UNITED
      STATES


SECURITIES
      AND EXCHANGE COMMISSION


Washington,
      D.C. 20549





FORM
      10-QSB





QUARTERLY
      REPORT UNDER SECTION 13 OR 15(d)


OF
      THE
      SECURITIES EXCHANGE ACT OF 1934





For
      the
      quarterly period ended **March
      31, 2007**





Commission
      File Number **0-21138**




**ENER1,
      INC.**


(Exact
      name of registrant as specified in its charter)





**Florida**
            
            **59-2479377**State or other jurisdiction
              of
                incorporation or organization
            
            (I.R.S. Employer
              Identification
                No.)







**500
      West Cypress Creek Road-Suite 100**


**Ft.
      Lauderdale, Florida 33309**


(Address
      of principal executive offices) (Zip Code)





**(954)
      556-4020**


(Registrant’s
      telephone number, including area code)





(Former
      name, former address, and former fiscal year if changed since last
      report)





Indicate
      by check mark whether the registrant (1) has filed all reports required to
      be
      filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
      the
      preceding 12 months (or for such shorter period that the registrant was required
      to file such reports), and (2) has been subject to such filing requirements
      for
      the past 90 days.




Yes x No o





Indicate
      by check mark whether registrant is a shell company (as defined in Rule 12b-2
      of
      the Exchange Act)




Yes o No x




Indicate
      the number of shares outstanding of each of the issuer’s classes of common
      stock, as of the latest practicable date.





**Class**
            **Outstanding
                as of May 1, 2007**Common
                Stock, par value $.01 per share
            439,676,830




Transitional
      Small Business Format (check one): Yes o No x








**ENER1,
      INC. AND SUBSIDIARIES**




**Form
      10-QSB for the Quarter Ended March 31, 2007**




INDEX




Part
                I. FINANCIAL INFORMATION
            PageItem 1.  Financial StatementsConsolidated Balance Sheets (unaudited) as ofMarch 31, 2007 and December 31, 2006
            3Consolidated Statements of Operations (unaudited)for the three months ended March 31, 2007 and 2006
            4Consolidated Statements of Cash Flows (unaudited)for the three months ended March 31, 2007 and 2006
            5Notes to Consolidated Financial Statements (unaudited)
            6Item 2.  Management's Discussion and Analysis of
                FinancialCondition and Results of Operations
            25Item 3.  Controls and Procedures
            29Part
                II. OTHER INFORMATIONItem
                1.  Legal Proceedings
            30Item
                2.  Unregistered Sales of Equity Securities and Use of
                Proceeds
            30Item 6.  Exhibits and Reports on Form 8-K
            31Signatures
            34





2


ENER1,
      INC. AND SUBSIDIARIES


CONSOLIDATED
      BALANCE SHEETS


(Unaudited)


(In
      thousands)


**March
                  31,**
              
              **December
                  31,****2007**
              
              **2006****ASSETS**Current
                  assetsCash
                  and equivalents, including restricted cash of $0 and
                  $224
              
              $
              471
              
              $
              291Accounts
                  receivable
              
              
              141
              
              
              152Prepaid
                  expenses and other current assets
              
              
              340
              
              
              248Total
                  current assets
              
              
              952
              
              
              691Property
                  and equipment, net
              
              
              3,393
              
              
              3,554Investment
                  in EnerStruct, Inc.
              
              
              -
              
              
              40Deferred
                  debenture and note costs, net of amortization of $3,709 and
                  $3,369
              
              
              2,721
              
              
              2,812Other
              
              
              70
              
              
              71Total
                  assets
              
              $
              7,136
              
              $
              7,168**LIABILITIES
                  AND STOCKHOLDERS' DEFICIT**Current
                  liabilitiesCurrent
                  portion of installment loan
              
              
              26
              
              
              27Notes
                  payable - short-term
              
              
              157
              
              
              -Accounts
                  payable and accrued expenses
              
              
              4,978
              
              
              5,937Interest
                  payable
              
              
              1,272
              
              
              1,300Derivative
                  liabilities
              
              
              6,583
              
              
              7,162Total
                  current liabilities
              
              
              13,016
              
              
              14,426Long-term
                  portion of installment loan
              
              
              33
              
              
              39Convertible
                  notes, advances and accrued interest due to related party,net
                  of discounts of $6,694 and $3,663
              
              
              6,375
              
              
              7,939$19,700
                  convertible debentures, net of discount of $10,994 and
                  $11,780
              
              
              8,706
              
              
              7,920$14,225
                  convertible debentures, net of discount of $8,397 and
                  $8,856
              
              
              5,828
              
              
              5,369Total
                  liabilities
              
              
              33,958
              
              
              35,693Redeemable
                  convertible preferred stock:EnerDel,
                  Inc. Series A Preferred, $.01 par value, 500,000 shares
                  authorized,8,000
                  shares issued and outstanding; liquidation preference
                  $8,000
              
              
              7,034
              
              
              6,576Series
                  B Preferred, $.01 par value, 180,000 shares authorized,152,500
                  shares issued and outstanding; liquidation preference
                  $15,250
              
              
              15,678
              
              
              15,162Minority
                  interest
              
              
              -
              
              
              -Commitments
                  and contingencies**STOCKHOLDERS'
                  DEFICIT**Common
                  stock, $.01 par value, 750,000,000 shares authorized439,091,830
                  and 417,349,560 issued and outstanding, respectively
              
              
              4,391
              
              
              4,174Paid
                  in capital
              
              
              145,278
              
              
              137,507Accumulated
                  deficit
              
              
              (199,203
              )
              
              (191,944
              )Total
                  stockholders' deficit
              
              
              (49,534
              )
              
              (50,263
              )Total
                  liabilities and stockholders' deficit
              
              $
              7,136
              
              $
              7,168






See
      notes
      to consolidated financial statements.


ENER1,
      INC. AND SUBSIDIARIES


CONSOLIDATED
      STATEMENTS OF OPERATIONS


(Unaudited)


(In
      thousands except per share data)





**Three
                  Months Ended****March
                  31,****2007**
              
              **2006**Net
                  sales
              
              $
              74
              
              $
              18Cost
                  of sales
              
              
              -
              
              
              -Gross
                  profit
              
              
              74
              
              
              18Operating
                  expenses:General
                  and administrative
              
              
              1,884
              
              
              3,042Research
                  and development
              
              
              2,491
              
              
              919Warrant
                  modification expense
              
              
              -
              
              
              927Depreciation
                  and amortization
              
              
              110
              
              
              101Total
                  operating expenses
              
              
              4,485
              
              
              4,989Loss
                  from operations
              
              
              (4,411
              )
              
              (4,971
              )Other
                  income (expense):Interest
                  expense
              
              
              (3,352
              )
              
              (2,843
              )Registration
                  delay expenses
              
              
              -
              
              
              (871
              )Equity
                  in loss of EnerStruct, Inc.
              
              
              (40
              )
              
              (147
              )Other
              
              
              (35
              )
              
              10Gain
                  on derivative liabilities
              
              
              579
              
              
              10,372Total
                  other income (expense)
              
              
              (2,848
              )
              
              6,521Income
                  (loss) before income taxes
              
              
              (7,259
              )
              
              1,550Income
                  taxes
              
              
              -
              
              
              -Net
                  income (loss) before minority interest
              
              
              (7,259
              )
              
              1,550Minority
                  interest
              
              
              (458
              )
              
              (596
              )Net
                  income (loss)
              
              
              (7,717
              )
              
              954Preferred
                  stock dividends
              
              
              (516
              )
              
              (693
              )Net
                  income (loss) attributable to common shareholders
              
              $
              (8,233
              )
              $
              261Net
                  income (loss) per share, basic
              
              $
              (0.02
              )
              $
              0.00Net
                  (loss) per share, diluted
              
              $
              (0.02
              )
              $
              (0.01
              )Weighted
                  average shares outstanding - basic
              
              
              439,092
              
              
              368,458Weighted
                  average shares outstanding - diluted
              
              
              439,092
              
              
              436,181


See
      notes
      to consolidated financial statements.


3


ENER1,
      INC. AND SUBSIDIARIES


CONSOLIDATED
      STATEMENTS OF CASH FLOWS


(Unaudited)


(In
      thousands)




**Three
                  Months Ended****March
                  31,****2007**
              
              **2006**Net
                  income (loss)
              
              $
              (7,717
              )
              $
              954Adjustments
                  to reconcile net income (loss) to cash used in operating
                  activities:Gain
                  on derivative liabilities
              
              
              (579
              )
              
              (10,372
              )Minority
                  interest in losses and preferred dividends of consolidated
                  subsidiary
              
              
              458
              
              
              596Accretion
                  of discounts on debentures and notes
              
              
              1,451
              
              
              1,479Non-cash
                  interest expense related to financing costs
              
              
              340
              
              
              308Non-cash
                  interest expense related to convertible notes and advancesfrom
                  related party
              
              
              288
              
              
              -Depreciation
                  and amortization
              
              
              110
              
              
              101Stock
                  for services
              
              
              409
              
              
              385Equity
                  in loss from investment in EnerStruct
              
              
              40
              
              
              147Loss
                on disposal of equipment
              
              
              38
              
              
              -Assets
                  transferred under Warrant Exercise Agreement
              
              
              -
              
              
              803Changes
                  in current assets, liabilities and other
              
              
              (798
              )
              
              685Net
                  cash used in operating activities
              
              
              (5,960
              )
              
              (4,914
              )Investing
                  ActivitiesCapital
                Expenditure
              
              
              (42
              )
              
              (55
              )Proceeds
                from sale of assets
              
              
              55
              
              
              -Financing
                  Activities:Proceeds
                  from convertible notes and advances from related party, net of
                  costs
              
              
              928
              
              
              -Proceeds
                  from exercise of warrants
              
              
              5,206
              
              
              3,560Repayment
                  of bank installment loan
              
              
              (7
              )
              
              (7
              )Net
                  cash provided by financing activities
              
              
              6,127
              
              
              3,553Net
                  increase (decrease) in cash and equivalents
              
              
              180
              
              
              (1,416
              )Cash
                  and cash equivalents - beginning balance
              
              
              291
              
              
              2,306Cash
                  and cash equivalents - ending balance
              
              $
              471
              
              $
              890


See
      notes
      to consolidated financial statements.


4




ENER1,
      INC. AND SUBSIDIARIES


NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS


(UNAUDITED)





1.  BASIS
      OF
      PRESENTATION





The
      accompanying unaudited consolidated financial statements for Ener1, Inc.
      ("Ener1" or the "Company") have been prepared in accordance with accounting
      principles generally accepted in the United States of America for interim
      financial information and with the instructions to Form 10-QSB for quarterly
      reports under Section 13 or 15 (d) of the Securities Exchange Act of 1934.
      Accordingly, they do not include all of the information and footnotes required
      by accounting principles generally accepted in the United States of America
      for
      complete financial statements. In the opinion of management, all adjustments
      considered necessary for a fair presentation have been included and such
      adjustments are of a normal recurring nature. Operating results for the three
      months ended March 31, 2007 are not necessarily indicative of the results that
      may be expected for the year ending December 31, 2007. The audited financial
      statements at December 31, 2006, which are included in Ener1’s Annual Report on
      Form 10-KSB for the year ended December 31, 2006, should be read in conjunction
      with these consolidated financial statements.





Certain
      amounts in the prior periods have been reclassified to conform to the current
      period presentation.





*New
      Accounting Standards*





In
      February 2006, the FASB issued Statement of Financial Accounting Standards
      (“SFAS”)  No. 155,
“Accounting for Certain Hybrid Financial Instruments - An Amendment of FASB
      Statements No. 133 and 140.” SFAS No. 155 simplifies the accounting for certain
      hybrid financial instruments, eliminates the interim FASB guidance which
      provides that beneficial interests in securitized financial assets are not
      subject to the provisions of SFAS No. 133, “Accounting for Derivative
      Instruments and Hedging Activities,” and eliminates the restriction on the
      passive derivative instruments that a qualifying special-purpose entity may
      hold. Effective January 1, 2007, Ener1 adopted the provisions of SFAS No. 155
      prospectively for all financial instruments acquired or issued on or after
      January 1, 2007. Ener1 did not acquire or issue any new financial instruments
      subject to this standard since January 1, 2007. As a result, adoption of this
      statement did not have any effect on Ener1’s consolidated results of operations,
      financial position or cash flows.







2.  GOING
      CONCERN




The
      accompanying consolidated financial statements have been prepared on a going
      concern basis, which contemplates the realization of assets and the satisfaction
      of liabilities in the normal course of business. Ener1 has experienced net
      operating losses since 1997 and negative cash flows from operations since 1999.
      In addition, as of March 31, 2007, the Company has an accumulated deficit of
      $199,203,000 and working capital deficit of $12,064,000 and is not in compliance
      with its debt agreements’ requirement to pay registration delay expenses related
      to its senior secured convertible debentures due 2009. It is likely that Ener1's
      operations will continue to incur negative cash flows through December 31,
      2007
      and 2008, and Ener1 requires additional financing to fund its planned operations
      through that time. These conditions give rise to substantial doubt about Ener1's
      ability to continue as a going concern. The consolidated financial statements
      do
      not include any adjustments relating to the recoverability and classification
      of
      recorded asset amounts or the amounts and classifications of liabilities that
      might be necessary should Ener1 not be able to continue as a going concern.





5


In
      2006
      and the first quarter of 2007, the Company has relied on its controlling
      shareholder, Ener1 Group, Inc. ("Ener1 Group") for adequate funding to sustain
      operations on a month-to-month basis. There is no assurance that Ener1 Group
      will continue to provide any funds to Ener1. During the three months ended
      March
      31, 2007, Ener1 Group provided interim operating funding to Ener1 through the
      cash exercise of certain warrants to purchase Ener1 common stock and loan
      advances in amounts sufficient to meet Ener1's immediate working capital
      requirements, but not in amounts sufficient to meet Ener1's working capital
      deficit or sustain its operations for any significant period of time. The
      Company requires additional interim working capital financing until it raises
      permanent capital. The Company intends to raise substantial additional capital
      during 2007 from government sources including grants or public financing, or
      from strategic or financial investors. If the Company is unable to raise
      adequate permanent capital for its current plan of operations, it would have
      to
      curtail its research and development activities and adopt an alternative
      operating model to continue as a going concern.





