Document:

Exhibit 4.1
                                                                     -----------

                                                                  EXECUTION COPY

                          SECURITIES PURCHASE AGREEMENT

      SECURITIES PURCHASE AGREEMENT (the "Agreement"), dated as of September 29,
2005,  by  and  among  Arotech  Corporation,   a  Delaware   corporation,   with
headquarters  located  at  354  Industry  Drive,  Auburn,   Alabama  36830  (the
"Company"),  and the investors  listed on the Schedule of Buyers attached hereto
(individually, a "Buyer" and collectively, the "Buyers").

      WHEREAS:

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

      B. The Company has authorized a new series of senior  secured  convertible
notes of the Company, which Notes shall be convertible into the Company's common
stock,  par value $0.01 per share (the "Common  Stock"),  in accordance with the
terms of the Notes.

      C. Each Buyer wishes to purchase, and the Company wishes to sell, upon the
terms and conditions  stated in this  Agreement,  (i) that  aggregate  principal
amount of Notes,  in  substantially  the form attached  hereto as Exhibit A (the
"Notes"),  set forth opposite such Buyer's name in column (3) on the Schedule of
Buyers (which  aggregate  principal  amount for all Buyers shall be $17,500,000)
(as converted,  collectively,  the "Conversion  Shares") and (ii) a warrant,  in
substantially  the  form  attached  hereto  as  Exhibit  B  (collectively,   the
"Warrants"), to acquire that number of shares of Common Stock set forth opposite
such  Buyer's  name in  column  (4) on the  Schedule  of Buyers  (as  exercised,
collectively, the "Warrant Shares").

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

      E.  The  Notes,  Warrants,  Warrant  Shares  and  the  Conversion  Shares,
collectively are referred to herein as the "Securities".

      F. The Notes  will be (i)  subordinated  to the  Senior  Indebtedness  (as
hereinafter  defined),  but will rank senior to all other outstanding and future
indebtedness  of the  Company  and its  Subsidiaries  other  than  as  permitted
hereunder,  (ii)  secured  by a  security  interest  in all of the assets of the
Company  and in all of the shares of capital  stock and all assets of all of the
Company's  Subsidiaries (as hereinafter  defined) identified on Schedule 3(a) as
guarantors and all future Subsidiaries,  as evidenced by the Security Agreement,
in the form  attached  hereto as Exhibit D (as amended or modified  from time to
time,  the "Security  Agreement")  in favor of Smithfield  Fiduciary LLC, in its
capacity as  collateral  agent (in such  capacity,  the "Senior  Agent") for the
Buyers hereto and for the holders of the  Securities,  which  security  interest
shall be senior to all other security interests  therein,  except those security
interests  securing  the  Senior  Indebtedness,  and  (iii)  guaranteed  by  the
Guarantee of all of the  Company's  Subsidiaries  identified on Schedule 3(a) as
guarantors and future  Subsidiaries,  other than those Subsidiaries which remain
inactive and have no assets,  income or operations,  in the form attached hereto
as Exhibit E (such Guaranty,  together with the Security Agreement,  as each may
amended or modified from time to time, collectively,  the "Security Documents").
The Company  will also be obtaining a letter of credit (the "Letter of Credit"),
in the amount of $2,625,000  (the "Letter of Credit  Amount") issued in favor of
the Senior  Agent by a bank  acceptable  to such  Senior  Agent (the  "Letter of
Credit  Bank"),  which may be drawn  upon the  Company's  failure  to timely pay
interest or other obligations due under the Note.

<PAGE>

      NOW, THEREFORE, the Company and each Buyer hereby agree as follows:

      1. PURCHASE AND SALE OF NOTES AND WARRANTS.

            (a) Purchase of Notes and Warrants.

                  (i)  Notes  and  Warrants.  Subject  to the  satisfaction  (or
waiver) of the conditions set forth in Sections 6 and 7 below, the Company shall
issue and sell to each Buyer, and each Buyer severally,  but not jointly, agrees
to  purchase  from the Company on the Closing  Date (as  defined  below),  (A) a
principal  amount of Notes as is set forth  opposite such Buyer's name in column
(3) on the Schedule of Buyers and (B) a warrant to acquire that number of shares
of Common  Stock set  forth  opposite  such  Buyer's  name in column  (4) on the
Schedule of Buyers (the "Closing").

                  (1) Closing.  The date and time of the Closing  (the  "Closing
      Date") shall be 10:00 a.m.,  New York City time, on September 29, 2005 (or
      such later date as is  mutually  agreed to by the  Company and each Buyer)
      after  notification of  satisfaction  (or waiver) of the conditions to the
      Closing set forth in Sections 6 and 7 below at the offices of Schulte Roth
      & Zabel  LLP,  919 Third  Avenue,  New York,  New York  10022,  subject to
      notification of satisfaction  (or waiver) of the conditions to the Closing
      set forth in Sections 6 and 7 below.

                  (2) Purchase Price. The aggregate purchase price for the Notes
      and the  Warrants  to be  purchased  by each  Buyer  at the  Closing  (the
      "Purchase Price") shall be the amount set forth opposite such Buyer's name
      in column (5) of the  Schedule  of Buyers.  Each Buyer shall pay $1.00 for
      each  $1.00 of  principal  amount  of Notes  and  related  Warrants  to be
      purchased by such Buyer at the Closing.

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

                                      -2-
<PAGE>

      2. BUYER'S REPRESENTATIONS AND WARRANTIES.

      Each Buyer represents and warrants with respect to only itself that:

            (a) Organization; Authority. Such Buyer is an entity duly organized,
validly  existing and in good standing under the laws of the jurisdiction of its
organization  with the  requisite  power  and  authority  to  enter  into and to
consummate  the  transactions  contemplated  by this  Agreement and otherwise to
carry out its obligations hereunder. The execution,  delivery and performance by
such Buyer of the transactions  contemplated by this Agreement, the Registration
Rights Agreement and the Security  Documents to which such Buyer is a party have
been duly  authorized by all  necessary  action on the part of such Buyer and no
further action is required by such Buyer or any of its composite  entities (such
as a board of directors,  management  committee,  partners or  stockholders)  in
connection herewith.  Each of this Agreement,  the Registration Rights Agreement
and the Security Documents to which such Buyer is a party has been duly executed
by such Buyer,  and when  delivered by such Buyer in  accordance  with the terms
hereof,  will constitute the valid and legally binding obligation of such Buyer,
enforceable  against  it in  accordance  with  its  terms,  except  (a) as  such
enforceability  may be  limited by  bankruptcy,  insolvency,  reorganization  or
similar laws affecting creditors' rights generally, (b) as enforceability of any
indemnification and contribution provisions may be limited under the federal and
state  securities  laws and public  policy,  and (c) that the remedy of specific
performance and injunctive and other forms of equitable relief may be subject to
equitable  defenses  and to  the  discretion  of  the  court  before  which  any
proceeding therefor may be brought.

            (b) No Public Sale or Distribution.  Such Buyer is (i) acquiring the
Notes  and  Warrants,  (ii)  upon  conversion  of the  Notes  will  acquire  the
Conversion Shares issuable upon conversion of the Notes, and (iii) upon exercise
of the Warrants  (other than pursuant to a Cashless  Exercise (as defined in the
Warrants))  will  acquire  the  Warrant  Shares  issuable  upon  exercise of the
Warrants,  as principal for its own account and not with a view towards,  or for
resale in  connection  with,  the public sale or  distribution  thereof,  except
pursuant to sales registered or exempted under the 1933 Act; provided,  however,
that by making the representations herein, such Buyer does not agree to hold any
of the  Securities for any minimum or other specific term and reserves the right
to dispose of the  Securities  at any time in  accordance  with or pursuant to a
registration  statement  or an  exemption  under  applicable  federal  and state
securities  laws.  Such  Buyer is  acquiring  the  Securities  hereunder  in the
ordinary course of its business.  Such Buyer is not a  broker-dealer  registered
with the SEC under the 34 Act or entity engaged in a business that would require
it to be so  registered.  Such Buyer does not  presently  have any  agreement or
understanding,  directly or indirectly, with any Person to distribute any of the
Securities.

            (c) Accredited Investor Status; General Solicitation.  Such Buyer is
an "accredited investor" as that term is defined in Rule 501(a) of Regulation D.
Such  Buyer,  either  alone  or  together  with  its  representatives,  has such
knowledge, sophistication and experience in business and financial matters so as
to be capable of evaluating the merits and risks of the  prospective  investment
in the Securities, and has so evaluated the merits and risks of such investment.
Such Buyer is able to bear the economic risk of an investment in the  Securities
and, at the present time, is able to afford a complete loss of such  investment.
Such Buyer is not purchasing  the  Securities as a result of any  advertisement,
article, notice or other communication regarding the Securities published in any
newspaper,  magazine or similar media or broadcast  over  television or radio or
presented at any seminar.

                                      -3-
<PAGE>

            (d)  Reliance  on  Exemptions.   Such  Buyer  understands  that  the
Securities  are being offered and sold to it in reliance on specific  exemptions
from the registration requirements of United States federal and state securities
laws and that the Company is relying in part upon the truth and accuracy of, and
such Buyer's  compliance  with,  the  representations,  warranties,  agreements,
acknowledgments  and  understandings  of such Buyer set forth herein in order to
determine the  availability of such exemptions and the eligibility of such Buyer
to acquire the Securities.

            (e)  Information.  Such Buyer and its  advisors,  if any,  have been
furnished  with or has  otherwise  had access to all  materials  relating to the
business,  finances and operations of the Company and materials  relating to the
offer and sale of the Securities  which have been requested by such Buyer.  Such
Buyer and its  advisors,  if any,  have been  afforded  the  opportunity  to ask
questions of the Company.  Neither such  inquiries  nor any other due  diligence
investigations  conducted  by  such  Buyer  or  its  advisors,  if  any,  or its
representatives  shall modify, amend or affect such Buyer's right to rely on the
Company's   representations   and  warranties   contained  herein.   Such  Buyer
understands  that its  investment  in the  Securities  involves a high degree of
risk.  Such Buyer has  sought  such  accounting,  legal and tax advice as it has
considered necessary to make an informed investment decision with respect to its
acquisition of the Securities.

            (f) No Governmental  Review.  Such Buyer  understands that no United
States federal or state agency or any other  government or  governmental  agency
has passed on or made any recommendation or endorsement of the Securities or the
fairness  or  suitability  of the  investment  in the  Securities  nor have such
authorities  passed  upon  or  endorsed  the  merits  of  the  offering  of  the
Securities.

            (g)  Transfer  or Resale.  Such  Buyer  understands  that  except as
provided in the Registration Rights Agreement:  (i) the Securities have not been
and are not being  registered  under the 1933 Act or any state  securities laws,
and may not be  offered  for sale,  sold,  assigned  or  transferred  unless (A)
subsequently  registered thereunder,  (B) such Buyer shall have delivered to the
Company an opinion of counsel,  in a generally  acceptable  form,  to the effect
that such Securities to be sold,  assigned or transferred may be sold,  assigned
or  transferred  pursuant to an exemption  from such  registration,  or (C) such
Buyer provides the Company with reasonable assurance that such Securities can be
sold,  assigned or  transferred  pursuant  to Rule 144 or Rule 144A  promulgated
under the 1933 Act,  as amended  (or a successor  rule  thereto)  (collectively,
"Rule 144"); (ii) any sale of the Securities made in reliance on Rule 144 may be
made only in accordance  with the terms of Rule 144 and further,  if Rule 144 is
not applicable,  any resale of the Securities  under  circumstances in which the
seller (or the Person (as  defined  in Section  3(e))  through  whom the sale is
made) may be deemed to be an  underwriter  (as that term is  defined in the 1933
Act) may require  compliance with some other exemption under the 1933 Act or the
rules and regulations of the SEC  thereunder;  and (iii) neither the Company nor
any other Person is under any  obligation to register the  Securities  under the
1933 Act or any state securities laws or to comply with the terms and conditions
of any exemption thereunder.

                                      -4-
<PAGE>

            (h) Legends.  Such Buyer  understands that the certificates or other
instruments  representing the Notes and the Warrants and, until such time as the
resale of the  Conversion  Shares and the Warrant  Shares  have been  registered
under the 1933 Act as contemplated by the  Registration  Rights  Agreement,  the
stock  certificates  representing the Conversion  Shares and the Warrant Shares,
except as set forth  below,  shall bear any legend as required by the "blue sky"
laws of any state and a restrictive  legend in substantially  the following form
(and a  stop-transfer  order  may be  placed  against  transfer  of  such  stock
certificates):

            [NEITHER THE ISSUANCE AND SALE OF THE SECURITIES REPRESENTED BY THIS
            CERTIFICATE  NOR THE  SECURITIES  INTO WHICH  THESE  SECURITIES  ARE
            [CONVERTIBLE][EXERCISABLE]  HAVE BEEN][THE SECURITIES REPRESENTED BY
            THIS  CERTIFICATE HAVE NOT BEEN] REGISTERED UNDER THE SECURITIES ACT
            OF 1933,  AS AMENDED,  OR  APPLICABLE  STATE  SECURITIES  LAWS.  THE
            SECURITIES  MAY  NOT BE  OFFERED  FOR  SALE,  SOLD,  TRANSFERRED  OR
            ASSIGNED  (I)  IN THE  ABSENCE  OF  (A)  AN  EFFECTIVE  REGISTRATION
            STATEMENT FOR THE  SECURITIES  UNDER THE  SECURITIES ACT OF 1933, AS
            AMENDED,  OR (B) AN OPINION OF COUNSEL,  IN A  GENERALLY  ACCEPTABLE
            FORM,  THAT  REGISTRATION  IS NOT  REQUIRED  UNDER  SAID ACT OR (II)
            UNLESS  SOLD  PURSUANT  TO RULE 144 OR RULE  144A  UNDER  SAID  ACT.
            NOTWITHSTANDING  THE  FOREGOING,  THE  SECURITIES  MAY BE PLEDGED IN
            CONNECTION  WITH A  BONA  FIDE  MARGIN  ACCOUNT  OR  OTHER  LOAN  OR
            FINANCING ARRANGEMENT SECURED BY THE SECURITIES.

The legend  set forth  above  shall be removed  and the  Company  shall  issue a
certificate without such legend to the holder of the Securities upon which it is
stamped,  if,  unless  otherwise  required by state  securities  laws,  (i) such
Securities are registered for resale under the 1933 Act and are thereafter  sold
in compliance with said Act, (ii) in connection with a sale, assignment or other
transfer,  such holder  provides  the Company  with an opinion of counsel,  in a
generally acceptable form, to the effect that such sale,  assignment or transfer
of  the  Securities  may be  made  without  registration  under  the  applicable
requirements  of the 1933 Act, or (iii) such holder  provides  the Company  with
reasonable  assurance,  reasonably  acceptable  to the  Company's  registrar and
transfer  agent,  that the  Securities  can be  sold,  assigned  or  transferred
pursuant to Rule 144 or Rule 144A.

            (i) No Conflicts.  The execution,  delivery and  performance by such
Buyer of this  Agreement,  the  Registration  Rights  Agreement and the Security
Documents to which such Buyer is a party and the  consummation  by such Buyer of
the  transactions  contemplated  hereby  and  thereby  do not and  will  not (i)
conflict  with or violate  the  organizational  documents  of such Buyer or (ii)
except as set forth on Schedule 3(d), conflict with, or constitute a default (or
an event  which  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 of, any agreement, indenture or instrument to which such Buyer is a
party,  or (iii)  result in a violation  of any law,  rule,  regulation,  order,
judgment or decree  (including  federal and state securities laws) applicable to
such  Buyer,  except  in the case of  clauses  (ii) and  (iii)  above,  for such
conflicts,  defaults,  rights or violations which would not,  individually or in
the aggregate,  reasonably be expected to have a material  adverse effect on the
ability of such Buyer to perform its obligations hereunder.

                                      -5-
<PAGE>

            (j)  Residency.  Such  Buyer  is a  resident  of  that  jurisdiction
specified below its address on the Schedule of Buyers.

            (k) Agent Fees. That no fees, commissions,  or other payments are or
will be payable to any broker,  finder,  placement agent, or intermediary acting
on  behalf  of  such  Buyer  for  actions  relating  to or  arising  out  of the
transactions contemplated by this Agreement,  including, without limitation, any
fees or commissions payable to such Buyer's agents.

            (l)  Certain  Trading   Activities.   Neither  such  Buyer  nor  its
affiliates has directly or indirectly  engaged in any Short Sales  involving the
Company's  securities  since the time that such Buyer was first contacted by the
Company with respect to the  transactions  contemplated  hereby.  "Short  Sales"
include,  without  limitation,   all  "short  sales"  as  defined  in  Rule  200
promulgated  under Regulation SHO under the 1934 Act and all types of direct and
indirect stock pledges,  forward sale contracts,  options,  puts,  calls,  short
sales, swaps and similar  arrangements  (including on a total return basis), and
sales and other transactions  through non-US broker dealers or foreign regulated
brokers.  Notwithstanding  the  foregoing,  in the case of a Buyer that is or is
part of a multi-managed investment vehicle (a "Fund") whereby separate portfolio
managers  manage  separate  portions  of such  Fund's  assets and the  portfolio
managers  have no  direct  knowledge  of the  investment  decisions  made by the
portfolio   managers  managing  other  portions  of  such  Fund's  assets,   the
representation set forth above shall solely apply with respect to the portion of
assets of such Buyer or its affiliates, as applicable,  managed by the portfolio
manager that made the investment  decision to purchase the Securities covered by
this Agreement.

      The Company  acknowledges  and agrees that each Buyer does not make or has
not made any  representations  or  warranties  with respect to the  transactions
contemplated hereby other than those specifically set forth in this Section 2.

      3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.

      The Company hereby makes the following  representations  and warranties to
each Buyer:

            (a) Subsidiaries.  There is no entity in which the Company, directly
or indirectly,  owns capital stock or holds an equity or similar  interest other
than those  listed in Schedule  3(a)  ("Subsidiaries").  Except as  disclosed in
Schedule  3(a),  the Company owns,  directly or  indirectly,  all of the capital
stock  of  each  Subsidiary  free  and  clear  of any and  all  liens,  charges,
encumbrances,  security interests, rights of first refusal or other restrictions
of any kind  ("Liens"),  and all the  issued and  outstanding  shares of capital
stock of each  Subsidiary are validly issued and are fully paid,  non-assessable
and free of  preemptive  and similar  rights.  As of the Closing  Date,  none of
Arotech Security Corp., a Delaware corporation, I.E.S. Defense Services, Inc., a
Delaware   corporation,   Summit  Training   International,   Inc.,  a  Delaware
corporation and Electric Fuel Transportation Corp., a Delaware corporation (each
an "Inactive Subsidiary") owns or possesses any material property or assets.

                                      -6-
<PAGE>

            (b) Organization and Qualification.  Except as set forth on Schedule
3(b)  hereto,  (1) each of the  Company  and each  Subsidiary  is an entity duly
organized,  validly  existing  and  in  good  standing  under  the  laws  of the
jurisdiction of its  incorporation  or organization  (as  applicable),  with the
requisite  power and authority to own and use its  properties  and assets and to
carry on its  business as currently  conducted,  (2) neither the Company nor any
Subsidiary  is  in  violation  of  any  of  the  provisions  of  its  respective
certificate  or articles of  incorporation,  bylaws or other  organizational  or
charter  documents,  and (3) each of the  Company  and each  Subsidiary  is duly
qualified to conduct  business and is in good standing as a foreign  corporation
or other  entity  in each  jurisdiction  in which  the  nature  of the  business
conducted or property  owned by it makes such  qualification  necessary,  except
where the failure to be so  qualified or in good  standing,  as the case may be,
could not,  individually or in the aggregate,  have or reasonably be expected to
result in (i) an adverse effect on the legality,  validity or  enforceability of
any Transaction Document (as hereinafter  defined),  (ii) a material and adverse
effect on the results of operations,  assets, business or financial condition of
the  Company  and the  Subsidiaries,  taken  as a whole,  or  (iii)  an  adverse
impairment to the Company's ability to perform on a timely basis its obligations
under any Transaction  Document (any of (i), (ii) or (iii), a "Material  Adverse
Effect").

            (c)  Authorization;  Enforcement.  The  Company  has  the  requisite
corporate  power and authority to enter into and to consummate the  transactions
contemplated  by  each  of  this  Agreement,   the  Notes,  the  Warrants,   the
Registration Rights Agreement, the Security Documents, the Letter of Credit, the
Irrevocable  Transfer Agent  Instructions  (as defined in Section 5(b)), and any
other  documents or  agreements  executed in  connection  with the  transactions
contemplated hereunder (collectively, the "Transaction Documents") and otherwise
to  carry  out  its  obligations  hereunder  and  thereunder  and to  issue  the
Securities  in accordance  with the terms hereof and thereof.  The execution and
delivery  of  each  of  the  Transaction   Documents  by  the  Company  and  the
consummation  by  it  of  the  transactions  contemplated  hereby  and  thereby,
including,  without  limitation,  the  issuance of the Notes and  Warrants,  the
reservation for issuance and the issuance of the Conversion Shares issuable upon
conversion  of the Notes and the Warrant  Shares  issuable  upon exercise of the
Warrants,  and the granting of a security interest in the Collateral (as defined
in the Security Documents), have been duly authorized by all necessary action on
the part of the Company and no further  action is required by the  Company,  its
Board of Directors or its  stockholders  in  connection  herewith and  therewith
(other than (i) the filing of  appropriate  UCC  financing  statements  with the
appropriate  states and other  authorities  pursuant to the Security  Agreement,
(ii)  the  filing  with  the  SEC of  one or  more  Registration  Statements  in
accordance with the requirements of the Registration  Rights  Agreement),  (iii)
the Company  obtaining  Stockholder  Approval (as hereinafter  defined) and (iv)
filings that have been made pursuant to  applicable  state  securities  laws and
post-sale  filings  pursuant to  applicable  state and federal  securities  laws
and/or any other notices  required  thereby and (v) the filing of an application
with a  Trading  Market  (as  hereinafter  defined)  for  the  inclusion  of the
Conversion Shares and the Warrant Shares for trading in such Trading Market with
respect  to  the  offering  contemplated  by  the  Transaction  Documents.  Each
Transaction Document has been (or upon delivery will have been) duly executed by
the Company  and,  when  delivered in  accordance  with the terms  hereof,  will
constitute the valid and binding obligation of the Company  enforceable  against
the Company in accordance with its terms,  except (a) as such enforceability may
be limited by bankruptcy,  insolvency,  reorganization or similar laws affecting
creditors' rights generally,  (b) as enforceability of any  indemnification  and
contribution  provisions  may be limited under the federal and state  securities
laws and public  policy,  and (c) that the remedy of  specific  performance  and
injunctive  and other  forms of  equitable  relief may be  subject to  equitable
defenses and to the discretion of the court before which any proceeding therefor
may be brought.

