Exhibit 4.1





THIS DEBENTURE AND THE
SECURITIES ISSUABLE UPON CONVERSION OF THIS DEBENTURE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”), OR ANY STATE
SECURITIES LAW, AND MAY NOT BE OFFERED FOR SALE OR SOLD UNLESS A REGISTRATION STATEMENT
UNDER SUCH ACT AND APPLICABLE STATE SECURITIES LAWS SHALL BE EFFECTIVE WITH RESPECT
THERETO, OR AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT AND APPLICABLE STATE
SECURITIES LAWS IS AVAILABLE IN CONNECTION WITH SUCH OFFER OR SALE. 



THIS DEBENTURE DOES NOT REQUIRE
PHYSICAL SURRENDER HEREOF IN THE EVENT OF A PARTIAL PAYMENT, REDEMPTION OR CONVERSION.
ACCORDINGLY, THE OUTSTANDING PRINCIPAL AMOUNT OF THIS DEBENTURE MAY BE LESS THAN THE
PRINCIPAL AMOUNT INDICATED BELOW. 




ENER1, INC. 




5% SENIOR SECURED
CONVERTIBLE DEBENTURE 




New York, New York             
                          
                   
                    
                      
               
$____________Issue 
Date: __________________ 



        FOR
VALUE RECEIVED, ENER1, INC., a Florida corporation (the
“Corporation”), hereby promises to pay to the order of __________________
or its permitted successors or assigns (the “Holder”) the sum of
__________________ ($_______________) in same day funds, on or before [the five-year
anniversary of the Issue Date] (the “Maturity Date”). The
Holder may convert amounts of principal of this Debenture into shares (“Conversion
Shares”) of the Corporation’s common stock, par value $.01 per share (the
“Common Stock”), on the terms and subject to the conditions set forth
herein. 



        The
Corporation has issued this Debenture pursuant to a Securities Purchase Agreement, dated
as of January 16, 2004 (the “Securities Purchase Agreement”). The
debentures issued by the Corporation pursuant to the Securities Purchase Agreement,
including this Debenture, are collectively referred to herein as the
“Debentures”, and the warrants issued by the Corporation pursuant to the
Securities Purchase Agreement are collectively referred to herein as the
“Warrants”. 



        The
Corporation’s obligations under the Debentures, including without limitation its
obligation to make payments of principal thereof and interest thereon, are guaranteed by
the Corporation’s wholly-owned subsidiary, Ener1 Battery Company (the
“Mortgagor”), pursuant to a Subsidiary Guarantee Agreement between the
Mortgagor and each Investor (the “Subsidiary Guarantee”). The obligations
of the Mortgagor under the Subsidiary Guarantee are secured pursuant to the terms of a
Mortgage, Security Agreement and Assignment of Leases and Rents by the Mortgagor in favor
of each Investor (the “Mortgage”) and a Security Agreement between the
Corporation and each Investor (the “Security Agreement”). 


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        The
following terms shall apply to this Debenture: 




1.    DEFINITIONS. 



        “Applicable
Interest Rate” means five percent (5%) per annum, provided that if all Milestones
(as defined below) are not satisfied concurrently (i) on or before the one hundred and
eightieth (180th) day following the Issue Date, the Applicable Interest Rate shall be
increased to seven and one-half percent (7.5%) per annum and (ii) on or before the three
hundred and sixty fifth (365th) day following the Issue Date, the Applicable
Interest Rate shall be increased to fifteen percent (15%) per annum; provided,
however, that if the Applicable Interest Rate increases pursuant to clause (i) or
(ii) above, and subsequent thereto all of the Milestones are satisfied concurrently for a
period of at least forty five (45) consecutive calendar days, the Applicable Interest
shall be five percent (5%) per annum for all periods thereafter. 



        “Business
Day” means any day other than a Saturday, a Sunday or a day on which the New York
Stock Exchange is closed or on which banks are authorized by law to close in New York, New
York. 



        “Closing
Bid Price” shall mean, for the Common Stock as of any date, the closing bid price
on such date for the Common Stock on the Principal Market as reported by Bloomberg
Financial Markets (“Bloomberg”), or if the Principal Market begins to
operate on an extended hours basis, and does not designate the closing bid price, then the
last bid price at 4:00 p.m. (eastern time), as reported by Bloomberg, or if the foregoing
do not apply, the last closing bid price of the Common Stock in the over-the-counter
market on the electronic bulletin board for such security as reported by Bloomberg, or, if
no closing bid price is reported for such security by Bloomberg, the last closing trade
price for such security as reported by Bloomberg, or, if no last closing trade price is
reported for such security by Bloomberg, the average of the bid prices of any market
makers for such security as reported in the “pink sheets” by Pink Sheets LLC
(formerly the National Quotation Bureau, Inc.). If the Closing Bid Price cannot be
calculated for the Common Stock on such date on any of the foregoing bases, then the
Corporation shall submit such calculation to an independent investment banking firm of
national reputation, and shall cause such investment banking firm to perform such
determination and notify the Corporation and the Holder of the results of determination no
later than two (2) Business Days from the time such calculation was submitted to it by the
Corporation. Such investment banking firm’s determination shall be deemed conclusive
absent manifest error. All such determinations shall be appropriately adjusted for any
stock dividend, stock split or other similar transaction during such period. 


        “"Continuing Director"
means at any date a member of the Corporation's Board of Directors (i) who was a member of
such board on the date of the Securities Purchase Agreement or (ii) who was nominated or
elected by at least a majority of the directors who were Continuing Directors at the time
of such nomination or election or whose election to the Corporation’s Board of
Directors was recommended or endorsed by at least a majority of the directors who were
Continuing Directors at the time of such nomination or election or such lesser number
comprising a majority of a nominating committee if authority for such nominations or
elections has been delegated to a nominating committee whose authority and composition
have been approved by at least a majority of the directors who were continuing directors
at the time such committee was formed. 


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        “Conversion
Price” means the lesser of (i) ninety percent (90%) of the Market Price in effect on
the Issue Date and (ii) $1.25 (in each such case subject to adjustment as provided
herein). The initial Conversion Price is $1.25, subject to adjustment as provided herein. 


        “"Debt" means as to any
Person at any time: (a) all indebtedness, liabilities and obligations of such Person for
borrowed money; (b) all indebtedness, liabilities and obligations of such Person to pay
the deferred purchase price of Property or services, except trade accounts payable of such
Person arising in the ordinary course of business that are not past due by more than 90
days; (c) all capital lease obligations of such Person; (d) all Debt of others guaranteed
by such Person; (e) all indebtedness, liabilities and obligations secured by a Lien (other
than a Permitted Lien) existing on Property owned by such Person, whether or not the
indebtedness, liabilities or obligations secured thereby have been assumed by such Person
or are non-recourse to such Person; (f) all reimbursement obligations of such Person
(whether contingent or otherwise) in respect of letters of credit, bankers’
acceptances, surety or other bonds and similar instruments; and (g) all liabilities and
obligations of such Person to redeem or retire shares of capital stock of such Person
(other than the Corporation’s obligation to redeem the Securities under the
circumstances specified therein). Debt shall not include any liability for (i) federal,
state, local or other taxes imposed by a Governmental Authority, (ii) endorsements of
negotiable instruments for deposit or collection or similar transactions in the ordinary
course of business or (iii) any indebtedness that has been fully and finally defeased in
accordance with the terms of the documents governing such indebtedness.



