Document:

Exhibit 10.4

ENER1
BATTERY COMPANY, formerly known as ENER1 USA INCORPORATED, as mortgagor 
(Mortgagor) 

to
SATELLITE ASSET MANAGEMENT, L.P.,
 as agent (Satellite) 

and

 THE PARTIES LISTED ON SCHEDULE 1 HERETO, as mortgagees

     _________________ 

MORTGAGE, SECURITY
AGREEMENT ANDASSIGNMENT 
OF LEASES AND RENTS 

     _________________ 

Dated: January ___,
2004
Location: 1751 West Cypress Creek Road 
Fort Lauderdale,
Florida 

Property
Identification Number: 19209-01-04000
County: Broward 

UPON RECORDATION RETURN TO:

                                    Dunwody White & Landon, P.A.

                                    550 Biltmore Way, Suite 810

                                    Coral Gables, Florida 33134

                                    Attention: Thomas Matkov, Esq.

This instrument prepared by: 

Adam H. SherDuval 
&
Stachenfeld LLP
300 East 42nd Street
New York, New York 10017 

     

        THIS
MORTGAGE, SECURITY AGREEMENT AND ASSIGNMENT OF LEASES AND RENTS (this
“Security Instrument”) is made as of the ____ day of January, 2004, by
ENER1 BATTERY COMPANY, a Florida corporation, formerly known as Ener1 USA Incorporated,
having its principal place of business at 550 W. Cypress Creek Road, Suite 120, Fort
Lauderdale, Florida 33309, as mortgagor (“Mortgagor”) to SATELLITE ASSET
MANAGEMENT, L.P., having an address at 623 Fifth Avenue, 20th Floor, New York,
New York 10022, as agent (“Agent”) and the entities listed on Schedule
1 attached hereto (each a “Mortgagee” and collectively, the
“Mortgagees”). 

RECITALS: 

        Ener1,
Inc., a Florida corporation (“Ener1”), by its 5% senior secured
convertible debentures, each of even date herewith, is indebted to Mortgagees in the
aggregate principal sum of Twenty Million and 00/100 Dollars ($20,000,000.00) in lawful money
of the United States of America (each such debenture together with all extensions,
renewals, modifications, substitutions and amendments thereof shall collectively be
referred to as a “Debenture” and all of the Debentures are collectively
referred to herein as the “Debentures”), with interest from the date
thereof at the rates set forth in the Debentures, principal and interest to be payable in
accordance with the terms and conditions provided in the Debentures, and subject to the
terms and conditions of that certain Securities Purchase Agreement dated the date hereof
among Mortgagor and Mortgagees (the “Securities Purchase Agreement”). 

        Pursuant
to that certain Subsidiary Guaranty of even date herewith (the “Subsidiary
Guaranty”), given by Mortgagor to Mortgagees, Mortgagor has guaranteed the
complete payment and performance of the obligations of Ener1 under the Debentures, the
Securities Purchase Agreement and the other Investment Documents (as hereinafter defined). 

        Pursuant
to that certain Intercreditor Agreement, dated as of the date hereof (the
“Intercreditor Agreement”), by and among Agent and the Mortgagees, the
Mortgagees have designated the Agent as their collateral agent for the limited purposes
set forth in the Intercreditor Agreement. 

        Mortgagor
desires to secure the payment and performance of the Obligations (as defined in
Section 2.1 hereof). 

1 — GRANTS OF
SECURITY 

        1.1
PROPERTY MORTGAGED. Mortgagor does hereby irrevocably mortgage, grant, bargain,
sell, pledge, assign, warrant, transfer and convey to Mortgagees and Agent, on behalf of
Mortgagees, and grant a security interest to each Mortgagee and Agent, on behalf of
Mortgagees, in, the following property, rights, interests and estates now owned, or
hereafter acquired by Mortgagor (collectively, the “Property”): (a) the
real property described in Exhibit A attached hereto and made a part hereof (the
“Land”); (b) all additional lands, estates and development rights
hereafter acquired by Mortgagor and reasonably necessary for the current use of the Land
and the development of the Land and all additional lands and estates therein which may,
from time to time, by supplemental mortgage or otherwise be expressly made subject to the
lien of this Security Instrument; (c) the buildings, structures, fixtures, additions,
enlargements, extensions, modifications, repairs, replacements and improvements now or
hereafter erected or located on the Land (the “Improvements”); (d) all
easements, rights-of-way or use, rights, strips and gores of land, streets, ways, alleys,
passages, sewer rights, water, water courses, water rights and powers, air rights and
development rights, and all estates, rights, titles, interests, privileges, liberties,
servitudes, tenements, hereditaments and appurtenances of any nature whatsoever, in any
way now or hereafter belonging, relating or pertaining to the Land and the Improvements
and the reversion and reversions, remainder and remainders, and all land lying in the bed
of any street, road or avenue, opened or proposed, in front of or adjoining the Land, to
the center line thereof and all the estates, rights, titles, interests, dower and rights
of dower, curtesy and rights of curtesy, property, possession, claim and demand
whatsoever, both at law and in equity, of Mortgagor of, in and to the Land and the
Improvements and every part and parcel thereof, with the appurtenances thereto; (e) all
furnishings, machinery, equipment, fixtures (including, but not limited to, all heating,
air conditioning, plumbing, lighting, communications and elevator fixtures) owned by
Mortgagor, or in which Mortgagor has or shall have an interest, now or hereafter located
upon the Land and the Improvements, or appurtenant thereto, and usable in connection with
the present or future operation and occupancy of the Land and the Improvements and all
building equipment, materials and supplies of any nature whatsoever owned by Mortgagor, or
in which Mortgagor has or shall have an interest, now or hereafter located upon the Land
and the Improvements, or appurtenant thereto, or usable in connection with the present or
future operation and occupancy of the Land and the Improvements (collectively, the
“Personal Property”), and the right, title and interest of Mortgagor in
and to any of the Personal Property which may be subject to any security interests, as
defined in the Uniform Commercial Code, as adopted and enacted by the state or states
where any of the Property is located (the “Uniform Commercial Code”),
superior in lien to the lien of this Security Instrument and all proceeds and products of
the above; (f) all leases and other agreements affecting the use, enjoyment or occupancy
of the Land and the Improvements heretofore or hereafter entered into, whether before or
after the filing by or against Mortgagor of any petition for relief under 11 U.S.C. §
101 et seq., as the same may be amended from time to time (the “Bankruptcy
Code”) (the “Leases”) and all right, title and interest of
Mortgagor, its successors and assigns therein and thereunder, including, without
limitation, cash or securities deposited thereunder to secure the performance by the
lessees of their obligations thereunder and all rents, additional rents, revenues
(including, but not limited to, any payments made by tenants under the Leases in
connection with the termination of any Lease), issues and profits (including all oil and
gas or other mineral royalties and bonuses) from the Land and the Improvements whether
paid or accruing before or after the filing by or against Mortgagor of any petition for
relief under the Bankruptcy Code (the “Rents”) and all proceeds from the
sale or other disposition of the Leases and the right to receive and apply the Rents to
the payment of the Debts (as hereinafter defined); (g) any and all lease guaranties,
letters of credit and any other credit support (individually, a “Lease
Guaranty” and collectively, the “Lease Guaranties”) given by any
guarantor in connection with any of the Leases (individually, a “Lease
Guarantor” and collectively, the “Lease Guarantors”); (h) all
rights, powers, privileges, options and other benefits of Mortgagor as lessor under the
Leases and beneficiary under all Lease Guaranties; (i) all awards or payments, including
interest thereon, which may heretofore and hereafter be made with respect to the Property,
whether from the exercise of the right of eminent domain (including but not limited to any
transfer made in lieu of or in anticipation of the exercise of the right), or for a change
of grade, or for any other injury to or decrease in the value of the Property; (j) all
proceeds of and any unearned premiums on any insurance policies covering the Property,
including, without limitation, the right to receive and apply the proceeds of any
insurance, judgments, or settlements made in lieu thereof, for damage to the Property in
accordance with the terms hereof; (k) all refunds, rebates or credits in connection with a
reduction in real estate taxes and assessments charged against the Property as a result of
tax certiorari or any applications or proceedings for reduction; (l) all proceeds of the
conversion, voluntary or involuntary, of any of the foregoing including, without
limitation, proceeds of insurance and condemnation awards, into cash or liquidation
claims; (m) the right, in the name and on behalf of Mortgagor, to appear in and defend any
action or proceeding brought with respect to the Property and to commence any action or
proceeding to protect the interest of each Mortgagee in the Property; (n) to the extent
permitted under applicable law, all agreements, contracts, certificates, instruments,
franchises, permits, licenses, plans, specifications and other documents, now or hereafter
entered into, and all rights therein and thereto, respecting or pertaining to the use,
occupation, construction, management or operation of the Land and any part thereof and any
Improvements and all right, title and interest of Mortgagor therein and thereunder,
including, without limitation, the right, upon the happening of any default hereunder, to
receive and collect any sums payable to Mortgagor thereunder; and (o) any and all other
rights of Mortgagor in and to the items set forth in Subsections (a) through (n) above.
Notwithstanding the foregoing, the Property shall not include any items under clause
(e) above that are acquired after the date hereof that are (i) not purchased with the
proceeds of the sale of any such existing items described in clause (e) above or
(ii) acquired in connection with the production of goods for sale in the course of
Mortgagor’s business conducted on the Land as of the date hereof, other that such
items that are purchased with the proceeds of the sale of any such existing items
described in clause (e) above. 

        1.2
ASSIGNMENT OF LEASES AND RENTS. Mortgagor hereby absolutely and unconditionally
assigns to each Mortgagee and Agent, on behalf of Mortgagees, all of Mortgagor’s
right, title and interest in and to (i) all current and future Leases and Rents, (ii) all
of Mortgagor’s claims and rights (the “Bankruptcy Claims”) to the
payment of damages arising from any rejection by a lessee of any Lease under the
Bankruptcy Code, (iii) all of Mortgagor’s right, title and interest in and claims
under any and all Lease Guaranties, (iv) all proceeds from the sale or other disposition
of the Leases, the Rents, the Lease Guaranties and the Bankruptcy Claims, (v) all rights,
powers, privileges, options and other benefits of Mortgagor, as lessor under the Leases
and beneficiary under the Lease Guaranties, including, without limitation, the immediate
and continuing right to make claim for, receive, collect and receipt for all Rents payable
or receivable under the Leases and all sums payable under the Lease Guaranties or pursuant
thereto (and to apply the same to the payment of the Debts), and to do all other things
which Mortgagor or any lessor is or may become entitled to do under the Leases or the
Lease Guaranties, (vi) the right, at Mortgagees’ option, upon revocation of the
license granted herein, to enter upon the Property in person, by agent or by
court-appointed receiver, to collect the Rents, (vii) Mortgagor’s irrevocable power
of attorney, coupled with an interest, to take any and all of the actions set forth in
Section 10.1(g) hereof and any or all other actions designated by Mortgagees for
the proper management and preservation of the Property and (viii) any and all other rights
of Mortgagor in and to the items set forth in clauses (i) through (vii) above, and all
amendments, modifications, replacements, renewals and substitutions thereof; it being
intended by Mortgagor that this assignment constitutes a present, absolute assignment and
not an assignment for additional security only. Nevertheless, subject to the terms of this
Section 1.2 and Section 3.6, each Mortgagee grants to Mortgagor a revocable
license to collect and receive the Rents, which license shall be automatically revoked
upon the occurrence of an Event of Default (as hereinafter defined). Mortgagor shall hold
the Rents and all sums received pursuant to any Lease Guaranty, or a portion thereof
sufficient to discharge all current sums due on the Debts, in trust for the benefit of
Mortgagees for use in the payment of such sums. Mortgagor hereby agrees to authorize and
direct the lessees named in the Leases or any other or future lessees or occupants of the
Property and all Lease Guarantors, upon the occurrence of an event of Default, to pay over
to Mortgagees or to such other party as Mortgagees direct all Rents and all sums due under
any Lease Guaranties upon receipt from Mortgagees of written notice to the effect that
Mortgagees are then the holder of the Security Instrument and that an Event of Default
exists, and to continue so to do until otherwise notified by Agent, on behalf of
Mortgagees. 

        1.3
SECURITY AGREEMENT. This Security Instrument is both a real property mortgage and a
“security agreement” within the meaning of the Uniform Commercial Code. The
Property includes both real and personal property and all other rights and interests,
whether tangible or intangible in nature, of Mortgagor in the Property. By executing and
delivering this Security Instrument, Mortgagor hereby grants to each Mortgagee, as
security for the Obligations, a security interest in the Property to the full extent that
the Property may be subject to the Uniform Commercial Code. 

        1.4
PLEDGE OF MONIES HELD. Mortgagor hereby pledges to each Mortgagee and Agent, on
behalf of Mortgagees, any and all monies now or hereafter held by such Mortgagee and/or
Agent, on behalf of Mortgagees, including, without limitation, any sums deposited in the
Escrow Fund (as defined in Section 3.4), Net Proceeds (as defined in Section
4.3) held by such Mortgagee and/or Agent, on behalf of Mortgagees, and condemnation
awards or payments described in Section 3.5 held by such Mortgagee and/or Agent, on
behalf of Mortgagees (collectively, “Deposits”), as additional security
for the Obligations until expended or applied as provided in this Security Instrument. 

CONDITIONS TO GRANT 

        TO
HAVE AND TO HOLD the above granted and described Property unto and to the use and benefit
of each Mortgagee and Agent, on behalf of Mortgagees, and the successors and assigns of
Agent and each Mortgagee, forever; 

        PROVIDED,
HOWEVER, these presents are upon the express condition that, upon either (i) the payment
in full of the Debts at the time and in the manner provided in the Debentures, the
Securities Purchase Agreement and this Security Instrument or (ii) the full conversion of
Debentures into shares of common stock of Ener1 pursuant to the terms and conditions of
the Debentures and the other Investment Documents, and if Mortgagor shall well and truly
perform the Other Obligations (as defined in Section 2.1 hereof) as set forth in
this Security Instrument, and if each and every covenant and condition set forth herein
and in any other Investment Documents shall have been well and truly abided by and
complied with, these presents and the estate hereby granted shall cease, terminate and be
void. 

2 — DEBT AND
OBLIGATIONS SECURED 

        2.1
DEBT AND OBLIGATIONS SECURED. This Security Instrument and the grants, assignments
and transfers made in Article 1 are given for the purpose of securing the payment
and performance of all of the obligations of Mortgagor under the Subsidiary Guaranty
(which obligations include, without limitation, the guaranty of the full and timely
repayment of the Debts by Ener1 in accordance with the terms of the Debentures) and the
performance of the Other Obligations, in such order of priority as each Mortgagee may
determine in its sole discretion. For purposes hereof, the term “Debts”
shall mean (i) the aggregate of the indebtedness evidenced by the Debentures in favor of
each Mortgagee in lawful money of the United States of America, interest, default
interest, late charges, prepayment premiums and other sums, as provided in the Debentures,
this Security Instrument or the other Investment Documents, (ii) all other moneys agreed
or provided to be paid by Ener1 pursuant to the Debentures or the other Investment
Documents, (iii) all sums advanced by Agent or a Mortgagee pursuant to this Security
Instrument to protect and preserve the Property and the lien and the security interest
created hereby and (iv) all other moneys agreed or provided to be paid by Mortgagor
pursuant to the Subsidiary Guaranty. For purposes hereof, the term “Other
Obligations” shall mean the obligations of Mortgagor (other than the obligation
to repay the Debts) contained in this Security Instrument, the Debentures and the other
Investment Documents. For purposes hereof, the term “Investment
Documents” shall mean the Debentures, this Security Instrument, the Security
Agreement, the Subsidiary Guaranty and any other documents or instruments which now or
shall hereafter wholly or partially secure or guarantee payment of any Debenture or which
have otherwise been executed or are hereafter executed by Ener1, Mortgagor and/or any
other person or entity in connection with the loan evidenced by the Debentures and any
renewal, extension, amendment, modification, consolidation, change of, or substitution or
replacement for, all or any part thereof. Mortgagor’s obligations under the
Subsidiary Guaranty for the payment of the Debts and Mortgagor’s obligation to
perform the Other Obligations shall be referred to collectively below as the
“Obligations.” All the covenants, conditions and agreements contained in
the Subsidiary Guaranty and the other Investment Documents to which Mortgagor is a party
are hereby made a part of this Security Instrument to the same extent and with the same
force as if fully set forth herein. 

3 — MORTGAGOR
COVENANTS 

        Mortgagor
covenants and agrees that: 

        3.1      PERFORMANCE  OF  OBLIGATIONS.  Mortgagor  will pay and  perform the  Obligations  at the
time and in the manner provided in this Security Instrument, the Subsidiary Guaranty and the other Investment
Documents to which Mortgagor is a party.

        3.2
INSURANCE.

         (a)       
          Mortgagor shall obtain and maintain, or cause to be maintained, insurance for
          Mortgagor and the Property providing at least the coverages set forth herein: 

         (i)       
          comprehensive all risk insurance on the Improvements and the Personal Property,
          in each case (A) in an amount equal to 100% of the “Full Replacement
          Cost,” which for purposes of this Security Instrument shall mean actual
          replacement value (exclusive of costs of excavations, foundations, underground
          utilities and footings) with a waiver of depreciation; (B) containing either an
          agreed amount endorsement or a waiver of all co-insurance provisions; (C)
          providing for a deductible of not greater than $10,000; (D) if any of the
          Improvements or the use of the Property shall at any time constitute a legal
          non-conforming structure or use, Mortgagor shall obtain an “Ordinance or
          Law Coverage” or “Enforcement” endorsement, which shall include
          sufficient coverage for (1) costs to comply with building and zoning codes
          and ordinances, (2) demolition costs, and (3) increased costs of
          construction, and (E) providing windstorm coverage in an amount equal to 100% of
          the “Full Replacement Cost”. If any portion of the Improvements is
          currently or at any time in the future located in a federally designated
          “special flood hazard area”, Mortgagor shall obtain flood hazard
          insurance in such an amount as each Mortgagee shall require, but in no event
          less than the maximum amount of such insurance available under the National
          Flood Insurance Act of 1968, the Flood Disaster Protection Act of 1973 or the
          National Flood Insurance Reform Act of 1994, as each may be amended. In
          addition, in the event the Property is located in an area with a high degree of
          seismic activity, Mortgagor shall obtain earthquake insurance in amounts and in
          form and substance satisfactory to each Mortgagee; 

         (ii)       
          commercial general liability insurance against claims for personal injury,
          bodily injury, death or property damage occurring upon, in or about the
          Property, such insurance (A) to be on the “occurrence” form with a
          combined single limit (including “umbrella” coverage in place) of not
          less than (1) $3,000,000 and a general aggregate limit of not less than
          $4,000,000; or (2) if any of the Improvements contain elevators, a combined
          single limit of not less than $5,000,000 and a general aggregate limit of
          $6,000,000; (B) to continue at not less than the aforesaid limit until required
          to be changed by a Mortgagee in writing by reason of changed economic conditions
          making such protection inadequate; and (C) to cover at least the following
          hazards: (1) premises and operations ; (2) products and completed operations on
          an “if any” basis; (3) independent contractors; and (4) blanket
          contractual liability for all written and oral contracts, to the extent the same
          is available; 

         (iii)       
          business income insurance (A) with loss payable to each Mortgagee; (B) covering
          all risks required to be covered by the insurance provided for in Subsection
          3.2(a)(i); (C) on an agreed value actual loss sustained basis in an
          amount equal to 100% of the projected gross income from the Property for a
          period of twelve (12) months; and (D) if the Mortgagor is required to
          obtain an “Ordinance or Law Coverage” or “Enforcement”
          endorsement pursuant to Subsection 3.2(a)(i)(D), coverage for the
          increased period of restoration. The amount of such business income insurance
          shall be determined prior to the date hereof and at least once each year
          thereafter based on Mortgagor’s reasonable estimate of the gross income
          from the Property for the succeeding twelve (12) month period. All insurance
          proceeds payable to a Mortgagee pursuant to this Subsection shall be held by
          such Mortgagee and shall be applied to the obligations secured hereunder from
          time to time due and payable hereunder and under the Debentures; provided,
          however, that nothing herein contained shall be deemed to relieve Mortgagor of
          its obligations to pay the obligations secured hereunder on the respective dates
          of payment provided for in the Debentures except to the extent such amounts are
          actually paid out of the proceeds of such business income insurance; 

         (iv)       
          (A) at all times during which structural construction, material repairs or
          alterations are being made with respect to the Improvements, owner’s
          contingent or protective liability insurance covering claims not covered by or
          under the terms or provisions of the above mentioned commercial general
          liability insurance policy; and (B) during new construction, the insurance
          provided for in Subsection 3.2(a)(i) written in a so-called
          builder’s risk completed value form on a non-reporting basis; 

         (v)       
          if Mortgagor has employees, workers’ compensation, subject to the statutory
          limits of the state in which the Property is located, and employer’s
          liability insurance with a limit of at least $1,000,000 per accident and per
          disease per employee, and $1,000,000 aggregate coverage for disease in respect
          of any work or operations on or about the Property, or in connection with the
          Property or its operation; 

         (vi)       
          if the Property contains HVAC or other equipment not covered by the
          comprehensive all risk insurance, comprehensive boiler and machinery insurance,
          in amounts as shall be reasonably required by each Mortgagee; 

         (vii)       
          if Mortgagor owns or operates motor vehicles, motor vehicle liability coverage
          for all owned and non-owned vehicles, including rented and leased vehicles
          containing minimum limits reasonably acceptable to each Mortgagee; and 

         (viii)       
          such other insurance and in such amounts as a Mortgagee from time to time may
          reasonably request against such other insurable hazards which at the time are
          commonly insured against for property similar to the Property located in or
          around the region in which the Property is located. 

