Document:

<PAGE>

                                                                 Exhibit 4.1

                         LOAN AND WARRANT AGREEMENT

         This Loan and Warrant Agreement is entered into and dated as of
October 14, 2004 (as amended, supplemented or otherwise modified from time
to time, together with the Disclosure Schedule, this "AGREEMENT"), among
Zoltek Companies, Inc., a Missouri corporation (the "BORROWER"), the Lenders
identified on the signature pages hereto (each, a "LENDER" and collectively,
the "LENDERS"), and Omicron Master Trust, a Bermuda business trust ("OMT"),
as administrative agent for the Lenders (in such capacity, the
"ADMINISTRATIVE AGENT").

         WHEREAS, subject to the terms and conditions set forth in this
Agreement, the Borrower desires to borrow certain sums from each of the
Lenders and, in consideration thereof issue certain convertible notes and
warrants to each of the Lenders, and each Lender, severally and not jointly,
desires to make a loan to the Borrower and accept such notes and warrants
from the Borrower, all pursuant to the terms set forth herein.

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

                                  ARTICLE I.

                                 DEFINITIONS

         1.1.     Definitions. In addition to the terms defined elsewhere in
                  -----------
this Agreement, when used herein the following terms shall have the meanings
set forth in this Section 1.1:

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

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

                  "BORROWER COUNSEL" means Thompson Coburn LLP.

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

                  "CAPITAL LEASE OBLIGATIONS" of any Person shall mean the
         obligations of such Person to pay rent or other amounts under any
         lease of (or other arrangement conveying the right to use) real or
         personal property, or a combination thereof, which obligations are
         required to be classified and accounted for as capital leases on a
         balance sheet of such

         Person under GAAP and, for the purposes of this Agreement, the amount
         of such obligations at any time shall be the capitalized amount
         thereof at such time determined in accordance with GAAP.

                  "CASH EQUIVALENTS" means:

                           (a) investments in debt obligations maturing within
one year from the date of acquisition thereof to the extent the principal
thereof and interest thereon is backed by the full faith and credit of the
United States of America;

                           (b) investments in commercial paper maturing within

180 days or less from the date of acquisition thereof and having, at such
date of acquisition, the highest credit rating obtainable from Standard &
Poor's Ratings Services, a division of The McGraw Hill Companies, or any
successor thereto, or from Moody's Investors Service, Inc. or any successor
thereto;

                           (c) investments in certificates of deposit, banker's
acceptances and time deposits maturing within 180 days from the date of
acquisition thereof issued or guaranteed by or placed with, and money market
deposit accounts issued or offered by, any domestic office of any commercial
bank organized under the laws of the United States of America or any State
thereof that has a combined capital and surplus and undivided profits of not
less than $500,000,000, in each case denominated in dollars; and

                           (d) money market mutual funds, at least 90% of the
investments of which are in cash or investments contemplated by clauses (a),
(b) and (c) of this definition.

                  "CLOSING" means the closing of the loan and the purchase
         and sale of Securities pursuant to Section 2.1.

                  "CLOSING DATE" means the Business Day immediately
         following the date on which all the conditions set forth in
         Sections 6.1 and 6.2 hereof are satisfied or waived by the
         appropriate party.

                  "COLLATERAL SECURITY" all of the property subject to the
         Lien of the Security Agreement or the Mortgage.

                  "COMMISSION" means the U.S. Securities and Exchange
         Commission.

                  "COMMON STOCK" means the common stock of the Borrower,
         $0.01 par value per share, and any securities into which such
         common stock may hereafter be reclassified.

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

                                     2

                  "DISCLOSURE SCHEDULE" means the Disclosure Schedule
attached to this Agreement.

                  "DOLLARS" means U.S. dollars.

                  "EFFECTIVE DATE" means the date that a Registration
         Statement is first declared effective by the Commission.

                  "ELIGIBLE MARKET" means any of the New York Stock
         Exchange, the American Stock Exchange, the Nasdaq National Market
         or the Nasdaq SmallCap Market.

                  "EQUITY INTEREST" means (i) shares of corporate stock,
         partnership interests, membership interests and any other interest
         that confers on a Person the right to receive a share of the
         profits and losses of, or a distribution of the assets of, the
         issuing Person and (ii) all warrants, options or other rights to
         acquire any Equity Interest set forth in clause (i) of this defined
         term.

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

                  "EVENT OF DEFAULT" has the meaning assigned to such term
         in the Notes.

                  "GAAP" means U.S. generally accepted accounting principles
         as in effect from time to time applied on a consistent basis during
         the periods involved.

                  "INTERCREDITOR AGREEMENT" has the meaning set forth in
         Section 2.2(a)(viii).

                  "LENDER PERCENTAGE" means, with respect to any Lender as
         of any date, the percentage equal to a fraction the numerator of
         which shall be the outstanding principal balance of such Lender's
         Notes and the denominator of which shall be the aggregate
         outstanding principal balance of all Notes.

                  "LIEN" means (a) any lien, charge, claim, security
         interest, encumbrance, right of first refusal or other restriction,
         wherever created or charged, (b) with respect to any property, the
         interest of a vendor or a lessor under any conditional sale
         agreement, capital lease or title retention agreement relating to
         such property, and (c) in the case of securities, any purchase
         option, call or similar right of a third party with respect to such
         securities.

                  "LOAN AMOUNT" means, with respect to each Lender, the loan
         amount indicated below such Lender's name on its signature page of
         this Agreement.

                  "NOTES" means, collectively, each of the senior secured
         convertible promissory notes, due on the date that is 42 months
         after the Closing Date, each issuable by the Borrower to one of the
         Lenders pursuant to the terms hereof, in the form of Exhibit A
                                                              ---------
         hereto.

                  "OPCO" means Zoltek Vegyipari Reszvenytarsasag, a
         corporation formed under the laws of the Republic of Hungary, whose
         registered office is at H-2537 Nyergesujfalu,

                                     3

         Varga Jozsef ter 1., registered by the Court of Komarom-Esztergom
         county acting as Court of Registration under registration
         No. 11-10-001447.

                  "PERMITTED LIENS" means: (a) liens for taxes, assessments
         or governmental charges not delinquent or being contested in good
         faith and by appropriate proceedings and for which adequate
         reserves in accordance with GAAP are maintained on the books of the
         Borrower or the applicable Subsidiary; (b) liens arising out of
         deposits in connection with workers' compensation, unemployment
         insurance, old age pensions or other social security or retirement
         benefits legislation; (c) deposits or pledges to secure bids,
         tenders, contracts (other than contracts for the payment of money),
         leases, statutory obligations, surety and appeal bonds, and other
         obligations of like nature arising in the ordinary course of
         business of the Borrower or a Subsidiary; (d) liens imposed by law,
         such as mechanics', workers', materialmens', carriers' or other
         like liens arising in the ordinary course of business of the
         Borrower or a Subsidiary which secure the payment of obligations
         which are not past due or which are being diligently contested in
         good faith by appropriate proceedings and for which adequate
         reserves in accordance with GAAP are maintained on the books of the
         Borrower or the applicable Subsidiary; (e) liens existing on the
         Closing Date and disclosed in Section 1.1 of the Disclosure
         Schedule, and any extensions, renewals or replacements thereof,
         provided that no additional property shall be encumbered by such
         liens and the unpaid principal amount of the Debt secured thereby
         shall not be increased on or after the date of any such extension,
         renewal or replacement; (f) purchase money security interests or
         liens for the purchase of fixed assets to be used in the business
         of the Borrower or a Subsidiary, securing solely the fixed assets
         so purchased and the proceeds thereof; (g) capitalized leases which
         do not violate any provision of this Agreement; (h) liens of
         commercial depository institutions, arising in the ordinary course
         of business, constituting a statutory or common law right of setoff
         against amounts on deposit with such institution; (i) liens in
         favor of the Administrative Agent and the Lenders pursuant to the
         Transaction Documents; and (j) rights of way, zoning restrictions,
         easements and similar encumbrances affecting the Borrowers' real
         property which do not materially interfere with the use of such
         property.

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

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

                  "REGISTRATION STATEMENT" means one or more registration
         statements meeting the requirements of the Registration Rights
         Agreement and covering the resale of Underlying Shares by the
         Lenders who shall be named "selling shareholders" thereunder.

                  "REGISTRATION RIGHTS AGREEMENT" means the Registration
         Rights Agreement, dated as of the date of this Agreement, among the
         Borrower and the Lenders, in the form of Exhibit B hereto.
                                                  ---------

                                     4

                  "RELATED PARTIES" means, with respect to any specified
         Person, such Person's Affiliates and the respective directors,
         officers, employees, agents and advisors of such Person and such
         Person's Affiliates.

                  "REQUIRED LENDERS" means one or more Lenders that made one
         or more Loans in an initial principal amount representing greater
         than 50% of the aggregate initial principal amount of all Loans.

                  "REQUIRED MINIMUM" means, as of any date, the maximum
         aggregate number of shares of Common Stock then issued or
         potentially issuable in the future pursuant to the Transaction
         Documents that the Borrower is obligated to issue, whether
         contingently or otherwise, including, without limitation, any
         Underlying Shares issuable upon exercise or conversion (as
         applicable) in full of all Warrants and Notes and assuming that any
         previously unconverted Notes are held until the maturity date
         thereof, and all interest on the Notes is paid with shares of
         Common Stock.

                  "RESTRICTED PAYMENT" means, as to any Person, (a) any
         dividend or other distribution by such Person (whether in cash,
         securities or other property) with respect to any Equity Interests
         of such Person, (b) any payment (whether in cash, securities or
         other property), including any sinking fund or similar deposit, on
         account of the purchase, redemption, retirement, acquisition,
         cancellation or termination of any such Equity Interest, (c) the
         acquisition for value by such Person of any Equity Interests issued
         by such Person or any other Person that controls such Person and
         (d) any payment by such Person to its officers or directors other
         than (i) in compliance with existing Borrower stock option plans,
         (ii) salaries in the ordinary course of business, and (iii)
         payments required by the terms of the 2003 Debentures (as defined
         in the Notes), the 2004 Debentures (as defined in the Notes) and
         the Notes, in each case to the extent held by such officers and
         directors.

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

                  "SECURITIES" means the Notes, the Warrants and the
         Underlying Shares issuable under the Notes and the Warrants.

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

                  "SECURITY AGREEMENT" has the meaning set forth in
         Section 2.2(a)(v).

                  "SHAREHOLDER AGREEMENT" has the meaning set forth in
         Section 2.2(a)(vii).

                  "STRATEGIC TRANSACTION" means a transaction or
         relationship in which (1) the Borrower issues shares of Common
         Stock to a Person which the Board of Directors of the Borrower
         determines in good faith is, itself or through its Subsidiaries, an
         operating company in a business synergistic with the business of
         the Borrower and (2) the Borrower expects to receive benefits in
         addition to the investment of funds, but shall not

                                     5

         include a transaction in which the Borrower issues securities
         primarily for the purpose of raising capital or to an entity whose
         primary business is investing in securities.

                  "SUBSIDIARY" means, with respect to any Person (the
         "PARENT") at any date, any corporation, limited liability company,
         partnership, association or other entity the accounts of which
         would be consolidated with those of the parent in the parent's
         consolidated financial statements if such financial statements were
         prepared in accordance with GAAP as of such date, as well as any
         other corporation, limited liability company, partnership,
         association or other entity of which securities or other ownership
         interests representing 50% or more of the equity or 50% or more of
         the ordinary voting power is or, in the case of a partnership, 50%
         or more of the general partnership interests are, as of such date,
         owned, controlled or held by the parent or one or more subsidiaries
         of the parent. Unless otherwise expressly provided, "Subsidiary"
         shall mean a Subsidiary of the Borrower.

                  "TRADING DAY" means (i) a day on which the Common Stock is
         traded on a Trading Market (other than the OTC Bulletin Board), or
         (ii) if the Common Stock is not traded on a Trading Market (other
         than the OTC Bulletin Board), a day on which the Common Stock is
         traded in the over-the-counter market, as reported by the OTC
         Bulletin Board or the National Quotation Bureau Incorporated, or
         (iii) if the Common Stock is not traded on any Trading Market and
         not quoted on the OTC Bulletin Board, a day on which the Common
         Stock is quoted in the over-the-counter market as reported by the
         National Quotation Bureau Incorporated (or any similar organization
         or agency succeeding to its functions of reporting prices);
         provided, that in the event that the Common Stock is not listed or
         quoted as set forth in (i), (ii) and (iii) hereof, then Trading Day
         shall mean a Business Day.

                  "TRADING MARKET" means Nasdaq National Market, the OTC
         Bulletin Board or any Eligible Market on which the Common Stock is
         then listed or quoted.

                  "TRANSACTION DOCUMENTS" means this Agreement, the Notes,
         the Warrants, the Registration Rights Agreement, the Security
         Agreement, the Mortgage, the Guarantee Agreement, the Intercreditor
         Agreement and any other documents or agreements executed or
         delivered in connection with the transactions contemplated
         hereunder.

                  "UNDERLYING SHARES" means the shares of Common Stock
         issuable upon conversion of the Notes, as payment of interest
         thereunder, and upon exercise of the Warrants, and in satisfaction
         of any other obligation of the Borrower to issue shares of Common
         Stock pursuant to the Transaction Documents.

                  "WARRANTS" means the Common Stock purchase warrants in the
         form of Exhibit C, issuable pursuant to Section 2.2(a)(ii).
                 ---------

                                     6

                                  ARTICLE II.

                           LOAN; PURCHASE AND SALE

         2.1.     Closing. Subject to the terms and conditions set forth in
                  -------
this Agreement, at the Closing each Lender shall severally make a loan to
the Borrower in a principal amount equal to the Loan Amount with respect to
such Lender (with respect to each Lender, a "LOAN") and, in consideration
thereof, Borrower shall execute and deliver to such Lender a Note evidencing
such Loan and a Warrant. The Closing shall take place at the offices of
Bryan Cave LLP, 1290 Avenue of the Americas, New York, NY 10104 on the date
this Agreement is executed and delivered by the parties or at such other
location or time as the parties may agree.

         2.2.     Closing Deliveries.
                  ------------------

                  (a)  At the Closing, the Borrower shall deliver or cause
to be delivered to each Lender the following, appropriately dated (the
"BORROWER DELIVERABLES"):

                       (i)    a Note, in the aggregate principal amount of the
         Loan Amount indicated below such Lender's name on its signature page
         of this Agreement, registered in the name of such Lender;

                       (ii)   a Warrant, duly executed by the Borrower and
         registered in the name of such Lender, pursuant to which such Lender
         shall have the right to acquire 30% of the number of shares of Common
         Stock issuable upon an assumed conversion in full of the Note referred
         to in Section 2.2(a)(i);

                       (iii)  a mortgage agreement, duly executed by Opco, the
         Administrative Agent and each other Lender, in the form attached
         hereto as Exhibit D (as amended, supplemented or otherwise modified
                   ---------
         from time to time, the "MORTGAGE");

                       (iv)   a guarantee agreement, duly executed by Opco, the
         Borrower and each other Lender, in the form attached hereto as
         Exhibit E (as amended, supplemented or otherwise modified from time
         ---------
         to time, the "GUARANTEE AGREEMENT");

                       (v)    a security agreement, duly executed by Opco, the
         Administrative Agent and each other Lender, in the form attached
         hereto as Exhibit F (as amended, supplemented or otherwise modified
                   ---------
         from time to time, the "SECURITY AGREEMENT");

                       (vi)   the Registration Rights Agreement, duly executed
         by the Borrower;

                       (vii)  a letter agreement, duly executed by Zsolt Rumy,
         Chief Executive Officer of the Borrower, in his individual
         capacity, and accepted and agreed to by the Borrower (as amended,
         supplemented or otherwise modified from time to time, the
         "SHAREHOLDER AGREEMENT");

                       (viii) an intercreditor agreement, duly executed by the
         Borrower, Opco, the Administrative Agent and each other Lender, in
         the form attached hereto as Exhibit H
                                     ---------

                                     7

         (as amended, supplemented or otherwise modified from time to time,
         the "INTERCREDITOR AGREEMENT");

                       (ix)   evidence of proper applications made to, and
         approvals received from, each Trading Market with respect to the
         trading of Underlying Securities thereon;

                       (x)    the legal opinion of Borrower Counsel, in agreed
         form, addressed to the Administrative Agent and such Lender;

                       (xi)   a legal opinion of Hungarian counsel to the
         Borrower and Opco as to certain matters (including, without limitation,
         perfection, tax and qualification matters) arising under the
         Guarantee Agreement and the Security Agreement, all in form and
         substance satisfactory to the Administrative Agent and such Lender;

                       (xii)  any and all consents from all Persons that are
         necessary or reasonably required by the Administrative Agent or
         such Lender in connection with the Transaction Documents,
         including, without limitation (1) the consents and certificates
         referred to in Section 6.1(g), and (2) relating to the Republic of
         Hungary or any local governmental authority contained therein;

                       (xiii) appropriate lien and record search reports showing
         that there are no liens on the collateral security granted under
         the Mortgage and the Security Agreement, other than Liens expressly
         permitted thereby; and

                       (xiv)  any other document reasonably requested by the
         Administrative Agent or such Lender.

                  (b)  At the Closing, each Lender shall deliver or cause to be
delivered to the Borrower the following:

                       (i)    the Loan Amount indicated below such Lender's name
         on the signature page of this Agreement, in United States dollars and
         in immediately available funds, by wire transfer to an account
         designated in writing by the Borrower for such purpose;

                       (ii)   the Registration Rights Agreement, duly executed
         by such Lender;

                       (iii)  the Mortgage, duly executed by such Lender;

                       (iv)   the Intercreditor Agreement duly executed by such
         Lender;

                       (v)    the Guarantee Agreement duly executed by such
         Lender; and

                       (vi)   the Security Agreement, duly executed by such
         Lender.

                                     8

                                 ARTICLE III.

                       REPRESENTATIONS AND WARRANTIES

         3.1.     Representations and Warranties of the Borrower. Subject to
                  ----------------------------------------------
the qualifications and disclosures set forth beside the specific reference to
this Agreement in the Disclosure Schedule (the parties hereto agreeing that
a reference in the Disclosure Schedule to a particular Section shall only
apply to the representation in such Section), the Borrower hereby makes the
following representations and warranties to the Administrative Agent and
each Lender:

                  (a)  Subsidiaries. The Borrower does not directly or
                       ------------
indirectly control or own any Equity Interest in any Subsidiary, other than
as listed in Section 3.1(a) of the Disclosure Schedule. Except as disclosed
in Section 3.1(a) of the Disclosure Schedule, the Borrower owns, directly or
indirectly, all of the Equity Interests of each Subsidiary free and clear of
any Lien, and all the issued and outstanding Equity Interests of each
Subsidiary are validly issued and are fully paid, non-assessable and free of
preemptive and similar rights.

