Document:

EXHIBIT 4.1

                          SECURITIES PURCHASE AGREEMENT

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

                  WHEREAS:

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

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

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

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

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

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

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

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

                                   ARTICLE I.
                                   DEFINITIONS

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

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

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

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

                  "COMMISSION" means the Securities and Exchange Commission.

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

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

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

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

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

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

                  "IES ELECTRONICS" means IES Electronics Industries Ltd.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

                                   ARTICLE II.
                                PURCHASE AND SALE

                  Section 2.1 Purchase and Sale of Debentures and Warrants.

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

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

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

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

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

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

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

                  Section 2.2 Company Closing Deliveries.

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

                      (i) this Agreement duly executed by the Company;

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

                  Section 2.3 Purchaser Closing Deliveries.

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

                      (i) this Agreement duly executed by such Purchaser;

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

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

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

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

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

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

                                  ARTICLE III.
                         REPRESENTATIONS AND WARRANTIES

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

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

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

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

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

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

                                     - 10 -
<PAGE>

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

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

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

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

                                     - 11 -
<PAGE>

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

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

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

                                     - 12 -
<PAGE>

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

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

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

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

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

                                     - 13 -
<PAGE>

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

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

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

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

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

                                     - 14 -
<PAGE>

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

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

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

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

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

                                     - 15 -
<PAGE>

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

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

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

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

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

                                     - 16 -
<PAGE>

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

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

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

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

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

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

                                     - 17 -
<PAGE>

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

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

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

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

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

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

                                     - 18 -
<PAGE>

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

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

                                  ARTICLE IV.
                         OTHER AGREEMENTS OF THE PARTIES

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

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

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

                                     - 19 -
<PAGE>

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

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

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

                                     - 20 -
<PAGE>

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

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

                  Section   4.4   Subsequent    Registrations   and   Subsequent
Placements.

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

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

                                     - 21 -
<PAGE>

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

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

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

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

                                     - 22 -
<PAGE>

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

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

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

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

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

                                     - 23 -
<PAGE>

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

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

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

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

                                   ARTICLE V.
                                  MISCELLANEOUS

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

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

                                     - 24 -
<PAGE>

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

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

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

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

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

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

                                     - 25 -
<PAGE>

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

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

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

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

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

                                     - 26 -
<PAGE>

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

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

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

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

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

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

                                     - 27 -
<PAGE>

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

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

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

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

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

                                     - 28 -
<PAGE>

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

                   [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK
                             SIGNATURE PAGES FOLLOW]

                                     - 29 -
<PAGE>

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

                                         AROTECH CORPORATION

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

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

                                     - 30 -
<PAGE>

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

                                    SMITHFIELD FIDUCIARY LLC

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

                                    Investment Amount:             $1,750,000

                                    Address for Notice:

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

                                    With a copy to:

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

                                     - 31 -
<PAGE>

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

                                    OMICRON MASTER TRUST

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

                                    Investment Amount:               $500,000

                                    Address for Notice:

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

                                     - 32 -
<PAGE>

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

                                    PORTSIDE GROWTH AND OPPORTUNITY FUND

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

                                    Investment Amount:        $750,000

                                    Address for Notice:

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

                                     - 33 -
<PAGE>

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

                                    MAINFIELD ENTERPRISES INC.

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

                                    Investment Amount:              $750,000

                                    Address for Notice:

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

                                     - 34 -
<PAGE>

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

                                    CRANSHIRE CAPITAL L.P.

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

                                    Investment Amount:              $750,000

                                    Address for Notice:

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

                                     - 35 -
<PAGE>

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

                                    CLEVELAND OVERSEAS LTD.

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

                                    Investment Amount:          $500,000

                                    Address for Notice:

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

                                     - 36 -
<PAGE>

                                    EXHIBITS
                                    --------

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

                                    SCHEDULES
                                    ---------

Schedule 3.1(a)            Subsidiaries
Schedule 3.1(e)            Consents
Schedule 3.1(g)            Capitalization
Schedule 3.1(j)            Litigation
Schedule 3.1(x)            Registration Rights
Schedule 3.1(y)            Listing and Maintenance Requirements Exceptions
Schedule 3.1(bb)           RankingEXHIBIT 4.2

                                FORM OF DEBENTURE

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

                                         ORIGINAL ISSUE DATE: SEPTEMBER 30, 2003

No. [ ]                                                                   $[ ]

                               AROTECH CORPORATION
             8% SECURED CONVERTIBLE DEBENTURE DUE SEPTEMBER 30, 2006

            THIS  DEBENTURE  is one of a series of duly  authorized  and  issued
debentures of AROTECH  CORPORATION,  a corporation  organized  under the laws of
Delaware (the "COMPANY"),  designated as its 8% Secured  Convertible  Debentures
due September 30, 2006 in the aggregate principal amount of up to Eleven Million
Dollars ($11,000,000) (collectively, the "DEBENTURES").

         FOR  VALUE  RECEIVED,  the  Company  promises  to pay to the  order  of
[SMITHFIELD  FIDUCIARY  LLC]  or  its  registered  assigns  (the  "HOLDER")  the
principal sum of [ ] Dollars ($[ ]) and any additional  sums due pursuant to the
terms hereof,  on September 30, 2006, or such earlier date as the Debentures are
required or permitted to be repaid as provided  hereunder (the "MATURITY DATE"),
and to pay interest to the Holder on the principal  amount of this  Debenture in
accordance  with  the  provisions  hereof.  This  Debenture  is  subject  to the
following additional provisions.

         1.  Definitions.  In addition to the terms  defined  elsewhere  in this
Debenture,  capitalized  terms that are not otherwise  defined herein shall have
the meanings given to such terms in the Securities  Purchase  Agreement dated as
of September  30, 2003 to which the Company and the original  Holder are parties
(the "PURCHASE Agreement").

<PAGE>

         "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.

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

         "BLOOMBERG"  means  Bloomberg  Financial  L.P.  (or  its  successor  to
reporting stock prices).

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

         "CLOSING PRICE" means,  for any date, the price determined by the first
of the following clauses that applies: (a) if the Common Stock is then listed or
quoted on an Trading Market, the closing bid price per share of the Common Stock
for such date (or the nearest  preceding  date if there is no such price on such
date) on the Trading  Market on which the Common Stock is then listed or quoted;
(b) if the Common Stock is not then listed or quoted on an Trading Market and if
prices for the  Common  Stock are then  quoted on the OTC  Bulletin  Board,  the
closing  bid price per share of the Common  Stock for such date (or the  nearest
preceding  date if there  is no such  price  on such  date) on the OTC  Bulletin
Board; (c) if the Common Stock is not then listed or quoted on an Trading Market
or the OTC Bulletin  Board and if prices for the Common Stock are then  reported
in the "Pink  Sheets"  published by the Pink Sheets LLC  (formerly  the National
Quotation Bureau  Incorporated) (or a similar  organization or agency succeeding
to its  functions of reporting  prices),  the most recent bid price per share of
the Common Stock so reported;  or (d) in all other cases,  the fair market value
of a share of Common Stock as determined by an independent appraiser selected in
good faith by the Holder.

