**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**





WASHINGTON,
      D.C. 20549









Form
      10-KSB





x
              ANNUAL
                  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                  ACT OF
                  1934




**For
      The Fiscal Year Ended December 31, 2006**





o
            TRANSITION
                REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                ACT OF
                1934




For
      The
      Transition Period From ____________ to ____________





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**


**Fort
      Lauderdale, Florida 33309**


**(954)
      556-4020**


(Address,
      including zip code, and telephone number, including area code, of principal
      executive offices)





Securities
      registered pursuant to Section 12(b) of the Act: NONE





Securities
      registered pursuant to Section 12(g) of the Act:





COMMON
      STOCK, par value $0.01 per share


(title
      of
      class)





Check
      whether the issuer is not required to file reports pursuant to Section 13 or
      15(d) of the Exchange Act. o





Indicate
      by check mark whether the issuer (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 issuer was required
      to
      file such reports), and (2) has been subject to such filing requirements for
      the
      past 90 days.





Yes
x
      No o





Check
      if
      there is no disclosure of delinquent filers in response to Item 405 of
      Regulation S-B contained in this form, and no disclosure will be contained,
      to
      the best of the issuer’s knowledge, in definitive proxy or information
      statements incorporated by reference in Part III of this Form 10-KSB or any
      amendment to this Form 10-KSB. o





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


Yes
o  No
x





The
      issuer’s revenue for its fiscal year ended December 31, 2006 was
      $100,000.





The
      aggregate market value of voting stock held by non-affiliates (67,884,114
      shares) as of April 3, 2007: $19,686,000 **** based
      on
      the $0.29 closing price for the common stock quoted on the OTC Bulletin Board
      on
      such date.





Shares
      of
      Common Stock outstanding as of March 31, 2007: 438,991,830 **s** hares.





Transitional
      Small Business Disclosure Format: Yes o No x









**ENER1,
      INC.**


**ANNUAL
      REPORT ON FORM 10-KSB**


**FOR
      THE YEAR ENDED DECEMBER 31, 2006**





**INDEX**




**Page****PART
                I**ITEM
                1
            
            Business
            
            1ITEM
                2
            
            Properties
            
            21ITEM
                3
            
            Legal
                Proceedings
            
            22ITEM
                4
            
            Submission
                of Matters to a Vote of Security Holders
            
            22**PART
                II**ITEM
                5
            
            Market
                for the Registrant's Common Equity, Related Stockholder
                Mattersand
                Small Business Issuer Purchases of Equity Securities
            
            23ITEM
                6
            
            Management’s
                Discussion and Analysis of Financial Condition and Results of Operations
                and Risk Factors
            
            24ITEM
                7
            
            Financial
                Statements
            
            39ITEM
                8
            
            Changes
                in and Disagreements with Accountants on Accounting and
                Financial
              Disclosure
            
            76ITEM
                8A
            
            Controls
                and Procedures
            
            76ITEM
                8B
            
            Other
                Information
            
            76**PART
                III**ITEM
                9
            
            Directors,
                Officers and Control Persons
            
            77ITEM
                10
            
            Executive
                Compensation
            
            80ITEM
                11
            
            Security
                Ownership of Certain Beneficial Owners and Managementand
                Related Stockholder Matters
            
            85ITEM
                12
            
            Certain
                Relationships and Related Transactions
            
            88ITEM
                13
            
            Exhibits
            
            93ITEM
                14
            
            Principal
                Accountant Fees and Services
            
            100









**PART
        I**
  **ITEM
        1: BUSINESS**
 
 **BUSINESS**
 
 **Overview**
 
 We
        have
        three business lines which we conduct through our three operating subsidiaries.
        EnerDel, Inc., which is an 80.5% owned subsidiary that we operate as a joint
        venture with Delphi Corporation, develops lithium-ion (“Li-ion”) batteries and
        complete battery packs, including electronic controllers and battery management
        systems for use in hybrid electric vehicles (HEVs). Our wholly-owned subsidiary,
        EnerFuel, Inc., develops fuel cell components and products, including
        fully-integrated fuel cell-based specialty products. Our wholly-owned
        subsidiary, NanoEner, Inc., develops technologies, nanostructured materials
        and
        processing technology for use in a variety of industrial
        applications.
 