         (b)       
          All insurance provided for in Subsection 3.2(a) hereof shall be obtained
          under valid and enforceable policies (the “Policies” or in the
          singular, the “Policy”), and shall be subject to the approval
          of each Mortgagee as to insurance companies, amounts, forms, deductibles, loss
          payees and insureds. The insurance companies must be approved, authorized or
          licensed to provide insurance in the state in which the Property is located and
          have a rating of “A” or better for claims paying ability assigned by
          Moody’s Investors Service, Inc. and Standard & Poor’s Rating Group
          or a general policy rating of “A-” or better and a financial class of
          VIII or better assigned by A.M. Best Company, Inc. Each such insurer shall be
          referred to herein as a “Qualified Insurer”. 

         (c)       
          Mortgagor shall not obtain (i) any umbrella or blanket liability or casualty
          Policy unless, in each case, such Policy is approved in advance in writing by
          each Mortgagee and such Mortgagee’s interest is included therein as
          provided in this Security Instrument and such Policy is issued by a Qualified
          Insurer, or (ii) separate insurance concurrent in form or contributing in the
          event of loss with that required in Subsection 3.2(a) to be furnished by,
          or which may be reasonably required to be furnished by, Mortgagor. In the event
          Mortgagor obtains separate insurance or an umbrella or a blanket Policy,
          Mortgagor shall concurrently notify each Mortgagee of the same and shall cause
          certified copies of each Policy to be delivered as required in Subsection
          3.2(e). Any blanket insurance Policy shall specifically allocate to the
          Property the amount of coverage from time to time required hereunder and shall
          otherwise provide the same protection as would a separate Policy insuring only
          the Property in compliance with the provisions of Subsection 3.2(a). 

         (d)       
          All Policies of insurance provided for or contemplated by Subsection
          3.2(a), except for the Policy referenced in Subsection 3.2(a)(v),
          shall name each Mortgagee and Mortgagor as the insured or additional insured, as
          their respective interests may appear, and in the case of property damage,
          boiler and machinery, flood and earthquake insurance, shall contain a so-called
          New York standard non-contributing Mortgagee clause in favor of each Mortgagee
          providing, among other things, that each Mortgagee shall receive notification of
          any termination or cancellation of insurance and that the loss thereunder shall
          be payable to the Mortgagees. 

         (e)       
          If not previously delivered to each Mortgagee, Mortgagor shall deliver to each
          Mortgagee no later than thirty (30) days after the date hereof certified copies
          of the existing Policies providing the insurance coverage required under
          Section 3.2(a) marked “premium paid” or accompanied by evidence
          satisfactory to each Mortgagee of payment of the premiums due thereunder (the
          “Insurance Premiums”) annually in advance. In addition, no
          later than thirty (30) days prior to the expiration dates of the Policies which
          Mortgagor is now or hereafter required to maintain hereunder, Mortgagor shall
          deliver to each Mortgagee certified copies of new or renewal Policies (also
          marked “premium paid” or accompanied by evidence satisfactory to each
          Mortgagee of payment of the Insurance Premiums due thereunder annually in
          advance), together with certificates of insurance therefor, setting forth, among
          other things, the amounts of insurance maintained, the risks covered by such
          insurance and the insurance company or companies which carry such insurance. If
          requested by a Mortgagee, Mortgagor shall furnish verification of the adequacy
          of such insurance by an independent insurance broker or appraiser acceptable to
          such requesting Mortgagee. Under no circumstances shall Mortgagor be permitted
          to finance the payment of any portion of the Insurance Premiums. 

         (f)       
          If at any time a Mortgagee is not in receipt of written evidence that all
          insurance required hereunder is in full force and effect, such Mortgagee shall
          have the right, without notice to Mortgagor to take such action as such
          Mortgagee deems necessary to protect its interest in the Property, including,
          without limitation, the obtaining of such insurance coverage as such Mortgagee
          in its sole discretion deems appropriate, and all expenses incurred by such
          Mortgagee in connection with such action or in obtaining such insurance and
          keeping it in effect shall be paid by Mortgagor to such Mortgagee upon demand
          and until paid shall be secured by this Security Instrument and shall bear
          interest in accordance with Section 10.3 hereof. 

         (g)       
          If the Property shall be damaged or destroyed, in whole or in part, by fire or
          other casualty, Mortgagor shall give prompt notice of such damage to each
          Mortgagee and shall promptly commence and diligently prosecute the completion of
          the repair and restoration of the Property as nearly as possible to the
          condition the Property was in immediately prior to such fire or other casualty,
          with such alterations as may be approved by each Mortgagee (the
          “Restoration”) and otherwise in accordance with Section
          4.3 of this Security Instrument, except in instances where the Mortgagees
          have failed or elected not to disburse Net Proceeds to Mortgagor under such
          Section 4.3 (provided that such exception shall not apply if the failure
          to disburse is attributable to Mortgagor’s failure to comply with the
          conditions set forth in Clauses (A), (D) or (I) of Subsection 4.3(b)(i)
          or in Subsection 4.3(b)(ii) or any other conditions set forth in
          Section 4.3 which Mortgagor has the practical ability to satisfy). A
          Mortgagee may, but shall not be obligated to make proof of loss if not made
          promptly by Mortgagor. 

         (h)       
          In the event of foreclosure of this Security Instrument, or other transfer of
          title to the Property in extinguishment in whole or in part of the Debt, all
          right, title and interest of Mortgagor in and to such policies then in force
          concerning the Property and all proceeds payable thereunder shall thereupon vest
          in the purchaser at such foreclosure or the Mortgagees or other transferee in
          the event of such other transfer of title. 

         (i)       
          By their acceptance of this Security Agreement, except as otherwise set forth in that certain post-closing side letter, dated as of the date hereof,
Mortgagees hereby confirm that
          the insurance coverages currently being maintained by Mortgagor are acceptable
          to Mortgagees as of the date hereof. 

        3.3
PAYMENT OF TAXES, ETC. Mortgagor shall promptly pay all taxes, assessments, water
rates, sewer rents, governmental impositions, and other charges, including without
limitation vault charges and license fees for the use of vaults, chutes and similar areas
adjoining the Land, now or hereafter levied or assessed or imposed against the Property or
any part thereof (the “Taxes”), all ground rents, maintenance charges,
property association charges and similar charges, now or hereafter levied or assessed or
imposed against the Property or any part thereof (the “Other Charges”),
and all charges for utility services provided to the Property prior to the time same
become delinquent. Mortgagor will deliver to each Mortgagee, promptly upon
Mortgagee’s request, evidence satisfactory to each Mortgagee that the Taxes, Other
Charges and utility service charges have been so paid or are not then delinquent.
Mortgagor shall not suffer and shall promptly cause to be paid and discharged any lien or
charge whatsoever which may be or become a lien or charge against the Property. Except to
the extent sums sufficient to pay all Taxes and Other Charges have been deposited with a
Mortgagee in accordance with the terms of this Security Instrument, Mortgagor shall
furnish to each Mortgagee paid receipts for the payment of the Taxes and Other Charges
prior to the date the same shall become delinquent. 

        3.4
RESERVES. If a Mortgagee so requests in writing, Mortgagor shall pay to the
Mortgagee or each Mortgagee’s designee on the first day of each calendar month (a)
one-twelfth of an amount which would be sufficient to pay the Taxes payable, or estimated
by such Mortgagee to be payable, during the next ensuing twelve (12) months and (b)
one-twelfth of an amount which would be sufficient to pay the Insurance Premiums due for
the renewal of the coverage afforded by the Policies upon the expiration thereof (the
amounts in (a) and (b) above shall be called the “Escrow Fund”).
Mortgagor agrees to notify each Mortgagee immediately of any changes to the amounts,
schedules and instructions for payment of any Taxes and Insurance Premiums of which it has
obtained knowledge and authorizes each Mortgagee or such Mortgagee’s respective agent
to obtain the bills for Taxes and Other Charges directly from the appropriate taxing
authority. The Escrow Fund and the payments of interest or principal or both, payable
pursuant to the Debentures shall be added together and shall be paid as an aggregate sum
by Mortgagor to the Mortgagees. The Mortgagees will apply the Escrow Fund to payments of
Taxes and Insurance Premiums required to be made by Mortgagor pursuant to Sections
3.2 and 3.3 hereof. If the amount of the Escrow Fund shall exceed the amounts
due for Taxes and Insurance Premiums pursuant to Sections 3.2 and 3.3
hereof, then, if agreed to by each Mortgagee, in their respective discretion, any excess
shall be returned to Mortgagor or credited against future payments to be made to the
Escrow Fund; provided, however, each Mortgagee shall comply with all laws
applicable to the handling of any portion of the Escrow Fund held by such Mortgagee In
allocating such excess, a Mortgagee may deal with the person shown on the records of such
Mortgagee to be the owner of the Property. If the Escrow Fund is not sufficient to pay the
items set forth in clauses (a) and (b) above, then upon demand from a Mortgagee, Mortgagor
shall promptly pay to the Mortgagee, or Mortgagee’s designee, an amount which
Mortgagee shall estimate as sufficient to make up the deficiency. The Escrow Fund shall
not constitute a trust fund and may be commingled with other monies held by the
Mortgagees. Mortgagor shall be entitled to receive any earnings or interest that are
earned with respect to the Escrow Fund; provided, however, Mortgagees shall not have any
duty to Mortgagor of any kind or nature with respect to the amount of any such interest or
earnings. 

        3.5
CONDEMNATION. Mortgagor shall promptly give each Mortgagee notice of the actual or
threatened commencement of any condemnation or eminent domain proceeding and shall deliver
to each Mortgagee copies of any and all papers served in connection with such proceedings.
A Mortgagee may participate in any such proceedings, and Mortgagor shall from time to time
deliver to such Mortgagee all instruments requested by such Mortgagee to permit such
participation. Mortgagor shall, at its expense, diligently prosecute any such proceedings,
and shall consult with each Mortgagee, its respective attorneys and experts, and cooperate
with each of them in the carrying on or defense of any such proceedings. Notwithstanding
any taking by any public or quasi-public authority through eminent domain or otherwise
(including but not limited to any transfer made in lieu of or in anticipation of the
exercise of such taking), Mortgagor shall continue to pay the Debts at the time and in the
manner provided for its payment in the Debentures and in this Security Instrument and the
Debts shall not be reduced until any award or payment therefor shall have been actually
received and applied by the Mortgagees, after the deduction of expenses of collection, to
the reduction or discharge of the Debts. A Mortgagee shall not be limited to the interest
paid on the award by the condemning authority but each shall be entitled to receive out of
the award interest at the rate or rates provided herein or in the Debentures. If the
Property or any portion thereof is taken by a condemning authority, Mortgagor shall
promptly commence and diligently prosecute the Restoration of the remaining portion of the
Property, if any, and otherwise comply with the provisions of Section 4.3 of this
Security Instrument, except in instances where the Mortgagees have failed or elected not
to disburse Net Proceeds to Mortgagor under such Section 4.3 (provided that such
exception shall not apply if the failure to disburse is attributable to Mortgagor’s
failure to comply with the conditions set forth in clauses (A), (D) or
(I) of Subsection 4.3(b)(i) or in Subsection 4.3(b)(ii) or any other
conditions set forth in Section 4.3 which Mortgagor has the practical ability to
satisfy). If the Property is sold, through foreclosure or otherwise, prior to the receipt
by the Mortgagees of the award or payment, a Mortgagee shall have the right, whether or
not a deficiency judgment on the Debentures shall have been sought, recovered or denied,
to receive the award or payment, or a portion thereof sufficient to pay the Debts. 

        3.6
[INTENTIONALLY OMITTED]

        3.7
MAINTENANCE OF PROPERTY. Mortgagor shall cause the Property to be maintained in a
good and safe condition and repair and in accordance with requirements of all restrictive
covenants affecting the Land. The Improvements and the Personal Property shall not be
removed, demolished or materially altered (except for normal replacement of the Personal
Property) in each case, without the consent of each Mortgagee. For purposes of the
preceding sentence, an alteration of the Improvements shall be deemed to be
“material” if the anticipated or actual cost thereof is $100,000 or more.
Subject to the provisions of Subsection 3.2(g) and Section 3.5, Mortgagor
shall promptly repair, replace or rebuild any part of the Property which may be destroyed
by any casualty, or become damaged, worn, dilapidated or obsolete or which may be affected
by any proceeding of the character referred to in Section 3.5 hereof and shall
complete and pay for any structure at any time in the process of construction or repair on
the Land. Mortgagor shall not initiate, join in, acquiesce in, or consent to any change in
any private restrictive covenant, zoning law or other public or private restriction,
limiting or defining the uses which may be made of the Property or any part thereof. If
under applicable zoning provisions the use of all or any portion of the Property is or
shall become a nonconforming use, Mortgagor will not cause or permit the nonconforming use
to be discontinued or abandoned without the express written consent of each Mortgagee. 

        3.8
WASTE. Mortgagor shall not commit or suffer any waste of the Property or make any
change in the use of the Property which will in any way materially increase the risk of
fire or other hazard arising out of the operation of the Property, or take any action that
might invalidate or give cause for cancellation of any Policy, or do or permit to be done
thereon anything that may in any way materially impair the value of the Property or the
security of this Security Instrument. 

        3.9
COMPLIANCE WITH LAWS. Mortgagor shall (i) promptly comply with all existing and
future federal, state and local laws, orders, ordinances, governmental rules and
regulations or court orders affecting the Property, or the use thereof including, but not
limited to, the Americans with Disabilities Act (“ADA”) (collectively,
the “Applicable Laws”), (ii) from time to time, upon Mortgagee’s
request, provide Mortgagee with evidence satisfactory to such Mortgagee that the Property
complies with all Applicable Laws or is exempt from compliance with Applicable Laws, (iii)
give prompt notice to each Mortgagee of the receipt by Mortgagor of any written notice
related to a violation of any Applicable Laws and of the commencement of any proceedings
or investigations which relate to compliance with Applicable Laws, and (iv) take
appropriate measures to prevent and will not engage in or knowingly permit any illegal
activities at the Property. 

        3.10
BOOKS AND RECORDS. (a) Mortgagor shall furnish a Mortgagee with such information
pertaining to the Property as may, from time to time, be reasonably required by such
Mortgagee in form and substance reasonably satisfactory to such Mortgagee;
provided, however, Mortgagor shall not deliver any financial information
pertaining to Mortgagor or Ener1 to Agent or a Mortgagee that is not expressly requested
by Agent or such Mortgagee. 

         (b)       
          A Mortgagee may commission new or updated appraisals, phase I and/or phase II
          environmental reports, property condition surveys and seismic risk assessments
          of the Property to be prepared by third parties (each a “Third
          Party”) designated by such Mortgagee after the date hereof (each, a
          “Third Party Report”). Any additional updates of any Third
          Party Report or any new Third Party Reports may be obtained at Mortgagor’s
          expense any time a Mortgagee reasonably believes there has been a change in the
          condition of the Property (it being understood that each Mortgagee shall have
          the right but not the obligation to obtain such updated or new Third Party
          Report at its own expense at any time). Mortgagor shall cooperate with each
          Third Party and the Mortgagees in the preparation of the Third Party Reports and
          shall reimburse each Mortgagee within ten (10) days after a Mortgagee’s
          demand for all costs incurred by each Mortgagee in connection with such Third
          Party Reports. 

        3.11
PAYMENT FOR LABOR AND MATERIALS. Mortgagor will promptly pay when due all bills and
costs for labor, materials, and specifically fabricated materials incurred in connection
with the Property and never permit to be created or exist in respect of the Property or
any part thereof any other or additional lien or security interest other than the liens or
security interests hereof, except for the Permitted Exceptions (defined below). 

        3.12     [INTENTIONALLY OMITTED]

        3.13
PERFORMANCE OF OTHER AGREEMENTS. Mortgagor shall observe and perform each and every
term to be observed or performed by Mortgagor pursuant to the terms of any agreement or
recorded instrument affecting or pertaining to the Property, or given by Mortgagor to a
Mortgagee for the purpose of further securing an obligation secured hereby and any
amendments, modifications or changes thereto. 

        3.14
CHANGE OF NAME, IDENTITY OR STRUCTURE. Mortgagor will not change Mortgagor’s
name, identity (including its trade name or names) or, if not an individual,
Mortgagor’s corporate, limited liability company, partnership or other structure
without notifying each Mortgagee of such change in writing at least thirty (30) days prior
to the effective date of such change and, in the case of a change in Mortgagor’s
structure, without first obtaining the prior written consent of each Mortgagee. Mortgagor
will execute and deliver to each Mortgagee, prior to or contemporaneously with the
effective date of any such change, any financing statement or financing statement change
required by a Mortgagee to establish or maintain the validity, perfection and priority of
the security interest granted herein. At the request of a Mortgagee, Mortgagor shall
execute a certificate in form satisfactory to such Mortgagee listing the trade names under
which Mortgagor intends to operate the Property, and representing and warranting that
Mortgagor does business under no other trade name with respect to the Property 

        3.15
EXISTENCE. Mortgagor will continuously maintain its existence and its rights to do
business in the state where the Property is located together with its franchises and trade
names. 

4 — SPECIAL
COVENANTS 

        Mortgagor
covenants and agrees that: 

        4.1      PROPERTY USE.  The Property shall not be used for any unlawful use or purpose.

        4.2
[Intentionally omitted]

        4.3      RESTORATION.  The following  provisions  shall apply in connection  with the Restoration
of the Property: 

         (a)       
          If the Net Proceeds shall be less than One Hundred Thousand Dollars ($100,000)
          and the costs of completing the Restoration shall be less than One Hundred
          Thousand Dollars ($100,000), the Net Proceeds will be disbursed by Mortgagees to
          Mortgagor upon receipt, provided that all of the conditions set forth in
          Subsection 4.3(b)(i) are met and Mortgagor delivers to each Mortgagee a
          written undertaking to expeditiously commence and to satisfactorily complete
          with due diligence the Restoration in accordance with the terms of this Security
          Instrument. 

         (b)       
          If the Net Proceeds are equal to or greater than One Hundred Thousand Dollars
          ($100,000) or the costs of completing the Restoration is equal to or greater
          than One Hundred Thousand Dollars ($100,000), the Mortgagees shall make the Net
          Proceeds available for the Restoration in accordance with the provisions of this
          Subsection 4.3(b). The term “Net Proceeds” for purposes
          of this Section 4.3 shall mean: (i) the net amount of all insurance
          proceeds received by the Mortgagees pursuant to Subsections 3.2(a)(i),
          (iv), (vi) and (ix) of this Security Instrument as a result
          of such damage or destruction (or any proceeds of self-insurance maintained in
          lieu of such insurance policies), after deduction of its reasonable costs and
          expenses (including, but not limited to, reasonable counsel fees), if any, in
          collecting same (“Insurance Proceeds”), or (ii) the net amount
          of all awards and payments received by the Mortgagees with respect to a taking
          referenced in Section 3.5 of this Security Instrument, after deduction of
          its reasonable costs and expenses (including, but not limited to, reasonable
          counsel fees), if any, in collecting same (“Condemnation
          Proceeds”), whichever the case may be. 