                                      -7-
<PAGE>

            (d) No Conflicts.  The  execution,  delivery and  performance of the
Transaction  Documents by the Company and the consummation by the Company of the
transactions contemplated hereby and thereby including,  without limitation, the
issuance of the Notes and the Warrants,  the granting of a security  interest in
the  Collateral  and  reservation  for issuance  and issuance of the  Conversion
Shares and the Warrant  Shares) do not and will not (i) conflict with or violate
any provision of the Company's or any  Subsidiary's  certificate  or articles of
incorporation,  any certificate of  designations,  preferences and rights of any
outstanding series of preferred stock, bylaws or other organizational or charter
documents, or (ii) conflict with, or constitute a default (or an event that with
notice or lapse of time or both would become a default) under, or give to others
any rights of termination,  amendment,  acceleration  or  cancellation  (with or
without notice, lapse of time or both) of, any agreement,  credit facility, debt
or other  instrument  (evidencing a Company or Subsidiary  debt or otherwise) or
other  understanding  to which the  Company or any  Subsidiary  is a party or by
which  any  property  or  asset of the  Company  or any  Subsidiary  is bound or
affected, or (iii) subject to the Company obtaining Stockholder Approval, result
in a violation of any law, rule, regulation, order, judgment, injunction, decree
or other restriction of any court or governmental authority to which the Company
or a Subsidiary  is subject  (including  federal and state  securities  laws and
regulations  of whichever  of the New York Stock  Exchange,  Inc.,  the American
Stock  Exchange,  the Nasdaq  National  Market (the  "Principal  Market") or The
Nasdaq SmallCap Market or the OTC Bulletin Board that the Common Stock is listed
or quoted for trading on the date in question (any of the foregoing,  a "Trading
Market"),  or by which any property or asset of the Company or a  Subsidiary  is
bound or affected; except in the case of each of clauses (ii) and (iii), such as
could not,  individually or in the aggregate,  have or reasonably be expected to
result in a Material Adverse Effect.

            (e)  Filings,  Consents and  Approvals.  Neither the Company nor any
Subsidiary is required to obtain any consent, waiver, authorization or order of,
give  any  notice  to,  or  make  any  filing  or  registration   (collectively,
"Consents") with, any court or other federal, state, local or other governmental
authority or any  regulatory or  self-regulatory  agency or other  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 (a  "Person")  in
connection  with the execution,  delivery and  performance by the Company of the
Transaction Documents other than (i) filing appropriate UCC financing statements
with the  appropriate  states and other  authorities  pursuant  to the  Security
Agreement,  (ii) filing a Current  Report on Form 8-K with the SEC, (iii) filing
with the SEC of one ore more  registration  statements  in  accordance  with the
Registration  Rights  Agreement,  (iv)  filing  applications  for the listing of
additional shares with a Trading Market,  (v) obtaining those Consents set forth
in Schedule 3(e), which Consents have been obtained prior to the date hereof and
(vi)  filings  that  have  been or will be made  pursuant  to  applicable  state
securities laws and post-sale  filings  pursuant to applicable state and federal
securities laws and/or any other notices required thereby.

                                      -8-
<PAGE>

            (f)  Issuance  of  Securities.  The  issuance  of the  Notes and the
Warrants have been duly  authorized  and,  upon issuance in accordance  with the
terms hereof and payment therefor,  will be duly and validly issued,  fully paid
and  nonassessable,  free from all taxes,  Liens and charges with respect to the
issue thereof. As of the Closing,  the Company shall have reserved from its duly
authorized  capital stock not less than (i) 130% of the maximum number of shares
of Common Stock  issuable upon  conversion of the Notes  issuable at the Closing
(assuming for purposes  hereof,  that the Notes are  convertible  at the initial
Conversion  Price  and  without  taking  into  account  any  limitations  on the
conversion  of the Notes set forth in the  Notes)  and (ii) 100% of the  maximum
number of shares of Common Stock  issuable upon  exercise of the Warrants.  Upon
conversion  in  accordance  with the  Notes,  the  Conversion  Shares,  and upon
exercise and payment in accordance with the Warrants,  the Warrant Shares,  will
be validly issued,  fully paid and nonassessable and free from all preemptive or
similar rights, taxes, Liens and charges with respect to the issue thereof, with
the holders being  entitled to all rights  accorded to a holder of Common Stock.
Assuming  the  accuracy  of the  representations  and  warranties  contained  in
Sections 2(b) through 2(f), inclusive, above as they relate to all of the Buyers
in the  aggregate,  the offer and issuance by the Company of the  Securities  is
exempt from registration under the 1933 Act.

            (g) Capitalization. The number of shares and type of all authorized,
issued and  outstanding  capital  stock of the  Company is set forth in Schedule
3(g).  Except as set forth in Schedule  3(g),  no  securities of the Company are
entitled to preemptive or similar  rights,  and no Person has any right of first
refusal,  preemptive  right,  right of  participation,  or any similar  right to
participate  in the  transactions  contemplated  by the  Transaction  Documents.
Except as a result of the  purchase  and sale of the  Securities  and  except as
disclosed in Schedule 3(g), there are no outstanding  options,  warrants,  scrip
rights  to  subscribe  to,  calls or  commitments  of any  character  whatsoever
relating  to,  or  securities,   rights  or  obligations   convertible  into  or
exchangeable  for, or giving any Person any right to  subscribe  for or acquire,
any  shares  of Common  Stock,  or  contracts,  commitments,  understandings  or
arrangements  by which the Company or any  Subsidiary  is or may become bound to
issue additional shares of Common Stock, or securities or rights  convertible or
exchangeable into shares of Common Stock.  Except as set forth in Schedule 3(g),
the issue and sale of the Securities  will not,  immediately or with the passage
of  time,  obligate  the  Company  to  issue  shares  of  Common  Stock or other
securities  to any Person (other than the Buyers) and will not result in a right
of any holder of Company securities to adjust the exercise, conversion, exchange
or reset  price  under  such  securities.  The  Company  has  furnished  or made
available  to the Buyer  true,  correct  and  complete  copies of the  Company's
Certificate  of  Incorporation,  as amended  and as in effect on the date hereof
(the "Certificate of  Incorporation"),  and the Company's Bylaws, as amended and
as in effect on the date hereof (the "Bylaws").

                                      -9-
<PAGE>

            (h) SEC  Reports;  Financial  Statements.  The Company has filed all
reports  permitted  or  required  to be filed  by it under  the 1933 Act and the
Securities Exchange Act of 1934, as amended (the "1934 Act"), including pursuant
to Section 13(a) or 15(d) thereof,  for the two years  preceding the date hereof
(or such shorter period as the Company was required by law to file such reports)
(the foregoing  materials,  including any amendments  thereto filed with the SEC
prior to the date  hereof,  being  collectively  referred  to herein as the "SEC
Reports" and,  together with the Schedules to this  Agreement,  the  "Disclosure
Materials") on a timely basis or has received a valid  extension of such time of
filing and has filed any such SEC Reports  prior to the  expiration  of any such
extension. The Company has delivered to the Buyers a copy of all SEC Reports not
available on the EDGAR system. Except as set forth on Schedule 3(h), as of their
respective  dates,  the SEC Reports  complied in all material  respects with the
requirements  of the 1933 Act and the 1934 Act applicable  thereto and the rules
and regulations of the SEC promulgated thereunder,  and none of the SEC Reports,
when filed,  contained  any untrue  statement  of a material  fact or omitted to
state a material  fact  required to be stated  therein or  necessary in order to
make the statements  therein, in the light of the circumstances under which they
were made, not misleading.  Except as set forth in Schedule 3(h), the Company is
in compliance with the Sarbanes-Oxley Act of 2002, and the rules and regulations
promulgated   thereunder  by  all  government  and  regulatory  authorities  and
agencies.  The financial  statements of the Company  included in the SEC Reports
comply in all material respects with applicable accounting  requirements and the
rules and  regulations of the SEC with respect  thereto as in effect at the time
of filing.  Such  financial  statements  have been prepared in  accordance  with
generally  accepted  accounting  principles applied on a consistent basis during
the periods  involved  ("GAAP"),  except as may be  otherwise  specified in such
financial  statements or the notes  thereto,  and fairly present in all material
respects the financial position of the Company and its consolidated Subsidiaries
as of and for the dates thereof and the results of operations and cash flows for
the periods then ended, subject, in the case of unaudited statements, to normal,
immaterial, year-end audit adjustments.

            (i) Material Changes. Since the date of the latest audited financial
statements included within the SEC Reports,  except as specifically disclosed in
the SEC Reports and except as set forth on Schedule  3(i) hereto,  (i) there has
been no event,  occurrence or development  that has had or that could reasonably
be expected  to result in a Material  Adverse  Effect,  (ii) the Company has not
incurred any liabilities (contingent or otherwise) other than (A) trade payables
and accrued expenses incurred in the ordinary course of business consistent with
past practice and (B)  liabilities not required to be reflected in the Company's
financial  statements  pursuant to GAAP or required to be  disclosed  in filings
made with the SEC, (iii) the Company has not altered its method of accounting or
the  identity of its  auditors,  (iv) the  Company has not  declared or made any
dividend  or  distribution  of cash or other  property  to its  stockholders  or
purchased,  redeemed or made any  agreements to purchase or redeem any shares of
its capital stock,  (v) the Company has not issued any equity  securities to any
officer, director or any Person that, directly or indirectly through one or more
intermediaries,  controls or is controlled by or is under common  control with a
Person, as such terms are used in and construed under Rule 144 promulgated under
the 1933  Act,  as  amended  (or a  successor  rule  thereto)  ("Rule  144") (an
"Affiliate"),  except  pursuant to existing  stock  option plans of the Company,
(vi) the Company has not sold any assets,  individually or in the aggregate,  in
excess of  $250,000  outside of the  ordinary  course of  business  or (vii) the
Company has not had capital expenditures,  individually or in the aggregate,  in
excess of $250,000. The Company does not have pending before the SEC any request
for confidential treatment of information.

                                      -10-
<PAGE>

            (j)  Litigation.  Except as set forth in Schedule 3(j),  there is no
action, suit,  proceeding,  inquiry or investigation which (i) adversely affects
or challenges the legality, validity or enforceability of any of the Transaction
Documents  or the  Securities  or (ii)  could,  if  there  were  an  unfavorable
decision,  individually  or in the aggregate,  have or reasonably be expected to
result in a Material Adverse Effect. Neither the Company nor any Subsidiary, nor
any director or officer thereof, is or has been the subject of any claim, action
or  proceeding  involving a claim of violation of or liability  under federal or
state  securities  laws or a claim of breach of  fiduciary  duty.  There has not
been, and to the knowledge of the Company, there is not pending or contemplated,
any  investigation  by the SEC  involving  the  Company or any current or former
director or officer of the Company.

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

            (l)  Compliance.  Except as set forth in Schedule 3(l),  neither the
Company nor any  Subsidiary  (i) is in default  under or in violation of (and no
event has occurred  that has not been waived that,  with notice or lapse of time
or both, would result in a default by the Company or any Subsidiary  under), nor
has the  Company  or any  Subsidiary  received  notice of a claim  that it is in
default  under or that it is in  violation  of,  any  indenture,  loan or credit
agreement  or any other  agreement  or  instrument  to which it is a party or by
which it or any of its  properties  is bound  (whether  or not such  default  or
violation  has been  waived),  (ii) is in  violation  of any order of any court,
arbitrator,  governmental  body, or regulatory or  self-regulatory  authority or
(iii) is or has been in  violation  of any statute,  rule or  regulation  of any
governmental authority, including without limitation all foreign, federal, state
and local laws relating to taxes, environmental protection,  occupational health
and safety, product quality and safety and employment and labor matters,  except
in each case as could not, individually or in the aggregate,  have or reasonably
be expected to result in a Material Adverse Effect.

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

            (n) Title to Assets.  The Company and the Subsidiaries have good and
marketable  title in fee  simple  to all  real  property  owned by them  that is
material to their  respective  businesses and good and  marketable  title in all
personal property owned by them that is material to their respective businesses,
in each case free and clear of all Liens,  except as set forth in Schedule  3(n)
and except for Liens as do not materially  affect the value of such property and
do not  materially  interfere  with the use made and proposed to be made of such
property by the Company and the  Subsidiaries.  Any real property and facilities
held under  lease by the  Company  and the  Subsidiaries  are held by them under
valid,   subsisting  and  enforceable  leases  of  which  the  Company  and  the
Subsidiaries are in compliance in all material respects.

                                      -11-
<PAGE>

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

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

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

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

            (s) Tax Status.  The Company  and each of its  Subsidiaries  (i) has
made or filed all federal and state  income and all other tax  returns,  reports
and declarations  required by any jurisdiction to which it is subject,  (ii) has
paid all taxes and other governmental  assessments and charges that are material
in  amount,  shown  or  determined  to be  due  on  such  returns,  reports  and
declarations, except those being contested in good faith and (iii) has set aside
on its books provision reasonably adequate for the payment of all material taxes
for  periods  subsequent  to the  periods  to which  such  returns,  reports  or
declarations  apply. There are no unpaid taxes in any material amount claimed to
be due by the taxing  authority  of any  jurisdiction,  and the  officers of the
Company know of no basis for any such claim.

                                      -12-
<PAGE>

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

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

            (v) Reserved.

            (w)  Application  of Takeover  Protections;  Rights  Agreement.  The
Company 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 Certificate of Incorporation
or the laws of the  jurisdiction  of its  formation  which  is or  could  become
applicable  to any Buyer as a result of the  transactions  contemplated  by this
Agreement,   including,  without  limitation,  the  Company's  issuance  of  the
Securities  and any Buyer's  ownership  of the  Securities.  The Company has not
adopted  a  stockholder   rights  plan  or  similar   arrangement   relating  to
accumulations of beneficial  ownership of Common Stock or a change in control of
the Company.

            (x) No General  Solicitation;  Placement  Agent's Fees.  Neither the
Company,  nor any of its  affiliates,  nor any  Person  acting  on its or  their
behalf, has engaged in any form of general  solicitation or general  advertising
(within the meaning of Regulation D) in connection with the offer or sale of the
Securities.  The Company shall be  responsible  for the payment of any placement
agent's fees,  financial advisory or consultancy fees,  brokers'  commissions or
finder's  fee (other  than for  persons  engaged by any Buyer or its  investment
advisor)  relating to or arising out of the  transactions  contemplated  hereby,
which fees are set forth in Section  4(f).  The Company shall pay, and hold each
Buyer harmless  against,  any  liability,  loss or expense  (including,  without
limitation,  attorney's fees and  out-of-pocket  expenses) arising in connection
with any such claim; provided, that the Company shall not be responsible for the
payment of any  amounts  under  this  Agreement  resulting  from a breach of the
representation by any Buyer set forth in Section 2(k).

                                      -13-
<PAGE>

            (y) No Integrated  Offering.  None of the Company, its Subsidiaries,
any of their Affiliates,  and any Person acting on their behalf has, directly or
indirectly,  made any offers or sales of any security or solicited any offers to
buy any  security,  under  circumstances  that would cause this  offering of the
Securities to be integrated  with prior offerings by the Company for purposes of
any applicable stockholder approval provisions,  including,  without limitation,
under the rules and regulations of any exchange or automated quotation system on
which any of the securities of the Company are listed or designated. None of the
Company,  its  Subsidiaries,  their  Affiliates  and any Person  acting on their
behalf will take any action or steps referred to in the preceding  sentence that
would  cause  the  offering  of  the  Securities  to be  integrated  with  other
offerings.

            (z)  Ranking  of Notes.  Except as set forth on  Schedule  3(z) (the
"Senior  Indebtedness"),  no  Indebtedness  of the Company is senior to or ranks
pari passu with the Notes in right of payment,  whether  with respect of payment
of  redemptions,  interest,  damages  or  upon  liquidation  or  dissolution  or
otherwise.

            (aa)  Certain  Registration  Matters.  The  Company is  eligible  to
register the sale of its Common Stock under Form S-3 promulgated  under the 1933
Act.  Except  as  described  in  Schedule  3(aa) and  securities  that have been
previously  registered for resale by the Company, the Company has not granted or
agreed to grant to any Person any rights  (including  "piggy-back"  registration
rights) to have any  securities  of the Company  registered  with the SEC or any
other governmental authority that have not been satisfied.

            (bb) Listing and  Maintenance  Requirements.  Except as set forth in
the SEC Reports or as set forth in Schedule  3(bb),  the Company has not, in the
two years preceding the date hereof,  received notice (written or oral) from any
Trading  Market on which the Common Stock is or has been listed or quoted to the
effect that the  Company is not in  compliance  with the listing or  maintenance
requirements  of such Trading  Market.  Except for the  maintenance of the $1.00
minimum  bid  price  (pursuant  to the rules and  regulations  of the  Principal
Market),  the  Company is  currently  in  compliance  with all such  listing and
maintenance  requirements.  Subject to obtaining the Stockholder Approval to the
extent required by the Principal Market, the issuance and sale of the Securities
hereunder does not contravene the rules and regulations of the Principal  Market
and no approval of the  stockholders  of the Company is required for the Company
to issue  and  deliver  to the  Buyers up to (i) 130% of the  maximum  number of
shares of Common Stock  issuable upon  conversion  of the Notes  issuable at the
Closing  (assuming for purposes  hereof,  that the Notes are  convertible at the
initial   Conversion  Price  (including  any  shares  issuable  as  amortization
payments) and without  taking into account any  limitations on the conversion of
the Notes set forth in the Notes) and (ii) 100% of the maximum  number of shares
of Common Stock issuable upon exercise of the Warrants.

                                      -14-
<PAGE>

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

            (dd)  Disclosure.  Other than  information  regarding  the  offering
contemplated by the Transaction Documents,  the Company confirms that neither it
nor any other  Person  acting on its  behalf has  provided  any of the Buyers or
their  agents  or  counsel  with  any  information  that  constitutes  material,
nonpublic  information.  The Company  understands  and confirms that each of the
Buyers will rely on the foregoing  representations in effecting  transactions in
securities of the Company.  All disclosure  provided to the Buyers regarding the
Company, its business and the transactions  contemplated hereby, furnished by or
on behalf of the Company, including the Schedules to this Agreement, is true and
correct in all material  respects and does not contain any untrue statement of a
material fact or omit to state any material fact  necessary in order to make the
statements made therein, in the light of the circumstances under which they were
made, in all material  respects not  misleading.  No event or  circumstance  has
occurred  or  information  exists  with  respect  to the  Company  or any of its
Subsidiaries  or its or their  business,  properties,  operations  or  financial
conditions,  which,  under  applicable law, rule or regulation,  requires public
disclosure  or  announcement  by the  Company but which has not been so publicly
announced or disclosed.

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

      4. COVENANTS.

            (a)  Reasonable  Best Efforts.  Each party shall use its  reasonable
best efforts  timely to satisfy each of the covenants  and the  conditions to be
satisfied  by it as  provided  in this  Section 4 and  Sections  6 and 7 of this
Agreement.

            (b) Form D and Blue Sky.  The  Company  agrees to file a Form D with
respect to the Securities as required  under  Regulation D and to provide a copy
thereof to each Buyer  promptly  after such  filing.  The Company  shall,  on or
before the  Closing  Date,  take such  action as the  Company  shall  reasonably
determine is  necessary  in order to obtain an  exemption  for or to qualify the
Securities  for sale to the Buyers at the  Closing  pursuant  to this  Agreement
under  applicable  securities  or "Blue  Sky" laws of the  states of the  United
States (or to obtain an exemption  from such  qualification),  and shall provide
evidence  of any such  action so taken to the Buyers on or prior to the  Closing
Date.  The Company shall make all filings and reports  relating to the offer and
sale of the Securities  required under applicable  securities or "Blue Sky" laws
of the states of the United States following the Closing Date.

                                      -15-
<PAGE>

            (c)  Reporting  Status.  Until the date on which the  Investors  (as
defined in the Registration Rights Agreement) shall have sold all the Conversion
Shares and Warrant Shares and none of the Notes or Warrants are outstanding (the
"Reporting  Period"),  the Company  shall file all reports  required to be filed
with the SEC pursuant to the 1934 Act, and the Company  shall not  terminate its
status as an issuer required to file reports under the 1934 Act even if the 1934
Act  or the  rules  and  regulations  thereunder  would  otherwise  permit  such
termination.

            (d) Financial Information.  The Company agrees to send the following
to each Investor (as defined in the Registration  Rights  Agreement)  during the
Reporting  Period (i) unless the  following are filed with the SEC through EDGAR
and are  available  to the  public  through  the EDGAR  system,  within  one (1)
Business Day after the filing thereof with the SEC, a copy of its Annual Reports
on Form 10-K, any interim reports or any  consolidated  balance  sheets,  income
statements,  stockholders' equity statements and/or cash flow statements for any
period other than annual,  any Current Reports on Form 8-K and any  registration
statements  (other than on Form S-8) or  amendments  filed  pursuant to the 1933
Act, (ii) on the same day as the release  thereof,  facsimile or e-mailed copies
of all material financial press releases issued by the Company, and (iii) unless
the  following  are filed with the SEC through  EDGAR and are  available  to the
public  through the EDGAR  system,  copies of any notices and other  information
made  available  or  given  to  the  stockholders  of  the  Company   generally,
contemporaneously   with  the  making   available  or  giving   thereof  to  the
stockholders.

            (e)  Listing.  The Company  shall,  when and as  required  under the
Registration  Rights  Agreement,  secure the  listing of all of the  Registrable
Securities (as defined in the Registration  Rights Agreement) upon each national
securities  exchange and  automated  quotation  system,  if any,  upon which the
Common Stock is then listed  (subject to official  notice of issuance) and shall
maintain such listing of all  Registrable  Securities from time to time issuable
under the terms of the  Transaction  Documents.  The Company shall  maintain the
Common  Stock's  authorization  for  listing on a Trading  Market.  Neither  the
Company  nor any of its  Subsidiaries  shall  take  any  action  which  would be
reasonably expected to result in the delisting or suspension of the Common Stock
on all  Trading  Markets.  The  Company  shall  pay all  fees  and  expenses  in
connection with satisfying its obligations under this Section 4(e).

            (f) Fees. At the Closing, the Company shall pay an expense allowance
of $100,000 to  Smithfield  Fiduciary  LLC (a Buyer) or its  designee(s),  which
amount shall be withheld by such Buyer from its aggregate  Purchase Price at the
Closing.  The Company  shall be  responsible  for the  payment of any  placement
agent's fees,  financial advisory fees, or broker's  commissions (other than for
Persons  engaged by any Buyer)  relating to or arising  out of the  transactions
contemplated  hereby.  The  Company  shall  pay,  and hold each  Buyer  harmless
against,  any  liability,  loss  or  expense  (including,   without  limitation,
reasonable  attorney's fees and  out-of-pocket  expenses)  arising in connection
with any claim  relating to any such  payment.  Except as otherwise set forth in
this  Agreement or in the  Transaction  Documents,  each party to this Agreement
shall bear its own expenses in connection with the sale of the Securities to the
Buyers;  provided,  that the Company shall not be responsible for the payment of
any amounts under this Agreement  resulting from a breach of the  representation
by any Buyer as set forth in Section 2(k).

                                      -16-
<PAGE>

            (g) Pledge of Securities.  The Company  acknowledges and agrees that
the  Securities  may, to the extent  permitted by the 1933 Act, be pledged by an
Investor (as defined in the Registration  Rights Agreement) in connection with a
bona fide  margin  agreement  or other  loan or  financing  arrangement  that is
secured by the Securities.  The pledge of Securities shall not be deemed to be a
transfer,  sale or  assignment  of the  Securities  hereunder,  and no  Investor
effecting a pledge of  Securities  shall be required to provide the Company with
any notice  thereof or otherwise  make any  delivery to the Company  pursuant to
this Agreement or any other Transaction Document, including, without limitation,
Section 2(h) hereof; provided that an Investor and its pledgee shall be required
to comply with the  provisions of Section 2(h) hereof in order to effect a sale,
transfer or assignment of Securities to such pledgee.  The Company hereby agrees
to execute and deliver such  documentation  as a pledgee of the  Securities  may
reasonably request in connection with a pledge of the Securities to such pledgee
by an Investor.