3.  NATURE
      OF
      BUSINESS





Ener1
      is
      a Florida corporation, founded in 1985 and headquartered in Fort Lauderdale,
      Florida. Ener1’s primary lines of business consist of the development and
      marketing of advanced Lithium-ion (“Li-ion”) batteries, fuel cells and
      nanotechnology-related manufacturing processes and materials. In
      January 2002, Ener1 Group acquired a majority interest in the Company and owns
      approximately 84% of the outstanding common stock of the Company as of March
      31,
      2007.





Ener1’s
      operations are conducted by Ener1 and three of its subsidiaries: EnerDel, Inc.
      (“EnerDel”), EnerFuel, Inc. (“EnerFuel”) and NanoEner, Inc. (“NanoEner”).
      Certain real estate and equipment assets used by Ener1 are held by Ener1 Battery
      Company (“Ener1 Battery” or the “Battery Company”). Ener1 owns 100% of EnerFuel,
      Ener1 Battery and NanoEner and 80.5% of EnerDel. Ener1 owns approximately 42%
      of
      EnerStruct, a technology development joint venture with ITOCHU Corporation.




4.    
      INVESTMENT IN ENERSTRUCT




In
      2003,
      Ener1 invested $2,003,000 in EnerStruct, Inc., a Japanese company, in exchange
      for an initial 49% equity ownership interest. ITOCHU Corporation invested
      $1,100,000 plus equipment totaling approximately $500,000 for an initial 51%
      ownership interest. Through March 31, 2007, the value of Ener1’s investment in
      EnerStruct was reduced by $2,003,000 which represents Ener1’s share of
      EnerStruct losses through that date. As a result of subsequent investments
      in
      2006 in EnerStruct by ITOCHU and SBIC, a Japanese investment bank, Ener1’s
      equity ownership interest in EnerStruct has been reduced to 42%.




At
      March
      31, 2007, the Company’s investment in EnerStruct had a carrying value of $0 as
      compared to an underlying equity in net assets of $292,000, primarily due to
      the
      difference between the equity ownership interests agreed upon between Ener1
      and
      ITOCHU as compared to their relative capital contributions.





The
      unaudited net loss for EnerStruct for the quarter ending March 31, 2007 was
      $435,000. Summarized unaudited balance sheet information of EnerStruct as of
      March 31, 2007 is as follows (in thousands):





Cash
              
              $
              107Total
                  assets
              
              $
              2,380Total
                  liabilities
              
              $
              1,684


5.
      DERIVATIVES





Ener1
      evaluated the features of a convertible note and warrants to purchase up to
      27,000,000 shares of common stock issued to Ener1 Group on February 13, 2007
      (“Group Note V”) as well as the conversion feature of the note issued to Ener1
      Group on January 19, 2007 (“Group Note IV”) and determined that the instruments
      were not derivatives under SFAS No. 133, “Accounting for Derivative Instruments
      and Hedging Activities” (“SFAS 133”) and EITF Issue 00-19, “Accounting for
      Derivative Financial Instruments Indexed to and Potentially Settled in a
      Company’s Own Stock” ("EITF 00-19"). The convertible note was deemed to be
      conventional convertible debt under EITF 00-19 and therefore was accounted
      for
      as a convertible instrument under EITF Issue 00-27, “Application of Issue No.
      98-5 to Certain Convertible Instruments” (“EITF 00-27”).





6


Ener1
      previously evaluated the application of SFAS 133 and EITF 00-19 to the
      following:




·
            the
                conversion, interest rate adjustment, registration delay expenses,
                redemption premium, forced conversion default premium and change
                in
                control premium features of Ener1's secured convertible debentures
                due
                January 20, 2009 (the "2004 Debentures");·
            the
                2005 Debentures conversion, interest rate adjustment, registration
                delay
                expenses, default premium and change in control premium features
                of
                Ener1's secured convertible debentures due March 14, 2009 (the "2005
                Debentures"); and·
            warrants
                to purchase common stock associated with the 2005 Debentures (the
                "2005
                Debenture Warrants").




Based
      on
      the guidance in SFAS 133 and EITF 00-19, Ener1 concluded all of these
      instruments were required to be accounted for as derivatives. SFAS 133 and
      EITF
      00-19 require Ener1 to bifurcate and separately account for the conversion
      and
      other derivatives features of the 2004 Debentures and 2005 Debentures as
      embedded derivatives. SFAS 155 permits fair value remeasurement of any
      hybrid financial instrument that contains embedded derivatives that otherwise
      would require bifurcation. However, Ener1 has decided to continue to bifurcate
      the embedded derivatives, and separately record the fair value of the conversion
      features and the warrants and options that are classified as derivatives on
      its
      balance sheet at fair value with changes in the values of these derivatives
      reflected in the consolidated statement of operations as “Gain on derivative
      liabilities.”





The
      2004
      Debentures and 2005 Debentures both contain more than one embedded derivative
      feature which SFAS 133 requires be accounted for as separate derivative
      instruments. The various embedded derivative features of each series of
      debentures have been bundled together as a single, compound embedded derivative
      instrument that has been bifurcated from the debenture in accordance with
      Derivatives Implementation Group Issue No. B15. The derivative features that
      have been bundled together in the compound embedded derivative include: (1)
      the
      conversion feature of the debentures, (2) the holder's right to force Ener1
      to
      redeem the debentures after an event of default, (3) the holder's right to
      force
      Ener1 to redeem the debentures after a change in control, (4) Ener1's right
      to
      redeem the debentures after 3 years, (5) the requirement to pay an increased
      interest rate if Ener1 fails to achieve certain milestones, and (6) Ener1's
      right to force conversion of the debentures into common stock if certain
      conditions are satisfied. The value of the compound embedded derivative
      liability was bifurcated from the debenture and recorded as a derivative
      liability, which results in a reduction of the initial carrying amount (as
      unamortized discount) of the related debenture at inception. The unamortized
      discount is being amortized to interest expense using the effective interest
      method over the life of the debenture.





The
      impact of the application of SFAS 133 and EITF 00-19 on the balance sheet and
      statements of operations as of March 31, 2007 and the impact on the balance
      sheet as of December 31, 2006 are as follows (in thousands):






**March
                  31,**
              
              **December
                  31,**
              
              **Gain****2007**
              
              **2006**
              
              **(Loss)**2004
                  Debentures compound derivative
              
              $
              3,324
              
              $
              3,753
              
              $
              4292005
                  Debentures compound derivative
              
              
              2,192
              
              
              2,442
              
              $
              2502005
                  Debenture Warrants
              
              
              1,067
              
              
              967
              
              $
              (100
              )$
              6,583
              
              $
              7,162
              
              $
              579




Ener1
      has
      authorized and issued Series B Convertible Preferred Stock ("Series B Preferred
      Stock"). Because the conversion option for the Series B Preferred Stock is
      contingent upon Ener1’s sale of common stock under a registration statement of a
      certain size, the Series B Preferred Stock is not within the scope of SFAS
      133
      and EITF 00-19. If the contingent event occurs in the future and the holder
      becomes able to convert, Ener1 will assess whether the conversion option meets
      the definition of a derivative under SFAS 133.





Ener1
      uses the Black-Scholes pricing model for determining the fair value of its
      warrant derivatives. Ener1 uses a lattice valuation model to value the compound
      embedded derivative features in the 2004 Debentures and 2005
      Debentures.





7


*Lattice
      Valuation Model*





Ener1
      valued the compound embedded derivative features in the 2004 Debentures and
      2005
      Debentures using a lattice model with the assistance of a valuation consultant.
      The lattice model values the compound embedded derivatives based on a
      probability weighted discounted cash flow model. This model is based on future
      projections of the five primary alternatives possible for settlement of the
      features included within the compound embedded derivative, including: (1)
      payments are made in cash, (2) payments are made in stock, (3) the holder
      exercises its right to convert the debentures, (4) Ener1 exercises its right
      to
      convert the debentures and (5) Ener1 defaults on the debentures. Ener1 uses
      the model to analyze: (a) the underlying economic factors that
      influence which of these events will occur, (b) when they are likely to occur,
      and (c) the common stock price and specific terms of the debentures such as
      interest rate and conversion price that will be in effect when they occur.
      Based
      on the analysis of these factors, Ener1 uses the model to develop a set of
      potential scenarios. Probabilities of each scenario occurring during the
      remaining term of the debentures are determined based on management’s
      projections. These probabilities are used to create a cash flow projection
      over
      the term of the debentures and determine the probability that the projected
      cash
      flow would be achieved. A discounted weighted average cash flow for each
      scenario is then calculated and compared to the discounted cash flow of the
      debentures without the compound embedded derivative in order to determine a
      value for the compound embedded derivative.





The
      primary determinants of the economic value of a compound embedded derivative
      under the lattice model are (1) the price of Ener1's common stock, (2) the
      volatility of Ener1's common stock price, (3) the likelihood that Ener1 will
      be
      required to pay registration delay expenses, (4) the likelihood that an event
      of
      default or a change in control will occur, (5) the likelihood that the
      conversion price will be adjusted, (6) the likelihood that Ener1's common stock
      will be listed on an exchange, (7) the likelihood that Ener1 will be able to
      obtain alternative financing and (8) the likelihood that Ener1 would be able
      to
      force conversion of the debentures.





The
      fair
      value of the compound derivative embedded in the 2004 Debentures as of March
      31,
      2007 and 2006 determined using the lattice valuation model was based on the
      following management assumptions:


**2004
                  Debentures****March
                  31,**
              
              **March
                  31,*****Assumptions:***
              
              **2007**
              
              **2006**The
                  price of Ener1's common stock would increase at a rate commensurate
                  withthe
                  cost of equity, with a volatility of:
              
              
              100%
              
              
              120%Percent
                  likelihood that Ener1 would not be in default of its obligations
                  under
                  theregistration
                  rights agreement relating to the 2004 Debentures:
              
              
              100%
              
              
              95%Percent
                  likelihood that an event of default or a fundamental change would
                  occur,increasing
                  over time:
              
              
              5%
              
              
              5%Reset
                  events projected to occur with a weighted average adjustment factor
                  of
                  :
              
              
              0.896
              
              
              0.989Percent
                  likelihood that Ener1 would force the conversion of the 2004 Debentures
                  ifthe
                  stock price reached $1.75:
              
              
              95%
              
              
              95%The
                  holders of the 2004 Debentures would convert the 2004 Debentures
                  if
                  theregistration
                  rights agreement was effective, Ener1 was not in default under
                  the
                  2004Debentures,
                  and Ener1's common stock price was:
              
              $
              3.50
              
              $
              3.50Ener1
                  would redeem the 2004 Debentures following the third anniversary
                  of
                  theissue
                  date if Ener1's common stock price reached:
              
              $
              1.50
              
              $
              1.50Percent
                  likelihood that Ener1 would be able to obtain alternative financing
                  thatwould
                  enable it to redeem the 2004 Debentures, increasing 2.5% per quarter
                  to
                  amaximum
                  of 25%:
              
              
              0%
              
              
              0%Percent
                  likelihood that Ener1's common stock would be listed on an
                  exchangeincreasing
                  10% quarterly to a maximum of 90%:
              
              
              0%
              
              
              0%





8


Based
      on
      these management assumptions, the fair value of the compound embedded derivative
      in the 2004 Debentures as of March 31, 2007 and 2006 was calculated by
      management to be $3,324,000 and $5,025,000, respectively.





The
      fair
      value of the compound derivative embedded in the 2005 Debentures as of March
      31,
      2007 and 2006 determined using the lattice valuation model was based on the
      following management assumptions:





**2005
                  Debentures****March
                  31,**
              
              **March
                  31,*****Assumptions:***
              
              **2007**
              
              **2006**The
                  price of Ener1's common stock would increase at a rate commensurate
                  withthe
                  cost of equity, with a volatility of:
              
              
              100%
              
              
              120%Percent
                  likelihood that Ener1 would not be in default of its obligations
                  under
                  theregistration
                  rights agreement relating to the 2005 Debentures:
              
              
              95%
              
              
              95%Percent
                  likelihood that an event of default or a fundamental change would
                  occur:
              
              
              5%
              
              
              5%Reset
                  events projected to occur with a weighted average adjustment factor
                  of:
              
              
              0.977
              
              
              0.973Percent
                  likelihood that Ener1 would force the conversion of the 2005 Debentures
                  ifthe
                  Ener1 common stock price reached $1.50:
              
              
              95%
              
              
              95%The
                  holders of the 2005 Debentures would convert the 2005 Debentures
                  if
                  theregistration
                  rights agreement was effective, Ener1 was not in default under
                  the
                  2004Debentures
                  and Ener1's common stock price reached:
              
              $
              1.75
              
              $
              1.75Ener1
                  would redeem the 2005 Debentures following the third anniversary
                  of
                  theissue
                  date if Ener1's common stock price reached:
              
              $
              1.25
              
              $
              1.25Percent
                  likelihood that Ener1 would be able to obtain alternative financing
                  thatwould
                  enable it to redeem the 2005 Debentures, increasing 2.5% per quarter
                  to
                  amaximum
                  likelihood of 25%:
              
              
              0%
              
              
              0%Percent
                  likelihood that Ener1's common stock would be listed on an exchange
                  andmeet
                  the volume requirements set forth in the 2005 Debentures, increasing
                  10%quarterly
                  to a maximum likelihood of 90%:
              
              
              0%
              
              
              0%





Based
      on
      these management assumptions, the fair value of the compound embedded derivative
      in the 2005 Debentures as of March 31, 2007 and 2006 was calculated by
      management to be $2,192,000 and $3,532,000, respectively.





All
      of
      the above assumptions are reviewed quarterly and are subject to change based
      primarily on management’s assessment of the probability of the events described
      occurring. Accordingly, changes to these assessments could materially affect
      the
      valuation.





*Black-Scholes
      Valuation Model*





Ener1
      used the Black-Scholes pricing model to determine the fair values of the 2005
      Debenture Warrants. The model uses market sourced inputs such as interest rates,
      stock prices, and option volatilities, the selection of which requires
      management’s judgment, and which may impact net income or loss.  Ener1 uses
      volatility rates based upon the closing stock price of its common stock
      since January 2002, when Ener1 underwent a change in control. Ener1 determined
      that share prices prior to this period do not reflect the ongoing business
      valuation of its current operations. Ener1 uses a risk free interest
      rate which is the U. S. Treasury bill rate for securities with a maturity that
      approximates the estimated expected life of a derivative or security. Ener1
      uses
      the closing market price of the common stock on the date of issuance of a
      derivative or at the end of a quarter when a derivative is valued at fair value.
      The volatility factor used in the Black-Scholes pricing model has
      a significant effect on the resulting valuation of the derivative
      liabilities on the balance sheet. The volatility has ranged from 296% to 134%
      during the last four years.