         "COMMISSION" means the Securities and Exchange Commission.

                                     - 2 -
<PAGE>

         "COMMON  STOCK" means the Company's  Common  Stock,  $.01 par value per
share, and stock of any other class into which such shares may be reclassified.

         "COMPANY  REDEMPTION  PRICE"  means  the  sum  of (i)  the  outstanding
principal  amount of this Debenture  plus (ii) all other  amounts,  interest and
liquidated damages due in respect of this Debentures.

         "CONVERSION  DATE" is the date  specified  in a  Conversion  Notice  to
effect conversions of Debentures under Section 5(a), which date may not be prior
to (i)  January 1, 2004 and (ii) the date the Holder  delivers  such  Conversion
Notice.  If no  Conversion  Date is specified in a Conversion  Notice,  then the
Conversion  Date for such  notice  shall be the date that such  notice is deemed
delivered hereunder.

         "CONVERSION  PRICE" means  [INSERT IN INITIAL  DEBENTURES  ONLY:  $1.15
(subject to adjustment in accordance  with Section  5(d))][INSERT  IN ADDITIONAL
DEBENTURES ONLY: $1.45 (subject to adjustment in accordance with Section 5(d))].

         "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.

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

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

         "EQUITY  CONDITIONS"  means,  with  respect to a specified  issuance of
Common Stock, that each of the following conditions is satisfied: (i) the number
of authorized  but unissued and otherwise  unreserved  shares of Common Stock is
sufficient  for such  issuance;  (ii) such shares of Common Stock are registered
for resale by the Holder pursuant to an effective  registration  statement,  and
the  prospectus  thereunder  is  available  for use by the  Holder  to sell such
shares, or all such shares may be sold by the Holder without volume restrictions
pursuant to Rule 144(k)  under the  Securities  Act;  (iii) the Common  Stock is
listed or quoted (and is not  suspended  from  trading) on a Trading  Market and
such shares of Common Stock are approved for listing on such Trading Market upon
issuance;  (iv) such issuance  would be permitted in full without  violating the
rules or  regulations  of the Trading  Market on which such shares are listed or
quoted;  (v) no  Bankruptcy  Event has  occurred;  (vii) the  Company  is not in
default with respect to any obligation  hereunder or under any other Transaction
Document;  or (ix) no Event of Default  nor any event  that with the  passage of
time and  without  being cured would  constitute  an Event of Default  which has
occurred and not been cured.

                                     - 3 -
<PAGE>

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

                  (i) any  default in the  payment of  principal  or  liquidated
damages in  respect  of any  Debentures,  as and when the same  becomes  due and
payable  (whether by acceleration or otherwise) or any default in the payment of
interest in respect of any Debentures, within five Trading Days of when the same
becomes due and payable;

                  (ii) 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,  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;

                  (iii) a Bankruptcy Event;

                  (iv)  the  Company  shall  fail  for  any  reason  to  deliver
certificates representing Underlying Shares issuable upon a conversion hereunder
that comply with the provisions  hereof prior to the fifth Trading Day after the
Conversion Date or the Company shall provide notice to any Holder,  including by
way of public  announcement,  at any time,  of its  intention not to comply with
requests for conversion of Debentures in accordance with the terms hereof;

                  (v) the  Company  shall fail for any reason to pay in full the
amount of cash due pursuant to a Buy-In within seven days after notice  therefor
is delivered  hereunder or shall fail to pay any liquidated damages due pursuant
to the  Transaction  Documents  within seven days of the date of the request for
such payment;

                  (vi) the Company  shall fail to have  available  a  sufficient
number of  authorized  and  unreserved  shares of Common  Stock to issue to such
Holder upon a conversion hereunder;

                  (vii) a Fundamental Transaction with respect to the Company or
its subsidiaries;

                  (viii) the Registration Statement shall not have been declared
effective  by the  Commission  on or prior to the 120th  day after the  Original
Issue Date;

                  (ix)  during  the  Effectiveness  Period  (as  defined  in the
Registration Rights Agreement),  the effectiveness of the Registration Statement
lapses for any reason or the Holder shall not be permitted to resell Registrable
Securities  (as  defined  in  the  Registration   Rights  Agreement)  under  the
Registration  Statement,  in either case, for more than five consecutive Trading
Days or an  aggregate  of eight  Trading  Days  (which  need not be  consecutive
Trading Days);

                                     - 4 -
<PAGE>

                  (x) an Event (as defined in the Registration Rights Agreement)
shall  not  have  been  cured to the  satisfaction  of the  Holder  prior to the
expiration  of ten days  from the Event  Date (as  defined  in the  Registration
Rights Agreement) relating thereto (other than an Event resulting from a failure
of a  Registration  Statement to be declared  effective by the  Commission on or
prior to the 120th day after the Original Issue Date,  which shall be covered by
clause (viii) above);

                  (xi) the  Company  defaults in the timely  performance  of any
other obligation under the Transaction Documents (including, without limitation,
any of the Security Agreements and pursuant to Sections 2.2(c) and 2.2(d) of the
Purchase  Agreement)  and such  default  continues  uncured for a period of five
Trading  Days after the date on which  written  notice of such  default is first
given to the  Company by the Holder (it being  understood  that no prior  notice
need be given in the case of a default  that cannot  reasonably  be cured within
five  Trading Days or for  defaults  pursuant to Section  2.2(c) of the Purchase
Agreement); and

                  (xii) the Company or any Subsidiary  takes (or agrees to take)
any Restricted Action in violation of this Debenture.

         "FUNDAMENTAL  TRANSACTION" means any (i) merger or consolidation of the
Company with or into another Person,  (ii) any sale of more than one-half of the
assets  of the  Company  (on an as valued  basis) in one or a series of  related
transactions,  (iii) any tender offer or exchange  offer (whether by the Company
or another  Person)  pursuant to which  holders of Common Stock are permitted to
tender or exchange their shares for other securities,  cash or property, or (iv)
any  reclassification  of the  Common  Stock or any  compulsory  share  exchange
pursuant to which the Common Stock is  effectively  converted  into or exchanged
for other securities, cash or property.

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

         "INITIAL ISSUANCE DATE" means September 30, 2003.

                                     - 5 -
<PAGE>

         "INTEREST  PAYMENT DATE" means each of March 31, June 30,  September 30
and  December  31,  except if such date is not a Trading Day, in which case such
Interest Payment Date shall be the next succeeding Trading Day.
         "INTEREST  SHARES"  means  shares of Common Stock issued or issuable in
payment of accrued interest under Section 2.