 EnerDel
        was formed in October 2004. Its activities focus on development and
        commercialization of battery material, cells, electronic controls and
        manufacturing processes, and production and testing of prototypes.
 
 In
        June
        2005, we restructured EnerDel's operations based on a change in strategy
        to
        focus development and marketing efforts on U.S.-based production of Li-ion
        batteries for U.S. manufacturers of HEVs. HEVs are cars that are powered
        by
        combining an electric motor with a combustion engine. HEVs use a gasoline
        or
        diesel engine as the primary source of propulsion, and an electric motor
        powered
        by battery provides additional power when needed. In addition, HEVs can use
        the electric motor as the sole source of propulsion for low-speed,
        low-acceleration driving, such as in stop-and-go traffic or for backing up.
        HEVs
        require "high-rate" or "high power" batteries, which are batteries that can
        discharge rapidly, providing high levels of power output quickly, in order
        to
        power high-stress applications such as driving in stop-and-go traffic,
        accelerating and braking.
 
 EnerDel's
        change in strategy was based on our determination that the high-rate battery
        technology and automated manufacturing process technologies we were able
        to
        acquire from our affiliate, EnerStruct, Inc. ("EnerStruct") would enable
        us to
        pursue the emerging market for HEV batteries more effectively. During the
        second
        half of 2005, we decided to consolidate EnerDel’s development engineering and
        production activities in our Indianapolis, Indiana facility.
 
 During
        the last year, we built a pilot production line to produce sample battery
        cells and we intend to add additional equipment to produce
        completed product for HEVs. In order to execute these plans, we currently
        expect that during the next two years we will need to make capital expenditures
        of $20,000,000 and increase our research and development expenses to
        approximately $10,000,000 annually. We will need to raise a minimum
        of $40,000,000 over the next two years to implement this strategy, plus an
        additional $20,000,000 for administration and financing costs. We intend
        to
        raise this 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.
 
 In
        May
        2006, EnerDel was awarded a cost-sharing development contract by the United
        States Advanced Battery Consortium (“USABC”) to provide funding for battery
        research. The USABC is a consortium of the three U.S. auto manufacturers
        --
        Ford, General Motors and DaimlerChrysler, with funding provided by the U.S
        Department of Energy (DOE). The charter of the USABC is to support the
        commercial development of alternative energy for automotive applications.
        The
        development contract is the first phase of what is expected to be a multi-phase,
        multi-million dollar program. EnerDel's responsibilities under the first
        phase
        of this program are to provide samples of Li-ion batteries that offer
        potentially significant advantages in terms of weight, volume, performance
        and
        safety over existing technologies for HEVs. Argonne National Laboratory (ANL)
        is
        a subcontractor to EnerDel in this project. EnerDel made its first scheduled
        delivery of samples at the end of November 2006. In January 2007, EnerDel
        received test results of its battery cells from USABC, conducted by Idaho
        National Laboratory. The results met or exceeded all of goals established
        by
        USABC. In February 2007, EnerDel delivered an improved generation of cells
        for
        the next phase of testing, the results of which are expected to be received
        in
        April 2007.
  1
 
 We
        believe that the market for HEVs will grow dramatically in the next few years.
        We also believe that Li-ion batteries will replace existing battery technology
        for HEVs once the technology is adopted for automotive use because Li-ion
        batteries weigh less and have more power than existing HEV batteries. In
        addition, major auto makers are introducing new HEV models and announcing
        plans
        for additional HEVs. We believe that EnerDel has a battery technology and
        manufacturing process capability that will give it a competitive edge in
        this
        emerging market. Therefore, EnerDel is focusing primarily on the HEV
        market.
 
 EnerDel
        is obtaining certain key elements of its technology from EnerStruct, which
        we
        formed with ITOCHU Corporation in 2003 to pursue technology development and
        marketing opportunities for Li-ion batteries in Japan. We and ITOCHU have
        each
        licensed to EnerStruct some of our respective battery technologies for use
        in
        Japanese markets. EnerStruct and EnerDel have entered into an agreement under
        which EnerStruct is working with EnerDel to develop high-rate battery and
        manufacturing technologies for use by EnerDel.
 
