Substances in
violation of any applicable environmental laws. The environmental compliance
programs of the Company comply in all respects with all environmental laws,
whether federal, state or local, currently in effect. As used herein, "Hazardous
Substances" means any substance, waste, contaminant, pollutant or material that
has been determined by any applicable governmental authority to be capable of
posing a risk of injury to health, safety, property or the environment.

                                      -10-
<PAGE>

     (w) Inventory. All inventory of the Company and its subsidiaries is valued
         ---------
on the Company's consolidated books and records at the lower of cost, determined
by the "first in, first out" method of accounting, or the fair market value
thereof. Except, to the extent of the Company's reserves for obsolete or
unmerchantable inventory reflected in the Company's SEC Documents, all such
inventory, after consideration of reserves consisting of finished goods is of
merchantable quality and is saleable in the ordinary course of business
consistent with past practice.

4.   COVENANTS.
     ---------

     (a) Reasonable Best Efforts. The parties shall use their reasonable best
         -----------------------
efforts timely to satisfy each of the conditions described in Section 6 and
Section 7 of this Agreement.

     (b) Form 8-K. Within three (3) trading days after the Closing Date, the
         --------
Company shall file a Form 8-K summarizing under Item 5 thereof this Agreement
and the transactions contemplated hereby, which Form 8-K shall attach this
Agreement and the Warrants, as exhibits to such Form 8-K.

     (c) Reporting Status. So long as the Purchaser beneficially owns any
         ----------------
Securities, the Company shall timely file (within applicable extension periods)
all reports required to be filed with the SEC pursuant to the Exchange Act, and
the Company shall not terminate its status as an issuer required to file reports
under the Exchange Act even if the Exchange Act or the rules and regulations
thereunder would permit such termination. In addition, the Company shall take
all actions necessary to continue to meet the "registrant eligibility"
requirements set forth in the general instructions to Form S-3 or any successor
form thereto, to continue to be eligible to register the resale of its Common
Stock on a registration statement on Form S-3 under the Securities Act.

     (d) Use of Proceeds. The Company shall use the proceeds from the sale of
         ---------------
the Common Shares and Warrants substantially as set forth in Schedule 4(d).
                                                             -------------

     (e) Additional Equity Capital; Right of First Offer. During the period
         -----------------------------------------------
beginning on the date hereof and ending 180 days following the Closing Date (the
"Lock-Up Period"), the Company will not, without the prior written consent of
the Purchaser so long as the Purchaser owns any Securities and, without
duplication, holders(s) of Warrants having a majority in-interest of the Warrant
Shares, contract with any party to obtain additional financing in which any
equity or equity-linked securities, having common stock registration rights
and/or public resale rights effective within one (1) year after the Closing
Date, are issued (including any debt financing with an equity component) (a
"Future Offering"). In addition, the Company will not conduct any Future
Offering during the period beginning on the date hereof and ending 180 days
following the expiration of the Lock-Up Period, unless it shall have first
delivered to Purchaser so long as the Purchaser owns any Securities, at least
ten (10) business days prior to the closing of such Future Offering, written
notice describing the proposed Future Offering, including the terms and
conditions thereof, and providing the Purchaser, an option during the ten (10)
business day period following delivery of such notice to purchase up to the
Applicable Portion (as defined below) of the securities being offered in the
Future Offering on the same terms as contemplated by such Future Offering.
During the Lock-up Period and during the 180 day period following the Mandatory
Exercise Date, as such term is defined in the Series B Warrant, the Company
will not issue any securities subject to the Registration Statement, except for
the Securities, unless it shall have first delivered to the Purchaser, so long
as the Purchaser owns any Securities, at least ten (10) business days prior to
the proposed issuance of such Securities, written notice describing the proposed
transaction, including the terms and conditions thereof, and providing the
Purchaser an option during the ten (10) business day period following the
delivery of such notice to purchase any or all of the securities being offered
on the same terms as contemplated by such offering. In addition, the Company
will not register for sale any of its equity securities in a secondary public
offering (other than pursuant to registration rights arising under obligations
existing on the Closing Date and disclosed on Schedule 3(d) hereto, except for
those arising under the employment agreements referred to in the last sentence
of Section 4(v) hereof; provided however that registrations pursuant to
registration rights arising under either or both of the employment agreements
referred to in the last sentence of Section 4(v) hereof will be permitted at any
time after the termination of such agreements) at any time during the Lock-Up
Period and during the 180 day period following the Mandatory Exercise Date, as
such term is defined in the Series B Warrant (the limitations referred to in

                                      -11-
<PAGE>

this and the three immediately preceding sentences are collectively referred to
as the "Capital Raising Limitations"). The Capital Raising Limitations shall not
apply to any transaction involving issuances of securities as consideration in a
merger, consolidation or acquisition of assets, or in connection with any
strategic partnership or joint venture (the primary purpose of which is not to
raise equity capital), or as consideration for the acquisition of a business,
product or license by the Company. The Capital Raising Limitation also shall not
apply to (i) the issuance of securities pursuant to an underwritten public
offering, (ii) the issuance of securities upon exercise or conversion of the
Company's options, warrants or other convertible securities outstanding as of
the date hereof or (iii) the grant of additional options or warrants, or the
issuance of additional securities, under any Company stock option, bonus plan or
restricted stock plan for the benefit of the Company's employees, directors or
consultants. The "Applicable Portion" shall mean a fraction, the numerator of
which is the number of Initial Securities then held by the Purchaser and the
denominator of which is the total number of Initial Securities purchased by the
Purchaser hereunder.

     (f) Expenses.  The Company shall pay to Heights Capital Management, Inc.
         --------
("Heights") at the Closing, reimbursement for the expenses reasonably incurred
by Heights and its affiliates and advisors in connection with the negotiation,
preparation, execution and delivery of this Agreement and the other agreements
to be executed in connection herewith, including, without limitation, Heights'
and its affiliates and advisors' reasonable due diligence and attorneys' fees
and expenses (the "Expenses"); provided, however, that Capital Ventures
International ("CVI") shall be permitted to deduct such Expenses (up to the
maximum amount set forth below) from the Purchase Price payable by CVI hereunder
and remit such Expenses to Heights. In addition, from time to time thereafter,
upon CVI's written request, the Company shall pay to Heights such additional
Expenses, if any, not covered by such payment, in each case to the extent
reasonably incurred by Heights or its affiliates or agents in connection with
the negotiation, preparation, execution and delivery of this Agreement and the
other agreement executed in connection herewith. Notwithstanding the foregoing,
the Company shall be obligated to reimburse Heights for no more than $50,000 of
Expenses (including additional Expenses) in the aggregate.

     (g) Financial Information.  The Company shall send the following reports to
         ---------------------
the Purchaser until the Purchaser transfers, assigns or sells all of its
Securities: (i) within ten (10) days after the filing with the SEC, a copy of
its Annual Report on Form 10-K, its Quarterly Reports on Form 10-Q, its proxy
statements and any Current Reports on Form 8-K; and (ii) within one (1) day
after release, copies of all press releases issued by the Company or any of its
subsidiaries.

     (h) Reservation of Shares.  The Company shall at all times have authorized
         ---------------------
and reserved for the purpose of issuance a sufficient number of shares of Common
Stock to provide for the full exercise of the Warrants and the issuance of the
Warrant Shares in connection therewith and as otherwise required by the
Warrants.

     (i) Listing. The Company shall maintain, so long as the Purchaser (or any
         -------
of their affiliates) owns any Securities, the listing of all Common Shares and
such Warrant Shares as may from time to time be issued upon exercise of the
Warrants covered by this Agreement on each

                                      -12-
<PAGE>

national securities exchange or automated quotation system on which shares of
Common Stock are listed at the relevant time. The Company will use its best
efforts to continue the listing and trading of its Common Stock on the
Market/Exchange and will comply in all respects with the reporting, filing and
other obligations under the bylaws or rules of the NASD and such exchanges, as
applicable.

     (j) Corporate Existence.  So long as the Purchaser beneficially owns any
         -------------------
Warrants, the Company shall maintain its corporate existence, and in the event
of a merger, consolidation or sale of all or substantially all of the Company's
assets, the Company shall ensure that the surviving or successor entity in such
transaction (i) assumes the Company's obligations hereunder and under the
Warrants and the agreements and instruments entered into in connection herewith
regardless of whether or not the Company would have had a sufficient number of
shares of Common Stock authorized and available for issuance in order to effect
the exercise in full of all Warrants outstanding as of the date of such
transaction and (ii) is a publicly traded corporation whose common stock is
listed for trading on the Market/Exchange, New York Stock Exchange or American
Stock Exchange.

     (k) No Integrated Offerings.  The Company shall not make any offers or
         -----------------------
sales of any security (other than the Securities) under circumstances that would
cause this offering of the Securities to be integrated with any other offering
of securities by the Company for purposes of any stockholder approval provision
applicable to the Company or its securities.

     (l) Legal Compliance.  The Company shall conduct its business and the
         ----------------
business of its subsidiaries in compliance with all laws, ordinances or
regulations of governmental entities applicable to such businesses, except where
the failure to do so would not be reasonably likely to have a Material Adverse
Effect.

     (m) Intentionally omitted.

     (n) Trading Restrictions.  The Purchaser shall not be permitted to sell,
         --------------------
transfer or otherwise dispose of, during any 45 trading day period, more than
9.99% of the least number of shares of Common Stock issued and outstanding
during such 45 trading day period (other than dispositions to the Company).

     (o) Information.   Upon the request of the Purchaser, the Company will
         -----------
furnish via electronic transmission or otherwise, to the Purchaser, so long as
it holds any Warrants:

          (i)  concurrently with the filing with the SEC of its annual reports
and quarterly reports on Form 10-K and Form 10-Q, respectively, a certificate of
the President, a Vice President or a senior financial officer of the Company
stating that, based upon such examination or investigation and review of this
Agreement as in the opinion of the signer is necessary to enable the signer to
express an informed opinion with respect thereto, neither the Company nor any of
its subsidiaries is or has during such period been in material default in the
performance or observance of any of the terms, covenants or conditions hereof,
or, if the Company or any of its subsidiaries shall be or shall have been in
default, specifying all such defaults, and the nature and period of existence
thereof, and

                                      -13-
<PAGE>

what action the Company or such subsidiary has taken, is taking or proposes to
take with respect thereto; and

          (ii)    the information the Company must deliver to any holder or to
any prospective transferee of Securities in order to permit the sale or other
transfer of such Securities pursuant to Rule 144A of the SEC or any similar rule
then in effect; provided that the Company shall only be required to deliver such
information, if at the time of such request, there is no current registration
statement covering the Warrant Shares.