         "LIEN" means any lien  (statutory  or  otherwise),  security  interest,
mortgage,  deed of trust,  priority,  pledge,  charge,  conditional  sale, title
retention  agreement,  financing lease or other  encumbrance or similar right of
others, or any agreement to give any of the foregoing.

         "LIQUIDATION"  means for any Person,  any  liquidation,  dissolution or
winding-up of such Person, whether voluntary or involuntary, by operation or law
or otherwise.

         "MANDATORY  PREPAYMENT  AMOUNT" for any Debentures  shall equal the sum
of: (i) the greater of (A) the principal amount of Debentures to be prepaid and,
if applicable,  the  Reinstated  Principal (to the extent the Holder returns the
Underlying  Shares subject to such Reinstated  Principal),  plus all accrued and
unpaid  interest  thereon,  and (B) the  principal  amount of  Debentures  to be
prepaid and, if applicable,  the Reinstated  Principal (to the extent the Holder
returns the Underlying  Shares subject to such Reinstated  Principal),  plus all
accrued and unpaid  interest  thereon,  divided by the  Conversion  Price on the
Trading Day  immediately  preceding  (x) the date of the Event of Default or (y)
the date the  Mandatory  Prepayment  Amount is paid in full,  whichever is less,
multiplied  by the Closing  Price on (x) the date of the Event of Default or (y)
the date the Mandatory  Prepayment Amount is paid in full, whichever is greater,
and (ii) all other  amounts,  costs,  expenses  and  liquidated  damages  due in
respect of such Debentures.

         "ORIGINAL  ISSUE  DATE"  means the date of the first  issuance  of this
Debenture  regardless of the number of transfers of any particular Debenture and
regardless  of the number of  certificates  which may be issued to evidence such
Debenture.

         "OUTSTANDING  DEBENTURES"  means the Company's  outstanding  9% Secured
Convertible Debentures due June 30, 2005.

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

         "PROCEEDING" means an action, claim, suit,  investigation or proceeding
(including,  without limitation, an investigation or partial proceeding, such as
a deposition),  whether commenced or threatened  concerning the  interpretation,
enforcement  or  defense  of any  transaction  contemplated  by any  Transaction
Document  (whether  brought  against a party hereto or such parties  affiliates,
directors, officers, employees or agents).

         "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.

                                     - 6 -
<PAGE>

         "REGISTRATION   RIGHTS   AGREEMENT"  means  the   Registration   Rights
Agreement,  dated as of the Initial  Issuance Date, to which the Company and the
original Holders are parties, as amended,  modified or supplemented from time to
time in accordance with its terms.

         "REGISTRATION  STATEMENT"  means a registration  statement  meeting the
requirements of the  Registration  Rights  Agreement and covering the resale of,
among other things, all Underlying Shares by the Holders,  who shall be named as
"selling stockholders" thereunder.

         "REINSTATED   PRINCIPAL"  means  the  principal  amount  of  Debentures
converted  during the ten Trading  Days  preceding  the  delivery of an Event of
Default  Notice,  for  which  the  Company  issued  or was  obligated  to  issue
Underlying Shares to the Holder.

         "RESTRICTED  ACTIONS"  means  the  taking  by  Company  or  any  of its
subsidiaries of any of the following actions:

                  (i) create, incur, assume or suffer to exist any Indebtedness,
other  than  Indebtedness  reflected  in the  Company's  most  recent  quarterly
financial statement that has been filed with the Commission prior to the Initial
Issuance  Date or  Indebtedness  incurred  in the  ordinary  course of  business
consistent with past practice and not in excess of $100,000;  provided, however,
that EF Battery Corporation, a Subsidiary of the Company, may incur Indebtedness
in an amount not to exceed  $1,000,000  in the  aggregate  to be used  solely in
connection  with the  operation of the zinc air battery  business,  which amount
will be only secured by the assets of EF Battery Corporation;

                  (ii) create,  incur,  assume or suffer to exist any  guaranty,
provided,  that the  Company  may suffer to exist any  existing  guaranties  for
obligations of  Subsidiaries  that it had entered into in the ordinary course of
business consistent with past practice;

                  (iii) create,  incur, assume or suffer to exist any Lien, upon
or with respect to any interest in Property,  except for Liens  disclosed in the
Purchase  Agreement or for Liens pursuant to the Debentures,  or the Outstanding
Debentures or for Liens incurred in connection  with the settlement  with Yehuda
Harats regarding assets of Electric Fuel (E.F.L.) Ltd.;

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

                  (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 $150,000;

                                     - 7 -
<PAGE>

                  (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;

                  (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).

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

         "SECURITY  AGREEMENTS" means (i) the Security  Agreement (as defined in
the Purchase  Agreement) and (ii) the Intellectual  Property Security  Agreement
(as defined in the Purchase Agreement).

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

                                     - 8 -
<PAGE>

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

         "TRANSACTION  DOCUMENTS"  shall  have  the  meaning  set  forth  in the
Purchase Agreement.

         "UNDERLYING SHARES" means, collectively, the Common Stock issuable upon
conversion  of this  Debenture and the Interest  Shares in  accordance  with the
terms hereof.

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

         2. Interest.

                  (a) The  Company  shall  pay  interest  to the  Holder  on the
aggregate  unconverted and then  outstanding  principal amount of this Debenture
(including any interest added to such principal in accordance  with this Section
2) at the rate of 8% per annum, payable in arrears on each Interest Payment Date
and on the Maturity  Date.  Interest  shall be payable on each Interest  Payment
Date,  to the  Holder,  in cash or, at the option of the  Company,  in shares of
Common Stock (the  "INTEREST  SHARES")  provided that the interest which accrued
during any  period  shall be  payable  in  Interest  Shares if, and only if, the
Company delivers written notice of such election ("INTEREST ELECTION NOTICE") to
the Holder at least 10 Trading Days prior to the Interest Payment Date (each, an
"INTEREST  ELECTION  DATE").  Interest to be paid on an Interest Payment Date in
Interest  Shares  shall  be paid in a number  of  Interest  Shares  equal to the
quotient  obtained  by  dividing  the  amount  of  such  interest  by 90% of the
arithmetic average of the VWAP for each of the five (5) Trading Days immediately
preceding  (but not  including)  the Interest  Payment Date.  Interest  shall be
calculated  on the basis of a 360 day year and shall accrue daily  commencing on
the  Original  Issue  Date  (regardless  of  the  number  of  transfers  of  the
Debentures).  If any Interest Shares are to be paid on an Interest Payment Date,
then the Company shall (X) issue and deliver on the applicable  Interest Payment
Date,  to such  address as  specified by the Holder in writing to the Company at
least two  Business  Days  prior to the  applicable  Interest  Payment  Date,  a
certificate,  registered  in the name of the  Holder  or its  designee,  for the
number of Interest Shares to which the Holder shall be entitled, or (Y) provided
that the Company's transfer agent (the "TRANSFER AGENT") is participating in the
Depository Trust Company ("DTC") Fast Automated  Securities Transfer Program and
such  Interest  Shares do not require the  placement of any legends  restricting
transfer of such Interest  Shares,  upon the request of the Holder,  credit such
aggregate number of Interest Shares 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.  Notwithstanding the foregoing,  the Company
shall not be entitled to pay  interest in Interest  Shares and shall be required
to pay such interest in cash on the applicable  Interest Payment Date if (w) the
Equity  Conditions are not satisfied with respect to the Interest Shares on each
day during the period  beginning on the  applicable  Interest  Election Date and
ending on and including the applicable Interest Payment Date, or (y) the Company
has not obtained the Stockholder Approval (as defined in the Purchase Agreement)