            (h) Disclosure of Transactions and Other Material  Information.  The
Company  shall,  on or before 8:30 a.m.,  New York City Time,  on September  30,
2005, issue a press release  reasonably  acceptable to the Buyers disclosing all
material terms of the transactions contemplated hereby (the "Press Release"). On
or before 8:30 a.m.,  New York Time,  on the second  Business Day  following the
execution  and  delivery of this  Agreement,  the  Company  shall file a Current
Report on Form 8-K describing the terms of the transactions  contemplated by the
Transaction  Documents in the form  required by the 1934 Act, and  attaching the
material Transaction Documents (including,  without limitation,  this Agreement,
the  form of each  of the  Notes,  the  Warrants,  the  Letter  of  Credit,  the
Registration  Rights  Agreement and the Security  Documents) as exhibits to such
filing (including all attachments,  the "8-K Filing"). From and after the filing
of the 8-K Filing,  no Buyer shall be in possession  of any material,  nonpublic
information  provided to them by the Company,  any of its Subsidiaries or any of
its respective officers,  directors,  employees or agents, that is not disclosed
in such  8-K  Filing.  The  Company  shall  not,  and  shall  cause  each of its
Subsidiaries and its and each of their respective officers, directors, employees
and agents,  not to, provide any Buyer with any material  nonpublic  information
regarding  the Company or any of its  Subsidiaries  from and after the filing of
the press release  referred to in the first sentence of this Section without the
express  written  consent of such Buyer.  Subject to the foregoing,  neither the
Company  nor any  Buyer  shall  issue  any press  releases  or any other  public
statements  with  respect to the  transactions  contemplated  hereby;  provided,
however,  that the Company shall be entitled,  without the prior approval of any
Buyer, to make any press release or other public disclosure with respect to such
transactions   (i)  in   substantial   conformity   with  the  8-K   Filing  and
contemporaneously  therewith  and  (ii) as is  required  by  applicable  law and
regulations,  including the  applicable  rules and  regulations of the Principal
Market (provided that in the case of clause (i) each Buyer shall be consulted by
the Company in connection with any such press release or other public disclosure
prior to its  release).  Without  the prior  written  consent of any  applicable
Buyer,  the  Company  shall not  disclose  the name of any Buyer in any  filing,
announcement, release or otherwise.

            (i) Use of Proceeds. The Company will use the proceeds from the sale
of the Securities to pay all amounts  currently  owing to Alan G. Jordan and Tim
L. Carr under the Stock Purchase/Sale  Agreement dated January 7, 2004 among the
Company,  FAAC  Incorporated,  Alan G. Jordan and Tim L. Carr, as amended by the
letter  dated April 10, 2005 (the "FAAC  Agreement"),  which  amounts  shall not
exceed $5.4 million in the aggregate (the "FAAC Stockholders' Repayment"),  with
any remaining  proceeds used for general  corporate  purposes other than the (A)
repayment  of any other  outstanding  Indebtedness  of the Company  prior to the
final due date thereof or (B)  redemption  or repurchase of any of its equity or
equity-linked Securities.

                                      -17-
<PAGE>

            (j)  Restriction  on Redemption and Cash  Dividends.  So long as any
Notes are outstanding,  without the prior express written consent of the holders
of Notes representing not less than a majority of the aggregate principal amount
of the then outstanding  Notes,  the Company shall not,  directly or indirectly,
redeem,  or  declare or pay any cash  dividend  or  distribution  on, the Common
Stock.

            (k) Additional  Notes and Warrants;  Variable  Securities;  Dilutive
Issuances.  So long as any Notes remain outstanding,  the Company will not issue
any Notes  (other  than to the Buyers as  contemplated  hereby)  and the Company
shall not issue any other  securities that would cause a breach or default under
the Notes. For long as any Notes remain  outstanding,  the Company shall not, in
any manner,  issue or sell any rights,  warrants or options to subscribe  for or
purchase Common Stock or directly or indirectly convertible into or exchangeable
or exercisable  for Common Stock at a price which varies or may vary,  from time
to time,  with the market price of the Common Stock,  including by way of one or
more  reset(s) to any fixed price  unless the  conversion,  exchange or exercise
price of any such security  cannot be less than the then  applicable  Conversion
Price (as defined in the Notes) with  respect to the Common Stock into which any
Note is  convertible  or the then  applicable  Exercise Price (as defined in the
Warrants)   with  respect  to  the  Common  Stock  into  which  any  Warrant  is
exercisable. Until the Stockholder Approval has been obtained, the Company shall
not, in any manner,  enter into or affect any  Dilutive  Issuance (as defined in
the  Notes)  and,  thereafter,   for  long  as  any  Notes  or  Warrants  remain
outstanding,  the Company  shall not,  in any  manner,  enter into or affect any
Dilutive  Issuance  (as  defined in the  Notes) if the  effect of such  Dilutive
Issuance is to cause the Company to be required to issue upon  conversion of any
Note any shares of Common  Stock or exercise of any Warrant any shares of Common
Stock in excess of that  number of shares of Common  Stock which the Company may
issue upon conversion of the Notes or exercise of the Warrants without breaching
the Company's  obligations under the rules or regulations of the Eligible Market
(as defined in the Note).

            (l) Corporate  Existence.  So long as any Notes remain  outstanding,
the Company shall not be party to any Fundamental Transaction (as defined in the
Notes)  unless  the  Company is in  compliance  with the  applicable  provisions
governing Fundamental Transactions set forth in the Notes.

            (m) Reservation of Shares. So long as any Notes or Warrants,  as the
case may be, remain outstanding,  the Company shall take all action necessary to
at all times have authorized,  and reserved for the purpose of issuance, no less
than the sum of (i)  130% of the  maximum  number  of  shares  of  Common  Stock
issuable  upon  conversion  of the Notes  issuable at the Closing  (assuming for
purposes hereof,  that the Notes are convertible at the initial Conversion Price
and without  taking into account any  limitations on the conversion of the Notes
set forth in the Notes) and (ii) 100% of the maximum  number of shares of Common
Stock  issuable upon exercise of the Warrants  (without  taking into account any
limitations on the exercise of the Warrants set forth in the Warrants).

                                      -18-
<PAGE>

            (n)  Conduct  of  Business.  The  business  of the  Company  and its
Subsidiaries  shall not be  conducted  in  violation  of any law,  ordinance  or
regulation of any  governmental  entity,  except where such violations would not
result, either individually or in the aggregate, in a Material Adverse Effect.

            (o)  Additional  Issuances  of  Securities.  Except  as set forth on
Schedule  4(o) hereto,  from the Original Date until the date that is 90 Trading
Days (as defined in the Notes)  following the Effective  Date (as defined in the
Registration  Rights  Agreement),  the Company will not, directly or indirectly,
offer, sell, grant any option to purchase,  or otherwise dispose of (or announce
any offer, sale, grant or any option to purchase or other disposition of) any of
its or its  Subsidiaries'  equity or  equity  equivalent  securities,  including
without  limitation any debt,  preferred  stock or other  instrument or security
that is, at any time  during its life and under any  circumstances,  convertible
into or  exchangeable  or exercisable for shares of Common Stock or any stock or
securities  convertible into or exercisable or exchangeable for shares of Common
Stock.  The foregoing shall not apply to Excluded  Securities (as defined in the
Notes).

            (p) Letter of Credit.  On or prior to the Closing Date,  the Company
shall  obtain  the Letter of Credit,  in the Letter of Credit  Amount  issued in
favor of the Senior Agent by the Letter of Credit Bank and in form and substance
reasonably  acceptable to such Senior Agent.  The Letter of Credit shall have an
expiration  date that is the earlier to occur of (A) 100 days after the Maturity
Date (as  defined in the  Notes),  (B) such date the Letter of Credit  Amount is
reduced to zero in  accordance  with  Section 2(d) of the Note and (C) such date
whereafter no Notes remain outstanding.

            (q) Stockholder Approval. The Company shall provide each stockholder
entitled to vote at a special or annual meeting of  stockholders  of the Company
(the "Stockholder  Meeting"),  which shall be promptly called and held not later
than December 15, 2005 (the "Stockholder Meeting Deadline"),  a proxy statement,
substantially in the form which has been previously reviewed by the Buyers and a
counsel  of their  choice  (which  review  shall be  completed  within  five (5)
Business Days of such counsel's  receipt of the proxy  statement and such review
requirement  shall be waived if such counsel has not completed its review within
such  five  (5)  Business  Day  period),   soliciting  each  such  stockholder's
affirmative  vote  at  the  Stockholder  Meeting  for  approval  of  resolutions
providing  for the Company's  issuance of all of the  Securities as described in
the  Transaction  Documents in accordance  with applicable law and the rules and
regulations of the Principal Market (such affirmative approval being referred to
herein as the "Stockholder Approval"),  and the Company shall use its reasonable
best efforts to solicit its  stockholders'  approval of such  resolutions and to
cause the Board of Directors  of the Company to  recommend  to the  stockholders
that they approve such  resolutions.  The Company  shall be obligated to use its
reasonable  best efforts to obtain the  Stockholder  Approval by the Stockholder
Meeting  Deadline.  If,  despite  the  Company's  reasonable  best  efforts  the
Stockholder  Approval  is not  obtained on or prior to the  Stockholder  Meeting
Deadline,  the Company shall cause an additional  Stockholder Meeting to be held
every six (6) months  thereafter until such Stockholder  Approval is obtained or
the Notes are no longer outstanding.

                                      -19-
<PAGE>

            (r) Securities  Issuance.  Until the one (1) year anniversary of the
effective  date of the  Registration  Statement,  the Company shall not issue or
sell, or be deemed to have issued or sold, any shares of Common Stock (including
the  issuance  or sale of  shares of  Common  Stock  owned or held by or for the
account of the Company, but excluding shares of Common Stock deemed to have been
issued or sold by the  Company in  connection  with any  Excluded  Security  (as
defined in the Note)) for a  consideration  per share less than a price equal to
the  Conversion  Price (as defined in the Note) in effect  immediately  prior to
such issue or sale.

            (s) Inactive  Subsidiaries.  The Company  agrees that each  Inactive
Subsidiary  shall remain a dormant company until such time as each such Inactive
Subsidiary  is  dissolved in  accordance  with the laws of its  jurisdiction  of
incorporation.  The Company shall not, and shall cause its  Subsidiaries not to,
transfer any property or asset to any Inactive Subsidiary.

            (t) Post Closing Covenant.  Within 5 Business Days after the Closing
Date (as such period may from time to time be  extended  with the consent of the
Buyers),  the Company shall deliver to the Buyers a completed schedule to the IP
Security Agreement,  together with any other documentation  reasonably requested
by Senior Agent and take all actions  reasonably  necessary to permit the Buyers
to file the IP Security Agreement with the U.S. Patent and Trademark Office. The
Company  agrees that a breach of this  Section  4(t) shall not require  that any
notice of such by the holders of the Notes  pursuant to Section  4(a)(xi) of the
Notes or that any cure period be provided  pursuant to such Section  4(a)(xi) of
the Notes.

            (u)  FAAC  Agreement.  The  Company  confirms  that  after  the FAAC
Stockholders'  Repayment  (as defined in Section 4(i)) neither it nor any of its
Subsidiaries has any further obligations under the FAAC Agreement other than the
payment of the 2005 Earnout Consideration (as defined in the FAAC Agreement) and
the  Pro-Safe  Earnout  Consideration  (as defined in the FAAC  Agreement).  The
Company  agrees that the  aggregate  of the 2005 Earnout  Consideration  and the
Pro-Safe Earnout Consideration will not exceed $1.5 million.

      5. REGISTER; TRANSFER AGENT INSTRUCTIONS.

            (a) Register.  The Company shall maintain at its principal executive
offices (or such other  office or agency of the Company as it may  designate  by
notice to each holder of Securities),  a register for the Notes and the Warrants
in which the  Company  shall  record the name and address of the Person in whose
name the Notes and the Warrants have been issued (including the name and address
of each  transferee),  the principal  amount of Notes and the number of Warrants
held by such Person, the number of Conversion Shares issuable upon conversion of
the Notes  and the  number of  Warrant  Shares  issuable  upon  exercise  of the
Warrants  held by such  Person.  The Company  shall keep the  register  open and
available at all times during  business hours for inspection of any Buyer or its
legal representatives.

            (b) Transfer Agent Instructions. The Company shall issue irrevocable
instructions  to its transfer  agent,  and any  subsequent  transfer  agent (the
"Transfer  Agent"),  to issue  certificates  or credit shares to the  applicable
balance accounts at The Depository Trust Company ("DTC"), registered in the name
of each Buyer or its respective  nominee(s),  for the  Conversion  Shares issued
upon  conversion of the Notes and the Warrant Shares issued upon exercise of the
Warrants  in such  amounts as  specified  from time to time by each Buyer to the
Company upon conversion of the Notes and Exercise of the Warrants in the form of
Exhibit G attached hereto (the "Irrevocable Transfer Agent  Instructions").  The
Company warrants that no instruction in respect of the Securities other than the
Irrevocable  Transfer Agent  Instructions  referred to in this Section 5(b), and
stop transfer  instructions to give effect to Section 2(g) hereof, will be given
by the Company to the Transfer Agent, and that the Securities shall otherwise be
freely transferable on the books and records of the Company as and to the extent
provided  in this  Agreement  and the other  Transaction  Documents.  If a Buyer
effects a sale,  assignment or transfer of the  Securities  in  accordance  with
Section 2(g), the Company shall permit the transfer and shall promptly  instruct
the Transfer  Agent to issue one or more  certificates  or credit  shares to the
applicable  balance  accounts at DTC in such name and in such  denominations  as
specified  by such Buyer to effect  such sale,  transfer or  assignment.  In the
event that such sale,  assignment or transfer  involves  Conversion Shares sold,
assigned or  transferred  pursuant to an  effective  registration  statement  or
pursuant to Rule 144, the Company  will, or will use its  reasonable  efforts to
cause the  Transfer  Agent to issue such  Securities  to the Buyer,  assignee or
transferee,  as the case may be,  without any  restrictive  legend.  The Company
acknowledges  that  a  breach  by it of its  obligations  hereunder  will  cause
irreparable  harm to a Buyer.  Accordingly,  the Company  acknowledges  that the
remedy at law for a breach of its  obligations  under this  Section 5(b) will be
inadequate  and  agrees,  in the event of a breach or  threatened  breach by the
Company of the provisions of this Section 5(b),  that a Buyer shall be entitled,
in addition  to all other  available  remedies,  to an order  and/or  injunction
restraining any breach and requiring  immediate  issuance and transfer,  without
the necessity of showing  economic  loss and without any bond or other  security
being  required.  Nothing in the foregoing  shall be  interpreted to require the
Company or the Transfer Agent to effect any transfer or take any other action in
violation of applicable federal or state securities laws.

                                      -20-
<PAGE>

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

            (a) Closing Date. The  obligation of the Company  hereunder to issue
and sell the Notes to each Buyer at the Closing is subject to the  satisfaction,
at or before the Closing  Date, of each of the  following  conditions,  provided
that these  conditions  are for the Company's  sole benefit and may be waived by
the  Company at any time in its sole  discretion  by  providing  each Buyer with
prior written notice thereof:

                  (i) Such Buyer  shall have  executed  each of the  Transaction
Documents to which it is a party and delivered the same to the Company.

                  (ii) Such Buyer and each other Buyer shall have  delivered  to
the Company the Purchase Price (less,  in the case of Smithfield  Fiduciary LLC,
the amounts withheld  pursuant to Section 4(f)) for the Notes being purchased by
such Buyer at the  Closing  by wire  transfer  of  immediately  available  funds
pursuant to the wire instructions provided by the Company.

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

                                      -21-
<PAGE>

      7. CONDITIONS TO EACH BUYER'S OBLIGATION TO PURCHASE.

            (a) Closing Date. The obligation of each Buyer hereunder to purchase
the Notes and  Warrants  at the  Closing is subject to the  satisfaction,  at or
before the Closing  Date,  of each of the  following  conditions,  provided that
these  conditions  are for each  Buyer's  sole benefit and may be waived by such
Buyer at any time in its sole  discretion  by  providing  the Company with prior
written notice thereof:

                  (i) The Company  shall have  executed  and  delivered  to such
Buyer (i) each of the Transaction  Documents,  (ii) the Notes (in such principal
amounts as such Buyer shall  request),  and (iii) the related  Warrants (in such
amounts as such Buyer shall request), which are being purchased by such Buyer at
the Closing pursuant to this Agreement.

                  (ii) Such  Buyer  shall  have  received  the  opinions  of the
Company's  in-house counsel,  dated as of the Closing Date, in substantially the
form of Exhibit H-1 attached hereto.

                  (iii)  Such  Buyer  shall  have   received   the  opinions  of
Lowenstein  Sandler PC, the Company's  outside counsel,  dated as of the Closing
Date, in substantially the form of Exhibit H-2 attached hereto.

                  (iv) The Company shall have  delivered to such Buyer a copy of
the Irrevocable  Transfer Agent Instructions,  in the form of Exhibit G attached
hereto,  which  instructions  shall have been delivered to and  acknowledged  in
writing by the Company's transfer agent.

                  (v)  The  Company  shall  have   delivered  to  such  Buyer  a
certificate  evidencing the organization and good standing of the Company in the
State of Delaware issued by the Secretary of State of the State of Delaware,  as
of a date within 10 days of the Closing Date.

                  (vi)  The  Company  shall  have  delivered  to  such  Buyer  a
certificate evidencing the Company's  qualification as a foreign corporation and
good standing  issued by the Secretary of State (or  comparable  office) of each
jurisdiction in which the Company conducts business, as of a date within 10 days
of the Closing Date.

                  (vii)  The  Company  shall  have  delivered  to  such  Buyer a
certified copy of the Certificate of Incorporation as certified by the Secretary
of State of the State of Delaware within ten (10) days of the Closing Date.

                  (viii)  The  Company  shall  have  delivered  to such  Buyer a
certificate,  executed  by the  Secretary  of the  Company  and  dated as of the
Closing Date, as to (i) the  resolutions  consistent  with this  transaction  as
adopted by the Company's Board of Directors in a form  reasonably  acceptable to
such Buyer,  (ii) the Certificate of  Incorporation  and (iii) the Bylaws of the
Company,  each as in  effect  at the  Closing,  in the form  attached  hereto as
Exhibit I.

                                      -22-
<PAGE>

                  (ix) The  representations  and warranties of the Company shall
be true and correct in all material  respects  (other than  representations  and
warranties that are already  qualified by materiality or Material Adverse Effect
which shall be true and correct in all respects) as of the date when made and as
of the Closing Date as though made at that time (except for  representations and
warranties  that  speak  as of a  specific  date)  and the  Company  shall  have
performed, satisfied and complied in all respects with the covenants, agreements
and conditions required by the Transaction Documents to be performed,  satisfied
or  complied  with by the Company at or prior to the  Closing  Date.  Such Buyer
shall have received a certificate,  executed by the Chief  Executive  Officer of
the Company,  dated as of the Closing Date,  to the  foregoing  effect and as to
such other  matters  as may be  reasonably  requested  by such Buyer in the form
attached hereto as Exhibit J.

                  (x) The Company  shall have  delivered  to such Buyer a letter
from the  Company's  transfer  agent  certifying  the number of shares of Common
Stock outstanding as of a date within five days of the Closing Date.

                  (xi) The Common Stock (I) shall be listed on a Trading  Market
and (II) shall not have been suspended,  as of the Closing Date, by the SEC or a
Trading Market from trading on a Trading Market nor shall  suspension by the SEC
or a Trading Market have been threatened,  as of the Closing Date, either (A) in
writing  by the SEC or a Trading  Market  or (B) by  falling  below the  minimum
listing  maintenance  requirements of a Trading Market.  The Buyers  acknowledge
that the Common  Stock has been  trading at a price below $1.00 since August 15,
2005, and that the Company has received a notification from the Principal Market
to the effect that the Common  Stock does not satisfy  Nasdaq  Marketplace  Rule
4310(c)(4) (the "Minimum Bid Price Rule"), and that in accordance with the rules
of the  Principal  Market,  the Company will be provided  180  calendar  days to
regain compliance with the Minimum Bid Price Rule.

                  (xii)  The  Company  shall  have  obtained  all  governmental,
regulatory or third party consents and approvals, if any, necessary for the sale
of the Securities.

                  (xiii) Within five (5) Business Days prior to the Closing, the
Company shall have  delivered or caused to be delivered to each Buyer  certified
copies of UCC search results,  listing all effective financing  statements which
name as debtor the Company  filed in the prior five years to perfect an interest
in any assets thereof,  together with copies of such financing statements,  none
of which,  except as otherwise agreed in writing by the Buyers,  shall cover any
of the Collateral (as defined in the Security Documents),  other than Collateral
securing the Senior  Indebtedness,  and the results of searches for any tax lien
and judgment  lien filed  against such Person or its  property,  which  results,
except as  otherwise  agreed to in writing by the Buyers shall not show any such
Liens (as defined in the Security Documents).

                  (xiv) The  Company  shall  have  delivered  to such Buyer such
other documents  relating to the transactions  contemplated by this Agreement as
such Buyer or its counsel may reasonably request.

      8. TERMINATION. In the event that the Closing shall not have occurred with
respect to a Buyer on or before five (5) Business  Days from the date hereof due
to the Company's or such Buyer's  failure to satisfy the conditions set forth in
Sections  6 and 7 above  (and the  nonbreaching  party's  failure  to waive such
unsatisfied  condition(s)),  the  nonbreaching  party  shall  have the option to
terminate this  Agreement  with respect to such breaching  party at the close of
business  on such  date  without  liability  of any  party to any  other  party;
provided, however, that if this Agreement is terminated pursuant to this Section
8, the Company shall remain obligated to reimburse the non-breaching  Buyers for
the expenses described in Section 4(f) above.

                                      -23-
<PAGE>

      9. MISCELLANEOUS.

            (a)  Governing  Law;   Jurisdiction;   Jury  Trial.   All  questions
concerning the construction,  validity,  enforcement and  interpretation of this
Agreement  shall be  governed  by the  internal  laws of the  State of New York,
without  giving effect to any choice of law or conflict of law provision or rule
(whether of the State of New York or any other  jurisdictions)  that would cause
the  application  of the laws of any  jurisdictions  other than the State of New
York. Each party hereby irrevocably submits to the exclusive jurisdiction of the
state and federal courts sitting in The City of New York,  Borough of Manhattan,
for the adjudication of any dispute hereunder or in connection  herewith or with
any transaction  contemplated hereby or discussed herein, and hereby irrevocably
waives,  and agrees not to assert in any suit,  action or proceeding,  any claim
that it is not personally  subject to the  jurisdiction of any such court,  that
such suit, action or proceeding is brought in an inconvenient  forum or that the
venue of such  suit,  action  or  proceeding  is  improper.  Each  party  hereby
irrevocably  waives  personal  service of process and consents to process  being
served in any such suit,  action or proceeding by mailing a copy thereof to such
party at the address for such 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 HEREBY  IRREVOCABLY
WAIVES ANY RIGHT IT MAY HAVE,  AND AGREES NOT TO  REQUEST,  A JURY TRIAL FOR THE
ADJUDICATION  OF ANY DISPUTE  HEREUNDER OR IN CONNECTION  WITH OR ARISING OUT OF
THIS AGREEMENT OR ANY TRANSACTION CONTEMPLATED HEREBY.

            (b)  Counterparts.  This  Agreement  may be  executed in two or more
identical  counterparts,  all of  which  shall  be  considered  one and the same
agreement and shall become effective when  counterparts have been signed by each
party and  delivered to the other  party;  provided  that a facsimile  signature
shall be  considered  due  execution  and shall be  binding  upon the  signatory
thereto with the same force and effect as if the signature were an original, not
a facsimile signature.