The
      following table shows the volatility, risk free rate and market price used
      in
      the calculation of the Black-Scholes call value for the 2005 Debenture Warrants
      at issuance date and at March 31, 2007:





9


**Risk-Free**
              
              
              
              **Term****Interest**
              
              **Market**
              
              **in****Issue
                  Date**
              
              **Volatility**
              
              **Rate**
              
              **Price**
              
              **Years****Valuation
                  inputs at issuance date for:**2005
                  Debenture Warrants
              
              
              3/11/2005
              
              
              135
              %
              
              3.5
              %
              $
              0.75
              
              
              5**Valuation
                  inputs at:**March
                  31, 2007
              
              
              
              
              
              134
              %
              
              4.7
              %
              $
              0.26
              
              
              3





Based
      on
      these Black-Scholes calculations, the fair value of the 2005 Debenture Warrants
      as of March 31, 2007 and 2006 was calculated by management to be $1,067,000
      and
      $1,465,000, respectively.





6.
      DEBT





*$19,700,000
      CONVERTIBLE DEBENTURES*





On
      January 20, 2004, Ener1 issued $20,000,000 in aggregate principal amount of
      the
      2004 Debentures and warrants to purchase 16,000,000 shares of Ener1’s common
      stock. The net proceeds were $18,527,000. Debentures in the amount of $300,000
      have been converted to date.





At
      the
      issuance date, the 2004 Debentures were convertible at any time into common
      shares at a price of $1.25 per share, subject to adjustment for dilutive
      issuances of common stock by the Company. As of March
      31 ,
      2007,
      the adjusted conversion price was $1.09 per share. The warrants to purchase
      16,000,000 shares of common stock had an exercise price of $2.51 per share
      at
      the issuance date, subject to adjustment. As of March 31, 2007, the adjusted
      exercise price was $2.01 per share. The warrants are exercisable at any time
      through January 20, 2010. In addition, Ener1 issued warrants to purchase
      1,920,000 shares of common stock with an exercise price of $2.51 per share
      to
      the placement agent for the 2004 Debentures.





Accrued
      interest expense for the 2004 Debentures was $739,000 and $739,000 for the
      three
      months ended March 31, 2007 and 2006, respectively. All or a portion of the
      accrued and unpaid interest may be converted at the option of the debenture
      holder at any time under the same conversion terms as the principal. No interest
      has been converted. Interest is due quarterly. All interest payments due through
      March 31, 2007 have been paid except for the $739,000 quarterly interest
      payments due March 31, 2007, which were paid on April 2, 2007. The initial
      annual interest rate was 5%, which was increased to 7.5% as of July 19, 2004
      and
      15% as of January 20, 2005 because Ener1 failed to achieve certain milestone
      requirements in the debentures. Upon issuance, the 2004 Debentures included
      embedded derivative liabilities and beneficial conversion features which, when
      bifurcated into and valued as separate liabilities, exceeded the notional debt
      amount and resulted in a fully discounted debenture. After giving effect to
      the
      discount, the effective rate of interest for the 2004 Debentures was 61.5%
      as of
      March 31, 2007.




Ener1
      may
      prepay principal at 103% of unpaid principal from January 20, 2007 to January
      20, 2008 and 101% of unpaid principal from January 21, 2008 to January 20,
      2009.
      The 2004 Debentures are senior to Ener1’s existing and future indebtedness and
      pari passu with the 2005 Debentures. In the event of any “Event of Default" or
      "Fundamental Change” as defined under the 2004 Debentures, the holder may
      require Ener1 to redeem the 2004 Debentures at a price equal to 101% of the
      unpaid principal plus accrued interest. Ener1’s obligations under the 2004
      Debentures are partially secured by collateral, including land, building and
      battery production equipment owned by Ener1 Battery and used by EnerDel. No
      Fundamental Change has occurred.





Pursuant
      to the Registration Rights Agreement executed in connection with the issuance
      of
      the 2004 Debentures, Ener1 was required for a period of two years to register
      the resale of the common stock underlying the 2004 Debentures and associated
      warrants. The 2004 Registration Rights Agreement provided that if the
      registration statements were not available for use by the holders of the 2004
      Debentures during the two year period (subject to minor exceptions), Ener1
      would
      be required to pay to the 2004 Debenture holders an amount equal to 1.5% of
      the
      outstanding principal of the 2004 Debentures (or approximately $295,000) for
      each month (prorated for portions thereof) for all periods during which the
      registration statements were not available for use (the “registration delay
      expenses”). The registration statement for the 2004 Debentures became
      unavailable for use on November 22, 2005, and registration delay expenses of
      $601,000 were accrued for the period November 22, 2005 through January 20,
      2006,
      when the registration requirement for the 2004 Debentures expired.





10


Ener1
      is
      accounting for the conversion option in the 2004 Debentures as a derivative
      liability in accordance with SFAS 133 and EITF 00-19. The terms of the 2004
      Debentures include several features that Ener1 is required to account for as
      derivatives, including (1) the conversion feature, (2) the holder's right to
      force Ener1 to redeem the debentures after an event of default, (3) the holder's
      right to force Ener1 to redeem the debentures after a change in control, (4)
      Ener1's right to redeem the debentures after 3 years, (5) the requirement to
      pay
      an increased interest rate if Ener1 fails to achieve certain milestones and
      (6)
      Ener1's right to force conversion of the debentures into common stock if certain
      conditions are satisfied. These derivatives must be bundled together as a
      single, compound embedded derivative instrument that is bifurcated and accounted
      for separately from the debenture under SFAS 133 and Derivatives Implementation
      Group Issue No. B15. The warrants issued to the purchasers of the 2004
      Debentures were treated as a derivative liability until June 30, 2006, at which
      time Ener1 determined that it had sufficient available authorized and unissued
      shares to fulfill its obligations to issue shares if the warrants were exercised
      in full as a result of the fact that certain other previously issued warrants
      with uncapped anti-dilution provisions were no longer outstanding.




*$14,225,000
      CONVERTIBLE DEBENTURES*





On
      March
      14, 2005, Ener1 issued $14,225,000 in aggregate principal amount of senior
      secured convertible debentures due March 14, 2009 (the “2005 Debentures”) and
      warrants to purchase 7,112,500 shares of Ener1’s common stock. The net proceeds
      of the issuance totaled $13,134,000. As a result of Ener1’s failure to meet
      certain milestone requirements in the 2005 Debentures, the holders of the 2005
      Debentures have a security interest all of EnerDel common stock owned by
      Ener1.





At
      the
      issuance date, the 2005 Debentures were convertible at any time into common
      shares at a price of $1.00 per share subject to adjustment for dilutive
      issuances of common stock by the Company. As of March 31, 2007, the conversion
      price was $0.89 per share. The 2004 Debenture Warrants were divided into Series
      A and Series B. Ener1 issued Series A warrants to purchase 4,267,500 shares
      of
      common stock with an exercise price of $1.15 per share at the issuance date,
      subject to adjustment. As of March 31, 2007, the adjusted exercise price was
      $1.03 per share. Ener1 issued Series B warrants to purchase 2,845,000 shares
      of
      common stock with an exercise price of $1.25 per share at the issuance date,
      subject to adjustment. As of March 31, 2007, the adjusted exercise price was
      $1.10 per share. The warrants are exercisable, in whole or in part, at any
      time
      on or before March 14, 2010. In addition, Ener1 issued warrants to purchase
      up
      to 426,750 shares of common stock with an initial exercise price of $1.00 per
      share to the placement agent for the 2005 Debentures.




Ener1
      may
      require that a specified amount of the principal of the 2005 Debentures be
      converted if certain conditions are satisfied for a period of 22 consecutive
      trading days. At any time on or after March 14, 2008, Ener1 may prepay some
      or
      all, of the principal of the 2005 Debentures at 103% of the principal, plus
      accrued interest. The 2005 Debentures are senior to Ener1’s existing and future
      indebtedness and pari passu with the 2004 Debentures.





Accrued
      interest expense for the 2005 Debentures was $533,000 and $320,000 for the
      years
      ended March 31, 2007 and 2006, respectively. All or a portion of the accrued
      and
      unpaid interest may be converted at the option of the debenture holder at any
      time under the same conversion terms as the principal. No interest has been
      converted. Interest
      is due quarterly. All interest payments due through March 31, 2007 have been
      paid, except for the $533,000 quarterly interest payments due March 31, 2007,
      which were paid on April 2, 2007. The initial annual interest rate was 7.5%,
      which was increased to 15% as of March 14, 2006 because Ener1 failed to achieve
      certain milestone requirements of the debentures. Upon issuance, the 2005
      Debentures included embedded derivative liabilities and beneficial conversion
      features which, when bifurcated into and valued as separate liabilities,
      resulted in a discount to the notional debt amount of the debenture. After
      giving effect to the discount, the effective rate of interest for the 2005
      Debentures was 72.0% as of March 31, 2006.





11





Pursuant
      to the terms of the Registration Rights Agreement executed in connection with
      the issuance of the 2005 Debentures, Ener1 was required to register the resale
      of the common stock underlying the 2005 Debentures and associated warrants
      for a
      period of two years and to maintain the listing or quotation of its common
      stock
      on the OTC Bulletin Board or certain other stock exchanges. If the registration
      statements were not available for use during the two year period from March
      2005
      to March 2007 or Ener1’s common stock was not listed or quoted on the OTC
      Bulletin Board, Ener1 would be required to pay registration delay expenses
      to
      the holders of the 2005 Debentures at a fixed rate of $213,375 per month
      (prorated for portions of a month) for all periods during which such
      requirements are not met. The registration statements became unavailable for
      use
      in November 2005, and Ener1’s stock was neither traded or quoted or listed, as
      applicable, on the OTC Bulletin Board or other required exchange from December
      22, 2005 to April 6, 2006. Registration delay expenses of $2,070,000 were
      accrued through September 8, 2006, at which time Ener1’s registration statement
      for the 2005 Debentures was again available for use by the 2005 Debenture
      holders.





In
      an
“Event of Default” as defined under the 2005 Debentures, the holder may require
      Ener1 to redeem the 2005 Debentures at a price equal to the greater of (1)
      105%
      of the unpaid principal and accrued interest or (2) the value of the shares
      that the principal and accrued interest could be converted into at the time
      of
      default. In the event of any “Fundamental Change,” as defined, including the
      sale or disposition of substantially all of the assets of the Company or certain
      transactions which result in the transfer of more than 50% of the Company's
      voting equity, the holder can redeem the 2005 Debentures at a price equal to
      115% of the unpaid principal and accrued interest if the fundamental change
      occurs between March 14, 2006 and March 14, 2007, and 110% of the unpaid
      principal and accrued interest if the fundamental change occurs after March
      14,
      2007. No Fundamental Change has occurred.




Ener1
      is
      accounting for the conversion option in the 2005 Debentures as a derivative
      liability in accordance with SFAS 133 and EITF 00-19.  The terms of the
      2005 Debentures include several features that Ener1 is required to account
      for
      as derivatives, including (1) the conversion feature, (2) the holder's right
      to
      force Ener1 to redeem the debentures after an event of default, (3) the holder's
      right to force Ener1 to redeem the debentures after a change in control, (4)
      Ener1's right to redeem the debentures after 3 years, (5) the requirement to
      pay
      an increased interest rate if Ener1 fails to achieve certain milestones and
      (6)
      Ener1's right to force conversion of the debentures into common stock if certain
      conditions are satisfied. These derivatives must be bundled together as a
      single, compound embedded derivative instrument that is bifurcated and accounted
      for separately from the debenture under SFAS 133 and Derivatives Implementation
      Group Issue No. B15.





*REGISTRATION
      DELAY EXPENSES*





At
      December 31, 2006, accrued registration delay expenses relating to the 2004
      and
      2005 Debentures of $2,221,000 were unpaid. During the three months ended March
      31, 2007, $1,000,000 of the accrued registration delay expenses was paid to
      one
      of the holders of $9.5 million principal amount of the 2004 Debentures and
      $10.0
      million principal amount of the 2005 Debentures in accordance with the terms
      of
      several successive Forbearance Agreements under which that holder agreed to
      forbear from taking any action against Ener1 related to the non-payment of
      the
      registration delay expenses if Ener1 complied with the terms of the Forbearance
      Agreements. On April 4, 2007, the Company paid an additional $150,000 of the
      registration delay expenses to the holder in exchange for the holder's agreement
      to extend the latest forbearance period until May 4, 2007. On May 7, 2007,
      the
      Company paid the remaining $145,000 in registration delay payments. As of May
      7,
      2007, the Company does not owe any registration delay payments to this holder.





As
      of May
      15, 2007, the Company has not paid registration delay expenses of $926,000
      to
      the remaining holders of the 2004 and 2005 Debentures. The Company has not
      entered into a forbearance agreement with, nor received a default notice from,
      any of the remaining holders with respect to its noncompliance with these
      payment obligations.





7.  REDEEMABLE
      PREFERRED STOCK





*EnerDel
      Series A Convertible Preferred Stock*





In
      October 2004, a subsidiary of Delphi Corporation purchased 8,000 shares of
      Non-Voting, Cumulative and Redeemable Series A Convertible Preferred Stock
      issued by EnerDel (“Series A Preferred Stock”) plus warrants to purchase Ener1
      common stock for an aggregate purchase price of $8,000,000. No shares were
      converted, and the conversion feature expired in January 2005.





12


Ener1
      is
      accounting for the freestanding warrants and embedded conversion feature of
      the
      Series A Preferred Stock in accordance with SFAS 133. The proceeds were first
      allocated to the freestanding warrants at their fair value. The remaining
      proceeds were next allocated based on the with-and-without method first to
      the
      embedded conversion feature of the Series A Preferred Stock and then to the
      host
      instrument (Series A Preferred Stock).





The
      Series A Preferred Stock is classified as temporary equity in accordance with
      EITF Topic D-98, “Classification and Measurement of Redeemable Securities”
(“EITF D-98”), as the redemption feature is not solely within the control of
      Ener1. The holders of the Series A Preferred Stock are entitled to dividends
      as
      declared by the Board of Directors at the annual rate of 8.25%, which is payable
      in cash annually on December 31. The dividends are cumulative. Payment of
      dividends is restricted by the terms of the 2004 Debentures and 2005 Debentures,
      to which to the Series A Preferred Stock is subordinate. As such, no dividends
      have been paid to date.