          The Company will keep at its principal executive office a true copy of
this Agreement (as at the time in effect), and cause the same to be available
for inspection at such office during normal business hours by any holder of
Securities or any prospective transferee of Securities designated by a holder
thereof.

     (p)  Inspection of Properties and Books.  So long as the Purchaser shall
          ----------------------------------
hold any Securities, the Purchaser and its representatives and agents
(collectively, the "Inspectors") shall have the right, during reasonable local
business hours, at the Purchaser's expense, to visit and inspect any of the
properties of the Company and of its subsidiaries, to examine the books of
account and records of the Company and of its subsidiaries, to make or be
provided with copies and extracts therefrom, to discuss the affairs, finances
and accounts of the Company and of its subsidiaries with, and to be advised as
to the same by, its and their officers, employees and independent public
accountants (and by this provision the Company authorizes such accountants to
discuss such affairs, finances and accounts, whether or not a representative of
the Company is present) all at such reasonable times and intervals and to such
reasonable extent as the Purchaser may desire; provided, however, that each
Inspector shall hold in confidence and shall not make any disclosure (except to
the Purchaser) of any such information which the Company determines in good
faith to be confidential, and of which determination the Inspectors are so
notified, unless (a) the release of such information is ordered pursuant to a
subpoena or other order from a court or government body of competent
jurisdiction, or (b) such information has been made generally available to the
public other than by disclosure in violation of this or any other agreement. The
Company shall not be required to disclose any confidential information to any
Inspector until and unless such Inspector shall have entered into
confidentiality agreements (in form and substance satisfactory to the Company)
with the Company with respect thereto, substantially in the form of this Section
4(p). The Purchaser agrees that it shall, upon learning that disclosure of such
information is sought in or by a court or governmental body of competent
jurisdiction or through other means, give prompt notice to the Company and allow
the Company, at its expense, to undertake appropriate action to prevent
disclosure of, or to obtain a protective order for, the information deemed
confidential. The Purchaser acknowledges that under certain circumstances the
Exchange Act may prohibit the trading of securities by persons having material
non-public information about the Company.

     (q)  Intentionally omitted.

                                      -14-
<PAGE>

     (r)  Stockholder Approval.  If, on the Closing Date, the Company is
          --------------------
prohibited by Rule 4460(i) of the NASD or any successor or similar rule, or the
rules of any other securities exchange on which the Common Stock is then listed
or traded, from issuing the shares of Common Stock issuable hereunder and upon
complete exercise of the Warrants (without giving effect to the limitations on
exercise contained in Section 7(f) of the Warrants), the Company shall call a
meeting of its stockholders to be held as promptly as practicable and in any
event no later than 90 days after the Closing Date for the purpose of voting
upon and approving this Agreement and the Warrants, the authorization and
issuance of the Common Shares and the Warrants, and the issuance of the Warrant
Shares upon exercise of or otherwise pursuant to the Warrants. The Company
shall, through its Board of Directors, recommend to its stockholders approval of
such matters. The Company shall use its best efforts to solicit from its
stockholders proxies in favor of such matters sufficient to comply with all
relevant legal requirements, including, without limitation, Rule 4460(i)
promulgated by the NASD, and shall vote such proxies in favor of such matters.

     (s)  Antidilution.  So long as the Purchaser beneficially owns any
          ------------
Securities, the Company will send to the holders of Securities any notice which
the Company sends to holders of any debt or equity securities or instruments
(including options, warrants and other convertible securities) issued by the
Company which notice is occasioned by an event which triggers the application of
the anti-dilution provisions of such debt or equity securities or instruments
and results in an adjustment to any of the terms of such debt or equity
security. The Company will send the notice required by this Section 4(s) to the
holders of Securities at the same time as it sends such notice to the holders of
the affected debt or equity securities.

5.   TRANSFER AGENT INSTRUCTIONS.
     ---------------------------

     (a) The Company shall instruct its transfer agent to issue certificates,
registered in the name of the Purchaser or its nominee for the Warrant Shares in
such amounts as specified from time to time by the Purchaser to the Company upon
exercise of the Warrants.

     (b) The Company warrants that no instruction other than the instructions
referred to in this Section 5 will be given by the Company to its transfer agent
and that the Securities shall otherwise be freely transferable on the books and
records of the Company as and to the extent provided in this Agreement.

     (c) If the Purchaser provides the Company and the transfer agent with an
opinion of counsel, which opinion of counsel shall be in form, substance and
scope customary for opinions of counsel in comparable transactions, to the
effect that the Securities to be sold or transferred may be sold or transferred
pursuant an exemption from registration, or the Purchaser provides the Company
with reasonable assurances that such Securities may be sold under Section 4(1)
of the Securities Act, the Company shall permit the transfer and, in the case of
the Warrant Shares, promptly instruct its transfer agent to issue one or more
certificates for such Warrant Shares in such names and in such denominations as
specified by the Purchaser.

                                      -15-
<PAGE>

6.   CONDITIONS TO THE COMPANY'S OBLIGATION TO SELL.
     ----------------------------------------------

     The obligation of the Company hereunder to issue and sell the Initial
Securities to the Purchaser hereunder is subject to the satisfaction, at or
before the Closing, of each of the following conditions thereto, provided that
these conditions are for the Company's sole benefit and may be waived by the
Company at any time in its sole discretion.

     (a) The Purchaser shall have executed the Purchaser's Execution Page to
this Agreement and delivered the same to the Company.

     (b) The Purchaser shall have delivered the Purchase Price for the Initial
Securities in the amount set forth on the Purchaser's Execution Page in
accordance with Section 1(b)above.

     (c) The representations and warranties of the Purchaser shall be true and
correct as of the date when made and as of the Closing Date as though made at
that time (except for representations and warranties that speak as of a specific
date, which representations and warranties shall be true and correct as of such
date), and the Purchaser shall have performed, satisfied and complied in all
material respects with the covenants, agreements and conditions required by this
Agreement to be performed, satisfied or complied with by the Purchaser at or
prior to the Closing Date.

     (d) No statute, rule, regulation, executive order, decree, ruling or
injunction shall have been enacted, entered, promulgated or endorsed by any
court or governmental authority of competent jurisdiction or any self-regulatory
organization having authority over the matters contemplated hereby which
prohibits the consummation of any of the transactions contemplated by this
Agreement.

     (e) The Company shall have filed the Supplement. The Registration Statement
as supplemented by the Supplement, shall be effective and shall cover the
issuance and sale of the Initial Securities to the Purchaser pursuant to this
Agreement and the issuance and sale of Warrant Shares upon the exercise of the
Warrants. No stop order suspending the effectiveness of the Registration
Statement shall have been issued and no proceeding therefor has been initiated
or threatened by the SEC.

7.  CONDITIONS TO EACH PURCHASER'S OBLIGATION TO PURCHASE.
    -----------------------------------------------------

     The obligation of the Purchaser hereunder to purchase the Initial
Securities set forth on the Purchaser's Execution Page to be purchased by it at
the Closing is subject to the satisfaction, at or before the Closing Date, of
each of the following conditions, provided that such conditions are for the
Purchaser's sole benefit and may be waived by the Purchaser at any time in the
Purchaser's sole discretion:

     (a) The Company shall have executed this Agreement and the Warrants and
delivered executed original copies of the same to the Purchaser.

                                      -16-
<PAGE>

     (b) The Company shall have filed the Supplement. The Registration Statement
as supplemented by the Supplement, shall be effective and shall cover the
issuance and sale of the Initial Securities to the Purchaser pursuant to this
Agreement and the issuance and sale of Warrant Shares upon the exercise of the
Warrants. No stop order suspending the effectiveness of the Registration
Statement shall have been issued and no proceeding therefor has been initiated
or threatened by the SEC. Any request by the SEC for inclusion of additional
information in the Registration Statement or otherwise shall have been complied
with and the Company shall not have filed with the SEC any subsequent amendment
or supplement to the Registration Statement without the consent of the
Purchaser.

     (c) The Company shall have delivered or caused to be delivered to the
Purchaser duly executed certificates representing the Common Shares (in such
denominations as the Purchaser shall request) and duly executed warrant
agreements in the forms of Exhibit A or Exhibit B, as applicable representing
the Warrants (each in such denominations as the Purchaser shall request) being
so purchased by the Purchaser in accordance with Section 1(b) above.

     (d) The Common Stock shall be authorized for quotation and listed on the
Market/Exchange and trading in the Common Stock (or the Market/Exchange
generally) shall not have been suspended by the SEC or the Market/Exchange.

     (e) The representations and warranties of the Company shall be true and
correct as of the date when made and as of the Closing Date as though made at
that time (except for representations and warranties that speak as of a specific
date, which representations and warranties shall be true and correct as of such
date) and the Company shall have performed, satisfied and complied in all
material respects with the covenants, agreements and conditions required by this
Agreement to be performed, satisfied or complied with by the Company at or prior
to the Closing Date.  The Purchaser shall have received a certificate, executed
by the Chief Executive Officer of the Company after reasonable investigation,
dated as of the Closing Date to the foregoing effect.

     (f) No statute, rule, regulation, executive order, decree, ruling,
injunction, action or proceeding shall have been enacted, entered, promulgated
or endorsed by any court or governmental authority of competent jurisdiction or
any self-regulatory organization having authority over the matters contemplated
hereby which questions the validity of, challenges or prohibits the consummation
of, any of the transactions contemplated by this Agreement.

     (g) The Purchaser shall have received an opinion of the Company's counsel,
dated as of the Closing Date, in form, scope and substance reasonably
satisfactory to the Purchaser and in substantially the form of Exhibit E
                                                               ---------
attached hereto.

     (h) There shall have been no material adverse changes and no material
adverse developments in the business, properties, operations, prospects,
financial condition or results of operations of the Company and its
subsidiaries, taken as a whole, since the date hereof, and no

                                      -17-
<PAGE>

information, of which the Purchaser is not currently aware, shall come to the
attention of the Purchaser that is materially adverse to the Company.

     (i) The Purchaser shall have received:  (A) a copy of resolutions, duly
adopted by the Board of Directors of the Company, which shall be in full force
and effect at the time of the Closing, authorizing the execution, delivery and
performance by the Company of this Agreement, the Warrants and the consummation
by the Company of the transactions contemplated hereby and thereby, (B) the
Company's certificate of incorporation, as amended to date, and (C) the
Company's by-laws, as amended to date, each of the foregoing certified as such
by the Secretary or Assistant Secretary of the Company.