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

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

                                      -24-
<PAGE>

            (e)  Entire  Agreement;  Amendments.  This  Agreement  and the other
Transaction  Documents  supersede  all other  prior oral or  written  agreements
between the Buyers,  the Company,  their  Affiliates and Persons acting on their
behalf with respect to the matters  discussed  herein,  and this Agreement,  the
other  Transaction  Documents and the instruments  referenced herein and therein
contain  the entire  understanding  of the parties  with  respect to the matters
covered  herein and therein  and,  except as  specifically  set forth  herein or
therein,  neither the Company nor any Buyer makes any representation,  warranty,
covenant or  undertaking  with  respect to such  matters.  No  provision of this
Agreement may be amended  other than by an  instrument in writing  signed by the
Company  and the  holders  of at least a  majority  of the  aggregate  number of
Securities  such  Buyers  are  obligated  to  purchase  (on an as  converted  or
exercised  basis),  or, if prior to the Closing Date, the Company and the Buyers
listed on the  Schedule  of Buyers as being  obligated  to  purchase  at least a
majority of the aggregate  number of Securities  outstanding on such date (on an
as converted or exercised  basis),  and any amendment to this  Agreement made in
conformity  with the  provisions  of this  Section  9(e) shall be binding on all
Buyers and holders of  Securities,  as  applicable.  No provision  hereof may be
waived other than by an instrument  in writing  signed by the party against whom
enforcement is sought.  No such amendment  shall be effective to the extent that
it applies to less than all of the  holders of the  applicable  Securities  then
outstanding. No consideration shall be offered or paid to any Person to amend or
consent to a waiver or  modification  of any provision of any of the Transaction
Documents unless the same consideration also is offered to all of the parties to
the Transaction  Documents,  holders of Notes and Warrants. The Company has not,
directly or  indirectly,  made any  agreements  with any Buyers  relating to the
terms  or  conditions  of  the  transactions  contemplated  by  the  Transaction
Documents except as set forth in the Transaction Documents. Without limiting the
foregoing,  the Company confirms that, except as set forth in this Agreement, no
Buyer has made any commitment or promise or has any other  obligation to provide
any financing to the Company or otherwise.

            (f) Notices. Any notices,  consents, waivers or other communications
required or permitted to be given under the terms of this  Agreement  must be in
writing  and will be deemed  to have  been  delivered:  (i) upon  receipt,  when
delivered  personally;  (ii)  upon  receipt,  when sent by  facsimile  (provided
confirmation of transmission  is  mechanically or  electronically  generated and
kept on file by the sending party); or (iii) one Business Day after deposit with
an overnight  courier service,  in each case properly  addressed to the party to
receive the same.  The addresses and facsimile  numbers for such  communications
shall be:

                If to the Company:

                         Arotech Corporation
                         354 Industry Drive
                         Auburn, Alabama 36830
                         Facsimile No.: (334) 502-9001
                         Telephone No.: (334) 502-3008
                         Attention: Chief Executive Officer

                                      -25-
<PAGE>

                With a copy to:

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

                With a copy (for informational purposes only) to:

                         Lowenstein Sandler PC
                         65 Livingston Avenue
                         Roseland, New Jersey 07068
                         Facsimile No.: (973) 597-2477
                         Telephone No.: (973) 597-2500
                         Attention: Steven Skolnick, Esq.

                If to the Transfer Agent:

                         American Stock Transfer and Trust Company
                         6201 15th Avenue
                         Brooklyn, New York 11219
                         Facsimile No.: (718) 234-5001
                         Telephone No.: (718) 921-8200
                         Attention: Herbert J. Lemmer, Esq., Vice President

If to a Buyer, to its address and facsimile  number set forth on the Schedule of
Buyers, with copies to such Buyer's representatives as set forth on the Schedule
of Buyers,

                with a copy (for informational purposes only) to:

                         Schulte Roth & Zabel LLP
                         919 Third Avenue
                         New York, New York  10022
                         Telephone: (212) 756-2000
                         Facsimile: (212) 593-5955
                         Attention: Eleazer N. Klein, Esq.

or to such other address and/or facsimile number and/or to the attention of such
other Person as the  recipient  party has  specified by written  notice given to
each  other  party  five (5) days  prior to the  effectiveness  of such  change.
Written  confirmation  of receipt  (A) given by the  recipient  of such  notice,
consent,  waiver or other  communication,  (B)  mechanically  or  electronically
generated by the sender's facsimile machine containing the time, date, recipient
facsimile  number  and an image of the first  page of such  transmission  or (C)
provided  by an  overnight  courier  service  shall be  rebuttable  evidence  of
personal  service,  receipt by facsimile  or receipt  from an overnight  courier
service in accordance with clause (i), (ii) or (iii) above, respectively.

                                      -26-
<PAGE>

            (g) Successors and Assigns. This Agreement shall be binding upon and
inure to the benefit of the parties and their respective successors and assigns,
including any purchasers of the Notes or Warrants.  The Company shall not assign
this Agreement or any rights or obligations  hereunder without the prior written
consent  of the  holders  of at least a  majority  of the  aggregate  number  of
Securities  outstanding  on such date (on an as converted  or exercised  basis),
including  by  way  of a  Fundamental  Transaction  (unless  the  Company  is in
compliance with the applicable provisions governing Fundamental Transactions set
forth in the  Notes).  A Buyer may assign  some or all of its  rights  hereunder
without the consent of the Company, in which event such assignee shall be deemed
to be a Buyer hereunder with respect to such assigned rights.

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

            (i) Survival.  Unless this Agreement is terminated  under Section 8,
the  representations  and warranties of the Company and the Buyers  contained in
Sections 2 and 3 and the agreements and covenants set forth in Sections 4, 5 and
9 shall survive the Closing.  Each Buyer shall be  responsible  only for its own
representations, warranties, agreements and covenants hereunder.

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

            (k) Indemnification.  In consideration of each Buyer's execution and
delivery of the  Transaction  Documents and acquiring the Securities  thereunder
and in addition to all of the Company's other  obligations under the Transaction
Documents,  the Company shall defend, protect,  indemnify and hold harmless each
Buyer and each other  holder of the  Securities  and all of their  stockholders,
partners,  members,  officers,  directors,  employees  and  direct  or  indirect
investors  and any of the  foregoing  Persons'  agents or other  representatives
(including,   without   limitation,   those  retained  in  connection  with  the
transactions contemplated by this Agreement)  (collectively,  the "Indemnitees")
from and against any and all actions,  causes of action, suits, claims,  losses,
costs,  penalties,  fees,  liabilities  and damages,  and expenses in connection
therewith  (irrespective of whether any such Indemnitee is a party to the action
for  which  indemnification  hereunder  is  sought),  and  including  reasonable
attorneys' fees and disbursements (the "Indemnified  Liabilities"),  incurred by
any  Indemnitee  as a result  of,  or  arising  out of, or  relating  to (a) any
misrepresentation  or  breach  of any  representation  or  warranty  made by the
Company in the  Transaction  Documents or any other  certificate,  instrument or
document  contemplated  hereby  or  thereby,  (b) any  breach  of any  covenant,
agreement or obligation of the Company contained in the Transaction Documents or
any other certificate,  instrument or document contemplated hereby or thereby or
(c) any cause of action,  suit or claim brought or made against such  Indemnitee
by a third party  (including for these  purposes a derivative  action brought on
behalf of the Company) and arising out of or resulting  from (i) the  execution,
delivery,  performance or enforcement of the Transaction  Documents or any other
certificate,  instrument or document  contemplated  hereby or thereby,  (ii) any
transaction  financed  or to be  financed  in  whole  or in  part,  directly  or
indirectly,  with the proceeds of the issuance of the  Securities,  or (iii) the
status of such Buyer or holder of the  Securities  as an investor in the Company
pursuant to the transactions  contemplated by the Transaction Documents.  To the
extent that the foregoing  undertaking by the Company may be  unenforceable  for
any reason,  the Company shall make the maximum  contribution to the payment and
satisfaction of each of the Indemnified  Liabilities  which is permissible under
applicable  law.  Except  as  otherwise  set forth  herein,  the  mechanics  and
procedures  with respect to the rights and  obligations  under this Section 9(k)
shall be the same as those set forth in  Section  6 of the  Registration  Rights
Agreement.

                                      -27-
<PAGE>

            (l) No Strict Construction. The language used in this Agreement will
be deemed to be the  language  chosen by the  parties  to express  their  mutual
intent, and no rules of strict construction will be applied against any party.

            (m)  Remedies.  Each Buyer and each holder of the  Securities  shall
have all rights and  remedies  set forth in the  Transaction  Documents  and all
rights and  remedies  which such holders have been granted at any time under any
other  agreement or contract and all of the rights which such holders have under
any law.  Any Person  having any rights under any  provision  of this  Agreement
shall be entitled to enforce such rights specifically (without posting a bond or
other security),  to recover damages by reason of any breach of any provision of
this Agreement and to exercise all other rights granted by law. Furthermore, the
Company  recognizes  that in the event  that it fails to  perform,  observe,  or
discharge any or all of its  obligations  under the Transaction  Documents,  any
remedy  at law may prove to be  inadequate  relief to the  Buyers.  The  Company
therefore  agrees  that the  Buyers  shall be  entitled  to seek  temporary  and
permanent  injunctive  relief in any such case without the  necessity of proving
actual damages and without posting a bond or other security.

            (n)  Payment  Set Aside.  To the  extent  that the  Company  makes a
payment or  payments  to the Buyers  hereunder  or  pursuant to any of the other
Transaction  Documents or the Buyers enforce or exercise their rights  hereunder
or thereunder,  and such payment or payments or the proceeds of such enforcement
or exercise or any part  thereof are  subsequently  invalidated,  declared to be
fraudulent  or  preferential,  set aside,  recovered  from,  disgorged by or are
required to be refunded, repaid or otherwise restored to the Company, a trustee,
receiver or any other Person under any law (including,  without limitation,  any
bankruptcy law, foreign,  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.

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

                                      -28-
<PAGE>

            (p) Senior Agent.  Each Buyer hereby appoints  Smithfield  Fiduciary
LLC as the Senior  Agent,  and  authorizes  the Senior Agent to act on behalf of
such Buyer in  connection  with the  Letter of Credit to  exercise  such  powers
hereunder  and  thereunder as are  specifically  delegated to or required of the
Senior Agent by the terms hereof and thereof,  together  with such powers as may
be reasonably incidental thereto. Each Buyer hereby indemnifies (which indemnity
shall  survive any  termination  of this  Agreement)  the Senior  Agent from and
against any and all liabilities,  obligations, losses, damages, claims, costs or
expenses of any kind or nature  whatsoever  which may at any time be imposed on,
incurred  by, or asserted  against,  the Senior  Agent in any way relating to or
arising out of this  Agreement,  the Notes and any other  Transaction  Document,
including  reasonable  attorneys'  fees, and as to which the Senior Agent is not
reimbursed by the Company; provided,  however, that no Buyer shall be liable for
the payment of any portion of such liabilities,  obligations,  losses,  damages,
claims,  costs  or  expenses  which  are  determined  by a  court  of  competent
jurisdiction  in a final  proceeding  to have  resulted  solely  from the Senior
Agent's gross  negligence or willful  misconduct.  The Senior Agent shall not be
required  to take any  action  hereunder,  under  the  Notes or under  any other
Transaction  Document,  or to  prosecute  or defend  any suit in respect of this
Agreement, the Notes or any other Transaction Document, unless it is indemnified
hereunder  to its  satisfaction.  If any  indemnity in favor of the Senior Agent
shall be or become, in the Senior Agent's determination,  inadequate, the Senior
Agent may call for  additional  indemnification  from the Buyers and cease to do
the acts indemnified against hereunder until such additional indemnity is given.

            (q) Exculpation of Senior Agent. Neither the Senior Agent nor any of
its  directors,  officers,  employees or agents shall be liable to any Buyer for
any action taken or omitted to be taken by it under this  Agreement or any other
Transaction Document, or in connection herewith or therewith, except for its own
willful  misconduct or gross  negligence,  nor  responsible  for any  warranties
herein or therein,  nor for the effectiveness,  enforceability,  validity or due
execution  of this  Agreement  or any other  Transaction  Document,  nor for the
creation,  perfection or priority of any liens purported to be created by any of
the  Transaction  Documents,  or  the  validity,  genuineness,   enforceability,
existence,  value or  sufficiency of any  collateral  security,  nor to make any
inquiry  respecting the performance by the Company of its obligations  hereunder
or under any other Transaction  Document.  Any such inquiry which may be made by
the Senior  Agent shall not  obligate it to make any further  inquiry or to take
any  action.  The Senior  Agent shall be entitled to rely upon advice of counsel
concerning legal matters and upon any notice, consent, certificate, statement or
writing which the Senior Agent believes to be genuine and to have been presented
by a proper Person.

                                      -29-
<PAGE>

            (r) Successor  Senior Agent.  The Senior Agent may resign as such at
any time upon at least ten  business  days' prior  notice to the Company and all
the Buyers.  If the Senior Agent at any time shall resign,  the Buyers may, with
the prior  consent  of the  Company  (which  consent  shall not be  unreasonably
withheld),  appoint  another  Person as a  successor  Senior  Agent  which shall
thereupon become the Senior Agent hereunder.  If no successor Senior Agent shall
have been so appointed by the Buyers,  and shall have accepted such appointment,
within ten business  days after the retiring  Senior  Agent's  giving  notice of
resignation,  then the  retiring  Senior  Agent  may,  on behalf of the  Buyers,
appoint  a  successor  Senior  Agent,  which  shall  be one of the  Buyers  or a
commercial  banking  institution  organized  under the laws of the U.S.  (or any
State thereof) or a U.S. branch or agency of a commercial  banking  institution.
Upon the acceptance of any  appointment as Senior Agent hereunder by a successor
Senior Agent,  such successor Senior Agent shall be entitled to receive from the
retiring  Senior  Agent  such  documents  of  transfer  and  assignment  as such
successor Senior Agent may reasonably  request,  and shall thereupon  succeed to
and become vested with all rights, powers, privileges and duties of the retiring
Senior Agent,  and the retiring Senior Agent shall be discharged from its duties
and  obligations  under  this  Agreement.  After  any  retiring  Senior  Agent's
resignation hereunder as the applicable Senior Agent, the provisions of (i) this
Agreement  shall inure to its  benefit as to any actions  taken or omitted to be
taken  by it  while it was the  Senior  Agent  under  this  Agreement;  and (ii)
Sections 9(p), (q) and (r) shall continue to inure to its benefit.

                            [Signature Page Follows]

                                      -30-
<PAGE>

      IN  WITNESS  WHEREOF,  each  Buyer  and  the  Company  have  caused  their
respective  signature  page to this  Securities  Purchase  Agreement  to be duly
executed as of the date first written above.

                                      COMPANY:

                                      AROTECH CORPORATION

                                      By:
                                         ---------------------------------------
                                         Name:  Robert S. Ehrlich
                                         Title: Chairman, President and Chief
                                         Executive Officer

<PAGE>

      IN  WITNESS  WHEREOF,  each  Buyer  and  the  Company  have  caused  their
respective  signature  page to this  Securities  Purchase  Agreement  to be duly
executed as of the date first written above.

                                      BUYERS:

                                      SMITHFIELD FIDUCIARY LLC

                                      By:
                                         ---------------------------------------
                                         Name:  Adam J. Chill
                                         Title: Authorized Signatory

<PAGE>

      IN  WITNESS  WHEREOF,  each  Buyer  and  the  Company  have  caused  their
respective  signature  page to this  Securities  Purchase  Agreement  to be duly
executed as of the date first written above.

                                      OTHER BUYERS:

                                      PORTSIDE GROWTH AND
                                         OPPORTUNITY FUND

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

<PAGE>

      IN  WITNESS  WHEREOF,  each  Buyer  and  the  Company  have  caused  their
respective  signature  page to this  Securities  Purchase  Agreement  to be duly
executed as of the date first written above.

                                      OTHER BUYERS:

                                      OMICRON MASTER TRUST

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

<PAGE>

      IN  WITNESS  WHEREOF,  each  Buyer  and  the  Company  have  caused  their
respective  signature  page to this  Securities  Purchase  Agreement  to be duly
executed as of the date first written above.

                                      OTHER BUYERS:

                                      CRANSHIRE CAPITAL L.P.

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

<PAGE>

      IN  WITNESS  WHEREOF,  each  Buyer  and  the  Company  have  caused  their
respective  signature  page to this  Securities  Purchase  Agreement  to be duly
executed as of the date first written above.

                                      OTHER BUYERS:

                                      IROQUOIS MASTER FUND LTD.

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

<PAGE>

                                    EXHIBITS
                                    --------

Exhibit A         Form of Notes
Exhibit B         Form of Warrant
Exhibit C         Registration Rights Agreement
Exhibit D         Form of Security Agreement
Exhibit E         Form of Guarantee
Exhibit F         Form of Letter of Credit
Exhibit G         Irrevocable Transfer Agent Instructions
Exhibit H-1       Form of In-House Company Counsel Opinion
Exhibit H-2       Form of Outside Company Counsel Opinion
Exhibit I         Form of Secretary's Certificate
Exhibit J         Form of Officer's CertificateExhibit 4.2
                                                                     -----------

                    [FORM OF SENIOR SECURED CONVERTIBLE NOTE]

NEITHER THE ISSUANCE AND SALE OF THE SECURITIES  REPRESENTED BY THIS CERTIFICATE
NOR THE  SECURITIES  INTO  WHICH  THESE  SECURITIES  ARE  CONVERTIBLE  HAVE BEEN
REGISTERED  UNDER THE  SECURITIES ACT OF 1933, AS AMENDED,  OR APPLICABLE  STATE
SECURITIES LAWS. THE SECURITIES MAY NOT BE OFFERED FOR SALE,  SOLD,  TRANSFERRED
OR ASSIGNED (I) IN THE ABSENCE OF (A) AN EFFECTIVE  REGISTRATION  STATEMENT  FOR
THE SECURITIES  UNDER THE SECURITIES ACT OF 1933, AS AMENDED,  OR (B) AN OPINION
OF COUNSEL,  IN A GENERALLY  ACCEPTABLE FORM, THAT  REGISTRATION IS NOT REQUIRED
UNDER SAID ACT OR (II) UNLESS SOLD  PURSUANT TO RULE 144 OR RULE 144A UNDER SAID
ACT.  NOTWITHSTANDING THE FOREGOING, THE SECURITIES MAY BE PLEDGED IN CONNECTION
WITH A BONA FIDE MARGIN ACCOUNT OR OTHER LOAN OR FINANCING  ARRANGEMENT  SECURED
BY THE SECURITIES. ANY TRANSFEREE OF THIS NOTE SHOULD CAREFULLY REVIEW THE TERMS
OF THIS NOTE,  INCLUDING  SECTIONS  3(c)(iii)  AND 19(a)  HEREOF.  THE PRINCIPAL
AMOUNT REPRESENTED BY THIS NOTE AND,  ACCORDINGLY,  THE SECURITIES ISSUABLE UPON
CONVERSION  HEREOF  MAY BE LESS THAN THE  AMOUNTS  SET FORTH ON THE FACE  HEREOF
PURSUANT TO SECTION 3(c)(iii) OF THIS NOTE.

                               AROTECH CORPORATION

                         SENIOR SECURED CONVERTIBLE NOTE

Issuance Date: September 29, 2005      Original Principal Amount: U.S. $________

      FOR VALUE  RECEIVED,  Arotech  Corporation  a  Delaware  corporation  (the
"Company"),  hereby  promises  to pay  to the  order  of  [SMITHFIELD  FIDUCIARY
LLC][OTHER  BUYERS] or registered assigns ("Holder") the amount set out above as
the Original  Principal Amount (as reduced pursuant to the terms hereof pursuant
to redemption,  conversion or otherwise, the "Principal") when due, whether upon
the Maturity Date (as defined below),  on any  Installment  Date with respect to
the Installment  Amount due on such  Installment Date (each, as defined herein),
acceleration, redemption or otherwise (in each case in accordance with the terms
hereof) and to pay interest  ("Interest") on any outstanding Principal at a rate
per annum equal to the Interest Rate (as defined  below),  from the date set out
above as the Issuance Date (the "Issuance  Date") until the same becomes due and
payable, whether upon an Interest Date (as defined below), any Installment Date,
the Maturity Date,  acceleration,  conversion,  redemption or otherwise (in each
case in accordance with the terms hereof).  This Senior Secured Convertible Note
(including all Senior Secured Convertible Notes issued in exchange,  transfer or
replacement  hereof,  this  "Note")  is  one  of  an  issue  of  Senior  Secured
Convertible  Notes  (collectively,  the  "Notes" and such other  Senior  Secured
Convertible Notes, the "Other Notes") issued pursuant to the Securities Purchase
Agreement (as defined below).  Certain  capitalized terms are defined in Section
29.

<PAGE>

      (1)  MATURITY.  On each  Installment  Date,  the Company  shall pay to the
Holder an amount equal to the Installment Amount due on such Installment Date in
accordance  with Section 8. The "Maturity  Date" shall be March 31, 2008, as may
be extended  at the option of the Holder (i) in the event that,  and for so long
as, an Event of Default (as defined in Section  4(a)) shall have occurred and be
continuing  or any event shall have  occurred and be  continuing  which with the
passage of time and the failure to cure would  result in an Event of Default and
(ii) through the date that is ten (10) Business Days after the consummation of a
Change of Control in the event that a Change of Control is publicly announced or
a Change of Control  Notice (as defined in Section 5) is delivered  prior to the
Maturity Date.

      (2) INTEREST; INTEREST RATE; LETTER OF CREDIT.

            (a)  Interest on this Note shall  commence  accruing on the Issuance
Date and  shall be  computed  on the  basis of a 365-day  year and  actual  days
elapsed and shall be payable in arrears on the last day of each Calendar Quarter
during the period  beginning on the Issuance Date and ending on, and  including,
the Maturity Date (each, an "Interest  Date") with the first Interest Date being
December  31,  2005.  Interest  shall be payable  on each  Interest  Date,  each
Conversion Date (as defined below) and other  applicable  circumstances in cash.
Prior to the  payment  of  Interest  on an  Interest  Date,  Conversion  Date or
otherwise,  Interest on this Note shall  accrue at the Interest  Rate.  From and
after  the  occurrence  of an Event  of  Default,  the  Interest  Rate  shall be
increased to fifteen percent (15.0%). In the event that such Event of Default is
subsequently  cured, the adjustment  referred to in the preceding sentence shall
cease to be effective as of the date of such cure; provided that the Interest as
calculated  at such  increased  rate  during  the  continuance  of such Event of
Default  shall  continue  to apply to the extent  relating to the days after the
occurrence  of such Event of Default  through and  including the date of cure of
such Event of Default.

            (b)  This  Note  is one  of a  series  of  Notes  referred  to in an
irrevocable  letter of  credit  issued by a bank  reasonably  acceptable  to the
Required  Holders (the  "Bank") on behalf of the Company in favor of  Smithfield
Fiduciary  LLC,  in its  capacity as  collateral  agent (in such  capacity,  the
"Senior  Agent")  for the Buyers and for the  holders of the  Securities,  in an
original amount of $2,625,000, a copy of which is annexed hereto as Annex A (the
"Letter of Credit").  The Company  hereby  acknowledges  that the Holder and any
subsequent  Holder shall be entitled to the benefits of the Letter of Credit and
covenants  and  agrees  that it will not impair the  Holder's  rights  under the
Letter of Credit and  (except  to the extent  provided  in Section  2(c))  shall
maintain  the  Letter of Credit in full force and  effect  until the  earlier to
occur of (A) 100 days  after the  Maturity  Date,  (B) such  date the  Letter of
Credit  Amount is reduced to zero in  accordance  with Section 2(d) and (C) such
date whereafter no Notes remain outstanding (the "LC Expiration Date").

            (c) Upon the  failure of the Company to timely pay to the Holder (i)
any interest payment which is then due and payable to the Holder under this Note
pursuant  to Section  2(a) or (ii) if an Event of Default  has  occurred  and is
continuing,  any amount  which is then due and payable to the Holder  under this
Note  (collectively,  the "LC  Obligations"),  the Holder  shall be  entitled to
direct the Senior Agent to draw on the Letter of Credit on behalf of such Holder
through a written request to the Senior Agent, in form and substance  reasonably
satisfactory  to the Senior  Agent,  solely to the extent of any such payment or
payments  so due to the  Holder  as of such  date  (each  a  "Letter  of  Credit
Withdrawal").  The Senior  Agent  shall  direct the Bank to wire such  Letter of
Credit Withdrawal directly to the Holder.