If
      EnerDel has not redeemed all of the shares of Series A Preferred Stock on or
      before October 20, 2008, the holders may require EnerDel to redeem all of the
      Series A Preferred shares on 10 days notice. Ener1 can extend payment of the
      redemption price over four quarterly installments.





In
      connection with the issuance of the Series A Preferred Stock, Ener1 issued
      warrants to purchase up to 1,750,000 shares of common stock at an exercise
      price
      of $0.70 per share and warrants to purchase up to 5,250,000 shares of common
      stock at an exercise price of $1.00 per share. These warrants have a seven
      year
      term. Ener1 is not required to register the resale of the warrants or of the
      common stock issuable upon exercise of the warrants. The fair value of the
      warrants was determined utilizing the Black-Scholes stock option valuation
      model. The significant assumptions used in the valuation are: the exercise
      prices as noted above; the market value of Ener1’s common stock on the date of
      issuance, $0.66 per share; expected volatility of 207%; a risk free interest
      rate of approximately 1.74%; and a term of seven years.





*Ener1,
      Inc. Series B Convertible Preferred Stock*





In
      October 2004, Ener1 sold 150,000 shares of Series B Preferred Stock , plus
      warrants to purchase 4,166,666 shares of common stock at an exercise price
      of
      $1.25 per share and warrants to purchase 4,166,666 shares of common stock at
      an
      exercise price of $1.50 per share, for an aggregate purchase price of
      $15,000,000.The proceeds were first allocated to the fair value of the
      freestanding warrants, and the remaining proceeds were allocated to the
      Series B Preferred Stock.





Also,
      in
      October 2004, Ener1 entered into an agreement with Ener1 Group under which
      Ener1
      Group agreed to purchase, from time to time, at Ener1's request, up to 30,000
      shares of the Series B Preferred Stock (“Series B Preferred Stock Put”) and
      warrants to purchase up to 833,334 shares of its common stock at an exercise
      price of $1.25 per share, and warrants to purchase up to 833,334 shares of
      its
      common stock at an exercise price of $1.50 per share. Under the terms of the
      Series B Preferred Stock Put, if Ener1 required Ener1 Group to purchase any
      of
      the Series B Preferred Stock and warrants, Ener1 was required to pay Ener1
      Group
      a fee equal to one-third of the aggregate purchase price for the securities
      purchased in return for Ener1 Group’s assistance in arranging a prior sale of
      Series B Preferred Stock. To date, Ener1 has sold 2,500 shares of Series B
      Preferred Stock, at a purchase price of $100 per share, plus warrants to
      purchase 69,445 shares of common stock at an exercise price of $1.25 per share
      and warrants to purchase 69,445 shares of common stock at an exercise price
      of
      $1.50 per share, for an aggregate purchase price of $250,000. The Series B
      Preferred Stock Put was terminated on March 30, 2006, in conjunction with an
      agreement with Ener1 Group to exercise certain warrants to purchase common
      stock
      prior to the expiration date of the warrants. The above Series B Preferred
      Stock
      issued by the Company remained outstanding as of March 31, 2007.





The
      conversion feature for the Series B Preferred Stock is contingent upon Ener1
      filing a registration statement with the Securities and Exchange Commission
      to
      register an underwritten offering of common stock. If this occurs, the holders
      of Series B Preferred Stock will have the right to convert up to one-half of
      their shares of Series B Preferred Stock into common stock for sale pursuant
      to
      the registration statement, subject to the discretion of the underwriters for
      the offering. The conversion ratio is calculated by dividing the liquidation
      value per share of the Series B Preferred Stock by the price for the common
      stock sold in the registered offering. Because of this contingency, the
      conversion option is not within the scope of SFAS 133 and EITF 00-19. If the
      contingency is triggered in the future and the holder receives the ability
      to
      convert, Ener1 will need to reassess whether the conversion feature meets the
      definition of a derivative under SFAS 133.





13


The
      Series B Preferred Stock is redeemable by Ener1 at any time in part or whole
      at
      100% of the liquidation value as set forth in the Certificate of Designation
      for
      the Series B Preferred Stock, plus accrued and unpaid dividends. The Series
      B
      Preferred Stock is also redeemable at the option of the holder once none of
      the
      2004 Debentures are outstanding. If such redemption occurs in full before
      maturity of the 2004 Debentures on January 20, 2009, the redemption price would
      be paid in 24 equal monthly installments beginning 30 days from the date of
      Ener1’s receipt of a redemption notice from the holder. If such redemption
      occurs on January 20, 2009, the redemption price will be paid in twelve equal
      monthly installments, the first payment beginning February 19, 2009. In each
      case, the redemption payments would include all accrued and unpaid dividends.
      There are no registration rights associated with the warrants issued to the
      purchasers of the Series B Preferred Stock, or with the common stock underlying
      such warrants.





The
      Series B Preferred Stock is classified as temporary equity in accordance with
      EITF Topic D-98 as the redemption features are not solely within the control
      of
      Ener1. The holders of the Series B Preferred Stock are entitled to dividends
      payable semi-annually in arrears at the annual rate of 7%, which is payable
      in
      additional shares of Series B Preferred Stock for the first two years after
      issuance, and thereafter is payable in cash. The dividends are cumulative.
      Payment of dividends is restricted by the terms of the 2004 Debentures and
      2005
      Debentures, to which to the Series B Preferred Stock is subordinate. As such,
      no
      dividends have been paid to date.





In
      connection with the issuances of its Series B Preferred Stock, Ener1 issued
      warrants to purchase up to 4,236,111 shares of common stock at an exercise
      price
      of $1.25 per share and warrants to purchase up to 4,236,111 shares of common
      stock at an exercise price of $1.50 per share. These warrants have a ten-year
      term. Ener1 is not required to register the resale of the warrants or of the
      common stock issuable upon exercise of the warrants. The fair value of the
      warrants was determined utilizing the Black-Scholes valuation model. The
      significant assumptions used in the valuation are: the exercise prices as noted
      above; the market value of Ener1’s common stock on the date of issuance, $0.65
      per share and $0.80 per share for October 2004 and February 2005, respectively;
      expected volatility of 207%; a risk-free interest rate of approximately 1.8%;
      and a term of ten years.





The
      following are the components of redeemable preferred stock as of March 31,
      2007
      (in thousands):




**EnerDel**
              
              **Ener1****Series
                  A**
              
              **Series
                  B**Face
                  value
              
              $
              8,000
              
              $
              15,250Less
                  initial fair value of warrant derivative
              
              
              (4,620
              )
              
              (5,514
              )Less
                  initial fair value of conversion option
              
              
              (1,183
              )
              
              -Fair
                  value at date of issue
              
              
              2,197
              
              
              9,736Accumulated
                  accretion of discounts
              
              
              3,222
              
              
              3,339Cumulative
                  dividends
              
              
              1,615
              
              
              2,603Carrying
                  value as of March 31, 2007
              
              $
              7,034
              
              $
              15,678





8.    
      RELATED PARTY TRANSACTIONS





*Intercompany
      Transactions with Ener1 Group*





Ener1
      Group and its subsidiaries have from time to time used various services and
      employees of Ener1. Ener1 billed Ener1 Group and its subsidiaries for the actual
      cost of these services and employees. Similarly, Ener1 has from time to time
      used various services and employees of Ener1 Group and its subsidiaries, and
      Ener1 Group has billed Ener1 for the actual cost of these services and
      employees.





14


In
      January 2006, Ener1 Group agreed to assume Ener1’s lease on an office in New
      York City, New York, for which the monthly rent was $35,520. The lease, which
      was to expire in September 2010, was terminated with the landlord in February
      2007 without obligation. The lease payments on the office space were secured
      by
      a letter of credit issued on behalf of Ener1 and the letter of credit was
      secured by a cash collateral account of $224,000. The letter of credit was
      cancelled in February 2007 and the cash collateral was returned to Ener1 on
      March 22, 2007.





*Ener1
      Group Convertible Notes, Warrants and Advances*





On
      January 5, 2007, the Company amended
      the terms of certain warrants to purchase up to 16,000,000 shares of Ener1
      common stock previously issued to Ener1 Group to  reduce
      the exercise price of the warrants from $2.00 and $1.50 per share to $0.25
      per
      share, and change the expiration date of the warrants from November 14, 2013
      to
      January 5, 2007. On
      January 5, 2007, f ollowing
      the amendment of the terms of these warrants, Ener1 Group exercised the warrants
      to purchase 16,000,000 shares of Ener1 common stock for an aggregate purchase
      price of $4,000,000. The
      Company recorded $0 in warrant modification expense because the fair value
      of
      the warrants after modification was less than the fair value before
      modification.





On
      January 19, 2007, the Company issued a subordinated, convertible note to Ener1
      Group in the principal amount of $655,000 (“Group Note IV”) .
      The
      note bears interest at the rate of 10% per annum. All interest accrues until
      the
      maturity of the note on April 15, 2009. No warrants were issued in connection
      with this note. The note is subordinated to the rights of the holders 2004
      Debentures and 2005 Debentures. Once all of the Company's obligations under
      the
      2004 Debentures and 2005 Debentures have been satisfied, the note will be
      convertible at Ener1 Group's option into 1,310,000 shares of the Company’s
      common stock at the conversion price of $0.50 per share.





On
      February 13, 2007, the Company issued Group Note V, a $4,500,000 subordinated,
      convertible note, to Ener1 Group, which represents the Company's obligation
      to
      repay advances made by Ener1 Group to the Company from September 20, 2006
      through December 31, 2006. The principal amount of the note includes a financing
      fee of $250,000. The note bears interest at the rate of 10% per annum. Upon
      issuance, Group Note V included beneficial conversion features which resulted
      in
      discount to the notional debt amount of the note. After giving effect to the
      discount, the effective rate of interest at March 31, 2007 was 79.4%. All
      interest accrues until the maturity of the note on May 15, 2009, at which time
      all principal and accrued interest are payable in full, or earlier but not
      before January 1, 2008, if all of the Company's obligations under the 2004
      Debentures and 2005 Debentures have been satisfied. The note is subordinated
      to
      the rights of the holders 2004 Debentures and 2005 Debentures. Once all of
      the
      Company's obligations under the 2004 Debentures and 2005 Debentures have been
      satisfied, the note will be convertible at Ener1 Group's option into 9,000,000
      shares of the Company’s common stock at the conversion price of $0.50 per share.
      Ener1 Group may accelerate the amounts due under the note if none of the 2004
      or
      2005 Debentures are outstanding and certain bankruptcy events occur with respect
      to the Company.  In connection with the note, the Company issued to Ener1
      Group immediately exercisable warrants to purchase up to 9,000,000 shares of
      the
      Company’s common stock at an exercise price of $0.50 per share and immediately
      exercisable warrants to purchase up to 18,000,000 shares of the Company’s common
      stock at an exercise price of $0.60 per share. These warrants have a five-year
      term. The
      value
      of these warrants at the time of the grant of approximately $3,236,000 was
      recorded in additional paid in capital as debt issuance costs and is being
      amortized using the effective interest method over the remaining term of the
      underlying debt.





The
      Company is accounting for the warrant and conversion features of Group Note
      V in
      accordance with EITF 00-27. The proceeds of Group Note V were first allocated
      to
      the warrants at their relative fair value and credited to paid in capital.
      Ener1
      used the Black-Scholes pricing model to value the warrants issued with Group
      Note V. The model assumes a risk-free interest rate of 5.1%, the current stock
      price at date of issuance of $0.30 per share, the exercise price of the warrants
      of $0.50 per share and $0.60 per share, the term of five years and volatility
      of
      141%. Ener1 recorded a discount to the convertible note equal to the relative
      fair value of the warrants, which is being amortized over the life of the note
      as interest expense. The intrinsic value of the conversion feature was
      $1,796,000 at the date of issuance. No entry was made to record the value of
      the
      conversion feature because the ability of the holder to convert is contingent
      upon Ener1’s repayment of the 2004 and 2005 Debentures which is considered
      outside the holder’s control. Once the 2004 Debentures and 2005 Debentures are
      repaid, Ener1 will revalue the benefit of the conversion feature and record
      the
      intrinsic value, if any, as a credit to paid in capital.





On February
      21, 2007 ,
      the
      Company amended
      the terms of certain warrants to purchase up to 4,823,047 shares of Ener1 common
      stock previously issued to Ener1 Group to  reduce
      the exercise price of the warrants from $1.50 and $0.50 per share to $0.25
      per
      share, and change the expiration date of the warrants from February 14, 2015
      and
      June 29, 2011 to February 21, 2007. On
      February 21, 2007, f ollowing
      the amendment of the terms of these warrants, Ener1 Group exercised the warrants
      to purchase 4,823,047 shares of Ener1 common stock for an aggregate purchase
      price of $1,205,000. The
      Company recorded $0 in warrant modification expense as the fair value of the
      warrants after modification was less than the fair value before
      modification.





15


On
      March
      30, 2007, the Company received loan advances of $400,000 from Ener1 Group which
      were used for working capital.





The
      components of the notes issued to Ener1 Group and advances at March 31, 2007
      are
      as follows (in thousands):


**Group**
              
              **Group**
              
              **Group**
              
              **Group**
              
              **Group**
              
              
              
              **Total
                  Group****Note**
              
              **Note**
              
              **Note**
              
              **Note**
              
              **Note**
              
              **Group**
              
              **Notes
                  and****I**
              
              **II**
              
              **III**
              
              **IV**
              
              **V**
              
              **Advances**
              
              **Advances**Note
                  proceeds and advances
              
              $
              3,000
              
              $
              3,000
              
              $
              455
              
              $
              655
              
              $
              4,250
              
              $
              452
              
              $
              11,812Financing
                  fees
              
              
              250
              
              
              100
              
              
              -
              
              
              -
              
              
              250
              
              
              -
              
              
              600Total
                  notes and advances
              
              
              3,250
              
              
              3,100
              
              
              455
              
              
              655
              
              
              4,500
              
              
              452
              
              
              12,412Unamortized
                  discount relatedto
                  fair value of warrants
              
              
              (1,508
              )
              
              (2,021
              )
              
              -
              
              
              -
              
              
              (3,165
              )
              
              -
              
              
              (6,694
              )Accrued
                  interest payable at maturity
              
              
              244
              
              
              194
              
              
              18
              
              
              13
              
              
              183
              
              
              5
              
              
              657Balance
                  at March 31, 2007
              
              $
              1,986
              
              $
              1,273
              
              $
              473
              
              $
              668
              
              $
              1,518
              
              $
              457
              
              $
              6,375




*Purchase
      Agreement among Ener1, Ener1 Group and Credit Suisse*





On
      January 5, 2007, the Company was party to a Purchase Agreement, a Warrant
      Agreement and a Registration Rights Agreement ** among
      Ener1, Ener1 Group and Credit Suisse related to 1) the sale by Ener1 Group
      of
      20,000,000 shares of Ener1 unregistered common stock owned by Ener1 Group for
      $5,000,000 and 2) the issuance by Ener1 of warrants to purchase up to 5,000,000
      shares of Ener1 common stock for an exercise price of $0.30 per share. In
      accordance with the Purchase Agreement, Ener1 Group was required to deliver
      proceeds of $4,000,000 to Ener1. To effect the transaction, Ener1 modified
      the
      exercise price for 16,000,000 warrants with exercise prices ranging from $1.50
      -
      $2.00 per share to $0.25 per share. Ener1 Group then exercised 16,000,000 Ener1
      warrants for total proceeds of $4,000,000.