     (j) The aggregate Purchase Price for the Initial Securities being purchased
hereunder by the Purchaser at the Closing shall be Eight Million Three Hundred
Seventy Five Thousand Dollars ($8,375,000).

     (k) The Company shall have filed its quarterly report on Form 10-Q for the
nine months ended September 30, 2000 on or prior to the Closing Date.

     8.  INDEMNIFICATION AND CONTRIBUTION
         --------------------------------

     (a) Indemnification
         ---------------

         (i) To the extent permitted by law, the Company will indemnify, hold
harmless and defend (A) the Purchaser and (B) the directors, officers, partners,
members, employees and agents of the Purchaser and each person who controls any
Investor within the meaning of Section 15 of the Securities Act or Section 20 of
the Exchange Act, if any, (each, an "Indemnified Person"), against any joint or
several losses, claims, damages, liabilities or expenses  (collectively,
together with actions, proceedings or inquiries by any regulatory or self-
regulatory organization, whether commenced or threatened, in respect thereof,
"Claims") to which any of them may become subject insofar as such Claims arise
out of or are based upon: (I) any untrue statement or alleged untrue statement
of a material fact contained in the Registration Statement or the Supplement (as
amended or supplemented, if the Company files any amendment or supplement with
the SEC) or the omission or alleged omission to state therein any material fact
necessary to make the statements made therein, in light of the circumstances
under which the statements therein were made, not misleading, or (II) any
violation or alleged violation by the Company of the Securities Act, the
Exchange Act, any other law, including, without limitation, any state securities
law, or any rule or regulation thereunder relating to the offer or sale of the
Securities (the matters in the foregoing clauses (I) and (II) being,
collectively, "Violations"). Subject to the restrictions set forth in Section
8(a)(iii) with respect to the number of legal counsel, the Company shall
reimburse the Purchaser and each other Indemnified Person, promptly as such
expenses are incurred and are due and payable, for any reasonable legal fees or
other reasonable expenses incurred by them in connection with investigating,
defending or settling any such Claim. Notwithstanding anything to the contrary
contained herein, the indemnification agreement contained in this Section
8(a)(i): (Y) shall not apply to a Claim arising

                                      -18-
<PAGE>

out of or based upon a Violation which occurs in reliance upon and in conformity
with information furnished in writing to the Company by such Indemnified Person
expressly for use in the Supplement or any amendment or supplement thereto; and
(Z) shall not apply to amounts paid in settlement of any Claim if such
settlement is effected without the prior written consent of the Company, which
consent shall not be unreasonably withheld. Such indemnity shall remain in full
force and effect regardless of any investigation made by or on behalf of the
Indemnified Person and shall survive the transfer of the Securities by the
Purchaser.

         (ii)  In connection with the Supplement, the Purchaser agrees severally
and not jointly to indemnify, hold harmless and defend, to the same extent and
in the same manner set forth in Section 8(a)(i), the Company, each of its
directors, each of its officers, its employees, agents and each person, if any,
who controls the Company within the meaning of Section 15 of the Securities Act
or Section 20 of the Exchange Act, (each an "Indemnified Party"), against any
Claim to which any of them may become subject, under the Securities Act, the
Exchange Act or otherwise, insofar as such Claim arises out of or is based upon
any Violation, in each case to the extent (and only to the extent) that such
Violation occurs in reliance upon and in conformity with the representations and
warranties of the Purchaser in this Agreement or written information furnished
to the Company by the Purchaser expressly for use in connection with the
Supplement and subject to Section 8(a)(iii), the Purchaser will reimburse any
legal or other expenses (promptly as such expenses are incurred and are due and
payable) reasonably incurred by them in connection with investigating, defending
or settling any such Claim; provided, however, that the indemnity agreement
                            -----------------
contained in this Section 8(a)(ii) shall not apply to amounts paid in settlement
of any Claim if such settlement is effected without the prior written consent of
the Purchaser, which consent shall not be unreasonably withheld; provided,
                                                                 --------
further, however, that the Purchaser shall be liable under this Agreement
-------  -------
(including this Section 8(a)(ii) and Section 8(b)), for only that amount as does
not exceed the Purchase Price paid by the Purchaser for the Initial Securities.
Such indemnity shall remain in full force and effect regardless of any
investigation made by or on behalf of such Indemnified Party and shall survive
the transfer of the Initial Securities by the Purchaser.

         (iii) Promptly after receipt by an Indemnified Person or Indemnified
Party under this Section 8(a) of notice of the commencement of any action
(including any governmental action), such Indemnified Person or Indemnified
Party shall, if indemnification is to be sought against any indemnifying party
under this Section 8(a), deliver to the indemnifying party a written notice of
the commencement thereof, and the indemnifying party shall have the right to
participate in, and, to the extent the indemnifying party so desires, jointly
with any other indemnifying party similarly noticed, to assume control of the
defense thereof with counsel mutually satisfactory to the indemnifying party and
the Indemnified Person or the Indemnified Party, as the case may be; provided,
                                                                     --------
however, that such indemnifying party shall not be entitled to assume such
-------
defense and an Indemnified Person or Indemnified Party shall have the right to
retain its own counsel with the fees and expenses to be paid by the indemnifying
party, if, in the reasonable opinion of counsel retained by the indemnifying
party, the representation by such counsel of the Indemnified Person or
Indemnified Party and the indemnifying party would be inappropriate due to
actual or potential conflicts of interest between such Indemnified Person or
Indemnified Party and any other indemnified or indemnifying party

                                      -19-
<PAGE>

represented by such counsel in such proceeding or the actual or potential
defendants in, or targets of, any such action include both the Indemnified
Person or the Indemnified Party and the indemnifying party and any such
Indemnified Person or Indemnified Party reasonably determines that there may be
legal defenses available to such Indemnified Person or Indemnified Party which
are in conflict with those available to such indemnifying party. The
indemnifying party shall pay for only one separate legal counsel for the
Indemnified Persons or the Indemnified Parties, as applicable, and such legal
counsel shall be selected by Purchaser acquiring a majority of the Initial
Securities, if the Purchaser are entitled to indemnification hereunder, or by
the Company, if the Company is entitled to indemnification hereunder, as
applicable. The failure to deliver written notice to the indemnifying party
within a reasonable time of the commencement of any such action shall not
relieve such indemnifying party of any liability to the Indemnified Person or
Indemnified Party under this Section 8(a), except to the extent that the
indemnifying party is actually prejudiced in its ability to defend such action.
The indemnification required by this Section 8(a) shall be made by periodic
payments of the amount thereof during the course of the investigation or
defense, as such expense, loss, damage or liability is incurred and is due and
payable.

     (b) Contribution.  To the extent any indemnification by an indemnifying
         ------------
party is prohibited or limited by law, the indemnifying party agrees to make the
maximum contribution with respect to any amounts for which it would otherwise be
liable under Section 8(a) to the fullest extent permitted by law as is
appropriate to reflect the relative fault of the indemnifying party, on the one
hand, and the Indemnified Person or Indemnified Party, as the case may be, on
the other hand, with respect to the Violation giving rise to the applicable
Claim; provided, however, that (i) no contribution shall be made under
       --------  -------
circumstances where the maker would not have been liable for indemnification
under the fault standards set forth in Section 8(a), (ii) no person guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of the
Securities Act) shall be entitled to contribution from any seller of  Securities
who was not guilty of such fraudulent misrepresentation, and (iii) contribution
(together with any indemnification or other obligations under this Agreement) by
any seller of Securities shall be limited in amount to the net amount of
proceeds received by such seller from the sale of such  Securities.

                                      -20-
<PAGE>

9.   GOVERNING LAW; MISCELLANEOUS.
     ----------------------------

     (a) Governing Law; Jurisdiction.  This Agreement shall be governed by and
         ---------------------------
construed in accordance with the laws of the State of Delaware applicable to
contracts made and to be performed in the State of Delaware. Each of the parties
hereto irrevocably consents to the jurisdiction of the United States federal
courts and the state courts located in the State of Delaware in any suit or
proceeding based on or arising under this Agreement and irrevocably agree that
all claims in respect of such suit or proceeding may be determined in such
courts.   Each of the parties hereto irrevocably waives the defense of an
inconvenient forum to the maintenance of such suit or proceeding. Each of the
parties hereto further agrees that service of process upon the other parties
hereto mailed by first class mail shall be deemed in every respect effective
service of process upon such parties in any such suit or proceeding.  Nothing
herein shall affect the right of any of the parties hereto to serve process in
any other manner permitted by law. Each of the parties hereto agrees that a
final non-appealable judgment in any such suit or proceeding to which it is a
party shall be conclusive and may be enforced in other jurisdictions by suit on
such judgment or in any other lawful manner.

     (b) Counterparts.  This Agreement may be executed in two or more
         ------------
counterparts, all of which shall be considered one and the same agreement and
shall become effective when counterparts have been signed by each party and
delivered to the other party.  This Agreement, once executed by a party, may be
delivered to the other parties hereto by facsimile transmission of a copy of
this Agreement bearing the signature of the party so delivering this Agreement.
In the event any signature is delivered by facsimile transmission, the party
using such means of delivery shall cause the manually executed Execution Page(s)
hereof to be physically delivered to the other party within five (5) days of the
execution hereof, provided that the failure to so deliver any manually executed
Execution Page shall not affect the validity or enforceability of this
Agreement.

     (c) Headings.  The headings of this Agreement are for convenience of
         --------
reference and shall not form part of, or affect the interpretation of, this
Agreement.

     (d) Severability.  If any provision of this Agreement shall be invalid or
         ------------
unenforceable in any jurisdiction, such invalidity or unenforceability shall not
affect the validity or enforceability of the remainder of this Agreement or the
validity or enforceability of this Agreement in any other jurisdiction.

     (e) Entire Agreement; Amendments.  This Agreement and the Warrants contain
         ----------------------------
the entire understanding of the Purchaser, the Company, their affiliates and
persons acting on their behalf with respect to the matters covered herein and
therein and, except as specifically set forth herein or therein, neither the
Company nor the Purchaser makes any representation, warranty, covenant or
undertaking with respect to such matters.  No provision of this Agreement may be
waived other than by an instrument in writing signed by the waiving party and no
provision of this Agreement may be amended other than by an instrument in
writing signed by the Company and the Purchaser.