         (i)       
          The Net Proceeds shall be made available to Mortgagor for the Restoration
          provided that each of the following conditions are met: (A) no Event of Default
          shall have occurred and be continuing under any Debenture, this Security
          Instrument or any of the other Investment Documents; (B) (1) in the event Net
          Proceeds are Insurance Proceeds, less than fifty percent (50%) of the total
          floor area of the Improvements has been damaged, destroyed, or rendered unusable
          as a result of such fire or other casualty or (2) in the event the Net Proceeds
          are Condemnation Proceeds, less than ten percent (10%) of the land constituting
          the Property is taken, and such land is located along the perimeter or periphery
          of the Property; (C) [intentionally omitted]; (D) Mortgagor shall have commenced
          the Restoration as soon as reasonably practicable (but in no event later than
          ninety (90) days after such damage or destruction or taking, whichever the case
          may be, occurs) and shall diligently pursue the same to satisfactory completion;
          (E) [intentionally omitted]; (F) [intentionally omitted]; (G) each Mortgagee
          shall be reasonably satisfied that the Restoration will be completed on or
          before the earliest to occur of (1) six (6) months prior to the Maturity Date
          (as defined in the Debentures), (2) twelve (12) months after the occurrence of
          such fire or other casualty or taking, whichever the case may be, or (3) such
          time as may be required under any applicable zoning laws, ordinances, rules or
          regulations in order to repair and restore the Property to the condition it was
          in immediately prior to such fire or other casualty or to as nearly as possible
          the condition it was in immediately prior to such taking, as applicable; (H) the
          Property and the use thereof after the Restoration will be in compliance with
          and permitted under all applicable zoning laws, ordinances, rules and
          regulations (including as a legally non-conforming structure, if the
          Improvements are legally non-conforming structures as of the date hereof); (I)
          the Restoration shall be done and completed by Mortgagor in an expeditious and
          diligent fashion and in compliance with all applicable laws, rules and
          regulations; and (J) such fire or other casualty or taking, as applicable, does
          not result in the loss of access to the Property or the Improvements. 

         (ii)       
          The Net Proceeds shall be held by the Mortgagees or their joint designee and,
          until disbursed in accordance with the provisions of this Subsection
          4.3(b), shall constitute additional security for the Obligations. The Net
          Proceeds shall be disbursed by the Mortgagees to, or as directed by, Mortgagor
          from time to time during the course of the Restoration, upon receipt of evidence
          satisfactory to each Mortgagee that (A) all materials installed and work and
          labor performed (except to the extent that they are to be paid for out of the
          requested disbursement and except for commercially reasonable Retainage for
          “punch-list” items) in connection with the Restoration have been paid
          for in full, and (B) there exist no notices of pendency, stop orders,
          mechanic’s or materialman’s liens or notices of intention to file
          same, or any other liens or encumbrances of any nature whatsoever on the
          Property arising out of the Restoration which have not either been fully bonded
          to the satisfaction of each Mortgagee and discharged of record or in the
          alternative fully insured to the satisfaction of each Mortgagee by the title
          company insuring the lien of this Security Instrument. 

         (iii)       
          All plans and specifications required in connection with the Restoration shall
          be subject to prior review and approval in all respects by each Mortgagee and by
          an independent consulting engineer selected by such Mortgagee (each, a
          “Casualty Consultant”), which approval shall not be
          unreasonably withheld or delayed. Each Mortgagee shall have the use of the plans
          and specifications and all permits, licenses and approvals required or obtained
          in connection with the Restoration. The identity of the contractors,
          subcontractors and materialmen engaged in the Restoration, as well as the
          contracts under which they have been engaged, shall be subject to prior review
          and acceptance by each Mortgagee and the Casualty Consultant, which approval
          shall not be unreasonably withheld or delayed. All costs and expenses incurred
          by each Mortgagee in connection with making the Net Proceeds available for the
          Restoration including, without limitation, reasonable counsel fees and
          disbursements and the Casualty Consultant’s fees, shall be paid by
          Mortgagor. 

         (iv)       
          In no event shall the Mortgagees or their designee be obligated to make
          disbursements of the Net Proceeds in excess of an amount equal to the costs
          actually incurred from time to time for work in place as part of the
          Restoration, as certified by the Casualty Consultant, minus the Casualty
          Retainage. The term “Casualty Retainage” as used in this
          Subsection 4.3(b) shall mean an amount equal to 10% of the costs actually
          incurred for work in place as part of the Restoration, as certified by the
          Casualty Consultant, until the Restoration has been completed. The Casualty
          Retainage shall in no event, and notwithstanding anything to the contrary set
          forth above in this Subsection 4.3(b), be less than the amount actually
          held back by Mortgagor from contractors, subcontractors and materialmen engaged
          in the Restoration. The Casualty Retainage shall not be released until the
          Casualty Consultant certifies to each Mortgagee that the Restoration has been
          completed in accordance with the provisions of this Subsection 4.3(b) and
          that all approvals necessary for the re-occupancy and use of the Property have
          been obtained from all appropriate governmental and quasi-governmental
          authorities, and the Mortgagees receive evidence reasonably satisfactory to each
          Mortgagee that, subject to Section 4.3(b)(ii)(B) above, the costs of the
          Restoration have been paid in full or will be paid in full out of the Casualty
          Retainage, provided, however, that the Mortgagees will release the portion of
          the Casualty Retainage being held with respect to any contractor, subcontractor
          or materialman engaged in the Restoration as of the date upon which the Casualty
          Consultant certifies to each Mortgagee that the contractor, subcontractor or
          materialman has satisfactorily completed all work and has supplied all materials
          in accordance with the provisions of the contractor’s, subcontractor’s
          or materialman’s contract, and the contractor, subcontractor or materialman
          delivers the lien waivers and evidence of payment in full of all sums due to the
          contractor, subcontractor or materialman as may be reasonably requested by a
          Mortgagee or by the title company insuring the lien of this Security Instrument.
          If required by a Mortgagee, the release of any such portion of the Casualty
          Retainage shall be approved by the surety company, if any, which has issued a
          payment or performance bond with respect to the contractor, subcontractor or
          materialman. 

         (v)       
          The Mortgagees shall not be obligated to make disbursements of the Net Proceeds
          more frequently than once every calendar month. 

         (vi)       
          If at any time the Net Proceeds or the undisbursed balance thereof shall not, in
          the reasonable opinion of a Mortgagee, be sufficient to pay in full the balance
          of the costs which are estimated by the Casualty Consultant to be incurred in
          connection with the completion of the Restoration, Mortgagor shall deposit the
          deficiency (the “Net Proceeds Deficiency”) with the Mortgagees
          or their joint designee before any further disbursement of the Net Proceeds
          shall be made. The Net Proceeds Deficiency deposited with the Mortgagees or
          their designee shall be held by the Mortgagees or their designee and shall be
          disbursed for costs actually incurred in connection with the Restoration on the
          same conditions applicable to the disbursement of the Net Proceeds, and until so
          disbursed pursuant to this Subsection 4.3(b) shall constitute additional
          security for the Obligations. With respect to Restorations following a casualty
          in which the Improvements are restored to substantially the same condition as
          they existed prior to the casualty, the excess, if any, of the Net Proceeds and
          the remaining balance, if any, of the Net Proceeds Deficiency deposited with the
          Mortgagees or their designee after the Casualty Consultant certifies to each
          Mortgagee that the Restoration has been completed in accordance with the
          provisions of this Subsection 4.3(b), and the receipt by the Mortgagees
          of evidence reasonably satisfactory to each Mortgagee that all costs incurred in
          connection with the Restoration have been paid in full, shall be remitted by the
          Mortgagees to Mortgagor, provided no Event of Default shall have occurred and
          shall be continuing under any Debenture, this Security Instrument or any of the
          other Investment Documents. 

         (c)       
          All Net Proceeds not required (i) to be made available for the Restoration or
          (ii) to be returned to Mortgagor as excess Net Proceeds pursuant to
          Subsection 4.3(b)(vi) shall, subject to Section 4.3(d) below, be
          remitted by the Mortgagees to Mortgagor unless an event of Default shall exist,
          in which case any such Net Proceeds may be retained and applied by a Mortgagee
          toward the payment of the Debts of such Mortgagee whether or not then due and
          payable in such order, priority and proportions as such Mortgagee in its
          discretion shall deem proper or, at the election of all Mortgagees, the same may
          be paid, either in whole or in part, to Mortgagor for such purposes as the
          Mortgagees shall jointly designate, in their sole discretion. Any such
          prepayment shall be applied to the principal last due under the Debentures and
          shall not release Mortgagor from the obligation to pay the payments required to
          be paid by Mortgagor under the Subsidiary Guaranty and such payments shall not
          be adjusted or recalculated as a result of such partial prepayment. If the
          Mortgagees shall receive and retain Net Proceeds, the lien of this Security
          Instrument shall be reduced only by the amount thereof received and retained by
          each Mortgagee and actually applied by each Mortgagee in reduction of the
          respective Debts. 

         (d)       
          Notwithstanding anything contained herein to the contrary, if Mortgagor is
          otherwise entitled to receive Net Proceeds but Mortgagor elects not to undertake
          the Restoration, then (i) such Net Proceeds (the “Special Net
          Proceeds”) shall be deposited into one or more Special Proceeds
          Accounts (as hereinafter defined). As used herein, the term “Special
          Proceeds Account” means an account (i) that is established at a
          financial institution that is acceptable to the Secured Parties in their sole
          and absolute discretion, and (ii) in which the Mortgagees have a first priority
          perfected security interest. In furtherance of the foregoing, Mortgagor shall
          not be permitted to receive any Special Net Proceeds pursuant to this Section
          4.3(d) unless and until a Special Proceeds Account that is acceptable to the
          Mortgagees has been established. From and after the date that is two (2) years
          after the date hereof, each Mortgagee shall have the right, but not the
          obligation, in each Mortgagee’s sole discretion, to apply its Proportionate
          Loan Share of any funds contained in a Special Proceeds Account to satisfy all
          or any of the Obligations then owing to such Mortgagee in any order that such
          Mortgagee deems appropriate. 

5 —
REPRESENTATIONS AND WARRANTIES 

Mortgagor represents and warrants to
Agent and each Mortgagee that: 

        5.1
WARRANTY OF TITLE. Mortgagor has paid for and has good title to the Property and
has the right to mortgage, grant, bargain, sell, pledge, assign, warrant, set over,
transfer and convey the same and that Mortgagor possesses an unencumbered fee simple
absolute estate in the Land and the Improvements and that it owns the Property free and
clear of all liens, encumbrances and charges whatsoever except for those exceptions shown
in the title insurance policy insuring the lien of this Security Instrument (the
“Permitted Exceptions”). Mortgagor shall forever warrant, defend and
preserve the title and the validity and priority of the lien of this Security Instrument
and shall forever warrant and defend the same to each Mortgagee against the claims of all
persons whomsoever. 

        5.2
AUTHORITY. Mortgagor (and the undersigned representative of Mortgagor, if any) has
full power, authority and legal right to execute this Security Instrument, and to
mortgage, grant, bargain, sell, pledge, assign, warrant, set-over, transfer and convey the
Property pursuant to the terms hereof and to keep and observe all of the terms of this
Security Instrument on Mortgagor’s part to be performed. 

        5.3
LEGAL STATUS AND AUTHORITY. Mortgagor (a) is duly organized, validly existing and
in good standing under the laws of its state of organization or incorporation; (b) is duly
qualified to transact business and is in good standing in the State where the Property is
located; and (c) has all necessary approvals, governmental and otherwise, and full power
and authority to own the Property and carry on its business as now conducted and proposed
to be conducted. Mortgagor now has and shall continue to have the full right, power and
authority to operate and lease the Property, to encumber the Property as provided herein
and to perform all of the other obligations to be performed by Mortgagor under the
Subsidiary Guaranty, this Security Instrument and the other Investment Documents to which
Mortgagor is a party. 

        5.4
VALIDITY OF DOCUMENTS. (a) The execution, delivery and performance of this Security
Instrument (i) is within the corporate power of Mortgagor; (ii) has been authorized by all
requisite corporate action; (iii) has received all necessary approvals and consents,
corporate, governmental or otherwise; (iv) will not violate, conflict with, result in a
breach of or constitute (with notice or lapse of time, or both) a default under any
provision of law, any order or judgment of any court or governmental authority, the
articles of incorporation, by-laws or other governing instrument of Mortgagor, or any
indenture, agreement or other instrument to which Mortgagor is a party or by which it or
any of its assets or the Property is or may be bound or affected; (v) will not result in
the creation or imposition of any lien, charge or encumbrance whatsoever upon any of its
assets, except the lien and security interest created hereby; and (vi) will not require
any authorization or license from, or any filing with, any governmental or other body
(except for the recordation of this instrument in appropriate land records in the State
where the Property is located); and (b) this Security Instrument constitutes the legal,
valid and binding obligations of Mortgagor. 

        5.5  [INTENTIONALLY OMITTED]

        5.6
STATUS OF PROPERTY. (a) No portion of the Improvements is located in an area
identified by the Secretary of Housing and Urban Development or any successor thereto as
an area having special flood hazards pursuant to the National Flood Insurance Act of 1968
or the Flood Disaster Protection Act of 1973, as amended, or any successor law, or, if
located within any such area, Mortgagor has obtained and will maintain the insurance
prescribed in Section 3.2 hereof; (b) Mortgagor has obtained all necessary
certificates, licenses and other approvals, governmental and otherwise, necessary for the
operation of the Property and the conduct of its business and all required zoning,
building code, land use, environmental and other similar permits or approvals, all of
which are in full force and effect as of the date hereof and not subject to revocation,
suspension, forfeiture or modification; (c) the Property and the present and contemplated
use and occupancy thereof are in compliance with all Applicable Laws in all material
respects, including, without limitation, zoning ordinances, building codes, land use and
environmental laws, laws relating to the disabled (including, but not limited to, the ADA)
and other similar laws; (d) the Property is served by all utilities (including, but not
limited to, public water and sewer systems) required for the current or contemplated use
thereof; (e) all utility service is provided by public utilities and the Property has
accepted or is equipped to accept such utility service; (f) all public roads and streets
necessary for service of and access to the Property for the current or contemplated use
thereof have been completed, are serviceable and are physically and legally open for use
by the public; (g) the Property is, to the best of Mortgagor’s knowledge, free from
damage caused by fire or other casualty; (h) all costs and expenses of any and all labor,
materials, supplies and equipment used in the construction of the Improvements have been
paid in full; (i) all liquid and solid waste disposal, septic and sewer systems located on
the Property are in a good and safe condition and repair and in compliance with all
Applicable Laws; and (j) all Improvements lie within the boundary of the Land. 

        5.7  [INTENTIONALLY OMITTED]

        5.8
SEPARATE TAX LOT. The Property is assessed for real estate tax purposes as one or
more wholly independent tax lot or lots, separate from any adjoining land or improvements
not constituting a part of such lot or lots, and no other land or improvements are
assessed and taxed together with the Property or any portion thereof. 

        5.9  [INTENTIONALLY OMITTED]

        5.10  LEASES.  There are no Leases currently affecting the Property.

        5.11  [INTENTIONALLY OMITTED]

        5.12  BUSINESS  PURPOSES.  The loan  evidenced  by the  Debentures  is  solely  for the  business
purpose of Mortgagor and Ener1, and is not for personal, family, household, or agricultural purposes.

        5.13  [INTENTIONALLY OMITTED]

        5.14  MAILING  ADDRESS.  Mortgagor's  mailing  address,  as set  forth in the  opening  paragraph
hereof or as changed in accordance with the provisions hereof, is true and correct.

        5.15  [INTENTIONALLY OMITTED]

        5.16
DISCLOSURE. To Mortgagor’s best knowledge, Mortgagor has disclosed to each
Mortgagee all material facts and has not failed to disclose any material fact that could
cause any representation or warranty made herein to be materially misleading. 

        5.17  [INTENTIONALLY OMITTED]

        5.18  ILLEGAL  ACTIVITY.  No portion of the  Property  has been  purchased  with  proceeds of any
illegal activity.

        5.19  USE  OF   PROPERTY.   The   Property  is   currently   being  used  only  for   Mortgagor's
manufacturing, research and development use, and for no other use.

Mortgagor acknowledges that in
accepting the Debentures, this Security Instrument and the other Investment Documents,
each Mortgagee is expressly and primarily relying on the truth and accuracy of the
warranties and representations set forth above notwithstanding any investigation of the
Property by such Mortgagee; that such reliance existed on the part of each Mortgagee prior
to the date hereof; that the warranties and representations are a material inducement to
each Mortgagee in making the loan evidenced by the Debentures and that each Mortgagee
would not make such loan in the absence of such warranties. 

6 — OBLIGATIONS
AND RELIANCES 

        6.1
RELATIONSHIP OF MORTGAGOR, AGENT AND THE MORTGAGEES. The relationship between
Mortgagor, Agent and the Mortgagees is solely that of debtor, creditors and collateral
agent, and neither Agent nor any Mortgagee has any fiduciary or other special relationship
with Mortgagor and no term or condition of any of the Debentures, this Security Instrument
and the other Investment Documents shall be construed so as to deem the relationship
between Mortgagor, Agent and the Mortgagees to be other than that of debtor, creditors and
collateral agent. Mortgagor is not relying on Agent’s or a Mortgagee’s expertise
business acumen or advice in connection with the Property. 

        6.2
NO MORTGAGEE OBLIGATIONS. (a) Notwithstanding the provisions of Subsections
1.1(f) and (l) or Section 1.2, neither Agent nor any Mortgagee is
undertaking the performance of (i) any obligations under the Leases; or (ii) any
obligations with respect to such agreements, contracts, certificates, instruments,
franchises, permits, trademarks, licenses and other documents. 

         (b)       
          By accepting or approving anything required to be observed, performed or
          fulfilled or to be given to Agent or a Mortgagee pursuant to this Security
          Instrument, neither Agent nor any Mortgagee shall be deemed to have warranted,
          consented to, or affirmed the sufficiency, the legality or effectiveness of
          same, and such acceptance or approval thereof shall not constitute any warranty
          or affirmation with respect thereto by Agent or a Mortgagee. 

7 — FURTHER
ASSURANCES 

        7.1
RECORDING OF SECURITY INSTRUMENT, ETC. Each Mortgagee and Agent, on behalf of
Mortgagees, forthwith upon the execution and delivery of this Security Instrument and
thereafter, from time to time, will have the right to cause this Security Instrument and
any of the other Investment Documents creating a lien or security interest or evidencing
the lien hereof upon the Property to be filed, registered or recorded in such manner and
in such places as may be required by any present or future law in order to publish notice
of and fully to protect and perfect the lien or security interest hereof upon, and the
interest of Agent and each Mortgagee in, the Property. Except where prohibited by law,
Mortgagor will pay all taxes, duties, imposts, assessments, filing, registration and
recording fees, and any and all expenses incident to the preparation, execution,
acknowledgment and/or recording of the Investment Documents and any amendment or
supplement thereto, including, without limitation, any title insurance premium payable in
connection with the Mortgagees’ title insurance policy insuring this Security
Instrument and the cost of any affirmative insurance or endorsements thereto required by a
Mortgagee. 

        7.2
FURTHER ACTS, ETC. Mortgagor will, at the cost of Mortgagor, and without expense to
Agent or any Mortgagee, do, execute, acknowledge and deliver all and every such further
acts, deeds, conveyances, mortgages, deeds of trust, assignments, notices of assignments,
transfers, deeds to secure debt and assurances as Agent or a Mortgagee shall, from time to
time, reasonably require, for the better assuring, conveying, assigning, transferring, and
confirming unto Agent and/or such Mortgagee the property and rights hereby mortgaged,
granted, bargained, sold, conveyed, confirmed, pledged, assigned, warranted and
transferred or intended now or hereafter so to be, or which Mortgagor may be or may
hereafter become bound to convey or assign to Agent and/or such Mortgagee, or for carrying
out the intention or facilitating the performance of the terms of this Security Instrument
or for filing, registering or recording this Security Instrument, or for complying with
all Applicable Laws. Mortgagor, on demand, will execute and deliver and hereby authorizes
Agent and each Mortgagee to execute in the name of Mortgagor or without the signature of
Mortgagor to the extent Agent and/or such Mortgagee may lawfully do so, one or more
financing statements, chattel mortgages or other instruments, to evidence more effectively
the security interest of the Mortgagees and Agent, on behalf of Mortgagees, in the
Property. Mortgagor grants to Agent and each Mortgagee an irrevocable power of attorney
coupled with an interest for the purpose of exercising and perfecting any and all rights
and remedies available to Agent and the Mortgagees at law and in equity, including without
limitation such rights and remedies available to Agent and the Mortgagees pursuant to this
Section 7.2. 