                                     - 9 -
<PAGE>

prior to the Interest  Election  Date.  The Company  shall pay any and all taxes
that may be payable  with  respect to the  issuance  and  delivery  of  Interest
Shares.

                  (b) If the Company fails for any reason to pay interest on the
Interest  Payment Date, the Holder may (but shall not be required to) treat such
interest as if it had been added to the principal amount of this Debenture as of
such Interest Payment Date.

                  (c) Any interest to be paid  hereunder that is not paid on the
Interest  Payment Date and not added to the  principal  amount of the  Debenture
shall  continue  to accrue  and shall  entail a late fee,  which must be paid in
cash,  at the rate of 12% per annum or the lesser rate  permitted by  applicable
law (such fees to accrue  daily,  from the date such  interest is due  hereunder
through and including the date of payment).

         3.   Registration  of  Debentures.   The  Company  shall  register  the
Debentures  upon records to be  maintained  by the Company for that purpose (the
"DEBENTURE  REGISTER")  in the name of each record  holder  thereof from time to
time. The Company may deem and treat the registered  Holder of this Debenture as
the  absolute  owner  hereof  for the  purpose of any  conversion  hereof or any
payment of interest hereon, and for all other purposes,  absent actual notice to
the contrary.

         4. Registration of Transfers and Exchanges.  The Company shall register
the transfer of any portion of this  Debenture in the  Debenture  Register  upon
surrender  of this  Debenture to the Company at its address for notice set forth
herein.   Upon  any  such  registration  or  transfer,   a  new  debenture,   in
substantially  the  form of this  Debenture  (any  such  new  debenture,  a "NEW
DEBENTURE"),  evidencing the portion of this  Debenture so transferred  shall be
issued to the transferee and a New Debenture evidencing the remaining portion of
this Debenture not so transferred,  if any, shall be issued to the  transferring
Holder.  The acceptance of the New Debenture by the transferee  thereof shall be
deemed the acceptance by such transferee of all of the rights and obligations of
a holder of a Debenture.  This Debenture is exchangeable  for an equal aggregate
principal  amount  of  Debentures  of  different  authorized  denominations,  as
requested by the Holder  surrendering  the same. No service  charge or other fee
will be  imposed  in  connection  with  any such  registration  of  transfer  or
exchange.  Transfers of this Debenture and the Underlying Shares are governed by
Section 4.1 of the Purchase Agreement.

         5. Conversion.

                  (a) At the  Option of the  Holder.  All or any  portion of the
principal amount of this Debenture then  outstanding  (together with all accrued
but unpaid interest  thereon) shall be convertible into Common Stock (subject to
the limitations set forth in Section 5(b)), at the option of the Holder,  at any
time and from time to time from and after the  January  1, 2004.  Holders  shall
effect  conversions  under this  Section 5(a) by  delivering  the Company with a
written notice in the form attached hereto as Exhibit A (a "CONVERSION  NOTICE")
together  with a  schedule  in the  form of  Schedule  1  attached  hereto  (the
"CONVERSION  SCHEDULE").  The  number of  Underlying  Shares  issuable  upon any
conversion  hereunder  shall (subject to the  limitations of Section 5(b)) equal
the outstanding  principal amount of this Debenture (plus all accrued but unpaid
interest thereon) to be converted divided by the Conversion Price.

                                     - 10 -
<PAGE>

                  (b) Certain Conversion Restrictions.

                      (i) Notwithstanding  anything  to the  contrary  contained
herein,  the number of shares of Common  Stock that may be  acquired by a Holder
upon any  conversion  of Debentures  (or  otherwise in respect  hereof) shall be
limited to the extent  necessary to insure that,  following such  conversion (or
other  issuance),  the total number of shares of Common Stock then  beneficially
owned by such Holder and its affiliates  and any other Persons whose  beneficial
ownership of shares of Common Stock would be  aggregated  with such Holder's for
purposes of Section  13(d) of the Exchange  Act,  does not exceed  4.999% of the
total number of issued and  outstanding  shares of Common Stock  (including  for
such  purpose the shares of Common Stock  issuable  upon such  conversion).  For
purposes of the foregoing  sentence,  the  aggregate  number of shares of Common
Stock  beneficially owned by such Holder and its affiliates shall exclude shares
of Common Stock which would be issuable upon (i)  conversion  of the  remaining,
unconverted portion of the principal amount of this Debenture beneficially owned
by such  Holder  and its  affiliates  and (ii)  exercise  or  conversion  of the
unexercised  or  unconverted  portion  of any other  securities  of the  Company
beneficially  owned  by such  Holder  and  its  affiliates  (including,  without
limitation,  any  convertible  notes,  convertible  preferred stock or warrants)
subject to a limitation on conversion  or exercise  analogous to the  limitation
contained herein. Except as set forth in the preceding sentence, for purposes of
this  paragraph,  beneficial  ownership  shall be determined in accordance  with
Section  13(d) of the  Exchange  Act and the rules and  regulations  promulgated
thereunder.  This  provision  shall not  restrict the number of shares of Common
Stock which a Holder may receive or  beneficially  own in order to determine the
amount of securities or other  consideration that such Holder may receive in the
event  of a  merger,  sale or other  business  combination  or  reclassification
involving the Company as contemplated herein.