 We
        restructured EnerFuel's fuel cell business plan and operations in January
        2006.
        EnerFuel now focuses on developing what it believes will be the next generation
        of high-temperature fuel cells, intended to address the fuel cell industry's
        need for fuel cells that are smaller, less costly and less complex. EnerFuel
        is
        pursuing fuel cell related opportunities in the portable power, auxiliary
        power,
        distributed power and backup power markets. As part of the restructuring,
        EnerFuel hired a president with ten years of experience in these markets,
        having
        built a fuel cell company from startup and operated it successfully. EnerFuel
        has further expanded its development capability by hiring a team of engineers
        with experience from a major fuel cell industry participant. EnerFuel has
        also
        acquired additional fuel cell development equipment and leased a fuel cell
        development facility into which it has moved most of its
        operations.
 
 NanoEner,
        our nanotechnology subsidiary, has built prototype equipment that utilizes
        our
        proprietary vapor deposition and solidification (“VDS”) process for depositing
        materials onto battery electrodes as part of the battery cell manufacturing
        process. We are currently evaluating NanoEner's operations and business
        prospects in order to determine whether to pursue our nanotechnology operations
        as a separate line of business. We are also continuing to evaluate NanoEner’s
        capabilities of providing nanotechnology to our other business
        units.
 
 At
        March
        1, 2007, we had a total of 73 full time employees, including 39
        full time EnerDel employees, 15 full time EnerFuel employees, 4 full time
        NanoEner employees and 15 full time Ener1, Inc. employees.
 
 **Company
        History**
 
 Ener1
        is
        a Florida corporation, founded in 1985 and headquartered in Fort Lauderdale,
        Florida. In October 2002, we changed our name from Boca Research, Inc. to
        Ener1,
        Inc. In 2002 and a portion of 2003, we provided computer-related engineering
        and
        consulting services and developed and marketed associated hardware and software,
        including set top boxes for use in hotels and hospitals. These set top boxes
        were used as a platform for providing various menu-oriented software and
        communications services and capabilities for customers and patients. This
        business was an outgrowth of our previous business of developing and marketing
        modems and network communications systems, devices and software.
  During
        the past five years, we have substantially changed our business focus based
        on
        changing market conditions. We have transformed from a computer
        hardware/software-oriented company to an alternative energy technology company,
        a process that began shortly after Ener1 Group, Inc., a privately held
        technology incubator company headquartered in Fort Lauderdale ("Ener1 Group"),
        acquired an 80% stake in our company in early 2002. Ener1 Group now owns
        approximately 86% of our outstanding common stock and four of our six directors
        are affiliated with Ener1 Group.
 
 In
        September 2002, we acquired Ener1 Battery Company ("Ener1 Battery"), which
        was
        engaged in research, development and marketing of lithium battery technologies,
        from Ener1 Group in return for a combination of equity and debt consideration.
        This acquisition provided us with several pending patents for various lithium
        battery technologies; a staff of research and development engineers; the
        land
        and building where Ener1 Battery conducted its operations; and lithium battery
        research, development and production equipment.
  2
 
 After
        we
        acquired Ener1 Battery, we began to phase out our software engineering and
        consulting/set top box business. In May 2003, we transferred substantially
        all
        of that business and related assets to one of our subsidiaries, EnerLook
        Health
        Care Solutions, Inc. (“EnerLook”), which continued to develop and market set top
        box technologies, products and services to hotel and hospital customers.
        In
        December 2004, we transferred all of the assets of EnerLook to TVR
        Communications, LLC in return for a 5% equity interest in TVR Communications.
        In
        2006, we transferred this ownership interest to Ener1 Group, our controlling
        shareholder,
 
 To
        complement our battery operations and expand our alternative energy business,
        in
        September 2003 we began a research and development program focusing on fuel
        cells and related products and technologies. Since that time, we have added
        numerous scientists and engineers to our fuel cell staff and filed several
        patent applications covering various fuel cell technologies, systems and
        components.
 