Under
      the
      terms of the Registration Rights Agreement, Ener1 was required to use its
      reasonable and best efforts to file a registration statement for the common
      stock and the common stock underlying the warrants with the Securities and
      Exchange Commission within 45 days of the closing and have the registration
      statement declared effective within 120 days of the closing. The registration
      statement was filed with the SEC on February 14, 2007, within the time
      prescribed by the Purchase Agreement. On May 7, 2007, the registration statement
      was withdrawn by agreement of the parties. Ener1 and Credit Suisse have agreed
      on an amendment whereby the Registration Rights Agreement extends the period
      for
      filing a registration statement until July 15, 2008 and requires the
      registration statement to be declared effective within 45 days of that date
      or
      within 75 days of that date if the registration statement is subjected to a
      full
      review by the SEC.




*Sale
      of Stock to Vice Chairman*





On
      January 5, 2007, Ener1 Group sold 2,000,000 shares of Ener1 common stock and
      Ener1 issued warrants to purchase up to 500,000 shares of Ener1 common stock,
      to
      the Vice Chairman of Ener1 at an exercise price of $0.30 per share.





The
      Purchase Agreement and the sale of stock to the Vice Chairman of Ener1 was
      treated as a unit offering for the issuance of 16,000,000 shares and 5,500,000
      warrants. The
      fair
      value of these warrants on the date of issue using the Black-Scholes option
      pricing model was computed as $1,485,000 and was recorded
      in additional paid in capital. The warrant modification was evaluated in
      accordance with SFAS 123(R) and Ener1 recorded $0 in warrant modification
      expense because the fair value of the warrants after modification was less
      than
      the fair value before modification.





16




9. STOCK
      ISSUANCES DURING QUARTER ENDED MARCH 31, 2007





During
      the three months ended March 31, 2007, Ener1 issued 194,223 shares of its
      unregistered common stock to a firm as compensation for public relations
      services provided in 2007 and 2006 and, in accordance with SFAS 123R, recorded
      the value of the equity issued as general and administrative expense of $24,000
      for current services and $40,000 in payment of accounts payable.




In
      January 2007, Ener1 issued 175,000 shares of its unregistered common stock
      to
      two individuals as compensation for investor relations services and, in
      accordance with SFAS 123R, recorded the value of the equity issued as general
      and administrative expense of $59,500





In
      January 2007, Ener1 issued 300,000 shares valued at $72,000 of its unregistered
      common stock to an employee in payment of a bonus earned and recorded in 2006.





In
      February 2007, Ener1 issued 150,000 shares valued at $51,000 of its unregistered
      common stock to an investment banking firm as compensation for capital raising
      services and, in accordance with SFAS 123R, recorded general and administrative
      expense.





10. STOCK-BASED
      COMPENSATION





At
      March
      31, 2007, Ener1 had eight stock-based employee, executive, director, advisory
      board and consultant compensation plans: the Ener1,
      Inc. 2007 Stock Incentive Plan (the “2007 Plan”); the 2002
      Ener1, Inc. 2002 Stock Participation Plan (the “2002 Plan”); the 2002
      Non-Employee Director Stock Participation Plan (the “Director Stock Plan”); the
      CEO Option Plan (which consists of options issued to Ener1's former chief
      executive officer during his employment); the EnerDel Officer Plan; the Advisory
      Committee Plan; the 2004 Advisory Committee Plan; and the EnerStruct Employee
      Plan.





*Valuation
      and Expense Information under SFAS 123R*





Ener1
      recorded share-based compensation costs of $275,000 and $385,000 for the three
      months ended March 31, 2007 and 2006, respectively.





As
      required by SFAS 123R, Ener1 estimates forfeitures of employee stock options
      and
      recognizes compensation cost only for the portion of those awards expected
      to
      vest. Forfeiture rate estimates for each plan are based on actual experience
      through March 31, 2007 and are adjusted annually to reflect actual forfeiture
      experience as needed.





In
      connection with the adoption of SFAS 123R, Ener1 estimates the fair value of
      each stock option on the date of grant using a Black-Scholes Model option
      valuation model, applying the following assumptions, and amortizes the estimated
      fair value to expense over the option’s vesting period using the straight-line
      attribution approach.





*Expected
      Term:* The
      expected term represents the period over which the share-based awards are
      expected to be outstanding. It has been determined using the “shortcut method”
described in Staff Accounting Bulletin Topic 14.D.2, which is based on a
      calculation that determines the midpoint between the vesting date and the end
      of
      the contractual term.





*Risk-Free
      Interest Rate:* Ener1
      based the risk-free interest rate used in its assumptions on the implied yield
      currently available on U.S. Treasury issues with a remaining term equivalent
      to
      the stock option award’s expected term. The weighted-average risk-free interest
      rate used through March 31, 2007 was 4.0%.





*Expected
      Volatility:* Ener1
      uses volatility rates based upon the weekly closing stock price of Ener1’s
      common stock since January 2002, when Ener1 underwent a change in control.
      Ener1
      determined that share prices prior to January 2002 do not reflect the ongoing
      business valuation of Ener1’s operations. The weighted-average expected
      volatility used during the period options were granted was 110%.





17


*Expected
      Dividend Yield* :
      Ener1
      does not intend to pay dividends on its common stock for the foreseeable future.
      Accordingly, Ener1 uses a dividend yield of zero in its
      assumptions.




*Stock
      Options*





A
      summary
      of the changes in the stock options outstanding under all of the Company’s stock
      option plans described above as of March 31, 2007 is as follows:


**Average****Remaining****Weighted**
              
              **Contractual****Number
                  of**
              
              **Average**
              
              **Term
                  in**
              
              **Intrinsic****Options**
              
              **Options**
              
              **Price**
              
              **Years**
              
              **Value**Outstanding
                  at December 31, 2006
              
              
              29,275,205
              
              $
              0.36Granted
              
              
              -
              
              $
              -Exercised
              
              
              (100,000
              )
              $
              -Forfeited
                  or expired
              
              
              (300,000
              )
              $
              0.23Outstanding
                  at March 31, 2007
              
              
              28,875,205
              
              $
              0.37
              
              
              8.4
              
              $
              418,000Exercisable
                  at March 31, 2007
              
              
              13,311,155
              
              $
              0.47
              
              
              7.1
              
              $
              136,000




18


No
      options were granted during the three months ended March 31, 2007. One employee
      exercised options to purchase a total of 100,000 shares during the three months
      ended March 31, 2007 at an exercise price of $0.00. The total intrinsic value
      of
      these shares on the date of exercise was $26,000. As of March 31, 2007, there
      was $2,070,000 of total unrecognized compensation cost related to the stock
      options granted under Ener1 stock plans. That cost is expected to be recognized
      over a weighted-average period of three years.




11.  WARRANTS





At
      March
      31, 2007 and December 31, 2006, the Company had the following warrants
      outstanding:


**Number
                  of Shares****Grant**
              
              **March
                  31,**
              
              **December
                  31,**
              
              **Exercise**
              
              **Expiration****Warrant
                  Holder**
              
              **Date**
              
              **2007**
              
              **2006**
              
              **Price**
              
              **Date**Debt
                  Exchange Warrants - Ener1 Group
              
              
              11/14/03
              
              
              -
              
              
              8,806,147
              
              $
              2.00
              
              
              11/14/13Debt
                  Exchange Warrants - Ener1 Group
              
              
              11/14/03
              
              
              -
              
              
              8,806,146
              
              $
              1.50
              
              
              11/14/13Debt
                  Exchange Warrants - Dr. Peter Novak
              
              
              11/14/03
              
              
              976,688
              
              
              976,688
              
              $
              1.50
              
              
              11/14/13Debt
                  Exchange Warrants - Dr. Peter Novak
              
              
              11/14/03
              
              
              976,688
              
              
              976,688
              
              $
              2.00
              
              
              11/14/13Debt
                  Exchange Warrants - Mike Zoi
              
              
              11/14/03
              
              
              217,165
              
              
              217,165
              
              $
              1.50
              
              
              11/14/13Debt
                  Exchange Warrants - Mike Zoi
              
              
              11/14/03
              
              
              217,165
              
              
              217,165
              
              $
              2.00
              
              
              11/14/132004
                  Debenture Holders
              
              
              01/21/04
              
              
              16,000,000
              
              
              16,000,000
              
              $
              2.48
              
              
              01/21/142004
                  Debenture Placement Agent
              
              
              01/21/04
              
              
              1,920,000
              
              
              1,920,000
              
              $
              2.51
              
              
              01/21/14Delphi
                  Automotive Systems, LLC
              
              
              10/20/04
              
              
              1,750,000
              
              
              1,750,000
              
              $
              0.70
              
              
              10/20/11Delphi
                  Automotive Systems, LLC
              
              
              10/20/04
              
              
              5,250,000
              
              
              5,250,000
              
              $
              1.00
              
              
              10/20/11Series
                  B Preferred - Cofis
              
              
              10/15/04
              
              
              4,166,666
              
              
              4,166,666
              
              $
              1.25
              
              
              10/15/14Series
                  B Preferred - Cofis
              
              
              10/15/04
              
              
              4,166,666
              
              
              4,166,666
              
              $
              1.50
              
              
              10/15/14Series
                  B Preferred - Ener1 Group
              
              
              02/11/05
              
              
              -
              
              
              69,445
              
              $
              1.25
              
              
              02/14/15Series
                  B Preferred - Ener1 Group
              
              
              02/11/05
              
              
              -
              
              
              69,445
              
              $
              1.50
              
              
              02/14/152005
                  Debenture Holders
              
              
              03/11/05
              
              
              4,267,500
              
              
              4,267,500
              
              $
              1.15
              
              
              03/11/102005
                  Debenture Holders
              
              
              03/11/05
              
              
              2,845,000
              
              
              2,845,000
              
              $
              1.25
              
              
              03/11/102005
                  Debenture Placement Agent
              
              
              03/11/05
              
              
              426,750
              
              
              426,750
              
              $
              0.75
              
              
              05/17/10Early
                  Exercise Warrants -Ener1 Group
              
              
              06/30/06
              
              
              16,928,136
              
              
              20,000,000
              
              $
              0.50
              
              
              06/30/162006
                  Group Note I - Ener1 Group
              
              
              08/11/06
              
              
              9,000,000
              
              
              9,000,000
              
              $
              0.50
              
              
              08/11/112006
                  Group Note II - Ener1 Group
              
              
              09/30/06
              
              
              9,000,000
              
              
              9,000,000
              
              $
              0.40
              
              
              09/30/112006
                  Group Note II - Ener1 Group
              
              
              09/30/06
              
              
              9,000,000
              
              
              9,000,000
              
              $
              0.60
              
              
              09/30/112007
                  Warrants - Credit Suisse
              
              
              01/05/07
              
              
              5,000,000
              
              
              -
              
              $
              0.30
              
              
              01/05/122007
                  Warrants - Charles Gassenheimer
              
              
              01/05/07
              
              
              500,000
              
              
              -
              
              $
              0.30
              
              
              01/05/122007
                  Group Note V - Ener1 Group
              
              
              02/13/07
              
              
              9,000,000
              
              
              -
              
              $
              0.50
              
              
              02/13/122007
                  Group Note V - Ener1 Group
              
              
              02/13/07
              
              
              18,000,000
              
              
              -
              
              $
              0.60
              
              
              02/13/12Total
                  Warrants Outstanding
              
              
              
              
              
              119,608,424
              
              
              107,931,471


On
      January 5, 2007, in conjunction with a Purchase Agreement among Ener1 Group,
      Ener1 and Credit Suisse, Ener1 amended
      the terms of the Debt Exchange Warrants to purchase up to 16,000,000 shares
      of
      Ener1 common stock previously issued to Ener1 Group to  reduce
      the exercise price of the warrants from $2.00 and $1.50 per share to $0.25
      per
      share, and change the expiration date of the warrants from November 14, 2013
      to
      January 5, 2007. On
      January 5, 2007, f ollowing
      the amendment of the terms of these warrants, Ener1 Group exercised the warrants
      to purchase 16,000,000 shares of Ener1 common stock for an aggregate purchase
      price of $4,000,000. The
      Company recorded $0 in warrant modification expense because the fair value
      of
      the warrants after modification was less than the fair value before
      modification.





On February
      21, 2007 ,
      the
      Company amended
      the terms of the remaining 1,612,293 Debt Exchange Warrants and 3,210,754 Early
      Exercise Warrants and Series B Preferred Warrants to purchase up to 4,823,047
      shares of Ener1 common stock previously issued to Ener1 Group to  reduce
      the exercise price of the warrants from $1.50, $1.25 and $0.50 per share to
      $0.25 per share, and change the expiration date of the warrants from February
      14, 2015 and June 29, 2011 to February 21, 2007. On
      February 21, 2007, f ollowing
      the amendment of the terms of these warrants, Ener1 Group exercised the warrants
      to purchase 4,823,047 shares of Ener1 common stock for an aggregate purchase
      price of $1,205,000. The
      Company recorded $0 in warrant modification expense as the fair value of the
      warrants after modification was less than the fair value before modification.