                                      -21-
<PAGE>

     (f) Notices.  Any notices required or permitted to be given under the terms
         -------
of this Agreement shall be sent by certified or registered mail (return receipt
requested) or delivered personally, by responsible overnight carrier or by
confirmed facsimile, and shall be effective five (5) days after being placed in
the mail, if mailed, or upon receipt or refusal of receipt, if delivered
personally, or by responsible overnight carrier or confirmed facsimile, in each
case addressed to a party.  The addresses for such communications shall be:

               If to the Company:

               ELECTRIC FUEL CORPORATION
               120 Wood Avenue South
               Suite 300
               Iselin, New Jersey 08830
               Tel. No.:(732) 635-7100
               Facsimile: (732) 635-7101
               Attn:  Robert S. Ehrlich
                      Chairman of the Board and
                      Chief Financial Officer

               with a copy simultaneously transmitted by like means to:

               Harris Beach LLP
               130 East Main Street
               Rochester, New York 14604
               Tel. No.:  (716) 232-4400
               Facsimile: (716) 232-6925
               Attn:      Thomas Willett, Esq.

               and to:

               Yaakov Har-Oz, Adv
               Vice President and General Counsel
               Electric Fuel Limited
               Western Industrial Park
               P.O. Box 641
               Bent Shemesh  99000, Israel
               Tel. No.: 972-2-990-6623
               Fax No.:  972-2-990-6688

     If to the Purchaser, to such address set forth under the Purchaser's name
on the Execution Page hereto executed by the Purchaser.

     Each party shall provide notice to the other parties of any change in
address.

                                      -22-
<PAGE>

     (g) Successors and Assigns.  This Agreement shall be binding upon and inure
         ----------------------
to the benefit of the parties and their successors and assigns.  Except as
provided herein or therein, neither the Company nor the Purchaser shall assign
this Agreement or any rights or obligations hereunder. The Purchaser may assign
its rights hereunder to any of its "affiliates," as that term is defined under
the Exchange Act, without the consent of the Company or to any other person or
entity with the consent of the Company, which consent shall not be unreasonably
withheld. This provision shall not limit a Purchaser's right to transfer the
Securities pursuant to the terms of the Warrants and this Agreement, or to
assign the Purchaser's rights hereunder or thereunder to any such transferee of
at least ten percent of either Warrant.  In addition, and notwithstanding
anything to the contrary contained in this Agreement or the Warrants, the
Securities may be pledged and all rights of the Purchaser under this Agreement
or any other agreement or document related to the transactions contemplated
hereby may be assigned, without further consent of the Company, to a bona fide
pledgee in connection with the Purchaser's margin or brokerage account.

     (h) Third Party Beneficiaries.  This Agreement is intended for the benefit
         -------------------------
of the parties hereto and their respective permitted successors and assigns, and
is not for the benefit of, nor may any provision hereof be enforced by, any
other person; provided that Section 4(f) may be enforced by Heights.

     (i) Survival.  The representations and warranties of the Company and the
         --------
agreements and covenants set forth in Sections 3, 4, 5, 8 and 9 hereof shall
survive the Closing notwithstanding any due diligence investigation conducted by
or on behalf of the Purchaser.  Moreover, none of the representations and
warranties made by the Company herein shall act as a waiver of any rights or
remedies the Purchaser may have under applicable U.S. federal or state
securities laws.  The Company shall indemnify and hold harmless each Purchaser
and each of the Purchaser's officers, directors, employees, partners, members,
agents and affiliates for all losses or damages arising as a result of or
related to any breach or alleged breach by the Company of any of its
representations or covenants set forth herein, including advancement of expenses
as they are incurred; provided that without limiting the Company's
indemnification obligations for actual breaches by the Company of any of its
representations or covenants set forth herein, the Company's indemnification
obligations for any alleged breach of the Company's representations or covenants
shall arise only in connection with allegations made by third parties unrelated
to the Purchaser and its affiliates .

     (j) Publicity.  The Company and the Purchaser shall have the right to
         ---------
approve before issuance any press releases, SEC or NASD filings, or any other
public statements with respect to the transactions contemplated hereby;
provided, however, that the Company shall be entitled, without the prior
approval of the Purchaser, to make any press release or SEC or NASD filings with
respect to such transactions as is required by applicable law and regulations
(although the Purchaser shall be consulted by the Company in connection with any
such press release and filing prior to its release and shall be provided with a
copy thereof).

                                      -23-
<PAGE>

     (k) Further Assurances.  Each party shall do and perform, or cause to be
         ------------------
done and performed, all such further acts and things, and shall execute and
deliver all such other agreements, certificates, instruments and documents, as
the other party may reasonably request in order to carry out the intent and
accomplish the purposes of this Agreement and the consummation of the
transactions contemplated hereby.

     (l) Termination.  In the event that the Closing shall not have occurred on
         -----------
or before November 17, 2000, unless the parties agree otherwise, this Agreement
shall terminate at the close of business on such date.  Notwithstanding any
termination of this Agreement, any party not in breach of this Agreement shall
preserve all rights and remedies it may have against another party hereto for a
breach of this Agreement prior to or relating to the termination hereof.

     (m) Joint Participation in Drafting.  Each party to this Agreement has
         --------------------------------
participated in the negotiation and drafting of this Agreement and the Warrants.
As such, the language used herein and therein shall be deemed to be the language
chosen by the parties hereto to express their mutual intent, and no rule of
strict construction will be applied against any party to this Agreement.

     (n) Equitable Relief.  The Company acknowledges that a breach by it of its
         ----------------
obligations hereunder will cause irreparable harm to the Purchaser by vitiating
the intent and purpose of the transactions contemplated hereby.  Accordingly,
the Company acknowledges that the remedy at law for a breach of its obligations
hereunder (including, but not limited to, its obligations pursuant to Section 5
hereof) will be inadequate and agrees, in the event of a breach or threatened
breach by the Company of the provisions of this Agreement (including, but not
limited to, its obligations pursuant to Section 5 hereof), that the Purchaser
shall be entitled, in addition to all other available remedies, to an injunction
restraining any breach and requiring immediate issuance and transfer of the
Securities, without the necessity of showing economic loss and without any bond
or other security being required.

     (o) Additional Acknowledgement.  The Purchaser acknowledges that it has
         --------------------------
independently evaluated the merits of the transactions contemplated by this
Agreement and the Warrants, that it has independently determined to enter into
the transactions contemplated hereby and thereby, and that it is not acting in
concert with any other person in making its purchase of securities hereunder.
The Purchaser and, to its knowledge, the Company agree that the Purchaser has
not taken any actions that would deem the Purchaser to be a member of a "group"
for purposes of Section 13(d) of the Exchange Act.

                 [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]

                                      -24-
<PAGE>

     IN WITNESS WHEREOF, the undersigned Purchaser and the Company have caused
this Agreement to be duly executed as of the date first above written.

ELECTRIC FUEL CORPORATION

     /s/ Yehuda Harats
  By:------------------------
      Name:  Yehuda Harats
      Title: President and CEO

PURCHASER:

CAPITAL VENTURES INTERNATIONAL

By:  Heights Capital Management, Inc.
     its authorized agent

   /s/ Martin Kobinger
By:------------------------
   Name: Martin Kobinger
   Title:  Investment Manager

RESIDENCE:     Cayman Islands

ADDRESS:       c/o Heights Capital Management Inc.
               425 California, Suite 1100
               San Francisco, California 94104
               Telephone No.: (415) 403-6500
               Facsimile No.: (415) 403-6525
               Attn.: Mr. Martin Kobinger

               with copies of all notices to:

               Wolf, Block, Schorr and Solis-Cohen LLP
               1650 Arch Street
               Philadelphia, PA 19103-2097
               Telephone No.: (215) 977-2000
               Facsimile No.: (215) 977-2334
               Attn.: Jason M. Shargel, Esq.

AGGREGATE SUBSCRIPTION AMOUNT

     Percentage of Each Initial Security     100   %
                                             -----
     Purchase Price                                $ 8,375,000<PAGE>

                                                                       EXHIBIT A
                                                                   to Securities
                                                                        Purchase
                                                                       Agreement

     VOID AFTER 5:00 P.M., NEW YORK CITY
     TIME, ON November 17, 2005
     (UNLESS EXTENDED PURSUANT TO SECTION 2 HEREOF)

                                    Right to Purchase 666,667 Shares of
                                    Common Stock, par value $.01 per share

Date: November 17, 2000

                           ELECTRIC FUEL CORPORATION
                        SERIES A STOCK PURCHASE WARRANT

     THIS CERTIFIES THAT, for value received, CAPITAL VENTURES INTERNATIONAL, or
its registered assigns, is entitled to purchase from Electric Fuel Corporation,
a corporation organized under the laws of the State of Delaware (the "Company"),
at any time or from time to time during the period specified in Section 2
hereof, Six Hundred Sixty-Six Thousand Six Hundred and Sixty-Seven (666,667)
fully paid and nonassessable shares of the Company's common stock, par value
$.01 per share (the "Common Stock"), at an exercise price per share (the
"Exercise Price") equal to $12.56 in effect on the Issue Date (as defined in
Section 2 hereof). The number of shares of Common Stock purchasable hereunder
(the "Warrant Shares") and the Exercise Price are subject to adjustment as
provided in Section 4 hereof. The term "Warrants" means this Warrant and the
other Series A Share Warrants and Series B Shares Warrants of the Company issued
pursuant to and as defined in that certain Securities Purchase Agreement, dated
as of November 17, 2000, by and between the Company and the other signatories
thereto (the "Securities Purchase Agreement").