        “Default
Interest Rate” means the lower of fifteen (15%) and the maximum rate permitted by
applicable law or by the applicable rules or regulations of any governmental agency or of
any stock exchange or other self-regulatory organization having jurisdiction over the
Corporation or the trading of its securities. 



        “Effective
Date” has the meaning set forth in the Registration Rights Agreement. 


        “"Fundamental Change"
means the existence or occurrence of any of the following: (a) the sale, conveyance or disposition
of all or substantially all of the assets of the Corporation; (b) the effectuation of a
transaction or series of transactions in which more than fifty percent (50%) of the voting
power of the Corporation is disposed of, other than dispositions of Common Stock by Ener1
Group, Inc. through open market transactions or sales pursuant to Rule 144, as long as (i)
the purchaser of such stock has not been solicited, directly or indirectly, in connection
with such transaction and (ii) no such purchaser is, immediately following such
transaction or series of transactions, the beneficial owner of greater than five percent
(5%) of the Common Stock; (c) the consolidation, merger or other business combination of
the Corporation with or into any other entity, immediately following which the prior
stockholders of the Corporation fail to own, directly or indirectly, at least fifty
percent (50%) of the surviving entity; (d) a transaction or series of transactions in
which any Person or group acquires more than fifty percent (50%) of the voting equity of
the Corporation (other than Ener1 Group, Inc. or a wholly-owned Subsidiary of the
Corporation); (e) a transaction or series of transactions in which any Person (other than
the Corporation or a wholly-owned Subsidiary of the Corporation) or group acquires any
capital stock of the Mortgagor; and (f) Continuing Directors do not at any time
constitute at least a majority of the Board of Directors of the Corporation; provided that
a Fundamental Change shall not be deemed to have occurred if at least ninety percent (90%)
of the consideration (excluding cash payments for fractional shares) in the transaction or
transactions constituting the Fundamental Change consists of (and the capital stock into
which the Debentures would be convertible consists of) shares of capital stock that are,
or upon issuance will be, listed on the New York Stock Exchange or approved for trading on
the Nasdaq National Market System. 


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        "Governmental Authority"
 means any nation or government, any state, provincial orpolitical subdivision thereof and any
entity exercising executive, legislative, judicial, regulatory or administrative functions
of or pertaining to government, including without limitation any stock exchange,
securities market or self-regulatory organization. 



        "Issue
Date" means the date on which this Debenture is issued pursuant to the Securities Purchase Agreement. 


        "Junior Securities"
means all securities of the Corporation, other than the Debentures, issued and outstanding at
any time. 


       "Lien" and "Permitted Lien"
shall have the respective meanings set forth in the Securities Purchase Agreement. 



        "Liquidation
Event" has the meaning specified in Section 7 hereof. 



        "Major
Transaction" means a merger, consolidation, business combination, tender offer,
exchange of shares, recapitalization, reorganization, redemption or other similar event,
as a result of which shares of Common Stock shall be changed into the same or a different
number of shares of the same or another class or classes of stock or securities or other
assets of the Corporation or another entity or the Corporation shall sell all or
substantially all of its assets. 


        "Market Price" means, as
of a particular date, the lesser of (i) the average of the Closing Bid Prices for the Common
Stock occurring during the ten (10) Trading Day period ending on (and including) the
Trading Day immediately preceding such date and (ii) the Closing Bid Price on the Trading
Day immediately preceding such date. 



        “Milestone”
means each of the following events: 



          		    (i)       
               the Registration Statement shall have been declared effective and shall be
               available to the Holder, and shall cover the number of Registrable Securities
               required by the Registration Rights Agreement; provided, however, that if the
               Corporation is no longer required to maintain the effectiveness of the
               Registration Statement pursuant to the Registration Rights Agreement, the event
               described in this clause (i) shall no longer constitute a “Milestone”; 



               



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          		    (ii)       
               the Common Stock shall be listed on the Nasdaq National Market, the Nasdaq
               SmallCap Market or the New York Stock Exchange and trading in the Common Stock
               on such market or exchange shall not have been suspended; 



               



          		    (iii)       
               an Event of Default (as defined below), or an event that with the passage of
               time or giving of notice, or both, would constitute an Event of Default, shall
               not have occurred and be continuing; and 



               



          		    (iv)       
               the Closing Bid Price shall be greater than $1.75 (subject to adjustment for
               stock splits, stock dividends and similar events). 



               


        “Person” means any individual, corporation, trust, association, company, partnership,
joint venture, limited liability
company, joint stock company, Governmental Authority or other entity. 



        “Principal
Market” means the principal securities exchange or market on which the Common
Stock is listed or traded. 



        “Real
Property” has the meaning specified in the Securities Purchase Agreement. 


        “Registrable Securities”
has the meaning set forth in the Registration Rights Agreement. 


        “Registration Rights Agreement"” means the agreement, dated as of January 16 2004,
between the Holder and the Corporation pursuant to which the Corporation has agreed to register the
shares of Common Stock issuable under the Debentures and the Warrants. 


        “Registration Statement” has the meaning set forth in the Registration Rights
Agreement. 




     “Scheduled
Interest Payment Date” means each March 31, June 30, September 30, and December 31 following the
Issue Date, with the first Scheduled Interest Payment Date occurring on March 31, 2004, provided, that
if any of such days in any year is not a Business Day, then the Scheduled Interest Payment
Date shall be the Business Day immediately following such date. 



        “Trading
Day” means any day on which the Common Stock is purchased and sold on the Principal Market. 



        All
definitions contained in this Debenture are equally applicable to the singular and plural
forms of the terms defined. The words “hereof”, “herein” and
“hereunder” and words of similar import referring to this Debenture refer to
this Debenture as a whole and not to any particular provision of this Debenture. Any
capitalized term that is not defined herein shall have the meaning specified in the
Securities Purchase Agreement. 


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2.   INTEREST. 



         (a)       
          Interest Accrual. This Debenture shall bear interest on the unpaid
          principal amount hereof (“Interest”) at an annual rate equal to
          the Applicable Interest Rate in effect from time to time, computed on the basis
          of a 360-day year and calculated using the actual number of days elapsed since
          the Issue Date or the day on which Interest was most recently paid, as the case
          may be, and if not timely paid as provided herein, compounded quarterly on each
          Scheduled Interest Payment Date. The Corporation shall pay accrued and unpaid
          Interest in cash (i) on each Scheduled Interest Payment Date, (ii) on the
          Maturity Date and (iii) on any date on which the entire principal amount of this
          Debenture is paid in full (whether through conversion or otherwise) (each of
          (i), (ii) and (iii) being referred to herein as an “Interest Payment
          Date”). 



         (b)       
          Default Interest. Any amount of Interest that is not paid on the relevant
          Interest Payment Date shall bear interest at the Default Interest Rate. The
          Corporation must pay interest at the Default Interest Rate in cash on or before
          the fifth (5th) Business Day following the last day of each calendar
          month in which such interest accrues. 




3.    CONVERSION. 



         (a)       
          Right to Convert. Subject to the conditions and limitations specifically
          provided herein or in the Securities Purchase Agreement, the Holder shall have
          the right to convert, at any time and from time to time after the Issue Date,
          (i) all or any part of the outstanding and unpaid principal amount of this
          Debenture and (ii) at the Holder’s option, in its sole discretion, all
          accrued and unpaid Interest hereon, into such number of fully paid and
          non-assessable Conversion Shares as is determined in accordance with the terms
          hereof (a “Conversion”). In the event that the Holder elects to
          convert all or any Interest accrued hereon, the amount of Interest otherwise due
          and payable hereunder shall be reduced by the amount so converted. 