19





12.  EARNINGS
      PER SHARE





Basic
      net
      income per share is computed by dividing the net income attributable to common
      shareholders by the weighted-average number of common shares outstanding during
      the period. Diluted net income (loss) per share is computed using the
      weighted-average number of common shares outstanding during the period, adjusted
      for the dilutive effect of common stock equivalents, consisting of shares that
      would be issued upon exercise of common stock warrants and upon the conversion
      of the Company’s convertible debentures. In calculating diluted net income
      (loss) per share, the numerator is also adjusted to: (1) add back interest
      expense in the convertible debentures; and (2) subtract the derivative gains
      on
      convertible securities to the extent the effect is dilutive. Weighted-average
      common shares do not include the common stock equivalents resulting from common
      stock options because their inclusion would be anti-dilutive. The Company’s
      Series B Preferred Stock was not convertible at March 31, 2007 and these common
      stock equivalents were excluded from the earnings per share calculations. The
      dilutive effect of outstanding stock options and warrants is reflected in
      diluted net income or loss per share by application of the treasury stock
      method. The dilutive effect of outstanding convertible securities is reflected
      in diluted net income or loss per share by application of the if-converted
      method.





The
      following potential common shares have been included in the computation of
      diluted net loss per share for the periods presented:





**March
                  31,**
              
              **March
                  31,****2007**
              
              **2006**Weighted
                  Average Shares Outstanding - Basic
              
              
              421,798,000
              
              
              368,458,000Plus
                  net shares from assumed conversion of warrantsunder
                  treasury stock method
              
              
              -
              
              
              37,482,000Plus
                  shares from assumed conversion of convertible instruments:2004
                  Debentures
              
              
              -
              
              
              16,016,0002005
                  Debentures
              
              
              -
              
              
              14,225,000Weighted
                  Average Shares Outstanding - Diluted
              
              
              421,798,000
              
              
              436,181,000





The
      following potential common shares have been excluded from the computation of
      diluted net loss per share for all periods presented because the securities
      were
      not in the money (the exercise price was above the average stock price for
      the
      period) or the effect of including would have been antidilutive:




**March
                    31,**
                
                **March
                    31,****2007**
                
                **2006**Stock
                    options excluded
                
                
                28,875,000
                
                
                22,087,450Warrants
                    that were not in the money
                
                
                119,608,000
                
                
                61,131,471Plus
                    shares from assumed conversion of convertible instruments:2004
                    Debentures
                
                
                17,434,000
                
                
                16,016,2602005
                    Debentures
                
                
                15,296,000
                
                
                14,225,000Group
                    Convertible Notes
                
                
                23,920,000
                
                
                -Total
                    options, warrants and convertiblesecurities
                    excluded from weighted average shares
                
                
                205,133,000
                
                
                113,460,181





20


The
      following is a reconciliation of net income (loss) as reported and net income
      (loss) used in the numerator for the calculation of diluted earnings per share
      (in thousands):




**March
                  31,**
              
              **March
                  31,****2007**
              
              **2006**Net
                  income (loss) as reported
              
              $
              (7,717
              )
              $
              954Less
                  preferred stock dividends and accretion
              
              
              (516
              )
              
              (693
              )Add
                  interest expense and accretion of discount onconvertible
                  debentures
              
              
              -
              
              
              2,843Less
                  derivative gain on convertible debentures
              
              
              -
              
              
              (1,977
              )Less
                  derivative gain on warrants
              
              
              -
              
              
              (3,413
              )Net
                  loss computed for diluted earnings per share
              
              $
              (8,233
              )
              $
              (2,286
              )





13.  SEGMENT
      REPORTING





As
      of
      March 31, 2007, the Company is organized based upon the following segments:
      battery, fuel cell and nanotechnology. The battery business develops and markets
      advanced lithium batteries. The fuel cell business develops and markets fuel
      cells and fuel cell systems. The nanotechnology business develops nanotechnology
      related manufacturing processes and materials.





Transactions
      between segments, consisting principally of product sales and purchases, are
      recorded at the consummated sales price. The Company determines reportable
      segments based on the way management organizes segments for decision making
      and
      performance assessment purposes. The Company regularly reviews the performance
      of its segments and allocates resources to them based on anticipated future
      contribution.





The
      table
      below provides segment financial information (in thousands) :


**Three
                  Months
                  Ended****March
                  31,****Net
                  sales:**
              
              **2007**
              
              **2006**Battery
              
              $
              -
              
              $
              -Fuel
                  Cell
              
              
              74
              
              
              18Total
                  net sales
              
              $
              74
              
              $
              18**Net
                  income (loss):**Corporate
              
              
              (5,051
              )
              
              3,709Battery
              
              
              (1,917
              )
              
              (1,926
              )Fuel
                  Cell
              
              
              (514
              )
              
              (608
              )Nanotechnology
              
              
              (235
              )
              
              (221
              )Net
                  income (loss)
              
              $
              (7,717
              )
              $
              954
  **March
                  31,**
              
              **December
                  31,****2007**
              
              **2006****Assets:**Corporate
              
              
              3,311
              
              
              3,487Battery
              
              
              3,565
              
              
              3,510Fuel
                  Cell
              
              
              183
              
              
              104Nanotechnology
              
              
              77
              
              
              67Total
                  assets
              
              $
              7,136
              
              $
              7,168




The
      Company reports proceeds from grants as a reduction of research and development
      expense. Proceeds from grants was $50,000 and $0 in the three months ended
      March
      31, 2007 and 2006, respectively.





14.  COMMITMENTS
      AND CONTINGENCIES





*Litigation*





The
      Company receives communications from time to time alleging various claims.
      These
      claims include, but are not limited to, employment matters, collections of
      accounts payable, and allegations that certain of the Company’s products
      infringe the patent rights of other third parties. The Company cannot predict
      the outcome of any such claims or the effect of any such claims on the Company’s
      operating results, financial condition, or cash flows.





21


On
      March
      12, 2007, Universal Tool & Engineering Company, Inc. (“UTE”) filed a lawsuit
      in Superior Court, Marion County, Indiana, against EnerDel. The lawsuit alleges
      that EnerDel breached its payment obligations under its month-to-month lease
      and
      demands the removal of EnerDel from the facilities, unspecified monetary damages
      for breach of contract and unlawful enrichment, and immediate appointment of
      a
      receiver over EnerDel.





On
      April
      4,  2007,
      EnerDel filed its answer and counterclaims in Superior Court, Marion County,
      Indiana, against UTE alleging, among other things, that UTE breached its
      obligations to provide a reasonable replacement lease and negotiate the terms
      of
      such lease in good faith; and that UTE is abusing the process of law in an
      attempt to force EnerDel to accept an unreasonably one-sided lease. EnerDel
      filed a motion indicating its intent to vacate the property and relocate its
      operations, and requesting unspecified damages.





On
      April
      27, 2007, UTE and EnerDel mutually agreed to terms of a five year lease
      agreement for its Indianapolis, Indiana production facility. Since the UTE
      Estate is under the supervision of the probate court, the lease agreement is
      subject to approval by Indiana’s Marion County Probate Court, which is expected
      to grant the approval. If and when the lease agreement is approved, the Company
      expects the respective lawsuits of both parties will be withdrawn.





15.    
      SUBSEQUENT EVENTS





*Forbearance
      Agreement*





Effective
      April 4, 2007, Ener1 entered into a Forbearance Agreement with one of the
      holders of $9.5 million principal amount of the 2004 Debentures and $10.0
      million principal amount of the 2005 Debentures. Ener1 agreed to pay an
      additional $150,000 of registration delay expenses due to the holder and the
      holder agreed to continue to forbear from taking any action against Ener1until
      May 4, 2007 with respect to the remaining $145,000 of registration delay
      expenses owed to this holder if Ener1 remained in compliance with the
      Forbearance Agreement during this time. On May 7, 2007, the Company paid the
      remaining $145,000 to this debenture holder. As of May 7, 2007, the Company
      does
      not owe any registration delay payments to this holder.





*Loans
      and Advances from Ener1 Group*





Since
      April 1, 2007, the Company received loan advances of $4,216,000 from Ener1
      Group
      and used $1,272,000 of the funds for interest payments due on April 2, 2007
      to
      the holders of the 2004 Debentures and 2005 Debentures. The balance was used
      for
      various operating expenses. Following this advance, the Company owed Ener1
      Group
      $4,667,000 for advances, the repayment terms for which have not yet been
      established.





*Appointment
      of President*





On
      April
      13, 2007, the Company entered into an employment agreement with Mr. Subhash
      Dhar, under which Mr. Dhar will serve as President of Ener1. Mr. Dhar’s salary
      under the agreement is initially $360,000 per year with the potential to
      increase to $410,000 per year within six months if Mr. Dhar achieves certain
      milestones related to Ener1’s strategic plan. The employment agreement has an
      initial term of one year and automatically renews for subsequent one year
      periods, unless terminated by either party with a written notice of 45 days.
      Either party may terminate the agreement with or without cause (as defined
      in
      the agreement) with 60 days notice. In the event of a termination without cause,
      the agreement calls for the Company to pay Mr. Dhar severance in the form of
      his
      base salary for a period of 120 days, if termination of his employment occurs
      within the first year and for a period of 180 days if termination of his
      employment occurs after the first year. In connection with the agreement, Ener1
      is required to issue to Mr. Dhar 2,000,000 shares of restricted stock upon
      the
      commencement of his employment. These shares of restricted stock will vest
      upon
      the achievement of certain milestones relating to the performance of Ener1.
      The
      agreement also requires Ener1 to issue to Mr. Dhar options to purchase 3,000,000
      shares of common stock with one half at an exercise price of $0.28 per share
      and
      the other half at an exercise price of $0.35 per share, which would not vest
      until the price of the common stock of the Company has reached $1.00 per share. The
      fair
      value of these options on the date of grant using Black-Scholes was computed
      as
      $780,000 which will be expensed as stock based compensation once the price
      of
      the common stock reaches $1.00.




22


*10%
      Convertible Debentures - Ener1 Group*




On
      May
      10, 2007, Ener1, Ener1 Group and a third party entered into a Securities
      Purchase Agreement and a Registration Rights Agreement related to 1) the sale
      by
      Ener1 Group of $2.0 million principal amount of debentures exchangeable, at
      the
      election of the investor, into 8.0 million shares of common stock of Ener1
      owned
      by Ener1 Group and 2) the issuance by Ener1 Group of warrants to purchase up
      to
      4.8 million shares of Ener1 common stock owned by Ener1 Group. The warrants
      have
      an exercise price of $0.30 per share and a term of five years. Ener1 Group
      is
      required to invest $1.6 million of the proceeds in Ener1 within 30 days of
      the
      closing. Ener1 Group's obligations under the debentures are secured by a pledge
      of 10.0 million shares of Ener1 common stock owned by Ener1 Group.




Under
      the
      terms of the Registration Rights Agreement, Ener1 is required to file a
      registration statement for the common stock underlying the debentures and the
      warrants with the Securities and Exchange Commission within 30 days of the
      closing and have the registration statement declared effective within 90 days
      of
      the closing.




23


**Item
      2. Management’s Discussion and Analysis of Financial Condition and Results of
      Operations**





This
      report on Form 10-QSB contains forward-looking statements within the meaning
      of
      Section 27A of the Securities Act of 1933, as amended, and Section 23E of the
      Securities Act of 1934, as amended. These statements relate to our expectations
      regarding future events or future financial performance. Any statements
      contained in this report that are not statements of historical fact may be
      deemed forward-looking statements. In some cases, forward-looking statements
      can
      be identified by terminology such as “may,” “will,” “should,” “expect,” “plan,”
“anticipate,” “intend,” “believe,” “estimate,” “predict,” “potential” or
“continue,” or the negative of such terms or other comparable terminology. These
      statements are only predictions and are subject to a number of assumptions,
      risks and uncertainties that could cause actual results to differ materially
      from those expressed or implied in the forward-looking statements. The following
      important factors, in addition to those discussed in our filings with the
      Securities and Exchange Commission from time to time, and other unforeseen
      events or circumstances, could affect our future results and could cause those
      results or other outcomes to differ materially from those expressed or implied
      in our forward-looking statements: our ability to raise capital; general
      economic conditions; competition; our ability to control costs; changes within
      our industries; release of new and upgraded products and services by us or
      our
      competitors; development of our sales force; employee retention; managerial
      execution; legal and regulatory issues; changes in accounting policies or
      practices; and successful adoption of our products and services.





All
      forward-looking statements are based on information available to us on the
      date
      of this filing, and we assume no obligation to update such statements. The
      following discussion should be read in conjunction with our Annual Reports
      on
      Form 10-KSB, Quarterly Reports on Form 10-QSB and other filings with the
      Securities and Exchange Commission and the condensed consolidated financial
      statements and related notes included in this Quarterly Report.





***Overview***





We
      have
      three business lines which we conduct through our three operating subsidiaries.
      EnerDel, which is an 80.5% owned subsidiary which is 19.5% owned by Delphi,
      develops Li-ion batteries, battery packs and components such as Li-ion battery
      electrodes and lithium electronic controllers for lithium battery packs.
      EnerFuel develops fuel cell products and services. NanoEner develops
      technologies, materials and equipment for nanomanufacturing.





Currently,
      we generate minimal revenue from sales of Ener1’s products and product samples.
      Substantially all of our planned products are still under development. We will
      require significant capital investment to continue our product development
      activities to commercialize our technology.





The
      accompanying consolidated financial statements have been prepared on a going
      concern basis, which contemplates the realization of assets and the satisfaction
      of liabilities in the normal course of business. Ener1 has experienced net
      operating losses since 1997 and negative cash flows from operations since 1999
      and had an accumulated deficit of $199,203,000 and a working capital deficit
      of
      $12,064,000 as of March 31, 2007. It is likely that Ener1’s operations will
      continue to incur negative cash flows through December 31, 2007 and additional
      financing will be required to fund Ener1’s planned operations and meet its
      current obligations through those periods. Such conditions raise substantial
      doubt about Ener1’s ability to continue as a going concern.





**Results
      of Operations**





**** *Net
      income (loss)* .
      We
      reported a net loss of $7,717,000 for the three months ended March 31, 2007,
      an
      increase of $8,671,000 when compared to net income of $954,000 for the three
      months ended March 31, 2006.





Our
      net
      loss for the three months ended March 31, 2007 includes a gain on derivative
      liabilities of $579,000 and our net income for the three months ended March
      31,
      2006 includes a gain on derivative liabilities of $10,372,000. The decrease
      in
      gain on derivative liabilities of $9,793,000 accounts for substantially all
      of
      the year-over-year decrease in net income. The
      primary cause for the decrease in gain on derivative liabilities was the
      termination, exercise or change in status of various instruments that caused
      them to no longer be treated as derivative liabilities. The decrease in gain
      associated with these instruments was $7,655,000 or 78% of the decrease in
      gain
      on derivative liabilities .
      The
      remaining decrease in gain on derivative liabilities is attributable to non-cash
      changes in the accounting value of freestanding and embedded derivative
      liabilities, primarily due to changes in the market price of our common
      stock.