     This Warrant is subject to the following terms, provisions and conditions:

     1.   Manner of Exercise; Issuance of Certificates; Payment for Shares.
          ----------------------------------------------------------------
Subject to the provisions hereof, including, without limitation, the limitations
contained in Section 7 hereof, this Warrant may be exercised by the holder
hereof, in whole or in part, by the surrender of this Warrant, together with a
completed exercise agreement in the form attached hereto (the "Exercise
Agreement"), to the Company during normal business hours on any business day at
the Company's principal executive offices (or such other office or agency of the
Company as it may designate by notice to the holder hereof), and upon (i)
payment to the Company in United States dollars in cash, by certified or
official bank check or by wire transfer of immediately available funds for the
account of the Company, of the Exercise Price for the Warrant Shares specified
in the Exercise Agreement or (ii) if the holder is effectuating a Cashless
Exercise (as defined in Section 11(c) hereof) pursuant to Section 11(c) hereof,
delivery to the Company of a written notice of an election to effect a Cashless
Exercise for the Warrant Shares specified in the Exercise Agreement. The Warrant
Shares so purchased shall be deemed to be issued to the holder hereof or such
holder's designee, as the record

                                       1
<PAGE>

owner of such shares, as of the close of business on the date on which this
Warrant shall have been surrendered, the completed Exercise Agreement shall have
been delivered, and payment shall have been made for such shares as set forth
above or, if such date is not a business date, on the next succeeding business
date. The Warrant Shares so purchased, representing the aggregate number of
shares specified in the Exercise Agreement, shall be delivered to the holder
hereof within a reasonable time, not exceeding two business days, after this
Warrant shall have been so exercised (the "Delivery Period"). If the Company's
transfer agent is participating in the Depository Trust Company ("DTC") Fast
Automated Securities Transfer program, the Company shall cause its transfer
agent to electronically transmit the Warrant Shares so purchased to the holder
by crediting the account of the holder or its nominee with DTC through its
Deposit Withdrawal Agent Commission system ("DTC Transfer"). If the
aforementioned conditions to a DTC Transfer are not satisfied, the Company shall
deliver to the holder physical certificates representing the Warrant Shares so
purchased. Further, the holder may instruct the Company to deliver to the holder
physical certificates representing the Warrant Shares so purchased in lieu of
delivering such shares by way of DTC Transfer. Any certificates so delivered
shall be in such denominations as may be reasonably requested by the holder
hereof shall be registered in the name of such holder or such other name as
shall be designated by such holder, and shall not bear any restrictive legend,
unless otherwise required by law. If this Warrant shall have been exercised only
in part, then the Company shall, at its expense, at the time of delivery of such
certificates, deliver to the holder a new Warrant representing the number of
shares with respect to which this Warrant shall not then have been exercised.

     If, at any time, a holder of this Warrant submits this Warrant, an Exercise
Agreement and payment to the Company of the Exercise Price for each of the
Warrant Shares specified in the Exercise Agreement (including pursuant to a
Cashless Exercise), and the Company fails for any reason to deliver, on or prior
to the fourth business day following the expiration of the Delivery Period for
such exercise, the number of shares of Common Stock to which the holder is
entitled upon such exercise (an "Exercise Default"), then the Company shall pay
to the holder payments ("Exercise Default Payments") for an Exercise Default in
the amount of (a) (N/365), multiplied by (b) the amount by which the Market
Price (as defined in Section 4(l) hereof) on the date the Exercise Agreement
giving rise to the Exercise Default is transmitted in accordance with this
Section 1 (the "Exercise Default Date") exceeds the Exercise Price in respect of
such Warrant Shares, multiplied by (c) the number of shares of Common Stock the
Company failed to so deliver in such Exercise Default, multiplied by (d) .24,
where N = the number of days from the Exercise Default Date to the date that the
Company effects the full exercise of this Warrant which gave rise to the
Exercise Default. The accrued Exercise Default Payment for each calendar month
shall be paid in cash or shall be convertible into Common Stock, at the holder's
option, as follows:

          (a)  In the event holder elects to take such payment in cash, cash
payment shall be made to holder by the fifth day of the month following the
month in which it has accrued; and

          (b)  In the event holder elects to take such payment in Common Stock,
the holder may convert such payment amount into Common Stock at the lower of the
Exercise Price or the Market Price (as defined in Section 4(l)) (as in effect at
the time of exercise) at any time after the fifth day of the month following the
month in which it has accrued.

               Nothing herein shall limit the holder's right to pursue actual
damages for the Company's failure to maintain a sufficient number of authorized
shares of Common Stock as required pursuant to the terms of Section 3(b) hereof
or to otherwise issue shares of Common Stock upon

                                       2
<PAGE>

exercise of this Warrant in accordance with the terms hereof, and the holder
shall have the right to pursue all remedies available at law or in equity
(including a decree of specific performance and/or injunctive relief).

     2.   Period of Exercise. This Warrant is immediately exercisable, at any
          ------------------
time or from time to time on or after the date of initial issuance of this
Warrant (the "Issue Date") and before 5:00 p.m., New York City time, on the
fifth anniversary of the Issue Date (the "Exercise Period").  The Exercise
Period shall automatically be extended by one (1) business day for each day on
which the Company is not in compliance with Section 3(b) hereof.

     3.   Certain Agreements of the Company.  The Company hereby covenants and
          ---------------------------------
agrees as follows:

          (a)  Shares to be Fully Paid.  All Warrant Shares will, upon issuance
               -----------------------
in accordance with the terms of this Warrant, be validly issued, fully paid, and
nonassessable and free from all taxes, liens, claims and encumbrances.

          (b)  Reservation of Shares. During the Exercise Period, the Company
               ---------------------
shall at all times have authorized, and reserved for the purpose of issuance
upon exercise of this Warrant, a sufficient number of shares of Common Stock to
provide for the exercise in full of this Warrant (without giving effect to the
limitations on exercise set forth in Section 7(f) hereof).

          (c)  Listing. The Company shall promptly secure the listing of the
               -------
Warrant Shares upon each national securities exchange or automated quotation
system, if any, upon which shares of Common Stock are then listed or become
listed (subject to official notice of issuance upon exercise of this Warrant)
and shall maintain, so long as any other shares of Common Stock shall be so
listed, such listing of all Warrant shares; and the Company shall so list on
each national securities exchange or automated quotation system, as the case may
be, and shall maintain such listing of, any other shares of capital stock of the
Company issuable upon the exercise of this Warrant if and so long as any shares
of the same class shall be listed on such national securities exchange or
automated quotation system.

          (d)  Certain Actions Prohibited. The Company will not, by amendment of
               --------------------------
its charter or through any reorganization, transfer of assets, consolidation,
merger, dissolution, issue or sale of securities, or any other voluntary action,
avoid or seek to avoid the observance or performance of any of the terms to be
observed or performed by it hereunder, but will at all times in good faith
assist in the carrying out of all the provisions of this Warrant and in the
taking of all such action as may reasonably be requested by the holder of this
Warrant in order to protect the economic benefit inuring to the holder hereof
and the exercise privilege of the holder of this Warrant against dilution or
other impairment, consistent with the tenor and purpose of this Warrant. Without
limiting the generality of the foregoing, the Company (i) will not increase the
par value of any shares of Common Stock receivable upon the exercise of this
Warrant above the Exercise Price then in effect, and (ii) will take all such
actions as may be necessary or appropriate in order that the Company may validly
and legally issue fully paid and nonassessable shares of Common Stock upon the
exercise of this Warrant.

          (e)  Successors and Assigns. This Warrant will be binding upon any
               ----------------------
entity succeeding to the Company by merger, consolidation, or acquisition of all
or substantially all of the Company's assets.

                                       3
<PAGE>

          (f)  Blue Sky Laws. The Company shall, on or before the date of
               -------------
issuance of any Warrant Shares, take such actions as the Company shall
reasonably determine are necessary to qualify the Warrant Shares for, or obtain
exemption for the Warrant Shares for, sale to the holder of this Warrant upon
the exercise hereof under applicable securities or "blue sky" laws of the states
of the United States, and shall provide evidence of any such action so taken to
the holder of this Warrant prior to such date; provided, however, that the
Company shall not be required in connection therewith or as a condition thereto
to (a) qualify to do business in any jurisdiction where it would not otherwise
be required to qualify but for this Section 3(f), (b) subject itself to general
taxation in any such jurisdiction or (c) file a general consent to service of
process in any such jurisdiction.

     4.   Antidilution Provisions.  During the Exercise Period, the Exercise
          -----------------------
Price and the number of Warrant Shares issuable hereunder shall be subject to
adjustment from time to time as provided in this Section 4.

     In the event that any adjustment of the Exercise Price as required herein
results in a fraction of a cent, such Exercise Price shall be rounded up or down
to the nearest cent.

          (a)  Adjustment of Exercise Price.  Except as otherwise provided in
               ----------------------------
Sections 4(c) and 4(e) hereof, if and whenever during the Exercise Period the
Company issues or sells, or in accordance with Section 4(b) hereof is deemed to
have issued or sold, any shares of Common Stock for no consideration or for a
consideration per share less than the Market Price on the Measurement Date (as
such terms are hereinafter defined) (a "Dilutive Issuance"), then effective
immediately upon the Dilutive Issuance, the Exercise Price will be adjusted in
accordance with the following formula:

          E' = E x   O + P/M
                   ---------
                      CSDO

          where:

          E'   =    the adjusted Exercise Price;
          E    =    the Exercise Price on the Measurement Date;
          M    =    the Market Price on the Measurement Date;
          O    =    the number of shares of Common Stock outstanding immediately
                    prior to the Dilutive Issuance;
          P    =    the aggregate consideration, calculated as set forth in
                    Section 4(b) hereof, received by the Company upon such
                    Dilutive Issuance; and
          CSDO =    the total number of shares of Common Stock Deemed
                    Outstanding (as defined in Section 4(l)(i)) immediately
                    after the Dilutive Issuance.

Notwithstanding the foregoing, no adjustment shall be made pursuant to this
Section 4(a) if such adjustment would result in an increase in the Exercise
Price.

          (b)  Effect on Exercise Price of Certain Events.  For purposes of
               ------------------------------------------
determining the adjusted Exercise Price under Section 4(a) hereof, the following
will be applicable:

               (i)  Issuance of Rights or Options.  If the Company in any manner
                    -----------------------------
issues or grants any warrants, rights or options, whether or not immediately
exercisable, to subscribe for or to purchase Common Stock or other securities
exercisable, convertible into or exchangeable for

                                       4
<PAGE>

Common Stock ("Convertible Securities") (such warrants, rights and options to
purchase Common Stock or Convertible Securities are hereinafter referred to as
"Options") and the price per share for which Common Stock is issuable upon the
exercise of such Options is less than the Market Price in effect on the
Measurement Date ("Below Market Options"), then the maximum total number of
shares of Common Stock issuable upon the exercise of all such Below Market
Options (assuming full exercise, conversion or exchange of Convertible
Securities, if applicable) will, as of the date of the issuance or grant of such
Below Market Options, be deemed to be outstanding and to have been issued and
sold by the Company for such price per share. For purposes of the preceding
sentence, the "price per share for which Common Stock is issuable upon the
exercise of such Below Market Options" is determined by dividing (i) the total
amount, if any, received or receivable by the Company as consideration for the
issuance or granting of all such Below Market Options, plus the minimum
aggregate amount of additional consideration, if any, payable to the Company
upon the exercise of all such Below Market Options, plus, in the case of
Convertible Securities issuable upon the exercise of such Below Market Options,
the minimum aggregate amount of additional consideration payable upon the
exercise, conversion or exchange thereof (determined in accordance with the
calculation method set forth in (b)(ii) below) at the time such Convertible
Securities first become exercisable, convertible or exchangeable, by (ii) the
maximum total number of shares of Common Stock issuable upon the exercise of all
such Below Market Options (assuming full conversion of Convertible Securities,
if applicable). No further adjustment to the Exercise Price will be made upon
the actual issuance of such Common Stock upon the exercise of such Below Market
Options or upon the exercise, conversion or exchange of Convertible Securities
issuable upon exercise of such Below Market Options. If, in any case, the total
number of shares of Common Stock issuable upon exercise of any Below Market
Options or upon exercise, conversion or exchange of any Convertible Securities
(including Convertible Securities contemplated by Section 4(b)(ii) below) is
not, in fact, issued and the rights to exercise such Below Market Option or to
exercise, convert or exchange such Convertible Securities shall have expired or
terminated, the Exercise Price then in effect will be readjusted to the Exercise
Price which would have been in effect at the time of such expiration or
termination had such Below Market Options or Convertible Securities, to the
extent outstanding immediately prior to such expiration or termination (other
than in respect of the actual number of shares of Common Stock issued upon
exercise or conversion thereof), never been issued.