                                      -2-
<PAGE>

            (d) The Holder  agrees  that the face amount of the Letter of Credit
shall be reduced from time to time pursuant to the terms set forth below (each a
"Letter of Credit Reduction Event"):

                  (i) subsequent to each Letter of Credit  Withdrawal,  the face
amount of the Letter of Credit  shall be reduced on the date on which the Holder
receives  such Letter of Credit  Withdrawal by an amount equal to such Letter of
Credit Withdrawal; and

                  (ii)  subsequent to each Interest Date, the face amount of the
Letter of Credit shall be reduced on the date on which the Holder  receives such
interest  payment in  accordance  with  Section  2(a) by an amount equal to such
interest payment paid on such Interest Date.

            (e)  Following  each Letter of Credit  Reduction  Event,  the Senior
Agent shall  promptly  deliver to the Bank a notice  certifying  to the Bank the
reduced face amount of the Letter of Credit that is required to be maintained by
the Company hereunder.

            (f) Any  amounts  received  by the Holder  pursuant to a draw on the
Letter of Credit shall be applied  against all unsatisfied LC Obligations of the
Company under this Note.

            (g) Notwithstanding the foregoing,  the Holder acknowledges that (i)
each  Holder is  entitled  to no more than its pro rata  share of the  Letter of
Credit and (ii) any request for a Letter of Credit Withdrawal  greater than such
Holder's pro rata share of any amounts  remaining in such Letter of Credit shall
not be honored by the Senior Agent.

            (h) If, at any time, the Company cannot obtain a renewal,  extension
or  replacement  of the  Letter of Credit  such that the  Letter of Credit  will
expire prior to the LC Expiration Date (a "Withdrawal  Event"),  the Company and
the Letter of Credit Bank shall each give the Senior Agent written notice of the
occurrence of a Withdrawal Event at least forty-five (45) days prior to the then
current  expiration date of the Letter of Credit.  Following a Withdrawal Event,
the Senior  Agent shall be entitled to draw down the Letter of Credit  Amount in
its entirety  (whether or not  otherwise  permissible  hereunder)  and hold such
amount as collateral against the Company's LC Obligations hereunder.

            (i)  Following  the LC  Expiration  Date,  the  Senior  Agent  shall
promptly deliver to the Bank a notice  certifying to the Bank that the Company's
obligation to maintain the Letter of Credit has terminated.

                                      -3-
<PAGE>

      (3)  CONVERSION OF NOTES.  This Note shall be  convertible  into shares of
common stock of the Company,  par value $0.01 per share (the "Common Stock"), on
the terms and conditions set forth in this Section 3.

            (a) Conversion Right.  Subject to the provisions of Section 3(d), at
any time or times on or after the Issuance Date, the Holder shall be entitled to
convert any portion of the outstanding and unpaid  Conversion Amount (as defined
below) into fully paid and  nonassessable  shares of Common Stock in  accordance
with Section 3(c), at the Conversion Rate (as defined below).  The Company shall
not issue any  fraction of a share of Common Stock upon any  conversion.  If the
issuance  would result in the issuance of a fraction of a share of Common Stock,
the Company  shall round such  fraction of a share of Common Stock up or down to
the nearest  whole  share.  The Company  shall pay any and all taxes that may be
payable  with  respect  to the  issuance  and  delivery  of  Common  Stock  upon
conversion of any Conversion Amount.

            (b)  Conversion  Rate. The number of shares of Common Stock issuable
upon  conversion  of any  Conversion  Amount  pursuant to Section  3(a) shall be
determined by dividing (x) such  Conversion  Amount by (y) the Conversion  Price
(the "Conversion Rate").

                  (i) "Conversion  Amount" means the portion of the Principal to
be converted,  redeemed or otherwise with respect to which this determination is
being made.

                  (ii)  "Conversion  Price" means, as of any Conversion Date (as
defined below) or other date of determination,  $1.00,  subject to adjustment as
provided herein.

            (c) Mechanics of Conversion.

                  (i) Optional Conversion. To convert any Conversion Amount into
shares of Common Stock on any date (a "Conversion  Date"),  the Holder shall (A)
transmit by facsimile or  electronic  mail (with a facsimile  within 24 hours of
such electronic mail) (or otherwise  deliver),  for receipt on or prior to 11:59
p.m., New York Time, on such date, a copy of an executed notice of conversion in
the form attached hereto as Exhibit I (the  "Conversion  Notice") to the Company
and (B) if required by Section  3(c)(iii),  surrender  this Note to an overnight
courier  service  for  delivery  to the  Company  as soon as  practicable  on or
following such date (or an indemnification undertaking with respect to this Note
in the case of its loss,  theft or  destruction).  On or before the first  (1st)
Business Day following the date of receipt of a Conversion  Notice,  the Company
shall transmit by facsimile or electronic mail (with a facsimile within 24 hours
of such electronic mail) a confirmation of receipt of such Conversion  Notice to
the Holder and the Company's transfer agent (the "Transfer Agent"). On or before
the second  (2nd)  Business  Day  following  the date of receipt of a Conversion
Notice (the "Share  Delivery  Date"),  the Company  shall (1) (X)  provided  the
Transfer Agent is  participating  in the Depository  Trust Company  ("DTC") Fast
Automated  Securities Transfer Program credit such aggregate number of shares of
Common  Stock to which the  Holder  shall be  entitled  to the  Holder's  or its
designee's  balance  account  with DTC  through  its  Deposit  Withdrawal  Agent
Commission  system or (Y) if the Transfer Agent is not  participating in the DTC
Fast Automated Securities Transfer Program,  issue and deliver to the address as
specified in the Conversion Notice, a certificate, registered in the name of the
Holder or its  designee,  for the number of shares of Common  Stock to which the
Holder shall be entitled and (2) pay to the Holder an amount,  in cash, equal to
the sum of (x) any accrued and unpaid Interest on such Principal  amount and (y)
the amount of Interest that would have otherwise accrued and been payable on the
Principal  amount  converted from the Conversion  Date through the next Interest
Date.  If this Note is  physically  surrendered  for  conversion  as required by
Section 3(c)(iii) and the outstanding Principal of this Note is greater than the
Principal  portion of the Conversion  Amount being  converted,  then the Company
shall as soon as practicable  and in no event later than three (3) Business Days
after  receipt  of this Note and at its own  expense,  issue and  deliver to the
holder  a  new  Note  (in  accordance  with  Section  19(d))   representing  the
outstanding  Principal not converted.  The Person or Persons entitled to receive
the shares of Common  Stock  issuable  upon a  conversion  of this Note shall be
treated  for all  purposes  as the record  holder or  holders of such  shares of
Common Stock on the  Conversion  Date.  In the event of a partial  conversion of
this Note pursuant to hereto,  the Principal  amount delivered shall be deducted
from the Installment  Amounts relating to the Installment  Dates as set forth in
the Conversion Notice.

                                      -4-
<PAGE>

                  (ii) Company's Failure to Timely Convert.  If within three (3)
Trading Days after the Company's  receipt of the  facsimile or  electronic  mail
copy of a  Conversion  Notice  the  Company  shall  fail to issue and  deliver a
certificate  to the Holder or credit the Holder's  balance  account with DTC for
the number of shares of Common  Stock to which the Holder is entitled  upon such
holder's conversion of any Conversion Amount (a "Conversion Failure"), and if on
or after such Trading Day the Holder purchases (in an open market transaction or
otherwise)  Common Stock to deliver in  satisfaction  of a sale by the Holder of
Common Stock issuable upon such conversion that the Holder anticipated receiving
from the Company (a "Buy-In"),  then the Company shall, within three (3) Trading
Days after the Holder's request and in the Holder's  discretion,  either (i) pay
cash to the  Holder in an amount  equal to the  Holder's  total  purchase  price
(including  brokerage  commissions,  if any) for the  shares of Common  Stock so
purchased  (the "Buy-In  Price"),  at which point the  Company's  obligation  to
deliver such certificate  (and to issue such Common Stock) shall  terminate,  or
(ii) promptly  honor its  obligation  to deliver to the Holder a certificate  or
certificates  representing  such  Common  Stock and pay cash to the Holder in an
amount  equal to the excess (if any) of the Buy-In Price over the product of (A)
such  number of shares of Common  Stock,  times (B) the Closing Bid Price on the
Conversion Date.

                  (iii) Book-Entry. Notwithstanding anything to the contrary set
forth herein, upon conversion of any portion of this Note in accordance with the
terms hereof, the Holder shall not be required to physically surrender this Note
to the Company unless (A) the full Conversion Amount represented by this Note is
being  converted or (B) the Holder has  provided the Company with prior  written
notice (which notice may be included in a Conversion Notice) requesting physical
surrender and reissue of this Note.  The Holder and the Company  shall  maintain
records ("Records") showing the Principal and Interest converted or paid and the
dates of such conversions or payments or shall use such other method, reasonably
satisfactory  to the  Holder  and the  Company,  so as not to  require  physical
surrender of this Note upon  conversion.  Within  three  Trading Days after each
Share  Delivery  Date,  the Company  shall send the Holder a copy of its Records
showing  the  Principal  and  Interest  converted  or paid and the dates of such
conversions  or  payments  as of the day  following  such Share  Delivery  Date;
failure of the Holder to object to the accuracy of the information  contained in
such  Records  within two  Trading  Days of receipt  thereof  will  establish  a
rebuttable presumption that such Records were accurate on the day following such
Share  Delivery  Date.  Any dispute as to the  accuracy  of any Records  will be
resolved in accordance with Section 24.

                                      -5-
<PAGE>

                  (iv) Pro Rata  Conversion;  Disputes.  In the  event  that the
Company receives a Conversion  Notice from more than one holder of Notes for the
same  Conversion  Date and the Company can  convert  some,  but not all, of such
portions of the Notes submitted for conversion,  the Company, subject to Section
3(d),  shall convert from each holder of Notes electing to have Notes  converted
on such date a pro rata amount of such holder's  portion of its Notes  submitted
for conversion  based on the principal  amount of Notes submitted for conversion
on such date by such holder  relative to the aggregate  principal  amount of all
Notes submitted for conversion on such date. In the event of a dispute as to the
number of shares of Common  Stock  issuable to the Holder in  connection  with a
conversion  of this Note,  the  Company  shall issue to the Holder the number of
shares of Common  Stock not in dispute and resolve  such  dispute in  accordance
with Section 24.

            (d) Limitations on Conversions.

                  (i)  Beneficial  Ownership.  The Company  shall not effect any
conversion of this Note, and the Holder of this Note shall not have the right to
convert any portion of this Note  pursuant to Section  3(a),  to the extent that
after giving effect to such  conversion,  the Holder (together with the Holder's
affiliates) would beneficially own in excess of 4.99% of the number of shares of
Common Stock outstanding immediately after giving effect to such conversion. For
purposes  of the  foregoing  sentence,  the  number of  shares  of Common  Stock
beneficially  owned by the Holder and its affiliates shall include the number of
shares of Common Stock  issuable  upon  conversion  of this Note with respect to
which the  determination  of such sentence is being made,  but shall exclude the
number of shares of Common Stock which would be issuable upon (A)  conversion of
the  remaining,  nonconverted  portion  of this Note  beneficially  owned by the
Holder  or  any  of  its  affiliates  and  (B)  exercise  or  conversion  of the
unexercised  or  nonconverted  portion of any other  securities  of the  Company
(including,  without  limitation,  any Other  Notes or  warrants)  subject  to a
limitation  on  conversion  or exercise  analogous to the  limitation  contained
herein beneficially owned by the Holder or any of its affiliates.  Except as set
forth  in  the  preceding  sentence,  for  purposes  of  this  Section  3(d)(i),
beneficial ownership shall be calculated in accordance with Section 13(d) of the
Securities  Exchange  Act of 1934,  as amended.  For  purposes  of this  Section
3(d)(i),  in determining the number of outstanding  shares of Common Stock,  the
Holder may rely on the number of outstanding shares of Common Stock as reflected
in (x) the Company's  most recent Form 10-K,  Form 10-Q or Form 8-K, as the case
may be (y) a more  recent  public  announcement  by the Company or (z) any other
notice by the Company or the Transfer  Agent  setting forth the number of shares
of Common  Stock  outstanding.  For any reason at any time,  upon the written or
oral  request of the  Holder,  the Company  shall  within one (1)  Business  Day
confirm orally and in writing to the Holder the number of shares of Common Stock
then outstanding.  In any case, the number of outstanding shares of Common Stock
shall be  determined  after  giving  effect to the  conversion  or  exercise  of
securities of the Company,  including this Note, by the Holder or its affiliates
since the date as of which such number of outstanding shares of Common Stock was
reported.

                                      -6-
<PAGE>

                  (ii)  Principal  Market  Regulation.  The Company shall not be
obligated  to issue any shares of Common Stock upon  conversion  of this Note if
the issuance of such shares of Common Stock would exceed the aggregate number of
shares of Common Stock which the Company may issue upon  conversion or exercise,
as  applicable,  of the Notes  and  Warrants  without  breaching  the  Company's
obligations  under  the  rules  or  regulations  of the  Principal  Market  (the
"Exchange  Cap"),  except that such limitation shall not apply in the event that
the  Company  obtains  the  approval  of its  stockholders  as  required  by the
applicable rules of the Principal Market for issuances of Common Stock in excess
of such amount. Until such approval or written opinion is obtained, no purchaser
of the Notes pursuant to the Securities  Purchase  Agreement (the  "Purchasers")
shall be issued in the aggregate, upon conversion or exercise, as applicable, of
Notes or Warrants,  shares of Common Stock (as adjusted for stock splits,  stock
dividends,  stock  combinations  and other  similar  transactions)  in an amount
greater  than the product of the  Exchange  Cap  multiplied  by a fraction,  the
numerator of which is the  principal  amount of Notes  issued to the  Purchasers
pursuant  to the  Securities  Purchase  Agreement  on the  Closing  Date and the
denominator  of which is the aggregate  principal  amount of all Notes issued to
the Purchasers pursuant to the Securities Purchase Agreement on the Closing Date
(with respect to each Purchaser,  the "Exchange Cap  Allocation").  In the event
that any  Purchaser  shall sell or otherwise  transfer  any of such  Purchaser's
Notes,  the transferee shall be allocated a pro rata portion of such Purchaser's
Exchange Cap Allocation,  and the restrictions of the prior sentence shall apply
to such  transferee  with respect to the portion of the Exchange Cap  Allocation
allocated  to such  transferee.  In the event  that any  holder  of Notes  shall
convert  all of such  holder's  Notes  into a number of  shares of Common  Stock
which,  in the aggregate,  is less than such holder's  Exchange Cap  Allocation,
then the difference between such holder's Exchange Cap Allocation and the number
of shares of Common Stock  actually  issued to such holder shall be allocated to
the respective  Exchange Cap Allocations of the remaining  holders of Notes on a
pro rata basis in proportion to the aggregate principal amount of the Notes then
held by each such holder.

      (4) RIGHTS UPON EVENT OF DEFAULT.

            (a) Event of Default.  Each of the following events shall constitute
an "Event of Default":

                  (i)  the  failure  of the  applicable  Registration  Statement
required  to be  filed  pursuant  to the  Registration  Rights  Agreement  to be
declared effective by the SEC on or prior to the date that is one hundred-twenty
(120)  days after the  Issuance  Date,  or,  while the  applicable  Registration
Statement is required to be  maintained  effective  pursuant to the terms of the
Registration Rights Agreement,  the effectiveness of the applicable Registration
Statement lapses for any reason (including,  without limitation, the issuance of
a stop  order) or is  unavailable  to any holder of the Notes for sale of all of
such holder's  Registrable  Securities  (as defined in the  Registration  Rights
Agreement) in accordance with the terms of the  Registration  Rights  Agreement,
and such lapse or unavailability  continues for a period of five (5) consecutive
days or for more than an  aggregate of eight (8) days (other than days during an
Event (as defined in the Registration Rights Agreement));

                                      -7-
<PAGE>

                  (ii) the  suspension  from  trading  or  failure of the Common
Stock to be listed on the Principal Market or on an Eligible Market for a period
of five (5)  consecutive  Trading Days or for more than an aggregate of five (5)
Trading Days in any 365-day period;

                  (iii) the Company's  (A) failure to cure a Conversion  Failure
by delivery of the  required  number of shares of Common  Stock  within ten (10)
Trading  Days after the  applicable  Conversion  Date or (B) notice,  written or
oral,  to any holder of the Notes,  including by way of public  announcement  or
through any of its agents,  at any time,  of its  intention not to comply with a
request for conversion of any Notes into shares of Common Stock that is tendered
in accordance with the provisions of the Notes;

                  (iv)  at any  time  following  the  tenth  (10th)  consecutive
Business  Day that the Holder's  Authorized  Share  Allocation  is less than the
number of shares of Common  Stock that the Holder  would be  entitled to receive
upon a conversion of the full Conversion  Amount of this Note (without regard to
any limitations on conversion set forth in Section 3(d) or otherwise);

                  (v) the  Company's  failure to pay to the Holder any amount of
Principal (including any Installment Amount), Interest or other amounts when and
as due under  this Note or any other  Transaction  Document  (as  defined in the
Securities Purchase Agreement) or any other agreement,  document, certificate or
other  instrument  delivered in connection  with the  transactions  contemplated
hereby and thereby to which the Holder is a party,  except, (i) in the case of a
failure to pay  Interest  when and as due,  in which  case only if such  failure
continues for a period of at least five (5) Trading Days and (ii) in the case of
a failure  to pay in full the  amount of cash due  pursuant  to a Buy-In  within
seven (7) days after notice  thereof is delivered or a failure to pay liquidated
damages due pursuant to the Transaction  Documents  within seven (7) days of the
date of the request for such payments;

                  (vi) the  Company  or any  Subsidiary  defaults  in any of its
obligations under any other debenture 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 in excess of $100,000,  whether such  Indebtedness now exists or is
hereafter  created,  and such default results in such  Indebtedness  becoming or
being  declared  due and payable  prior to the date on which it would  otherwise
become due and payable;

                  (vii) the Company or any of its  Subsidiaries,  pursuant to or
within the meaning of Title 11, U.S.  Code, or any similar  Federal,  foreign or
state law for the  relief  of  debtors  (collectively,  "Bankruptcy  Law"),  (A)
commences a  voluntary  case,  (B)  consents to the entry of an order for relief
against  it in an  involuntary  case,  (C)  consents  to  the  appointment  of a
receiver, trustee, assignee,  liquidator or similar official or such appointment
is not discharged or stayed within sixty (60) days (a "Custodian"),  (D) makes a
general  assignment  for the benefit of its  creditors  or (E) admits in writing
that it is  generally  unable  to pay its debts as they  become  due or any such
involuntary case is not dismissed within sixty (60) days of commencement;

                                      -8-
<PAGE>

                  (viii) a court of  competent  jurisdiction  enters an order or
decree under any  Bankruptcy  Law that (A) is for relief  against the Company or
any of its Subsidiaries in an involuntary  case, (B) appoints a Custodian of the
Company or any of its  Subsidiaries or (C) orders the liquidation of the Company
or any of its Subsidiaries;

                  (ix) a final  judgment or  judgments  for the payment of money
aggregating in excess of $500,000 are rendered against the Company or any of its
Subsidiaries and which judgments are not, within sixty (60) days after the entry
thereof,  bonded,  discharged or stayed  pending  appeal,  or are not discharged
within sixty (60) days after the  expiration  of such stay;  provided,  however,
that any judgment  which is covered by  insurance or an indemnity  from a credit
worthy party shall not be included in calculating  the $500,000 amount set forth
above so long as the Company  provides the Holder a written  statement from such
insurer or indemnity  provider  (which  written  statement  shall be  reasonably
satisfactory  to the  Holder) to the  effect  that such  judgment  is covered by
insurance  or an  indemnity  and the Company  will  receive the proceeds of such
insurance or indemnity within thirty (30) days of the issuance of such judgment;

                  (x) until the one (1) year  anniversary  of the effective date
of the Registration Statement, the Company issues or sells, or is deemed to have
issued or sold,  any shares of Common Stock  (including  the issuance or sale of
shares of Common Stock owned or held by or for the account of the  Company,  but
excluding  shares of  Common  Stock  deemed  to have been  issued or sold by the
Company in connection with any Excluded  Security) for a consideration per share
less than a price equal to the Conversion Price in effect  immediately  prior to
such issue or sale;

                  (xi)  the  Company  breaches  any  representation,   warranty,
covenant  or other term or  condition  of any  Transaction  Document;  provided,
however,  that other than in  connection  with the breach of Section 4(t) of the
Securities  Purchase  Agreement,  in the case of a breach of a covenant which is
curable, only if such breach continues for a period of at least five (5) Trading
Days after the date on which  written  notice of such  default is first given by
the Holder or any holder of Other Notes;

                  (xii) any  breach  or  failure  to comply in (A) any  material
respect  with  Section 8 of this Note or (B) any respect with Section 15 of this
Note or ;

                  (xiii)  either:  (A) the  Letter of Credit  shall be  revoked,
withdrawn, terminated or disaffirmed by the Bank (except as permitted by Section
2(d)) or (B) the Holder shall have received  notification from the Bank pursuant
to the Letter of Credit that the Letter of Credit  shall not be renewed and: (x)
45 days shall have  elapsed  since the delivery of such  notification,  (y) such
non-renewal shall not have been withdrawn by the Bank prior to such 45th day and
(z) the Company shall not have  delivered a substitute  letter of credit in form
and substance satisfactory to the Holder in its sole and absolute discretion; or

                  (xiv) any Event of Default  (as  defined  in the Other  Notes)
occurs with respect to any Other Notes.

                                      -9-
<PAGE>

            (b)  Redemption   Right.   Promptly  after  becoming  aware  of  the
occurrence  of an Event of Default  with respect to this Note or any Other Note,
the Company shall  deliver  written  notice  thereof via facsimile and overnight
courier  (an "Event of Default  Notice")  to the  Holder.  At any time after the
earlier of the  Holder's  receipt  of an Event of Default  Notice and the Holder
becoming  aware of an Event of  Default,  the Holder may  require the Company to
redeem all or any portion of this Note by delivering written notice thereof (the
"Event of Default  Redemption  Notice") to the  Company,  which Event of Default
Redemption Notice shall indicate the portion of this Note the Holder is electing
to redeem.  Each  portion  of this Note  subject to  redemption  by the  Company
pursuant to this  Section 4(b) shall be redeemed by the Company at a price equal
to the  greater of (i) the product of (x) the  Conversion  Amount to be redeemed
plus accrued and unpaid Interest thereon and (y) the Redemption Premium and (ii)
the sum of (I) the  product  of (A) the  Conversion  Rate with  respect  to such
Conversion  Amount in effect at such  time as the  Holder  delivers  an Event of
Default  Redemption Notice and (B) the Closing Sale Price of the Common Stock on
the date  immediately  preceding such Event of Default and (II) plus accrued and
unpaid  Interest on such  Conversion  Amount  (the "Event of Default  Redemption
Price").  Redemptions  required by this Section 4(b) shall be made in accordance
with the  provisions of Section 12. In the event of a partial  redemption of the
Note pursuant  hereto,  the Principal amount redeemed shall be deducted from the
Installment Amounts relating to the applicable Installment Dates as set forth in
the Event of Default Redemption Notice.

      (5) RIGHTS UPON FUNDAMENTAL TRANSACTION AND CHANGE OF CONTROL.