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

                  (c)  Authorization; Enforcement. Each of the Borrower and
                       --------------------------
Opco has the requisite corporate power and authority to enter into and to
consummate the transactions contemplated by each of the Transaction
Documents and otherwise to carry out its obligations thereunder. The
execution and delivery by the Borrower and Opco of each of the Transaction
Documents to which it is a party and the consummation by it of the
transactions contemplated thereunder have been duly authorized by all
necessary corporate action on the part of the Borrower or Opco, as the case
may be, and no further consent or action is required by the Borrower, Opco,
or their respective Boards of Directors or shareholders. Each of the
Transaction Documents has been (or upon delivery will be) duly executed by
the Borrower or Opco, as the case may be, and, when delivered in accordance
with the terms hereof, will constitute the valid and binding obligation of
the Borrower and Opco, to the extent a party thereto, enforceable against
the Borrower or Opco, as the case may be, in accordance with its

                                     9

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 equitable principles of general application.

                  (d)  No Conflicts. The execution, delivery and performance
                       ------------
of the Transaction Documents by the Borrower and Opco and the consummation
by the Borrower and Opco of the transactions contemplated thereby do not and
will not (i) conflict with or violate any provision of the Borrower's or any
Subsidiary's certificate or articles of incorporation, bylaws or other
organizational or charter documents, or (ii) conflict with, or constitute a
default (or an event that with notice or lapse of time or both would become
a default) under, or give to others any rights of termination, amendment,
acceleration or cancellation (with or without notice, lapse of time or both)
of, any agreement, contract, credit facility, debt or other instrument
(evidencing debt of the Borrower or a Subsidiary or otherwise) or other
understanding to which the Borrower or any Subsidiary is a party or by which
any property or asset of the Borrower or any Subsidiary is bound or
affected, or (iii) result in a violation of any law, rule, regulation,
order, judgment, injunction, decree or other restriction of any court or
governmental authority to which the Borrower or any Subsidiary is subject
(including federal and state securities laws and regulations) and the rules
and regulations of any self-regulatory organization to which the Borrower or
its securities are subject, or by which any property or asset of the
Borrower or a Subsidiary is bound or affected; except in the case of each of
clauses (ii) and (iii), such as could not, individually or in the aggregate,
have or reasonably be expected to result in a Material Adverse Effect.
Payments of cash on account of principal of or interest under the Notes,
upon any Event of Default under the Notes, as a result of liquidated damages
under any Transaction Document or upon a Buy-In under and as such term is
defined in a Warrant will not require the consent of, any payment to, or the
springing of any Lien in favor of any lender to or creditor of the Borrower
or any Subsidiary (under a credit facility, loan agreement or otherwise) and
will not result in a default under any such credit facilities, loans or
other agreements.

                  (e)  Filings, Consents and Approvals. Neither the Borrower
                       -------------------------------
nor Opco is required to obtain any consent, waiver, authorization or order
of, give any notice to, or make any filing or registration with, any court
or other federal, state, local or other governmental authority or other
Person in connection with the execution, delivery and performance by it of
any Transaction Document to which it is a party, other than (i) the filing
with the Commission of one or more Registration Statements in accordance
with the requirements of the Registration Rights Agreement, (ii) the
application(s) to the Trading Market on which the Common Stock is listed for
trading for the listing of the Underlying Shares for trading thereon in the
time and manner required thereby which have been made and obtained prior to
the Closing Date, and (iii) the requirements, disclosed in Section 3.1(e) of
the Disclosure Schedule, of Hungarian laws, rules and regulations with
respect to the Guarantee Agreement, the Mortgage and the Security Agreement.

                  (f)  Issuance of the Securities. Each of the Securities
                       --------------------------
have been duly authorized and, when issued and paid for in accordance with
the Transaction Documents or otherwise, have been or, when issued, will be
duly and validly issued, fully paid and nonassessable, free and clear of all
Liens. The Borrower has reserved from its duly authorized capital stock a
number of shares of Common Stock issuable upon conversion of the Notes (as

                                     10

may be issued on account of interest thereunder) and exercise of the
Warrants, which number of reserved shares is not less than the Required
Minimum calculated as of the date hereof.

                  (g)  Capitalization. The number of shares and type of all
                       --------------
authorized, issued and outstanding capital stock of the Borrower, and all
shares of Common Stock reserved for issuance under the Borrower's various
option and incentive plans and all warrants, debentures and Common Stock
Equivalents (on a pro forma basis immediately after giving effect to the
transactions contemplated by the Transaction Documents), is set forth in
Section 3.1(g) of the Disclosure Schedule. Except as set forth in Section
3.1(g) of the Disclosure Schedule, no securities of the Borrower are
entitled to preemptive or similar rights, and no Person has any right of
first refusal, preemptive right, right of participation, or any similar
right to participate in the transactions contemplated by the Transaction
Documents. Except as a result of the purchase and sale of the Securities and
except as set forth in Section 3.1(g) of the Disclosure Schedule, there are
no outstanding options, warrants, scrip rights to subscribe to, calls or
commitments of any character whatsoever relating to, or securities, rights
or obligations convertible into or exchangeable for, or giving any Person
any right to subscribe for or acquire, any shares of Common Stock, or any
contract, commitment, understanding or arrangement by which the Borrower is
or may become bound to issue additional shares of Common Stock or Common
Stock Equivalents. The issue and sale of the Securities will not,
immediately or with the passage of time, obligate the Borrower to issue
shares of Common Stock or other securities to any Person (other than the
Lenders) and will not result in a right of any holder of Borrower securities
to adjust the exercise, conversion, exchange or reset price under such
securities.

                  (h)  SEC Reports; Financial Statements. The Borrower has
                       ---------------------------------
filed all reports required to be filed by it under the Exchange Act,
including pursuant to Section 13(a) or 15(d) thereof, for the twelve months
preceding the date hereof (or such shorter period as the Borrower was
required by law to file such material) (the foregoing materials being
collectively referred to herein as the "SEC REPORTS" and, together with this
Agreement and Section 3.1(h) of the Disclosure Schedule to this Agreement,
the "DISCLOSURE MATERIALS") on a timely basis or has timely filed a valid
extension of such time of filing and has filed any such SEC Reports prior to
the expiration of any such extension. As of their respective dates, the SEC
Reports complied in all material respects with the requirements of the
Securities Act and the Exchange Act and the rules and regulations of the
Commission promulgated thereunder, and none of the SEC Reports, when filed,
contained any untrue statement of a material fact or omitted to state a
material fact required to be stated therein or necessary in order to make
the statements therein, in light of the circumstances under which they were
made, not misleading. The financial statements of the Borrower included in
the SEC Reports comply in all material respects with applicable accounting
requirements and the rules and regulations of the Commission with respect
thereto as in effect at the time of filing. Such financial statements have
been prepared in accordance GAAP, except as may be otherwise specified in
such financial statements or the notes thereto, and fairly present in all
material respects the financial position of the Borrower and its
consolidated Subsidiaries as of and for the dates thereof and the results of
operations and cash flows for the periods then ended, subject, in the case
of unaudited statements, to normal, immaterial, year-end audit adjustments
and the absence of footnotes. All material agreements to which the Borrower
or any Subsidiary is a party or to which the property or assets of the
Borrower or any Subsidiary are subject are included as part of or
specifically identified in the SEC Reports.

                                     11

                  (i)  Press Releases. The press releases disseminated by
                       --------------
the Borrower during the two (2) years preceding the date of this Agreement
taken as a whole do not contain any untrue statement of a material fact or
omit 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.

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

                  (k)  Litigation. There is no Action which (i) adversely
                       ----------
affects or challenges the legality, validity or enforceability of any of the
Transaction Documents or the Securities or (ii) except as otherwise set
forth in the SEC Reports, could, individually or in the aggregate, have or
reasonably be expected to result in a Material Adverse Effect. Neither the
Borrower nor any Subsidiary, nor any director or officer thereof, is or has
been the subject of any Action involving a claim of violation of or
liability under federal or state securities laws or a claim of breach of
fiduciary duty. There has not been, and to the knowledge of the Borrower,
there is not pending or contemplated, any investigation by the Commission
involving the Borrower or any current or former director or officer of the
Borrower. The Commission has not issued any stop order or other order
suspending the effectiveness of any registration statement filed by the
Borrower or any Subsidiary under the Exchange Act or the Securities Act.

                  (l)  Labor Relations. No material labor dispute exists or,
                       ---------------
to the knowledge of the Borrower, is imminent with respect to any of the
employees of the Borrower or any Subsidiary.

                  (m)  Compliance. Neither the Borrower nor any Subsidiary
                       ----------
(i) is in default under or in violation of (and no event has occurred that
has not been waived that, with notice or lapse of time or both, would result
in a default by the Borrower or any Subsidiary under), nor has the Borrower
or any Subsidiary received notice of a claim that it is in default under or
that it is in violation of, any indenture, loan or credit agreement or any
other agreement or instrument to which it is a party or by which it or any
of its properties is bound (other than defaults or violations that have been
cured or waived), (ii) is in violation of any order of any court, arbitrator
or governmental body, or (iii) is or has been in violation of any statute,
rule or regulation of any governmental authority, including without
limitation all foreign, federal, state and local laws

                                     12

relating to taxes, environmental protection, occupational health and safety,
product quality and safety and employment and labor matters, except in each
case as could not, individually or in the aggregate, have or could not
reasonably be expected to result in a Material Adverse Effect. The Borrower
is in compliance with the applicable requirements of the Sarbanes-Oxley Act
of 2002, as amended, and the rules and regulations thereunder promulgated by
the Commission, except where such noncompliance could not have or reasonably
be expected to result in a Material Adverse Effect. The Borrower is not, to
the best of its knowledge (after due inquiry), in default in any material
respect with the terms, conditions or covenants set forth in (i) the
Securities Purchase Agreement, or the debentures or warrants issued pursuant
thereto, among the Borrower and the Lenders, dated as of December 19, 2003
or (ii) the Securities Purchase Agreement, or the debentures or warrants
issued pursuant thereto, among the Borrower and the Lenders, dated as of
March 11, 2004.

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

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

                  (p)  Patents and Trademarks. The Borrower and the
                       ----------------------
Subsidiaries have, or have rights to use, all patents, patent applications,
trademarks, trademark applications, service marks, trade names, copyrights,
licenses and other similar rights that are necessary or material for use in
connection with their respective businesses as described in the SEC Reports
and which the failure to so have could not, individually or in the
aggregate, have or reasonably be expected to result in a Material Adverse
Effect (collectively, the "INTELLECTUAL PROPERTY RIGHTS"). Neither the
Borrower nor any Subsidiary has received a written notice that any
Intellectual Property Right violates or infringes upon the rights of any
Person. Except as set forth in the SEC Reports, to the knowledge of the
Borrower, all such Intellectual Property Rights are enforceable and there is
no existing infringement by another Person of any of the Intellectual
Property Rights.

                  (q)  Insurance. The Borrower and the Subsidiaries are insured
                       ---------
by insurers of recognized financial responsibility against such losses and
risks and in such amounts as are prudent and customary in the businesses in
which the Borrower and the Subsidiaries are engaged. Neither the Borrower
nor any Subsidiary has any reason to believe that it will not be

                                     13

able to renew its existing insurance coverage as and when such coverage expires
or to obtain similar coverage from similar insurers as may be necessary to
continue its business without a significant increase in cost.

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

                  (s)  Internal Accounting Controls. The Borrower and the
                       ----------------------------
Subsidiaries maintain a system of internal accounting controls sufficient to
provide reasonable assurance that (i) transactions are executed in
accordance with management's general or specific authorizations, (ii)
transactions are recorded as necessary to permit preparation of financial
statements in conformity with generally accepted accounting principles and
to maintain asset accountability, (iii) access to assets is permitted only
in accordance with management's general or specific authorization, and (iv)
the recorded accountability for assets is compared with the existing assets
at reasonable intervals and appropriate action is taken with respect to any
differences. The Borrower has established disclosure controls and procedures
(as defined in Exchange Act Rules 13a-14 and 15d-14) for the Borrower and
designed such disclosure controls and procedures to ensure that material
information relating to the Borrower, including its Subsidiaries, is made
known to the certifying officers by others within those entities,
particularly during the period in which the Borrower's Form 10-K or 10-Q, as
the case may be, is being prepared. The Borrower's certifying officers have
evaluated the effectiveness of the Borrower's controls and procedures in
accordance with Item 307 of Regulation S-K under the Exchange Act for the
Borrower's most recently ended fiscal quarter or fiscal year-end (such date,
the "EVALUATION DATE"). The Borrower presented in its most recently filed
Form 10-K or Form 10-Q the conclusions of the certifying officers about the
effectiveness of the disclosure controls and procedures based on their
evaluations as of the Evaluation Date. Since the Evaluation Date, there have
been no significant changes in the Borrower's internal controls (as such
term is defined in Item 308(c) of Regulation S-K under the Exchange Act) or,
to the Borrower's knowledge, in other factors that could significantly
affect the Borrower's internal controls.

                  (t)  Solvency. Based on the financial condition of the
                       --------
Borrower as of the Closing Date (and assuming that the Closing shall have
occurred), (i) the Borrower's fair saleable value of its assets exceeds the
amount that will be required to be paid on or in respect of the Borrower's
existing debts and other liabilities (including known contingent
liabilities) as they mature; (ii) the Borrower's assets do not constitute
unreasonably small capital to carry on its business for the current fiscal
year as now conducted and as proposed to be conducted including its capital
needs taking into account the particular capital requirements of the
business conducted by the Borrower, and projected capital requirements and
capital availability thereof; and (iii) the current cash flow of the
Borrower, together with the proceeds the Borrower would receive, were it to
liquidate all of its assets, after taking into account all anticipated uses
of the cash, would be

                                     14

sufficient to pay all amounts on or in respect of its debt when such amounts
are required to be paid. The Borrower does not intend to incur debts beyond
its ability to pay such debts as they mature (taking into account the timing
and amounts of cash to be payable on or in respect of its debt).

                  (u)  Certain Fees. Except as set forth in Section 3.1(u) of
                       ------------
the Disclosure Schedule, no brokerage or finder's fees or commissions are or
will be payable by the Borrower to any broker, financial advisor or
consultant, finder, placement agent, investment banker, bank or other Person
with respect to the transactions contemplated by this Agreement. Neither the
Administrative Agent nor any Lender shall have any obligation with respect
to any fees or with respect to any claims (other than such fees or
commissions owed by such Person pursuant to written agreements executed by
such Person which fees or commissions shall be the sole responsibility of
such Person) made by or on behalf of other Persons for fees of a type
contemplated in this Section that may be due in connection with the
transactions contemplated by this Agreement.

                  (v)  Certain Registration Matters. Assuming the accuracy of
                       ----------------------------
the Lenders' representations and warranties set forth in Sections
3.2(b)-(e), no registration under the Securities Act is required for the
offer and sale of the Securities by the Borrower to the Lenders under the
Transaction Documents. The Borrower is eligible to register the resale of
its Common Stock for resale by the Lenders under Form S-3 promulgated under
the Securities Act. The Borrower has not granted or agreed to grant to any
Person any rights (including without limitation "piggy-back" registration
rights) to have any securities of the Borrower registered with the
Commission or any other governmental authority that have not been satisfied.

                  (w)  Listing and Maintenance Requirements. Except as
                       ------------------------------------
specified in the SEC Reports, the Borrower has not, in the two years
preceding the date hereof, received notice from any Eligible Market to the
effect that the Borrower is not in compliance with the listing or
maintenance requirements thereof. The Borrower is, and has no reason to
believe that it will not in the foreseeable future continue to be, in
compliance with the listing and maintenance requirements for continued
listing of the Common Stock on the Trading Market. The issuance and sale of
the Securities under the Transaction Documents does not contravene the rules
and regulations of the Trading Market, and no approval of the shareholders
of the Borrower thereunder is required for the Borrower to issue and deliver
to the Lenders the maximum number of Securities contemplated by Transaction
Documents, including as may be required pursuant to Nasdaq Rule Filing
SR-NASD-2003-40 (March 14, 2003) concerning shareholder approval
requirements when officers and directors participate in discounted private
placements and Nasdaq Rule Filing SR-NASD-2003-61 (March 28, 2003)
concerning shareholder approval requirements in connection with a change of
control.

                  (x)  Environmental Matters. Neither the Borrower nor any
                       ---------------------
Subsidiary (i) is in violation of any statute, rule, regulation, decision or
order of any governmental agency or body or any court, domestic or foreign,
relating to the use, disposal or release of hazardous or toxic substances or
relating to the protection or restoration of the environment or human
exposure to hazardous or toxic substances (collectively, "ENVIRONMENTAL
LAWS"), (ii) owns or operates any real property contaminated with any
substance that is subject to any Environmental Laws, (iii) is liable for any
off-site disposal or contamination pursuant to any Environmental Laws, and
(iv) is

                                     15

subject to any claim relating to any Environmental Laws, which violation,
contamination, liability or claim has had or could reasonably be expected to
have a Material Adverse Effect, individually or in the aggregate; and there
is no pending investigation threatened in writing by any governmental
authority that might lead to such a claim.

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

                  (z)  Application of Takeover Protections. The Borrower and
                       -----------------------------------
its Board of Directors have taken all necessary action, if any, in order to
render inapplicable any control share acquisition, business combination,
poison pill (including any distribution under a rights agreement) or other
similar anti-takeover provision under the Borrower's Articles of
Incorporation (or similar charter documents) or the laws of its state of
incorporation that is or could become applicable to the Administrative Agent
or the Lenders as a result of the Administrative Agent, the Lenders and the
Borrower fulfilling their obligations or exercising their rights under the
Transaction Documents, including without limitation the Borrower's issuance
of the Securities and the Lenders' ownership of the Securities.

                  (aa) No Additional Agreements. The Borrower does not have
                       ------------------------
any agreement or understanding with the Administrative Agent or any Lender
with respect to the transactions contemplated by the Transaction Documents
other than as specified therein, except that any officer or director who
participates in this transaction as a Lender shall not be entitled to any
anti-dilution protection (other than on account of stock splits, stock
combinations and similar events) under the Notes or the Warrants acquired by
them or their Affiliates so as not to violate Nasdaq Rule Filing
SR-NASD-2003-40 (March 14, 2003).