               (ii) Issuance of Convertible Securities.
                    ----------------------------------

                    (A)  If the Company in any manner issues or sells any
Convertible Securities, which Convertible Securities do not have a fluctuating
conversion or exercise price or exchange ratio, whether or not immediately
convertible (other than where the same are issuable upon the exercise of
Options) and the price per share for which Common Stock is issuable upon such
exercise, conversion or exchange (as determined pursuant to Section 4(b)(ii)(B)
if applicable) is less than the Market Price in effect on the Measurement Date,
then the maximum total number of shares of Common Stock issuable upon the
exercise, conversion or exchange of all such Convertible Securities will, as of
the date of the issuance of such Convertible Securities, be deemed to be
outstanding and to have been issued and sold by the Company for such price per
share. For the purposes of the preceding sentence, the "price per share for
which Common Stock is issuable upon such exercise, conversion or exchange" is
determined by dividing (i) the total amount, if any, received or receivable by
the Company as consideration for the issuance or sale of all such Convertible
Securities, plus the minimum aggregate amount of additional consideration, if
any, payable to the Company upon the exercise, conversion or exchange thereof at
the time such Convertible Securities first become exercisable, convertible or
exchangeable, by (ii) the maximum total number of shares of

                                       5
<PAGE>

Common Stock issuable upon the exercise, conversion or exchange of all such
Convertible Securities. No further adjustment to the Exercise Price will be made
upon the actual issuance of such Common Stock upon exercise, conversion or
exchange of such Convertible Securities.

                         (B)  If the Company in any manner issues or sells any
Convertible Securities with a fluctuating conversion or exercise price or
exchange ratio (a "Variable Rate Convertible Security"), then the "price per
share for which Common Stock is issuable upon such exercise, conversion or
exchange" for purposes of the calculation contemplated by Section 4(b)(ii)(A)
shall be deemed to be the lowest price per share which would be applicable
(assuming all holding period and other conditions to any discounts contained in
such Convertible Security have been satisfied) if the Market Price on the
Measurement Date of such Convertible Security were 75% of the actual Market
Price on such Measurement Date (the "Assumed Variable Market Price"). Further,
if the Market Price at any time or times thereafter is less then or equal to the
Assumed Variable Market Price last used for making any adjustment under this
Section 4 with respect to any Variable Rate Convertible Security, the Exercise
Price in effect at such time shall be readjusted to equal the Exercise Price
which would have resulted if the Assumed Variable Market Price at the time of
issuance of the Variable Rate Convertible Security had been 75% of the Market
Price existing at the time of the adjustment required by this sentence.

                 (iii)   Change in Option Price or Conversion Rate. If there is
                         -----------------------------------------
a change at any time in (i) the amount of additional consideration payable to
the Company upon the exercise of any Options; (ii) the amount of additional
consideration, if any, payable to the Company upon the exercise, conversion or
exchange of any Convertible Securities; or (iii) the rate at which any
Convertible Securities are convertible into or exchangeable for Common Stock (in
each such case, other than under or by reason of provisions designed to protect
against dilution and except when an adjustment is made pursuant to (ii)(B)
above), the Exercise Price in effect at the time of such change will be
readjusted to the Exercise Price which would have been in effect at such time
had such Options or Convertible Securities still outstanding provided for such
changed additional consideration or changed conversion rate, as the case may be,
at the time initially granted, issued or sold.

                 (iv)    Calculation of Consideration Received. If any Common
                         -------------------------------------
Stock, Options or Convertible Securities are issued, granted or sold for cash,
the consideration received therefor for purposes of this Warrant will be the
amount received by the Company therefor, after deduction of all commissions,
underwriting discounts or allowances and other expenses paid or incurred by the
Company in connection with such issuance, grant or sale. In case any Common
Stock, Options or Convertible Securities are issued or sold for a consideration
part or all of which shall be other than cash, including in the case of a
strategic or similar arrangement in which the other entity will provide services
to the Company, purchase services from the Company or otherwise provide
intangible consideration to the Company, the amount of the consideration other
than cash received by the Company (including the net present value of the
consideration expected by the Company for the provided or purchased services)
will be the fair market value of such consideration, except where such
consideration consists of securities, in which case the amount of consideration
received by the Company will be the Market Price thereof as of the date of
receipt.  In case any Common Stock, Options or Convertible Securities are issued
in connection with any merger or consolidation in which the Company is the
surviving corporation, the amount of consideration therefor will be deemed to be
the fair market value of such portion of the net assets and business of the non-
surviving corporation as is attributable to such Common Stock, Options or
Convertible Securities, as the case may be. Notwithstanding anything else herein
to the contrary, if Common Stock, Options or Convertible

                                       6
<PAGE>

Securities are issued, granted or sold in conjunction with each other as part of
a single transaction or in a series of related transactions, the holder of this
Warrant may elect to determine the amount of consideration deemed to be received
by the Company therefore by deducting the fair value of any type of securities
(the "Disregarded Securities") issued, granted or sold in such transaction or
series of transactions. If the holder makes an election pursuant to the
immediately preceding sentence, no adjustment to the Exercise Price shall be
made pursuant to this Section 4 for the issuance of the Disregarded Securities
or upon any conversion or exercise thereof. For example, if the Company were to
issue convertible notes having a face value of $1,000,000 and warrants to
purchase shares of Common Stock at an exercise price equal to the market price
of the Common Stock on the date of issuance of such warrants in exchange for
$1,000,000 of consideration, the fair value of the warrants would be subtracted
from the $1,000,000 of consideration received by the Company for the purposes of
determining whether the shares of Common Stock issuable upon conversion of the
convertible notes shall be deemed to be issued at a price per share below market
price and, if so, for purposes of determining any adjustment to the Exercise
Price hereunder as a result of the issuance of the Convertible Securities. The
Company shall calculate, using standard commercial valuation methods appropriate
for valuing such assets, the fair market value of any consideration other than
cash or securities; provided, however, that if the holder hereof does not agree
to such fair market value calculation within three business days after receipt
thereof from the Company, then such fair market value will be determined in good
faith by an investment banker or other appropriate expert of national reputation
selected by the Company and reasonably acceptable to the holder hereof, with the
costs of such appraisal to be borne by the Company.

               (v)  Issuances Pursuant to Existing Securities. If the Company,
                    -----------------------------------------
at any time during the Exercise Period, issues shares of Common Stock pursuant
to any antidilution or similar adjustments contained in a security or instrument
outstanding on and including the Issue Date but not included on Schedule 3(d) of
the Stock Purchase Agreement, then all shares of Common Stock so issued shall be
deemed to have been issued for no consideration.  If the Company, at any time
during the Exercise Period, issues shares of Common Stock pursuant to any
antidilution or similar adjustments contained in a security or instrument
without complying with Section 4(s) of the Stock Purchase Agreement, all shares
so issued shall be deemed to have been issued for no consideration.

               (vi) Exceptions to Adjustment of Exercise Price. No adjustment to
                    ------------------------------------------
the Exercise Price will be made (i) upon the exercise of any warrants, options
or convertible securities issued and outstanding on and including the Issue Date
and set forth on Schedule 3(d) of the Securities Purchase Agreement in
accordance with the terms of such securities or instruments as of such date
provided that the Company has complied with Section 4(s) of Securities Purchase
Agreement; (ii) upon the grant or exercise of any stock or options which may
hereafter be granted or exercised under any employee benefit plan of the Company
now existing or to be implemented in the future, so long as the issuance of such
stock or options is approved by a majority of the non-employee members of the
Board of Directors of the Company or a majority of the members of a committee of
non-employee directors established for such purpose; (iii) upon the issuance of
Common Shares and Warrants pursuant to and in accordance with the terms of the
Securities Purchase Agreement; or (iv) upon or exercise of the Warrants.

     (c)  Subdivision or Combination of Common Stock.  If the Company, at any
          ------------------------------------------
time during the Exercise Period, subdivides (by any stock split, stock dividend,
recapitalization, reorganization, reclassification or otherwise) its shares of
Common Stock into a greater number of shares, then, after the date of record for
effecting such subdivision, the Exercise Price in effect immediately prior to
such

                                       7
<PAGE>

subdivision will be proportionately reduced. If the Company, at any time during
the Exercise Period, combines (by reverse stock split, recapitalization,
reorganization, reclassification or otherwise) its shares of Common Stock into a
smaller number of shares, then, after the date of record for effecting such
combination, the Exercise Price in effect immediately prior to such combination
will be proportionately increased.

     (d)  Adjustment in Number of Shares.  Upon each adjustment of the Exercise
          ------------------------------
Price pursuant to the provisions of Section 4(c), the number of shares of Common
Stock issuable upon exercise of this Warrant at each such Exercise Price shall
be adjusted by multiplying a number equal to the Exercise Price in effect
immediately prior to such adjustment by the number of shares of Common Stock
issuable upon exercise of this Warrant at such Exercise Price immediately prior
to such adjustment and dividing the product so obtained by the adjusted Exercise
Price.