         (b)       
          Conversion Notice. In order to convert principal of (and, if the Holder
          so elects, Interest accrued on) this Debenture, the Holder shall send by
          facsimile transmission, at any time prior to 5:00 p.m., eastern time, on the
          Business Day on which the Holder wishes to effect such Conversion (the
          “Conversion Date”), a properly completed notice of conversion
          to the Corporation, in the form set forth on Annex I hereto, stating the
          amount of principal (and accrued Interest, if applicable) to be converted and a
          calculation of the number of shares of Common Stock issuable upon such
          Conversion (a “Conversion Notice”). The Conversion Notice shall
          also state the name or names (with address) in which the shares of Common Stock
          that are issuable on such conversion shall be issued. If shares are to be issued
          in the name of a person other than the Holder, the Holder will pay all transfer
          taxes payable with respect thereto. The Holder shall not be required to
          physically surrender this Debenture to the Corporation in order to effect a
          Conversion. The Corporation shall maintain a record showing, at any given time,
          the unpaid principal amount of this Debenture and the date of each Conversion or
          other payment of principal hereof. The Holder shall amend Annex II hereto
          upon any such Conversion or payment of principal to reflect the unpaid principal
          amount hereof. In the case of a dispute as to the number of Conversion Shares
          issuable upon a Conversion (including without limitation as a result of
          adjustments to the Conversion Price made in accordance with Section 4 below),
          the Corporation shall promptly issue to the Holder the number of Conversion
          Shares that are not disputed and shall submit the disputed calculations to its
          independent accountants within two (2) Business Days of receipt of the
          Holder’s Conversion Notice. The Corporation shall use its best efforts to
          cause such accountants to calculate the Conversion Price as provided herein and
          to notify the Corporation and the Holder of the results in writing no later than
          two (2) Business Days following the day on which such accountant received the
          disputed calculations (the “Dispute Procedure”). Such
          accountant’s calculation shall be deemed conclusive absent manifest error.
          The fees of any such accountant shall be borne by the party whose calculations
          are most at variance with those of such accountant. 



         (c)       
          Number of Conversion Shares; Conversion Price. The number of Conversion
          Shares to be delivered by the Corporation pursuant to a Conversion shall be
          equal to the principal amount of (and, if the Holder so elects, Interest accrued
          on) this Debenture being converted divided by the Conversion Price. 



6





         (d)       
          Delivery of Common Stock Upon Conversion. Upon receipt of a Conversion
          Notice, the Corporation shall, no later than the close of business on the third
          (3rd) Business Day following the later to occur of (i) the Conversion Date set
          forth in such Conversion Notice and (ii) the date on which the transfer taxes
          specified in paragraph 3(b), if any, are paid in full (the “Delivery
          Date”), issue and deliver or cause to be delivered to the Holder the
          number of Conversion Shares determined pursuant to paragraph 3(c) above,
          provided, however, that any Conversion Shares that are the subject
          of a Dispute Procedure shall be delivered no later than the close of business on
          the third (3rd) Business Day following the determination made pursuant thereto.
          The Corporation shall effect delivery of Conversion Shares to the Holder, as
          long as the Corporation’s designated transfer agent or co-transfer agent in
          the United States for the Common Stock (the “Transfer Agent”)
          participates in the Depository Trust Company (“DTC”) Fast
          Automated Securities Transfer program (“FAST”), by crediting
          the account of the Holder or its nominee at DTC (as specified in the applicable
          Conversion Notice) with the number of Conversion Shares required to be
          delivered, no later than the close of business on such Delivery Date. In the
          event that the Transfer Agent is not a participant in FAST or if the Holder so
          specifies in a Conversion Notice or otherwise in writing on or before the
          Conversion Date, the Corporation shall effect delivery of Conversion Shares by
          delivering to the Holder or its nominee physical certificates representing such
          Conversion Shares, no later than the close of business on such Delivery Date. If
          any Conversion would create a fractional Conversion Share, such fractional
          Conversion Share shall be disregarded and the number of Conversion Shares
          issuable upon such Conversion, in the aggregate, shall be the nearest whole
          number of Conversion Shares. Conversion Shares delivered to the Holder shall not
          contain any restrictive legend unless such legend is required pursuant to the
          terms of the Securities Purchase Agreement. 



         (e)       
          Failure to Deliver Conversion Shares. 



        In
the event that the Corporation fails for any reason to deliver to the Holder the number of
Conversion Shares specified in a Conversion Notice (without any restrictive legend to the
extent permitted by the terms of the Securities Purchase Agreement) on or before the
second (2d) Business Day following the Delivery Date therefor (a “Conversion
Default”), the Holder shall have the right to receive from the Corporation the
greater of the following amounts: 



         (A)       
          an amount equal to (i) (N/365) multiplied by (ii) the principal amount
          of, and any Interest accrued on, this Debenture represented by the Conversion
          Shares which remain the subject of such Conversion Default multiplied by
          (iii) the Default Interest Rate, where “N” equals the number of days
          elapsed between the original Delivery Date of such Conversion Shares and the
          date on which such Conversion Default has been cured; and 


7 






         (B)       
          an amount equal to (i) the aggregate amount paid by the Holder for shares of
          Common Stock purchased by the Holder in order to make delivery on a sale
          effected in anticipation of receiving Conversion Shares upon such Conversion
          minus (ii) the aggregate amount of net proceeds, if any, received by the
          Holder from the sale of the Conversion Shares issued by the Corporation pursuant
          to such Conversion. 



        In
addition to its right to receive the foregoing amounts, the Holder shall have the right to
pursue all other remedies available to it at law or in equity (including, without
limitation, a decree of specific performance and/or injunctive relief). Amounts payable
under this paragraph (e) shall be paid to the Holder in immediately available funds on or
before the fifth (5th) Business Day following written notice from the Holder to the
Corporation specifying the amount owed to it by the Corporation pursuant to this paragraph
(e). 



         (f)       
          Limitations on Right to Convert. In no event shall the Holder be
          permitted to convert principal of or Interest on this Debenture in excess of
          that amount upon the Conversion of which (x) the number of Conversion Shares to
          be issued pursuant to such Conversion plus (y) the number of shares of
          Common Stock beneficially owned by the Holder (other than Common Stock which may
          be deemed beneficially owned except for being subject to a limitation on
          conversion or exercise analogous to the limitation contained in this paragraph
          (f)) would exceed 4.99% of the number of shares of Common Stock then issued and
          outstanding, it being the intent of the Corporation and the Holder that the
          Holder not be deemed at any time to have the power to vote or dispose of greater
          than 4.99% of the number of shares of Common Stock issued and outstanding at any
          time. Nothing contained herein shall be deemed to restrict the right of the
          Holder to convert such excess principal amount at such time as such Conversion
          will not violate the provisions of this paragraph (f). As used herein,
          beneficial ownership shall be determined in accordance with Section 13(d) of the
          Securities Exchange Act of 1934, as amended, and the rules thereunder. To the
          extent that the limitation contained in this paragraph (f) applies (and without
          limiting any rights the Corporation may otherwise have), the Corporation may
          rely on the Holder’s determination of whether this Debenture is convertible
          pursuant to the terms hereof, the Corporation having no obligation whatsoever to
          verify or confirm the accuracy of such determination, and the submission of a
          Conversion Notice by the Holder shall be deemed to be the Holder’s
          representation that this Debenture is convertible pursuant to the terms hereof.
          The Corporation shall have no liability to any person if the Holder’s
          determination of whether this Debenture is convertible pursuant to the terms
          hereof is incorrect. The holders of Common Stock are to be deemed third-party
          beneficiaries of the limitation imposed hereby and, accordingly, this paragraph
          may not be amended without the consent of the holders of a majority of the
          shares of Common Stock then outstanding; provided, however, that the
          Holder shall have the right, upon sixty (60) days’ prior written notice to
          the Corporation, to waive the provisions of this paragraph (f) in the event that
          either a Fundamental Change or Liquidation Event is announced or occurs, without
          obtaining such consent. 