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

                  (cc) Acknowledgment Regarding Lenders' Purchase of Securities.
                       --------------------------------------------------------
The Borrower acknowledges and agrees that each of the Lenders is acting
solely in the capacity of an arm's length lender with respect to the
Transaction Documents and the transactions contemplated hereby. The Borrower
further acknowledges that neither the Administrative Agent nor any Lender is
acting as a financial advisor or fiduciary of the Borrower (or in any
similar capacity) with respect to the Transaction Documents and the
transactions contemplated hereby and any advice given by the Administrative
Agent or any Lender or any of their respective

                                     16

representatives or agents in connection with the Transaction Documents and
the transactions contemplated hereby is merely incidental to the Lenders'
purchase of the Securities or the Administrative Agent's performance of its
duties under the Transaction Documents. The Borrower further represents to
the Administrative Agent and each Lender that the Borrower's decision to
enter into this Agreement has been based solely on the independent
evaluation by the Borrower and its representatives.

         3.2.     Representations and Warranties of the Lenders. Each Lender,
                  ---------------------------------------------
for itself and for no other Lender, hereby represents and warrants to the
Borrower as follows:

                  (a)  Organization; Authority. Such Lender is an entity duly
                       -----------------------
organized, validly existing and in good standing under the laws of the
jurisdiction of its organization with the requisite corporate, partnership,
limited liability company or other applicable like power and authority to
enter into and to consummate the transactions contemplated by the applicable
Transaction Documents and otherwise to carry out its obligations thereunder.
The execution, delivery and performance by such Lender of the transactions
contemplated by this Agreement have been duly authorized by all necessary
corporate or, if such Lender is not a corporation, such partnership, limited
liability company or other applicable like action, on the part of such
Lender. Each of this Agreement and the Registration Rights Agreement has
been duly executed by such Lender, and when delivered by such Lender in
accordance with terms hereof, will constitute the valid and legally binding
obligation of such Lender, enforceable against it in accordance with its
terms.

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

                  (c)  Lender Status. At the time such Lender was offered its
                       -------------
Note and its Warrant, it was, and at the date hereof, it is, an "accredited
investor" as defined in Rule 501(a) under the Securities Act. Such Lender is
not a registered broker-dealer under Section 15 of the Exchange Act.

                  (d)  General Solicitation. Such Lender is not taking the
                       --------------------
Note or the Warrant as a result of any advertisement, article, notice or
other communication regarding either of them published in any newspaper,
magazine or similar media or broadcast over television or radio or presented
at any seminar or any other general solicitation or general advertisement.

                  (e)  Access to Information. Such Lender acknowledges that
                       ---------------------
it has reviewed the Disclosure Materials and has been afforded (i) the
opportunity to ask such questions as it has deemed necessary of, and to
receive answers from, representatives of the Borrower concerning the terms
and conditions of the offering of the Securities and the merits and risks of
investing in

                                     17

the Securities; (ii) access to information about the Borrower and the
Subsidiaries and their respective financial condition, results of
operations, business, properties, management and prospects sufficient to
enable it to evaluate its investment; and (iii) the opportunity to obtain
such additional information that the Borrower possesses or can acquire
without unreasonable effort or expense that is necessary to make an informed
investment decision with respect to the investment. Neither such inquiries
nor any other investigation conducted by or on behalf of such Lender or its
representatives or counsel shall modify, amend or affect such Lender's right
to rely on the truth, accuracy and completeness of the Disclosure Materials
and the Borrower's representations and warranties contained in the
Transaction Documents.

                  (f)  Limited Ownership. The purchase by such Lender of the
                       -----------------
Securities issuable to it at the Closing (including the Underlying Shares
that would be issuable upon the conversion and exercise of such Securities)
will not result in such Lender (individually or together with other Persons
with whom such Lender has identified, or will have identified, itself as
part of a "group" in a public filing made with the Commission involving the
Borrower's securities) acquiring, or obtaining the right to acquire, in
excess of 19.999% of the Common Stock or the voting power of the Borrower on
a post transaction basis that assumes that the Closing shall have occurred.
Such Lender does not presently intend to, alone or together with others,
make a public filing with the Commission to disclose that it has (or that it
together with such other Persons have) acquired, or obtained the right to
acquire, as a result of the Closing (when added to any other securities of
the Borrower that it or they then own or have the right to acquire), in
excess of 19.999% of the Common Stock or voting power of the Borrower on a
post transaction basis that assumes that the Closing shall have occurred.

                  (g)  Independent Investment Decision. Such Lender has
                       -------------------------------
independently evaluated the merits of its decision to invest in the Note and
the Warrant pursuant to this Agreement, such decision has been independently
made by such Lender and such Lender confirms that it has only relied on the
advice of its own business and/or legal counsel and not on the advice of any
other Lender's business and/or legal counsel in making such decision.

The Borrower acknowledges and agrees that no Lender makes or has made any
representations or warranties with respect to the transactions contemplated
hereby other than those specifically set forth in this Section 3.2. The
Borrower acknowledges and agrees that the Administrative Agent does not make
and has not made any representations or warranties with respect to the
transactions contemplated hereby other than those specifically set forth in
this Section 3.2.

                                 ARTICLE IV.

                       OTHER AGREEMENTS OF THE PARTIES

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

                                     18

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

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

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

                  (b)  Certificates evidencing Underlying Shares shall not
contain any legend (including the legend set forth in Section 4.1(b)): (i)
following a sale of such Securities under a registration statement
(including the Registration Statement), or (ii) following any sale of such
Securities pursuant to Rule 144, or (iii) while such Securities are eligible
for sale under Rule 144(k), or (iv) if such legend is not required under
applicable requirements of the Securities Act (including judicial
interpretations and pronouncements issued by the Staff of the Commission).
Borrower may not make any notation on its records or give instructions to
any transfer agent of the Borrower that enlarge the restrictions on transfer
set forth in this Section.

                                     19

         4.2.     Furnishing of Information. As long as any Lender owns the
                  -------------------------
Securities issued or issuable to it, the Borrower covenants to timely file
(or obtain extensions in respect thereof and file within the applicable
grace period) all reports required to be filed by the Borrower after the
date hereof pursuant to the Exchange Act. Upon the request of any such
Person, the Borrower shall deliver to such Person a written certification of
a duly authorized officer as to whether it has complied with the preceding
sentence. As long as any Lender owns Securities, if the Borrower is not
required to file reports pursuant to such laws, it will prepare and furnish
to the Lenders and make publicly available in accordance with Rule 144(c)
such information as is required for the Lenders to sell the Underlying
Shares under Rule 144. The Borrower further covenants that it will take such
further action as any holder of Securities may reasonably request, all to
the extent required from time to time to enable such Person to sell such
Underlying Shares without registration under the Securities Act within the
limitation of the exemptions provided by Rule 144.

         4.3.     Acknowledgment of Dilution. The Borrower acknowledges that
                  --------------------------
the issuance of the Securities (including the Underlying Shares) will result
in dilution of the outstanding shares of Common Stock, which dilution may be
substantial. The Borrower further acknowledges that its obligations under
the Transaction Documents, including without limitation its obligation to
issue the Securities (including the Underlying Shares) pursuant to the
Transaction Documents, are unconditional and absolute and not subject to any
right of set off, counterclaim, delay or reduction, regardless of the effect
of any such dilution or any claim that the Borrower may have against the
Administrative Agent or any Lender.

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

         4.5.     Listing of Common Stock. From the date hereof through the
                  -----------------------
Effectiveness Period (as such term is defined in the Registration Rights
Agreement) the Borrower agrees (i) if the Borrower applies to have the
Common Stock traded on any Trading Market other than the Trading Market
which the Common Stock is currently listed for trading, it will include in
such application the Underlying Shares, and will take such other action as
is necessary or desirable to cause such securities to be listed on such
other Trading Market as promptly as possible and (ii) it will take all
action reasonably necessary to continue the listing and trading of its
Common Stock on a Trading Market and will comply in all material respects
with the Borrower's reporting, filing and other obligations under the bylaws
or rules of the Trading Market.

         4.6.     Reservation of Shares. The Borrower shall maintain a reserve
                  ---------------------
from its duly authorized shares of Common Stock to comply with its conversion
obligations under the Notes and its exercise obligations under the Warrants.
If on any date the Borrower would be, if notice of exercise or conversion
were to be delivered on such date, precluded from issuing the number of
Underlying Shares, as the case may be, issuable upon conversion in full of
the Notes or exercise in full under the Warrants due to the unavailability
of a sufficient number of authorized but unissued or reserved shares of
Common Stock, then the Board of Directors of the Borrower

                                     20

shall promptly prepare and mail to the shareholders of the Borrower proxy
materials or other applicable materials requesting authorization to amend
the Borrower's articles of incorporation or other organizational document to
increase the number of shares of Common Stock which the Borrower is
authorized to issue so as to provide enough shares for issuance of the
Underlying Shares. In connection therewith, the Board of Directors shall (a)
adopt proper resolutions authorizing such increase, (b) recommend to and
otherwise use its best efforts to promptly and duly obtain shareholder
approval to carry out such resolutions (and hold a special meeting of the
shareholders as soon as practicable, but in any event not later than the
60th day after delivery of the proxy or other applicable materials relating
to such meeting) and (c) within five Business Days of obtaining such
shareholder authorization, file an appropriate amendment to the Borrower's
articles of incorporation or other organizational document to evidence such
increase.

         4.7.     Conversion and Exercise Procedures. The form of Exercise
                  ----------------------------------
Notice included in and as defined in the Warrants and the form of Conversion
Notice included in and as defined in the Notes set forth the totality of the
procedures required by the Lenders in order to exercise the Warrants and
convert the Notes. No additional legal opinion or other information or
instructions shall be necessary to enable the Lenders to exercise the
Warrants or convert Notes. The Borrower shall honor exercises of the
Warrants and conversions of the Notes and shall deliver Underlying Shares in
accordance with the terms, conditions and time periods set forth in the
Transaction Documents.

         4.8.     Subsequent Registrations; Subsequent Placements.
                  -----------------------------------------------

                  (a)  From the Closing Date through and including the
Effective Date, the Borrower will not file a registration statement (other
than on a Form S-8 and pursuant to the Registration Rights Agreement) with
the Commission with respect to any securities of the Borrower.

                  (b)  Prior to the first year anniversary of the Closing
Date, in the event the Borrower or any Subsidiary, directly or indirectly,
determines to offer, sell, grant any option to purchase, or otherwise
dispose of (or announces any offer, sale, grant or any option to purchase or
otherwise dispose of) any Common Stock or Common Stock Equivalents (other
than under and pursuant to the Notes and the Warrants) or any of its
Subsidiaries' equity or Common Stock Equivalents, including without
limitation, pursuant to a private placement, an equity line of credit or a
shelf registration statement in accordance with Rule 415 under the
Securities Act, (such offer, sale, grant, disposition or announcement being
referred to as "SUBSEQUENT PLACEMENT"), the Borrower shall deliver to each
Lender a written notice (the "SUBSEQUENT PLACEMENT NOTICE") of its intention
to effect such Subsequent Placement, which specifies in reasonable detail
all of the material terms of such Subsequent Placement, the amount of
proceeds intended to be raised thereunder, the names of the investors
(including the investment manager of such investors, if any) and the
investment bankers with whom such Subsequent Placement is proposed to be
effected, and attached to which shall be a term sheet or similar document.
Each Lender shall have until 6:30 p.m. (New York City time) on the fifth
Trading Day after their respective receipt of the Subsequent Placement
Notice to notify Borrower of its intention to participate, subject to
completion of mutually acceptable documentation, in such financing on the
same terms as set forth in the Subsequent Placement Notice. The Borrower
shall not be required to permit a Lender to participate in a Subsequent
Placement hereunder in an amount (whether in

                                     21

terms of a purchase price or shares of Common Stock) in excess of the
greater of: (i) its pro rata portion (calculated by reference to its Lender
Percentage) of 25% of the aggregate amount of such Subsequent Placement and
(ii) its pro rata portion (calculated by reference to its Lender Percentage)
of that proportion of the Subsequent Financing equal to the outstanding
principal balance of the Notes held by such Lender divided by the aggregate
dollar amount of the Subsequent Placement.

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

                  (d)  The Borrower's obligations under Section 4.8(b) shall
not apply to any grant or issuance by the Borrower of any of the following:
(i) the issuance of securities upon the exercise or conversion of any Common
Stock Equivalents issued by the Borrower prior to the date of this Agreement
(but will apply to any amendments, modifications and reissuances thereof),
and (ii) the grant of options or warrants, or the issuance of additional
securities, under any duly authorized company stock option, restricted stock
plan or stock purchase plan in existence on the Closing Date, (iii) the
issuance of Common Stock in payment of interest on the Notes, or (iv) the
issuance of Common Stock Equivalents pursuant to a Strategic Transaction.

         4.9.     Securities Laws Disclosure; Publicity. By 8:30 a.m. (New
                  -------------------------------------
York City time) on both the Trading Day following the day this Agreement is
executed and on the Closing Date, the Borrower shall issue a press release
reasonably acceptable to the Lenders and the Administrative Agent disclosing
the transactions contemplated hereby on the date of this Agreement and file
a Current Report on Form 8-K disclosing the material terms of the
transactions contemplated hereby. The Borrower will file an additional
Current Report on Form 8-K on the Closing Date to disclose the Closing. In
addition, the Borrower will make such other filings and notices in the
manner and time required by the Commission and the Trading Market on which
the Common Stock is listed. Notwithstanding the foregoing, the Borrower
shall not publicly disclose the name of the Administrative Agent, any
Lender, or include the name of the Administrative Agent or any Lender in any
filing with the Commission (other than the Registration Statement and any
exhibits to filings made in respect of this transaction in accordance with
periodic filing requirements under the Exchange Act) or any regulatory
agency or Trading Market, without the prior written consent of the
Administrative Agent or such Lender, as the case may be, except to the
extent such disclosure is required by law or Trading Market regulations, in
which case the Borrower shall provide the Administrative Agent and the
Lenders with prior notice of such disclosure.

         4.10.    Limitation on Issuance of Future Priced Securities. Following
                  --------------------------------------------------
the Closing and for so long as Notes remain outstanding, the Borrower shall not
issue or agree to issue any "Future Priced Securities" as such term is
described by NASD IM-4350-1.

         4.11.    Indemnification of Lenders. In addition to the indemnity
                  --------------------------
provided in the Registration Rights Agreement and in Section 8.18, the
Borrower will indemnify and hold the Lenders and their directors, officers,
shareholders, partners, employees and agents (each, a

                                     22

"LENDER PARTY") harmless from any and all losses, liabilities, obligations,
claims, contingencies, damages, costs and expenses, including all judgments,
amounts paid in settlements, court costs and reasonable attorneys' fees and
costs of investigation that any such Lender Party may suffer or incur as a
result of or relating to any misrepresentation, breach or inaccuracy of any
representation, warranty, covenant or agreement made by the Borrower in any
Transaction Document. In addition to the indemnity contained herein, the
Borrower will reimburse each Lender Party for its reasonable legal and other
expenses (including the cost of any investigation, preparation and travel in
connection therewith) incurred in connection therewith, as such expenses are
incurred.

         4.12.    Non-Public Information. The Borrower covenants and agrees
                  ----------------------
that neither it nor any other Person acting on its behalf will provide the
Administrative Agent, any Lender or any agent or counsel to the
Administrative Agent or any Lender with any information that the Borrower
believes constitutes material non-public information. The Borrower
understands and confirms that the Administrative Agent and each Lender shall
be relying on the foregoing representations in effecting transactions in
securities of the Borrower.

         4.13.    Certain Trading Restrictions. Each Lender agrees that neither
                  ----------------------------
it nor its Affiliates (taken as a whole) will enter into or maintain a net
short position with respect to the Common Stock. Accordingly, each Lender
agrees that neither it nor its Affiliates will enter into or maintain any
short sale of the Common Stock at a time when there is no equivalent
offsetting long position in the Common Stock held by such Lender. For
purposes of determining whether there is an equivalent offsetting long
position in the Common Stock held by such Lender, the Underlying Shares
issuable upon exercise of all warrants (including the Warrants) and
conversion of the debentures and Notes (including in each case any shares
issuable on account of interest thereunder) held by such Lender (without
regard to any exercise or conversion caps contained therein, and whether or
not any exercise or conversion notice shall have been tendered by such
Lender) shall be deemed held long by such Lender for purposes of this
Section.

         4.14.    Existence; Conduct of Business. The Borrower will, and will
                  ------------------------------
cause each of the Subsidiaries to, do or cause to be done all things
necessary to preserve, renew and keep in full force and effect its legal
existence and the rights, licenses, permits, privileges and franchises
material to the conduct of its business, provided that the foregoing shall
                                         --------
not prohibit (a) any sale, lease, transfer or other disposition permitted by
Section 5.1, or (b) any merger of (i) any domestic Subsidiary with any other
domestic Subsidiary, (ii) any domestic Subsidiary with and into the
Borrower, (iii) any foreign Subsidiary (other than Opco and its
Subsidiaries) with any other foreign Subsidiary, or (iv) any Subsidiary of
Opco with Opco or any other Subsidiary of Opco.

         4.15.    Maintenance of Cash and Cash Equivalents. While any Notes are
                  ----------------------------------------
outstanding, the Borrower will, at all times, maintain unrestricted cash and
Cash Equivalents, together with availability under the Borrower's revolving
line of credit, in an aggregate amount not less than $500,000, free and
clear of all Liens (other than Permitted Liens within the meaning of clauses
(a), (h) or (i) of such defined term) and any right of offset. In the event
that such unrestricted cash and Cash Equivalents maintained by the Borrower
hereunder shall at the end of any fiscal quarter (as reflected in Borrower's
Quarterly Report on Form 10-Q under the Exchange Act for such fiscal
quarter) be in an aggregate amount less than such amount, the Borrower shall
deliver

                                     23

to each Lender at the Borrower's expense, a letter of credit (in form and
substance acceptable to such Lender) and issued by a bank reasonably
acceptable to such Lender in a face amount equal to the sum of 100% of the
then outstanding principal amount of such Lender's Note plus interest
payable thereon until the maturity date thereof. Such letters of credit
shall provide, among other things, that the beneficiary thereof shall have
the right to draw thereunder upon presentation of a draft together with a
certificate signed by such Lender referring to this Agreement and the Notes
held by such Lender and certifying that an Event of Default has occurred and
is continuing under the Transaction Documents.

         4.16.    Use of Proceeds. The Borrower shall use the net proceeds from
                  ---------------
the sale of the Securities hereunder (i) for working capital purposes, but
not (a) for the satisfaction of any portion of the Borrower's debt (other
than payment of the Borrower's existing line of credit and trade payables
and accrued expenses in the ordinary course of the Borrower's business and
consistent with prior practices), (b) to redeem any Common Stock or Common
Stock Equivalents or (c) to settle any outstanding Action, and (ii) towards
the repayment of Opco's existing Indebtedness.