     (e)  Consolidation, Merger or Sale.  In case of any consolidation of the
          -----------------------------
Company with, or merger of the Company into, any other corporation, or in case
of any sale or conveyance of all or substantially all of the assets of the
Company other than in connection with a plan of complete liquidation of the
Company at any time during the Exercise Period, then as a condition of such
consolidation, merger or sale or conveyance, adequate provision will be made
whereby the holder hereof will have the right to acquire and receive upon
exercise of this Warrant in lieu of the shares of Common Stock immediately
theretofore acquirable upon the exercise of this Warrant, such shares of stock,
securities, cash or assets as may be issued or payable with respect to or in
exchange for the number of shares of Common Stock immediately theretofore
acquirable and receivable upon exercise of this Warrant had such consolidation,
merger or sale or conveyance not taken place.  In any such case, the Company
will make appropriate provision to insure that the provisions of this Section 4
hereof will thereafter be applicable as nearly as may be in relation to any
shares of stock or securities thereafter deliverable upon the exercise of this
Warrant.  The Company will not effect any consolidation, merger or sale or
conveyance unless prior to the consummation thereof, the successor corporation
(if other than the Company) assumes by written instrument the obligations under
this Warrant and the obligations to deliver to the holder hereof such shares of
stock, securities or assets as, in accordance with the foregoing provisions, the
holder may be entitled to acquire.  Notwithstanding the foregoing, in the event
of any consolidation of the Company with, or merger of the Company into, any
other corporation, or the sale or conveyance of all or substantially all of the
assets of the Company, at any time during the Exercise Period, the holder hereof
shall, at its option, have the right to receive, in connection with such
transaction, cash consideration equal to the fair market value of this Warrant
as determined in accordance with customary valuation methodology used in the
investment banking industry.

     (f)  Distribution of Assets.  In case the Company shall declare or make any
          ----------------------
distribution of its assets (or rights to acquire its assets) to holders of
Common Stock as a partial liquidating dividend, stock repurchase by way of
return of capital or otherwise (including any dividend or distribution to the
Company's shareholders of cash or shares (or rights to acquire shares) of
capital stock of a subsidiary) (a "Distribution"), at any time during the
Exercise Period, then the holder hereof shall be entitled upon exercise of this
Warrant for the purchase of any or all of the shares of Common Stock subject
hereto, to receive the amount of such assets (or rights) which would have been
payable to the holder had such holder been the holder of such shares of Common
Stock on the record date for the determination of shareholders entitled to such
Distribution.  If the Company distributes rights, warrants, options or any other
form of convertible securities and the right to exercise or convert such
securities would expire in accordance with their terms prior to the expiration
of the Exercise Period,

                                       8
<PAGE>

then the terms of such securities shall provide that such exercise or
convertibility right shall remain in effect until 30 days after the date the
holder hereof receives such securities pursuant to the exercise hereof.

     (g)  Notice of Adjustment.  Upon the occurrence of any event which requires
          --------------------
any adjustment of the Exercise Price, then, and in each such case, the Company
shall give notice thereof to the holder hereof, which notice shall state the
Exercise Price resulting from such adjustment and the increase or decrease in
the number of Warrant Shares purchasable at such price upon exercise, setting
forth in reasonable detail the method of calculation and the facts upon which
such calculation is based.  Such calculation shall be certified by the chief
financial officer of the Company.

     (h)  Minimum Adjustment of Exercise Price.  No adjustment of the Exercise
          ------------------------------------
Price shall be made in an amount of less than $.01, but any such lesser
adjustment shall be carried forward and shall be made at the time and together
with the next subsequent adjustment which, together with any adjustments so
carried forward, shall amount to not less than $.01.

     (i)  No Fractional Shares.  No fractional shares of Common Stock are to be
          --------------------
issued upon the exercise of this Warrant, but the Company shall pay a cash
adjustment in respect of any fractional share which would otherwise be issuable
in an amount equal to the same fraction of the Market Price of a share of Common
Stock on the date of such exercise.

     (j)  Other Notices.  In case at any time:
          -------------

               (i)   the Company shall declare any dividend upon the Common
Stock payable in shares of stock of any class or make any other distribution
(other than dividends or distributions payable in cash out of retained earnings
consistent with the Company's past practices with respect to declaring dividends
and making distributions) to the holders of the Common Stock;

               (ii)  the Company shall offer for subscription pro rata to the
holders of the Common Stock any additional shares of stock of any class or other
rights;

               (iii) there shall be any capital reorganization of the Company,
or reclassification of the Common Stock, or consolidation or merger of the
Company with or into, or sale of all or substantially all of its assets to,
another corporation or entity; or

               (iv)  there shall be a voluntary or involuntary dissolution,
liquidation or winding-up of the Company;

then, in each such case, the Company shall give to the holder of this Warrant
(a) notice of the date or estimated date on which the books of the Company shall
close or a record shall be taken for determining the holders of Common Stock
entitled to receive any such dividend, distribution, or subscription rights or
for determining the holders of Common Stock entitled to vote in respect of any
such reorganization, reclassification, consolidation, merger, sale, dissolution,
liquidation or winding-up and (b) in the case of any such reorganization,
reclassification, consolidation, merger, sale, dissolution, liquidation or
winding-up, notice of the date (or, if not then known, a reasonable estimate
thereof by the Company) when the same shall take place. Such notice shall also
specify the date on which the holders of Common Stock shall be entitled to
receive such dividend, distribution, or subscription rights or to exchange their
Common Stock for stock or other securities or property

                                       9
<PAGE>

deliverable upon such reclassification, consolidation, merger, sale,
dissolution, liquidation, or winding-up, as the case may be. Such notice shall
be given at least thirty (30) days prior to the record date or the date on which
the Company's books are closed in respect thereto. Failure to give any such
notice or any defect therein shall not affect the validity of the proceedings
referred to in clauses (i), (ii), (iii) and (iv) above. Notwithstanding the
foregoing, the Company shall publicly disclose the substance of any notice
delivered hereunder prior to delivery of such notice to the holder hereof.

          (k)  Certain Events.  If, at any time during the Exercise Period, any
               --------------
event occurs of the type contemplated by the adjustment provisions of this
Section 4 but not expressly provided for by such provisions, the Company will
give notice of such event as provided in Section 4(g) hereof, and the Company's
Board of Directors will make an appropriate adjustment in the Exercise Price and
the number of shares of Common Stock acquirable upon exercise of this Warrant at
each such Exercise Price so that the rights of the holder shall be neither
enhanced nor diminished by such event.

          (l)  Certain Definitions.
               -------------------

               (i)   "Common Stock," for purposes of this Section 4, includes
the Common Stock and any additional class of stock of the Company having no
preference as to dividends or distributions on liquidation, provided that the
shares purchasable pursuant to this Warrant shall include only Common Stock in
respect of which this Warrant is exercisable, or shares resulting from any
subdivision or combination of such Common Stock, or in the case of any
reorganization, reclassification, consolidation, merger, or sale of the
character referred to in Section 4(e) hereof, the stock or other securities or
property provided for in such Section.

               (ii)  "Common Stock Deemed Outstanding" shall mean the number of
shares of Common Stock actually outstanding (not including shares of Common
Stock held in the treasury of the Company), plus (x) in the case of any
adjustment required by Section 4(a) resulting from the issuance of any Below
Market Options, the maximum total number of shares of Common Stock issuable upon
the exercise of the Below Market Options for which the adjustment is required
(including any Common Stock issuable upon the conversion of Convertible
Securities issuable upon the exercise of such Below Market Options), and (y) in
the case of any adjustment required by Section 4(a) resulting from the issuance
of any Convertible Securities, the maximum total number of shares of Common
Stock issuable upon the exercise, conversion or exchange of the Convertible
Securities for which the adjustment is required, as of the date of issuance of
such Convertible Securities, if any.

               (iii) "Market Price," as of any date, (i) means the average of
the closing bid prices for the shares of Common Stock as reported on the Nasdaq
National/SmallCap Market by Bloomberg Financial Markets ("Bloomberg") for the
five consecutive business days immediately preceding such date, or (ii) if the
Nasdaq National/SmallCap Market is not the principal trading market for the
shares of Common Stock, the average of the reported closing bid prices reported
by Bloomberg on the principal trading market for the Common Stock during the
same period, or, if there is no bid price for such period, the last sales price
reported by Bloomberg for such period, or (iii) if the foregoing do not apply,
the last sale price of such security in the over-the-counter market on the pink
sheets or bulletin board for such security as reported by Bloomberg for such
period, or if no sale price is so reported for such security, the last bid price
of such security as reported by Bloomberg for such period, or (iv) if market
value cannot be calculated as of such date on any of the foregoing bases,

                                       10
<PAGE>

the Market Price shall be the average fair market value as reasonably determined
by an investment banking firm selected by the Company and reasonably acceptable
to the holder, with the costs of the appraisal to be borne by the Company. The
manner of determining the Market Price of the Common Stock set forth in the
foregoing definition shall apply with respect to any other security in respect
of which a determination as to market value must be made hereunder.

               (iv) "Measurement Date" means (i) for purposes of any private
offering of securities under Section 4(2) of the Securities Act of 1933, as
amended, the date that the Company enters into legally binding definitive
agreements for the issuance and sale of such securities, (ii) for purposes of
the issuance of securities issuable upon the exercise of any Options, the date
of issuance of such options, and (iii) for purposes of any other issuance of
securities, the date of issuance thereof.

     5.   Issue Tax.  The issuance of certificates for Warrant Shares upon the
          ---------
exercise of this Warrant shall be made without charge to the holder of this
Warrant or such shares for any issuance tax or other costs in respect thereof,
provided that the Company shall not be required to pay any tax which may be
payable in respect of any transfer involved in the issuance and delivery of any
certificate in a name other than the holder of this Warrant.

     6.   No Rights or Liabilities as a Shareholder.  This Warrant shall not
          -----------------------------------------
entitle the holder hereof to any voting rights or other rights as a shareholder
of the Company.  No provision of this Warrant, in the absence of affirmative
action by the holder hereof to purchase Warrant Shares, and no mere enumeration
herein of the rights or privileges of the holder hereof, shall give rise to any
liability of such holder for the Exercise Price or as a shareholder of the
Company, whether such liability is asserted by the Company or by creditors of
the Company.

     7.   Transfer, Exchange, Redemption and Replacement of Warrant.
          ---------------------------------------------------------

          (a)  Restriction on Transfer.  This Warrant and the rights granted to
               -----------------------
the holder hereof are transferable, in whole or in part, upon surrender of this
Warrant, together with a properly executed assignment in the form attached
hereto, at the office or agency of the Company referred to in Section 7(e)
below, provided, however, that any transfer or assignment shall be subject to
the conditions set forth in Section 7(f) hereof.  Each transferee of this
Warrant or any portion thereof shall be bound by the selling restrictions set
forth in Section 4(n) of the Securities Purchase Agreement, which Section is
incorporated herein by reference.  Until due presentment for registration of
transfer on the books of the Company, the Company may treat the registered
holder hereof as the owner and holder hereof for all purposes, and the Company
shall not be affected by any notice to the contrary.