                      (ii) Principal Market Regulation. The Company shall not be
obligated to issue any shares of Common Stock upon  conversion of this Debenture
if the  issuance  of such  shares of Common  Stock  would  exceed that number of
shares of Common  Stock  which the  Company  may issue  upon  conversion  of the
Debentures  without  breaching  the  Company's  obligations  under  the rules or
regulations  of the  Trading  Market  (the  "EXCHANGE  CAP"),  except  that such
limitation  shall  not apply in the  event  that the  Company  (A)  obtains  the
approval of its  stockholders as required by the applicable rules of the Trading
Market for  issuances  of Common Stock in excess of such amount or (B) obtains a
written  opinion from outside  counsel to the Company that such  approval is not
required,  which opinion shall be reasonably  satisfactory to the Holder.  Until
such  approval or written  opinion is obtained,  no purchaser of the  Debentures
pursuant to the Purchase  Agreement  (the  "PURCHASERS")  shall be issued,  upon
conversion of  Debentures,  shares of Common Stock in an amount greater than the
product of the Exchange Cap multiplied by a fraction,  the numerator of which is
the principal  amount of  Debentures  issued to such  Purchaser  pursuant to the
Purchase  Agreement on the Initial Issuance Date and the denominator of which is
the  aggregate  principal  amount of all  Debentures  issued  to the  Purchasers
pursuant to the Purchase Agreement on the Initial Issuance 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  Debentures,  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

                                     - 11 -
<PAGE>

to such transferee. In the event that any holder of Debentures shall convert all
of such holder's  Debentures  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 Debentures on a
pro rata basis in proportion to the aggregate principal amount of the Debentures
then held by each such holder.

                  (c) Mechanics of Conversion.

                      (i) By the third Trading Day after each  Conversion  Date,
the Company  shall issue or cause to be issued and cause to be  delivered  to or
upon the written order of the Holder and in such name or names as the Holder may
designate a certificate for the Underlying  Shares issuable upon such conversion
which,  unless  required  by  the  Purchase  Agreement,  shall  be  free  of all
restrictive  legends.  The Holder,  or any Person so designated by the Holder to
receive Underlying  Shares,  shall be deemed to have become the holder of record
of such Underlying  Shares as of the Conversion Date. If the Company's  transfer
agent is eligible to participate in The Depositary Trust Company DWAC system and
no  legends  are  required  to be  included  on  the  certificates  representing
Underlying  Shares pursuant to the Purchase  Agreement,  the Company shall, upon
request  of the  Holder,  use its best  efforts  to  deliver  Underlying  Shares
hereunder  electronically  through  The  Depository  Trust  Company  or  another
established clearing corporation performing similar functions.

                      (ii) To effect conversions hereunder, the Holder shall not
be  required  to  physically  surrender  this  Debenture  unless  the  aggregate
principal  amount  represented  by such Debenture is being  converted,  in which
event, the Holder shall deliver such Debenture promptly to the Company (it being
understood  that such  delivery is not a condition  precedent  to the  Company's
obligations  to deliver  Underlying  Shares upon such  conversion).  Conversions
hereunder  shall have the effect of lowering the  outstanding  principal  amount
represented by such  Debenture in an amount equal to the applicable  conversion,
which  shall be  evidenced  by  entries  set  forth in the  Conversion  Schedule
attached as Schedule I, which will be maintained by the Company and the Holder.

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

                      (iv) If  by the third  Trading Day after a Conversion Date
the  Company  fails to  deliver  to the Holder  such  Underlying  Shares in such
amounts and in the manner  required  pursuant to Section  5(a),  then the Holder
will have the right to rescind such conversion.

                                     - 12 -
<PAGE>

                      (v) If by the third  Trading Day  after  a Conversion Date
the  Company  fails to  deliver  to the Holder  such  Underlying  Shares in such
amounts and in the manner  required  pursuant to this Section 5(c), and if after
such third Trading Day the Holder  purchases (in an open market  transaction  or
otherwise)  shares of Common Stock to deliver in  satisfaction of a sale by such
Holder of the Underlying Shares which the Holder anticipated receiving upon such
conversion (a "BUY-IN"),  then the Company shall:  (A) pay in cash to the Holder
(in addition to any  remedies  available to or elected by the Holder) the amount
by which (x) the Holder's total purchase price (including brokerage commissions,
if any) for the  shares of Common  Stock so  purchased  exceeds  (y) the  amount
obtained by multiplying (1) the aggregate  number of Underlying  Shares that the
Company was required to deliver to the Holder in connection  with the conversion
at issue by (2) the Closing Price at the time of the  obligation  giving rise to
such purchase  obligation and (B) at the option of the Holder,  either reinstate
the principal  amount of Debentures and equivalent  number of Underlying  Shares
for which such  conversion  was not timely  honored or deliver to the Holder the
number of shares of Common  Stock that would  have been  issued had the  Company
timely  complied with its conversion  and delivery  obligations  hereunder.  For
example,  if the Holder purchases shares of Common Stock having a total purchase
price of $11,000 to cover a Buy-In with  respect to an attempted  conversion  of
Debentures with a market price on the date of conversion totaling $10,000, under
clause (A) of the immediately preceding sentence,  the Company shall be required
to pay the Holder  $1,000.  The Holder shall provide the Company  written notice
indicating the amounts payable to the Holder in respect of the Buy-In.

                  (d) Adjustments to Conversion  Price.  The Conversion Price in
effect from time to time shall be subject to adjustment in accordance  with this
Section 5(d):

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

                      (ii) Additional Distributions. If the Company, at any time
while any Debentures are outstanding,  shall distribute to all holders of shares
of Common Stock (and not to Holders)  evidences of its indebtedness or assets or
rights or warrants to subscribe for or purchase any security,  then in each such
case the  Conversion  Price at which the principal  amount of  Debentures  shall
thereafter be  convertible  shall be determined by  multiplying  the  Conversion
Price in effect  immediately prior to the record date fixed for determination of
stockholders  entitled to receive such  distribution  by a fraction of which the
denominator  shall  be  the  Closing  Price  determined  as of the  record  date
mentioned  above, and of which the numerator shall be such Closing Price on such

                                     - 13 -
<PAGE>

record date less the then fair  market  value at such record date of the portion
of such assets or evidence of  indebtedness  so  distributed  applicable  to one
outstanding  share of Common  Stock as  determined  by the Board of Directors in
good faith.  In either case the  adjustments  shall be  described in a statement
provided to the Holders of the portion of assets or evidences of indebtedness so
distributed or such subscription rights applicable to one share of Common Stock.
Such adjustment  shall be made whenever any such  distribution is made and shall
become effective immediately after the record date mentioned above.

                      (iii) Calculations. All calculations under this  Section 5
shall be made to the nearest cent or the nearest 1/100th of a share, as the case
may be. The number of shares of Common Stock outstanding at any given time shall
not include  shares owned or held by or for the account of the Company,  and the
disposition  of any such shares shall be  considered  an issue or sale of Common
Stock.

                      (iv) Notice of Adjustments. Whenever  the Conversion Price
is adjusted pursuant to the terms hereof the Company shall promptly mail to each
Holder,  a notice setting forth the Conversion  Price after such  adjustment and
setting forth a brief statement of the facts requiring such adjustment.