                                 ARTICLE V.

                             NEGATIVE COVENANTS

                  The Borrower covenants and agrees that from and after the
Closing Date and so long as any there remains any outstanding principal
amount under the Notes, the Borrower shall not, and shall not permit its
Subsidiaries to:

         5.1.     Dispositions of Assets or Subsidiaries. Sell, convey, assign,
                  --------------------------------------
lease, abandon or otherwise transfer or dispose of, voluntarily or
involuntarily, any material properties or assets, tangible or intangible
(including any spin-offs of any divisions, lines of business or subsidiaries
and also including sale, assignment, discount or other disposition of
accounts, contract rights, chattel paper, equipment or general intangibles
with or without recourse or of capital stock, shares of beneficial interest,
partnership interests or limited liability company interests of a Subsidiary
of the Borrower), except:

                  (a)  transactions involving the sale of inventory or upgrade
or exchange of machinery, in either case, in the ordinary course of business
and for usual and ordinary prices; or

                  (b)  any sale, transfer, lease or other disposition of
assets, other than Collateral Security (except to the extent otherwise
permitted by the Security Agreement or the Mortgage).

         5.2.     Restricted Payments. Declare or make, or agree to pay for or
                  -------------------
make, directly or indirectly, any Restricted Payment, provided that (a) the
                                                      --------
Borrower may declare and pay, and agree to pay, dividends with respect to
its Equity Interests payable solely in Common Stock, (b) any wholly-owned
Subsidiary of the Borrower may declare and pay dividends with respect to its
Equity Interests to the Borrower or any other wholly-owned Subsidiary of the
Borrower, (c) the Borrower may pay bonuses to its officers, directors and
employees consistent with past practices, (d) the Borrower may pay
director's fees to its directors consistent with past practices, and (e) the

                                     24

Borrower may pay fees to its directors for bona fide consulting services
consistent with past practices.

                                ARTICLE VI.

                            CONDITIONS PRECEDENT

         6.1.     Conditions Precedent to the Obligations of the Lenders. The
                  ------------------------------------------------------
obligation of each Lender to make its Loan is subject to the satisfaction or
waiver by such Lender of each of the following conditions:

                  (a)  Representations and Warranties. The representations
                       ------------------------------
and warranties of the Borrower contained herein shall be true and correct in
all respects as of the date when made and as of the Closing Date as though
made on and as of such date;

                  (b)  Performance. The Borrower shall have performed,
                       -----------
satisfied and complied in all respects with, and caused each of its
Subsidiaries to perform, satisfy and comply in all respects with, all
covenants, agreements and conditions required by the Transaction Documents
to be performed, satisfied or complied with by it at or prior to the
Closing;

                  (c)  No Injunction. No treaty and no U.S. or foreign
                       -------------
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 that prohibits the
consummation of any of the transactions contemplated by the Transaction
Documents;

                  (d)  Adverse Changes. Since the date of execution of this
                       ---------------
Agreement, no event or series of events shall have occurred that reasonably
would be expected to have or result in a (i) an adverse effect on the
legality, validity or enforceability of any Transaction Document, or (ii) a
material and adverse effect on the results of operations, assets, business
or condition (financial or otherwise) of (i) the Borrower, (ii) Opco, or
(iii) the Borrower and the Subsidiaries, taken as a whole;

                  (e)  No Suspensions of Trading in Common Stock; Listing.
                       --------------------------------------------------
Trading in the Common Stock shall not have been suspended by the Commission
or any Trading Market (except for any suspensions of trading of not more
than one Trading Day solely to permit dissemination of material information
regarding the Borrower) at any time since the date of execution of this
Agreement, and the Common Stock shall have been at all times since such date
listed for trading on a Trading Market;

                  (f)  Nasdaq Listing. The Nasdaq Stock Market shall have
                       --------------
waived application of the 15 day prior notice contained in NASD Marketplace
Rule 4310(17)(D) or such timeframe shall have expired without objection;

                  (g)  Bank Consent. The Borrower shall have received the
                       ------------
consent of each bank or other lender or provider of credit to the Borrower
or Opco whose consent is required with respect to the transactions
contemplated by the Transaction Documents as well as an estoppel certificate
indicating the absence of any event of default or any default which could

                                     25

with or without the passage of time or notice or both in an event of default
under any document or agreement governing the transactions with such bank,
lender or provider or credit;

                  (h)  Borrower Deliverables. The Lenders shall have received
                       ---------------------
the Borrower Deliverables;

                  (i)  Intercreditor Agreement. Each Lender shall have
                       -----------------------
executed and delivered to the Administrative Agent the Intercreditor
Agreement; and

                  (j)  Timing. The conditions to closing set forth herein
                       ------
shall have occurred no later than October 22, 2004.

         6.2.     Conditions Precedent to the Obligations of the Borrower to
                  ----------------------------------------------------------
deliver the Notes and the Warrants. The obligation of the Borrower to
----------------------------------
deliver the Notes and the Warrants is subject to the satisfaction or waiver
by the Borrower hereunder of each of the following conditions:

                  (a)  Representations and Warranties. The representations
                       ------------------------------
and warranties of each Lender contained herein shall be true and correct in
all respects as of the date when made and as of the Closing Date as though
made on and as of such date;

                  (b)  Performance. Each Lender shall have performed,
                       -----------
satisfied and complied in all respects with all covenants, agreements and
conditions required by the Transaction Documents to be performed, satisfied
or complied with by such Lender at or prior to the Closing;

                  (c)  No Injunction. 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 that prohibits the consummation of any of the transactions
contemplated by the Transaction Documents;

                  (d)  Nasdaq Listing. The Nasdaq Stock Market shall have
                       --------------
waived application of the 15 day prior notice contained in NASD Marketplace
Rule 4310(17)(D) or such timeframe shall have expired without objection; and

                  (e)  Timing. The conditions to closing set forth herein
                       ------
shall have occurred no later than October 22, 2004.

                                ARTICLE VII.

                            ADMINISTRATIVE AGENT

         Each Lender hereby irrevocably appoints the Administrative Agent as
its agent and authorizes the Administrative Agent to take such actions on
its behalf and to exercise such powers as are delegated to the
Administrative Agent by the terms hereof, together with such actions and
powers as are reasonably incidental thereto.

         The Person serving as the Administrative Agent hereunder shall have
the same rights and powers in its capacity as a Lender as any other Lender
and may exercise the same as though it were not the Administrative Agent,
and such Person and its Affiliates may lend money to and

                                     26

generally engage in any kind of business with the Borrower or any Subsidiary
or other Affiliate thereof as if it were not the Administrative Agent
hereunder.

         The Administrative Agent shall not have any duties or obligations
except those expressly set forth herein. Without limiting the generality of
the foregoing, (i) the Administrative Agent shall not be subject to any
fiduciary or other implied duties, regardless of whether an Event of Default
(or an event which, with the giving of notice, lapse of time, or both, would
constitute an Event of Default) has occurred and is continuing, (ii) the
Administrative Agent shall not have any duty to take any discretionary
action or exercise any discretionary powers, except discretionary rights and
powers expressly contemplated by the Transaction Documents that the
Administrative Agent is required to exercise in writing by the Required
Lenders (or such other number or percentage of the Lenders as shall be
necessary under the circumstances as provided in Section 8.4), and (iii)
except as expressly set forth herein, the Administrative Agent shall not
have any duty to disclose, and shall not be liable for the failure to
disclose, any information relating to the Borrower, any Affiliate thereof or
any Subsidiary that is communicated to or obtained by the Person serving as
Administrative Agent or any of its Affiliates in any capacity. The
Administrative Agent shall not be liable for any action taken or not taken
by it with the consent or at the request of the Required Lenders (or such
other number or percentage of the Lenders as shall be necessary under the
circumstances as provided in Section 8.4) or in the absence of its own gross
negligence or willful misconduct. The Administrative Agent shall be deemed
not to have knowledge of any Event of Default (or any event which, with the
giving of notice, lapse of time, or both, would constitute an Event of
Default) unless and until written notice thereof is given to the
Administrative Agent by the Borrower or a Lender (and, promptly after its
receipt of any such notice, it shall give each Lender and the Borrower
notice thereof), and the Administrative Agent shall not be responsible for
or have any duty to ascertain or inquire into (a) any statement, warranty or
representation made in or in connection with any Transaction Document, (b)
the contents of any certificate, report or other document delivered
thereunder or in connection therewith, (c) the performance or observance of
any of the covenants, agreements or other terms or conditions set forth
therein, (d) the validity, enforceability, effectiveness or genuineness
thereof or any other agreement, instrument or other document or (e) the
satisfaction of any condition set forth in Article VI or elsewhere in the
Transaction Documents.

         The Administrative Agent shall be entitled to rely upon, and shall
not incur any liability for relying upon, any notice, request, certificate,
consent, statement, instrument, document or other writing believed by it to
be genuine and to have been signed or sent by the proper Person. The
Administrative Agent also may rely upon any statement made to it orally or
by telephone and believed by it to be made by the proper Person, and shall
not incur any liability for relying thereon. The Administrative Agent may
consult with legal counsel (who may be counsel for the Borrower or any
Subsidiary), independent accountants and other experts selected by it, and
shall not be liable for any action taken or not taken by it in accordance
with the advice of any such counsel, accountants or experts.

         The Administrative Agent may perform any and all its duties and
exercise its rights and powers by or through any one or more sub agents
appointed by the Administrative Agent, provided that no such delegation
                                       --------
shall serve as a release of the Administrative Agent or waiver by the
Borrower or any Lender of any rights hereunder. The Administrative Agent and
any such sub agent may perform any and all its duties and exercise its
rights and powers through their respective Related Parties. The exculpatory
provisions of the preceding paragraphs shall apply to

                                     27

any such sub agent and to the Related Parties of the Administrative Agent
and any such sub agent, and shall apply to their respective activities in
connection with the activities as Administrative Agent.

         Subject to the appointment and acceptance of a successor
Administrative Agent as provided in this paragraph, the Administrative Agent
may resign at any time by notifying the Lenders and the Borrower. Upon any
such resignation, the Required Lenders shall have the right to appoint a
successor. If no successor shall have been so appointed by the Required
Lenders and shall have accepted such appointment within 30 days after the
retiring Administrative Agent gives notice of its resignation, then the
retiring Administrative Agent may, on behalf of the Lenders, appoint a
successor Administrative Agent. Upon the acceptance of its appointment as
Administrative Agent hereunder by a successor, such successor shall succeed
to and become vested with all the rights, powers, privileges and duties of
the retiring Administrative Agent, and the retiring Administrative Agent
shall be discharged from its duties and obligations hereunder. The fees
payable by the Borrower to a successor Administrative Agent shall be the
same as those payable to its predecessor unless otherwise agreed between the
Borrower and such successor. After the Administrative Agent's resignation
hereunder, the provisions of this Article and Section 8.18 shall continue in
effect for the benefit of such retiring Administrative Agent, its sub agents
and their respective Related Parties in respect of any actions taken or
omitted to be taken by any of them while it was acting as Administrative
Agent.

         Each Lender acknowledges that it has, independently and without
reliance upon the Administrative Agent or any other Lender and based on such
documents and information as it has deemed appropriate, made its own credit
analysis and decision to enter into this Agreement. Each Lender also
acknowledges that it will, independently and without reliance upon the
Administrative Agent or any other Lender and based on such documents and
information as it shall from time to time deem appropriate, continue to make
its own decisions in taking or not taking action under or based upon any
Transaction Document, any related agreement or any document furnished
thereunder.

                                ARTICLE VIII.

                                MISCELLANEOUS

         8.1.     Fees and Expenses. The Borrower shall be responsible for the
                  -----------------
reasonable legal fees and expenses of the Administrative Agent and each
Lender in the event that the Borrower requests any waiver or amendment of
the provisions of any Transaction Document following the Closing. Except as
otherwise specified in the Transaction Documents (including without
limitation Section 8.18), and except that Borrower shall reimburse OMT for
its legal fees and expenses incurred in connection with its entering into
the Transaction Documents (OMT may deduct such amount from the Loan Amount
deliverable to the Borrower at Closing), each party shall pay the fees and
expenses of its advisers, counsel, accountants and other experts, if any,
and all other expenses incurred by such party incident to the negotiation,
preparation, execution, delivery and performance of the Transaction
Documents. The Borrower shall pay all stamp and other taxes and duties
levied in connection with the sale of the Securities.

         8.2.     Entire Agreement. The Transaction Documents, together with
                  ----------------
the Exhibits and Schedules thereto, contain the entire understanding of the
parties with respect to the subject

                                     28

matter hereof and supersede all prior agreements and understandings, oral or
written, with respect to such matters, which the parties acknowledge have
been merged into such documents, exhibits and schedules. At or after the
Closing, and without further consideration, each party will execute and
deliver to the other party hereto such further documents as may be
reasonably requested in order to give practical effect to the intention of
the parties under the Transaction Documents.

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

                  If to the Borrower:       Zoltek Companies, Inc.
                                            3101 McKelvey Rd.
                                            St. Louis, Missouri 63044
                                            Facsimile No.: (314) 291-9082
                                            Attention:  Chief Financial Officer

                  With a copy to:           Thompson Coburn LLP
                                            One U.S. Bank Plaza
                                            St. Louis, Missouri 63101
                                            Facsimile No.: (314) 552-7000
                                            Attention: Thomas A. Litz, Esq.

                  If to any Lender:         To the address and facsimile
                                            number set forth under such
                                            Lender's name on its
                                            signature page attached hereto.

                  If to the
                  Administrative
                  Agent:                    To the address and facsimile
                                            number set forth under the
                                            Administrative Agent's name
                                            on its signature page attached
                                            hereto.

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

         8.4.     Amendments; Waivers
                  -------------------

                  (a)  No failure or delay by the Administrative Agent or any
Lender in exercising any right or power under any Transaction Document shall
operate as a waiver thereof, nor shall any single or partial exercise of any
such right or power, or any abandonment or

                                     29

discontinuance of steps to enforce such a right or power, preclude any other
or further exercise thereof or the exercise of any other right or power. The
rights and remedies of the Administrative Agent and the Lenders under the
Transaction Documents are cumulative and are not exclusive of any rights or
remedies that they would otherwise have. No waiver of any provision of any
Transaction Document or consent to any departure by the Borrower or any
Subsidiary therefrom shall in any event be effective unless the same shall
be permitted by paragraph (b) of this Section, and then such waiver or
consent shall be effective only in the specific instance and for the purpose
for which given.

                  (b)  Neither any Transaction Document (which, for purposes
of this Section 8.4(b), shall include the Shareholders Agreement) nor any
provision thereof may be waived, amended or modified except pursuant to an
agreement or agreements in writing entered into by the Borrower and the
Required Lenders or by the Borrower and the Administrative Agent with the
consent of the Required Lenders, provided that no such agreement shall (i)
increase the amount of the Loan agreed to be made by any Lender without the
written consent of such Lender, (ii) change the rate of interest applicable
to any Loan or the conversion price with respect to any Note unless the
resulting rate of interest or conversion price (as the case may be) applies
to all Loans or Notes (as the case may be), (iii) change any other term of
any Transaction Document if, as a result thereof, the rights and obligations
of any Lender under the Transaction Documents would be disproportionately
(based on its pro rata share) affected relative to the rights and
obligations of any other Lender under the Transaction Documents, or (iv)
change any of the provisions of this Section or the definition of the term
"Required Lenders" or any other provision hereof specifying the number or
percentage of Lenders required to waive, amend or modify any rights
hereunder or make any determination or grant any consent hereunder, or
change the currency in which Loans are to be made or payments under the
Transaction Documents are to be made, or provide for additional borrowers,
without the written consent of each Lender, and provided further that no
such agreement shall amend, modify or otherwise affect the rights or duties
of the Administrative Agent without the prior written consent of the
Administrative Agent.

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

         8.6.     Successors and Assigns. This Agreement shall be binding upon
                  ----------------------
and inure to the benefit of the parties and their successors and permitted
assigns. The Borrower may not assign this Agreement or any rights or
obligations hereunder without the prior written consent of the Lenders. Any
Lender may assign its rights under this Agreement to any Person to whom such
Lender assigns or transfers any Securities.

         8.7.     No Third-Party Beneficiaries. This Agreement is intended for
                  ----------------------------
the benefit of the parties hereto and their respective successors and
permitted assigns and is not for the benefit of, nor may any provision
hereof be enforced by, any other Person.

                                     30

         8.8.     Governing Law. All questions concerning the construction,
                  -------------
validity, enforcement and interpretation of this Agreement shall be governed
by and construed and enforced in accordance with the internal laws of the
State of New York, without regard to the principles of conflicts of law
thereof. Each party agrees that all Proceedings concerning the
interpretations, enforcement and defense of the transactions contemplated by
this Agreement, the Notes, the Warrants and the Registration Rights
Agreement (whether brought against a party hereto or its respective
Affiliates, employees or agents) shall be commenced exclusively in the state
and federal courts sitting in the City of New York, Borough of Manhattan
(the "NEW YORK COURTS"). Each party hereto hereby irrevocably submits to the
exclusive jurisdiction of the New York Courts for the adjudication of any
dispute hereunder or in connection herewith or with any transaction
contemplated hereby or discussed herein (including with respect to the
enforcement of the any of the Transaction Documents), and hereby irrevocably
waives, and agrees not to assert in any Proceeding, any claim that it is not
personally subject to the jurisdiction of any such New York Court, or that
such Proceeding has been commenced in an improper or inconvenient forum.
Each party hereto hereby irrevocably waives personal service of process and
consents to process being served in any such Proceeding by mailing a copy
thereof via registered or certified mail or overnight delivery (with
evidence of delivery) to such party at the address in effect for notices to
it under this Agreement and agrees that such service shall constitute good
and sufficient service of process and notice thereof. Nothing contained
herein shall be deemed to limit in any way any right to serve process in any
manner permitted by law. Each party hereto hereby irrevocably waives, to the
fullest extent permitted by applicable law, any and all right to trial by
jury in any legal proceeding arising out of or relating to this Agreement or
the transactions contemplated hereby. If either party shall commence a
Proceeding to enforce any provisions of a Transaction Document, then the
prevailing party in such Proceeding shall be reimbursed by the other party
for its reasonable attorneys' fees and other costs and expenses incurred
with the investigation, preparation and prosecution of such Proceeding.

         8.9.     Survival. The representations, warranties, agreements and
                  --------
covenants contained herein shall survive the Closing and the delivery,
exercise and conversion of the Securities.