        7.3
CHANGES IN TAX, DEBT, CREDIT AND DOCUMENTARY STAMP LAWS. (a) If any law is enacted
or adopted or amended after the date of this Security Instrument which deducts the Debts
from the value of the Property for the purpose of taxation or which imposes a tax, either
directly or indirectly, on the Debts or the Mortgagees’ interest in the Property,
Mortgagor will pay the tax, with interest and penalties thereon, if any. If a Mortgagee is
advised by counsel chosen by it that the payment of tax by Mortgagor would be unlawful or
taxable to a Mortgagee or unenforceable or provide the basis for a defense of usury, then
each Mortgagee shall have the option by written notice of not less than ninety (90) days
to declare the Debts immediately due and payable. 

         (b)       
          Mortgagor will not claim or demand or be entitled to any credit or credits
          against the Debts for any part of the Taxes or Other Charges assessed against
          the Property, or any part thereof, and no deduction shall otherwise be made or
          claimed from the assessed value of the Property, or any part thereof, for real
          estate tax purposes by reason of this Security Instrument or either Debt. If
          such claim, credit or deduction shall be required by law, each Mortgagee shall
          have the option, by written notice of not less than ninety (90) days, to declare
          the Debts immediately due and payable. 

         (c)       
          If at any time the United States of America, any State thereof or any
          subdivision of any such State shall require revenue or other stamps to be
          affixed to the Debentures, this Security Instrument, or any of the other
          Investment Documents or impose any other tax or charge on the same, Mortgagor
          will pay for the same, with interest and penalties thereon, if any. 

        7.4
ESTOPPEL CERTIFICATES. Mortgagor shall use its best efforts to deliver to Agent
and/or a Mortgagee, promptly upon request, duly executed estoppel certificates from any
one or more lessees as required by Agent and/or such Mortgagee attesting to such facts
regarding the applicable Lease as Agent and/or such Mortgagee may reasonably require. 

        7.5
REPLACEMENT DOCUMENTS. Upon receipt of an affidavit of an officer of a Mortgagee as
to the loss, theft, destruction or mutilation of the Debentures or any other Investment
Document which is not of public record, and, in the case of any such mutilation, upon
surrender and cancellation of such Debentures or other Loan Document, Mortgagor will
issue, in lieu thereof, replacement Debentures or other Investment Document, dated the
date of such lost, stolen, destroyed or mutilated Debenture or other Investment Document
in the same principal amount thereof and otherwise of like tenor. 

        7.6
MORTGAGE SATISFACTION; ASSIGNMENT. Upon either (i) the repayment in full of the
Debts and all accrued and unpaid interest thereon and any other charges and fees payable
to each Mortgagee under the Investment Documents or (ii) the full conversion of Debentures
into shares of common stock of Ener1 pursuant to the terms and conditions of the
Debentures and the other Investment Documents, Mortgagees shall execute, acknowledge and
deliver, at Mortgagor’s sole cost and expense, a satisfaction of this Security
Instrument in recordable form; provided, however, if Mortgagor notifies
Mortgagees in writing not less than five (5) Business Days prior to such repayment or
within five (5) Business Days after such conversion, then Mortgagees shall deliver an
assignment of their rights under this Security Instrument without representation, warranty
or recourse of any kind or nature to a party designated by Mortgagor. 

8 — DUE ON
SALE/ENCUMBRANCE 

        8.1
MORTGAGEES’ RELIANCE. Mortgagor acknowledges that Agent and each Mortgagee has
examined and relied on the experience of Mortgagor in owning and operating properties such
as the Property in agreeing to make the loans evidenced by the Debentures, and will
continue to rely on Mortgagor’s ownership of the Property as a means of maintaining
the value of the Property as security for payment and performance of the Obligations.
Mortgagor acknowledges that Agent and each Mortgagee has a valid interest in maintaining
the value of the Property so as to ensure that, if an Event of Default should occur, each
Mortgagee can recover any outstanding portion of its respective Debt by a sale of the
Property. 

        8.2
NO SALE/ENCUMBRANCE. Mortgagor agrees that except as expressly provided in the
Debentures, the sale, conveyance, mortgage, grant, bargain, encumbrance, pledge,
assignment, or other transfer of the Property, or any part thereof, without the prior
written consent of each Mortgagee, shall constitute an event allowing Agent, on behalf of
Mortgagees, to declare the entire unpaid Debts to be immediately due and payable without
notice of intention to accelerate, notice of acceleration, demand or any other notice.
Notwithstanding the foregoing, Mortgagor shall have the right to sell the Property without
the Mortgagees’ consent, so long as (i) any such sale (x) is not to an Affiliate (as
such term is defined in the Securities Purchase Agreement) in violation of the Securities
Purchase Agreement, (y) is on an arms-length basis for not less that the fair market value
of the Property and (z) is not part of a transaction or a series of transactions involving
assets other than the Property in which the allocation of the value of Property is less
than its fair market value, (ii) concurrently with such sale, Mortgagor deposits all of
the proceeds (the “Special Proceeds”) of such sale into one or more
Special Proceeds Accounts, which Special Proceeds and Special Proceeds Account shall be
subject to the provisions of Section 4.3(d) above. 

        8.3
SALE/ENCUMBRANCE DEFINED. A sale, conveyance, mortgage, grant, bargain,
encumbrance, pledge, assignment, or transfer within the meaning of this Article 8
shall be deemed to mean the occurrence of a “Fundamental Change”, as such term
is defined in the Debentures. 

        8.4
AGENT’S RIGHTS. Agent shall not be required to demonstrate any actual
impairment of the security granted hereunder or any increased risk of default hereunder in
order to declare the Debts immediately due and payable upon Mortgagor’s sale,
conveyance, mortgage, grant, bargain, encumbrance, pledge, assignment, or transfer of the
Property contrary to the terms hereof without each Mortgagee’s consent. This
provision shall apply to every sale, conveyance, mortgage, grant, bargain, encumbrance,
pledge, assignment, or transfer of the Property regardless of whether voluntary or not, or
whether or not a Mortgagee has consented to any previous sale, conveyance, mortgage,
grant, bargain, encumbrance, pledge, assignment, or transfer of the Property. 

9 — DEFAULT 

        9.1
EVENTS OF DEFAULT. The occurrence of any one or more of the following events shall
constitute an “Event of Default”: (a) if any payment required to be made
under the Subsidiary Guaranty is not paid upon demand; (b) if any of the Taxes or Other
Charges is not paid prior to the date the same becomes delinquent except to the extent
sums sufficient to pay such Taxes and Other Charges have been deposited with the
Mortgagees or their joint designee in accordance with the terms of this Security
Instrument; (c) if the Policies are not kept in full force and effect, or if the Policies
(or evidence of insurance satisfactory to Mortgagees) are not delivered to a Mortgagee
upon request or Mortgagor has not delivered evidence of the renewal of the Policies prior
to their expiration as provided in Section 3.2(e); (d) if Mortgagor violates or
does not comply with any of the provisions of Articles 8, 11 or 20;
(e) if any representation or warranty of Mortgagor made herein or in any certificate,
report, financial statement or other instrument or document furnished to a Mortgagee shall
have been false or misleading in any material respect when made; (f) if (i) Mortgagor
shall commence any case, proceeding or other action (A) under any existing or future law
of any jurisdiction, domestic or foreign, relating to bankruptcy, insolvency or relief of
debtors, seeking to have an order for relief entered with respect to it, or seeking to
adjudicate it a bankrupt or insolvent, or seeking reorganization, adjustment, liquidation,
dissolution or other relief with respect to it or its debts, or (B) seeking appointment of
a receiver, trustee, custodian or other similar official for it or for all or any
substantial part of its assets, or Mortgagor shall make a general assignment for the
benefit of its creditors; or (ii) there shall be commenced against Mortgagor any case,
proceeding or other action of a nature referred to in clause (i) above which (A) results
in the entry of an order for relief or any such adjudication or appointment or (B) remains
undismissed or undischarged for a period of sixty (60) days; or (iii) there shall be
commenced against Mortgagor any case, proceeding or other action seeking issuance of a
warrant of attachment, execution, distraint or similar process against all or any
substantial part of its assets which results in the entry of any order for any such relief
which shall not have been vacated, discharged, or stayed or bonded pending appeal within
sixty (60) days from the entry thereof; or (iv) Mortgagor shall take any action in
furtherance of, or indicating its consent to, approval of, or acquiescence in, any of the
acts set forth in clause (i), (ii), or (iii) above; or (v) Mortgagor shall generally not,
or shall be unable to, or shall admit in writing its inability to, pay its debts as they
become due; (g) if Mortgagor shall be in default beyond any applicable notice or cure
period under any other mortgage, deed of trust, deed to secure debt or other security
agreement covering any part of the Property whether it be superior or junior in lien to
this Security Instrument; (h) if the Property becomes subject to any mechanic’s,
materialman’s or other lien other than a lien for local real estate taxes and
assessments not then delinquent and the lien shall remain undischarged of record (by
payment, bonding or otherwise) for a period of forty five (45) days after Mortgagor has
first received notice thereof; (i) if any federal tax lien is filed against the Property
and same is not discharged of record within thirty (30) days after Mortgagor has first
received notice thereof; (j) [intentionally omitted], (k) if for more than ten (10) days
after notice from a Mortgagee, Mortgagor shall continue to be in default under any other
term, covenant or condition of this Security Instrument, the Subsidiary Guaranty or any
other Investment Document to which Mortgagor is a party in the case of any default which
can be cured by the payment of a sum of money or for thirty (30) days after notice from
such Mortgagee in the case of any other default, provided that if such default cannot
reasonably be cured within such thirty (30) day period and Mortgagor shall have commenced
to cure such default within such thirty (30) day period and thereafter diligently and
expeditiously proceeds to cure the same, such thirty (30) day period shall be extended for
so long as it shall require Mortgagor in the exercise of due diligence to cure such
default, it being agreed that no such extension shall be for a period in excess of sixty
(60) days or (l) if an “Event of Default” occurs under any Debenture or any
other Investment Document. 

10 — RIGHTS AND
REMEDIES 

        10.1
REMEDIES. Upon the occurrence of any Event of Default, Mortgagor agrees that a
Agent may take such action, without notice or demand, as it deems advisable to protect and
enforce the rights of Mortgagees against Mortgagor and in and to the Property, including,
but not limited to, the following actions, each of which may be pursued concurrently or
otherwise, at such time and in such order as Agent may determine, in its sole discretion,
without impairing or otherwise affecting the other rights and remedies of Agent, any
Mortgagee or the Mortgagees collectively: (a) declare either of the entire unpaid Debts to
be immediately due and payable; (b) with or without entry, institute proceedings, judicial
or otherwise, for the complete or partial foreclosure of this Security Instrument under
any applicable provision of law in which case the Property or any interest therein may be
sold for cash or upon credit in one or more parcels or in several interests or portions
and in any order or manner, any partial foreclosure to be subject to the continuing lien
and security interest of this Security Instrument for the balance of the Debts not then
due, unimpaired and without loss of priority; (c) sell for cash or upon credit the
Property or any part thereof and all estate, claim, demand, right, title and interest of
Mortgagor therein and rights of redemption thereof, pursuant to power of sale, judicial
decree or otherwise, at one or more sales, as an entirety or in one or more parcels; (d)
institute an action, suit or proceeding in equity for the specific performance of any
covenant, condition or agreement contained herein, in the Debentures or in the other
Investment Documents; (e) recover judgment on any Debenture either before, during or after
any proceedings for the enforcement of this Security Instrument or the other Investment
Documents; (f) apply for the appointment of a receiver, trustee, liquidator or conservator
of the Property, without notice and without regard for the adequacy of the security for
the Debts and without regard for the solvency of Mortgagor or of any person, firm or other
entity liable for the payment of the Debts; (g) enter into or upon the Property, either
personally or by its agents, nominees or attorneys and dispossess Mortgagor and its agents
and servants therefrom, without liability for trespass, damages or otherwise and exclude
Mortgagor and its agents or servants wholly therefrom, and take possession of all books,
records and accounts relating thereto and Mortgagor agrees to surrender possession of the
Property and of such books, records and accounts to Agent upon demand, and thereupon
Agent, on behalf of Mortgagees, may exercise all rights and powers of Mortgagor with
respect to the Property including, without limitation, (1) the right to use, operate,
manage, control, insure, maintain, repair, restore and otherwise deal with all and every
part of the Property and conduct the business thereat; (2) the right to make or complete
any construction, alterations, additions, renewals, replacements and improvements to or on
the Property as such Agent deems advisable; (3) the right to make, cancel, enforce or
modify Leases, Lease Guaranties, obtain and evict tenants, and demand, sue for, collect
and receive all Rents of the Property and every part thereof and any amounts payable under
any Lease Guaranties; (h) require Mortgagor to pay monthly in advance to the and Agent, on
behalf of Mortgagees, or any receiver appointed to collect the Rents, the fair and
reasonable rental value for the use and occupation of such part of the Property as may be
occupied by Mortgagor; (i) require Mortgagor to vacate and surrender possession of the
Property to and Agent, on behalf of Mortgagees, or to such receiver and, in default
thereof, Mortgagor may be evicted by summary proceedings or otherwise; (j) apply the
receipts from the Property, any Deposits and interest thereon and/or any unearned
Insurance Premiums paid to and Agent, on behalf of Mortgagees, upon the surrender of any
Policies maintained pursuant to Article 3 hereof (it being agreed that Agent shall
have the right to surrender such Policies upon the occurrence of an Event of Default), to
the payment of the Obligations, in such order, priority and proportions as the Mortgagees
shall deem appropriate in their sole discretion; (k) exercise any and all rights and
remedies granted to a secured party upon default under the Uniform Commercial Code,
including, without limiting the generality of the foregoing: (1) the right to take
possession of the Personal Property or any part thereof, and to take such other measures
as and Agent, on behalf of Mortgagees, may deem necessary for the care, protection and
preservation of the Personal Property, and (2) request Mortgagor at its expense to
assemble the Personal Property and make it available to and Agent at a convenient place
acceptable to Agent or (l) exercise any remedies of a Mortgagee under their respective
Debentures. Any notice of sale, disposition or other intended action by and Agent with
respect to the Personal Property sent to Mortgagor in accordance with the provisions
hereof at least ten (10) days prior to such action, shall constitute commercially
reasonable notice to Mortgagor. Upon any foreclosure or other sale of the Property
pursuant to the terms hereof, Agent, on behalf of Mortgagees, a Mortgagee or any
combination of Mortgagees may bid for and purchase the Property and shall be entitled to
apply all or any part of the secured indebtedness as a credit against the purchase price. 

        In
the event of a sale, by foreclosure, power of sale, or otherwise, of less than all of the
Property, this Security Instrument shall continue as a lien and security interest on the
remaining portion of the Property unimpaired and without loss of priority. Notwithstanding
the provisions of this Section 10.1 to the contrary, if any Event of Default as
described in clause (i) or (ii) of Subsection 9.1(f) shall occur, the entire unpaid
Debts shall be automatically due and payable, without any further notice, demand or other
action by Agent or any Mortgagee. 

        10.2
APPLICATION OF PROCEEDS. The purchase money, proceeds and avails of any disposition
of the Property, or any part thereof, or any other sums collected by a Mortgagee pursuant
to the Debentures, this Security Instrument or the other Investment Documents, may be
applied by such Mortgagee to the payment of the Debts in such priority and proportions as
such Mortgagee in its discretion shall deem proper. 

        10.3
RIGHT TO CURE DEFAULTS. Upon the occurrence of any Event of Default, and Agent, on
behalf of Mortgagees, may, but without any obligation to do so and without notice to or
demand on Mortgagor and without releasing Mortgagor from any obligation hereunder or
curing or being deemed to have cured any default hereunder, make or do the same in such
manner and to such extent as Agent may deem necessary to protect the security hereof.
Agent is authorized to enter upon the Property for such purposes, or appear in, defend, or
bring any action or proceeding to protect its respective interest in the Property or to
foreclose this Security Instrument or collect the Debts, and the cost and expense thereof
(including reasonable attorneys’ fees to the extent permitted by law), with interest
as provided in this Section 10.3, shall constitute a portion of the Debts and shall
be due and payable to Agent, on behalf of Mortgagees, upon demand. All such costs and
expenses incurred by Agent, on behalf of Mortgagees, in remedying such Event of Default or
such failed payment or act or in appearing in, defending, or bringing any such action or
proceeding shall bear interest at the Default Interest Rate (as defined in the
Debentures), for the period after notice from Agent that such cost or expense was incurred
to the date of payment to Agent. All such costs and expenses incurred by Agent, on behalf
of Mortgagees, together with interest thereon calculated at the Default Interest Rate
shall be deemed to constitute a portion of the Debts and be secured by this Security
Instrument and the other Investment Documents and shall be immediately due and payable
upon demand by Agent, on behalf of Mortgagees, therefor. 

        10.4
ACTIONS AND PROCEEDINGS. Each Mortgagee has the right to appear in and defend any
action or proceeding brought with respect to the Property and to bring any action or
proceeding, in the name and on behalf of Mortgagor, which such Mortgagee, in its
discretion, decides should be brought to protect its interest in the Property. 

        10.5
RECOVERY OF SUMS REQUIRED TO BE PAID. Each Mortgagee shall have the right from time
to time to take action to recover any sum or sums which constitute a part of the Debts as
the same become due, without regard to whether or not the balance of the Debts shall be
due, and without prejudice to the rights of Agent, on behalf of Mortgagees, thereafter to
bring an action of foreclosure, or any other action, for a default or defaults by
Mortgagor existing at the time such earlier action was commenced. 

        10.6  [INTENTIONALLY OMITTED]

        10.7
OTHER RIGHTS, ETC. (a) The failure of any or all of the Mortgagees to insist upon
strict performance of any term hereof shall not be deemed to be a waiver of any term of
this Security Instrument. Mortgagor shall not be relieved of Mortgagor’s obligations
hereunder by reason of (i) the failure of any or all of the Mortgagees to comply with any
request of Mortgagor to take any action to foreclose this Security Instrument or otherwise
enforce any of the provisions hereof or of any Debenture or the other Investment
Documents, (ii) the release, regardless of consideration, of the whole or any part of the
Property, or of any person liable for the Debts or any portion thereof, or (iii) any
agreement or stipulation by any or all of the Mortgagees extending the time of payment or
otherwise modifying or supplementing the terms of any Debenture, this Security Instrument
or the other Investment Documents. 

         (b)       
          It is agreed that the risk of loss or damage to the Property is on Mortgagor,
          and neither Agent nor any Mortgagee shall have any liability whatsoever for
          decline in value of the Property, for failure to maintain the Policies, or for
          failure to determine whether insurance in force is adequate as to the amount of
          risks insured. Possession by Agent, on behalf of Mortgagees, or any or all of
          the Mortgagees shall not be deemed an election of judicial relief, if any such
          possession is requested or obtained, with respect to any Property or collateral
          not in Agent’s or a Mortgagees’ possession. 

         (c)       
          A Mortgagee may resort for the payment of the Debts to any other security held
          by such Mortgagee in such order and manner as such Mortgagee, in its discretion,
          may elect. A Mortgagee may take action to recover the Debts, or any portion
          thereof, or to enforce any covenant hereof without prejudice to the right of
          Agent, on behalf of Mortgagees, thereafter to foreclose this Security
          Instrument. The rights of Agent and each Mortgagee and under this Security
          Instrument shall be separate, distinct and cumulative and none shall be given
          effect to the exclusion of the others. No act of Agent or a Mortgagee shall be
          construed as an election to proceed under any one provision herein to the
          exclusion of any other provision. Neither Agent nor the Mortgagees shall be
          limited exclusively to the rights and remedies herein stated but shall be
          entitled to every right and remedy now or hereafter afforded at law or in
          equity. 