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     4.   
          ADJUSTMENTS TO CONVERSION PRICE. 



         (a)       
          Stock Splits, Stock Dividends, Etc. If, at any time on or after the Issue
          Date, the number of outstanding shares of Common Stock is increased by a stock
          split, stock dividend, combination, reclassification or other similar event, the
          Conversion Price shall be proportionately reduced, or if the number of
          outstanding shares of Common Stock is decreased by a reverse stock split,
          combination, reclassification or other similar event, the Conversion Price shall
          be proportionately increased. In such event, the Corporation shall notify the
          Corporation’s transfer agent of such change on or before the effective date
          thereof. 



         (b)       
          Major Transactions. If, at any time after the Issue Date, any Major
          Transaction shall occur, then the Holder shall thereafter have the right to
          receive upon Conversion, in lieu of the shares of Common Stock otherwise
          issuable, such shares of stock, securities and/or other property as would have
          been issued or payable upon such Major Transaction with respect to or in
          exchange for the number of shares of Common Stock which would have been issuable
          upon Conversion had such Major Transaction not taken place (without giving
          effect to any limitations on such Conversion contained in this Debenture or the
          Securities Purchase Agreement). The Corporation shall not effect any Major
          Transaction unless (i) the Holder has received written notice of such
          transaction at least thirty (30) days prior thereto (which period shall be
          increased to sixty one (61) days if, at such time, without giving effect to the
          limitation on conversion contained in paragraph 3(f) hereof, the Holder would
          beneficially own more than 4.9% of the Common Stock then outstanding, and the
          Holder has notified the Corporation in writing of such circumstance) but in no
          event later than fifteen (15) days prior to the record date for the
          determination of stockholders entitled to vote with respect thereto;
          provided, however, that the Company shall publicly disclose the
          material terms of any such Major Transaction on or before the date on which it
          delivers notice of a Major Transaction to the Holder, and (ii) the resulting
          successor or acquiring entity (if not the Corporation) assumes by written
          instrument (in form and substance reasonable satisfactory to the Holder) the
          obligations of the Corporation under this Debenture (including, without
          limitation, the obligation to make payments of Interest accrued but unpaid
          through the date of such consolidation, merger or sale and accruing thereafter).
          The above provisions shall apply regardless of whether or not there would have
          been a sufficient number of shares of Common Stock authorized and available for
          issuance upon Conversion of this Debenture as of the date of such transaction,
          and shall similarly apply to successive Major Transactions. 



         (c)       
          Distributions. If, at any time after the Issue Date, the Corporation
          shall declare or make any distribution of its assets (or rights to acquire its
          assets) to holders of Common Stock as a partial liquidating dividend or
          otherwise (including any dividend or distribution to the Corporation’s
          stockholders in cash or shares (or rights to acquire shares) of capital stock of
          a subsidiary) (a “Distribution”), the Corporation shall deliver
          written notice of such Distribution (a “Distribution Notice”)
          to the Holder at least fifteen (15) Business Days prior to the earlier to occur
          of (i) the record date for determining stockholders entitled to such
          Distribution (the “Record Date”) and (ii) the date on which
          such Distribution is made (the “Distribution Date”). The Holder
          shall be entitled, at its option (to be exercised by written notice delivered to
          the Corporation on or before the fifteenth (15th) Business Day
          following the date on which a Distribution Notice is delivered to the Holder),
          either (A) upon any Conversion of this Debenture on or after the Record Date, to
          be entitled to receive, on the Distribution Date (for Conversions effected prior
          to the Distribution Date) or the applicable Delivery Date (for Conversions
          effected after the Distribution Date), the amount of such assets which would
          have been payable to the holder with respect to the shares of Common Stock
          issuable upon such Conversion (without giving effect to any limitations on such
          Conversion contained in this Debenture or the Securities Purchase Agreement) had
          the Holder been the holder of such shares of Common Stock on the Record Date or
          (B) upon any Conversion of this Debenture on or after the Distribution Date, to
          reduce the Conversion Price applicable to such Conversion by reducing the
          Conversion Price in effect on the Business Day immediately preceding the Record
          Date by an amount equal to the fair market value of the assets to be distributed
          divided by the number of shares of Common Stock as to which such
          Distribution is to be made, such fair market value to be reasonably determined
          in good faith by the independent members of the Corporation’s Board of
          Directors. Notwithstanding anything herein to the contrary, if the Holder does
          not notify the Corporation of whether the Holder has elected clause (A) or (B)
          in the preceding sentence by the date that is fifteen (15) Business Days after
          the date on which the Corporation delivers a Distribution Notice to the Holder,
          the Corporation shall have the right, exercisable upon written notice to the
          Holder, to determine whether clause (A) or (B) shall be applicable to
          Conversions effected on or after the Distribution Date. 


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         (d)       
          Convertible Securities; Purchase Rights. If, at any time after the Issue
          Date, the Corporation issues any securities or other instruments which are
          convertible into or exercisable or exchangeable for Common Stock
          (“Convertible Securities”) or options, warrants or other rights
          to purchase or subscribe for Common Stock or Convertible Securities
          (“Purchase Rights”) to the record holders of the Common Stock,
          whether or not such Convertible Securities or Purchase Rights are immediately
          convertible, exercisable or exchangeable, then the Holders shall be entitled,
          upon any Conversion of this Debenture after the date of record for determining
          stockholders entitled to receive such Convertible Securities or Purchase Rights
          (or if no such record is taken, the date on which such Convertible Securities or
          Purchase Rights are issued), to receive the aggregate number of Convertible
          Securities or Purchase Rights which the Holder would have received with respect
          to the shares of Common Stock issuable upon such conversion (without giving
          effect to any limitations on such Conversion contained in this Debenture or the
          Securities Purchase Agreement) had the Holder been the holder of such shares of
          Common Stock on the record date for the determination of stockholders entitled
          to receive such Convertible Securities or Purchase Rights (or if no such record
          is taken, the date on which such Convertible Securities or Purchase Rights were
          issued). 



         (e)       
          Dilutive Issuances. 



         (i)       
          Adjustment Upon Dilutive Issuance. If, at any time after the Issue Date,
          the Corporation issues or sells, or in accordance with subparagraph (ii) of this
          paragraph (e) is deemed to have issued or sold, any shares of Common Stock for
          no consideration or for a consideration per share less than the Conversion Price
          on the date of such issuance or sale (or deemed issuance or sale) (a
          “Dilutive Issuance”), then the Conversion Price shall be
          adjusted as follows: 



          		    (A)       
               If such Dilutive Issuance occurs prior to the Effective Date, then effective
               immediately upon the Dilutive Issuance, the Conversion Price shall be adjusted
               so as to equal the consideration received or receivable by the Corporation (on a
               per share basis) for the additional shares of Common Stock so issued, sold or
               deemed issued or sold in such Dilutive Issuance (which, in the case of a deemed
               issuance or sale, shall be calculated in accordance with subparagraph (ii)
               below). Notwithstanding the foregoing, prior to the Effective Date, the
               Corporation will not engage in any transaction that would result in the issuance
               or deemed issuance of shares of Common Stock (other than Excluded Securities (as
               defined below) for no consideration. 