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

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

         8.12.    Rescission and Withdrawal Right. Notwithstanding anything to
                  -------------------------------
the contrary contained in (and without limiting any similar provisions of)
the Transaction Documents, whenever any Lender exercises a right, election,
demand or option under a Transaction

                                     31

Document and the Borrower does not timely perform its related obligations
within the periods therein provided, then such Lender may rescind or
withdraw, in its sole discretion from time to time upon written notice to
the Borrower, any relevant notice, demand or election in whole or in part
without prejudice to its future actions and rights.

         8.13.    Replacement of Securities. If any certificate or instrument
                  -------------------------
evidencing any Securities is mutilated, lost, stolen or destroyed, the
Borrower shall issue or cause to be issued in exchange and substitution for
and upon cancellation thereof, or in lieu of and substitution therefor, a
new certificate or instrument, but only upon receipt of evidence reasonably
satisfactory to the Borrower of such loss, theft or destruction and
customary and reasonable indemnity, if requested. The applicants for a new
certificate or instrument under such circumstances shall also pay any
reasonable third-party costs associated with the issuance of such
replacement Securities.

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

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

         8.16.    Independent Nature of Lenders. The obligations of each Lender
                  -----------------------------
under each Transaction Document are several and not joint with the
obligations of each other Lender, and no Lender shall be responsible in any
way for the performance or observance of the obligations of any other Lender
under any Transaction Document. The decision of each Lender to acquire
Securities pursuant to this Agreement has been made by such Lender and each
Lender confirms that it has only relied on the advice of its own business
and/or legal counsel and not on the advice of any other Lender's business
and/or legal counsel. Nothing contained herein, or in any Transaction
Document, and no action taken by any Lender pursuant hereto or thereto,
shall be deemed to constitute the Lenders (or any of them) as a partnership,
an association, a joint venture or any other kind of entity, or create a
presumption that the Lenders are in any way acting in concert or as a group
with respect to the transactions contemplated by the Transaction Documents.
Except as specifically provided in the Transaction Documents, each Lender
shall be entitled to independently protect and enforce its rights, including
without limitation the rights arising out of this Agreement or out of the
other Transaction Documents, without joining any other Lender as an
additional party in any proceeding for such purpose.

                                     32

         8.17.    Limitation of Liability. Notwithstanding anything herein to
                  -----------------------
the contrary, the Borrower acknowledges and agrees that the liability of any
Lender arising directly or indirectly, under any Transaction Document, of
any and every nature whatsoever, shall be satisfied solely out of the assets
of such Lender, and that no trustee, officer, other investment vehicle
affiliated with such Lender or any investor, shareholder or holder of shares
of beneficial interest of such a Lender shall be personally liable for any
liabilities of such Lender.

         8.18.    Expenses; Indemnity; Damage Waiver
                  ----------------------------------

                  (a)  The Borrower shall pay (i) all reasonable
out-of-pocket costs and expenses incurred by the Administrative Agent and
its Related Parties, including the reasonable fees, charges and
disbursements of counsel for the Administrative Agent, in connection with
the administration of each Transaction Document, and (ii) all reasonable
out-of-pocket costs and expenses incurred by any Lender, including the
reasonable fees, charges and disbursements of any counsel for any Lender and
any consultant or expert witness fees and expenses, in connection with the
enforcement or protection of its rights in connection with the Transaction
Documents, including its rights under this Section, or in connection with
the Loans made, including all such reasonable out-of-pocket costs and
expenses incurred during any workout, restructuring or negotiations in
respect of such Loans.

                  (b)  The Borrower shall indemnify each Lender and each
Related Party thereof (each such Person being called an "Indemnitee")
                                                         ----------
against, and hold each Indemnitee harmless from, any and all losses, claims,
damages, liabilities and related expenses, including the reasonable fees,
charges and disbursements of any counsel for any Indemnitee, incurred by or
asserted against any Indemnitee arising out of, in connection with, or as a
result of (i) the execution or delivery of any Transaction Document or any
agreement or instrument contemplated thereby, the performance by the parties
to the Transaction Documents of their respective obligations thereunder or
the consummation of the Transactions or any other transactions contemplated
thereby, (ii) any Loan or the use of the proceeds thereof, or (iii) any
actual or prospective claim, litigation, investigation or proceeding
relating to any of the foregoing, whether based on contract, tort or any
other theory and regardless of whether any Indemnitee is a party thereto,
provided that such indemnity shall not, as to any Indemnitee, be available
--------
to the extent that such losses, claims, damages, liabilities or related
expenses are determined by a court of competent jurisdiction by final and
nonappealable judgment to have resulted from the gross negligence or willful
misconduct of such Indemnitee.

                  (c)  To the extent that the Borrower or any Subsidiary
fails to pay any amount required to be paid by it to the Administrative
Agent under this Section 8.18, each Lender severally agrees to pay to the
Administrative Agent an amount equal to the product of such unpaid amount
multiplied by a fraction, the numerator of which is the outstanding
-------------
principal balance of such Lender's Loans and the denominator of which is the
outstanding principal balance of all Lenders' Loans (in each case determined
as of the time that the applicable unreimbursed expense or indemnity payment
is sought or, in the event that no Lender shall have any outstanding Loans
at such time, as of the last time at which any Lender had any outstanding
Loans), provided that the unreimbursed expense or indemnified loss, claim,
        --------
damage, liability or related expense, as applicable, was incurred by or
asserted against the Administrative Agent in its capacity as such.

                                     33

                  (d)  To the extent permitted by applicable law, the
Borrower shall not assert, and hereby waives, any claim against any
Indemnitee, on any theory of liability, for special, indirect, consequential
or punitive damages (as opposed to direct and actual damages) arising out
of, in connection with, or as a result of, any Transaction Document or any
agreement, instrument or other document contemplated thereby, the
transactions contemplated by the Loan Documents or the use of the proceeds
thereof.

                  (e)  All amounts due under this Section shall be payable
promptly but in no event later than ten days after written demand therefor.

                 [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK
                           SIGNATURE PAGES FOLLOW]

                                     34

                         LOAN AND WARRANT AGREEMENT
                         --------------------------

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

                                         ZOLTEK COMPANIES, INC.

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

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

                         LOAN AND WARRANT AGREEMENT
                         --------------------------

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

                                         OMICRON MASTER TRUST, in its capacity
                                         as Administrative Agent

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

                                         Address for Notice:

                                         Facsimile:

                         LOAN AND WARRANT AGREEMENT
                         --------------------------

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

                                         [LENDER]

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

                                         Loan Amount:

                                         Address for Notice:

                                         Facsimile:

                         LOAN AND WARRANT AGREEMENT
                         --------------------------

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

                                         [LENDER]

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

                                         Loan Amount:

                                         Address for Notice:<PAGE>

                                                                 Exhibit 4.2

                                                                   EXHIBIT A
                                                                   ---------

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

No. __                                                    $________________
                                      Original Issue Date: October 14, 2004

                           ZOLTEK COMPANIES, INC.
           SENIOR SECURED 7.5% CONVERTIBLE NOTE DUE APRIL 14, 2008

                  THIS NOTE is one of a series of duly authorized and issued
notes of Zoltek Companies, Inc., a Missouri corporation (the "BORROWER"),
designated as its 7.5% Senior Secured Convertible Notes due April 14, 2008,
in the original aggregate principal amount of ($20,000,000) (collectively,
the "NOTES" and each Note comprising the Notes, a "NOTE").

                  FOR VALUE RECEIVED, the Borrower promises to pay to the
order of ________________ or its registered assigns (the "LENDER"), the
principal sum of __________ million dollars ($_____________), on April 14,
2008 or such earlier date as this Note is required to be repaid as provided
hereunder (the "MATURITY DATE"), and to pay interest to the Lender on the
principal amount of this Note outstanding from time to time in accordance
with the provisions hereof. All holders of Notes are referred to
collectively, as the "LENDERS." This Note is subject to the following
additional provisions:

                  1. Definitions. In addition to the terms defined elsewhere
                     -----------
in this Note: (a) capitalized terms that are used but not otherwise defined
herein have the meanings given to such terms in the Loan and Warrant
Agreement, dated as of the Original Issue Date, among the Borrower, the
lenders identified therein and Omicron Master Trust, as Administrative Agent

thereunder (the "LOAN AGREEMENT"), and (b) the following terms have the
meanings indicated below:

      "BANKRUPTCY EVENT" means any of the following events: (a) the Borrower
or any Subsidiary commences a case or other proceeding under any bankruptcy,
reorganization, arrangement, adjustment of debt, relief of debtors,
dissolution, insolvency or liquidation or similar law of any jurisdiction
relating to the Borrower or any Subsidiary thereof; (b) there is commenced
against the Borrower or any Subsidiary any such case or proceeding that is
not dismissed within 60 days after commencement; (c) the Borrower or any
Subsidiary is adjudicated by a court of competent jurisdiction insolvent or
bankrupt or any order of relief or other order approving any such case or
proceeding is entered; (d) the Borrower or any Subsidiary suffers any
appointment of any custodian or the like for it or any substantial part of
its property that is not discharged or stayed within 60 days; (e) under
applicable law the Borrower or any Subsidiary makes a general assignment for
the benefit of creditors; (f) the Borrower or any Subsidiary fails to pay,
or states that it is unable to pay or is unable to pay, its debts generally
as they become due; (g) the Borrower or any Subsidiary calls a meeting of
its creditors with a view to arranging a composition, adjustment or
restructuring of its debts; or (h) the Borrower or any Subsidiary, by any
act or failure to act, expressly indicates its consent to, approval of or
acquiescence in any of the foregoing or takes any corporate or other action
for the purpose of effecting any of the foregoing.

      "BOOK VALUE" shall mean, with respect to any item of Collateral
Security, the historical cost thereof set forth on the books of Opco in
accordance with applicable accounting principles, less all accumulated
depreciation, reserve, allowance and impairment with respect thereto in
accordance with applicable accounting principles.

      "BORROWER PREPAYMENT AMOUNT" for any principal amount of Notes which
shall be subject to prepayment, shall equal the sum of (1) the greater of:
(A) 115% of such outstanding principal amount, plus all accrued but unpaid
interest on such Notes, through the date of payment, or (B) the product of
(x) the Event Equity Value and (y) the number of the Underlying Shares
issuable upon conversion in full of such principal amount and all such
accrued but unpaid interest thereon (without regard to any conversion
limitation contained herein), and (2) the amount of any unpaid liquidated
damages and other amounts then owing (other than interest and principal)
under the Transaction Documents.

      "CHANGE OF CONTROL" means the occurrence of any of the following in
one or a series of related transactions: (i) an acquisition after the date
hereof by an individual or legal entity or "group" (as described in Rule
13d-5(b)(1) under the Exchange Act) of more than one-third of the voting
rights or equity interests in the Borrower; (ii) a replacement of more than
one-half of the members of the Borrower's board of directors in a single
election of directors that is not approved by those individuals who are
members of the board of directors on the date hereof (or other directors
previously approved by such individuals); (iii) a Fundamental Transaction
(as defined in Section 11(c)), a merger or consolidation of the Borrower or
any Subsidiary or a sale of more than one-half of the assets of the Borrower
in one or a series of related transactions, unless following such
transaction or series of transactions, the holders of the Borrower's
securities prior to the first such transaction continue to hold at least
two-thirds of the voting rights and equity interests in the surviving entity
or acquirer of such assets; (iv) a

                                     2

recapitalization, reorganization or other transaction involving the Borrower
or any Subsidiary that constitutes or results in a transfer of more than
one-third of the voting rights or equity interests in the Borrower, unless
following such transaction or series of transactions, the holders of the
Borrower's securities prior to the first such transaction continue to hold
at least two-thirds of the voting rights and equity interests in the
surviving entity or acquirer of such assets; (v) consummation of a "Rule
13e-3 transaction" as defined in Rule 13e-3 under the Exchange Act with
respect to the Borrower, or (vi) the execution by the Borrower or its
controlling shareholders of an agreement providing for or reasonably likely
to result in any of the foregoing events.

      "CLOSING PRICE" means, for any date, the price determined by the first
of the following clauses that applies: (a) if the Common Stock is then
listed or quoted on an Eligible Market, the closing sale price per share of
the Common Stock for such date (or the nearest preceding date) on the
primary Eligible Market or exchange on which the Common Stock is then listed
or quoted; (b) if prices for the Common Stock are then quoted on the OTC
Bulletin Board, the closing sale price per share of the Common Stock for
such date (or the nearest preceding date) so quoted; (c) if prices for the
Common Stock are then reported in the "Pink Sheets" published by the
National Quotation Bureau Incorporated (or a similar organization or agency
succeeding to its functions of reporting prices), the most recent sale price
per share of the Common Stock so reported; or (d) in all other cases, the
fair market value of a share of Common Stock as determined by an independent
qualified appraiser selected in good faith and paid for by a majority in
interest of the Lenders.

      "COMMON STOCK" means the common stock of the Borrower, $0.01 par value
per share, and any securities into which such common stock may hereafter be
reclassified.

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

      "CONVERSION DATE" means the date a Conversion Notice together with the
Conversion Schedule is delivered to the Borrower in accordance with
Section 5(a).

      "CONVERSION NOTICE" means a written notice in the form attached hereto
as Exhibit A.
   ---------

      "CONVERSION PRICE" means $12.00, subject to adjustment from time to
time pursuant to Section 11.

      "DEFAULT" means any event or condition which constitutes an Event of
Default or that upon notice, lapse of time or both would, unless cured or
waived, become an Event of Default.

      "ELIGIBLE MARKET" means any of the New York Stock Exchange, the
American Stock Exchange, the Nasdaq National Market or the Nasdaq SmallCap
Market.

      "EQUITY CONDITIONS ARE SATISFIED" means, as of any date of
determination, that each of the

                                     3

following conditions is (or would be) satisfied on such date, if the
Borrower were to issue on such date all of the Underlying Shares then
issuable upon (1) conversion in full of the outstanding principal amount of
all convertible debt issued by the Borrower (including the Notes), (2) the
exercise of all options and warrants for Common Stock (including the
Warrants) and (3) the payment of accrued and unpaid interest on such
Interest Payment Date under all convertible debt (including the Notes) of
the Borrower: (i) the number of authorized but unissued and otherwise
unreserved shares of Common Stock is sufficient for such issuance, (ii) the
Common Stock is listed or quoted (and is not suspended from trading) on an
Eligible Market and such shares of Common Stock are approved for listing on
such Eligible Market upon issuance, (iii) such Common Stock is registered
for resale under the Registration Statement, (iv) such issuance would be
permitted in full without violating, (x) in the case of Section 13, Section
5(b)(i) hereof, or (y) in all other cases, Section 5(b) hereof or the rules
or regulations of the Eligible Market on which such shares are listed or
quoted, (v) both immediately before and after giving effect thereto, no
Default shall or would exist, and (vi) no public announcement of a pending
or proposed Change of Control transaction has occurred that has not been
consummated.

      "EVENT EQUITY VALUE" means the average of the Closing Prices for the
five consecutive Trading Days preceding either: (a) the date of an Event
Notice or the date the Borrower becomes obligated to pay the Event Price
under Section 7(b), as applicable, or (b) the date on which the Event Price
with respect thereto (together with any other payments, expenses and
liquidated damages then due and payable under the Transaction Documents) is
paid in full, whichever is greater.

      "EVENT OF DEFAULT" means any one of the following events (whatever the
reason and whether it shall be voluntary or involuntary or effected by
operation of law or pursuant to any judgment, decree or order of any court,
or any order, rule or regulation of any administrative or governmental
body):

                  (i)      any default in the payment (free of any claim of
subordination), when the same becomes due and payable (whether on a
Conversion Date or the Borrower Conversion Date, a Prepayment Date, the
Maturity Date or by acceleration or prepayment or otherwise), of principal,
interest or liquidated damages in respect of this Note which default
continues unremedied for a period of three Trading Days after the date on
which written notice of such default is first given to the Borrower by the
Holder.

                  (ii)     the Borrower or any Subsidiary (1) fails to pay
when due any monetary obligation (regardless of amount) under any currently
existing or hereafter arising debenture (other than a Note) or any mortgage,
credit agreement or other facility, indenture agreement, factoring agreement
or other instrument under which there may be issued, or by which there may
be secured or evidenced, any Indebtedness or under any long term leasing or
factoring arrangement, if the aggregate amount of the obligations and
liabilities of the Borrower and the Subsidiaries thereunder exceed $350,000
(each of the foregoing a "Material Debt Agreement"), or (2) fails to observe
                          -----------------------
or perform any other obligation under any Material Debt Agreement, and such
failure results in the obligations thereunder becoming or being declared due
and payable prior to the date on which they would otherwise become due and
payable.

                                     4

                  (iii)    the occurrence or entering into by the Borrower
or any Subsidiary, or consummation of, any Change of Control transaction.

                  (iv)     the Borrower shall fail to observe or perform any
covenant, condition or agreement contained in Sections 4.4, 4.6, 4.8, 4.9,
4.10, 4.12, 4.16 or in Article 5 of the Loan Agreement.

                  (v)      the Borrower shall fail to observe or perform any
covenant, condition or agreement contained in any Transaction Document
(other than those specified in clause (i) or (iv) above and clause (xvii)
below), and such failure shall continue unremedied for a period of ten
Trading Days after the date on which written notice of such default is first
given to the Borrower by the Holder (it being understood that no prior
notice need be given in the case of a default that cannot reasonably be
cured within ten Trading Days).

                  (vi)     the occurrence and continuance of an Event of
Default under any other Note.

                  (vii)    any prepayment by the Borrower of any other Note
or any other Indebtedness (other than (a) the Borrower's outstanding
Indebtedness to Southwest Bank of St. Louis and Beal Bank, SSB, and (b) the
2003 Debentures (as defined below) or 2004 Debentures (as defined below),
each in accordance with their respective terms), issued by it or outstanding
under any issuance of securities in exchange for any Notes issued by it
(other than Underlying Shares upon conversion of such Notes in accordance
with their terms as in effect on the Original Issue Date thereof), except in
each case (1) if the Borrower offers to the Lender in writing the same
prepayment of this Note and all other Notes then held by such Lender on the
same economic terms on which the Borrower prepays or offers to prepay
(whichever is more favorable to the holder of such Note) such Notes, (2) in
accordance with the prepayment provisions of Section 13 of this Note and,
(3) in accordance with the prepayment provisions of Section 15 of the
Security Agreement.

                  (viii)   any of the Borrower's representations and warranties
set forth in the Loan Agreement shall be incorrect in any material respect
as of the Original Issue Date.

                  (ix)     the occurrence of a Bankruptcy Event.