            (a)  Assumption.  The Company  shall not enter into or be party to a
Fundamental  Transaction  unless (i) the Successor Entity assumes in writing all
of the  obligations  of the  Company  under this Note and the other  Transaction
Documents in  accordance  with the  provisions  of this Section 5(a) pursuant to
written  agreements in form and substance  satisfactory to the Required  Holders
and  approved by the Required  Holders  prior to such  Fundamental  Transaction,
including  agreements  to deliver to each holder of Notes in  exchange  for such
Notes a security  of the  Successor  Entity  evidenced  by a written  instrument
substantially  similar in form and  substance to the Notes,  including,  without
limitation,  having a principal  amount and interest rate equal to the principal
amounts  and the  interest  rates of the Notes  held by such  holder  and having
similar ranking to the Notes,  and satisfactory to the Required Holders and (ii)
the  Successor  Entity  (including  its  Parent  Entity)  is a  publicly  traded
corporation whose common stock is quoted on or listed for trading on an Eligible
Market. Upon the occurrence of any Fundamental Transaction, the Successor Entity
shall  succeed  to, and be  substituted  for (so that from and after the date of
such  Fundamental  Transaction,  the  provisions  of this Note  referring to the
"Company" shall refer instead to the Successor  Entity),  and may exercise every
right and power of the Company and shall  assume all of the  obligations  of the
Company  under this Note with the same  effect as if such  Successor  Entity had
been  named  as  the  Company  herein.  Upon  consummation  of  the  Fundamental
Transaction,  the Successor Entity shall deliver to the Holder confirmation that
there shall be issued upon  conversion  or  redemption  of this Note at any time
after the consummation of the Fundamental Transaction,  in lieu of the shares of
Common Stock (or other securities, cash, assets or other property) issuable upon
the conversion or redemption of the Notes prior to such Fundamental Transaction,
such shares of publicly traded common stock (or its equivalent) of the Successor
Entity  (including  its Parent  Entity),  as  adjusted  in  accordance  with the
provisions of this Note.  The  provisions of this Section shall apply  similarly
and equally to successive Fundamental  Transactions and shall be applied without
regard to any limitations on the conversion or redemption of this Note.

                                      -10-
<PAGE>

            (b)  Redemption  Right.  No sooner than  fifteen (15) days nor later
than ten (10) days prior to the  consummation  of a Change of  Control,  but not
prior to the public  announcement  of such Change of Control,  the Company shall
deliver written notice thereof via facsimile and overnight courier to the Holder
(a "Change of Control  Notice").  At any time during the period  beginning after
the Holder's receipt of a Change of Control Notice and ending on the date of the
consummation  of such  Change of Control  (or,  in the event a Change of Control
Notice is not delivered at least ten (10) days prior to a Change of Control,  at
any time on or after  the date  which  is ten  (10)  days  prior to a Change  of
Control  and  ending  ten (10) days  after the  consummation  of such  Change of
Control),  the Holder may  require  the  Company to redeem all or any portion of
this Note by delivering  written notice thereof  ("Change of Control  Redemption
Notice")  to the  Company,  which  Change of  Control  Redemption  Notice  shall
indicate the Conversion Amount the Holder is electing to redeem.  The portion of
this Note subject to redemption  pursuant to this Section 5 shall be redeemed by
the  Company  at a price  equal to the  greater  of (i) the  product  of (x) the
Conversion  Amount being redeemed plus accrued and unpaid  Interest  thereon and
(y) the quotient determined by dividing (A) the Closing Sale Price of the Common
Stock immediately  following the public  announcement of such proposed Change of
Control by (B) the Conversion Price and (ii) 125% of the Conversion  Amount plus
accrued and unpaid  Interest  thereon  being  redeemed  (the  "Change of Control
Redemption  Price").  Redemptions  required  by this  Section 5 shall be made in
accordance with the provisions of Section 12 and shall have priority to payments
to shareholders in connection with a Change of Control. Notwithstanding anything
to the contrary in this Section 5, but subject to Section 3(d), until the Change
of Control  Redemption  Price  (together  with any interest  thereon) is paid in
full, the Conversion Amount submitted for redemption under this Section 5(b) may
be converted,  in whole or in part, by the Holder into Common Stock  pursuant to
Section 3. In the event of a partial  redemption of this Note  pursuant  hereto,
the Principal  amount  redeemed shall be deducted from the  Installment  Amounts
relating  to the  applicable  Installment  Dates as set  forth in the  Change of
Control Redemption Notice.

      (6) RIGHTS UPON ISSUANCE OF PURCHASE RIGHTS AND OTHER CORPORATE EVENTS.

            (a) Purchase  Rights.  If at any time the Company grants,  issues or
sells any Options, Convertible Securities or rights to purchase stock, warrants,
securities  or other  property  pro rata to the  record  holders of any class of
Common  Stock (the  "Purchase  Rights"),  then the Holder  will be  entitled  to
acquire,  upon the terms  applicable  to such  Purchase  Rights,  the  aggregate
Purchase  Rights which the Holder could have acquired if the Holder had held the
number of shares of Common Stock  acquirable  upon  complete  conversion of this
Note  (without  taking  into  account any  limitations  or  restrictions  on the
convertibility  of this Note)  immediately  before the date on which a record is
taken for the grant,  issuance or sale of such Purchase  Rights,  or, if no such
record is taken,  the date as of which the record holders of Common Stock are to
be determined for the grant, issue or sale of such Purchase Rights.

                                      -11-
<PAGE>

            (b) Other Corporate  Events.  In addition to and not in substitution
for any other rights  hereunder,  prior to the  consummation  of any Fundamental
Transaction  pursuant to which holders of shares of Common Stock are entitled to
receive  securities or other assets with respect to or in exchange for shares of
Common Stock (a "Corporate Event"), the Company shall make appropriate provision
to insure  that the Holder  will  thereafter  have the right to  receive  upon a
conversion  of  this  Note,  (i) in  addition  to the  shares  of  Common  Stock
receivable  upon such  conversion,  such securities or other assets to which the
Holder would have been entitled to receive or retain with respect to such shares
of Common Stock had such shares of Common Stock been held by the Holder upon the
consummation   of  such  Corporate   Event  (without  taking  into  account  any
limitations or restrictions on the  convertibility of this Note) or (ii) in lieu
of the shares of Common Stock otherwise  receivable upon such  conversion,  such
securities or other assets  received by the holders of shares of Common Stock in
connection with the  consummation of such Corporate Event in such amounts as the
Holder would have been entitled to receive had this Note  initially  been issued
with conversion rights for the form of such  consideration (as opposed to shares
of Common Stock) at a conversion rate for such  consideration  commensurate with
the Conversion Rate.  Provision made pursuant to the preceding sentence shall be
in a form and substance  satisfactory to the Required Holders. The provisions of
this Section shall apply  similarly and equally to successive  Corporate  Events
and shall be applied  without  regard to any  limitations  on the  conversion or
redemption of this Note.

      (7) RIGHTS UPON SUBDIVISION OR COMBINATION OF COMMON STOCK. If the Company
at any time on or after the  Subscription  Date  subdivides (by any stock split,
stock  dividend,  recapitalization  or  otherwise)  one or more  classes  of its
outstanding  shares  of  Common  Stock  into a greater  number  of  shares,  the
Conversion  Price  in  effect  immediately  prior  to such  subdivision  will be
proportionately reduced. If the Company at any time on or after the Subscription
Date combines (by  combination,  reverse  stock split or otherwise)  one or more
classes  of its  outstanding  shares of Common  Stock  into a smaller  number of
shares,  the Conversion  Price in effect  immediately  prior to such combination
will be proportionately increased.

      (8) COMPANY INSTALLMENT CONVERSION OR REDEMPTION.

            (a) General.  On each Installment Date, the Company shall pay to the
Holder of this Note the Installment  Amount as of such  Installment  Date by the
combination of any of the following, at the Company's sole and exclusive option,
but subject to and in accordance  with the terms of this Section 8, (i) provided
that  during the  period  commencing  with the  Company  Installment  Notice (as
defined below) through the applicable  Installment  Date, the Equity  Conditions
have been  satisfied (or waived in writing by the Holder except that the Holders
may not waive any Equity  Condition  to the extent such  waiver  would cause the
Company  to be in  violation  of the  rules  and  regulations  of the  Principal
Market),  requiring the  conversion of a portion of the  applicable  Installment
Amount,  in whole or in part,  in  accordance  with this  Section 8 (a  "Company
Conversion"),  and/or (ii) redeeming the applicable Installment Amount, in whole
or in part, in accordance with this Section 8 (a "Company Redemption"); provided
that  all of the  outstanding  applicable  Installment  Amount  as of each  such
Installment  Date  must be  converted  and/or  redeemed  by the  Company  on the
applicable  Installment  Date,  subject  to the  provisions  of this  Section 8;
provided,  further,  however that unless the Company has otherwise  notified the
Holder that it is redeeming  all or any portion of an  Installment  Amount,  the
entire  Installment Amount due on any Installment Date shall be paid pursuant to
a Company Conversion.  On or prior to the date which is the twenty-fourth (24th)
Trading Day prior to each  Installment  Date (each, an  "Installment  Notice Due
Date"),  the Company shall deliver written notice (each, a "Company  Installment
Notice"),  to the Holder which  Company  Installment  Notice shall state (A) the
portion,  if any, of the applicable  Installment  Amount which the Company shall
convert pursuant to a Company Conversion, which amount when added to any Company
Redemption  Amount must equal the  applicable  Installment  Amount (the "Company
Conversion  Amount"),  (B) the portion,  if any, of the  applicable  Installment
Amount which the Company elects to redeem pursuant to a Company  Redemption (the
"Company Redemption Amount"),  which amount when added to any Company Conversion
Amount must equal the  applicable  Installment  Amount and (C) if an Installment
Amount is paid, in whole or in part, pursuant to a Company Conversion,  then the
Company  Installment  Notice shall certify that the Equity  Conditions have been
satisfied  as of the  date  of the  Company  Installment  Notice.  Each  Company
Installment  Notice  shall be  irrevocable.  No later than two (2) Trading  Days
after  delivery  of  a  Company  Installment  Notice  setting  forth  a  Company
Conversion  Amount,  the Company shall deliver to the Holder's  account with DTC
such number of shares of Common Stock (the "Pre-Installment  Conversion Shares")
equal to the quotient of (x) such Company  Conversion  Amount divided by (y) the
Conversion  Price.  In the event that the  Company  shall pay any  portion of an
Installment  Amount pursuant to a Company  Conversion,  the Holder shall, on the
Trading Day immediately  following the end of the Company  Conversion  Measuring
Period,  specify  to the  Company  in writing  the dates of the  seventeen  (17)
Trading  Days that shall be used to  calculate  the  Company  Conversion  Price.
Except as expressly  provided in this Section  8(a),  the Company  shall convert
and/or redeem the  applicable  Installment  Amount of this Note pursuant to this
Section 8 and the corresponding  Installment Amounts of the Other Notes pursuant
to the  corresponding  provisions  of the Other  Notes in the same  ratio of the
Installment  Amount  being  converted  and  redeemed   hereunder.   The  Company
Conversion  Amount shall be converted  in  accordance  with Section 8(b) and the
Company  Redemption  Amount shall be redeemed in  accordance  with Section 8(c).
Notwithstanding  the  foregoing,  unless  the  Company  is given  notice  to the
contrary by the Holder,  if the price  determined  pursuant to clause (i) of the
definition  of  "Company   Conversion  Price"  during  the  applicable   Company
Conversion Measuring Period (as defined in Section 29 below) is greater than the
Conversion  Price,  then the Company  shall be deemed to have  elected a Company
Conversion  in  the  Company  Installment  Notice  as to the  entire  applicable
Installment Amount.

                                      -12-
<PAGE>

            (b) Mechanics of Company Conversion. Subject to Section 3(d), if the
Company  shall  pay the  applicable  Installment  Amount,  in  whole or in part,
pursuant to a Company  Conversion  in  accordance  with Section  8(a),  then the
applicable Company Conversion Amount, if any, which remains outstanding shall be
converted  as  of  the  applicable   Installment  Date  by  converting  on  such
Installment Date such Company Conversion Amount at the Company Conversion Price;
provided that the Equity Conditions have been satisfied (or waived in writing by
the Holder) on such Installment Date. The number of shares of Common Stock to be
delivered  upon  such  conversion   shall  be  reduced  by  the  amount  of  any
Pre-Installment  Conversion Shares delivered in connection with such Installment
Date. If an Event of Default  occurs during any applicable  Installment  Period,
then either the Holder (i) shall return any  Pre-Installment  Conversion  Shares
delivered  in  connection  with  the  applicable  Installment  Date or (ii)  the
Conversion Amount used to calculate the Event of Default  Redemption Price shall
be reduced by the product of (x) the Company  Conversion  Amount  applicable  to
such  Installment  Date  multiplied by (y) the  Conversion  Share Ratio.  If the
Equity Conditions are not satisfied (or waived in writing by the Holder) on such
Installment Date (an "Equity  Conditions  Failure"),  then, at the option of the
Holder designated in writing to the Company,  the Holder may require the Company
to do any one or more of the following:  (1) the Company shall redeem all or any
part designated by the Holder of the unconverted Company Conversion Amount (such
designated  amount is  referred  to as the "First  Redemption  Amount")  on such
Installment  Date and the  Company  shall pay to the Holder on such  Installment
Date, by wire transfer of immediately  available  funds, an amount in cash equal
to 125% of such First Redemption  Amount, or (2) the Company Conversion shall be
null and void with  respect to all or any part  designated  by the Holder of the
unconverted  Company  Conversion  Amount and the Holder shall be entitled to all
the rights of a holder of this Note with  respect to such  amount of the Company
Conversion  Amount;  provided,  however,  that  the  Conversion  Price  for such
unconverted  Company Conversion Amount shall thereafter be adjusted to equal the
lesser of (A) the Company Conversion Price as in effect on the date on which the
Holder voided the Company  Conversion and (B) the Company Conversion Price as in
effect on the date on which the Holder  delivers a  Conversion  Notice  relating
thereto.  In the event of an Equity  Conditions  Failure,  either (I) the Holder
shall return any Pre-Installment  Conversion Shares delivered in connection with
the  applicable  Installment  Date or (II) any related First  Redemption  Amount
shall be reduced by the product of (X) the Company  Conversion Amount applicable
to such  Installment  Date multiplied by (Y) the Conversion  Share Ratio. If the
Company fails to redeem any First Redemption  Amount on or before the applicable
Installment Date by payment of such amount on the applicable  Installment  Date,
then the Holder  shall  have the  rights  set forth in  Section  12(a) as if the
Company  failed to pay the  applicable  Company  Redemption  Price and all other
rights under this Note (including, without limitation, such failure constituting
an Event of Default described in Section 4(a)(v)).  Notwithstanding  anything to
the  contrary  in this  Section  8(b),  but subject to Section  3(d),  until the
Company delivers Common Stock  representing the Company Conversion Amount to the
Holder, the Company Conversion Amount may be converted by the Holder into Common
Stock  pursuant  to  Section 3. In the event the  Holder  elects to convert  the
Company Conversion Amount prior to the applicable  Installment Date as set forth
in  the  immediately  preceding  sentence,  the  Company  Conversion  Amount  so
converted  shall  be  deducted  from the  Installment  Amounts  relating  to the
Installment Dates as set forth in the Conversion Notice.

                                      -13-
<PAGE>

            (c) Mechanics of Company Redemption. If the Company elects a Company
Redemption in accordance with Section 8(a), then the Company  Redemption Amount,
if any,  which is to be paid to the Holder on the  applicable  Installment  Date
shall be redeemed by the Company on such Installment Date, and the Company shall
pay to the Holder on such  Installment  Date,  by wire  transfer of  immediately
available  funds in  accordance  with  Section  25(b),  an  amount  in cash (the
"Company Installment  Redemption Price") equal to 100% of the Company Redemption
Amount.  If the  Company  fails to redeem the Company  Redemption  Amount on the
applicable  Installment  Date by payment of the Company  Installment  Redemption
Price on such date,  then at the option of the Holder  designated  in writing to
the Company (any such  designation,  a "Conversion  Notice" for purposes of this
Note),  the Holder may  require  the  Company to convert  all or any part of the
Company Redemption Amount at the Company Conversion Price.  Conversions required
by this Section 8(b) shall be made in accordance  with the provisions of Section
3(c). Notwithstanding anything to the contrary in this Section 8(b), but subject
to Section 3(d), until the Company  Installment  Redemption Price (together with
any interest  thereon) is paid in full, the Company  Redemption Amount (together
with any interest thereon) may be converted,  in whole or in part, by the Holder
into  Common  Stock  pursuant  to Section  3. In the event the Holder  elects to
convert  all or any  portion  of the  Company  Redemption  Amount  prior  to the
applicable  Installment Date as set forth in the immediately preceding sentence,
the  Company   Redemption  Amount  so  converted  shall  be  deducted  from  the
Installment  Amounts  relating  to the  Installment  Dates  as set  forth in the
Conversion Notice.

                                      -14-
<PAGE>

      (9) SECURITY.  This Note and the Other Notes are secured to the extent and
in the manner set forth in the Security  Documents (as defined in the Securities
Purchase Agreement).

      (10)  NONCIRCUMVENTION.  The Company hereby  covenants and agrees that the
Company will not, by amendment of its  Certificate of  Incorporation,  Bylaws or
through any reorganization, transfer of assets, consolidation, merger, scheme of
arrangement,  dissolution,  issue or sale of securities,  or any other voluntary
action, avoid or seek to avoid the observance or performance of any of the terms
of  this  Note,  and  will  at all  times  in good  faith  carry  out all of the
provisions  of this Note and take all action as may be  required  to protect the
rights of the Holder of this Note.

      (11) RESERVATION OF AUTHORIZED SHARES.

            (a)  Reservation.  The Company  initially  shall  reserve out of its
authorized and unissued Common Stock a number of shares of Common Stock for each
of the Notes equal to 130% of the Conversion Rate with respect to the Conversion
Amount of each such Note as of the  Issuance  Date.  So long as any of the Notes
are outstanding, the Company shall take all action necessary to reserve and keep
available  out of its  authorized  and  unissued  Common  Stock,  solely for the
purpose of effecting the conversion and  amortization of the Notes,  130% of the
number  of shares of Common  Stock as shall  from time to time be  necessary  to
effect  the  conversion  of all of the Notes  then  outstanding  (the  "Required
Reserve  Amount").  The initial  number of shares of Common  Stock  reserved for
conversions  of the Notes and each  increase in the number of shares so reserved
shall  be  allocated  pro rata  among  the  holders  of the  Notes  based on the
principal  amount of the Notes held by each holder at the Closing (as defined in
the Securities Purchase Agreement) or increase in the number of reserved shares,
as the case may be (the  "Authorized  Share  Allocation").  In the event  that a
holder  shall  sell or  otherwise  transfer  any of such  holder's  Notes,  each
transferee  shall be  allocated a pro rata portion of such  holder's  Authorized
Share  Allocation.  Any shares of Common  Stock  reserved  and  allocated to any
Person  which  ceases  to hold any Notes  shall be  allocated  to the  remaining
holders of Notes,  pro rata based on the principal amount of the Notes then held
by such holders.

            (b) Insufficient  Authorized Shares. If at any time while any of the
Notes  remain  outstanding  the  Company  does not have a  sufficient  number of
authorized  and  unreserved  shares of Common Stock to satisfy its obligation to
reserve for issuance upon conversion of the Notes at least a number of shares of
Common  Stock  equal  to the  Required  Reserve  Amount  (an  "Authorized  Share
Failure"),  then the Company shall  immediately  take all reasonable best action
necessary  to increase  the  Company's  authorized  shares of Common Stock to an
amount  sufficient to allow the Company to reserve the Required  Reserve  Amount
for the Notes then outstanding. Without limiting the generality of the foregoing
sentence,  as  soon as  practicable  after  the  date  of the  occurrence  of an
Authorized  Share Failure,  but in no event later than sixty (60) days after the
occurrence of such Authorized Share Failure, the Company shall hold a meeting of
its  shareholders  for the  approval of an increase in the number of  authorized
shares of Common  Stock.  In  connection  with such  meeting,  the Company shall
provide each  shareholder  with a proxy statement and shall use its best efforts
to solicit its  shareholders'  approval of such increase in authorized shares of
Common  Stock  and  to  cause  its  board  of  directors  to  recommend  to  the
shareholders that they approve such proposal.

                                      -15-
<PAGE>

      (12) HOLDER'S REDEMPTIONS.

            (a)  Mechanics.  The Company shall deliver the  applicable  Event of
Default  Redemption  Price to the Holder within five (5) Business Days after the
Company's  receipt of the Holder's Event of Default  Redemption  Notice.  If the
Holder has submitted a Change of Control  Redemption  Notice in accordance  with
Section  5(b),  the  Company  shall  deliver  the  applicable  Change of Control
Redemption Price to the Holder concurrently with the consummation of such Change
of Control if such notice is received prior to the  consummation  of such Change
of Control and within five (5) Business Days after the Company's receipt of such
notice  otherwise.  In  the  event  of a  redemption  of  less  than  all of the
Conversion  Amount of this Note,  the Company shall  promptly cause to be issued
and  delivered  to the  Holder a new Note (in  accordance  with  Section  19(d))
representing the outstanding Principal which has not been redeemed. In the event
that the Company does not pay the Redemption Price to the Holder within the time
period  required,  at any time thereafter and until the Company pays such unpaid
Redemption  Price  in  full,  the  Holder  shall  have  the  option,  in lieu of
redemption,  to require the Company to promptly  return to the Holder all or any
portion of this Note  representing the Conversion  Amount that was submitted for
redemption and for which the applicable Redemption Price has not been paid. Upon
the Company's  receipt of such notice,  (x) the Redemption  Notice shall be null
and void with  respect  to such  Conversion  Amount  and (y) the  Company  shall
immediately  return this Note, or issue a new Note (in  accordance  with Section
19(d)) to the Holder representing such Conversion Amount.

            (b)  Redemption  by Other  Holders.  Upon the  Company's  receipt of
notice from any of the holders of the Other Notes for redemption or repayment as
a result  of an event or  occurrence  substantially  similar  to the  events  or
occurrences  described  in  Section  4(b)  or  Section  5(b)  (each,  an  "Other
Redemption  Notice"),  the Company  shall  immediately  forward to the Holder by
facsimile a copy of such notice. If the Company receives a Redemption Notice and
one or more  Other  Redemption  Notices,  during  the  period  beginning  on and
including  the date  which is three (3)  Business  Days  prior to the  Company's
receipt of the Holder's  Redemption  Notice and ending on and including the date
which is three (3)  Business  Days after the  Company's  receipt of the Holder's
Redemption  Notice and the Company is unable to redeem all  principal,  interest
and other amounts designated in such Redemption Notice and such Other Redemption
Notices  received  during such seven (7) Business  Day period,  then the Company
shall  redeem a pro rata  amount from each  holder of the Notes  (including  the
Holder) based on the  principal  amount of the Notes  submitted  for  redemption
pursuant to such Redemption Notice and such Other Redemption Notices received by
the Company during such seven Business Day period.

                                      -16-
<PAGE>

      (13) RESTRICTION ON REDEMPTION AND CASH DIVIDENDS.  Until all of the Notes
have been  converted,  redeemed or otherwise  satisfied in accordance with their
terms,  the Company shall not,  directly or  indirectly,  redeem,  repurchase or
declare or pay any cash  dividend or  distribution  on its capital stock without
the prior express written consent of the Required Holders.

      (14) VOTING  RIGHTS.  The Holder shall have no voting rights as the holder
of this  Note,  except as  required  by law,  including  but not  limited to the
General  Corporate  Law of the State of Delaware,  and as expressly  provided in
this Note.

      (15) COVENANTS.