               



10 




          		    (B)       
               If such Dilutive Issuance occurs on or after the Effective Date, then effective
               immediately upon the Dilutive Issuance, the Conversion Price shall be adjusted
               so as to equal an amount determined by multiplying such Conversion Price by the
               following fraction: 



               




N0 + N1
N0 + N2






      where:



	 	N0	
= the number of shares of Common Stock outstanding immediately prior to the issuance, sale
or deemed issuance or sale of such additional shares of Common Stock in such Dilutive
Issuance (without taking into account any shares of Common Stock issuable upon conversion,
exchange or exercise of any Convertible Securities or Purchase Rights, including the
Debentures and Warrants); 






	 	N1	
= the number of shares of Common Stock which the aggregate consideration, if any, received
or receivable by the Corporation for the total number of such additional shares of Common
Stock so issued, sold or deemed issued or sold in such Dilutive Issuance (which, in the
case of a deemed issuance or sale, shall be calculated in accordance with subparagraph
(ii) below) would purchase at the Conversion Price in effect immediately prior to such
Dilutive Issuance; and 






	 	N2	
= the number of such additional shares of Common Stock so issued, sold or deemed issued or
sold in such Dilutive Issuance. 






	 	        Notwithstanding
the foregoing, no adjustment shall be made pursuant hereto if such adjustment would result
in an increase in the Conversion Price. 







         (ii)       
          Effect On Conversion Price Of Certain Events. For purposes of determining
          the adjusted Conversion Price under subparagraph (i) of this paragraph (e), the
          following will be applicable: 



          		    (A)       
               Issuance Of Purchase Rights. If the Corporation issues or sells any
               Purchase Rights, whether or not immediately exercisable, and the price per share
               for which Common Stock is issuable upon the exercise of such Purchase Rights
               (and the price of any conversion of Convertible Securities, if applicable) is
               less than the Conversion Price in effect on the date of issuance or sale of such
               Purchase Rights, then the maximum total number of shares of Common Stock
               issuable upon the exercise of all such Purchase Rights (assuming full
               conversion, exercise or exchange of Convertible Securities, if applicable)
               shall, as of the date of the issuance or sale of such Purchase Rights, be deemed
               to be outstanding and to have been issued and sold by the Corporation for such
               price per share. For purposes of the preceding sentence, the “price per
               share for which Common Stock is issuable upon the exercise of such Purchase
               Rights” shall be determined by dividing (x) the total amount, if any,
               received or receivable by the Corporation as consideration for the issuance or
               sale of all such Purchase Rights, plus the minimum aggregate amount of
               additional consideration, if any, payable to the Corporation upon the exercise
               of all such Purchase Rights, plus, in the case of Convertible Securities
               issuable upon the exercise of such Purchase Rights, the minimum aggregate amount
               of additional consideration payable upon the conversion, exercise or exchange
               thereof (determined in accordance with the calculation method set forth in
               subparagraph (ii)(B) below) at the time such Convertible Securities first become
               convertible, exercisable or exchangeable, by (y) the maximum total number of
               shares of Common Stock issuable upon the exercise of all such Purchase Rights
               (assuming full conversion, exercise or exchange of Convertible Securities, if
               applicable). No further adjustment to the Conversion Price shall be made upon
               the actual issuance of such Common Stock upon the exercise of such Purchase
               Rights or upon the conversion, exercise or exchange of Convertible Securities
               issuable upon exercise of such Purchase Rights. To the extent that shares
               of Common Stock or Convertible Securities are not delivered pursuant to such
               Purchase Rights, upon the expiration or termination of such Purchase Rights, the
               Conversion Price shall be readjusted to the Conversion Price that would then be
               in effect had the adjustments made upon the issuance of such Purchase Rights
               been made on the basis of delivery of only the number of shares of Common Stock
               actually delivered. 



               


11





          		    (B)       
               Issuance Of Convertible Securities. If the Corporation issues or sells
               any Convertible Securities, whether or not immediately convertible, exercisable
               or exchangeable, and the price per share for which Common Stock is issuable upon
               such conversion, exercise or exchange is less than the Conversion Price in
               effect on the date of issuance or sale of such Convertible Securities, then the
               maximum total number of shares of Common Stock issuable upon the conversion,
               exercise or exchange of all such Convertible Securities shall, as of the date of
               the issuance or sale of such Convertible Securities, be deemed to be outstanding
               and to have been issued and sold by the Corporation for such price per share. If
               the Convertible Securities so issued or sold do not have a fluctuating
               conversion or exercise price or exchange ratio, then for the purposes of the
               immediately preceding sentence, the “price per share for which Common Stock
               is issuable upon such conversion, exercise or exchange” shall be determined
               by dividing (A) the total amount, if any, received or receivable by the
               Corporation as consideration for the issuance or sale of all such Convertible
               Securities, plus the minimum aggregate amount of additional consideration, if
               any, payable to the Corporation upon the conversion, exercise or exchange
               thereof (determined in accordance with the calculation method set forth in this
               subparagraph (ii)(B)) at the time such Convertible Securities first become
               convertible, exercisable or exchangeable, by (B) the maximum total number of
               shares of Common Stock issuable upon the exercise, conversion or exchange of all
               such Convertible Securities. If the Convertible Securities so issued or sold
               have a fluctuating conversion or exercise price or exchange ratio (a
               “Variable Rate Convertible Security”); provided, however, that
               if the conversion or exercise price or exchange ratio of a Convertible Security
               may fluctuate solely as a result of provisions designed to protect against
               dilution, such Convertible Security shall not be deemed to be a Variable Rate
               Convertible Security, then for purposes of the first sentence of this
               subparagraph (b), the “price per share for which Common Stock is issuable
               upon such conversion, exercise or exchange” shall be deemed to be the
               lowest price per share which would be applicable (assuming all holding period
               and other conditions to any discounts contained in such Variable Rate
               Convertible Security have been satisfied) if the conversion price of such
               Variable Rate Convertible Security on the date of issuance or sale thereof were
               seventy-five percent (75%) of the actual conversion price on such date (the
               “Assumed Variable Market Price”), and, further, if the
               conversion price of such Variable Rate Convertible Security at any time or times
               thereafter is less than or equal to the Assumed Variable Market Price last used
               for making any adjustment under this paragraph (e) with respect to any Variable
               Rate Convertible Security, the Conversion Price in effect at such time shall be
               readjusted to equal the Conversion Price which would have resulted if the
               Assumed Variable Market Price at the time of issuance of the Variable Rate
               Convertible Security had been seventy-five percent (75%) of the actual
               conversion price of such Variable Rate Convertible Security existing at the time
               of the adjustment required by this sentence. No further adjustment to the
               Conversion Price shall be made upon the actual issuance of such Common Stock
               upon conversion, exercise or exchange of such Convertible Securities. To
               the extent that shares of Common Stock are not delivered pursuant to conversion
               of such Convertible Securities, upon the expiration or termination of the right
               to convert such Convertible Securities into Common Stock, the Conversion Price
               shall be readjusted to the Conversion Price that would then be in effect had the
               adjustments made upon the issuance of such Convertible Securities been made on
               the basis of delivery of only the number of shares of Common Stock actually
               delivered. 