 In
        April
        2004, we formed NanoEner, Inc. to pursue technologies for nanomaterials and
        nanomanufacturing. Initially, these activities focused on applying
        nanotechnology to improving the performance of Li-ion battery
        electrodes.
 
 In
        October 2004, we formed EnerFuel, Inc. to conduct all of our fuel cell
        activities going forward.
 
 In
        October 2004, we combined Ener1 Battery’s lithium battery assets with the
        lithium battery assets of Delphi Corporation in order to form
        EnerDel.
 
 **Our
        Battery Business**
 
 *Overview*
 
 We
        have
        been developing various types of batteries since 2002. Since we acquired
        Ener1
        Battery and its lithium battery business from Ener1 Group, we have pursued
        a
        number of different battery chemistries, both primary (non-rechargeable)
        and
        secondary (rechargeable), developed various battery and battery cell prototypes
        and filed several patent applications relating to lithium battery technology
        and
        processes.
 
 In
        July
        2003, we and Ener1 Battery entered into a joint venture with ITOCHU Corporation
        for the development of lithium battery technologies. As part of this joint
        venture, we and ITOCHU formed EnerStruct and licensed certain of our
        battery-related technologies to EnerStruct. Since July 2003 EnerStruct has
        pursued the development of high-rate battery technologies, filed its own
        patent
        applications in Japan and elsewhere and worked with us to advance our respective
        battery technologies. These activities have become increasingly important
        for
        our operations during the last two years.
 
 In
        October 2004, we and Delphi combined our respective lithium battery operations
        to form EnerDel.
 
 Delphi,
        which had ten years of experience in Li-ion battery research and development,
        contributed the following assets to EnerDel: testing and production equipment,
        Delphi's Li-ion patent portfolio, manufacturing facilities in Indianapolis
        and
        technical resources including the services of engineers and technical
        information. We contributed the following assets to EnerDel: $15,000,000
        in cash
        for working capital, substantially all of our battery-related patents and
        patent
        applications, technical resources including scientists and engineers and
        exclusive use of all of the battery testing and production equipment located
        at
        our Ft. Lauderdale facilities. We own 80.5% of EnerDel’s outstanding common
        stock and Delphi owns the remaining 19.5%. Delphi also owns 8,000 shares
        of
        EnerDel 8% Non-Voting Cumulative and Redeemable Series A Preferred Stock,
        which
        has a liquidation value of $8,000,000 plus accrued dividends.
 
 In
        2006,
        EnerDel focused its effort on finalizing the development of its technology
        and
        made progress towards commercializing its technology. EnerDel’s primary
        accomplishment in 2006 was the award of a Phase 1 cost-sharing development
        contract from the USABC a part of the United States Council for Automotive
        Research (USCAR), an organization founded by DaimlerChrysler, Ford and General
        Motors that works with the Department of Energy (DOE) to strengthen America’s
        auto industry through cooperative development of advanced technologies. USABC
        provides funding under this development contract to match EnerDel for up
        to
        $502,000 of EnerDel’s research and development costs. USABC pursues the
        development of high power and high energy storage technologies to provide
        future
        generations of electric, hybrid electric and fuel cell vehicle applications
        with
        significantly increased range and performance at a cost competitive with
        gasoline-powered vehicles. The focus of the twelve month Phase 1 project
        is to
        demonstrate that EnerDel's technology meets USABC performance goals in larger
        format battery cells. EnerDel has been meeting the milestones under this
        Phase 1
        contract and made a scheduled interim delivery of cells to USABC in late
        November for their testing and evaluation. In January 2007, EnerDel received
        test results of its cells from USABC, conducted by Idaho National Laboratory.
        The results met or exceeded all of goals established by USABC. In February
        2007,
        EnerDel delivered an improved next generation of cells for the next phase
        of
        testing, the results for which are expected to be received in April 2007.
        The
        Phase 1 contract will be completed at that time. This is the first phase
        of what
        is expected to be a three-phase program. EnerDel anticipates that it will
        be
        awarded a Phase 2 contract under this program in 2007.
  3
 
 EnerDel
        also invested in electrode manufacturing equipment which was installed in
        our
        Indianapolis facility during the year. This equipment is crucial for the
        continued development and sampling of cells to potential customers.
 