        10.8
RIGHT TO RELEASE ANY PORTION OF THE PROPERTY. Agent, on behalf of Mortgagees, or
the Mortgagees may release any portion of the Property for such consideration as is
approved and required by Agent, on behalf of Mortgagees, or each Mortgagee without, as to
the remainder of the Property, in any way impairing or affecting the lien or priority of
this Security Instrument, or improving the position of any subordinate lienholder with
respect thereto, except to the extent that the obligations hereunder shall have been
reduced by the actual monetary consideration, if any, received by Agent, on behalf of
Mortgagees, or a Mortgagee for such release, and may accept by assignment, pledge or
otherwise any other property in place thereof as Agent, on behalf of Mortgagees, or each
Mortgagees may require without being accountable for so doing to any other lienholder.
This Security Instrument shall continue as a lien and security interest in the remaining
portion of the Property. 

        10.9
VIOLATION OF LAWS. If the Property is not in compliance with Applicable Laws in all
material respects, Agent, on behalf of Mortgagees, may impose additional requirements upon
Mortgagor in connection therewith including, without limitation, monetary reserves or
financial equivalents. 

        10.10
RECOURSE AND CHOICE OF REMEDIES. Notwithstanding any other provision of this
Security Instrument, including but not limited to Article 13 hereof, Agent, on
behalf of Mortgagees, each Mortgagee and other Indemnified Parties (defined in Section
11.1 below) are entitled to enforce the obligations of Mortgagor contained in the
Subsidiary Guaranty and this Security Instrument without first resorting to or exhausting
any security or collateral and without first having recourse to the Debentures or any of
the Property, through foreclosure or acceptance of a deed in lieu of foreclosure or
otherwise, and in the event Agent, on behalf of Mortgagees, commences a foreclosure action
against the Property, Agent, on behalf of Mortgagees, is entitled to pursue a deficiency
judgment with respect to such obligations against Mortgagor. The liability of Mortgagor is
not limited to the original principal amount of the Debentures. Notwithstanding the
foregoing, nothing herein shall inhibit or prevent Agent, on behalf of Mortgagees, from
foreclosing pursuant to this Security Instrument or exercising any other rights and
remedies pursuant to the Debentures, this Security Instrument and the other Investment
Documents, whether simultaneously with foreclosure proceedings or in any other sequence. A
separate action or actions may be brought and prosecuted against Mortgagor, whether or not
action is brought against any other person or entity or whether or not any other person or
entity is joined in the action or actions. 

        10.11
RIGHT OF ENTRY. Agent and each Mortgagee and their respective agents shall have the
right to enter and inspect the Property at all reasonable times and on reasonable advance
notice to Mortgagor (which notice shall not be required to be in writing). 

        10.12
DEFAULT INTEREST. Mortgagor acknowledges that, without limitation to any of the
Mortgagees’ rights or remedies set forth in this Security Instrument, Agent, on
behalf of Mortgagees, has the right following an Event of Default to demand interest on
the principal amount of the Debentures at the Default Interest Rate in accordance with the
terms of the Debentures. 

11 —
INDEMNIFICATION 

        11.1
GENERAL INDEMNIFICATION. Mortgagor shall, at its sole cost and expense, protect,
defend, indemnify, release and hold harmless the Indemnified Parties for, from and against
any and all claims, suits, liabilities (including, without limitation, strict
liabilities), actions, proceedings, obligations, debts, damages, losses, costs, expenses,
diminutions in value, fines, penalties, charges, fees, expenses, judgments, awards,
amounts paid in settlement, punitive damages, foreseeable and unforeseeable consequential
damages, of whatever kind or nature (including but not limited to attorneys’ fees and
other costs of defense) (the “Losses”) imposed upon or incurred by or
asserted against any Indemnified Parties and directly or indirectly arising out of or in
any way relating to any one or more of the following, except to the extent the following
relate solely to an Indemnified Party’s gross negligence or willful misconduct: (a)
any Event of Default; (b) any and all lawful action that may be taken by Agent, on behalf
of Mortgagees, or a Mortgagee in connection with the enforcement of the provisions of this
Security Instrument or any Debenture or any of the other Investment Documents, whether or
not suit is filed in connection with same, or in connection with Mortgagor and/or any
partner, joint venturer or shareholder thereof becoming a party to a voluntary or
involuntary federal or state bankruptcy, insolvency or similar proceeding; (c) any
accident, injury to or death of persons or loss of or damage to property occurring in, on
or about the Property or any part thereof or on the adjoining sidewalks, curbs, adjacent
property or adjacent parking areas, streets or ways; (d) any use, nonuse or condition in,
on or about the Property or any part thereof; (e) any failure on the part of Mortgagor to
perform or be in compliance with any of the terms of this Security Instrument; (f) the
failure of any person to file timely with the Internal Revenue Service an accurate Form
1099-B, Statement for Recipients of Proceeds from Real Estate, Broker and Barter Exchange
Transactions, which may be required in connection with this Security Instrument, or to
supply a copy thereof in a timely fashion to the recipient of the proceeds of the
transaction in connection with which this Security Instrument is made; (g) any failure of
the Property to be in compliance with any Applicable Laws; (h) the enforcement by any
Indemnified Party of the provisions of this Article 11; (i) the payment of any
commission, charge or brokerage fee to anyone which may be payable in connection with the
funding under the Debentures; (j) any misrepresentation made by Mortgagor in this Security
Instrument or any other Investment Document; or (k) any other transaction arising out of
or in any way connected with the Property or the Debt. Any amounts payable to a Mortgagee
by reason of the application of this Section 11.1 shall become immediately due and
payable and shall bear interest at the Default Interest Rate from the date loss or damages
are sustained by such Mortgagee until paid. For purposes of this Article 11, the
term “Indemnified Parties” means Agent, each Mortgagee, and any person or
entity who is or will have been involved in the origination of any portion of the Debt,
any person or entity who is or will have been involved in the servicing of any portion of
the Debt, any person or entity in whose name the encumbrance created by this Security
Instrument is or will have been recorded and persons and entities who may hold or acquire
or will have held a full or partial interest in any portion of the Debt, including, but
not limited to, custodians, trustees and other fiduciaries who hold or have held a full or
partial interest in any portion of the Debt. 

        11.2
MORTGAGE, INTANGIBLE TAX, AND/OR DOCUMENTARY STAMP TAX. Mortgagor shall, at its
sole cost and expense, protect, defend, indemnify, release and hold harmless the
Indemnified Parties from and against any and all Losses imposed upon or incurred by or
asserted against any Indemnified Parties and directly or indirectly arising out of or in
any way relating to any tax on the making and/or recording of this Security Instrument,
the Debentures or any of the other Investment Documents. 

        11.3  [INTENTIONALLY OMITTED]

        11.4
DUTY TO DEFEND; ATTORNEYS’ FEES AND OTHER FEES AND EXPENSES. Upon written
request by any Indemnified Party, Mortgagor shall defend such Indemnified Party (if
requested by any Indemnified Party, in the name of the Indemnified Party) by attorneys and
other professionals approved by the Indemnified Parties. Notwithstanding the foregoing,
any Indemnified Parties may, in their sole and absolute discretion, engage their own
attorneys and other professionals to defend or assist them, and, at the option of
Indemnified Parties, their attorneys shall control the resolution of claim or proceeding.
Upon demand, Mortgagor shall pay or, in the sole and absolute discretion of the
Indemnified Parties, reimburse, the Indemnified Parties for the payment of reasonable fees
and disbursements of attorneys, engineers, environmental consultants, laboratories and
other professionals in connection therewith. 

12 — WAIVERS 

        12.1
WAIVER OF COUNTERCLAIM. Mortgagor hereby waives the right to assert a counterclaim,
other than a mandatory or compulsory counterclaim, in any action or proceeding brought
against it by Agent, on behalf of Mortgagees, or any or all of the Mortgagees arising out
of or in any way connected with this Security Instrument, the Debentures, any of the other
Investment Documents, or the Obligations. Any assignee of Agent or a Mortgagee’s
interest in this Security Instrument and the other Investment Documents shall take such
assignment free and clear of all offsets, counterclaims or defenses which are unrelated to
such documents which Mortgagor may otherwise have against any assignor of such documents,
and no such unrelated counterclaim or defense shall be interposed or asserted by Mortgagor
in any action or proceeding brought by any such assignee upon such documents, and any such
rights to interpose or assert any such unrelated offset, counterclaim or defense in any
such action or proceeding is hereby expressly waived by Mortgagor. 

        12.2
MARSHALLING AND OTHER MATTERS. Mortgagor hereby waives, to the extent permitted by
law, the benefit of all appraisement, valuation, stay, extension, reinstatement and
redemption laws now or hereafter in force and all rights of marshalling in the event of
any sale hereunder of the Property or any part thereof or any interest therein. Further,
Mortgagor hereby expressly waives any and all rights of redemption from sale under any
order or decree of foreclosure of this Security Instrument on behalf of Mortgagor, and on
behalf of each and every person acquiring any interest in or title to the Property
subsequent to the date of this Security Instrument and on behalf of all persons to the
extent permitted by applicable law. 

        12.3
WAIVER OF NOTICE. Mortgagor shall not be entitled to any notices of any nature
whatsoever from a Mortgagee except with respect to matters for which this Security
Instrument specifically and expressly provides for the giving of notice by a Mortgagee to
Mortgagor and except with respect to matters for which Agent or the Mortgagees are
required by applicable law to give notice, and Mortgagor hereby expressly waives the right
to receive any notice from Agent or a Mortgagee with respect to any matter for which this
Security Instrument does not specifically and expressly provide for the giving of notice
by Agent or a Mortgagee to Mortgagor. 

        12.4
SOLE DISCRETION OF THE MORTGAGEES. Wherever pursuant to this Security Instrument
(a) Agent, a Mortgagee or any combination of Mortgagees exercises any right given to it
(or them) to approve or disapprove, (b) any arrangement or term is to be satisfactory to
Agent, a Mortgagee (or all Mortgagees), or (c) any other decision or determination is to
be made by Agent, a Mortgagee (or all Mortgagees), the decision of Agent or a Mortgagee to
approve or disapprove, all decisions that arrangements or terms are satisfactory or not
satisfactory and all other decisions and determinations made by Agent or a Mortgagee,
shall be in the sole and absolute discretion of Agent or such Mortgagee and shall be final
and conclusive, except as may be otherwise expressly and specifically provided herein. 

        12.5
SURVIVAL. The indemnifications made pursuant to Section 11.3 shall continue
indefinitely in full force and effect and shall survive and shall in no way be impaired
by: any satisfaction or other termination of this Security Instrument, any assignment or
other transfer of all or any portion of this Security Instrument or each Mortgagee’s
interest in the Property (but, in such case, shall benefit both Indemnified Parties and
any assignee or transferee), any exercise of Agent, on behalf of Mortgagees, and/or each
Mortgagee’s rights and remedies pursuant hereto including but not limited to
foreclosure or acceptance of a deed in lieu of foreclosure, any exercise of any rights and
remedies pursuant to the Debentures or any of the other Investment Documents, any transfer
of all or any portion of the Property (whether by Mortgagor, Agent, on behalf of
Mortgagees, or by any Mortgagee following foreclosure or acceptance of a deed in lieu of
foreclosure or at any other time), any amendment to this Security Instrument, the
Debentures or the other Investment Documents, and any act or omission that might otherwise
be construed as a release or discharge of Mortgagor from the obligations pursuant hereto. 

        
 12.6 WAIVER OF TRIAL BY JURY. MORTGAGOR HEREBY WAIVES, TO THE FULLEST
EXTENT PERMITTED BY LAW, THE RIGHT TO TRIAL BY JURY IN ANY ACTION, PROCEEDING OR
COUNTERCLAIM, WHETHER IN CONTRACT, TORT OR OTHERWISE, RELATING DIRECTLY OR INDIRECTLY TO
ANY PORTION OF THE DEBT, ANY APPLICATION FOR THE DEBT, THE DEBENTURES, THIS SECURITY
INSTRUMENT OR THE OTHER INVESTMENT DOCUMENTS OR ANY ACTS OR OMISSIONS OF AGENT, A
MORTGAGEE, THEIR RESPECTIVE OFFICERS, EMPLOYEES, DIRECTORS OR AGENTS IN CONNECTION
THEREWITH. 

13 - [INTENTIONALLY OMITTED]

14 — NOTICES 

        14.1
NOTICES. Any notice, demand or request required or permitted to be given by the
Mortgagor, Agent or a Mortgagee pursuant to the terms of this Security Instrument 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: 

	If to Mortgagor: 

                 

                 

                 

                 

With a copy to:  

                 

                 

                 

                 

If to Mortgagees:

                 

If to Agent:     

                 

                 

                 

                 

With a copy to:  

                 

                 

                 

                 
	Ener1 Battery Company

550 West Cypress Creek Road, Suite 120

Ft. Lauderdale, Florida 33309

Facsimile No.:   (954) 229-7595

Attention:       Ronald Stewart

Gibson, Dunn & Crutcher LLP

1050 Connecticut Avenue N.W.

Washington, D.C. 20036

Facsimile No.:   (202) 530-9598

Attention:       Stephen Glover

At the addresses set forth in the Securities  Purchase  Agreement,  as same may

be modified from time to time in accordance with the terms thereof

Satellite Asset Management, L.P.

623 Fifth Avenue, 20th Floor

New York, New York 10022

Facsimile No.:   (212) 209-2020

Attention:       Charles Gassenheimer

Duval & Stachenfeld LLP

300 East 42nd Street

New York, New York 10017

Facsimile No.:   (212) 883-8883

Attention:       Robert L. Mazzeo

or addressed as such party may from
time to time designate by written notice to the other parties. Any party by notice to the
other may designate additional or different addresses for subsequent notices or
communications. For purposes of this Security Instrument, the term “Business
Day” shall mean any day other than Saturdays, Sundays and any other day on which
commercial banks in the City of New York are required or permitted to be closed for
business. 

15 — APPLICABLE LAW 

        15.1
CHOICE OF LAW. This Security Instrument shall be governed, construed, applied and
enforced in accordance with the laws of the state in which the Property is located and the
applicable laws of the United States of America. 

        15.2
USURY LAWS. This Security Instrument and the Debentures are subject to the express
condition that at no time shall Ener1 (or pursuant to the Subsidiary Guaranty, Mortgagor
on behalf of Ener1) be obligated or required to pay interest on the Debts at a rate which
could subject the holder of any Debenture to either civil or criminal liability as a
result of being in excess of the maximum interest rate which Ener1 (or pursuant to the
Subsidiary Guaranty, Mortgagor on behalf of Ener1) is permitted by applicable law to
contract or agree to pay. If by the terms of this Security Instrument or any Debentures,
Ener1 (or pursuant to the Subsidiary Guaranty, Mortgagor on behalf of Ener1) is at any
time required or obligated to pay interest on the Debts at a rate in excess of such
maximum rate, the rate of interest under this Security Instrument and such 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 such Debenture. All sums paid or agreed to be paid to Agent, on
behalf of Mortgagees, or a Mortgagee for the use, forbearance, or detention of the Debts
shall, to the extent permitted by applicable law, be amortized, prorated, allocated, and
spread throughout the full stated term of the applicable Debenture until payment in full
so that the rate or amount of interest on account of the Debts does not exceed the maximum
lawful rate of interest from time to time in effect and applicable to the Debts for so
long as any portion of the Debts are outstanding. 

        15.3
PROVISIONS SUBJECT TO APPLICABLE LAW. All rights, powers and remedies provided in
this Security Instrument may be exercised only to the extent that the exercise thereof
does not violate any applicable provisions of law and are intended to be limited to the
extent necessary so that they will not render this Security Instrument invalid,
unenforceable or not entitled to be recorded, registered or filed under the provisions of
any applicable law. If any term of this Security Instrument or any application thereof
shall be invalid or unenforceable, the remainder of this Security Instrument and any other
application of the term shall not be affected thereby. 

16 — SECONDARY
MARKET 

        16.1
TRANSFER OF DEBT. Each Mortgagee may, at any time, sell, transfer or assign its
Debenture, its interest in this Security Instrument and any other Investment Documents
subject to the terms and conditions set forth in each Debenture with respect to the
transfer of such Debenture. 

17 — COSTS 

        17.1
PERFORMANCE AT MORTGAGOR’S EXPENSE. Mortgagor acknowledges and confirms that
each Mortgagee shall be entitled to impose certain administrative processing and/or
commitment fees in connection with: (a) extensions, renewals, modifications, amendments
and terminations of this Security Instrument requested by Mortgagor and (b) the release or
substitution of collateral for the Debt requested by Mortgagor, and that each Mortgagee
shall be entitled to reimbursement for its reasonable out-of-pocket costs and expenses
associated with its provision of consents, waivers and approvals under the Investment
Documents (the occurrence of any of the above shall be called an
“Event”). Mortgagor further acknowledges and confirms that it shall be
responsible for the payment of all costs of reappraisal of the Property or any part
thereof, which are required by law, regulation or any governmental or quasi-governmental
authority. Mortgagor hereby acknowledges and agrees to pay, immediately, upon demand, all
such fees, costs and expenses. 

        17.2
ATTORNEY’S FEES FOR ENFORCEMENT. Mortgagor shall pay to Agent and/or each
Mortgagee on demand any and all reasonable out-of-pocket expenses, including legal
expenses and attorneys’ fees, incurred or paid by Agent or such Mortgagee in
protecting its interest in the Property or in collecting any amount payable hereunder or
in enforcing its rights hereunder with respect to the Property, whether or not any legal
proceeding is commenced hereunder or thereunder and whether or not any default or Event of
Default shall have occurred and is continuing, together with interest thereon at the
Default Interest Rate from the date paid or incurred by Agent and/or such Mortgagee until
such expenses are paid by Mortgagor 

18 — DEFINITIONS 

        18.1
GENERAL DEFINITIONS. Unless the context clearly indicates a contrary intent or
unless otherwise specifically provided herein, words used in this Security Instrument may
be used interchangeably in singular or plural form and the word “Mortgagor”
shall mean “each Mortgagor and any subsequent owner or owners of the Property or any
part thereof or any interest therein,” the word “Mortgagee” shall mean
“any Mortgagee and any subsequent holder of such Mortgagee’s Debenture,”
and the words “the Mortgagees” shall mean “the Mortgagees and any
subsequent holders of the Debentures,” the word “Debentures” shall mean
“the Debentures and any other evidence of indebtedness secured by this Security
Instrument,” the word “person” shall include an individual, corporation,
partnership, limited liability company, trust, unincorporated association, government,
governmental authority, and any other entity, the word “Property” shall include
any portion of the Property and any interest therein, and the phrases
“attorneys’ fees”, “legal fees” and “counsel fees”
shall include any and all reasonable attorneys’, paralegal and law clerk fees and
disbursements, including, but not limited to, fees and disbursements at the pre-trial,
trial and appellate levels incurred or paid by Agent and/or the Mortgagees in protecting
each of their interests in the Property, the Leases and the Rents and enforcing their
rights hereunder. The terms “include(s)” and “including” shall mean
“include(s), without limitation” and “including, without limitation”,
respectively. 

19 — MISCELLANEOUS
PROVISIONS 

        19.1
NO ORAL CHANGE. This Security Instrument, and any provisions hereof, may not be
modified, amended, waived, extended, changed, discharged or terminated orally or by any
act or failure to act on the part of Mortgagor, Agent or a Mortgagee, but only by an
agreement in writing signed by the party against whom enforcement of any modification,
amendment, waiver, extension, change, discharge or termination is sought (it being
acknowledged that any modification, amendment, waiver, extension, change, discharge or
termination affecting Agent and/or a Mortgagee shall be deemed to affect Agent and all
Mortgagees). 

        19.2
LIABILITY. If Mortgagor consists of more than one person, the obligations and
liabilities of each such person hereunder shall be joint and several. This Security
Instrument shall be binding upon and inure to the benefit of Mortgagor, Agent and each
Mortgagee and their respective successors and assigns forever. The Agent may resign or be
replaced in accordance with the terms of the Intercreditor Agreement, in which case the
term “Agent” shall be deemed to refer to the successor agent as though
such agent was an original signatory hereto. 

        19.3
INAPPLICABLE PROVISIONS. If any term, covenant or condition of this Security
Instrument is held to be invalid, illegal or unenforceable in any respect, this Security
Instrument shall be construed without such provision. 

        19.4
HEADINGS, ETC. The headings and captions of various Sections of this Security
Instrument are for convenience of reference only and are not to be construed as defining
or limiting, in any way, the scope or intent of the provisions hereof. 