               


12





          		    (C)       
               Change In Option Price Or Conversion Rate. If there is a change at any
               time in (x) the amount of additional consideration payable to the Corporation
               upon the exercise of any Purchase Rights; (y) the amount of additional
               consideration, if any, payable to the Corporation upon the conversion, exercise
               or exchange of any Convertible Securities; or (z) the rate at which any
               Convertible Securities are convertible into or exercisable or exchangeable for
               Common Stock (in each such case, other than under or by reason of provisions
               designed to protect against dilution), the Conversion Price in effect at the
               time of such change shall be readjusted to the Conversion Price which would have
               been in effect at such time had such Purchase Rights or Convertible Securities
               still outstanding provided for such changed additional consideration or changed
               conversion, exercise or exchange rate, as the case may be, at the time initially
               issued or sold. 



               



          		    (D)       
               Calculation Of Consideration Received. If any Common Stock, Purchase
               Rights or Convertible Securities are issued or sold for cash, the consideration
               received therefor will be the amount received by the Corporation therefor. In
               case any Common Stock, Purchase Rights or Convertible Securities are issued or
               sold for a consideration part or all of which shall be other than cash,
               including in the case of a strategic or similar arrangement in which the other
               entity will provide services to the Corporation, purchase services from the
               Corporation or otherwise provide intangible consideration to the Corporation,
               the amount of the consideration other than cash received by the Corporation
               (including the net present value of the consideration expected by the
               Corporation for the provided or purchased services) shall be the fair market
               value of such consideration, except where such consideration consists of
               securities, in which case the amount of consideration received by the
               Corporation will be the average of the last sale prices thereof on the principal
               market for such securities during the period of ten Trading Days immediately
               preceding the date of receipt. In case any Common Stock, Purchase Rights or
               Convertible Securities are issued in connection with any merger or consolidation
               in which the Corporation is the surviving corporation, the amount of
               consideration therefor will be deemed to be the fair market value of such
               portion of the net assets and business of the non-surviving corporation as is
               attributable to such Common Stock, Purchase Rights or Convertible Securities, as
               the case may be. Notwithstanding anything else herein to the contrary, if Common
               Stock, Purchase Rights or Convertible Securities are issued or sold in
               conjunction with each other as part of a single transaction or in a series of
               related transactions, the Holder may elect to determine the amount of
               consideration deemed to be received by the Corporation therefor by deducting the
               fair value of any type of securities (the “Disregarded
               Securities”) issued or sold in such transaction or series of
               transactions. If the holder makes an election pursuant to the immediately
               preceding sentence, no adjustment to the Conversion Price shall be made pursuant
               to this paragraph (e) for the issuance of the Disregarded Securities or upon any
               conversion, exercise or exchange thereof. The independent members of the
               Corporation’s Board of Directors shall calculate reasonably and in good
               faith, using standard commercial valuation methods appropriate for valuing such
               assets, the fair market value of any consideration other than cash or
               securities. 



               

13





          		    (E)       
               Issuances Pursuant To Existing Securities. If the Corporation issues (or
               becomes obligated to issue) shares of Common Stock pursuant to any antidilution
               or similar adjustments (other than as a result of stock splits, stock dividends
               and the like) contained in any Convertible Securities or Purchase Rights
               outstanding as of the date hereof but not specifically disclosed in a schedule
               to the Securities Purchase Agreement, then all shares of Common Stock so issued
               shall be deemed to have been issued for no consideration. If the Corporation
               issues (or becomes obligated to issue) shares of Common Stock pursuant to any
               antidilution or similar adjustments contained in any Convertible Securities or
               Purchase Rights specifically disclosed in a schedule to the Securities Purchase
               Agreement as a result of the issuance of the Debentures or Warrants and the
               number of shares that the Corporation issues (or is obligated to issue) as a
               result of such initial issuance exceeds the amount specified in such schedule,
               such excess shares shall be deemed to have been issued for no consideration. 



               



         (iii)       
          Exceptions To Adjustment Of Conversion Price. Notwithstanding the
          foregoing, no adjustment to the Conversion Price shall be made pursuant to this
          paragraph (e) upon the issuance of any Excluded Securities. For purposes hereof,
          “Excluded Securities” means (I) securities purchased under the
          Securities Purchase Agreement; (II) securities issued upon conversion or
          exercise of the Debentures or the Warrants; (III) shares of Common Stock
          issuable or issued to (x) employees, consultants or directors from time to time
          upon the exercise of options, in such case granted or to be granted in the
          discretion of the Board of Directors pursuant to one or more stock option plans
          or restricted stock plans in effect as of the Issue Date or adopted after the
          Issue Date by the independent members of the Board of Directors with
          substantially the same terms as such plans in effect as of the Issue Date, and
          (y) vendors pursuant to warrants to purchase Common Stock that are outstanding
          on the date hereof or issued hereafter, provided such issuances are approved by
          the Board of Directors; (IV) any borrowings, direct or indirect, from financial
          institutions by the Corporation that are approved by the Board of Directors,
          including any type of loan or payment evidenced by any type of Debt instrument,
          provided the value of the equity portion of any such borrowings, including
          warrants, options or other rights to purchase capital stock and other interests
          convertible into capital stock of the Corporation, does not exceed ten percent
          (10%) of such borrowing; (V) shares of Common Stock issued in connection with
          any stock split, stock dividend or recapitalization of the Corporation; (VI)
          shares of Common Stock issued in connection with the acquisition by the
          Corporation of any corporation or other entity occurring after the Effective
          Date and as long as a fairness opinion with respect to such acquisition is
          rendered by an investment bank of national recognition; (VII) shares of Common
          Stock issued in connection with any Convertible Securities or Purchase Rights
          outstanding on the date hereof and (VIII) shares issued to Persons with whom the
          Corporation is entering into a joint venture, strategic alliance or other
          commercial relationship in connection with the operation of the Corporation
          ‘s business and not in connection with a transaction the purpose of which
          is to raise equity capital. 



14 





         (iv)       
          Notice Of Adjustments. Upon the occurrence of each adjustment or
          readjustment of the Conversion Price pursuant to this paragraph (e) resulting in
          a change in the Conversion Price by more than one percent (1%), or any change in
          the number or type of stock, securities and/or other property issuable upon
          Conversion of this Debenture, the Corporation, at its expense, shall promptly
          compute such adjustment, readjustment or change and prepare and furnish to the
          Holder a certificate setting forth such adjustment, readjustment or change and
          showing in detail the facts upon which such adjustment, readjustment or change
          is based. The Corporation shall, upon the written request at any time of the
          Holder, furnish to the Holder a like certificate setting forth (i) such
          adjustment, readjustment or change, (ii) the Conversion Price at the time in
          effect and (iii) the number of shares of Common Stock and the amount, if any, of
          other securities or property which at the time would be received upon Conversion
          of this Debenture. 



     5.   
          FORCED CONVERSION. 



         (a)       
          Forced Conversion. In the event that all of the Milestones are satisfied
          on each Trading Day occurring during any period of twenty-two (22) consecutive
          Trading Days commencing after the Issue Date (a “Forced Conversion
          Period”), the Corporation shall have the right to require Conversion of
          this Debenture (a “Forced Conversion”). In the event of a
          Forced Conversion, the Corporation and the Holder shall follow the procedures
          for Conversion set forth in Section 3 above, with the Forced Conversion Date (as
          defined below) deemed to be the Conversion Date for purposes of Section 3,
          except that the Holder shall not be required to send a Conversion Notice as
          contemplated by paragraph (b) of Section 3. 