            (a) Rank. All payments due under this Note (a) shall rank pari passu
with all Other  Notes and (b) shall be senior to all other  Indebtedness  of the
Company and its Subsidiaries other than the 8% Convertible Debentures.

            (b) Restricted Actions. The Company shall not, and the Company shall
not permit any of its Subsidiaries to, directly or indirectly, take (or agree to
take) any Restricted Action.

      (16)  PARTICIPATION.  The  Holder,  as the holder of this  Note,  shall be
entitled to such dividends paid and distributions  made to the holders of Common
Stock to the same  extent as if the Holder had  converted  this Note into Common
Stock (without regard to any limitations on conversion  herein or elsewhere) and
had held such shares of Common Stock on the record date for such  dividends  and
distributions.  Payments under the preceding sentence shall be made concurrently
with the dividend or distribution to the holders of Common Stock

      (17) VOTE TO ISSUE, OR CHANGE THE TERMS OF, NOTES. The affirmative vote at
a meeting duly called for such purpose or the written  consent without a meeting
of the Required Holders shall be required for any change, amendment or waiver to
this Note or the Other Notes.

      (18) TRANSFER.  This Note may be offered, sold, assigned or transferred by
the Holder  without the consent of the Company,  subject only to applicable  law
and the provisions of Section 2(g) of the Securities Purchase Agreement.

      (19) REISSUANCE OF THIS NOTE.

      (a)  Transfer.  If  this  Note  is to be  transferred,  the  Holder  shall
surrender this Note to the Company,  whereupon the Company will forthwith  issue
and deliver upon the order of the Holder a new Note (in accordance  with Section
19(d)),  registered  as the Holder may  request,  representing  the  outstanding
Principal  being  transferred  by the  Holder  and,  if  less  then  the  entire
outstanding  Principal  is being  transferred,  a new Note (in  accordance  with
Section 19(d)) to the Holder  representing  the outstanding  Principal not being
transferred.   The  Holder  and  any  assignee,  by  acceptance  of  this  Note,
acknowledge and agree that, by reason of the provisions of Section 3(c)(iii) and
this Section  19(a),  following  conversion or redemption of any portion of this
Note, the  outstanding  Principal  represented by this Note may be less than the
Principal stated on the face of this Note.

                                      -17-
<PAGE>

            (b) Lost,  Stolen or Mutilated  Note. Upon receipt by the Company of
evidence reasonably satisfactory to the Company of the loss, theft,  destruction
or mutilation of this Note, and, in the case of loss,  theft or destruction,  of
any  indemnification  undertaking by the Holder to the Company in customary form
and, in the case of mutilation,  upon surrender and  cancellation  of this Note,
the Company  shall  execute and deliver to the Holder a new Note (in  accordance
with Section 19(d)) representing the outstanding Principal.

            (c) Note  Exchangeable  for  Different  Denominations.  This Note is
exchangeable, upon the surrender hereof by the Holder at the principal office of
the Company,  for a new Note or Notes (in  accordance  with Section 19(d) and in
principal  amounts  of at least  $100,000)  representing  in the  aggregate  the
outstanding  Principal of this Note,  and each such new Note will represent such
portion of such outstanding Principal as is designated by the Holder at the time
of such surrender.

            (d) Issuance of New Notes. Whenever the Company is required to issue
a new Note  pursuant  to the terms of this  Note,  such new Note (i) shall be of
like tenor with this Note,  (ii) shall  represent,  as  indicated on the face of
such new Note, the Principal remaining outstanding (or in the case of a new Note
being  issued  pursuant  to  Section  19(a)  or  Section  19(c),  the  Principal
designated by the Holder which,  when added to the principal  represented by the
other new Notes issued in  connection  with such  issuance,  does not exceed the
Principal  remaining  outstanding  under  this  Note  immediately  prior to such
issuance of new Notes),  (iii) shall have an issuance  date, as indicated on the
face of such new Note, which is the same as the Issuance Date of this Note, (iv)
shall have the same rights and conditions as this Note, and (v) shall  represent
unpaid  accrued  Interest on the Principal  and Interest of this Note,  from the
Issuance Date.

      (20)  REMEDIES,   CHARACTERIZATIONS,   OTHER  OBLIGATIONS,   BREACHES  AND
INJUNCTIVE RELIEF. The remedies provided in this Note shall be cumulative and in
addition  to all  other  remedies  available  under  this  Note  and  the  other
Transaction  Documents  at law or in  equity  (including  a decree  of  specific
performance and/or other injunctive relief),  and nothing herein shall limit the
Holder's right to pursue actual and consequential damages for any failure by the
Company to comply with the terms of this Note. Amounts set forth or provided for
herein with respect to payments,  conversion  and the like (and the  computation
thereof) shall be the amounts to be received by the Holder and shall not, except
as expressly  provided herein, be subject to any other obligation of the Company
(or the performance  thereof).  The Company  acknowledges that a breach by it of
its obligations hereunder will cause irreparable harm to the Holder and that the
remedy at law for any such  breach  may be  inadequate.  The  Company  therefore
agrees that,  in the event of any such breach or threatened  breach,  the Holder
shall be entitled, in addition to all other available remedies, to an injunction
restraining  any breach,  without the  necessity  of showing  economic  loss and
without any bond or other security being required.

      (21) PAYMENT OF COLLECTION,  ENFORCEMENT AND OTHER COSTS. If (a) this Note
is  placed in the hands of an  attorney  for  collection  or  enforcement  or is
collected or enforced through any legal proceeding or the Holder otherwise takes
action to collect  amounts due under this Note or to enforce the  provisions  of
this Note or (b) there occurs any  bankruptcy,  reorganization,  receivership of
the  Company  or other  proceedings  affecting  Company  creditors'  rights  and
involving a claim under this Note, then the Company shall pay the  out-of-pocket
costs  incurred by the Holder for such  collection,  enforcement or action or in
connection  with  such   bankruptcy,   reorganization,   receivership  or  other
proceeding,  including,  but not  limited  to,  reasonable  attorneys'  fees and
disbursements.

                                      -18-
<PAGE>

      (22)  CONSTRUCTION;  HEADINGS.  This Note  shall be  deemed to be  jointly
drafted by the Company  and all the  Purchasers  (as  defined in the  Securities
Purchase Agreement) and shall not be construed against any person as the drafter
hereof. The headings of this Note are for convenience of reference and shall not
form part of, or affect the interpretation of, this Note.

      (23) FAILURE OR INDULGENCE NOT WAIVER.  No failure or delay on the part of
the Holder in the  exercise of any power,  right or  privilege  hereunder  shall
operate as a waiver  thereof,  nor shall any single or partial  exercise  of any
such power,  right or privilege preclude other or further exercise thereof or of
any other right, power or privilege.

      (24) DISPUTE RESOLUTION.  In the case of a dispute as to the determination
of the Closing Bid Price,  the Closing Sale Price or the Weighted  Average Price
or the arithmetic  calculation of the Conversion  Rate or the Redemption  Price,
the Company shall submit the disputed  determinations or arithmetic calculations
via facsimile within one (1) Business Day of receipt of the Conversion Notice or
Redemption  Notice or other event giving rise to such  dispute,  as the case may
be, to the  Holder.  If the Holder and the Company are unable to agree upon such
determination  or  calculation  within  one (1)  Business  Day of such  disputed
determination or arithmetic  calculation being submitted to the Holder, then the
Company shall, within one (1) Business Day submit via facsimile (a) the disputed
determination  of the Closing Bid Price,  the Closing Sale Price or the Weighted
Average  Price to an  independent,  reputable  investment  bank  selected by the
Company and approved by the Holder or (b) the disputed arithmetic calculation of
the  Conversion  Rate or the  Redemption  Price  to the  Company's  independent,
outside  accountant.  The Company,  at the  Company's  expense,  shall cause the
investment  bank  or  the  accountant,  as the  case  may  be,  to  perform  the
determinations  or  calculations  and notify the  Company  and the Holder of the
results  no later  than five (5)  Business  Days from the time it  receives  the
disputed determinations or calculations.  Such investment bank's or accountant's
determination  or  calculation,  as the case may be,  shall be binding  upon all
parties absent demonstrable error.

      (25) NOTICES; PAYMENTS; TAXES.

            (a)  Notices.  Whenever  notice is  required  to be given under this
Note, unless otherwise provided herein, such notice shall be given in accordance
with  Section  9(f) of the  Securities  Purchase  Agreement.  The Company  shall
provide the Holder with prompt  written  notice of all actions taken pursuant to
this Note,  including in reasonable  detail a description of such action and the
reason therefore.  Without limiting the generality of the foregoing, the Company
will give written  notice to the Holder (i)  immediately  upon any adjustment of
the Conversion Price,  setting forth in reasonable detail,  and certifying,  the
calculation of such adjustment and (ii) at least ten (10) days prior to the date
on which the Company  closes its books or takes a record (A) with respect to any
dividend or distribution upon the Common Stock, (B) with respect to any pro rata
subscription  offer to holders of Common Stock or (C) for determining  rights to
vote with respect to any  Fundamental  Transaction,  dissolution or liquidation,
provided  in each case that such  information  shall be made known to the public
prior to or in conjunction with such notice being provided to the Holder.

                                      -19-
<PAGE>

            (b)  Payments.  Whenever  any  payment  of cash is to be made by the
Company  to any Person  pursuant  to this Note,  such  payment  shall be made in
lawful  money of the United  States of America by wire  transfer of  immediately
available  funds by providing the Company with prior written  notice setting out
such request and the Holder's  wire  transfer  instructions;  provided  that the
Holder may elect to receive a payment  via a check  drawn on the  account of the
Company and sent via overnight courier service to such Person at such address as
previously  provided to the Company in writing  (which  address,  in the case of
each of the  Purchasers,  shall  initially  be as set forth on the  Schedule  of
Buyers  attached to the  Securities  Purchase  Agreement).  Whenever  any amount
expressed  to be due or  payable  by the terms of this Note is due or payable on
any day which is not a Business Day, the same shall instead be due or payable on
the next succeeding day which is a Business Day and, in the case of any Interest
Date which is not the date on which this Note is paid in full,  the extension of
the due date thereof shall not be taken into account for purposes of determining
the amount of Interest due on such date.

            (c)  Taxes.  (i) Any  and all  payments  by the  Company  hereunder,
including any amounts received on a conversion or redemption of the Note and any
amounts on account of interest or deemed interest,  shall be made free and clear
of and  without  deduction  for any and all  present  or future  taxes,  levies,
imposts, deductions,  charges or withholdings,  and all liabilities with respect
thereto,  excluding taxes imposed on net income or franchise taxes of the Holder
by the  jurisdiction  in which such  person is  organized  or has its  principal
office  (all such  non-excluded  taxes,  levies,  imposts,  deductions,  charges
withholdings and liabilities,  collectively or  individually,  "Taxes").  If the
Company  shall be  required  to deduct  any Taxes  from or in respect of any sum
payable  hereunder to the Holder,  (i) except as required by law the sum payable
shall be  increased  by the amount (an  "additional  amount")  necessary so that
after  making  all  required  deductions  (including  deductions  applicable  to
additional  sums payable  under this Section  25(c)) the Holder shall receive an
amount equal to the sum it would have received had no such deductions been made,
(ii) the Company shall make such  deductions and (iii) the Company shall pay the
full amount deducted to the relevant  governmental  authority in accordance with
applicable law.

                  (ii) In  addition,  the Company  agrees to pay to the relevant
governmental  authority in accordance  with applicable law any present or future
stamp or  documentary  taxes or any other excise or property  taxes,  charges or
similar levies that arise from any payment made hereunder or from the execution,
delivery or  registration  of, or  otherwise  with respect to, this Note ("Other
Taxes").  The Company shall deliver to the Holder official receipts,  if any, in
respect of any Taxes or Other Taxes payable hereunder  promptly after payment of
such Taxes or Other Taxes or other evidence of payment reasonably  acceptable to
the Holder.

                  (iii) The  obligations of the Company under this Section 25(c)
shall survive the  termination  of this Note and the payment of the Note and all
other amounts payable hereunder.

                                      -20-
<PAGE>

            (d) Each Holder (or Transferee  thereof) that is organized under the
laws of a jurisdiction  outside the United States (a "Non-U.S.  Holder")  agrees
that it shall,  no later than the Closing  Date (or, in the case of a Transferee
which  becomes a party  hereto,  promptly  after the date upon which such Holder
becomes a party  hereto)  deliver  to the  Senior  Agent  (or,  in the case of a
participant,  to the Holder granting the participation only), with copies to the
Company, two properly completed and duly executed copies of either U.S. Internal
Revenue Service Form W-8BEN, W-8ECI or W-8IMY or any subsequent versions thereof
or successors thereto, in each case claiming complete exemption from, or reduced
rate of, U.S.  Federal  withholding tax and payments of interest  hereunder.  In
addition, in the case of a Non-U.S.  Holder claiming exemption from U.S. Federal
withholding  tax under  Section  871(h) or 881(c) of the Internal  Revenue Code,
such Non-U.S.  Holder hereby represents to the Senior Agent and the Company that
such  Non-U.S.  Holder  is not a bank for  purposes  of  Section  881(c)  of the
Internal  Revenue Code, is not a 10-percent  shareholder  (within the meaning of
Section  871(h)(3)(B) of the Internal  Revenue Code) of the Company and is not a
controlled  foreign  corporation  related to the Company  (within the meaning of
Section 864(d)(4) of the Internal Revenue Code), and such Non-U.S. Holder agrees
that  it  shall  promptly  notify  the  Senior  Agent  in  the  event  any  such
representation  is no longer  accurate.  Such forms shall be  delivered  by each
Non-U.S.  Holder on or before the date it becomes a party to this Agreement (or,
in the case of a Transferee  that is a  participation  holder,  on or before the
date such participation holder becomes a Transferee  hereunder) and on or before
the date, if any, such Non-U.S.  Holder changes its applicable  business address
by  designating  a different  business  address (a "New  Business  Office").  In
addition, such Non-U.S. Holder shall deliver to the Senior Agent (with copies to
the  Company)  such  forms  within 20 days after  receipt  of a written  request
therefor from the Senior Agent,  the assigning  Holder or the Holder  granting a
participation,  as  applicable.  Notwithstanding  any  other  provision  of this
Section 25, a Non-U.S. Holder shall not be required to deliver any form pursuant
to this Section 25(d) that such Non-U.S. Holder is not legally able to deliver.

      (26) CANCELLATION. After all Principal, accrued Interest and other amounts
at any  time  owed on  this  Note  has  been  paid  in  full,  this  Note  shall
automatically  be deemed  canceled,  shall be  surrendered  to the  Company  for
cancellation  and shall not be  reissued.

      (27) WAIVER OF NOTICE.  To the extent permitted by law, the Company hereby
waives demand,  notice,  protest and all other demands and notices in connection
with the delivery, acceptance,  performance, default or enforcement of this Note
and the Securities Purchase Agreement.

      (28)  GOVERNING  LAW.  This  Note  shall  be  construed  and  enforced  in
accordance  with,  and all  questions  concerning  the  construction,  validity,
interpretation  and  performance of this Note shall be governed by, the internal
laws of the State of New York,  without  giving  effect to any  choice of law or
conflict of law provision or rule (whether of the State of New York or any other
jurisdictions) that would cause the application of the laws of any jurisdictions
other than the State of New York.

      (29) CERTAIN  DEFINITIONS.  For purposes of this Note, the following terms
shall have the following meanings:

                                      -21-
<PAGE>

            (a) "8%  Convertible  Debentures"  means the 8% Secured  Convertible
Debentures of the Company due September 30, 2006.

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

            (c) "Approved Stock Plan" means any employee  benefit plan which has
been  approved by the Board of Directors  of the Company,  pursuant to which the
Company's  securities  may be  issued  to any  employee,  officer,  director  or
consultant for services provided to the Company.

            (d) "Bloomberg" means Bloomberg Financial Markets.

            (e)  "Business  Day"  means any day other than  Saturday,  Sunday or
other day on which  commercial  banks in The City of New York are  authorized or
required by law to remain closed.

            (f) "Calendar  Quarter"  means each of: the period  beginning on and
including  January 1 and ending on and including March 31; the period  beginning
on and  including  April 1 and  ending  on and  including  June 30;  the  period
beginning on and including July 1 and ending on and including  September 30; and
the period  beginning  on and  including  October 1 and ending on and  including
December 31.

            (g) "Change of Control" means any Fundamental Transaction other than
(A) any reorganization, recapitalization or reclassification of the Common Stock
in  which  holders  of the  Company's  voting  power  immediately  prior to such
reorganization,   recapitalization  or  reclassification   continue  after  such
reorganization,  recapitalization  or  reclassification  to hold publicly traded
securities and, directly or indirectly, the voting power of the surviving entity
or  entities  necessary  to elect a  majority  of the  members  of the  board of
directors (or their  equivalent if other than a  corporation)  of such entity or
entities,  or (B) pursuant to a migratory merger effected solely for the purpose
of changing the jurisdiction of incorporation of the Company.

            (h)  "Closing  Bid Price" and "Closing  Sale Price"  means,  for any
security  as of any date,  the last  closing  bid price and last  closing  trade
price,  respectively,  for such security on the Principal Market, as reported by
Bloomberg,  or, if the Principal  Market begins to operate on an extended  hours
basis and does not  designate  the closing bid price or the closing trade price,
as the case may be, then the last bid price or last trade  price,  respectively,
of such security prior to 4:00:00 p.m., New York Time, as reported by Bloomberg,
or, if the Principal Market is not the principal  securities exchange or trading
market  for such  security,  the last  closing  bid price or last  trade  price,
respectively,  of such security on the principal  securities exchange or trading
market where such security is listed or traded as reported by  Bloomberg,  or if
the  foregoing  do not apply,  the last  closing bid price or last trade  price,
respectively,  of such security in the over-the-counter market on the electronic
bulletin board for such security as reported by Bloomberg, or, if no closing bid
price or last trade  price,  respectively,  is  reported  for such  security  by
Bloomberg,  the average of the bid prices, or the ask prices,  respectively,  of
any market  makers for such  security as  reported in the "pink  sheets" by Pink
Sheets LLC (formerly the National  Quotation  Bureau,  Inc.). If the Closing Bid
Price or the  Closing  Sale  Price  cannot be  calculated  for a  security  on a
particular  date on any of the  foregoing  bases,  the  Closing Bid Price or the
Closing Sale Price,  as the case may be, of such  security on such date shall be
the fair market value as mutually  determined by the Company and the Holder.  If
the  Company  and the Holder are unable to agree upon the fair  market  value of
such security,  then such dispute shall be resolved  pursuant to Section 24. All
such determinations to be appropriately  adjusted for any stock dividend,  stock
split,  stock  combination  or other similar  transaction  during the applicable
calculation period.

                                      -22-
<PAGE>

            (i)  "Closing  Date"  shall  have  the  meaning  set  forth  in  the
Securities  Purchase  Agreement,  which date is the date the  Company  initially
issued Notes pursuant to the terms of the Securities Purchase Agreement.

            (j) "Common Stock Deemed  Outstanding" means, at any given time, the
number of shares of Common Stock  actually  outstanding  at such time,  plus the
number of shares of Common Stock deemed to be  outstanding  pursuant to Sections
7(a)(i) and 7(a)(ii)  hereof  regardless  of whether the Options or  Convertible
Securities are actually exercisable at such time, but excluding any Common Stock
owned or held by or for the account of the Company or issuable  upon  conversion
or exercise, as applicable, of the Notes and the Warrants.

            (k)  "Company   Conversion   Price"   means,   as  of  any  date  of
determination,  that price which shall be the lower of (i) the price computed as
92% of the arithmetic  average of the Weighted Average Price of the Common Stock
of the seventeen (17) Trading Days selected by the Holder during the twenty (20)
consecutive  Trading  Day  period  ending  two (2)  Trading  Days  prior  to the
applicable  Installment Date (each, a "Company Conversion Measuring Period") and
(ii)  the  applicable   Conversion   Price.  All  such   determinations   to  be
appropriately adjusted for any stock split, stock dividend, stock combination or
other similar transaction that proportionately decreases or increases the Common
Stock during such Company Conversion Measuring Period.

            (i) "Contingent  Obligation"  means, as to any Person, any direct or
indirect  liability or guaranty,  contingent or  otherwise,  of that Person with
respect to any  indebtedness,  lease,  dividend or other  obligation  of another
Person if the primary purpose or intent of the Person  incurring such liability,
or the primary effect  thereof,  is to provide  assurance to the obligee of such
liability that such liability will be paid or discharged, or that any agreements
relating  thereto will be complied  with, or that the holders of such  liability
will be protected (in whole or in part) against loss with respect thereto.

            (l) "Convertible  Securities"  means any stock or securities  (other
than  Options)  directly  or  indirectly  convertible  into  or  exercisable  or
exchangeable for Common Stock.

            (m) "Conversion Share Ratio" means as to any applicable  Installment
Date,  the  quotient  of (x) the  number of  Pre-Installment  Conversion  Shares
delivered in connection with such  Installment Date divided by (y) the number of
Post-Installment Conversion Shares applicable to such Installment Date.

                                      -23-
<PAGE>

            (n)   "Distribution"   means,  with  respect  to  any  Person,   the
declaration  or  payment  of any  dividends  by such  Person,  or the  purchase,
redemption,  retirement  or other  acquisition  for value of any of its  capital
stock or  other  equity  now or  hereafter  outstanding,  or the  making  of any
distribution of assets to its stockholders as such whether in cash, assets or in
obligations of such Person,  or the allocation or other setting apart of any sum
for the  payment  of any  dividend  or  distribution  on,  or for the  purchase,
redemption,  retirement or other acquisition of any shares of its capital stock,
or the making of any other  distribution by reduction of capital or otherwise in
respect of any shares of its capital stock.

            (o) "Eligible Market" means the Principal Market, The New York Stock
Exchange,  Inc., the American Stock Exchange,  The Nasdaq SmallCap Market or the
OTC Bulletin Board.

            (p)  "Equity  Conditions"  means:  (i) on each day during the period
beginning on the applicable  Company  Installment  Notice Date and ending on and
including the  applicable  Installment  Date (the "Equity  Conditions  Measuring
Period"),   either  (x)  the  Registration   Statement  filed  pursuant  to  the
Registration Rights Agreement shall be effective and available for the resale of
all  remaining  Registrable  Securities  in  accordance  with  the  terms of the
Registration  Rights  Agreement  and there  shall not have been any  Events  (as
defined in the Registration  Rights Agreement) or (y) all shares of Common Stock
issuable  upon  conversion  of the Notes and exercise of the  Warrants  shall be
eligible  for sale  without  restriction  and without the need for  registration
under any applicable  federal or state  securities laws; (ii) on each day during
the Equity  Conditions  Measuring  Period,  the Common Stock is  designated  for
quotation on an Eligible  Market and shall not have been  suspended from trading
on such exchange or market (other than suspensions of not more than two days and
occurring  prior  to the  applicable  date  of  determination  due  to  business
announcements by the Company) nor shall delisting or suspension by such exchange
or market been  threatened or pending  either (A) in writing by such exchange or
market  (other  than a notice from the  Principal  Market to the effect that the
common stock does not satisfy Nasdaq  Marketplace  Rule 4310(c)(4) (the "Minimum
Bid Price Rule"), and that in accordance with the rules of the Principal Market,
the Company  will be provided 180 calendar  days to regain  compliance  with the
Minimum  Bid Price  Rule or be  delisted  from the  Principal  Market) or (B) by
falling below the minimum listing maintenance  requirements of all such Eligible
Markets;  (iii) during the one (1) year period  ending on and including the date
immediately  preceding the applicable date of  determination,  the Company shall
have delivered Conversion Shares upon conversion of the Notes and Warrant Shares
upon  exercise of the  Warrants to the holders on a timely basis as set forth in
Section  2(c)(ii)  hereof (and analogous  provisions  under the Other Notes) and
Section 2(a) of the Warrants;  (iv) any applicable  shares of Common Stock to be
issued in connection  with the event  requiring  determination  may be issued in
full without  violating  Section 3(d) hereof and the rules or regulations of the
Principal Market; (v) during the Equity Conditions Measuring Period, the Company
shall not have failed to timely make any payments  within five (5) Business Days
of when such payment is due pursuant to any  Transaction  Document;  (vi) during
the Equity Conditions Measuring Period, there shall not have occurred either (A)
the  public  announcement  of  a  pending,   proposed  or  intended  Fundamental
Transaction  which has not been  abandoned,  terminated or consummated or (B) an
Event of Default  or an event that with the  passage of time or giving of notice
would constitute an Event of Default;  (vii) the Company shall have no knowledge
of any fact that would cause (x) the Registration  Statements  required pursuant
to the  Registration  Rights Agreement not to be effective and available for the
resale of all remaining  Registrable  Securities in accordance with the terms of
the  Registration  Rights  Agreement or (y) any shares of Common Stock  issuable
upon  conversion of the Notes and shares of Common Stock  issuable upon exercise
of the Warrants not to be eligible for sale without restriction pursuant to Rule
144(k)  and any  applicable  federal  and  state  securities  laws;  (viii)  the
Stockholder  Approval (as defined in the Securities  Purchase  Agreement)  shall
have been obtained;  and (ix) the Company  otherwise shall have been in material
compliance with and shall not have materially breached any provision,  covenant,
representation or warranty of any Transaction Document.