        19.5
DUPLICATE ORIGINALS; COUNTERPARTS. This Security Instrument may be executed in any
number of duplicate originals and each duplicate original shall be deemed to be an
original. This Security Instrument may be executed in several counterparts, each of which
counterparts shall be deemed an original instrument and all of which together shall
constitute a single Security Instrument. The failure of any party hereto to execute this
Security Instrument, or any counterpart hereof, shall not relieve the other signatories
from their obligations hereunder. 

        19.6
NUMBER AND GENDER. Whenever the context may require, any pronouns used herein shall
include the corresponding masculine, feminine or neuter forms, and the singular form of
nouns and pronouns shall include the plural and vice versa. 

        19.7
SUBROGATION. If any or all of the proceeds of any Debenture have been used to
extinguish, extend or renew any indebtedness heretofore existing against the Property,
then, to the extent of the funds so used, the applicable Mortgagee(s) shall be subrogated
to all of the rights, claims, liens, titles, and interests existing against the Property
heretofore held by, or in favor of, the holder of such indebtedness and such former
rights, claims, liens, titles, and interests, if any, are not waived but rather are
continued in full force and effect in favor of such Mortgagee(s) and are merged with the
lien and security interest created herein as cumulative security for the payment and
performance of the Obligations. 

        19.8
ENTIRE AGREEMENT. This Security Instrument, the Subsidiary Guaranty and the other
Investment Documents to which Mortgagor is a party constitute the entire understanding and
agreement between Mortgagor, Agent and the Mortgagees with respect to the transactions
arising in connection with the subject matter hereof and supersede all prior written or
oral understandings and agreements between Mortgagor, Agent and the Mortgagees with
respect thereto. Mortgagor hereby acknowledges that, except as incorporated in writing in
this Security Instrument, the Subsidiary Guaranty and the other Investment Documents to
which Mortgagor is a party, there are not, and were not, and no persons are or were
authorized by a Mortgagee to make, any representations, understandings, stipulations,
agreements or promises, oral or written, with respect to the transaction which is the
subject of this Security Instrument, the Subsidiary Guaranty and the other Investment
Documents to which Mortgagor is a party. 

20 — HAZARDOUS
SUBSTANCES 

        20.1
HAZARDOUS SUBSTANCES. Mortgagor covenants and agrees that: (a) all uses and
operations on or of the Property, whether by Mortgagor or any other person or entity,
shall be in compliance in all material respects with all Environmental Laws and permits
issued pursuant thereto, including, without limitation, Environmental Laws relating to the
release of Hazardous Substances; (b) there shall be no Releases (as hereinafter defined)
of Hazardous Substances in, on, under or from the Property by Mortgagor or anyone
controlled by, controlling or under common control with Mortgagor; (c) Mortgagor shall
keep the Property free and clear of all liens and other encumbrances imposed pursuant to
any Environmental Law, whether due to any act or omission of Mortgagor or any other person
or entity (the “Environmental Liens”); (d) if a Mortgagee has a
reasonable basis to believe that there has been a change in the environmental condition of
the Property, such Mortgagee shall have the right to require Mortgagor to, at
Mortgagor’s sole cost and expense, perform any environmental site assessment or other
investigation of environmental conditions in connection with the Property, and share with
each Mortgagee the reports and other results thereof, and each Mortgagee and all
Indemnified Parties shall be entitled to rely on such reports and other results thereof;
(e) Mortgagor shall, at its sole cost and expense, comply with all reasonable written
requests of a Mortgagee to (i) reasonably effectuate Remediation of any condition
(including but not limited to a Release of a Hazardous Substance) in, on, under or from
the Property in all material respects, to the extent such Remediation is required under
any Environmental Law; (ii) comply or cause compliance by any other tenant or user of the
Property with any Environmental Law; and (iii) comply or cause compliance by any other
tenant or user of the Property with any directive from any governmental authority; (f)
Mortgagor shall not do or allow any tenant or other user of the Property to do any act
that materially increases the dangers to human health or the environment, poses an
unreasonable risk of harm to any person or entity (whether on or off the Property),
impairs or may impair the value of the Property, is contrary to any requirement of any
insurer, constitutes a public or private nuisance, constitutes waste, or violates any
covenant, condition, agreement or easement applicable to the Property; and (g) Mortgagor
shall immediately notify each Mortgagee in writing of (i) any presence or Releases or
threatened Releases of Hazardous Substances in, on, under, from or migrating towards the
Property; (ii) any non-compliance with any Environmental Laws related in any way to the
Property; (iii) any actual or potential Environmental Lien; (iv) any required or proposed
Remediation of environmental conditions relating to the Property; and (v) any written or
oral notice or other communication of which Mortgagor becomes aware from any source
whatsoever (including but not limited to a governmental entity) relating in any way to
Hazardous Substances or Remediation thereof, possible liability of any person or entity
pursuant to any Environmental Law, other environmental conditions in connection with the
Property, or any actual or potential administrative or judicial proceedings relating to
the environment or human health in connection with the Property. 

        20.2     [INTENTIONALLY OMITTED]

        20.3
INDEMNIFIED PARTIES’ RIGHTS/COOPERATION AND ACCESS. Indemnified Parties and
any other person or entity designated by Indemnified Parties (including but not limited to
any receiver, any representative of a governmental entity and any environmental
consultant), shall have the right but not the obligation to enter upon the Property at all
reasonable times and upon reasonable advance notice to assess any and all aspects of the
environmental condition of the Property and its use, including but not limited to,
conducting any environmental assessment or audit (the scope of which shall be determined
in each Mortgagee’s sole and absolute discretion) and taking samples of soil,
groundwater or other water, air or building materials, and conducting other invasive
testing. Mortgagor shall cooperate with and provide access to Indemnified Parties and any
such person or entity designated by Indemnified Parties. All such investigations shall be
performed at each Mortgagee’s sole cost and expenses except following an Event of
Default, in which case all such investigations shall be performed at Mortgagor’s sole
cost and expense. 

        20.4
INDEMNIFICATION. Mortgagor covenants and agrees at its sole cost and expense, to
protect, defend, indemnify, release and hold Indemnified Parties harmless from and against
any and all Environmental Losses (defined below) imposed upon or incurred by or asserted
against any Indemnified Parties and directly or indirectly arising out of or in any way
relating to any one or more of the following (except to the extent the same relate solely
to Hazardous Substances first introduced to the Property by anyone other than Mortgagor or
its agents or employees following the foreclosure of this Security Instrument (or the
delivery and acceptance of a deed in lieu of such foreclosure), the expiration of any
applicable right of redemption and the obtaining by the purchaser at such foreclosure sale
or grantee under such deed of possession of the Property): (a) the past, present or future
presence, Release or threatened Release of any Hazardous Substances in, on, above, or
under the Property; (b) any past, present or threatened non-compliance or violations of
any Environmental Laws (or permits issued pursuant to any Environmental Law) in connection
with the Property or operations thereon; (c) any legal or administrative processes or
proceedings or judicial proceedings in any way connected with any matter addressed in this
Article 20; (d) any personal injury, wrongful death, or property or other damage
arising under any statutory or common law or tort law theory concerning Hazardous
Substances; and (e) any misrepresentation or inaccuracy in any representation or warranty
or material breach or failure to perform any covenants or other obligations pursuant to
this Article 20. 

        20.5
DUTY TO DEFEND AND ATTORNEYS AND OTHER FEES AND EXPENSES. Upon written request by
any Indemnified Party, Mortgagor shall defend same (if requested by any Indemnified Party,
in the name of the Indemnified Party) by attorneys and other professionals approved by the
Indemnified Parties. Notwithstanding the foregoing, any Indemnified Parties may, in their
sole and absolute discretion, engage their own attorneys and other professionals to defend
or assist them, and, at the option of Indemnified Parties, their attorneys shall control
the resolution of any claim or proceeding. Upon demand, Mortgagor shall pay or, in the
sole and absolute discretion of the Indemnified Parties, reimburse, the Indemnified
Parties for the payment of reasonable fees and disbursements of attorneys, engineers,
environmental consultants, laboratories and other professionals in connection therewith. 

        20.6 DEFINITIONS. As used in this Article 20, the following terms shall have the following
meanings: 

        "Environmental  Law"  means any  present  and  future  federal,  state  and local  laws,
statutes, ordinances, rules,
regulations, requirements and the like, as well as common law, relating to (i) protection
of human health or the environment, (ii) Hazardous Substances, (iii) liability for or
costs of Remediation or prevention of Releases of Hazardous Substances or (iv) liability
for or costs of other actual or threatened danger to human health or the environment. The
term “Environmental Law” includes, but is not limited to, the following
statutes, as amended, any successor thereto, and any regulations promulgated pursuant
thereto, and any similar state or local statutes, ordinances, rules, regulations,
requirements and the like addressing similar issues: the Comprehensive Environmental
Response, Compensation and Liability Act; the Emergency Planning and Community
Right-to-Know Act; the Hazardous Substances Transportation Act; the Resource Conservation
and Recovery Act (including but not limited to Subtitle I relating to underground storage
tanks); the Solid Waste Disposal Act; the Federal Water Pollution Control Act; the Air
Pollution Prevention and Control Act; the Toxic Substances Control Act; the Safe Drinking
Water Act; the Occupational Safety and Health Act; the Federal Insecticide, Fungicide and
Rodenticide Act; the Endangered Species Act; the National Environmental Policy Act; and
the River and Harbors Appropriation Act. The term “Environmental Law” also
includes, but is not limited to, any present and future federal, state and local laws,
statutes, ordinances, rules, regulations, requirements and the like, as well as common
law: conditioning transfer of property upon a negative declaration or other approval of a
governmental authority of the environmental condition of the property; requiring
notification or disclosure of Releases of Hazardous Substances or other environmental
condition of the Property to any governmental authority or other person or entity, whether
or not in connection with transfer of title to or interest in property; imposing
conditions or requirements in connection with permits or other authorization for lawful
activity; relating to nuisance, trespass or other causes of action related to the
environmental condition of the Property; and relating to wrongful death, personal injury,
or property or other damage in connection with any physical condition or use of the
Property. 

        “Environmental
Losses” includes any losses, damages, costs, fees, expenses, claims, suits,
judgments, awards, liabilities (including but not limited to strict liabilities),
obligations, debts, diminutions in value, fines, penalties, charges, costs of Remediation
(whether or not performed voluntarily), amounts paid in settlement, foreseeable and
unforeseeable consequential damages, litigation costs, attorneys’ fees,
engineers’ fees, environmental consultants’ fees, and investigation costs
(including but not limited to costs for sampling, testing and analysis of soil, water,
air, building materials, and other materials and substances whether solid, liquid or gas),
of whatever kind or nature, and whether or not incurred in connection with any judicial or
administrative proceedings, actions, claims, suits, judgments or awards. 

        “Hazardous  Substances”  includes but is not limited to any and all substances  (whether
solid, liquid or gas) defined,
listed, or otherwise classified as pollutants, hazardous wastes, hazardous substances,
hazardous materials, extremely hazardous wastes or words of similar meaning or regulatory
effect under any present or future Environmental Laws or that may have a negative impact
on human health or the environment, including but not limited to petroleum and petroleum
products, asbestos and asbestos-containing materials, polychlorinated biphenyls, lead,
radon, radioactive materials, flammables, explosives and toxic mold. 

        “Legal
Action” means any claim, suit or proceeding, whether administrative or judicial
in nature. 

        "Release"  with respect to any  Hazardous  Substance  includes but is not limited to any
release, deposit, discharge,
emission, leaking, leaching, spilling, seeping, migrating, injecting, pumping, pouring,
emptying, escaping, dumping, disposing or other movement of Hazardous Substances. 

        "Remediation"  includes  but is not  limited  to any  response,  remedial,  removal,  or
corrective action; any activity to
clean up, detoxify, decontaminate, contain or otherwise remediate any Hazardous Substance;
any actions to cure or mitigate any Release of any Hazardous Substance; any action to
comply with any Environmental Laws or with any permits issued pursuant thereto; any
inspection, investigation, study, monitoring, assessment, audit, sampling and testing,
laboratory or other analysis, or evaluation relating to the Release or threatened Release
of Hazardous Substances. 

21 — STATE
SPECIFIC PROVISIONS 

        21.1
FUTURE ADVANCES. Mortgagor acknowledges that the intent hereof to secure payment of
the Debt and the performance of all obligations under the Debentures and the Other
Obligations whether the entire amount shall have been advanced to the Mortgagor at the
date hereof, or at a later date, and to secure any other amount or amounts that may be
added to the indebtedness secured hereby under the terms of this Security Instrument. The
total amount of the principal indebtedness secured hereby may decrease or increase from
time to time, but the total unpaid balance so secured at any one time shall not exceed an
amount equal to Forty Million and 00/100 Dollars ($40,000,000.00) in principal plus interest thereon and any disbursements made for
the payment of taxes, levies, or insurance on the property with interest thereon. This
Security Instrument shall secure any and all additional or further monies which may be
advanced by any Mortgagee to the Mortgagor after the date hereof, which future advances of
money, if made, may be evidenced by a note or notes executed by the Mortgagor to the such
Mortgagee bearing such rate of interest and with such maturities as shall be determined
from time to time, but any and all such future advances secured by this Security
Instrument shall be made not more than twenty (20) years after the date hereof. Nothing
herein contained shall be deemed an obligation on the part of the Mortgagees to make any
future advances. Mortgagor hereby expressly waives and relinquishes any right granted
under Section 697.04, Florida Statutes, or otherwise to limit the amount of indebtedness
that may be outstanding at any time during the term of this Mortgage. Mortgagor further
covenants not to file for record any notice limiting the maximum principal of amount that
may be secured by this Mortgage, and agrees that any such notice, if filed, shall be null
and void and of no effect. 

        21.2
ASSIGNMENT OF LEASES AND RENTS. The assignment of Leases and Rents in this Security
Instrument is intended to confirm unto Mortgagees all of the rights and protections
afforded thereto under and by virtue of Section 697.07, Florida Statutes, as amended, and
to the fullest extent permissible by Florida law. The collection of such rents, issues and
profits or the exercise by Mortgagees of Mortgagees’ other remedies under this
Security Instrument or as provided by Florida law, shall not cure or waive any default or
notice of default hereunder or invalidate any act done in response to such default or
pursuant to such notice of default, or otherwise invalidate, impair, nullify, waive or
extinguish the rights and protections afforded Mortgagees under Section 697.07, Florida
Statutes, as amended. Furthermore, and as provided by Section 697.07, Florida Statutes, as
amended, upon the occurrence of a default under this Security Instrument, Mortgagees may
apply for a court order requiring Mortgagor to deposit all rents in the court registry
pursuant to Section 697.07, Florida Statutes, as amended. Mortgagor hereby consents to
entry of such an order upon the sworn ex parte motion of Mortgagees that default under
this Security Instrument has occurred. 

        21.3
CONFLICTING PROVISIONS. The provisions of this Article are intended to supplement,
and not limit, the other provisions of this Security Instrument; provided,
however , that in the event the provisions of this Article contradict any other
provision of this Security Instrument, the provisions of this Article shall govern. 

22 – MULTIPLE
MORTGAGEE PROVISIONS 

        22.1
MULTIPLE MORTGAGEES. Notwithstanding anything to the contrary contained herein,
Mortgagor and Agent and each Mortgagee, by its acceptance hereof, hereby acknowledge and
agree as follows: 

         (a)       
          Wherever in this Security Instrument the consent or approval of “each
          Mortgagee” (or words of similar import) is required for any matter or thing
          or a matter or thing is required to be satisfactory to “each
          Mortgagee” (or words of similar import), then such matter or thing must be
          consented to, approved by or satisfactory to all Mortgagees and if any Mortgagee
          shall disapprove same or find same to be unsatisfactory, then Mortgagor shall be
          prohibited from taking any action with respect to such matter or thing. 

         (b)       
          Subject to Section 22.1(e) below, wherever in this Security Instrument
          “a Mortgagee” (or words of similar import) is granted the right to
          take an action (other than the exercise of remedies under Article 10),
          make an election or request, approve a request or otherwise act, then any
          Mortgagee may take such action (other than the exercise of remedies under
          Article 10), make such election or request, approve such request or
          otherwise act, without the participation by or consent of any other Mortgagee. 

         (c)       
          Wherever in this Security Instrument funds are required to be deposited with or
          held by “the Mortgagees” (including, without limitation, funds
          deposited in the Escrow Fund and/or the Net Proceeds), each Mortgagee shall
          receive a portion of such funds equal to (x) such Mortgagee’s Proportionate
          Loan Share (as hereinafter defined) of (y) the funds to be deposited with or
          held by the Mortgagees. Each Mortgagee shall hold and apply its proportionate
          share of such deposited funds in accordance with this Security Instrument. 

         (d)       
          Any funds received by a Mortgagee pursuant to this Security Instrument shall be
          allocated between and paid to the Mortgagees in accordance with each
          Mortgagee’s Proportionate Loan Share or, if and as required under the
          Intercreditor Agreement, shall be paid to the Agent, to be held by Agent and
          distributed to the Mortgagees in accordance with the terms of the Intercreditor
          Agreement. To the extent that a Mortgagee receives greater than its
          Proportionate Loan Share, such Mortgagee shall promptly remit such overpayment
          to each other Mortgagee or the Agent, as applicable, as required to comply with
          this Agreement, the Debentures and the Intercreditor Agreement. Each Mortgagee
          may determine the order in which to apply funds received by it regardless of the
          order which any other Mortgagee applies funds (e.g., a Mortgagee may determine
          to apply funds first to expenses, second to interest and third to principal and
          a second Mortgagee may determine to apply funds first to interest, second to
          expenses and third to principal). 

         (e)       
          If an event occurs which, with the given of notice or the passage of time, would
          constitute an Event of Default, then Agent or its designee shall have the right
          to deliver any notice required to be given to the Mortgagor in connection with
          such event (and such notice shall be deemed to be given on behalf of all
          Mortgagees). 

         (f)       
          If an Event of Default occurs, Mortgagor acknowledges and agrees that pursuant
          to the terms of the Intercreditor Agreement, only the Agent (and no Mortgagee)
          shall have the right to take an action to exercise remedies under this Security
          Instrument, and any sums payable by Mortgagor to the Mortgagees hereunder shall
          be required to be paid to the Agent, on behalf of the Mortgagees, which sums
          shall be held by the Agent and distributed to the Mortgagees in accordance with
          the terms of the Intercreditor Agreement. In no event shall the foregoing
          preclude any Mortgagee from exercising any remedy granted to a Mortgagee under
          any other Investment Document (including, without limitation, the conversion by
          a Mortgagee of its Debenture to common stock of Ener1). 

         (g)       
          Each Mortgagee (each, an “Indemnifying Mortgagee”) hereby
          indemnifies and holds harmless Agent and each other Mortgagee (each, an
          “Indemnified Party”) from and against any and all losses,
          claims, liabilities, judgments, costs and expenses (including, without
          limitation, reasonable legal fees, costs and disbursements) sustained by an
          Indemnified Party as a result of the actions or omissions of the Indemnifying
          Mortgagee which are determined by a final, non-appealable order of a court of
          competent jurisdiction or arbitration proceeding to be in violation of the terms
          of this Security Instrument (including, without limitation, a claim by Mortgagor
          against the Agent or Mortgagees arising from the actions or failure to act of
          Agent or any one Mortgagee and/or a claim by an Indemnified Party against an
          Indemnifying Mortgagee arising from a breach of the provisions of this
          Section 22.1). In no event shall the Mortgagor be deemed to be a third
          party beneficiary of the foregoing indemnity. 

         (h)       
          As used herein “Proportionate Loan Share” shall mean, as to
          each Mortgagee, a percentage equal to, as of the date of determination (x) the
          amount due to such Mortgagee under the Investment Documents divided by (y) the
          total amount due to all of the Mortgagees under the Investment Documents. 

[Signature on Following
Page] 

        IN
WITNESS WHEREOF, THIS SECURITY INSTRUMENT has been executed by Mortgagor as of the day
and year first above written. 

	                               

                               

                               

                               

                               

WITNESS AS TO SIGNATURES:

____________________________   

Name:                          

SEALED AND DELIVERED

IN THE PRESENCE OF:

____________________________

Name:

Prepared by: Adam H. Sher, Esq.

and upon recordation return to:

Dunwody White & Landon, P.A.