          (b)  Warrant Exchangeable for Different Denominations. This Warrant is
               ------------------------------------------------
exchangeable, upon the surrender hereof by the holder hereof at the office or
agency of the Company referred to in Section 7(e) below, for new Warrants of
like tenor of different denominations representing in the aggregate the right to
purchase the number of shares of Common Stock which may be purchased hereunder,
each of such new Warrants to represent the right to purchase such number of
shares (at the Exercise Price therefor) as shall be designated by the holder
hereof at the time of such surrender.

          (c)  Replacement of Warrant.  Upon receipt of evidence reasonably
               ----------------------
satisfactory to the Company of the loss, theft, destruction, or mutilation of
this Warrant and, in the case of any such

                                       11
<PAGE>

loss, theft, or destruction, upon delivery of an indemnity agreement reasonably
satisfactory in form and amount to the Company, or, in the case of any such
mutilation, upon surrender and cancellation of this Warrant, the Company, at its
expense, will execute and deliver, in lieu thereof, a new Warrant of like tenor.

          (d)  Cancellation; Payment of Expenses.  Upon the surrender of this
               ---------------------------------
Warrant in connection with any transfer, exchange, or replacement as provided in
this Section 7, this Warrant shall be promptly canceled by the Company.  The
Company shall pay all taxes (other than securities transfer taxes) and all other
expenses (other than legal expenses, if any, incurred by the Holder or
transferees) and charges payable in connection with the preparation, execution,
and delivery of Warrants pursuant to this Section 7.  The Company shall
indemnify and reimburse the holder of this Warrant for all losses and damages
arising as a result of or related to any breach of the terms of this Warrant,
including costs and expenses (including legal fees) incurred by such holder in
connection with the enforcement of its rights hereunder.

          (e)  Warrant Register.  The Company shall maintain, at its principal
               ----------------
executive offices (or such other office or agency of the Company as it may
designate by notice to the holder hereof), a register for this Warrant, in which
the Company shall record the name and address of the person in whose name this
Warrant has been issued, as well as the name and address of each transferee and
each prior owner of this Warrant.

          (f)  Additional Restrictions on Exercise or Transfer.  In no event
               -----------------------------------------------
shall the holder hereof have the right to exercise any portion of this Warrant
for shares of Common Stock or to dispose of any portion of this Warrant to the
extent that such right to effect such exercise or disposition would result in
the holder or any of its affiliates beneficially owning more than 4.99% of the
outstanding shares of Common Stock.  For purposes of this Section 7(f),
beneficial ownership shall be determined in accordance with Section 13(d) of the
Securities Exchange Act of 1934, as amended, and Regulation 13D-G thereunder.
The restriction contained in this Section 7(f) may not be altered, amended,
deleted or changed in any manner whatsoever unless the holders of a majority of
the outstanding shares of Common Stock and the holder hereof shall approve, in
writing, such alteration, amendment, deletion or change.

     8.   Intentionally Omitted.
          ---------------------

     9.   Notices.  Any notices required or permitted to be given under the
          -------
terms of this Warrant shall be sent by certified or registered mail (return
receipt requested) or delivered personally or by courier or by confirmed
telecopy, and shall be effective five days after being placed in the mail, if
mailed, or upon receipt or refusal of receipt, if delivered personally or by
courier, or by confirmed telecopy, in each case addressed to a party.  The
addresses for such communications shall be:

               If to the Company:

               ELECTRIC FUEL CORPORATION
               120 Wood Avenue South
               Suite 300
               Iselin, New Jersey 08830
               Facsimile:  (732) 635-7101
               Attn:  Robert S. Erlich

                                       12
<PAGE>

                         Chief Financial Officer

               with a copy simultaneously transmitted by like means to:

                  HARRIS BEACH LLP
                  130 East Main Street
                  Rochester, New York 14604
                  Facsimile: (716) 232-6926
                  Attn.:  Thomas Willett, Esq.

                  and to:

                  Yaakov Har-Oz, Adv
                  Vice President and General Counsel
                  Electric Fuel Corporation
                  Western Industrial Park
                  P.O. Box 641
                  Bent Shemesh 99000
                  Israel
                  Tel No.: 972-2-990-6023
                  Fax No.: 972-2-990-6088

If to the holder, at such address as such holder shall have provided in writing
to the Company, or at such other address as such holder furnishes by notice
given in accordance with this Section 9.

     10.  Governing Law; Jurisdiction.  This Warrant shall be governed by and
          ---------------------------
construed in accordance with the laws of the State of Delaware.  The Company
irrevocably consents to the jurisdiction of the United States federal courts and
state courts located in the State of Delaware in any suit or proceeding based on
or arising under this Warrant and irrevocably agrees that all claims in respect
of such suit or proceeding may be determined in such courts. The Company
irrevocably waives any objection to the laying of venue and the defense of an
inconvenient forum to the maintenance of such suit or proceeding. The Company
further agrees that service of process upon the Company mailed by certified or
registered mail shall be deemed in every respect effective service of process
upon the Company in any such suit or proceeding.  Nothing herein shall affect
the holder's right to serve process in any other manner permitted by law.  The
Company agrees that a final non-appealable judgment in any such suit or
proceeding shall be conclusive and may be enforced in other jurisdictions by
suit on such judgment or in any other lawful manner.

     11.  Miscellaneous.
          -------------

          (a)  Amendments.  Except as provided in Section 7(f) hereof, this
               ----------
Warrant and any provision hereof may only be amended by an instrument in writing
signed by the Company and the holder hereof.

          (b)  Descriptive Headings.  The descriptive headings of the several
               --------------------
Sections of this Warrant are inserted for purposes of reference only, and shall
not affect the meaning or construction of any of the provisions hereof.

                                       13
<PAGE>

          (c)  Cashless Exercise.  Notwithstanding anything to the contrary
               -----------------
contained in this Warrant, this Warrant may be exercised at any time during the
Exercise Period by presentation and surrender of this Warrant to the Company at
its principal executive offices with a written notice of the holder's intention
to effect a cashless exercise, including a calculation of the number of shares
of Common Stock to be issued upon such exercise in accordance with the terms
hereof (a "Cashless Exercise").  In the event of a Cashless Exercise, in lieu of
paying the Exercise Price in cash, the holder shall surrender this Warrant for
that number of shares of Common Stock determined by multiplying the number of
Warrant Shares to which it would otherwise be entitled by a fraction, the
numerator of which shall be the difference between the then current Market Price
of a share of the Common Stock on the date of exercise and the Exercise Price,
and the denominator of which shall be the then current Market Price per share of
Common Stock.

          (d)  Business Day.  For purposes of this Warrant, the term "business
               ------------
day" means any day, other than a Saturday or Sunday or a day on which banking
institutions in the State of New York are authorized or obligated by law,
regulation or executive order to close.

                 [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]

                                       14
<PAGE>

     IN WITNESS WHEREOF, the Company has caused this Warrant to be signed by its
duly authorized officer.

                              ELECTRIC FUEL CORPORATION

                              By: _________________________________
                                  Name:
                                  Title:

                                       15
<PAGE>

                          FORM OF EXERCISE AGREEMENT

        (To be Executed by the Holder in order to Exercise the Warrant)

To:  ELECTRIC FUEL CORPORATION
     120 Wood Avenue South
     Suite 300
     Iselin, New Jersey 08830
     Facsimile:
     Attn:

     The undersigned hereby irrevocably exercises the right to purchase
_____________ shares of the Common Stock of ELECTRIC FUEL CORPORATION, a
corporation organized under the laws of the State of Delaware (the "Company"),
evidenced by the attached Warrant, and herewith [makes payment of the Exercise
Price with respect to such shares in full][elects to effect a Cashless Exercise
(as defined in Section 11(c) of such Warrant], all in accordance with the
conditions and provisions of said Warrant.

     The undersigned agrees not to offer, sell, transfer or otherwise dispose of
any Common Stock obtained on exercise of the Warrant, except under circumstances
that will not result in a violation of the Securities Act of 1933, as amended,
or any state securities laws.

[_]  The undersigned requests that the Company cause its transfer agent to
     electronically transmit the Common Stock issuable pursuant to this Exercise
     Agreement to the account of the undersigned or its nominee (which is
     _________________) with DTC through its Deposit Withdrawal Agent Commission
     System ("DTC Transfer"), provided that such transfer agent participates in
     the DTC Fast Automated Securities Transfer program.

[_]  In lieu of receiving the shares of Common Stock issuable pursuant to this
     Exercise Agreement by way of DTC Transfer, the undersigned hereby requests
     that the Company cause its transfer agent to issue and deliver to the
     undersigned physical certificates representing such shares of Common Stock.

     The undersigned requests that a Warrant representing any unexercised
portion hereof be issued, pursuant to the Warrant, in the name of the Holder and
delivered to the undersigned at the address set forth below:

Dated:_________________      _____________________________________
                                    Signature of Holder

                              _____________________________________
                                    Name of Holder (Print)

                                    Address:
                              _____________________________________
                              _____________________________________
                              _____________________________________

                                       16
<PAGE>

                              FORM OF ASSIGNMENT

     FOR VALUE RECEIVED, the undersigned hereby sells, assigns, and transfers
all the rights of the undersigned under the within Warrant, with respect to the
number of shares of Common Stock covered thereby set forth hereinbelow, to:

Name of Assignee              Address             No. of Shares
----------------              -------             -------------

, and hereby irrevocably constitutes and appoints ____________________________
as agent and attorney-in-fact to transfer said Warrant on the books of the
within-named corporation, with full power of substitution in the premises.

Dated: _____________________, ____

In the presence of

__________________

                              Name: ____________________________

                                    Signature: ________________________________
                                    Title of Signing Officer or Agent (if any):

                                              ________________________________
                                    Address:  ________________________________
                                              ________________________________

                                    Note: The above signature should correspond
                                          exactly with the name on the face of
                                          the within Warrant.

                                       17

Source: [{"source": "alea-institute/alea-institute/kl3m-data-edgar-agreements/train-00017-of-00352.parquet"}, [{"source": "alea-institute/alea-institute/kl3m-data-edgar-agreements/train-00017-of-00352.parquet"}]]