                  (x)      one or more judgments for the payment of money in
an aggregate amount in excess of (1) with respect to the existing litigation
pertaining to Scott Macon Securities, $850,000, or (2) in all other cases,
$350,000, shall be rendered against the Borrower or any Subsidiary or any
combination thereof (which shall not be fully covered by insurance without
taking into account any applicable deductibles) and the same shall remain
undischarged or unbonded for a period of 30 consecutive days during which
execution shall not be effectively stayed, or any action shall be legally
taken by a judgment creditor to attach or levy upon any assets of the
Borrower or any Subsidiary to enforce any such judgment.

                  (xi)     any Transaction Document shall cease, for any
reason, to be in full force and effect, or the Borrower shall so assert in
writing or shall disavow any of its obligations thereunder.

                                     5

                  (xii)    the Common Stock shall not be listed or quoted,
or is suspended from trading, on an Eligible Market for a period of three
Trading Days (which need not be consecutive Trading Days).

                  (xiii)   the Borrower fails to deliver a stock certificate
evidencing Underlying Shares to a Lender within three Trading Days after a
Conversion Date, or in the case of exercises under a Warrant, within three
Trading Days after a Date of Exercise under, and as such term is defined in,
such Warrant, or the conversion or exercise rights of the Lenders pursuant
to the terms hereof or the terms of the Warrants are otherwise suspended for
any reason (other than as a result of the limitations set forth in Section
5(b)(ii)).

                  (xiv)    the Borrower fails to have available a sufficient
number of authorized but unissued and otherwise unreserved shares of Common
Stock available to issue Underlying Shares upon any conversion of Notes or
upon any exercise of Warrants.

                  (xv)     the Borrower effects or publicly announces its
intention to effect any exchange, recapitalization or other transaction that
effectively requires or rewards physical delivery of certificates evidencing
the Common Stock, unless following such transaction, the holders of the
Borrower's securities prior to the first such transaction continue to
beneficially own at least two-thirds of the voting rights and equity
interests in the surviving entity or acquirer of such assets.

                  (xvi)    a Registration Statement under the Registration
Rights Agreement is not declared effective by the Commission by the 365th
day following the Closing Date, or is not effective as to all Registrable
Securities (as defined in the Registration Rights Agreement), and available
for use by the holders of Registrable Securities, for in excess of an
aggregate of 60 Trading Days (which need not be consecutive Trading Days)
during the Effectiveness Period (as defined in the Registration Rights
Agreement).

                  (xvii)   the Borrower fails to make any cash payment
required under the Transaction Documents (other than as set forth in
paragraph (i) above) and such failure is not cured within five Trading Days
after notice of such default is first given to the Borrower by a Lender.

                  (xviii)  there shall be an Event of Default under and as
defined in any debenture issued by the Borrower in respect of the Securities
Purchase Agreement dated as of December 19, 2003 (the "2003 SECURITIES
PURCHASE AGREEMENT") (such debentures, the "2003 DEBENTURES").

                  (xix)    there shall be an Event of Default under and as
defined in any debenture issued by the Borrower in respect of the Securities
Purchase Agreement dated as of March 11, 2004 (the "2004 SECURITIES PURCHASE
AGREEMENT") (such debentures, the "2004 DEBENTURES").

                  (xx)     the Borrower shall fail to certify to each Lender,
within 60 days after the end of each fiscal quarter of the Borrower, the
Book Value of the Collateral Security, taken as a whole, as of the end of
such quarter, expressed in U.S. Dollars at the prevailing

                                     6

exchange rate therefor as of such fiscal quarter end, and the Borrower fails
to cure such failure within 7 days of any demand therefor by the
Administrative Agent or any Lender.

                  (xxi)    the Collateral Security, taken as a whole, shall
fail as of the end of any calendar month to have a Book Value (expressed in
U.S. Dollars at the prevailing exchange rate therefor as of such date or, in
the event that such date is not a fiscal quarter end of the Borrower, as of
the immediately preceding fiscal quarter end), of at least one and one-half
times the aggregate outstanding principal balance of the Loans, and the
Borrower fails to cure such failure within 14 days of any demand therefor by
the Administrative Agent or any Lender.

                  (xxii)   the Borrower shall agree to amend, waive or
otherwise modify the Shareholders Agreement other than in accordance with
Section 8.4 of the Loan Agreement.

      "GUARANTEE" of or by any Person shall mean any obligation, contingent
or otherwise, of such Person guaranteeing or having the economic effect of
guaranteeing any Indebtedness of any other Person (the "primary obligor") in
any manner, whether directly or indirectly, and including any obligation of
such Person, direct or indirect, (a) to purchase or pay (or advance or
supply funds for the purchase or payment of) such Indebtedness or to
purchase (or to advance or supply funds for the purchase of) any security
for the payment of such Indebtedness, (b) to purchase property, securities
or services for the purpose of assuring the owner of such Indebtedness of
the payment of such Indebtedness or (c) to maintain working capital, equity
capital or other financial statement condition or liquidity of the primary
obligor so as to enable the primary obligor to pay such Indebtedness,
provided, that the term Guarantee shall not include endorsements for
--------
collection or deposit, in either case in the ordinary course of business.

      "INDEBTEDNESS" of any Person shall mean, without duplication, (a) all
obligations of such Person for borrowed money, (b) all obligations of such
Person evidenced by bonds, debentures, notes or similar instruments, (c) all
obligations of such Person upon which interest charges are customarily paid,
(d) all obligations of such Person under conditional sale or other title
retention agreements relating to property or assets purchased by such
Person, (e) all obligations of such Person issued or assumed as the deferred
purchase price of property or services (other than unsecured accounts
payable incurred in the ordinary course of business), (f) all Indebtedness
of others secured by (or for which the holder of such Indebtedness has an
existing right, contingent or otherwise, to be secured by) any Lien on
property owned or acquired by such Person, whether or not the obligations
secured thereby have been assumed, (g) all Guarantees by such Person of
Indebtedness of others, (h) all Capital Lease Obligations of such Person,
(i) all obligations of such Person in respect of interest rate protection
agreements, foreign currency exchange agreements or other interest or
exchange rate hedging arrangements that exceed amounts necessary to hedge
the Borrower's interest rate or cross-currency exposure and (j) all
obligations of such Person as an account party in respect of letters of
credit and bankers' acceptances. The Indebtedness of any Person shall
include the Indebtedness of any partnership in which such Person is a
general partner.

      "ORIGINAL ISSUE DATE" has the meaning set forth on the face of this
Note.

      "REGISTRATION STATEMENT" shall have the meaning set forth in the Loan
Agreement.

                                     7

      "SECURITY AGREEMENT" shall have the meaning set forth in the Loan
Agreement.

      "TRADING DAY" means (i) a day on which the Common Stock is traded on a
Trading Market (other than the OTC Bulletin Board), or (ii) if the Common
Stock is not traded on a Trading Market, a day on which the Common Stock is
traded in the over-the-counter market, as reported by the OTC Bulletin Board
or the National Quotation Bureau Incorporated, or (iii) if the Common Stock
is not traded on a Trading Market, a day on which the Common Stock is quoted
in the over-the-counter market as reported by the National Quotation Bureau
Incorporated (or any similar organization or agency succeeding to its
functions of reporting prices); provided, that in the event that the Common
Stock is not listed or quoted as set forth in (i), (ii) and (iii) hereof,
then Trading Day shall mean a Business Day.

      "UNDERLYING SHARES" means the shares of Common Stock issuable upon
conversion of the Notes and payment of interest thereunder, and upon
exercise of the Warrants.

      "VWAP" means, with respect to any date of determination, the daily
volume weighted average price (as reported by Bloomberg using the VAP
function) of the Common Stock on such date of determination, or if there is
no such price on such date of determination, then the daily volume weighted
average price on the date nearest preceding such date.

      "WARRANTS" shall have the meaning ascribed in the Loan Agreement.

            2.  Interest.
                --------

                (a) The Borrower shall pay interest to the Lender on the
aggregate unconverted and then outstanding principal amount of this Note at
the rate of 7.5% per annum, payable quarterly in cash or, subject to the
conditions of Section 2(b), in shares of Common Stock, in arrears on each
March 31, June 30, September 30 and December 31, beginning December 31,
2004, except if such date is not a Trading Day, in which case such interest
shall be payable on the next succeeding Trading Day. Interest shall be
calculated on the basis of a 360-day year for the actual number of days
elapsed and shall accrue daily commencing on the Original Issue Date.

                (b) Subject to the conditions and limitations set forth below,
the Borrower may at its option, on each Interest Payment Date, pay accrued
interest on this Note either: (i) in cash, or (ii) by delivering by the
Third Trading Day following the applicable Interest Payment Date, a number
of freely tradable shares of Common Stock equal to the quotient obtained by
dividing the amount of such interest by 93% of the arithmetic average of the
VWAP for each of the 20 consecutive Trading Days immediately preceding (but
not including) such Interest Payment Date. The Borrower must deliver written
notice to the Lender indicating the manner in which it intends to pay
interest at least ten Trading Days prior to each Interest Payment Date, but
the Borrower may indicate in any such notice that the election contained
therein shall continue for subsequent Interest Payment Dates until
rescinded. Failure to timely provide such written notice shall be deemed an
irrevocable election by the Borrower to pay such interest in cash. All
interest payable in respect of the Notes on any Interest Payment Date must
be paid in the same manner. Notwithstanding the foregoing, the Borrower may
not pay interest

                                     8

in shares of Common Stock on any Interest Payment Date unless, on the date
thereof, the Equity Conditions Are Satisfied.

            3.  Registration of Notes. The Borrower shall register the Notes
                ---------------------
upon records maintained by the Borrower for that purpose (the "NOTE
REGISTER") in the name of each record Lender thereof from time to time. The
Borrower may deem and treat the registered Lender of this Note as the
absolute owner hereof for the purpose of any conversion hereof or any
payment of interest hereon, and for all other purposes, absent actual notice
to the contrary from such record Lender. The Borrower shall at any time and
from time to time, upon one Business Days' prior notice by the
Administrative Agent or any Lender, make the Note Register available for
inspection by the Administrative Agent, such Lender or the representative(s)
of the Administrative Agent or such Lender, at the chief executive office of
the Borrower during normal business hours. The Administrative Agent shall be
permitted to rely on the information set forth in the Note Register.

            4.  Registration of Transfers and Exchanges. The Borrower shall
                ---------------------------------------
register the transfer of any portion of this Note in the Note Register upon
surrender of this Note to the Borrower at its address for notice set forth
herein. Upon any such registration or transfer, a new Note, in substantially
the form of this Note (any such new debenture, a "NEW NOTE"), evidencing the
portion of this Note so transferred shall be issued to the transferee and a
New Note evidencing the remaining portion of this Note not so transferred,
if any, shall be issued to the transferring Lender. The acceptance of the
New Note by the transferee thereof shall be deemed the acceptance by such
transferee of all of the rights and obligations of a holder of a Note. The
Borrower agrees that its prior consent is not required for the transfer of
any portion of this Note; provided, however, that the Borrower shall be
                          --------
entitled to reasonable assurance, including an opinion of counsel reasonably
acceptable to Borrower, that such transfer complies with applicable federal
and state securities laws. This Note is exchangeable for an equal aggregate
principal amount of Notes of different authorized denominations, as
requested by the Lender surrendering the same. No service charge or other
fee will be imposed in connection with any such registration of transfer or
exchange.

            5.  Conversion.
                ----------

                (a) (i)  At the Option of the Lender. All or any portion of
                         ---------------------------
the principal amount of this Note then outstanding together with any accrued
and unpaid interest hereunder shall be convertible into shares of Common
Stock at the Conversion Price (subject to limitations set forth in Section
5(b)), at the option of the Lender, at any time and from time to time from
and after the Original Issue Date. The Lender may effect conversions under
this Section 5(a), by delivering to the Borrower a Conversion Notice
together with a schedule in the form of Schedule 1 attached hereto (the
                                        ----------
"CONVERSION SCHEDULE"). If the Lender is converting less than all of the
principal amount represented by this Note, or if a conversion hereunder may
not be effected in full due to the application of Section 5(b), the Borrower
shall honor such conversion to the extent permissible hereunder and shall
promptly deliver to the Lender a Conversion Schedule indicating the
principal amount which has not been converted.

                         (ii) At Option of the Borrower. Subject to the
                              -------------------------
provisions of this Section 5(a)(ii), at any time after the Effective Date,
the Borrower may deliver a written notice

                                     9

(such notice, a "BORROWER CONVERSION NOTICE") to the Lender stating its
irrevocable election to convert at the Conversion Price all (but not less
than all) of the outstanding principal amount of this Note, provided that:
(i) the VWAP of the Common Stock for each of the 30 consecutive Trading Days
prior to the date of such Borrower Conversion Notice is greater than $21.50
(subject to equitable adjustment as a result of the events set forth in
Sections 11(a), (b) and (c)), (ii) on each date during the entire period
referred to in clause (i) above and through the Borrower Conversion Date (as
defined below), the Equity Conditions Are Satisfied, (iii) the average daily
trading volume of the Common Stock during the entire period referred to in
clause (i) above and through the Borrower Conversion Date (as defined below)
shall be at least 40,000 shares, (iv) immediately before or after giving
effect to such issuance on such date, no Default shall or would exist, and
(v) immediately after giving effect thereto on the Borrower Conversion Date,
none of the other Notes, or any of the 2003 Debentures or 2004 Debentures,
would be or remain outstanding. Subject to the terms and conditions of this
Section 5(a)(ii), the Borrower shall effect the conversion of this Note
pursuant to a Borrower Conversion Notice on the 10th Trading Day immediately
succeeding the date of the Borrower Conversion Notice (the "BORROWER
CONVERSION DATE"). Notwithstanding anything to the contrary set forth in
this Note, the Lender shall have the right to nullify such Borrower
Conversion Notice if any of the conditions set forth in this Section
5(a)(ii) shall not have been met from the date of the Borrower Conversion
Notice through the Borrower Conversion Date. The Borrower covenants and
agrees that it will honor all Conversion Notices tendered from the time of
delivery of the Borrower Conversion Notice through 6:30 p.m. on the Trading
Day prior to the Borrower Conversion Date. Notwithstanding the foregoing,
the Borrower and the Lender agree that, if and to the extent Section 5(b) of
this Note would restrict the right of the Borrower to issue or the right of
the Lender to receive any of the Underlying Shares otherwise issuable upon
the conversion in respect of a Borrower Conversion Notice, then
notwithstanding anything to the contrary set forth in the Borrower
Conversion Notice, the Borrower Conversion Notice shall be deemed
automatically amended to apply only to such portion of this Note as would
permit conversion in full in compliance with Section 5(b). The Lender will
promptly (and, in any event, prior to the Borrower Conversion Date) notify
the Borrower in writing following receipt of a Borrower Conversion Notice if
Section 5(b)(i) would restrict its right to receive the full number of
otherwise issuable Underlying Shares following such Borrower Conversion
Notice.

                (b) Certain Conversion Restrictions.
                    -------------------------------

                    (i)  Notwithstanding anything to the contrary contained
herein, the number of shares of Common Stock that may be acquired by a
Lender upon each conversion of Notes (or otherwise in respect hereof) shall
be limited to the extent necessary to insure that, following such conversion
(or other issuance), the total number of shares of Common Stock then
beneficially owned by such Lender and its Affiliates and any other Persons
whose beneficial ownership of Common Stock would be aggregated with such
Lender's for purposes of Section 13(d) of the Exchange Act, does not exceed
9.999% of the total number of issued and outstanding shares of Common Stock
(including for such purpose the shares of Common Stock issuable upon such
conversion). For such purposes, beneficial ownership shall be determined in
accordance with Section 13(d) of the Exchange Act and the rules and
regulations promulgated thereunder. This provision shall not restrict the
number of shares of Common Stock which a Lender may receive or beneficially
own in order to determine the amount of securities or other

                                     10

consideration that such Lender may receive in the event of a Fundamental
Transaction (defined below) involving the Borrower as contemplated herein.
This restriction may not be waived.

                    (ii) Notwithstanding anything to the contrary in this Note,
if the Borrower has not previously obtained Shareholder Approval (as defined
below), then the Borrower may not issue shares of Common Stock in excess of
the Issuable Maximum upon conversions of this Note at a conversion price
which is less than the Closing Price on the Trading Day immediately
preceding the Original Issue Date (the "THRESHOLD PRICE"). The "Issuable
Maximum" means, as of any date, a number of shares of Common Stock equal to
3,289,196, less such number of shares of Common Stock as have been issued at
a price below the Threshold Price (1) upon exercise of the Warrants issued
under the Loan Agreement and warrants issued under the 2003 Securities
Purchase Agreement or the 2004 Securities Purchase Agreement, (2) upon
conversion of the 2003 Debentures and the 2004 Debentures, and (3) upon
conversion of the Notes, or in payment of interest thereunder. Each Lender
shall be entitled to a portion of the Issuable Maximum equal to the quotient
obtained by dividing: (x) the principal amount of Notes issued and sold to
such Lender on the Original Issue Date by (y) the aggregate principal amount
of all Notes issued and sold by the Borrower on the Original Issue Date. If
any Lender shall no longer hold Notes, then such Lender's remaining portion
of the Issuable Maximum (other than those represented by the remaining
portion of the Warrant and the other warrants referenced in clause (1)
above) shall be allocated pro-rata among the remaining Lenders, giving
effect to the Borrower's desire to allocate this limitation among the class
of securities known as the Notes. If on any Conversion Date or Borrower
Conversion Date, or at such time as a Lender shall notify the Company that
the condition in (A) following this clause shall be in effect: (A) the
aggregate number of shares of Common Stock that would then be issuable upon
conversion in full of all then outstanding principal amount of Notes would
exceed the Issuable Maximum on such date, and (B) the Borrower shall not
have previously obtained the vote of shareholders, as may be required by the
applicable rules and regulations of the Nasdaq Stock Market (or any
successor entity or any other Eligible Market on which the Borrower's
securities then trade), applicable to approve the issuance of shares of
Common Stock in excess of the Issuable Maximum pursuant to the terms hereof
(the "SHAREHOLDER APPROVAL"), then, the Borrower shall issue to the Lender a
number of shares of Common Stock equal to the Issuable Maximum and, with
respect to the remainder of the principal amount of Notes then held by the
Lenders for which a conversion would result in an issuance of shares of
Common Stock in excess of the Issuable Maximum, the Borrower must seek
Shareholder Approval as soon as possible, but in any event not later than
the 90th day following such Conversion Date, Borrower Conversion Date or the
date of such request. The Borrower and the Lender understand and agree that
shares of Common Stock issued to and then held by the Lender as a result of
conversions of Notes shall not be entitled to cast votes on any resolution
to obtain Shareholder Approval pursuant hereto.