                  (e)  Certain   Fundamental   Transactions.   In  case  of  any
Fundamental  Transaction,  a  Holder  shall  have  the  right  to do  any of the
following:  (1)  convert  its  Debentures  into the  shares  of stock  and other
securities, cash and property receivable upon or deemed to be held by holders of
shares of Common Stock  following such  Fundamental  Transaction and such Holder
shall be entitled upon such  Fundamental  Transaction  to receive such amount of
securities,  cash and  property  as the  shares of Common  Stock into which such
Debentures  could  have been  converted  immediately  prior to such  Fundamental
Transaction would have been entitled,  or (2)(x) require the surviving entity to
issue  debentures in such principal  amount equal to the principal amount of the
Debentures held by such Holder prior to such Fundamental  Transaction,  plus all
other amounts owing thereon,  which newly issued debentures shall have identical
terms to the terms of the  Debentures and shall be entitled to all of the rights
and privileges of a Holder set forth herein and the agreements pursuant to which
the  prepayment  was issued,  and (y)  simultaneously  with the issuance of such
convertible  debentures  shall have the right to convert  such  shares only into
shares of stock and  other  securities,  cash and  property  receivable  upon or
deemed  to be  held  by  holders  of  shares  of  Common  Stock  following  such
Fundamental  Transaction  (the conversion  price applicable for the newly issued
convertible  debentures  shall be based upon the amount of securities,  cash and
property  that each share of Common  Stock  would  receive  in such  Fundamental
Transaction  and the  Conversion  Price  stated  herein) or (3) at the  Holder's
option and request,  any  successor  to the Company or surviving  entity in such
Fundamental  Transaction  shall  either pay to the Holder the greater of (A) the
outstanding  principal  amount of the  Debentures  held by such  Holder plus all
accrued  and  unpaid  interest  thereon,  and (B) the  principal  amount  of the
Debenture  held by such Holder,  plus all accrued and unpaid  interest  thereon,
divided by the Conversion Price on the Trading Day immediately preceding (x) the
date of prior to such  Fundamental  Transaction  or (y) the date the  amount set
forth in this  section is paid in full,  whichever  is less,  multiplied  by the
Closing Price on (x) the date of the Fundamental Transaction or (y) the date the
amount set forth in this  section is paid in full,  whichever  is  greater.  Any
Fundamental  Transaction  shall  include  such terms so as  continue to give the
Holders the right to receive the securities, cash and

                                     - 14 -
<PAGE>

property set forth in this Section upon any  conversion or redemption  following
such event.  This provision shall similarly apply to successive such Fundamental
Transactions. The rights set forth herein shall not alter the rights of a Holder
set forth elsewhere in this Debenture; provided, that a Holder may only exercise
the rights set forth  herein with  respect to a single event giving rise to such
rights.

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

                  (g)  Notice of  Corporate  Events.  If (a) the  Company  shall
declare a dividend  (or any other  distribution)  on the Common  Stock,  (b) the
Company shall declare a special nonrecurring cash dividend on or a redemption of
the Common Stock, (c) the Company shall authorize the granting to all holders of
Common  Stock  rights or warrants  to  subscribe  for or purchase  any shares of
capital  stock  of  any  class  or of  any  rights,  (d)  the  approval  of  any
stockholders of the Company shall be required in connection with any Fundamental
Transaction,  or (e) the Company shall  authorize  the voluntary or  involuntary
dissolution,  liquidation or winding up of the affairs of the Company,  then the
Company  shall file a press  release or Current  Report on Form 8-K to  disclose
such  occurrence  and notify the Holders at their last  addresses  as they shall
appear upon the stock books of the Company,  at least 20 calendar  days prior to
the applicable record or effective date hereinafter  specified, a notice stating
(x) the date on which a record is to be taken for the purpose of such  dividend,
distribution, redemption, rights or warrants, or if a record is not to be taken,
the date as of which the  holders of Common  Stock of record to be  entitled  to
such  dividend,  distributions,   redemption,  rights  or  warrants  are  to  be
determined or (y) the date on which any such Fundamental Transaction is expected
to become  effective  or  close,  and the date as of which it is  expected  that
holders of Common  Stock of record  shall be entitled to exchange  their  Common
Stock  for  securities,  cash  or  other  property  deliverable  upon  any  such
Fundamental Transaction.

                  (h) Reservation of Common Stock. The Company covenants that it
will at all times reserve and keep  available out of its authorized and unissued
shares of Common Stock  solely for the purpose of issuance  upon  conversion  of
Debentures,  each as herein provided,  free from preemptive  rights or any other
actual  contingent  purchase rights of persons other than the Holders,  not less
than  such  number  of shares  of  Common  Stock as shall be  issuable  upon the
conversion  of all  outstanding  principal  amount of  Debentures.  The  Company
covenants that all shares of Common Stock that shall be so issuable shall,  upon
issue,   be  duly  and  validly   authorized  and  issued  and  fully  paid  and
nonassessable.

                                     - 15 -
<PAGE>

                  (i) Fractional Shares. Upon a conversion hereunder the Company
shall not be required  to issue stock  certificates  representing  fractions  of
shares of Common Stock, but may if otherwise  permitted,  make a cash payment in
respect  of any final  fraction  of a share  based on the  Closing  Price on the
applicable Conversion Date. If any fraction of an Underlying Share would, except
for the provisions of this Section, be issuable upon a conversion hereunder, the
Company shall pay an amount in cash equal to the Conversion  Price multiplied by
such fraction.

                  (j) Stamp Taxes. The issuance of certificates for Common Stock
on conversion of principal amount of this Debenture shall be made without charge
to the Holders  thereof for any  documentary  stamp or similar taxes that may be
payable in respect of the issue or delivery of such  certificate,  provided that
the Company  shall not be required to pay any tax that may be payable in respect
of any transfer  involved in the  issuance and delivery of any such  certificate
upon  conversion  in a name other than that of the Holder of such  Debentures so
converted.

                  (k) Notices.  Any and all notices or other  communications  or
deliveries to be provided by the Holders,  including,  without  limitation,  any
Holder  Conversion  Notice,  shall be in writing and  delivered  personally,  by
facsimile  or  sent  by  a  nationally  recognized  overnight  courier  service,
addressed  to the  attention  of the  Chief  Executive  Officer  of the  Company
addressed to Arotech Corporation,  632 Broadway, Suite 1200, New York, NY 10012,
fax:  (646)  654-2187,  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,  Attn.:  General Counsel,  or to such other address or
facsimile  number as shall be  specified  in  writing  by the  Company  for such
purpose.  Any and all  notices  or  other  communications  or  deliveries  to be
provided by the Company hereunder shall be in writing and delivered  personally,
by facsimile  or sent by a  nationally  recognized  overnight  courier  service,
addressed to each Holder at the  facsimile  telephone  number or address of such
Holder appearing on the books of the Company,  or if no such facsimile telephone
number or address appears, at the principal place of business of the Holder. Any
notice or other communication or deliveries  hereunder shall be deemed given and
effective  on the  earliest of (i) the date of  transmission,  if such notice or
communication  is delivered  via  facsimile at the  facsimile  telephone  number
specified  in this  Section  prior  to  6:30  p.m.  (New  York  City  time)(with
confirmation of transmission),  (ii) the date after the date of transmission, if
such  notice or  communication  is  delivered  via  facsimile  at the  facsimile
telephone  number  specified in this Section later than 6:30 p.m. (New York City
time) on any date and earlier than 11:59 p.m.  (New York City time) on such date
(with confirmation of transmission), (iii) upon receipt, if sent by a nationally
recognized  overnight courier service,  or (iv) upon actual receipt by the party
to whom such notice is required to be given.