24


*Losses
      from operations* .
      We
      reported losses from operations of $4,411,000 for the three months ended March
      31, 2007, a decrease of $560,000 when compared to losses from operations of
      $4,971,000 for the three months ended March 31, 2006. The decrease in operating
      losses was attributable to a $1,158,000 decrease in general and administrative
      expenses, $927,000 reduction in warrant modification expenses partially offset
      by a $1,572,000 increase in research and development expenses.





*General
      and administrative (“G&A”) expenses.* G&A
      decreased $1,158,000, or 38%, to $1,884,000 for
      the three
      months ended March 31, 2007, compared to $3,042,000 for
      the three
      months ended March 31, 2006. This decrease was mainly due to a decrease of
      $501,000 in
      salaries, stock based compensation, bonuses and related benefits. Due to cost
      containment efforts, we also decreased expenses for legal and professional
      fees
      by $329,000 and insurance expenses by $139,000.





*Research
      and development (“R&D”) expenses.* Our
      R&D expenses were $2,491,000 and $919,000 for the three
      months ended March 31, 2007 and
      2006,
      respectively, an increase of $1,572,000 or 171% The increase is primarily
      attributable to increased R&D activity associated with our battery business.
      During the three months ended March 31, 2006, our battery business consolidated
      its operations, equipment and personnel into the Indiana manufacturing and
      R&D facility, and began accelerating its Li-ion battery development
      activities. R&D expenses were lower during this transition period. During
      the three months ended March 31, 2007, we increased R&D expenditures
      substantially in the battery business to accelerate development activities
      as
      reflected in the increased expenses for the three months ended March 31,
      2007 **.**





R&D
      expenses for the three
      months ended March 31, 2007 included $1,691,000 of expenses incurred in
      connection with our battery business, $572,000 of expenses incurred in
      connection with our fuel cell business, and $228,000 of expenses incurred in
      connection with our nanotechnology business. R&D expenses for the three
      months ended March 31, 2006 included $429,000 of expenses incurred in connection
      with our battery business, $389,000 of expenses incurred in connection with
      our
      fuel cell business, and $101,000 of expenses incurred in connection with our
      nanotechnology business.





*Warrant
      modification expense.* Warrant
      modification expense of $927,000 fo r
      the three
      months ended March 31, 2006
      resulted from modification of the terms of certain warrants to purchase our
      common stock under an agreement (the “Warrant Exercise Agreement”) with Ener1
      Group entered into on March 30, 2006. There was no warrant modification expense
      in first quarter 2007.





*Interest
      expense.* Interest
      expense was $3,352,000 and $2,843,000 for
      the three
      months ended March 31, 2007 and
      2006 ,
      respectively, an increase of $509,000 or 18%. Interest on the 2004 and 2005
      Debentures increased to $1,272,000 from $1,059,000 for the three
      months ended March 31, 2007 and
      2006, respectively, due to an increase in the interest rate of the 2005 Debentures.
      Non-cash interest expense related to the amortization of financing costs and
      bond discounts was $1,552,000 and $1,784,000 for the three
      months ended March 31, 2007 and
      2006, respectively. Interest expense for convertible notes and advances due to Ener1
      Group related to accrued interest and amortization of discount and deferred
      financing costs was $527,000 and $0 for the three
      months ended March 31, 2007 and
      2006, respectively. There were no outstanding convertible notes due to Ener1 Group
      in
      the first quarter 2006.





*Registration
      delay expenses.* Registration
      delay expenses decreased $871,000 to $0 for
      the three
      months ended March 31, 2007 compared to $871,000 for
      the three
      months ended March 31, 2006 because we ceased incurring registration delay
      expenses relating to the 2004 Debentures when our obligation to register the
      resale of the common stock underlying the 2004 Debentures expired on
      January 20, 2006 and we ceased incurring registration delay expenses relating
      to
      the 2005 Debentures when the registration statement for the common stock
      underlying the 2005 Debentures was declared effective on September 8,
      2006.





25


**Liquidity
      and Capital Resources**





At
      March
      31, 2007, we had a working capital deficit of $12,064,000, ($5,481,000 excluding
      derivative liabilities). Our available cash at March 31, 2007 was $471,000. We
      used
      $5,960,000 of cash for operating activities in the three
      months ended March 31, 2007 ,
      which
      was funded through financing activities of $6,127,000. These financing
      activities consisted of interim funding from Ener1 Group, our controlling
      shareholder, through its exercise of warrants to purchase Ener1 common stock,
      which generated proceeds of $5,206,000, the issuance of a $655,000 convertible
      note to Ener1 Group and net advances from Ener1 Group of $273,000.





In
      consideration for the exercise by Ener1 Group of the warrants, we lowered the
      exercise prices of these warrants prior to their expiration. The
      proceeds of our financing activities during the quarter were used for working
      capital purposes, including interest payments of $1,300,000 made on January
      5,
      2007 to the holders of the 2004 Debentures and 2005 Debentures and payments
      of
      $1,000,000 of registration delay expenses to a holder of our debentures. This
      holder has entered into a Forbearance Agreement under which the holder has
      agreed to forbear until April 2, 2007 from taking any action related to the
      non-payment of registration delay expenses owed to this holder. In addition
      to
      $295,000 in registration delay expenses owed to this debenture holder at March
      31, 2007, we owed $926,000 of registration delay expenses to the other holders
      of the 2004 Debentures and 2005 Debentures.





Since
      April 1, 2007, we received advances of $4,216,000 from Ener1 Group which we
      used
      for the interest payments under the 2004 Debentures and 2005 Debentures of
      $1,272,000 on April 2, 2007 and certain operating expenses. We also paid
      $295,000 for registration delay expenses to one of the holders of our
      debentures.





As
      of May
      11, 2007, we had $1,054,000 cash available and a working capital deficit of
      approximately $12,000,000 ($5,000,000 excluding derivative liabilities). In
      addition to cash requirements arising from our working capital deficit, we
      incur
      monthly cash operating expenses, primarily for salaries, insurance, employee
      benefits and rent, typically ranging from $1,200,000 and $1,600,000. In
      addition, interest payments averaging $1,300,000 related to our 2004 Debentures
      and 2005 Debentures are due at the end of each quarter. We
      will
      require additional funding in the next several weeks to meet our past due and
      on-going operating expenses. We do not have any commitments from Ener1 Group
      or
      other sources to provide additional funding.





We
      do not
      presently have sufficient funds to conduct our operations and estimate that
      we
      need to raise a minimum of $60,000,000 in additional capital to fully execute
      our business plans during 2007 and 2008, including $20,000,000 of planned
      capital expenditures for pilot production equipment and facilities upgrades
      at
      EnerDel, and funding of continuing R&D expenses. Such conditions raise
      substantial doubt about Ener1’s ability to continue as a going concern. We
      intend to raise needed capital through a combination of funds from government
      sources, including research and development grants and public financing such
      as
      revenue bonds, and equity or debt financing from strategic or financial
      investors.





If
      we are
      unable to obtain funding from any of the above sources, we plan to seek
      additional funds from Ener1 Group on terms similar to those contained in our
      convertible notes payable to Ener1 Group until such other funds can be obtained.
      There is no assurance that Ener1 Group will provide such funds. If we do not
      obtain adequate short-term working capital and permanent financing, we would
      have to curtail our research and development activities and adopt an alternative
      operating model to continue as a going concern.




***Critical
      Accounting Policies*** ****





The
      preparation of financial statements and related disclosures in conformity with
      accounting principles generally accepted in the United States (“GAAP”) requires
      management to make estimates and assumptions that affect the reported amounts
      of
      assets and liabilities, the fair value of financial instruments such as
      derivatives, the disclosure of contingent assets and liabilities at the date
      of
      the financial statements and expenses during the period reported. The following
      accounting policies involve a “critical accounting estimate” because they are
      particularly dependent on estimates and assumptions made by management about
      matters that are highly uncertain at the time the accounting estimates are
      made.
      In addition, while we have used our best estimates based on facts and
      circumstances available to us at the time, different estimates reasonably could
      have been used in the current period. Changes in the accounting estimates we
      use
      are reasonably likely to occur from period to period, which may have a material
      impact on the presentation of our financial condition and results of operations.
      We review these estimates and assumptions periodically and reflect the effects
      of revisions in the period that they are determined to be
      necessary.





26


***Recently
      Issued Accounting Pronouncements and Interpretations***





In
      February 2007, the Financial Accounting Standards Board (“FASB”) issued
      SFAS No. 159, *“The
      Fair Value Option for Financial Assets and Financial Liabilities,”* which
      provides companies with an option to report selected financial assets and
      liabilities at fair value in an attempt to reduce both complexity in accounting
      for financial instruments and the volatility in earnings caused by measuring
      related assets and liabilities differently. This Statement is effective as
      of
      the beginning of an entity’s first fiscal year beginning after November 15,
      2007. The Company is currently evaluating the impact of adopting SFAS 159 on
      its
      financial position, cash flows, and results of operations.





In
      September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS
      157”), which clarifies the definition of fair value, establishes guidelines for
      measuring fair value, and expands disclosures regarding fair value measurements.
      SFAS 157 does not require any new fair value measurements and eliminates
      inconsistencies in guidance found in various prior accounting pronouncements.
      SFAS 157 will be effective for the Company on January 1, 2008. The Company
      is
      currently evaluating the impact of adopting SFAS 157 on its financial position,
      cash flows, and results of operations.





In
      February 2006, the FASB issued SFAS No. 155, “Accounting for Certain Hybrid
      Financial Instruments - An Amendment of FASB Statements No. 133 and 140.” SFAS
      No. 155 simplifies the accounting for certain hybrid financial instruments,
      eliminates the interim FASB guidance which provides that beneficial interests
      in
      securitized financial assets are not subject to the provisions of SFAS No.
      133,
“Accounting for Derivative Instruments and Hedging Activities,” and eliminates
      the restriction on the passive derivative instruments that a qualifying
      special-purpose entity may hold. Effective January 1, 2007, Ener1 adopted the
      provisions of SFAS No. 155 prospectively for all financial instruments acquired
      or issued on or after January 1, 2007. Ener1 did not issue or acquire any new
      financial instruments subject to this standard since January 1, 2007. As a
      result, adoption of this statement did not have any effect on Ener1’s
      consolidated results of operations, financial position or cash
      flows.




SFAS
      155
      permits fair value remeasurement for any hybrid financial instrument that
      contains embedded derivatives that otherwise would require bifurcation. However,
      Ener1 has decided to continue to record the fair value of the conversion
      features and the warrants and options that are classified as derivatives on
      its
      balance sheet at fair value with changes in the values of these derivatives
      reflected in the consolidated statement of operations as “Gain on derivative
      liabilities.”




**Off-Balance
      Sheet Arrangements**





At
      March
      31, 2007, we did not have any off-balance sheet arrangements, as defined in
      item
      303(c) (2) of Regulation S-B.





27




**Item
      3: Controls and Procedures**





As
      of
      March 31, 2007, we carried out an evaluation of the effectiveness of the design
      and operation of our disclosure controls and procedures pursuant to Exchange
      Act
      Rule 13a-15. This evaluation was done under the supervision and with the
      participation of our management, including our Chief Executive Officer and
      Chief
      Financial Officer. Based on their evaluation of our disclosure controls and
      procedures (as defined in the Exchange Act Rule 13a-15e), our Chief Executive
      Officer and Chief Financial Officer have concluded that as of March 31, 2007
      such disclosure controls and procedures need improvement and may be considered
      “not effective.” The determination that such controls may be considered not
      effective is due primarily to our independent auditors identifying adjustments
      related to non-routine accounting transactions related to equity and debt
      transactions that were not properly recorded and disclosed.





We
      have
      recently implemented additional processes and procedures, including during
      the
      three months ended March 31, 2007, designed to increase the adequacy and
      effectiveness of our controls
      and procedures. Specifically,
      we have adopted a policy requiring periodic reviews of the accounting treatment
      of all existing debt and equity instruments and their associated calculations.
      We have established a policy that requires our Chief Financial Officer to
      approve any new financial instruments, including leases, debt and equity
      instruments. Our Corporate Controller will be responsible for valuing these
      financial instruments with assistance from an approved external advisor. In
      addition, a
      new
      Corporate Controller was hired in January 2007 and a new Division Controller
      was
      hired for EnerDel in March 2007 to improve our financial reporting and
      disclosure capabilities.





We
      will
      continue our efforts to improve supervision and training of our accounting
      staff
      and to improve and strengthen our control processes and procedures to fully
      remedy these deficiencies. Our management and directors will continue to work
      with our auditors and other outside advisors to improve the adequacy and
      effectiveness of our disclosure controls and procedures.


28


**PART
      II. OTHER INFORMATION**





**Item
      1: Legal Proceedings**





We
      receive communications from time to time alleging various claims. These claims
      include, but are not limited to, employment matters, collection of accounts
      payable, and allegations that certain of our products infringe the patent rights
      of other third parties. We cannot predict the outcome of any such claims or
      the
      effect of any such claims on our operating results, financial condition, or
      cash
      flows.





On
      March
      12, 2007, Universal Tool & Engineering Company, Inc. (“UTE”) filed a lawsuit
      in Superior Court, Marion County, Indiana, against EnerDel. The lawsuit alleges
      that EnerDel breached its payment obligations under its month-to-month lease
      and
      demands the removal of EnerDel from the facilities, unspecified monetary damages
      for breach of contract and unlawful enrichment, and immediate appointment of
      a
      receiver over EnerDel.





On
      April
      4,  2007,
      EnerDel filed its answer and counterclaims in Superior Court, Marion County,
      Indiana, against UTE alleging, among other things, that UTE breached its
      obligations to provide a reasonable replacement lease and negotiate the terms
      of
      such lease in good faith; and that UTE is abusing the process of law in an
      attempt to force EnerDel to accept an unreasonably one-sided lease. EnerDel
      filed a motion indicating its intent to vacate the property and relocate its
      operations, and requesting unspecified damages.





On
      April
      27, 2007, UTE and EnerDel mutually agreed to terms of a five year lease
      agreement for EnerDel's Indianapolis, Indiana production facility. Since the
      UTE
      Estate is under the supervision of the probate court, the lease agreement is
      subject to approval by Indiana’s Marion County Probate Court, which is expected
      to grant the approval. If and when the lease agreement is approved, we expect
      the respective lawsuits of both parties will be withdrawn.