            6.  Mechanics of Conversion.
                -----------------------

                (a) The number of Underlying Shares issuable upon any
conversion hereunder shall equal the outstanding principal amount of this
Note to be converted, divided by the Conversion Price on the Conversion
Date, plus (if indicated in the applicable Conversion Notice or the Borrower
Conversion Notice) the amount of any accrued but unpaid interest on this
Note through the Conversion Date, divided by the Conversion Price on the
Conversion Date.

                                     11

                (b) The Borrower shall promptly following each Conversion
Date (but in no event later than three Trading Days after such Conversion
Date) issue or cause to be issued and cause to be delivered to or upon the
written order of the Lender and in such name or names as the Lender may
designate a certificate for the Underlying Shares issuable upon such
conversion, free of restrictive legends. The Lender, or any Person so
designated by the Lender to receive Underlying Shares, shall be deemed to
have become holder of record of such Underlying Shares as of such Conversion
Date. The Borrower shall, upon request of the Lender, use its best efforts
to deliver Underlying Shares hereunder electronically (via a DWAC) through
the Depository Trust Corporation or another established clearing corporation
performing similar functions.

                (c) The Lender shall not be required to deliver the original
Note in order to effect a conversion hereunder. Execution and delivery of
the Conversion Notice shall have the same effect as cancellation of the Note
and issuance of a New Note representing the remaining outstanding principal
amount.

                (d) The Borrower's obligations to issue and deliver Underlying
Shares upon conversion of this Note in accordance with the terms hereof are
absolute and unconditional, irrespective of any action or inaction by the
Lender to enforce the same, any waiver or consent with respect to any
provision hereof, the recovery of any judgment against any Person or any
action to enforce the same, or any setoff, counterclaim, recoupment,
limitation or termination, or any breach or alleged breach by the Lender or
any other Person of any obligation to the Borrower or any violation or
alleged violation of law by the Lender or any other Person, and irrespective
of any other circumstance which might otherwise limit such obligation of the
Borrower to the Lender in connection with the issuance of such Underlying
Shares.

                (e) If by the third Trading Day after a Conversion Date or the
Borrower Conversion Date the Borrower fails to deliver to the Lender such
Underlying Shares in such amounts and in the manner required pursuant to
Section 5, then the Lender will have the right to rescind the Conversion
Notice or the Borrower Conversion Notice pertaining thereto by giving
written notice to the Borrower prior to such Lender's receipt of such
Underlying Shares.

                (f) If by the third Trading Day after a Conversion Date or
the Borrower Conversion Date the Borrower fails to deliver to the Lender the
required number of Underlying Shares in the manner required pursuant to
Section 5, and if after such third Trading Day and prior to the receipt of
such Underlying Shares, the Lender purchases (in an open market transaction
or otherwise) shares of Common Stock to deliver in satisfaction of a sale by
the Lender of the Underlying Shares which the Lender anticipated receiving
upon such conversion (a "BUY-IN"), then the Borrower shall: (1) pay in cash
to the Lender (in addition to any other remedies available to or elected by
the Lender) the amount by which (x) the Lender's total purchase price
(including brokerage commissions, if any) for the shares of Common Stock so
purchased exceeds (y) the amount obtained by multiplying (A) the number of
Underlying Shares that the Borrower was required to deliver to the Lender in
connection with the exercise at issue by (B) the Closing Price at the time
of the obligation giving rise to such purchase obligation and (2) at the
option of the Lender, either void the conversion at issue and reinstate the
principal amount of Notes (plus accrued interest therein) for which such
conversion was not timely honored or deliver to the Lender the number of
shares of Common Stock that would have been

                                     12

issued had the Borrower timely complied with its exercise and delivery
obligations hereunder. The Lender shall provide the Borrower reasonably
detailed evidence or written notice indicating the amounts payable to the
Lender in respect of the Buy-In.

            7.  Events of Default.
                -----------------

                (a) At any time or times following the occurrence and during
the continuance of an Event of Default (other than under clause (ix) of such
defined term with respect to the Borrower), the Lender may by notice to the
Borrower (an "EVENT NOTICE"), require the Borrower to purchase all or any
portion of the outstanding principal amount of this Note, as indicated in
such Event Notice, at a purchase price in Dollars in cash equal to the
greater of: (A) 100% of such outstanding principal amount, plus all accrued
but unpaid interest thereon and any unpaid liquidated damages and other
amounts then owing to the Lender under the Transaction Documents, through
the date of purchase, or (B) the Event Equity Value of the Underlying Shares
that would be issuable upon conversion of such principal amount and payment
in Common Stock of all such accrued but unpaid interest thereon (without
regard to any condition precedent or conversion limitation contained
herein). The aggregate amount payable pursuant to the preceding sentence is
referred to as the "EVENT PRICE." The Borrower shall pay the aggregate Event
Price to the Lender (free of any claim of subordination) no later than the
third Trading Day following the date of delivery of the Event Notice, and
upon receipt thereof the Lender shall deliver the original Note so
repurchased to the Borrower.

                (b) Upon the occurrence of any Bankruptcy Event with respect
to the Borrower, all outstanding principal and accrued but unpaid interest
on this Note and any unpaid liquidated damages and other amounts then owing
under the Transaction Documents shall immediately become due and payable in
full in Dollars in cash (free of any claim of subordination), without any
action by the Lender, and the Borrower shall immediately be obligated to
repurchase this Note held by such Lender at the Event Price pursuant to the
preceding paragraph as if the Lender had delivered an Event Notice
immediately prior to the occurrence of such Bankruptcy Event.

                (c) In connection with any Event of Default, the Lender need
not provide and the Borrower hereby waives any presentment, demand, protest
or other notice of any kind (other than the Event Notice), and the Lender
may immediately enforce any and all of its rights and remedies hereunder and
all other remedies available to it under applicable law. Any such
declaration may be rescinded and annulled by the Lender at any time prior to
payment hereunder. No such rescission or annulment shall affect any
subsequent Event of Default or impair any right consequent thereto.

            8.  Ranking. This Note ranks senior to or pari passu with all
                -------
other Notes now or hereafter issued pursuant to the Transaction Documents
and is senior to or pari passu with all existing and hereafter created
unsecured Indebtedness of the Borrower. No unsecured Indebtedness of the
Borrower is senior to this Note in right of payment, whether with respect of
interest, damages or upon liquidation or dissolution or otherwise. The
Borrower will not, directly or indirectly, enter into, create, incur, assume
or suffer to exist any unsecured indebtedness of any kind, on or with
respect to any of its property or assets now owned or hereafter acquired or

                                     13

any interest therein or any income or profits therefrom, that is senior in
any respect to the Borrower's obligations under the Notes.

            9.  Charges, Taxes and Expenses. Issuance of certificates for
                ---------------------------
Underlying Shares upon conversion of (or otherwise in respect of) this Note
shall be made without charge to the Lender for any issue or transfer tax,
withholding tax, transfer agent fee or other incidental tax or expense in
respect of the issuance of such certificate, all of which taxes and expenses
shall be paid by the Borrower; provided, however, that the Borrower shall
not be required to pay any tax which may be payable in respect of any
transfer involved in the registration of any certificates for Underlying
Shares or Notes in a name other than that of the Lender. The Lender shall be
responsible for all other tax liability that may arise as a result of
holding or transferring this Note or receiving Underlying Shares in respect
hereof.

            10. Reservation of Underlying Shares. The Borrower covenants that
                --------------------------------
it will at all times reserve and keep available out of the aggregate of its
authorized but unissued and otherwise unreserved Common Stock, solely for
the purpose of enabling it to issue Underlying Shares as required hereunder,
the number of Underlying Shares which are then issuable and deliverable upon
the conversion of (and otherwise in respect of) this entire Note (taking
into account the adjustments of Section 11), free from preemptive rights or
any other contingent purchase rights of persons other than the Lender. The
Borrower covenants that all Underlying Shares so issuable and deliverable
shall, upon issuance in accordance with the terms hereof, be duly and
validly authorized, issued and fully paid and nonassessable.

            11. Certain Adjustments. The Conversion Price is subject to
                -------------------
adjustment from time to time as set forth in this Section 11.(1)

                (a) Stock Dividends and Splits. If the Borrower, at any time
                    --------------------------
while this Note is outstanding: (i) pays a stock dividend on its Common
Stock or otherwise makes a distribution on any class of capital stock that
is payable in shares of Common Stock, (ii) subdivides outstanding shares of
Common Stock into a larger number of shares, or (iii) combines outstanding
shares of Common Stock into a smaller number of shares, then in each such
case the Conversion Price shall be multiplied by a fraction of which the
numerator shall be the number of shares of Common Stock outstanding
immediately before such event and of which the denominator shall be the
number of shares of Common Stock outstanding immediately after such event.
Any adjustment made pursuant to clause (i) of this paragraph shall become
effective immediately after the record date for the determination of
shareholders entitled to receive such dividend or distribution, and any
adjustment pursuant to clause (ii) or (iii) of this paragraph shall become
effective immediately after the effective date of such subdivision or
combination.

                (b) Pro Rata Distributions. If the Borrower, at any time while
                    ----------------------
this Note is outstanding, distributes to all holders of Common Stock (i)
evidences of its indebtedness, (ii) any security (other than a distribution
of Common Stock covered by the preceding paragraph), (iii) rights or
warrants to subscribe for or purchase any security, or (iv) any other asset
(in each case, "DISTRIBUTED PROPERTY"), then, at the request of the Lender
delivered before the 90th day after the record date fixed for determination
of shareholders entitled to receive such

<FN>
--------
(1) This provision will not be in the Notes issued to directors and officers
    of the Company.

                                     14

distribution, the Borrower will deliver to the Lender, within five Trading
Days after such request (or, if later, on the effective date of such
distribution), the Distributed Property that the Lender would have been
entitled to receive in respect of the Underlying Shares for which this Note
could have been converted immediately prior to such record date. If such
Distributed Property is not delivered to the Lender pursuant to the
preceding sentence, then upon any conversion of this Note that occurs after
such record date, the Lender shall be entitled to receive, in addition to
the Underlying Shares otherwise issuable upon such conversion, the
Distributed Property that the Lender would have been entitled to receive in
respect of such number of Underlying Shares had the Lender been the record
holder of such Underlying Shares immediately prior to such record date.
Notwithstanding the foregoing, this Section 11(b) shall not apply to any
distribution of rights or securities in respect of adoption by the Borrower
of a shareholder rights plan, which events shall be covered by Section 11(a).

                (c) Fundamental Transactions. If, at any time while this Note
                    ------------------------
is outstanding, (i) the Borrower effects any merger or consolidation of the
Borrower with or into another Person, (ii) the Borrower effects any sale of
all or substantially all of its assets in one or a series of related
transactions, (iii) any tender offer or exchange offer (whether by the
Borrower or another Person) is completed pursuant to which holders of Common
Stock tender or exchange their shares for other securities, cash or
property, or (iv) the Borrower effects any reclassification of the Common
Stock or any compulsory share exchange pursuant to which the Common Stock is
effectively converted into or exchanged for other securities, cash or
property (other than as a result of a subdivision or combination of shares
of Common Stock covered by Section 11(a) above) (in any such case, a
"FUNDAMENTAL TRANSACTION"), then upon any subsequent conversion of this
Note, the Lender shall have the right to: (x) declare an Event of Default
pursuant to clause (iii) thereunder, (y) receive, for each Underlying Share
that would have been issuable upon such conversion absent such Fundamental
Transaction, the same kind and amount of securities, cash or property as it
would have been entitled to receive upon the occurrence of such Fundamental
Transaction if it had been, immediately prior to such Fundamental
Transaction, the holder of one share of Common Stock (the "ALTERNATE
CONSIDERATION") or (z) require the surviving entity to issue to the Lender
and instrument identical to this Note (with an appropriate adjustments to
the conversion price). For purposes of any such conversion, the Borrower
shall apportion the Conversion Price among the Alternate Consideration in a
reasonable manner reflecting the relative value of any different components
of the Alternate Consideration. If holders of Common Stock are given any
choice as to the securities, cash or property to be received in a
Fundamental Transaction, then the Lender shall be given the same choice as
to the Alternate Consideration it receives upon any conversion of this Note
following such Fundamental Transaction. To the extent necessary to
effectuate the foregoing provisions, any successor to the Borrower or
surviving entity in such Fundamental Transaction (or, if different, the
ultimate parent of such successor or entity or the entity issuing the
Alternate Consideration) shall issue to the Lender a new debenture
consistent with the foregoing provisions and evidencing the Lender's right
to convert such debenture into Alternate Consideration. The terms of any
agreement pursuant to which a Fundamental Transaction is effected shall
include terms requiring any such successor or surviving entity to comply
with the provisions of this paragraph (c) and insuring that this Note (or
any such replacement security) will be similarly adjusted upon any
subsequent transaction analogous to a Fundamental Transaction.

                (d) Subsequent Equity Sales.
                    -----------------------

                                     15

                    (i)  If the Borrower or any subsidiary thereof, as
applicable, at any time while this Note is outstanding, shall issue shares
of Common Stock or Common Stock Equivalents entitling any Person to acquire
shares of Common Stock, at a price per share less than the Conversion Price
(if the holder of the Common Stock or Common Stock Equivalent so issued
shall at any time, whether by operation of purchase price adjustments, reset
provisions, floating conversion, exercise or exchange prices or otherwise,
or due to warrants, options or rights issued in connection with such
issuance, be entitled to receive shares of Common Stock at a price less than
the Conversion Price, such issuance shall be deemed to have occurred for
less than the Conversion Price), then, the Conversion Price shall be
adjusted to the lowest conversion, exchange or purchase price for such
Common Stock or Common Stock Equivalents (including any reset provisions
thereof) at issue. Such adjustment shall be made whenever such Common Stock
or Common Stock Equivalents are issued. The Borrower shall notify the Lender
in writing, no later than the Trading Day following the issuance of any
Common Stock or Common Stock Equivalent subject to this section, indicating
therein the applicable issuance price, or of applicable reset price,
exchange price, conversion price and other pricing terms. No further
adjustments shall be made to the Conversion Price upon the actual issuance
of Common Stock upon conversion or exercise of the applicable Common Stock
Equivalent.

                    (ii) For purposes of this subsection 11(d), the following
subsections (d)(ii)(l) to (d)(ii)(6) shall also be applicable:

                         (1) Issuance of Rights or Options. In case at any
                             -----------------------------
time the Company shall in any manner grant (directly and not by assumption
in a merger or otherwise) any warrants or other rights to subscribe for or
to purchase, or any options for the purchase of, Common Stock or any stock
or security convertible into or exchangeable for Common Stock (such
warrants, rights or options being called "OPTIONS" and such convertible or
exchangeable stock or securities being called "CONVERTIBLE SECURITIES")
whether or not such Options or the right to convert or exchange any such
Convertible Securities are immediately exercisable, and the price per share
for which Common Stock is issuable upon the exercise of such Options or upon
the conversion or exchange of such Convertible Securities (determined by
dividing (i) the sum (which sum shall constitute the applicable
consideration) of (x) the total amount, if any, received or receivable by
the Company as consideration for the granting of such Options, plus (y) the
aggregate amount of additional consideration payable to the Company upon the
exercise of all such Options, plus (z), in the case of such Options which
relate to Convertible Securities, the aggregate amount of additional
consideration, if any, payable upon the issue or sale of such Convertible
Securities and upon the conversion or exchange thereof, by (ii) the total
maximum number of shares of Common Stock issuable upon the exercise of such
Options or upon the conversion or exchange of all such Convertible
Securities issuable upon the exercise of such Options) shall be less than
the Conversion Price in effect immediately prior to the time of the granting
of such Options, then the total number of shares of Common Stock issuable
upon the exercise of such Options or upon conversion or exchange of the
total amount of such Convertible Securities issuable upon the exercise of
such Options shall be deemed to have been issued for such price per share as
of the date of granting of such Options or the issuance of such Convertible
Securities and thereafter shall be deemed to be outstanding for purposes of
adjusting the Conversion Price. Except as otherwise provided in subsection
11(d)(ii)(3), no adjustment of the Conversion Price shall be made upon the
actual issue of such Common Stock or of such

                                     16

Convertible Securities upon exercise of such Options or upon the actual
issue of such Common Stock upon conversion or exchange of such Convertible
Securities.

                         (2) Issuance of Convertible Securities. In case the
                             ----------------------------------
Company shall in any manner issue (directly and not by assumption in a
merger or otherwise) or sell any Convertible Securities, whether or not the
rights to exchange or convert any such Convertible Securities are
immediately exercisable, and the price per share for which Common Stock is
issuable upon such conversion or exchange (determined by dividing (i) the
sum (which sum shall constitute the applicable consideration) of (x) the
total amount received or receivable by the Company as consideration for the
issue or sale of such Convertible Securities, plus (y) the aggregate amount
of additional consideration, if any, payable to the Company upon the
conversion or exchange thereof, by (ii) the total number of shares of Common
Stock issuable upon the conversion or exchange of all such Convertible
Securities) shall be less than the Conversion Price in effect immediately
prior to the time of such issue or sale, then the total maximum number of
shares of Common Stock issuable upon conversion or exchange of all such
Convertible Securities shall be deemed to have been issued for such price
per share as of the date of the issue or sale of such Convertible Securities
and thereafter shall be deemed to be outstanding for purposes of adjusting
the Conversion Price, provided that (a) except as otherwise provided in
subsection 11(d)(ii)(3), no adjustment of the Conversion Price shall be made
upon the actual issuance of such Common Stock upon conversion or exchange of
such Convertible Securities and (b) no further adjustment of the Conversion
Price shall be made by reason of the issue or sale of Convertible Securities
upon exercise of any Options to purchase any such Convertible Securities for
which adjustments of the Conversion Price have been made pursuant to the
other provisions of subsection 11(d).

                         (3) Change in Option Price or Conversion Rate. Upon
                             -----------------------------------------
the happening of any of the following events, namely, if the purchase price
provided for in any Option referred to in subsection 11(d)(ii)(l) hereof,
the additional consideration, if any, payable upon the conversion or
exchange of any Convertible Securities referred to in subsections
11(d)(ii)(l) or 11(d)(ii)(2), or the rate at which Convertible Securities
referred to in subsections 11(d)(ii)(l) or 11(d)(ii)(2) are convertible into
or exchangeable for Common Stock shall change at any time (including, but
not limited to, changes under or by reason of provisions designed to protect
against dilution), the Conversion Price in effect at the time of such event
shall forthwith be readjusted to the Conversion Price which would have been
in effect at such time had such Options or Convertible Securities still
outstanding provided for such changed purchase price, additional
consideration or conversion rate, as the case may be, at the time initially
granted, issued or sold. On the termination of any Option for which any
adjustment was made pursuant to this subsection 11(d) or any right to
convert or exchange Convertible Securities for which any adjustment was made
pursuant to this subsection 11(d) (including without limitation upon the
redemption or purchase for consideration of such Convertible Securities by
the Company), the Conversion Price then in effect hereunder shall forthwith
be changed to the Conversion Price which would have been in effect at the
time of such termination had such Option or Convertible Securities, to the
extent outstanding immediately prior to such termination, never been issued.