         [INSERT  IN  ADDITIONAL  DEBENTURES  ONLY:  (l) This  Debenture  Deemed
Outstanding.  If during  the  period  beginning  on and  including  the  Initial
Issuance Date and ending on the date  immediately  preceding the Original  Issue
Date, the Company  entered into, or in accordance with this Section 5 would have
been deemed to have entered into (had this  Debenture  been  outstanding at such
time),  any of the events set forth in this  Section 5, then solely for purposes
of determining any adjustment or rights under this Section 5 as a result of such
event or deemed event,  this Debenture shall be deemed to have been  outstanding
at the time of each such event or deemed event.]

                                     - 16 -
<PAGE>

         6. Prepayment.

                  (a) Upon Event of Default.  Upon the  occurrence of a Event of
Default,  each  Holder  shall  (in  addition  to all  other  rights  it may have
hereunder or under  applicable  law),  have the right,  exercisable  at the sole
option of such  Holder,  and by delivery  of a written  notice to the Company to
require the Company (an "EVENT OF DEFAULT NOTICE") to prepay all or a portion of
the Debentures then held by such Holder and, at the option of the Holder, all or
a portion of the  Reinstated  Principal,  for an amount,  in cash,  equal to the
Mandatory  Prepayment Amount.  The Mandatory  Prepayment Amount shall be due and
payable within five Trading Days of the date of the Event of Default Notice. For
purposes of this Section,  any principal amount of Debentures shall be deemed to
be  outstanding  until such date as the Holder  shall have  received  Underlying
Shares  upon a  conversion  (or  attempted  conversion)  thereof  that meets the
requirements hereof.  Notwithstanding  anything herein to the contrary, upon the
occurrence  of a Bankruptcy  Event,  all  outstanding  principal and accrued but
unpaid  interest on this Debenture shall  immediately  become due and payable in
full in cash,  without any further  action by the Holder,  and the Company shall
immediately be obligated to pay the Mandatory Prepayment Amount pursuant to this
paragraph as if the Holder had delivered a Event of Default  Notice  immediately
prior to the  occurrence  of any such  Event of  Default.  The  Holder  need not
provide and the Company hereby waives any presentment,  demand, protest or other
notice of any kind, and the Holder may immediately and without expiration of any
grace period  enforce any and all of its rights and remedies  hereunder  and all
other remedies  available to it under  applicable  law. Such  declaration may be
rescinded and annulled by Holder at any time prior to payment hereunder. No such
rescission or annulment  shall affect any subsequent  Event of Default or impair
any right consequent thereon.

                  (b) At Company's  Option.  At any time after the date which is
15 months after the applicable  Effective Date, the Company may deliver a notice
to the Holder  (an  "OPTIONAL  PREPAYMENT  NOTICE"  and the date such  notice is
received  by  the  Holder,  the  "OPTIONAL   PREPAYMENT  NOTICE  DATE")  of  its
irrevocable election to prepay all, or any portion, of the then aggregate amount
outstanding  under  this  Debenture  (such  elected   prepayment   amount,   the
"PREPAYMENT  AMOUNT"),  for an amount, in cash, equal to the Company  Redemption
Price. The Company Redemption Price payable pursuant to this Section 6(b) is due
in full on the tenth Trading Day following the Optional  Prepayment  Notice Date
(the  "OPTIONAL  PREPAYMENT  DATE").  The Company  may only  deliver an Optional
Prepayment Notice, and the optional prepayment  thereunder may only occur on the
Optional  Prepayment  Date,  if each of the  following  shall be  true:  (i) the
Company shall have duly honored all  conversions  and  redemptions  scheduled to
occur or  occurring  by virtue of one or more  Conversion  Notices  prior to the
Optional  Prepayment  Notice Date and the  Optional  Prepayment  Date,  (ii) the
Equity  Conditions  shall have been  satisfied  at all times  from the  Optional
Prepayment  Notice Date to the Optional  Prepayment Date, and (iii) prior to the
Optional  Prepayment  Notice  Date (A) the VWAP shall  equal or exceed  $1.75/1/
(subject to adjustment for any stock dividend, stock split, stock combination or
other  similar  transaction  which occur after the  Initial  Issuance  Date) for
twenty (20) trading days in any thirty (30) consecutive trading period occurring
after the fifteen month anniversary of the applicable Effective Date, (B) the

--------
/1/   In the case of Additional Debentures, $1.95.

                                     - 17 -
<PAGE>

volume in number of shares  traded  on  fifteen  (15)  trading  days out of such
twenty (20)  trading  period  referred to in Clause (A) is greater  than 250,000
(excluding  block trades of 20,000  shares or more),  and (C) during such twenty
(20) days the applicable Registration Statement shall have been effective at all
times  and  there  shall  not have  been any  Event of  Defaults.  If any of the
foregoing conditions shall cease to be satisfied at any time during the required
period, or if the Company shall fail to pay the Company Redemption Price in full
on the Optional  Prepayment Date, then the Optional  Prepayment  Notice shall be
null and void,  ab  initio,  and the  Company  may not  deliver  any  subsequent
Optional  Prepayment  Notices.  The  Holder  may  convert  any  portion  of this
Debenture  prior to the Optional  Prepayment  Date.  The Company  covenants  and
agrees  that it will  honor all  Conversion  Notices  tendered  from the time of
delivery of the Optional Prepayment Notice through the Optional Prepayment Date.