**Item
      2: Unregistered Sales of Equity Securities and Use of
      Proceeds**




On
      February 13, 2007, we issued to Ener1 Group a convertible note in the principal
      amount of $4,500,000, a warrant to purchase up to 9,000,000 shares of our common
      stock at an exercise price of $0.50 per share and a warrant to purchase up
      to
      18,000,000 shares of our common stock at an exercise price of $0.60 per share.
      All interest accrues under the convertible note until the maturity of the note
      on May 15, 2009, at which time all principal and accrued interest are payable
      in
      full. The note may mature earlier than May 15, 2009, if all of the Company's
      obligations under the 2004 Debentures and 2005 Debentures have been satisfied,
      but not before January 1, 2008. Once all of our obligations under the 2004
      Debentures and 2005 Debentures have been satisfied, the note will be convertible
      at Ener1 Group's option into 9,000,000 shares of our common stock at the
      conversion price of $0.50 per share. The note is subordinated to the rights
      of
      the holders 2004 Debentures and 2005 Debentures.





During
      the three months ended March 31, 2007, we issued 194,223 shares of our common
      stock to Marston Webb International as compensation for public relations
      services provided in 2007 and 2006.





In
      January 2007, we issued 175,000 shares of common stock to two individuals Paul
      Cohen & Pavel Kouznetsov as compensation for investor relations services.





In
      January 2007, we issued 300,000 shares of common stock to an employee Gerald
      Herlihy in payment of a bonus earned in 2006.





In
      February 2007, we issued 150,000 shares of common stock to an investment banking
      firm GDR International as compensation for capital raising services.





All
      of
      the issuances of securities described above were exempt from registration under
      Section 4(2) of the Securities Act as issuances not involving a public
      offering.




29


**Item
      6: Exhibits**




3.1
              Amended
                  and Restated Articles of Incorporation of the Registrant, dated
                  February
                  12, 1993, incorporated by reference to Exhibit 3(i) to the Registrant's
                  Quarterly Report on Form 10-Q for the quarter ended September 30,
                  2000.3.2
              Articles
                  of Amendment to Amended and Restated Articles of Incorporation,
                  dated
                  March 11, 2002, incorporated by reference to Exhibit 3.2 of the
                  Registrant's Annual Report on Form 10-K for the year ended December
                  31,
                  2001.3.3
              Articles
                  of Amendment to Amended and Restated Articles of Incorporation,
                  dated
                  October 21, 2002, incorporated by reference to Exhibit 3.1 of the
                  Registrant's Current Report on Form 8-K dated October 28,
                  2002.3.4
              Articles
                  of Amendment to Amended and Restated Articles of Incorporation,
                  incorporated by reference to Exhibit A of the Registrant's Schedule
                  14C
                  filed on December 6, 2004.3.5
              By-laws
                  of the Registrant, incorporated by reference to Exhibit 3.4 of
                  the
                  Registrant's Registration Statement on Form SB-2 (Registration
                  No.
                  333-112837), filed February 13, 2004.3.6
              Certificate
                  of Designations of Series B Convertible Preferred Stock, dated
                  October 15,
                  2004, incorporated by reference to Exhibit 3.6 of the Registrant’s Annual
                  Report on Form 10-KSB for the year ended December 31,
                  2004.3.7
              Amendment
                  to Bylaws of the Registrant, dated January 5, 2005, incorporated
                  by
                  reference to Exhibit 3.2 of the Registrant’s Current Report on Form 8-K
                  dated January 12, 2005.4.1
              Form
                  of 5% Senior Secured Convertible Debenture incorporated by reference
                  to
                  Exhibit 4.1 to the Registrant's Current Report on Form 8-K dated
                  January
                  21, 2004.4.2
              Form
                  of Warrant to Purchase Common Stock issued pursuant to Securities
                  Purchase
                  Agreement, dated January 16, 2004, incorporated by reference to
                  Exhibit
                  4.2 to the Registrant's Current Report on Form 8-K dated January
                  21,
                  2004.4.3
              Registration
                  Rights Agreement, dated as of January 16, 2004, by and among the
                  Registrant the entities whose names appear on the signature pages
                  thereof
                  incorporated by reference to Exhibit 4.3 to the Registrant's Current
                  Report on Form 8-K dated January 21, 2004.4.4
              Warrant
                  issued to Cofis Compagnie Fiduciaire S.A. dated October 15, 2004
                  to
                  purchase from Ener1, Inc., 4,166,666 shares of Common Stock of
                  the Company
                  at a price per share of $1.25, incorporated by reference to Exhibit
                  4.4 of
                  the Registrant’s Annual Report on Form 10-KSB for the year ended December
                  31, 2004.4.5
              Warrant
                  issued to Cofis Compagnie Fiduciaire S.A. dated October 15, 2004
                  to
                  purchase from Ener1, Inc., 4,166,666 shares of Common Stock of
                  the Company
                  at a price per share of $1.50, incorporated by reference to Exhibit
                  4.5 of
                  the Registrant’s Annual Report on Form 10-KSB for the year ended December
                  31, 2004.4.6
              Warrant
                  to Purchase Common Stock issued October 20, 2004 to Delphi Automotive
                  Systems, LLC, to purchase up to 7,000,000 shares of Common Stock,
                  incorporated by reference to Exhibit 4.6 of the Registrant’s Annual Report
                  on Form 10-KSB for the year ended December 31, 2004.4.7
              Registration
                  Rights Agreement dated as of October 20, 2004, by and between Ener1,
                  Inc.
                  and Delphi Automotive Systems LLC, incorporated by reference to
                  Exhibit
                  4.7 of the Registrant’s Annual Report on Form 10-KSB for the year ended
                  December 31, 2004.4.8
              Registration
                  Rights Agreement dated as of October 20, 2004, by and between EnerDel,
                  Inc., Delphi Automotive Systems, LLC and Ener1, Inc., incorporated
                  by
                  reference to Exhibit 4.8 of the Registrant’s Annual Report on Form 10-KSB
                  for the year ended December 31, 2004.
  30
 4.9
              Form
                  of 7.5% Senior Secured Convertible Debenture issued pursuant to
                  Securities
                  Purchase Agreement dated March 5, 2005, incorporated by reference
                  to
                  Exhibit 4.1 of the Registrant’s Current Report on Form 8-K dated March 15,
                  2005.4.10
              Form
                  of Warrant to Purchase Common Stock issued pursuant to Securities
                  Purchase
                  Agreement, dated March 11, 2005 incorporated by reference to Exhibit
                  4.2
                  of the Registrant’s Current Report on Form 8-K dated March 15,
                  2005.4.11
              Registration
                  Rights Agreement, dated as of March 14, 2005, by and among Ener1,
                  Inc. and
                  the purchasers of Ener1's 7.5% Senior Secured Convertible Debentures,
                  incorporated by reference to Exhibit 4.3 of the Registrant’s Current
                  Report on Form 8-K dated March 15, 2005.4.12
              Form
                  of Warrant to Purchase Common Stock of Ener1, dated December 9,
                  2004
                  issued to Merriman Curhan Ford & Co., incorporated by reference to
                  Exhibit 4.10 to the Registrant’s Registration Statement on Form SB-2
                  (Registration No. 333-124745), filed May 9, 2005.4.13
              Certificate
                  of Designation of Non-Voting, Cumulative and Redeemable Series
                  A Preferred
                  Stock of EnerDel, Inc., dated October 20, 2004, incorporated by
                  reference
                  to Exhibit 4.6 to Amendment No. 1 to Ener1’s Quarterly Report on Form
                  10-QSB/A for the period ending September 30, 2004.4.14
              Form
                  of Convertible Note issued to Ener1 Group, Inc. on June 30, 2006
                  and
                  August 30, 2006, for $3,250,000 incorporated by reference to Exhibit
                  4.16
                  of Registrant's Quarterly Report on Form 10-QSB, filed August 21,
                  2006.4.15
              Warrant
                  issued to Ener1 Group, Inc. dated June 30, 2006 to purchase 9,000,000
                  shares of Common Stock of the Registrant incorporated by reference
                  to
                  Exhibit 4.17 of Registrant's Quarterly Report on Form 10-QSB, filed
                  August
                  21, 2006.4.16
              Warrant
                  issued to Ener1 Group, Inc. dated June 30, 2006 to purchase 20,000,000
                  shares of Common Stock of the Registrant incorporated by reference
                  to
                  Exhibit 4.18 of Registrant's Quarterly Report on Form 10-QSB, filed
                  August
                  21, 2006.4.17
              Form
                  of Warrant to Purchase Common Stock of Ener1, Inc. issued to Ener1
                  Group
                  on August 29, 2006, incorporated by reference to Exhibit 4.17 of
                  Registrant's Form SB-2/A filed September 3, 2006.4.18
              $3,100,000
                  Convertible Promissory Note issued to Ener1 Group, Inc. dated
                  September 30, 2006, incorporated by reference to Exhibit 4.19 of
                  Registrant's Quarterly Report on Form 10-QSB for the period ending
                  September 30, 2006.4.19
              Warrant
                  issued to Ener1 Group, Inc. dated September 30, 2006 to purchase
                  9,000,000
                  shares of Common Stock of the Registrant, incorporated by reference
                  to
                  Exhibit 4.20 of Registrant's Quarterly Report on Form 10-QSB for the
                  period ending September 30, 2006.4.20
              Warrant
                  issued to Ener1 Group, Inc. dated September 30, 2006 to purchase
                  9,000,000
                  shares of Common Stock of the Registrant, incorporated by reference
                  to
                  Exhibit 4.21 of Registrant's Quarterly Report on Form 10-QSB for the
                  period ending September 30, 2006.4.21
              Agreement
                  dated October 3, 2006 between Ener1 Group, Inc. and Ener1, Inc.
                  regarding
                  payment of salary and other costs of Ener1, Inc. for Victor Mendes,
                  incorporated by reference to Exhibit 4.22 of Registrant's Quarterly
                  Report on Form 10-QSB for the period ending September 30,
                  2006.4.22
              Agreement
                  dated October 3, 2006 between Ener1 Group, Inc. and Ener1, Inc.
                  regarding
                  payment of salary and other costs of Ener1, Inc. for Ajit Habbu,
                  incorporated by reference to Exhibit 4.23 of Registrant's Quarterly
                  Report on Form 10-QSB for the period ending September 30,
                  2006.
  4.23
              Employment
                  Agreement between Ener1, Inc. and Ajit Habbu, incorporated by reference
                  to
                  Exhibit 4.24 of Registrant's Quarterly Report on Form 10-QSB for the
                  period ending September 30, 2006.4.24
              Registration
                  Rights Agreement, dated January 5, 2007, by and between Ener1,
                  Inc and
                  Credit Suisse Securities (USA), LLC, incorporated by reference
                  to Exhibit
                  10.02 to the Registrant’s Current Report on Form 8-K dated January 8,
                  2007.4.25
              Warrant
                  issued to Credit Suisse Securities (USA), LLC, dated January 5,
                  2007, to
                  purchase 5,000,000 shares of common stock of the Registrant at a
                  price per share of $0.30, incorporated by reference to Exhibit
                  10.03 to
                  the Registrant’s Current Report on Form 8-K dated January 8,
                  2007.4.26
              $4,500,000
                  Convertible Promissory Note issued to Ener1 Group, Inc. dated February
                  13,
                  2007, incorporated by reference to Exhibit 4.26 to the Registrant’s
                  Registration Statement on Form SB-2 filed on February 13,
                  2007.4.27
              Form
                  of Warrant to purchase 9,000,000 and 18,000,000 shares of Common
                  Stock of
                  the Registrant, issued to Ener1 Group, Inc. dated February 13,
                  2007,
                  incorporated by reference to Exhibit 4.27 to the Registrant’s Registration
                  Statement on Form SB-2 filed on February 13, 2007.4.28
              Warrant
                  issued to Charles Gassenheimer dated January 5, 2007 to purchase
                  500,000
                  shares of common stock of the Registrant, incorporated by reference
                  to
                  Exhibit 4.28 to the Registrant’s Registration Statement on Form SB-2 filed
                  on February 13, 2007.4.29
              $455,000
                  Convertible Promissory Notes issued to Ener1 group, Inc. dated
                  November 9,
                  2006 *4.30
              $655,000
                  Convertible Promissory Note issued to Ener1 Group, Inc. dated January
                  19,
                  2006. *10.1
              Purchase
                  Agreement, dated January 5, 2007, by and between Ener1 Group, Inc.,
                  Ener1,
                  Inc and Credit Suisse Securities (USA), LLC, incorporated by reference
                  to
                  Exhibit 10.01 to the Registrant’s Current Report on Form 8-K dated January
                  8, 2007.10.2
              Registration
                  Rights Agreement, dated January 5, 2007, by and between Ener1 Group,
                  Inc.,
                  Ener1, Inc and Credit Suisse Securities (USA), LLC, incorporated
                  by
                  reference to Exhibit 10.02 to the Registrant’s Current Report on Form 8-K
                  dated January 8, 2007.31.1
              Certification
                  of Principal Executive Officer pursuant to Section 302 of the
                  Sarbanes-Oxley Act of 2002.*31.2
              Certification
                  of Principal Financial Officer pursuant to Section 302 of the
                  Sarbanes-Oxley Act of 2002.*32.1
              Certification
                  of Principal Executive Officer pursuant to 18 U.S.C. Sec. 1350,
                  as adopted
                  pursuant to Section 906 of the Sarbanes-Oxley Act of
                  2002.*32.2
              Certification
                  of Principal Financial Officer pursuant to 18 U.S.C. Sec. 1350,
                  as adopted
                  pursuant to Section 906 of the Sarbanes-Oxley Act of
                  2002.*
 *
        Filed
        herewith
   31


**ENER1,
      INC.****AND
      SUBSIDIARIES**




**SIGNATURES**




In
      accordance with the requirements of the Securities Exchange Act, the registrant
      has duly caused this Quarterly Report on Form 10-QSB to be signed on its behalf
      by the undersigned thereunto duly authorized.




ENER1,
                INC.Dated:
                May 15, 2007
            By:
            /s/ Dr.
              Peter
              NovakDr.
                Peter NovakChief
              Executive Officer(Principal Executive
              Officer)


Dated: May
                15, 2007
            By:
            /s/ Ajit
              HabbuAjit
                HabbuChief
              Financial Officer(Principal
                Financial and Accounting Officer)




32