                         (4) Stock Dividends. Subject to the provisions of
                             ---------------
this Section 11(d), in case the Company shall declare a dividend or make any
other distribution upon any stock of the Company (other than the Common
Stock) payable in Common Stock, Options

                                     17

or Convertible Securities, then any Common Stock, Options or Convertible
Securities, as the case may be, issuable in payment of such dividend or
distribution shall be deemed to have been issued or sold without
consideration.

                          (5) Consideration for Stock. In case any shares of
                              -----------------------
Common Stock, Options or Convertible Securities shall be issued or sold for
cash, the consideration received therefor shall be deemed to be the net
amount received by the Company therefor, after deduction therefrom of any
expenses incurred or any underwriting commissions or concessions paid or
allowed by the Company in connection therewith. In case any shares of Common
Stock, Options or Convertible Securities shall be issued or sold for a
consideration other than cash, the amount of the consideration other than
cash received by the Company shall be deemed to be the fair value of such
consideration as determined in good faith by the Board of Directors of the
Company, after deduction of any expenses incurred or any underwriting
commissions or concessions paid or allowed by the Company in connection
therewith. In case any Options shall be issued in connection with the issue
and sale of other securities of the Company, together comprising one
integral transaction in which no specific consideration is allocated to such
Options by the parties thereto, such Options shall be deemed to have been
issued for such consideration as determined in good faith by the Board of
Directors of the Company. If Common Stock, Options or Convertible Securities
shall be issued or sold by the Company and, in connection therewith, other
Options or Convertible Securities (the "ADDITIONAL RIGHTS") are issued, then
the consideration received or deemed to be received by the Company shall be
reduced by the fair market value of the Additional Rights (as determined
using the Black-Scholes option pricing model or another method mutually
agreed to by the Company and the Lender). The Board of Directors of the
Company shall respond promptly, in writing, to an inquiry by the Lenders as
to the fair market value of the Additional Rights. In the event that the
Board of Directors of the Company and the Lenders are unable to agree upon
the fair market value of the Additional Rights, the Company and the Lenders
shall jointly select an appraiser, who is experienced in such matters. The
decision of such appraiser shall be final and conclusive, and the cost of
such appraiser shall be borne evenly by the Company and the Lender.

                          (6) Record Date. In case the Company shall take a
                              -----------
record of the holders of its Common Stock for the purpose of entitling them
(i) to receive a dividend or other distribution payable in Common Stock,
Options or Convertible Securities or (ii) to subscribe for or purchase
Common Stock, Options or Convertible Securities, then such record date shall
be deemed to be the date of the issue or sale of the shares of Common Stock
deemed to have been issued or sold upon the declaration of such dividend or
the making of such other distribution or the date of the granting of such
right of subscription or purchase, as the case may be.

                    (iii) Notwithstanding the foregoing, no adjustment will
be made under this paragraph (d) in respect of: (A) the issuance of
securities upon the exercise or conversion of any Common Stock Equivalents
issued by the Borrower prior to the Original Issue Date of this Note (but
will apply to any amendments, modifications and reissuances thereof), and
(B) the grant of options or warrants, or the issuance of additional
securities, under any duly authorized Borrower stock option, stock incentive
plan, restricted stock plan or stock purchase plan in existence on the
Closing Date; (C) the issuance of Common Stock in payment of interest on

                                     18

Notes or on the 2003 Debentures or 2004 Debentures; or (D) the issuance of
Common Stock Equivalents pursuant to a Strategic Transaction.

                (e) Reclassifications; Share Exchanges. In case of any
                    ----------------------------------
reclassification of the Common Stock, or any compulsory share exchange
pursuant to which the Common Stock is converted into other securities, cash
or property (other than compulsory share exchanges which constitute Change
of Control transactions), the Lenders of the Notes then outstanding shall
have the right thereafter to convert such shares only into the shares of
stock and other securities, cash and property receivable upon or deemed to
be held by holders of Common Stock following such reclassification or share
exchange, and the Lenders shall be entitled upon such event to receive such
amount of securities, cash or property as a holder of the number of shares
of Common Stock of the Borrower into which such shares of Notes could have
been converted immediately prior to such reclassification or share exchange
would have been entitled. This provision shall similarly apply to successive
reclassifications or share exchanges.

                (f) Calculations. All calculations under this Section 11 shall
                    ------------
be made to the nearest cent or the nearest 1/100th of a share, as
applicable. The number of shares of Common Stock outstanding at any given
time shall not include shares owned or held by or for the account of the
Borrower, and the disposition of any such shares shall be considered an
issue or sale of Common Stock.

                (g) Notice of Adjustments. Upon the occurrence of each
                    ---------------------
adjustment pursuant to this Section 11, the Borrower at its expense will
promptly compute such adjustment in accordance with the terms hereof and
prepare a certificate describing in reasonable detail such adjustment and
the transactions giving rise thereto, including all facts upon which such
adjustment is based. Upon written request, the Borrower will promptly
deliver a copy of each such certificate to the Lender.

                (h) Notice of Corporate Events. If the Borrower (i) declares
                    --------------------------
a dividend or any other distribution of cash, securities or other property
in respect of its Common Stock, including without limitation any granting of
rights or warrants to subscribe for or purchase any capital stock of the
Borrower or any Subsidiary, (ii) authorizes and publicly approves, or enters
into any agreement contemplating or solicits shareholder approval for any
Fundamental Transaction or (iii) publicly authorizes the voluntary
dissolution, liquidation or winding up of the affairs of the Borrower, then
the Borrower shall deliver to the Lender a notice describing the material
terms and conditions of such transaction, at least 20 calendar days prior to
the applicable record or effective date on which a Person would need to hold
Common Stock in order to participate in or vote with respect to such
transaction, and the Borrower will take all steps reasonably necessary in
order to insure that the Lender is given the practical opportunity to
convert this Note prior to such time so as to participate in or vote with
respect to such transaction; provided, however, that the failure to deliver
such notice or any defect therein shall not affect the validity of the
corporate action required to be described in such notice.

            12. Fractional Shares. The Borrower shall not be required to issue
                -----------------
or cause to be issued fractional Underlying Shares on conversion of this
Note. If any fraction of an Underlying Share would, except for the
provisions of this Section, be issuable upon conversion

                                     19

of this Note or payment of interest hereon, the number of Underlying Shares
to be issued will be rounded up to the nearest whole share.

            13. Prepayment at Option of Borrower. Subject to the provisions
                --------------------------------
of this Section, at any time after the Effective Date, the Borrower may
deliver a written notice (such notice, a "PREPAYMENT NOTICE") to the Lender
stating its irrevocable undertaking to prepay at the Borrower Prepayment
Amount all (but not less than all) of the outstanding principal amount of
all Notes held by such Lender, together with all accrued and unpaid
interest, liquidated damages and other amounts then owing thereon through
the date the Borrower Prepayment Amount is paid, provided that: (i) VWAP of
the Common Stock for each of 30 consecutive Trading Days prior to the date
of the Prepayment Notice is greater than $21.50 (subject to equitable
adjustment as a result of the events set forth in Section 11(a), (b) and
(c)), (ii) on each date during the entire period referenced in clause (i)
above and through the Prepayment Date (as defined below), the Equity
Conditions Are Satisfied, (iii) the average daily trading volume of the
Common Stock during the entire period referred to in clause (i) above and
through the Borrower Conversion Date (as defined below) shall be at least
40,000 shares, (iv) there shall not exist any Default, (v) the prepayment
contemplated under this Section shall be free of all subordination rights of
other Persons, (vi) the Borrower shall not have previously defaulted on its
obligation to pay the full Borrower Prepayment Amount due in respect of any
prior Prepayment Notice, (vii) at the time the Borrower delivers the
Prepayment Notice, none of the 2003 Debentures or 2004 Debentures remain
outstanding, and (viii) on the Prepayment Date, none of the other Notes
would remain outstanding. If the conditions for delivery of a Prepayment
Notice set forth in clauses (i) - (vii) above are satisfied during the
period from the date of the Prepayment Notice through and including the
Prepayment Date, then the Borrower shall deliver to the Lender the full
Borrower Prepayment Amount in cash on the 31st Trading Day following the
date of the Prepayment Notice (the "PREPAYMENT DATE"), subject to (i)
reduction for principal and interest of the Lender's Notes that shall have
been converted between the date of the Prepayment Notice and the Prepayment
Date, (ii) the right of the Lender to nullify such Prepayment Notice if any
of such conditions shall not have been met from the date of the Prepayment
Notice through the Prepayment Date or if the Borrower shall during such
period fail to honor any Conversion Notice as contemplated in the
immediately following sentence, and (iii) the operation of the automatic
amendment to such Prepayment Notice in accordance with the last sentence of
this Section. The Borrower covenants and agrees that it will honor all
Conversion Notices tendered from the time of delivery of the Prepayment
Notice through 6:30 p.m. (New York City time) on the Trading Day prior to
the Prepayment Date. In addition, if any portion of the Borrower Prepayment
Amount remains unpaid after the Prepayment Date, the Lender subject to such
prepayment may elect by written notice to the Borrower to invalidate ab
initio the Prepayment Notice with respect to the unpaid amount,
notwithstanding anything herein contained to the contrary. If the Lender
makes such an election, this Note shall be reinstated with respect to such
unpaid amount and the Borrower shall no longer have any prepayment rights
under this Section. Notwithstanding the foregoing, the Borrower and the
Lender agree that, if and to the extent Section 5(b)(i) of this Note would
restrict the right of the Borrower to issue or the right of the Lender to
receive any of the Underlying Shares otherwise issuable upon the conversion
in full of the principal amount and interest then outstanding on all of the
Lender's Notes, then notwithstanding anything to the contrary set forth in a
Prepayment Notice, the Prepayment Notice shall be deemed automatically
amended to apply only to such portion of such Lender's Notes as would permit
conversion in full in compliance with Section 5(b)(i). The Lender will
promptly (and, in any event, prior to the

                                     20

Prepayment Date) notify the Borrower in writing following receipt of a
Prepayment Notice if Section 5(b)(i) would restrict its right to receive the
full number of otherwise issuable Underlying Shares under such
circumstances.

            14. Notices. Any and all notices or other communications or
                -------
deliveries hereunder (including without limitation any Conversion Notice or
the Borrower Conversion Notice) shall be in writing and shall be deemed
given and effective on the earliest of (i) the date of transmission, if such
notice or communication is delivered via facsimile at the facsimile number
specified in this Section prior to 6:30 p.m. (New York City time) on a
Trading Day, (ii) the next Trading Day after the date of transmission, if
such notice or communication is delivered via facsimile at the facsimile
number specified in this Section on a day that is not a Trading Day or later
than 6:30 p.m. (New York City time) on any Trading Day, (iii) the Trading
Day following the date of mailing, if sent by nationally recognized
overnight courier service, or (iv) upon actual receipt by the party to whom
such notice is required to be given. The addresses for such communications
shall be: (i) if to the Borrower, to 3101 McKelvey Road, St. Louis, Missouri
63044, facsimile: (314) 291-9082, attention Chief Financial Officer, (ii) if
to the Lender, to the address or facsimile number appearing on the
Borrower's shareholder records or such other address or facsimile number as
the Lender may provide to the Borrower in accordance with this Section, or
(iii) if to the Administrative Agent, to the address or facsimile number
therefor set forth in the Loan Agreement.

            15. Miscellaneous.
                -------------

                (a) This Note shall be binding on and inure to the benefit of
the parties hereto and their respective successors and assigns.

                (b) Subject to Section 15(a), above, nothing in this Note
shall be construed to give to any person or corporation other than the
Borrower and the Lender any legal or equitable right, remedy or cause under
this Note. This Note shall inure to the sole and exclusive benefit of the
Borrower and the Lender.

                (c) All questions concerning the construction, validity,
enforcement and interpretation of this Note shall be governed by and
construed and enforced in accordance with the internal laws of the State of
New York, without regard to the principles of conflicts of law thereof. Each
party agrees that all proceedings shall be commenced exclusively in the
state and federal courts sitting in the City of New York, Borough of
Manhattan (the "NEW YORK COURTS"). Each party hereto hereby irrevocably
submits to the exclusive jurisdiction of the New York Courts for any
proceeding, and hereby irrevocably waives, and agrees not to assert in any
proceeding, any claim that it is not personally subject to the jurisdiction
of any New York Court or that a New York Court is an inconvenient forum for
such proceeding. Each party hereto hereby irrevocably waives personal
service of process and consents to process being served in any such
proceeding by mailing a copy thereof via registered or certified mail or
overnight delivery (with evidence of delivery) to such party at the address
in effect for notices to it under this Note and agrees that such service
shall constitute good and sufficient service of process and notice thereof.
Nothing contained herein shall be deemed to limit in any way any right to
serve process in any manner permitted by law. Each party hereto hereby
irrevocably waives, to the fullest extent permitted by applicable law, any
and all right to trial by jury in any legal

                                     21

proceeding. The prevailing party in a proceeding shall be reimbursed by the
other party for its reasonable attorneys' fees and other costs and expenses
incurred with the investigation, preparation and prosecution of such
proceeding.

                (d) The headings herein are for convenience only, do not
constitute a part of this Note and shall not be deemed to limit or affect
any of the provisions hereof.

                (e) In case any one or more of the provisions of this Note
shall be invalid or unenforceable in any respect, the validity and
enforceability of the remaining terms and provisions of this Note shall not
in any way be affected or impaired thereby and the parties will attempt in
good faith to agree upon a valid and enforceable provision which shall be a
commercially reasonable substitute therefor, and upon so agreeing, shall
incorporate such substitute provision in this Note.

                (f) No provision of this Note may be waived, amended or
otherwise modified except in accordance with the requirements set forth in
the Loan Agreement. No waiver of any default with respect to any provision,
condition or requirement of this Note shall be deemed to be a continuing
waiver in the future or a waiver of any subsequent default or a waiver of
any other provision, condition or requirement hereof, nor shall any delay or
omission of either party to exercise any right hereunder in any manner
impair the exercise of any such right.

                (g) To the extent it may lawfully do so, the Borrower hereby
agrees not to insist upon or plead or in any manner whatsoever claim, and
will resist any and all efforts to be compelled to take the benefit or
advantage of, usury laws wherever enacted, now or at any time hereafter in
force, in connection with any claim, action or proceeding that may be
brought by any Lender in order to enforce any right or remedy under the
Notes. Notwithstanding any provision to the contrary contained in the Notes,
it is expressly agreed and provided that the total liability of the Borrower
under the Notes for payments in the nature of interest shall not exceed the
maximum lawful rate authorized under applicable law (the "MAXIMUM RATE"),
and, without limiting the foregoing, in no event shall any rate of interest
or default interest, or both of them, when aggregated with any other sums in
the nature of interest that the Borrower may be obligated to pay under the
Notes exceed such Maximum Rate. It is agreed that if the maximum contract
rate of interest allowed by law and applicable to the Notes is increased or
decreased by statute or any official governmental action subsequent to the
date hereof, the new maximum contract rate of interest allowed by law will
be the Maximum Rate of interest applicable to the Notes from the effective
date forward, unless such application is precluded by applicable law. If
under any circumstances whatsoever, interest in excess of the Maximum Rate
is paid by the Borrower to any Lender with respect to indebtedness evidenced
by the Notes, such excess shall be applied by such Lender to the unpaid
principal balance of any such indebtedness or be refunded to the Borrower,
the manner of handling such excess to be at such Lender's election.

                (h) Subject to Section 15 of the Security Agreement and
Sections 13 and 5(a)(ii) herein, the outstanding principal amount and
interest under this Note may not be prepaid or required to be converted by
the Borrower without the prior written consent of the Lender.

                                     22

                (i) The obligations under this Note are secured pursuant to
the Security Agreement, the Guarantee Agreement and the Mortgage.

         IN WITNESS WHEREOF, the Borrower has caused this Note to be duly
executed by a duly authorized officer as of the date first above indicated.

                                            ZOLTEK COMPANIES, INC.

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

                                     23

                                  EXHIBIT A

                              CONVERSION NOTICE

(To be Executed by the Registered Lender
in order to convert Notes)

         The undersigned hereby elects to convert the principal amount of
Note indicated below, into shares of Common Stock of Zoltek Companies, Inc.,
as of the date written below. If shares are to be issued in the name of a
Person other than undersigned, the undersigned will pay all transfer taxes
payable with respect thereto and is delivering herewith such certificates
and opinions as reasonably requested by the Borrower in accordance
therewith. No fee will be charged to the Lender for any conversion, except
for such transfer taxes, if any. All terms used in this notice shall have
the meanings set forth in the Note.

Conversion calculations:
                        -----------------------------------------------------
                        Date to Effect Conversion

                        -----------------------------------------------------
                        Principal amount of Note owned prior to conversion

                        -----------------------------------------------------
                        Principal amount of Note to be Converted

                        -----------------------------------------------------
                        Principal amount of Note remaining after Conversion

                        -----------------------------------------------------
                        Number of shares of Common Stock to be Issued

                        -----------------------------------------------------
                        Applicable Conversion Price

                        -----------------------------------------------------
                        Name of Lender

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

         By the delivery of this Conversion Notice the Lender represents and
warrants to the Borrower that its ownership of the Common Stock does not
exceed the restrictions set forth in Section 5(b) of the Note.

                                     24

                                 SCHEDULE 1

                           Zoltek Companies, Inc.

          7.5% Senior Secured Convertible Notes due April 14, 2008

                             CONVERSION SCHEDULE

         This Conversion Schedule reflects conversions made under the above
referenced Notes.

                                   Dated:

-----------------------------------------------------------------------------
Date of Conversion  Amount of   Aggregate Principal  Applicable Conversion
                    Conversion   Amount Remaining          Price
                                  Subsequent to
                                   Conversion
-----------------------------------------------------------------------------

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

                                     25

Source: [{"source": "alea-institute/alea-institute/kl3m-data-edgar-agreements/train-00072-of-00352.parquet"}, [{"source": "alea-institute/alea-institute/kl3m-data-edgar-agreements/train-00072-of-00352.parquet"}]]