         (b)       
          Forced Conversion Notice. In order to effect a Forced Conversion
          hereunder, the Corporation must deliver to the Holder written notice thereof (a
          “Forced Conversion Notice”) on or before 5:00 p.m. (eastern
          time) on the Business Day immediately following the last Trading Day of the
          Forced Conversion Period (such Business Day, the “Forced Conversion
          Date”) and, at the same time that it delivers such notice, the
          Corporation shall send a copy of such notice by email as long as the Holder has
          provided an email address to the Corporation. Notwithstanding the delivery by
          the Corporation of a Forced Conversion Notice, nothing contained herein shall be
          deemed to limit in any way (i) the right of the Holder to convert this Debenture
          prior to the Forced Conversion Date or (ii) the availability of any and all
          remedies that are provided to the Holder hereunder, including without limitation
          in the event that the Corporation fails to deliver Conversion Shares upon a
          Forced Conversion as required by the terms of Section 3 hereof. The Forced
          Conversion Notice shall specify the aggregate principal amount of the Debentures
          that is subject to the Forced Conversion, which amount shall not exceed the
          aggregate dollar volume traded on the Corporation’s principal market during
          the seven (7) Trading Days immediately preceding the Forced Conversion Date and
          (ii) shall be allocated among the holders of the Debentures on a pro rata
          basis; provided, however, that in no event shall any amount of
          principal be converted hereunder if, as a result, any limitation on Conversion
          contained herein or in the Securities Purchase Agreement would be violated. On
          the Forced Conversion Date, the Holder will be deemed to have converted an
          amount of principal of this Debenture equal to (A) its pro rata share of the
          aggregate principal amount specified in the Forced Conversion Notice minus (B)
          the amount of principal of this Debenture converted by the Holder during the
          twenty-two trading days immediately preceding the Forced Conversion Date. 



15 






6.    EVENTS OF DEFAULT;
MANDATORY REDEMPTION. 



         (a)       
          Mandatory Redemption. In the event that an Event of Default (as defined
          below) or a Fundamental Change occurs, the Holder shall have the right, upon
          written notice to the Corporation (a “Mandatory Redemption
          Notice”), to have all or any portion of the unpaid principal amount of
          this Debenture, plus all accrued and unpaid Interest thereon, redeemed by the
          Corporation (a “Mandatory Redemption”) at the Mandatory
          Redemption Price (as defined below) in same day funds. The Mandatory Redemption
          Notice shall specify the effective date of such Mandatory Redemption (the
          “Mandatory Redemption Date”), which date must be at least five
          (5) Business Days following the Business Day on which the Mandatory Redemption
          Notice is delivered to the Corporation, and the amount of principal and Interest
          to be redeemed. In order to effect a Mandatory Redemption hereunder, the Holder
          must deliver a Mandatory Redemption Notice no later than the close of business
          on the Business Day immediately following the first Business Day on which an
          Event of Default is no longer continuing; provided, however, that
          with respect to a Fundamental Change, the Holder must deliver a Mandatory
          Redemption Notice no later than the close of business on the third
          (3rd) Business Day following the date on which the Fundamental Change
          is effected. 



         (b)       
          Mandatory Redemption Price. For purposes hereof, “Mandatory
          Redemption Price” shall mean (i) the unpaid principal hereof
          multiplied by one hundred and one percent (101%) plus (ii) all accrued
          and unpaid Interest hereon. 



         (c)       
          Payment of Mandatory Redemption Price. 



     (i)    
          The Corporation shall pay the Mandatory Redemption Price to the Holder within
          five (5) Business Days of the Mandatory Redemption Date. In the event that the
          Corporation redeems the entire remaining unpaid principal amount of this
          Debenture, and pays to the Holder all Interest accrued thereon and all other
          amounts due in connection therewith, the Holder shall return this Debenture to
          the Corporation for cancellation. 



     (ii)    
          If the Corporation fails to pay the Mandatory Redemption Price to the Holder
          within five (5) Business Days of the Mandatory Redemption Date, the Holder shall
          be entitled to interest thereon at the Default Interest Rate from the Mandatory
          Redemption Date until the date on which Mandatory Redemption Price has been paid
          in full. 



         (d)       
          Events of Default. Each of the following events shall be deemed an
          “Event of Default”: 



     (i)    
          a Liquidation Event occurs or is publicly announced; 



     (ii)    
          the Corporation or the Mortgagor breaches or provides notice of its intent to
          breach, in a material respect, any covenant or other material term or condition
          of this Debenture (including without limitation any payment obligation
          thereunder), the Securities Purchase Agreement, the Mortgage, the Registration
          Rights Agreement or any other Transaction Document, including but not limited to
          the Corporation’s failure to deliver Conversion Shares and Warrant Shares
          on or before the Delivery Date therefor, and such breach continues for a period
          of ten (10) Business Days following written notice thereof from the Holder,
          provided, that if during such ten Business Day period, the Corporation or
          the Mortgagor, as the case may be, is diligently and in good faith taking steps
          to cure such breach, such period will be extended from ten Business Days to
          fifteen (15) Business Days; 


16 





     (iii)    
          any representation or warranty made by the Corporation or the Mortgagor
          contained in this Debenture, the Securities Purchase Agreement, the Mortgage,
          the Registration Rights Agreement or any other Transaction Document is
          inaccurate or misleading in any material respect as of the date such
          representation or warranty was made; provided, however, that to
          the extent any such representation or warranty is capable of being cured with
          the same effect as though such representation or warranty were true and accurate
          as of the date made, the Corporation shall have a period of five (5) Business
          Days following written notice from the Holder that such representation or
          warranty is inaccurate or misleading to effect such cure; provided, that
          if during such five Business Day period, the Corporation or the Mortgagor, as
          the case may be, is diligently and in good faith taking steps to cure such
          breach, such period will be extended from five Business Days to ten (10)
          Business Days; and 



     (iv)    
          a default occurs, after giving effect to any applicable grace or cure period,
          under or with respect to any instrument that evidences Debt of the Corporation
          or any of its Subsidiaries in a principal amount exceeding $100,000. 



     7.   
          PRIORITY ON LIQUIDATION. 



        In
the event of (x) any insolvency or bankruptcy proceedings, or any receivership,
liquidation, reorganization or other similar proceedings in connection therewith, relative
to the Corporation, the Company Subsidiaries or to its or their creditors, as such, or to
its or their assets or (y) the dissolution or other winding up of the Corporation or the
Company Subsidiaries, whether voluntary or involuntary and whether or not involving
insolvency or bankruptcy proceedings, or (z) any assignment for the benefit of creditors
or any marshalling of the material assets or material liabilities of the Corporation or
any Company Subsidiary (each a “Liquidation Event”), then, and in any
such event involving the Corporation, the Holder of this Debenture shall first be entitled
to receive payment in full of all principal of, and all Interest and other amounts due or
to become due on, this Debenture before any payment on account of principal, premium, if
any, interest, dividends or any other amounts is made on any Debt of the Corporation or
Junior Securities, whether on account of any purchase, exchange or redemption or other
acquisition of such Debt or Junior Securities, at maturity or otherwise. Notwithstanding
the foregoing, in the event that an involuntary petition in bankruptcy is filed against
the Corporation or any Company Subsidiary, such event shall not be deemed to be a
Liquidation Event as long as the Corporation or such Subsidiary actively contests such
petition and obtains a dismissal thereof within ninety (90) days of such filing. 