550 Biltmore Way, Suite 810

Coral Gables, Florida 33134

Attention: Thomas Matkov, Esq.
	MORTGAGOR:

ENER1 BATTERY COMPANY, a Florida corporation

By:      ____________________________________

         Name:    Ronald N. Stewart

         Title:   Chief Operating Officer

         ___________________________

                  Name:

NOTARY ACKNOWLEDGEMENT
(CORPORATION) 

STATE OF FLORIDA          
    )

           
                       
                   )
       SS: 

COUNTY OF BROWARD        )

        The
foregoing instrument was acknowledged before me this 20th day of January, 2004, by Ronald
N. Stewart, as Chief Operating Officer of ENER1 BATTERY COMPANY, a Florida corporation,
formerly known as Ener1 USA Incorporated, on behalf of the corporation. He/She is (notary
choose one) [ ] personally known to me or [ ] has produced ______________________________
as identification. 

	 	__________________________________________________

Notary Public, State of Florida

Name:_____________________________________________

Commission/Serial No._____________________________________________

My commission expires: 

(SEAL) 

C-2 

EXHIBIT A 

(Description of Land) 

The West 1/2 of Lot 40, of FORT
LAUDERDALE INDUSTRIAL AIRPARK SECTION 2, according to the map or plat thereof, as recorded
in Plat Book 63, Page 8, of the Public Records of Broward County, Florida, less the South
5 feet. 

Together with appurtenant rights
under Joint Use Agreement, recorded in Official Records Book 22595, at Page 204, Public
Records of Broward County, Florida. 

SCHEDULE 1 

Mortgagees 

Satellite Asset Management, L.P., a Delaware limited partnership, on behalf of one or more investment funds

managed by Satellite Asset Management, L.P.

Alexandra Global Master Fund Ltd., a British Virgin Islands limited company

Omicron Master Trust, a Bermuda-based business trust

Castle Creek Technology Partners LLC, a Delaware limited liability company

SF Capital Partners Ltd., a British Virgin Islands limited company

Capital Ventures International, a Cayman Islands corporation

Vertical Ventures, LLC, a Delaware limited liability company

Portside Growth and Opportunity Fund, a Cayman Islands corporationExhibit 4.1

         ADVANCED PLANT PHARMACEUTICALS, INC. 2004 INCENTIVE STOCK PLAN

================================================================================

      THIS ADVANCED PLANT PHARMACEUTICALS, INC. 2004 INCENTIVE STOCK PLAN (the
"Plan") is designed to retain directors, executives and selected employees and
consultants and reward them for making major contributions to the success of the
Company. These objectives are accomplished by making long-term incentive awards
under the Plan thereby providing Participants with a proprietary interest in the
growth and performance of the Company.

1.    Definitions.

      (a)   "Board" - The Board of Directors of the Company.

      (b)   "Code" - The Internal Revenue Code of 1986, as amended from time to
            time.

      (c)   "Committee" - The Compensation Committee of the Company's Board, or
            such other committee of the Board that is designated by the Board to
            administer the Plan, composed of not less than two members of the
            Board all of whom are disinterested persons, as contemplated by Rule
            16b-3 ("Rule 16b-3") promulgated under the Securities Exchange Act
            of 1934, as amended (the "Exchange Act").

      (d)   "Company" - ADVANCED PLANT PHARMACEUTICALS, INC. and its
            subsidiaries including subsidiaries of subsidiaries.

      (e)   "Exchange Act" - The Securities Exchange Act of 1934, as amended
            from time to time.

      (f)   "Fair Market Value" - The fair market value of the Company's issued
            and outstanding Stock as determined in good faith by the Board or
            Committee.

      (g)   "Grant" - The grant of any form of stock option, stock award, or
            stock purchase offer, whether granted singly, in combination or in
            tandem, to a Participant pursuant to such terms, conditions and
            limitations as the Committee may establish in order to fulfill the
            objectives of the Plan.

      (h)   "Grant Agreement" - An agreement between the Company and a
            Participant that sets forth the terms, conditions and limitations
            applicable to a Grant.

      (i)   "Option" - Either an Incentive Stock Option, in accordance with
            Section 422 of Code, or a Nonstatutory Option, to purchase the
            Company's Stock that may be awarded to a Participant under the Plan.
            A Participant who receives an award of an Option shall be referred
            to as an "Optionee."

      (j)   "Participant" - A director, officer, employee or consultant of the
            Company to whom an Award has been made under the Plan.

<Page>

      (k)   "Restricted Stock Purchase Offer" - A Grant of the right to purchase
            a specified number of shares of Stock pursuant to a written
            agreement issued under the Plan.

      (l)   "Securities Act" - The Securities Act of 1933, as amended from time
            to time.

      (m)   "Stock" - Authorized and issued or unissued shares of common stock
            of the Company.

      (n)   "Stock Award" - A Grant made under the Plan in stock or denominated
            in units of stock for which the Participant is not obligated to pay
            additional consideration.

2.    Administration. The Plan shall be administered by the Board, provided
      however, that the Board may delegate such administration to the Committee.
      Subject to the provisions of the Plan, the Board and/or the Committee
      shall have authority to (a) grant, in its discretion, Incentive Stock
      Options in accordance with Section 422 of the Code, or Nonstatutory
      Options, Stock Awards or Restricted Stock Purchase Offers; (b) determine
      in good faith the fair market value of the Stock covered by any Grant; (c)
      determine which eligible persons shall receive Grants and the number of
      shares, restrictions, terms and conditions to be included in such Grants;
      (d) construe and interpret the Plan; (e) promulgate, amend and rescind
      rules and regulations relating to its administration, and correct defects,
      omissions and inconsistencies in the Plan or any Grant; (f) consistent
      with the Plan and with the consent of the Participant, as appropriate,
      amend any outstanding Grant or amend the exercise date or dates thereof;
      (g) determine the duration and purpose of leaves of absence which may be
      granted to Participants without constituting termination of their
      employment for the purpose of the Plan or any Grant; and (h) make all
      other determinations necessary or advisable for the Plan's administration.
      The interpretation and construction by the Board of any provisions of the
      Plan or selection of Participants shall be conclusive and final. No member
      of the Board or the Committee shall be liable for any action or
      determination made in good faith with respect to the Plan or any Grant
      made thereunder.

3.    Eligibility.

      (a)   General: The persons who shall be eligible to receive Grants shall
            be directors, officers, employees or consultants to the Company. The
            term consultant shall mean any person, other than an employee, who
            is engaged by the Company to render services and is compensated for
            such services. An Optionee may hold more than one Option. Any
            issuance of a Grant to an officer or director of the Company
            subsequent to the first registration of any of the securities of the
            Company under the Exchange Act shall comply with the requirements of
            Rule 16b-3.

      (b)   Incentive Stock Options: Incentive Stock Options may only be issued
            to employees of the Company. Incentive Stock Options may be granted
            to officers or directors, provided they are also employees of the
            Company. Payment of a director's fee shall not be sufficient to
            constitute employment by the Company.

            The Company shall not grant an Incentive Stock Option under the Plan
      to any employee if such Grant would result in such employee holding the
      right to exercise for the first time in any one calendar year, under all
      Incentive Stock Options granted under the Plan or any other plan

<Page>

      maintained by the Company, with respect to shares of Stock having an
      aggregate fair market value, determined as of the date of the Option is
      granted, in excess of $100,000. Should it be determined that an Incentive
      Stock Option granted under the Plan exceeds such maximum for any reason
      other than a failure in good faith to value the Stock subject to such
      option, the excess portion of such option shall be considered a
      Nonstatutory Option. To the extent the employee holds two (2) or more such
      Options which become exercisable for the first time in the same calendar
      year, the foregoing limitation on the exercisability of such Option as
      Incentive Stock Options under the Federal tax laws shall be applied on the
      basis of the order in which such Options are granted. If, for any reason,
      an entire Option does not qualify as an Incentive Stock Option by reason
      of exceeding such maximum, such Option shall be considered a Nonstatutory
      Option.

      (c)   Nonstatutory Option: The provisions of the foregoing Section 3(b)
            shall not apply to any Option designated as a "Nonstatutory Option"
            or which sets forth the intention of the parties that the Option be
            a Nonstatutory Option.

      (d)   Stock Awards and Restricted Stock Purchase Offers: The provisions of
            this Section 3 shall not apply to any Stock Award or Restricted
            Stock Purchase Offer under the Plan.

4.    Stock.

      (a)   Authorized Stock: Stock subject to Grants may be either unissued or
            reacquired Stock.

      (b)   Number of Shares: Subject to adjustment as provided in Section 5(i)
            of the Plan, the total number of shares of Stock which may be
            purchased or granted directly by Options, Stock Awards or Restricted
            Stock Purchase Offers, or purchased indirectly through exercise of
            Options granted under the Plan shall not exceed Two Million
            (2,000,000). If any Grant shall for any reason terminate or expire,
            any shares allocated thereto but remaining unpurchased upon such
            expiration or termination shall again be available for Grants with
            respect thereto under the Plan as though no Grant had previously
            occurred with respect to such shares. Any shares of Stock issued
            pursuant to a Grant and repurchased pursuant to the terms thereof
            shall be available for future Grants as though not previously
            covered by a Grant.

      (c)   Reservation of Shares: The Company shall reserve and keep available
            at all times during the term of the Plan such number of shares as
            shall be sufficient to satisfy the requirements of the Plan. If,
            after reasonable efforts, which efforts shall not include the
            registration of the Plan or Grants under the Securities Act, the
            Company is unable to obtain authority from any applicable regulatory
            body, which authorization is deemed necessary by legal counsel for
            the Company for the lawful issuance of shares hereunder, the Company
            shall be relieved of any liability with respect to its failure to
            issue and sell the shares for which such requisite authority was so
            deemed necessary unless and until such authority is obtained.

      (d)   Application of Funds: The proceeds received by the Company from the
            sale of Stock pursuant to the exercise of Options or rights under
            Stock Purchase Agreements will be used for general corporate
            purposes.

<Page>

      (e)   No Obligation to Exercise: The issuance of a Grant shall impose no
            obligation upon the Participant to exercise any rights under such
            Grant.

5.    Terms and Conditions of Options. Options granted hereunder shall be
      evidenced by agreements between the Company and the respective Optionees,
      in such form and substance as the Board or Committee shall from time to
      time approve. The form of Incentive Stock Option Agreement attached hereto
      as Exhibit A and the three forms of a Nonstatutory Stock Option Agreement
      for employees, for directors and for consultants, attached hereto as
      Exhibit B-1, Exhibit B-2 and Exhibit B-3, respectively, shall be deemed to
      be approved by the Board. Option agreements need not be identical, and in
      each case may include such provisions as the Board or Committee may
      determine, but all such agreements shall be subject to and limited by the
      following terms and conditions:

      (a)   Number of Shares: Each Option shall state the number of shares to
            which it pertains.

      (b)   Exercise Price: Each Option shall state the exercise price, which
            shall be determined as follows:

            (i)   Any Incentive Stock Option granted to a person who at the time
                  the Option is granted owns (or is deemed to own pursuant to
                  Section 424(d) of the Code) stock possessing more than ten
                  percent (10%) of the total combined voting power or value of
                  all classes of stock of the Company ("Ten Percent Holder")
                  shall have an exercise price of no less than 110% of the Fair
                  Market Value of the Stock as of the date of grant; and

            (ii)  Incentive Stock Options granted to a person who at the time
                  the Option is granted is not a Ten Percent Holder shall have
                  an exercise price of no less than 100% of the Fair Market
                  Value of the Stock as of the date of grant.

                  For the purposes of this Section 5(b), the Fair Market Value
         shall be as determined by the Board in good faith, which determination
         shall be conclusive and binding; provided however, that if there is a
         public market for such Stock, the Fair Market Value per share shall be
         the average of the bid and asked prices (or the closing price if such
         stock is listed on the NASDAQ National Market System or Small Cap Issue
         Market) on the date of grant of the Option, or if listed on a stock
         exchange, the closing price on such exchange on such date of grant.

(c)           Medium and Time of Payment: The exercise price shall become
              immediately due upon exercise of the Option and shall be paid in
              cash or check made payable to the Company. Should the Company's
              outstanding Stock be registered under Section 12(g) of the
              Exchange Act at the time the Option is exercised, then the
              exercise price may also be paid as follows:

            (i)   in shares of Stock held by the Optionee for the requisite
                  period necessary to avoid a charge to the Company's earnings
                  for financial reporting purposes and valued at Fair Market
                  Value on the exercise date, or

            (ii)  through a special sale and remittance procedure pursuant to
                  which the Optionee shall concurrently provide irrevocable
                  written instructions (a) to a Company designated brokerage

<Page>

                  firm to effect the immediate sale of the purchased shares and
                  remit to the Company, out of the sale proceeds available on
                  the settlement date, sufficient funds to cover the aggregate
                  exercise price payable for the purchased shares plus all
                  applicable Federal, state and local income and employment
                  taxes required to be withheld by the Company by reason of such
                  purchase and (b) to the Company to deliver the certificates
                  for the purchased shares directly to such brokerage firm in
                  order to complete the sale transaction.

            At the discretion of the Board, exercisable either at the time of
      Option grant or of Option exercise, the exercise price may also be paid
      (i) by Optionee's delivery of a promissory note in form and substance
      satisfactory to the Company and permissible under the Securities Rules of
      the State of New York and bearing interest at a rate determined by the
      Board in its sole discretion, but in no event less than the minimum rate
      of interest required to avoid the imputation of compensation income to the
      Optionee under the Federal tax laws, or (ii) in such other form of
      consideration permitted by the New York corporations law as may be
      acceptable to the Board.

      (d)   Term and Exercise of Options: Any Option granted to an employee of
            the Company shall become exercisable over a period of no longer than
            five (5) years, and no less than twenty percent (20%) of the shares
            covered thereby shall become exercisable annually. No Option shall
            be exercisable, in whole or in part, prior to one (1) year from the
            date it is granted unless the Board shall specifically determine
            otherwise, as provided herein. In no event shall any Option be
            exercisable after the expiration of ten (10) years from the date it
            is granted, and no Incentive Stock Option granted to a Ten Percent
            Holder shall, by its terms, be exercisable after the expiration of
            five (5) years from the date of the Option. Unless otherwise
            specified by the Board or the Committee in the resolution
            authorizing such Option, the date of grant of an Option shall be
            deemed to be the date upon which the Board or the Committee
            authorizes the granting of such Option.

            Each Option shall be exercisable to the nearest whole share, in
      installments or otherwise, as the respective Option agreements may
      provide. During the lifetime of an Optionee, the Option shall be
      exercisable only by the Optionee and shall not be assignable or
      transferable by the Optionee, and no other person shall acquire any rights
      therein. To the extent not exercised, installments (if more than one)
      shall accumulate, but shall be exercisable, in whole or in part, only
      during the period for exercise as stated in the Option agreement, whether
      or not other installments are then exercisable.

      (e)   Termination of Status as Employee, Consultant or Director: If
            Optionee's status as an employee shall terminate for any reason
            other than Optionee's disability or death, then Optionee (or if the
            Optionee shall die after such termination, but prior to exercise,
            Optionee's personal representative or the person entitled to succeed
            to the Option) shall have the right to exercise the portions of any
            of Optionee's Incentive Stock Options which were exercisable as of
            the date of such termination, in whole or in part, not less than 30
            days nor more than three (3) months after such termination (or, in
            the event of "termination for good cause" as that term is defined in
            New York case law related thereto, or by the terms of the Plan or
            the Option Agreement or an employment agreement, the Option shall
            automatically terminate as of the termination of employment as to
            all shares covered by the Option).

<Page>

            With respect to Nonstatutory Options granted to employees, directors
      or consultants, the Board may specify such period for exercise, not less
      than 30 days (except that in the case of "termination for cause" or
      removal of a director, the Option shall automatically terminate as of the
      termination of employment or services as to shares covered by the Option,
      following termination of employment or services as the Board deems
      reasonable and appropriate. The Option may be exercised only with respect
      to installments that the Optionee could have exercised at the date of
      termination of employment or services. Nothing contained herein or in any
      Option granted pursuant hereto shall be construed to affect or restrict in
      any way the right of the Company to terminate the employment or services
      of an Optionee with or without cause.

      (f)   Disability of Optionee: If an Optionee is disabled (within the
            meaning of Section 22(e)(3) of the Code) at the time of termination,
            the three (3) month period set forth in Section 5(e) shall be a
            period, as determined by the Board and set forth in the Option, of
            not less than six months nor more than one year after such
            termination.

      (g)   Death of Optionee: If an Optionee dies while employed by, engaged as
            a consultant to, or serving as a Director of the Company, the
            portion of such Optionee's Option which was exercisable at the date
            of death may be exercised, in whole or in part, by the estate of the
            decedent or by a person succeeding to the right to exercise such
            Option at any time within (i) a period, as determined by the Board
            and set forth in the Option, of not less than six (6) months nor
            more than one (1) year after Optionee's death, which period shall
            not be more, in the case of a Nonstatutory Option, than the period
            for exercise following termination of employment or services, or
            (ii) during the remaining term of the Option, whichever is the
            lesser. The Option may be so exercised only with respect to
            installments exercisable at the time of Optionee's death and not
            previously exercised by the Optionee.

      (h)   Nontransferability of Option: No Option shall be transferable by the
            Optionee, except by will or by the laws of descent and distribution.

      (i)   Recapitalization: Subject to any required action of shareholders,
            the number of shares of Stock covered by each outstanding Option,
            and the exercise price per share thereof set forth in each such
            Option, shall be proportionately adjusted for any increase or
            decrease in the number of issued shares of Stock of the Company
            resulting from a stock split, stock dividend, combination,
            subdivision or reclassification of shares, or the payment of a stock
            dividend, or any other increase or decrease in the number of such
            shares affected without receipt of consideration by the Company;
            provided, however, the conversion of any convertible securities of
            the Company shall not be deemed to have been "effected without
            receipt of consideration" by the Company.

            In the event of a proposed dissolution or liquidation of the
      Company, a merger or consolidation in which the Company is not the
      surviving entity, or a sale of all or substantially all of the assets or
      capital stock of the Company (collectively, a "Reorganization"), unless
      otherwise provided by the Board, this Option shall terminate immediately
      prior to such date as is determined by the Board, which date shall be no
      later than the consummation of such Reorganization. In such event, if the

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      entity which shall be the surviving entity does not tender to Optionee an
      offer, for which it has no obligation to do so, to substitute for any
      unexercised Option a stock option or capital stock of such surviving of
      such surviving entity, as applicable, which on an equitable basis shall
      provide the Optionee with substantially the same economic benefit as such
      unexercised Option, then the Board may grant to such Optionee, in its sole
      and absolute discretion and without obligation, the right for a period
      commencing thirty (30) days prior to and ending immediately prior to the
      date determined by the Board pursuant hereto for termination of the Option
      or during the remaining term of the Option, whichever is the lesser, to
      exercise any unexpired Option or Options without regard to the installment
      provisions of Paragraph 6(d) of the Plan; provided, that any such right
      granted shall be granted to all Optionees not receiving an offer to
      receive substitute options on a consistent basis, and provided further,
      that any such exercise shall be subject to the consummation of such
      Reorganization.

            Subject to any required action of shareholders, if the Company shall
      be the surviving entity in any merger or consolidation, each outstanding
      Option thereafter shall pertain to and apply to the securities to which a
      holder of shares of Stock equal to the shares subject to the Option would
      have been entitled by reason of such merger or consolidation.

            In the event of a change in the Stock of the Company as presently
      constituted, which is limited to a change of all of its authorized shares
      without par value into the same number of shares with a par value, the
      shares resulting from any such change shall be deemed to be the Stock
      within the meaning of the Plan.

            To the extent that the foregoing adjustments relate to stock or
      securities of the Company, such adjustments shall be made by the Board,
      whose determination in that respect shall be final, binding and
      conclusive. Except as expressly provided in this Section 5(i), the
      Optionee shall have no rights by reason of any subdivision or
      consolidation of shares of stock of any class or the payment of any stock
      dividend or any other increase or decrease in the number of shares of
      stock of any class, and the number or price of shares of Stock subject to
      any Option shall not be affected by, and no adjustment shall be made by
      reason of, any dissolution, liquidation, merger, consolidation or sale of
      assets or capital stock, or any issue by the Company of shares of stock of
      any class or securities convertible into shares of stock of any class.