                  (c) Pro Rata Prepayment Requirement.  If the Company elects to
cause a prepayment of all or any portion of this  Debenture  pursuant to Section
6(b),  then it must  simultaneously  take the similar action with respect to all
Debentures and the Prepayment Amount for each holder of Debentures must be equal
to such holder's Prepayment Allocation Percentage multiplied by the aggregate of
all Prepayment  Amounts which the Company  elects to prepay  pursuant to Section
6(b) of all Debentures. The "PREPAYMENT ALLOCATION PERCENTAGE" for any holder of
Debentures shall mean a fraction, the numerator of which is the principal amount
of the  Debentures  initially  purchased by such holder on the Initial  Issuance
Date and the denominator of which is the sum of the aggregate  principal  amount
of all Debentures  purchased by all holders on the Initial Issuance Date. In the
event that the initial holder of any Debentures shall sell or otherwise transfer
any of such holder's  Debentures,  the transferee  shall be allocated a pro rata
portion  of  such  holder's  Prepayment  Allocation  Percentage.   The  Optional
Prepayment  Notice  shall  state (I) the  aggregate  Prepayment  Amounts  of all
Debentures  which the  Company  has elected to prepay from all of the holders of
the Debentures pursuant to Section 6(b) and (II) each holder's Prepayment Amount
that the Company has elected to prepay pursuant to Section 6(b).

         7. Ranking.  This Debenture ranks junior to the Outstanding  Debentures
and pari passu to all other  Debentures now or hereafter  issued pursuant to the
Transaction Documents.  Other than as set forth in Section 8, no Indebtedness of
the  Company  is senior to this  Debenture  in right of  payment,  whether  with
respect of interest, damages or upon Liquidation or dissolution or otherwise.

         8. Secured  Obligations.  The payment  obligations under this Debenture
are secured pursuant to the Security Agreements.  This Debenture will be secured
by (i) a first priority,  perfected  security interest in the stock of MDT Armor
Corporation  and any future assets acquired by or on behalf of the Company in an
Acquisition  (as defined in the  Security  Agreements),  (ii) a second  priority
security interest in the assets of IES Interactive  Training,  Inc. and stock of
other subsidiaries  directly or indirectly owned by the Company (other than that
of IES  Interactive  Training,  Inc.  and M.D.T.  Protective  Industries  Ltd.),
subordinate only to the security interest in favor of the holders of Outstanding
Debentures and (iii) a third priority  security  interest in the stock of M.D.T.
Protective  Industries Ltd., IES Interactive  Training,  Inc. and I.E.S. Defense
Services,  Inc.,  subordinate  only to the  security  interest  in  favor of the

                                     - 18 -
<PAGE>

holders  of  Outstanding  Debentures  and the  security  interest  in favor  IES
Electronics pursuant to the IES Security Agreement.

         9. Restricted  Actions.  The Company shall not and shall not permit any
of its  Subsidiaries  to take any  Restricted  Action  without the prior written
consent of the holders of the Debentures.

         10. Miscellaneous.

                  (a) This  Debenture  shall be binding on the  Company  and its
successors  and assigns  and inure to the  benefit of the Holder  hereto and its
respective successors and assigns. This Debenture may be amended only in writing
signed by the Company and the Holder and their successors and assigns.

                  (b) Nothing in this  Debenture  shall be  construed to give to
any Person other than the Company and the Holder any legal or  equitable  right,
remedy or cause under this Debenture.

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

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

                  (e)  In  case  any  one or  more  of the  provisions  of  this
Debenture  shall be invalid or  unenforceable  in any respect,  the validity and
enforceability of the remaining terms and provisions of this Debenture shall not
in any way be affected or impaired  thereby and the parties will attempt in good
faith  to  agree  upon a  valid  and  enforceable  provision  which  shall  be a

                                     - 19 -
<PAGE>

commercially  reasonable  substitute  therefor,  and  upon  so  agreeing,  shall
incorporate such substitute provision in this Debenture.

                  (f) No  provision of this  Debenture  may be waived or amended
except in a  written  instrument  signed,  in the case of an  amendment,  by the
Company and the Holder or, or, in the case of a waiver, by the Holder. No waiver
of any default with respect to any  provision,  condition or requirement of this
Debenture shall be deemed to be a continuing waiver in the future or a waiver of
any  subsequent  default  or a  waiver  of any  other  provision,  condition  or
requirement  hereof, nor shall any delay or omission of either party to exercise
any right hereunder in any manner impair the exercise of any such right.

                  (g) If it shall be found that any interest due hereunder shall
violate  applicable  laws governing  usury,  the applicable rate of interest due
hereunder shall be reduced to the maximum  permitted rate of interest under such
law.

                  (h)  Except  pursuant  to the  terms  of this  Debenture,  the
outstanding  principal  amount  and  interest  under this  Debenture  may not be
prepaid by the Company without the prior written consent of the Holder.

                   [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK
                             SIGNATURE PAGE FOLLOWS]

                                     - 20 -
<PAGE>

         IN WITNESS  WHEREOF,  the Company has caused this  Debenture to be duly
executed by a duly authorized officer as of the Original Issue Date.

                                    AROTECH CORPORATION

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

                                     - 21 -
<PAGE>

                                    EXHIBIT A

                               AROTECH CORPORATION
                                CONVERSION NOTICE

 TO BE EXECUTED BY THE REGISTERED HOLDER TO CONVERT THIS NOTE INTO COMMON STOCK

         Reference  is  made  to  the  8%  Secured  Convertible  Debenture  (the
"DEBENTURE")  issued to the undersigned by Arotech  Corporation (the "COMPANY").
In accordance with and pursuant to the Debenture,  the undersigned hereby elects
to convert the principal of the Debenture  indicated below into shares of common
stock,  par value $.01 per share, of the Company (the "COMPANY COMMON STOCK") as
of the date specified below.

         Date of Conversion:
                            ----------------------------------------------------

         Aggregate Principal Amount to be converted:

Please confirm the following information:

         Conversion Price:
                          ------------------------------------------------------

         Number of shares of Company Common Stock to be issued:

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

         Issue to:
                  --------------------------------------------------------------

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

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

         Facsimile Number:
                          ------------------------------------------------------

         Authorization:
                       ---------------------------------------------------------

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

Dated:
      --------------------------------------------------------------------------

         Account Number:
                        --------------------------------------------------------
           (if electronic book entry transfer)

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

<PAGE>

                                   SCHEDULE 1

                               CONVERSION SCHEDULE

         8% Secured  Convertible  Debenture,  due  September  30,  2006,  in the
         aggregate  principal amount of $_______ issued by Arotech  Corporation.
         This  Conversion  Schedule  reflects  conversions  made under the above
         referenced Debenture.

         Dated: September 30, 2003

<TABLE>
<CAPTION>
---------------------------- ---------------------------- --------------------- ---------------------- --------------------
Date of Conversion           Amount of Conversion         Aggregate Principal   Applicable             Mandatory
                                                          Amount Remaining      Conversion Price       Prepayment Amount
                                                          Subsequent to
                                                          Conversion
---------------------------- ---------------------------- --------------------- ---------------------- --------------------
<S>                          <C>                          <C>                   <C>                    <C>

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

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

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

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

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

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

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

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

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

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

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

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

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

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

---------------------------- ---------------------------- --------------------- ---------------------- --------------------
</TABLE>

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