17 







8.    PREPAYMENT. 



        The
Corporation shall not be entitled to prepay principal of this Debenture until the third
(3rd) anniversary of the Issue Date. The amount payable by the Corporation to the Holder
upon any such prepayment shall be equal to (i) during the period beginning on such third
anniversary and ending on the day prior to the fourth (4th) anniversary of the
Issue Date, one hundred and three percent (103%) of the amount of unpaid principal hereof,
plus accrued interest and (ii) during the period beginning on such fourth anniversary and
ending on the day prior to the Maturity Date, one hundred and one percent (101%) of the
amount of unpaid principal hereof, plus accrued interest. The Corporation shall deliver
written notice of any such prepayment to the Holder at least twenty (20) Trading Days
prior to the date on which such prepayment is intended to be made. The Company shall not
prepay principal of any Debenture unless it prepays the principal of each of the other
Debentures on a pro rata basis. 




9.    TAXES. 



        Notwithstanding
any other provision of this Debenture or any other Transaction Document, for income tax
purposes, any assignee or transferee shall agree that the Corporation and the Transfer
Agent shall be permitted to withhold from any amounts payable to such assignee or
transferee any taxes required by law to be withheld from such amounts. Unless exempt from
the obligation to do so, each assignee or transferee shall execute and deliver to the
Corporation or the Transfer Agent, as applicable, a properly completed Form W-8 or W-9,
indicating that such assignee or transferee is not subject to back-up withholding for
United States Federal income tax purposes. Each assignee or transferee that does not
deliver such a form pursuant to the preceding sentence shall have the burden of proving to
the Corporation’s reasonable satisfaction that it is exempt from such requirement. 




10.    MISCELLANEOUS. 



         (a)       
          Failure to Exercise Rights not Waiver. No failure or delay on the part of
          the Holder in the exercise of any power, right or privilege hereunder shall
          operate as a waiver thereof, nor shall any single or partial exercise of any
          such power, right or privilege preclude any other or further exercise thereof.
          All rights and remedies of the Holder hereunder are cumulative and not exclusive
          of any rights or remedies otherwise available. 



         (b)       
          Notices. Any notice, demand or request required or permitted to be given
          by the Corporation or the Holder pursuant to the terms of this Debenture shall
          be in writing and shall be deemed delivered (i) when delivered personally or by
          verifiable facsimile transmission, unless such delivery is made on a day that is
          not a Business Day, in which case such delivery will be deemed to be made on the
          next succeeding Business Day, (ii) on the next Business Day after timely
          delivery to an overnight courier and (iii) on the Business Day actually received
          if deposited in the U.S. mail (certified or registered mail, return receipt
          requested, postage prepaid), addressed as follows: 



18 









	 	If to the Corporation:



Ener1, Inc.

550 Cypress Creek Road

Suite 120

Fort Lauderdale, Florida 33309

Attn:    Kevin P. Fitzgerald

Tel:     954-202-4442

Fax:     954-202-2884



with a copy to:



Gibson, Dunn & Crutcher LLP

1050 Connecticut Avenue N.W.

Washington, DC 20036

Attn:    Stephen I. Glover

Tel:     202 955-8500

Fax:     202 467-0539







and if to the Holder, at such address
as the Holder shall have furnished the Corporation in writing. 



         (c)       
          Amendments. No amendment, modification or other change to, or waiver of
          any provision of, this Debenture may be made unless such amendment, modification
          or change is (A) set forth in writing and is signed by the Corporation and the
          Holder and (B) agreed to in writing by the holders of at least sixty-six percent
          (66%) of the unpaid principal amount of the Debentures, it being understood
          that, notwithstanding anything to the contrary contained in any Debenture, upon
          the satisfaction of the conditions described in (A) and (B) above, each
          Debenture (including any Debenture held by the Holder who did not execute the
          agreement specified in (B) above) shall be deemed to incorporate any amendment,
          modification, change or waiver effected thereby as of the effective date
          thereof. 



         (d)       
          Transfer of Debenture. The Holder may sell, transfer or otherwise dispose
          of all or any part of this Debenture (including without limitation pursuant to a
          pledge) to any person or entity as long as such sale, transfer or disposition is
          the subject of an effective registration statement under the Securities Act of
          1933, as amended, and applicable state securities laws, or is exempt from
          registration thereunder, and is otherwise made in accordance with the applicable
          provisions of the Securities Purchase Agreement. From and after the date of any
          such sale, transfer or disposition, the transferee hereof shall be deemed to be
          the holder of a Debenture in the principal amount acquired by such transferee,
          and the Corporation shall, as promptly as practicable, issue and deliver to such
          transferee a new debenture identical in all respects to this Debenture, in the
          name of such transferee. The Corporation shall be entitled to treat the original
          Holder as the holder of this entire Debenture unless and until it receives
          written notice of the sale, transfer or disposition hereof. 



         (e)       
          Lost or Stolen Debenture. Upon receipt by the Corporation of evidence of
          the loss, theft, destruction or mutilation of this Debenture, and (in the case
          of loss, theft or destruction) of indemnity or security reasonably satisfactory
          to the Corporation, and upon surrender and cancellation of the Debenture, if
          mutilated, the Corporation shall execute and deliver to the Holder a new
          Debenture identical in all respects to this Debenture. 


19





         (f)       
          Governing Law. This Debenture shall be governed by and construed in
          accordance with the laws of the State of New York applicable to contracts made
          and to be performed entirely within the State of New York. 



         (g)       
          Successors and Assigns. The terms and conditions of this Debenture shall
          inure to the benefit of and be binding upon the respective successors (whether
          by merger or otherwise) and permitted assigns of the Corporation and the Holder.
          The Corporation may not assign its rights or obligations under this Debenture
          except as specifically required or permitted pursuant to the terms hereof. 



         (h)       
          Usury. This Debenture is subject to the express condition that at no time
          shall the Corporation be obligated or required to pay interest hereunder at a
          rate which could subject the Holder to either civil or criminal liability as a
          result of being in excess of the maximum interest rate which the Corporation is
          permitted by applicable law to contract or agree to pay.  If by the terms
          of this Debenture, the Corporation is at any time required or obligated to pay
          interest hereunder at a rate in excess of such maximum rate, the rate of
          interest under this Debenture shall be deemed to be immediately reduced to such
          maximum rate and the interest payable shall be computed at such maximum rate and
          all prior interest payments in excess of such maximum rate shall be applied and
          shall be deemed to have been payments in reduction of the principal balance of
          this Debenture.  




[Signature Page to
Follow] 





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IN WITNESS WHEREOF, the Corporation
has caused this Debenture to be signed in its name by its duly authorized officer on the
date first above written. 




ENER1, INC. 




By:____________________________
  Name:
  Title:











ANNEX I 




NOTICE OF CONVERSION 



The undersigned hereby elects to
convert principal of the 5% Senior Secured Convertible Debenture (the
“Debenture”) issued by ENER1, INC. (the “Corporation”) into
shares of common stock (“Common Stock”) of the Corporation according to the
terms and conditions of the Debenture. Capitalized terms used herein and not otherwise
defined shall have the respective meanings set forth in the Debenture. 








	 	Date of Conversion:_____________________



Principal Amount of

Debenture to be Converted:______________



Amount of  Interest

to be Converted:________________________





Number of Shares of

Common Stock to be Issued:______________



Name of Holder:_________________________



Address:________________________________













Signature:______________________________

                  Name:

                  Title:






Holder Requests Delivery to be
made: (check one) 




�  By Delivery of Physical
Certificates to the Above Address 




�  Through Depository
Trust Corporation
(Account_______________) 












ANNEX II 




Schedule of
Decreases 
of Principal Amount 














	Principal

Balance	Amount of

Decrease	Date
	  $[  ],000,000



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