            The Grant of an Option pursuant to the Plan shall not affect in any
      way the right or power of the Company to make any adjustments,
      reclassifications, reorganizations or changes in its capital or business
      structure or to merge, consolidate, dissolve, or liquidate or to sell or
      transfer all or any part of its business or assets.

      (j)   Rights as a Shareholder: An Optionee shall have no rights as a
            shareholder with respect to any shares covered by an Option until
            the effective date of the issuance of the shares following exercise
            of such Option by Optionee. No adjustment shall be made for
            dividends (ordinary or extraordinary, whether in cash, securities or
            other property) or distributions or other rights for which the
            record date is prior to the date such stock certificate is issued,
            except as expressly provided in Section 5(i) hereof.

<Page>

      (k)   Modification, Acceleration, Extension, and Renewal of Options:
            Subject to the terms and conditions and within the limitations of
            the Plan, the Board may modify an Option, or, once an Option is
            exercisable, accelerate the rate at which it may be exercised, and
            may extend or renew outstanding Options granted under the Plan or
            accept the surrender of outstanding Options (to the extent not
            theretofore exercised) and authorize the granting of new Options in
            substitution for such Options, provided such action is permissible
            under Section 422 of the Code and the New York Securities Rules.
            Notwithstanding the provisions of this Section 5(k), however, no
            modification of an Option shall, without the consent of the
            Optionee, alter to the Optionee's detriment or impair any rights or
            obligations under any Option theretofore granted under the Plan.

      (l)   Exercise Before Exercise Date: At the discretion of the Board, the
            Option may, but need not, include a provision whereby the Optionee
            may elect to exercise all or any portion of the Option prior to the
            stated exercise date of the Option or any installment thereof. Any
            shares so purchased prior to the stated exercise date shall be
            subject to repurchase by the Company upon termination of Optionee's
            employment as contemplated by Section 5(n) hereof prior to the
            exercise date stated in the Option and such other restrictions and
            conditions as the Board or Committee may deem advisable.

      (m)   Other Provisions: The Option agreements authorized under the Plan
            shall contain such other provisions, including, without limitation,
            restrictions upon the exercise of the Options, as the Board or the
            Committee shall deem advisable. Shares shall not be issued pursuant
            to the exercise of an Option, if the exercise of such Option or the
            issuance of shares thereunder would violate, in the opinion of legal
            counsel for the Company, the provisions of any applicable law or the
            rules or regulations of any applicable governmental or
            administrative agency or body, such as the Code, the Securities Act,
            the Exchange Act, the New York Securities Rules, New York
            corporation law, and the rules promulgated under the foregoing or
            the rules and regulations of any exchange upon which the shares of
            the Company are listed. Without limiting the generality of the
            foregoing, the exercise of each Option shall be subject to the
            condition that if at any time the Company shall determine that (i)
            the satisfaction of withholding tax or other similar liabilities, or
            (ii) the listing, registration or qualification of any shares
            covered by such exercise upon any securities exchange or under any
            state or federal law, or (iii) the consent or approval of any
            regulatory body, or (iv) the perfection of any exemption from any
            such withholding, listing, registration, qualification, consent or
            approval is necessary or desirable in connection with such exercise
            or the issuance of shares thereunder, then in any such event, such
            exercise shall not be effective unless such withholding, listing
            registration, qualification, consent, approval or exemption shall
            have been effected, obtained or perfected free of any conditions not
            acceptable to the Company.

      (n)   Repurchase Agreement: The Board may, in its discretion, require as a
            condition to the Grant of an Option hereunder, that an Optionee
            execute an agreement with the Company, in form and substance
            satisfactory to the Board in its discretion ("Repurchase
            Agreement"), (i) restricting the Optionee's right to transfer shares
            purchased under such Option without first offering such shares to
            the Company or another shareholder of the Company upon the same
            terms and conditions as provided therein; and (ii) providing that
            upon termination of Optionee's employment with the Company, for any
            reason, the Company (or another shareholder of the Company, as

<Page>

            provided in the Repurchase Agreement) shall have the right at its
            discretion (or the discretion of such other shareholders) to
            purchase and/or redeem all such shares owned by the Optionee on the
            date of termination of his or her employment at a price equal to:
            (A) the fair value of such shares as of such date of termination; or
            (B) if such repurchase right lapses at 20% of the number of shares
            per year, the original purchase price of such shares, and upon terms
            of payment permissible under the New York securities rules; provided
            that in the case of Options or Stock Awards granted to officers,
            directors, consultants or affiliates of the Company, such repurchase
            provisions may be subject to additional or greater restrictions as
            determined by the Board or Committee.

6.    Stock Awards and Restricted Stock Purchase Offers.

      (a)   Types of Grants.

            (i)   Stock Award. All or part of any Stock Award under the Plan may
                  be subject to conditions established by the Board or the
                  Committee, and set forth in the Stock Award Agreement, which
                  may include, but are not limited to, continuous service with
                  the Company, achievement of specific business objectives,
                  increases in specified indices, attaining growth rates and
                  other comparable measurements of Company performance. Such
                  Awards may be based on Fair Market Value or other specified
                  valuation. All Stock Awards will be made pursuant to the
                  execution of a Stock Award Agreement substantially in the form
                  attached hereto as Exhibit C.

            (ii)  Restricted Stock Purchase Offer. A Grant of a Restricted Stock
                  Purchase Offer under the Plan shall be subject to such (i)
                  vesting contingencies related to the Participant's continued
                  association with the Company for a specified time and (ii)
                  other specified conditions as the Board or Committee shall
                  determine, in their sole discretion, consistent with the
                  provisions of the Plan. All Restricted Stock Purchase Offers
                  shall be made pursuant to a Restricted Stock Purchase Offer
                  substantially in the form attached hereto as Exhibit D.

      (b)   Conditions and Restrictions. Shares of Stock which Participants may
            receive as a Stock Award under a Stock Award Agreement or Restricted
            Stock Purchase Offer under a Restricted Stock Purchase Offer may
            include such restrictions as the Board or Committee, as applicable,
            shall determine, including restrictions on transfer, repurchase
            rights, right of first refusal, and forfeiture provisions. When
            transfer of Stock is so restricted or subject to forfeiture
            provisions it is referred to as "Restricted Stock". Further, with
            Board or Committee approval, Stock Awards or Restricted Stock
            Purchase Offers may be deferred, either in the form of installments
            or a future lump sum distribution. The Board or Committee may permit
            selected Participants to elect to defer distributions of Stock
            Awards or Restricted Stock Purchase Offers in accordance with
            procedures established by the Board or Committee to assure that such
            deferrals comply with applicable requirements of the Code including,
            at the choice of Participants, the capability to make further
            deferrals for distribution after retirement. Any deferred
            distribution, whether elected by the Participant or specified by the
            Stock Award Agreement, Restricted Stock Purchase Offers or by the
            Board or Committee, may require the payment be forfeited in
            accordance with the provisions of Section 6(c). Dividends or
            dividend equivalent rights may be extended to and made part of any

<Page>

            Stock Award or Restricted Stock Purchase Offers denominated in Stock
            or units of Stock, subject to such terms, conditions and
            restrictions as the Board or Committee may establish.

      (c)   Cancellation and Rescission of Grants. Unless the Stock Award
            Agreement or Restricted Stock Purchase Offer specifies otherwise,
            the Board or Committee, as applicable, may cancel any unexpired,
            unpaid, or deferred Grants at any time if the Participant is not in
            compliance with all other applicable provisions of the Stock Award
            Agreement or Restricted Stock Purchase Offer, the Plan and with the
            following conditions:

            (i)   A Participant shall not render services for any organization
                  or engage directly or indirectly in any business which, in the
                  judgment of the chief executive officer of the Company or
                  other senior officer designated by the Board or Committee, is
                  or becomes competitive with the Company, or which organization
                  or business, or the rendering of services to such organization
                  or business, is or becomes otherwise prejudicial to or in
                  conflict with the interests of the Company. For Participants
                  whose employment has terminated, the judgment of the chief
                  executive officer shall be based on the Participant's position
                  and responsibilities while employed by the Company, the
                  Participant's post-employment responsibilities and position
                  with the other organization or business, the extent of past,
                  current and potential competition or conflict between the
                  Company and the other organization or business, the effect on
                  the Company's customers, suppliers and competitors and such
                  other considerations as are deemed relevant given the
                  applicable facts and circumstances. A Participant who has
                  retired shall be free, however, to purchase as an investment
                  or otherwise, stock or other securities of such organization
                  or business so long as they are listed upon a recognized
                  securities exchange or traded over-the-counter, and such
                  investment does not represent a substantial investment to the
                  Participant or a greater than ten percent (10%) equity
                  interest in the organization or business.

            (ii)  A Participant shall not, without prior written authorization
                  from the Company, disclose to anyone outside the Company, or
                  use in other than the Company's business, any confidential
                  information or material, as defined in the Company's
                  Proprietary Information and Invention Agreement or similar
                  agreement regarding confidential information and intellectual
                  property, relating to the business of the Company, acquired by
                  the Participant either during or after employment with the
                  Company.

            (iii) A Participant, pursuant to the Company's Proprietary
                  Information and Invention Agreement, shall disclose promptly
                  and assign to the Company all right, title and interest in any
                  invention or idea, patentable or not, made or conceived by the
                  Participant during employment by the Company, relating in any
                  manner to the actual or anticipated business, research or
                  development work of the Company and shall do anything
                  reasonably necessary to enable the Company to secure a patent
                  where appropriate in the United States and in foreign
                  countries.

            (iv)  Upon exercise, payment or delivery pursuant to a Grant, the
                  Participant shall certify on a form acceptable to the
                  Committee that he or she is in compliance with the terms and
                  conditions of the Plan. Failure to comply with all of the
                  provisions of this Section 6(c) prior to, or during the six

<Page>

                  months after, any exercise, payment or delivery pursuant to a
                  Grant shall cause such exercise, payment or delivery to be
                  rescinded. The Company shall notify the Participant in writing
                  of any such rescission within two years after such exercise,
                  payment or delivery. Within ten days after receiving such a
                  notice from the Company, the Participant shall pay to the
                  Company the amount of any gain realized or payment received as
                  a result of the rescinded exercise, payment or delivery
                  pursuant to a Grant. Such payment shall be made either in cash
                  or by returning to the Company the number of shares of Stock
                  that the Participant received in connection with the rescinded
                  exercise, payment or delivery.

      (d)   Nonassignability.

            (i)   Except pursuant to Section 6(e)(iii) and except as set forth
                  in Section 6(d)(ii), no Grant or any other benefit under the
                  Plan shall be assignable or transferable, or payable to or
                  exercisable by, anyone other than the Participant to whom it
                  was granted.

            (ii)  Where a Participant terminates employment and retains a Grant
                  pursuant to Section 6(e)(ii) in order to assume a position
                  with a governmental, charitable or educational institution,
                  the Board or Committee, in its discretion and to the extent
                  permitted by law, may authorize a third party (including but
                  not limited to the trustee of a "blind" trust), acceptable to
                  the applicable governmental or institutional authorities, the
                  Participant and the Board or Committee, to act on behalf of
                  the Participant with regard to such Awards.

      (e)   Termination of Employment. If the employment or service to the
            Company of a Participant terminates, other than pursuant to any of
            the following provisions under this Section 6(e), all unexercised,
            deferred and unpaid Stock Awards or Restricted Stock Purchase Offers
            shall be cancelled immediately, unless the Stock Award Agreement or
            Restricted Stock Purchase Offer provides otherwise:

            (i)   Retirement Under a Company Retirement Plan. When a
                  Participant's employment terminates as a result of retirement
                  in accordance with the terms of a Company retirement plan, the
                  Board or Committee may permit Stock Awards or Restricted Stock
                  Purchase Offers to continue in effect beyond the date of
                  retirement in accordance with the applicable Grant Agreement
                  and the exercisability and vesting of any such Grants may be
                  accelerated.

            (ii)  Rights in the Best Interests of the Company. When a
                  Participant resigns from the Company and, in the judgment of
                  the Board or Committee, the acceleration and/or continuation
                  of outstanding Stock Awards or Restricted Stock Purchase
                  Offers would be in the best interests of the Company, the
                  Board or Committee may (i) authorize, where appropriate, the
                  acceleration and/or continuation of all or any part of Grants
                  issued prior to such termination and (ii) permit the exercise,
                  vesting and payment of such Grants for such period as may be
                  set forth in the applicable Grant Agreement, subject to
                  earlier cancellation pursuant to Section 9 or at such time as
                  the Board or Committee shall deem the continuation of all or
                  any part of the Participant's Grants are not in the Company's
                  best interest.

<Page>

            (iii) Death or Disability of a Participant.

                  (1)   In the event of a Participant's death, the Participant's
                        estate or beneficiaries shall have a period up to the
                        expiration date specified in the Grant Agreement within
                        which to receive or exercise any outstanding Grant held
                        by the Participant under such terms as may be specified
                        in the applicable Grant Agreement. Rights to any such
                        outstanding Grants shall pass by will or the laws of
                        descent and distribution in the following order: (a) to
                        beneficiaries so designated by the Participant; if none,
                        then (b) to a legal representative of the Participant;
                        if none, then (c) to the persons entitled thereto as
                        determined by a court of competent jurisdiction. Grants
                        so passing shall be made at such times and in such
                        manner as if the Participant were living.

                  (2)   In the event a Participant is deemed by the Board or
                        Committee to be unable to perform his or her usual
                        duties by reason of mental disorder or medical condition
                        which does not result from facts which would be grounds
                        for termination for cause, Grants and rights to any such
                        Grants may be paid to or exercised by the Participant,
                        if legally competent, or a committee or other legally
                        designated guardian or representative if the Participant
                        is legally incompetent by virtue of such disability.

                  (3)   After the death or disability of a Participant, the
                        Board or Committee may in its sole discretion at any
                        time (1) terminate restrictions in Grant Agreements; (2)
                        accelerate any or all installments and rights; and (3)
                        instruct the Company to pay the total of any accelerated
                        payments in a lump sum to the Participant, the
                        Participant's estate, beneficiaries or representative;
                        notwithstanding that, in the absence of such termination
                        of restrictions or acceleration of payments, any or all
                        of the payments due under the Grant might ultimately
                        have become payable to other beneficiaries.

                  (4)   In the event of uncertainty as to interpretation of or
                        controversies concerning this Section 6, the
                        determinations of the Board or Committee, as applicable,
                        shall be binding and conclusive.

7.    Investment Intent. All Grants under the Plan are intended to be exempt
      from registration under the Securities Act provided by Rule 701
      thereunder. Unless and until the granting of Options or sale and issuance
      of Stock subject to the Plan are registered under the Securities Act or
      shall be exempt pursuant to the rules promulgated thereunder, each Grant
      under the Plan shall provide that the purchases or other acquisitions of
      Stock thereunder shall be for investment purposes and not with a view to,
      or for resale in connection with, any distribution thereof. Further,
      unless the issuance and sale of the Stock have been registered under the
      Securities Act, each Grant shall provide that no shares shall be purchased
      upon the exercise of the rights under such Grant unless and until (i) all
      then applicable requirements of state and federal laws and regulatory
      agencies shall have been fully complied with to the satisfaction of the
      Company and its counsel, and (ii) if requested to do so by the Company,
      the person exercising the rights under the Grant shall (i) give written
      assurances as to knowledge and experience of such person (or a
      representative employed by such person) in financial and business matters
      and the ability of such person (or representative) to evaluate the merits
      and risks of exercising the Option, and (ii) execute and deliver to the
      Company a letter of investment intent and/or such other form related to
      applicable exemptions from registration, all in such form and substance as
      the Company may require. If shares are issued upon exercise of any rights

<Page>

      under a Grant without registration under the Securities Act, subsequent
      registration of such shares shall relieve the purchaser thereof of any
      investment restrictions or representations made upon the exercise of such
      rights.

8.    Amendment, Modification, Suspension or Discontinuance of the Plan. The
      Board may, insofar as permitted by law, from time to time, with respect to
      any shares at the time not subject to outstanding Grants, suspend or
      terminate the Plan or revise or amend it in any respect whatsoever, except
      that without the approval of the shareholders of the Company, no such
      revision or amendment shall (i) increase the number of shares subject to
      the Plan, (ii) decrease the price at which Grants may be granted, (iii)
      materially increase the benefits to Participants, or (iv) change the class
      of persons eligible to receive Grants under the Plan; provided, however,
      no such action shall alter or impair the rights and obligations under any
      Option, or Stock Award, or Restricted Stock Purchase Offer outstanding as
      of the date thereof without the written consent of the Participant
      thereunder. No Grant may be issued while the Plan is suspended or after it
      is terminated, but the rights and obligations under any Grant issued while
      the Plan is in effect shall not be impaired by suspension or termination
      of the Plan.

            In the event of any change in the outstanding Stock by reason of a
      stock split, stock dividend, combination or reclassification of shares,
      recapitalization, merger, or similar event, the Board or the Committee may
      adjust proportionally (a) the number of shares of Stock (i) reserved under
      the Plan, (ii) available for Incentive Stock Options and Nonstatutory
      Options and (iii) covered by outstanding Stock Awards or Restricted Stock
      Purchase Offers; (b) the Stock prices related to outstanding Grants; and
      (c) the appropriate Fair Market Value and other price determinations for
      such Grants. In the event of any other change affecting the Stock or any
      distribution (other than normal cash dividends) to holders of Stock, such
      adjustments as may be deemed equitable by the Board or the Committee,
      including adjustments to avoid fractional shares, shall be made to give
      proper effect to such event. In the event of a corporate merger,
      consolidation, acquisition of property or stock, separation,
      reorganization or liquidation, the Board or the Committee shall be
      authorized to issue or assume stock options, whether or not in a
      transaction to which Section 424(a) of the Code applies, and other Grants
      by means of substitution of new Grant Agreements for previously issued
      Grants or an assumption of previously issued Grants.

9.    Tax Withholding. The Company shall have the right to deduct applicable
      taxes from any Grant payment and withhold, at the time of delivery or
      exercise of Options, Stock Awards or Restricted Stock Purchase Offers or
      vesting of shares under such Grants, an appropriate number of shares for
      payment of taxes required by law or to take such other action as may be
      necessary in the opinion of the Company to satisfy all obligations for
      withholding of such taxes. If Stock is used to satisfy tax withholding,
      such stock shall be valued based on the Fair Market Value when the tax
      withholding is required to be made.

10.   Availability of Information. During the term of the Plan and any
      additional period during which a Grant granted pursuant to the Plan shall
      be exercisable, the Company shall make available, not later than one
      hundred and twenty (120) days following the close of each of its fiscal
      years, such financial and other information regarding the Company as is
      required by the bylaws of the Company and applicable law to be furnished
      in an annual report to the shareholders of the Company.

<Page>

11.   Notice. Any written notice to the Company required by any of the
      provisions of the Plan shall be addressed to the chief personnel officer
      or to the chief executive officer of the Company, and shall become
      effective when it is received by the office of the chief personnel officer
      or the chief executive officer.

12.   Indemnification of Board. In addition to such other rights or
      indemnifications as they may have as directors or otherwise, and to the
      extent allowed by applicable law, the members of the Board and the
      Committee shall be indemnified by the Company against the reasonable
      expenses, including attorneys' fees, actually and necessarily incurred in
      connection with the defense of any claim, action, suit or proceeding, or
      in connection with any appeal thereof, to which they or any of them may be
      a party by reason of any action taken, or failure to act, under or in
      connection with the Plan or any Grant granted thereunder, and against all
      amounts paid by them in settlement thereof (provided such settlement is
      approved by independent legal counsel selected by the Company) or paid by
      them in satisfaction of a judgment in any such claim, action, suit or
      proceeding, except in any case in relation to matters as to which it shall
      be adjudged in such claim, action, suit or proceeding that such Board or
      Committee member is liable for negligence or misconduct in the performance
      of his or her duties; provided that within sixty (60) days after
      institution of any such action, suit or Board proceeding the member
      involved shall offer the Company, in writing, the opportunity, at its own
      expense, to handle and defend the same.

13.   Governing Law. The Plan and all determinations made and actions taken
      pursuant hereto, to the extent not otherwise governed by the Code or the
      securities laws of the United States, shall be governed by the law of the
      State of New York and construed accordingly.

14.   Effective and Termination Dates. The Plan shall become effective on the
      date it is approved by the holders of a majority of the shares of Stock
      then outstanding. The Plan shall terminate ten years later, subject to
      earlier termination by the Board pursuant to Section 8.

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