                                      -24-
<PAGE>

            (q) "Excluded Securities" means any Common Stock issued or issuable:
(i) in  connection  with any Approved  Stock Plan;  (ii) upon  conversion of the
Notes or the  exercise  of the  Warrants;  (iii)  pursuant  to a bona  fide firm
commitment underwritten public offering with a nationally recognized underwriter
which  generates  gross proceeds to the Company in excess of $30,000,000  (other
than an "at-the-market offering" as defined in Rule 415(a)(4) under the 1933 Act
and "equity  lines");  and (iv) upon  conversion  of any Options or  Convertible
Securities   which  are  outstanding  on  the  day  immediately   preceding  the
Subscription  Date,  provided  that the  terms of such  Options  or  Convertible
Securities  are not  amended,  modified or changed on or after the  Subscription
Date.

            (r) "Fundamental Transaction" means that the Company shall, directly
or indirectly,  in one or more related  transactions,  (i)  consolidate or merge
with or into (whether or not the Company is the surviving  corporation)  another
Person, or (ii) sell,  assign,  transfer,  convey or otherwise dispose of all or
substantially  all of the properties or assets of the Company to another Person,
or (iii) allow another Person to make a purchase,  tender or exchange offer that
is  accepted by the  holders of more than the 50% of the  outstanding  shares of
Common  Stock (not  including  any shares of Common  Stock held by the Person or
Persons making or party to, or associated or affiliated  with the Persons making
or party to, such  purchase,  tender or exchange  offer),  or (iv)  consummate a
stock  purchase  agreement or other  business  combination  (including,  without
limitation,   a   reorganization,   recapitalization,   spin-off  or  scheme  of
arrangement)  with another Person  whereby such other Person  acquires more than
the 50% of either  the  outstanding  shares of Common  Stock or the  outstanding
shares of Common  Stock (not  including  any shares of Common  Stock held by the
other Person or other  Persons  making or party to, or  associated or affiliated
with the other  Persons  making or party to, such stock  purchase  agreement  or
other business combination),  or (v) reorganize,  recapitalize or reclassify its
Common Stock.

            (s)  "GAAP"  means  United  States  generally  accepted   accounting
principles, consistently applied.

            (t) "Indebtedness" of any Person means,  without duplication (A) all
indebtedness  for borrowed  money,  (B) all  obligations  issued,  undertaken or
assumed as the deferred purchase price of property or services (other than trade
payables entered into in the ordinary course of business), (C) all reimbursement
or payment obligations with respect to letters of credit, surety bonds and other
similar instruments,  (D) all obligations evidenced by notes, bonds,  debentures
or  similar  instruments,   including   obligations  so  evidenced  incurred  in
connection  with the  acquisition  of property,  assets or  businesses,  (E) all
indebtedness  created  or  arising  under any  conditional  sale or other  title
retention  agreement,  or incurred as financing,  in either case with respect to
any property or assets  acquired  with the proceeds of such  indebtedness  (even
though the rights and remedies of the seller or bank under such agreement in the
event of default are limited to repossession or sale of such property),  (F) all
monetary  obligations  under  any  leasing  or  similar  arrangement  which,  in
connection with generally accepted accounting  principles,  consistently applied
for  the  periods  covered  thereby,  is  classified  as a  capital  lease,  (G)
off-balance sheet liabilities  retained in connection with asset  securitization
programs,  synthetic  leases,  sale and leaseback  transactions or other similar
obligations  arising  with  respect  to  any  other  transaction  which  is  the
functional  equivalent  of or takes the place of  borrowing  but which  does not
constitute a liability on the consolidated  balance sheet of such Person and its
subsidiaries,  and (H) all  indebtedness  referred to in clauses (A) through (G)
above secured by (or for which the holder of such  Indebtedness  has an existing
right,  contingent  or  otherwise,  to be  secured  by) any Lien  upon or in any
property or assets (including accounts and contract rights) owned by any Person,
even though the Person  which owns such  assets or  property  has not assumed or
become  liable for the  payment  of such  indebtedness,  and (I) all  Contingent
Obligations  in respect of  indebtedness  or  obligations of others of the kinds
referred to in clauses (A) through (H) above.

                                      -25-
<PAGE>

            (u)  "Installment  Amount"  means,  with respect to any  Installment
Date,  the  lesser  of (i)  the  sum of (A) the  product  of (1)  $1,458,333.34,
multiplied  by (2) the Holder Pro Rata  Amount  plus (B) the  accrued and unpaid
interest  thereon;  and (ii) the  Principal  amount (plus any accrued and unpaid
interest  thereon)  under  this Note as of such  Installment  Date,  as any such
Installment  Amount may be reduced  pursuant to the terms of this Note,  whether
upon  conversion,  redemption  or  otherwise.  For the  avoidance of doubt,  any
accrued and unpaid interest which may be paid pursuant to this definition  shall
be deducted from the total interest to be paid on any subsequent Interest Date.

            (v)  "Installment  Date" means each of January 31,  2006,  March 31,
2006, May 31, 2006,  July 31, 2006,  September 30, 2006,  November 30, 2006, May
31, 2007,  July 31, 2007,  September  30, 2007,  November 30, 2007,  January 31,
2008, March 31, 2008.

            (w)  "Installment  Period"  means the  period  from the  Installment
Notice Due Date until the  applicable  Installment  Date.

            (x)  "Interest  Rate" means,  as of the first (1st)  Business Day of
each Calendar  Quarter,  LIBOR plus six percent (6.0%) or, if prior to the first
full Calendar Quarter  hereunder,  as of the Issuance Date,  subject to periodic
adjustment pursuant to Section 2; provided,  however, that in no event shall the
Interest  Rate be less than ten  percent  (10.0%)  or  greater  than  twelve and
one-half percent (12.5%).

            (y)  "LIBOR"  means,  as of  each  date  of  determination,  (i) the
six-month London Interbank Offered Rate for deposits in U.S.  dollars,  as shown
on such date in The Wall  Street  Journal  (Eastern  Edition)  under the caption
"Money Rates - London  Interbank  Offered  Rates  (LIBOR)";  or (ii) if The Wall
Street  Journal  does not  publish  such rate,  the offered  one-month  rate for
deposits in U.S.  dollars  which  appears on the Reuters  Screen LIBO Page as of
10:00 a.m., New York time, each day,  provided that if at least two rates appear
on the Reuters  Screen  LIBO Page on any day,  the "LIBOR" for such day shall be
the arithmetic mean of such rates.

                                      -26-
<PAGE>

            (z)  "Lien"  means any  mortgage,  lien,  pledge,  charge,  security
interest or other encumbrance.

            (aa)  "Options"  means any rights,  warrants or options to subscribe
for or purchase Common Stock or Convertible Securities.

            (bb) "Parent  Entity" of a Person means an entity that,  directly or
indirectly,  controls the applicable Person and whose common stock or equivalent
equity security is quoted or listed on an Eligible Market,  or, if there is more
than one such  Person or Parent  Entity,  the Person or Parent  Entity  with the
largest  public  market  capitalization  as of the date of  consummation  of the
Fundamental Transaction.

            (cc) "Permitted Indebtedness" means (i) Indebtedness incurred by the
Company  that  is  made  expressly  subordinate  in  right  of  payment  to  the
Indebtedness  evidenced  by this  Note,  as  reflected  in a  written  agreement
acceptable  to the  Required  Holders and  approved by the  Required  Holders in
writing,  and  which  Indebtedness  does  not  provide  at any  time for (1) the
payment,   prepayment,   repayment,   repurchase  or  defeasance,   directly  or
indirectly,  of any principal or premium,  if any, thereon until ninety-one (91)
days after the Maturity Date or later and (2) total  interest and fees at a rate
in excess of eight percent (8.0%) per annum, (ii) the 8% Convertible Debentures,
(iii)  Indebtedness  secured by  Permitted  Liens,  (iv)  Indebtedness  to trade
creditors  incurred  in the  ordinary  course of business  consistent  with past
practice,  (v) extensions,  refinancings  and renewals of any items of Permitted
Indebtedness,  provided that the principal  amount is not increased or the terms
modified to impose more burdensome terms upon the Company or its Subsidiary,  as
the case may be, (vi) Indebtedness incurred under a line of credit with Key Bank
National  Association in favor of FAAC  Incorporated in the amount of up to $5.0
million;  (vii)  Indebtedness  incurred  under a line of  credit in favor of MDT
Armor  Corporation  in the  amount of up to $80,000  and  (viii) any  additional
Indebtedness  incurred  by the  Company in an amount not exceed  $100,000 in the
aggregate outstanding at any time.

            (dd)  "Permitted  Liens" means (i) any Lien for taxes not yet due or
delinquent or being contested in good faith by appropriate proceedings for which
adequate  reserves  have been  established  in  accordance  with GAAP,  (ii) any
statutory  Lien arising in the  ordinary  course of business by operation of law
with respect to a liability  that is not yet due or  delinquent,  (iii) any Lien
created by operation of law, such as materialmen's  liens,  mechanics' liens and
other similar liens,  arising in the ordinary course of business with respect to
a liability  that is not yet due or  delinquent  or that are being  contested in
good  faith by  appropriate  proceedings,  (iv)  Liens  securing  the  Company's
obligations under the Notes, (v) Liens securing the Company's  obligations under
the 8%  Convertible  Debentures,  (vi)  Liens (A) upon or in any  equipment  (as
defined in the Security Agreement) acquired or held by the Company or any of its
Subsidiaries  to secure the purchase  price of such  equipment  or  indebtedness
incurred  solely for the purpose of financing the  acquisition  or lease of such
equipment,  or (B) existing on such  equipment  at the time of its  acquisition,
provided  that the Lien is  confined  solely to the  property  so  acquired  and
improvements  thereon, and the proceeds of such equipment,  (vii) Liens incurred
in connection  with the extension,  renewal or  refinancing of the  indebtedness
secured by Liens of the type  described in clauses (i) and (vi) above,  provided
that any extension, renewal or replacement Lien shall be limited to the property
encumbered  by the existing Lien and the  principal  amount of the  Indebtedness
being  extended,  renewed or  refinanced  does not  increase,  (viii)  leases or
subleases and licenses and sublicenses  granted to others in the ordinary course
of the Company's  business,  not  interfering  in any material  respect with the
business  of the Company and its  Subsidiaries  taken as a whole,  (ix) Liens in
favor of customs  and revenue  authorities  arising as a matter of law to secure
payments of custom duties in connection with the importation of goods, (x) Liens
incurred in connection with the settlement with Yehuda Harats  regarding  assets
of Electric Fuel (E.F.L.) Ltd.,  (xi) Liens arising from  judgments,  decrees or
attachments in circumstances  not constituting an Event of Default under Section
4(a)(ix),  (xii) Liens set forth on the  searches  delivered to the Senior Agent
pursuant to the terms of the Securities Purchase Agreement,  (xiii) the security
interest  in the  assets  of FAAC  Incorporated  ("FAAC")  granted  to Key  Bank
National  Association  ("KeyBank")  pursuant  to the  terms  of  the  Commercial
Security  Agreement  dated as of May 31, 2005 by and between FAAC and KeyBank in
effect as of the date hereof,  and (xiv) the security interest in the collateral
granted by the Company to KeyBank  pursuant to the terms of the Letter of Credit
Reimbursement and Security Agreement dated September 29, 2005 by and between the
Company and KeyBank in effect as of the date hereof.

                                      -27-
<PAGE>

            (ee) "Person" means an individual,  a limited liability  company,  a
partnership,  a  joint  venture,  a  corporation,  a  trust,  an  unincorporated
organization,  any other entity and a  government  or any  department  or agency
thereof.

            (ff)  "Post-Installment  Conversion  Shares"  means  that  number of
shares of Common  Stock that  would be  required  to be  delivered  pursuant  to
Section 8 on an  applicable  Installment  Date  without  taking into account the
delivery of any Pre-Installment Conversion Shares.

            (gg) "Property" means any interest in any kind of property or asset,
whether real,  personal or mixed,  and whether  tangible or  intangible,  of the
Company or any of its subsidiaries, now or hereinafter acquired.

            (hh) "Principal Market" means the Nasdaq National Market.

            (ii)  "Redemption  Notice"  means  each  of  the  Event  of  Default
Redemption  Notice,  the Change of Control  Redemption  Notice,  and any Company
Installment Notice electing a Company  Redemption  (collectively the "Redemption
Notices").

            (jj)  "Redemption  Premium"  means (i) in the case of the  Events of
Default  described in Section  4(a)(i) - (vi) and (x) - (xiii),  125% or (ii) in
the case of the Events of Default described in Section 4(a)(vii) - (viii), 100%.

            (kk)  "Redemption   Price"  means  each  of  the  Event  of  Default
Redemption  Price,  the  Change of  Control  Redemption  Price  and the  Company
Installment Redemption Price (collectively, the "Redemption Prices").

            (ll) "Registration Rights Agreement" means that certain registration
rights  agreement  between  the  Company  and the  initial  holders of the Notes
relating to, among other things,  the  registration  of the resale of the Common
Stock issuable upon conversion of the Notes and exercise of the Warrants.

                                      -28-
<PAGE>

            (mm) "Required  Holders" means the holders of Notes  representing at
least  a  majority  of  the  aggregate   principal  amount  of  the  Notes  then
outstanding.

            (nn) "Restricted Actions" means any of the following actions:

                  (i)  incur  or  guarantee,  assume  or  suffer  to  exist  any
Indebtedness,  other than (A) the  Indebtedness  evidenced  by this Note and the
Other Notes and (B) Permitted Indebtedness;

                  (ii) allow or suffer to exist any Lien upon or in any property
or assets  (including  accounts and contract rights) owned by the Company or any
of its Subsidiaries other than Permitted Liens;

                  (iii) create,  incur, assume or suffer to exist any obligation
as lessee for the rental or hire of any Property,  except leases existing on the
Issuance  Date,  and  any  extensions,  supplements,  replacements  or  renewals
thereof;

                  (iv) redeem, defease,  repurchase,  repay or make any payments
in respect of, by the payment of cash or cash  equivalents (in whole or in part,
whether by way of open market purchases,  tender offers, private transactions or
otherwise), all or any portion of any Permitted Indebtedness,  whether by way of
payment in respect of  principal  of (or  premium,  if any) or interest on, such
Indebtedness  if at the time such payment is due or is otherwise  made or, after
giving effect to such payment, an event  constituting,  or that with the passage
of time and  without  being  cured  would  constitute,  an Event of Default  has
occurred and is continuing;

                  (v) make any loan or advance to any Person or any  purchase or
other acquisition of any capital stock, assets,  obligations or other securities
of any  Person,  or  any  capital  contribution  to,  investment  in,  or  other
acquisition of any interest in, any Person;

                  (vi) make any  Distribution,  except that any  Subsidiary  may
make Distributions to the Company;

                  (vii) make any capital expenditures, in any single or a series
of related transactions, during any year, exceeding $250,000;

                  (viii) sell, lease,  assign,  transfer or otherwise dispose of
any  of its  now  owned  or  hereafter  acquired  Property  (including,  without
limitation,  shares  of  stock  and  Indebtedness,   receivables  and  leasehold
interests),  except in the  ordinary  course of  business  consistent  with past
practices;

                  (ix) sell, lease,  assign or otherwise dispose of any Property
to any  Affiliate;  (a) merge into or  consolidate  with or  purchase or acquire
Property from any Affiliate; or (b) enter into any other transaction directly or
indirectly  with  or for  the  benefit  of  any  Affiliate  (including,  without
limitation, guaranties and assumption of obligations of any Affiliate); provided
that;  any Affiliate who is an  individual  may serve as a director,  officer or
employee  of the  Company  or any  subsidiary  thereof  and  receive  reasonable
compensation for his or her services in such capacity;

                                      -29-
<PAGE>

                  (x)  merge or  consolidate  with,  or sell,  assign,  lease or
otherwise  dispose  of  (whether  in one  transaction  or in a series of related
transactions)  all or  substantially  all of its  assets  (whether  now owned or
hereafter  acquired) to, any Person,  or acquire all or substantially all of the
assets or the  business of any Person (or enter into any  agreement to do any of
the foregoing);

                  (xi) take any  action  that  would  permit  the  sale,  lease,
assignment, transfer or other disposition by MDT Armor Corporation of any of its
assets other than in the ordinary course of business;

                  (xii)   take  any  action  or   otherwise   allow  EF  Battery
Corporation to conduct  Acquisitions (as defined in the Security  Agreement) for
an amount in excess of $1,000,000 in the aggregate; or

                  (xiii)  enter into any  agreement  with  respect to any of the
foregoing provisions (i) through (xii).

            (oo)  "SEC"  means  the  United  States   Securities   and  Exchange
Commission.

            (pp) "Securities  Purchase  Agreement" means that certain securities
purchase  agreement dated the Subscription Date by and among the Company and the
initial holders of the Notes pursuant to which the Company issued the Notes.

            (qq) "Subscription Date" means September 29, 2005.

            (rr) "Successor Entity" means the Person,  which may be the Company,
formed by, resulting from or surviving any Fundamental Transaction or the Person
with which such Fundamental  Transaction shall have been made,  provided that if
such Person is not a publicly  traded  entity whose  common stock or  equivalent
equity security is quoted or listed for trading on an Eligible Market, Successor
Entity shall mean such Person's Parent Entity.

            (ss) "Trading Day" means any day on which the Common Stock is traded
on the  Principal  Market,  or, if the  Principal  Market  is not the  principal
trading market for the Common Stock, then on the principal  securities  exchange
or  securities  market on which the Common Stock is then traded;  provided  that
"Trading  Day" shall not include any day on which the Common  Stock is scheduled
to trade on such  exchange or market for less than 4.5 hours or any day that the
Common Stock is suspended  from trading during the final hour of trading on such
exchange or market (or if such  exchange or market does not designate in advance
the closing  time of trading on such  exchange  or market,  then during the hour
ending at 4:00:00 p.m., New York Time).

            (tt)  "Warrants"  has  the  meaning  ascribed  to  such  term in the
Securities Purchase Agreement, and shall include all warrants issued in exchange
therefor or replacement thereof.

                                      -30-
<PAGE>

            (uu)  "Weighted  Average  Price"  means,  for any security as of any
date,  the  dollar  volume-weighted  average  price  for  such  security  on the
Principal  Market during the period beginning at 9:30:01 a.m., New York Time (or
such other time as the Principal Market publicly  announces is the official open
of trading),  and ending at 4:00:00  p.m.,  New York Time (or such other time as
the Principal  Market  publicly  announces is the official  close of trading) as
reported  by  Bloomberg  through  its  "Volume at Price"  functions,  or, if the
foregoing  does not apply,  the  dollar  volume-weighted  average  price of such
security in the  over-the-counter  market on the  electronic  bulletin board for
such security  during the period  beginning at 9:30:01  a.m.,  New York Time (or
such  other time as such  market  publicly  announces  is the  official  open of
trading),  and ending at 4:00:00 p.m., New York Time (or such other time as such
market  publicly  announces  is the  official  close of  trading) as reported by
Bloomberg,  or, if no dollar volume-weighted  average price is reported for such
security by  Bloomberg  for such hours,  the average of the highest  closing bid
price and the  lowest  closing  ask price of any of the  market  makers for such
security  as  reported in the "pink  sheets" by Pink  Sheets LLC  (formerly  the
National  Quotation  Bureau,  Inc.).  If the  Weighted  Average  Price cannot be
calculated  for a security on a particular  date on any of the foregoing  bases,
the  Weighted  Average  Price of such  security  on such date  shall be the fair
market  value as mutually  determined  by the  Company  and the  Holder.  If the
Company  and the Holder are unable to agree upon the fair  market  value of such
security,  then such dispute shall be resolved  pursuant to Section 24. All such
determinations to be appropriately adjusted for any stock dividend, stock split,
stock combination or other similar transaction during the applicable calculation
period.

                            [Signature Page Follows]

                                      -31-
<PAGE>

      IN WITNESS  WHEREOF,  the Company has caused this Note to be duly executed
as of the Issuance Date set out above.

                                      AROTECH CORPORATION

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

<PAGE>

                                    EXHIBIT I

                               AROTECH CORPORATION
                                CONVERSION NOTICE

Reference is made to the Senior Secured  Convertible Note (the "Note") issued to
the undersigned by Arotech  Corporation (the "Company").  In accordance with and
pursuant to the Note,  the  undersigned  hereby elects to convert the Conversion
Amount (as  defined  in the Note) of the Note  indicated  below  into  shares of
Common  Stock par value  $0.01 per share (the  "Common  Stock"),  as of the date
specified below.

      Date of Conversion:_______________________________________________________

      Aggregate Conversion Amount to be converted:______________________________

      Installment Amount to be reduced:_________________________________________

Please confirm the following information:

      Conversion Price:_________________________________________________________

      Number of shares of Common Stock to be issued:____________________________

Notwithstanding  anything to the  contrary  contained  herein,  this  Conversion
Notice shall  constitute a  representation  by the Holder of the Note submitting
this Conversion Notice that, after giving effect to the conversion  provided for
in this Conversion  Notice,  such Holder (together with its affiliates) will not
have  beneficial  ownership  (together  with the  beneficial  ownership  of such
Person's  affiliates)  of a number of shares of Common  Stock which  exceeds the
maximum percentage of the total outstanding shares of Common Stock as determined
pursuant to the provisions of Section 3(d) of the Note.

Please  issue the Common  Stock into  which the Note is being  converted  in the
following name and to the following address:

         Issue to:
                  ______________________________________________________________
                  ______________________________________________________________
                  ______________________________________________________________

         Facsimile Number:______________________________________________________

         Authorization:_________________________________________________________

                  By:___________________________________________________________

<PAGE>

                  Title:________________________________________________________

Dated:__________________________________________________________________________

         Account Number:________________________________________________________
         (if electronic book entry transfer)

         Transaction Code Number:_______________________________________________
         (if electronic book entry transfer)

<PAGE>

                                 ACKNOWLEDGMENT

      The Company hereby  acknowledges this Conversion Notice and hereby directs
American Stock Transfer and Trust Company to issue the above indicated number of
shares of Common Stock in accordance with the Transfer Agent  Instructions dated
September,  29, 2005 from the Company and acknowledged and agreed to by American
Stock Transfer and Trust Company.

                                      AROTECH CORPORATION

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

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