 *EnerDel’s
        Business Strategy*
 
 Our
        goal
        is to become a leader in the North American HEV, Plug-In Hybrid Electric
        Vehicle
        ("PHEV") and Electric Vehicle ("EV") markets for high-rate , high performance
        batteries based upon our proprietary and unique cell and Li-ion battery system
        technologies and U.S.-based, mass-manufacturing capability. High energy
        batteries have high capacity; i.e., they provide the energy stored in the
        batteries for longer periods to provide long runtimes in the devices they
        power,
        but do not generally have the “burst” power capability of high-rate/high power
        batteries. We intend to target our Li-ion batteries to North American HEV
        and
        PHEV manufacturers. We also intend to seek government funding of our research
        and development activities and to implement cost reduction initiatives.
 
 We
        believe that the market potential for a high-performance Li-ion battery in
        automotive and other applications is significant. Li-ion batteries are superior
        in several respects to the nickel metal hydride ("NiMH") batteries currently
        used by car manufacturers: they are more powerful, have longer life and,
        more
        importantly, occupy less space and weigh less, each of which are critical
        considerations for automotive manufacturers. We believe that the domestic
        HEV
        market may grow dramatically if a better Li-ion battery for HEVs is successfully
        developed.
 
 Currently,
        HEVs use the larger, heavier and less powerful NiMH batteries. Li-ion technology
        for HEVs has not yet been fully developed and commercialized; significant
        technological and manufacturing cost hurdles remain. However, Toyota, the
        industry leader in HEVs, other battery manufacturers, such as Johnson Controls
        and A123, have announced plans to develop Li-ion batteries for automotive
        use
        during the next several years. We believe that the first companies to develop
        a
        proven (and cost-effective) Li-ion battery for HEVs will have a significant
        competitive advantage in this market. We believe we have the competitive
        advantages that will enable us to develop a Li-ion battery for use in HEVs:
        access to proprietary material and manufacturing process technology and an
        experienced management and engineering team with significant Li-ion battery
        experience.
 
 The
        development process to full commercialization will take several years and
        require significant capital investment. We intend to seek strategic alliances
        with automotive, battery or other companies to pursue this market. We intend
        to
        target the North American HEV manufacturers because we believe they will
        find it
        advantageous to purchase advanced performance batteries from local, United
        States battery manufacturers. In addition, consumer electronic manufacturers
        have historically controlled battery production for their own products and
        we
        expect Japanese automotive manufacturers will similarly seek to control
        production of batteries for their HEVs, though opportunities may exist to
        supply
        cells or batteries to these companies for their manufacturing activities
        in
        North America.
 
 One
        of
        the key aspects of EnerDel’s business strategy is to enter into a strategic
        partnership with a leading Tier 1 supplier or other industrial company that
        is
        pursuing the hybrid systems business as a supplier to the automotive industry.
        EnerDel is looking for a strategic partner that can offer marketing
        relationships to the automotive OEMs, large scale manufacturing experience
        from
        being a supplier to the automotive industry and access to additional financial
        resources.
 
 4
 We
          believe the Li-ion battery technologies that we are developing for HEV
          solutions
          will also have applications in other industry sectors. The following chart
          indicates some of the automotive and additional markets we plan to pursue
          based
          on technologies developed for the HEV sector:
 *Battery
                  Categories*
              
              Automotive
                  Applications
              
              Other
                Applications*High
                  Power Battery*
              
              Hybrid
                  Electric Vehicles (light vehicles, tanks, buses and others) and
                  Fuel Cell
                  Vehicles
              
              Power
                  tools, marine motors, load leveling, back up power (UPS- uninterrupted
                  power supply), auxiliary power and mobility devices*High
                  Capacity Battery*
              
              Plug-in
                  Hybrid Electric Vehicle, Electric Vehicles or Solar Cell
                  Vehicles
              
              Military
                  applications (power vests, “UAVs” or unmanned aerial vehicles), aerospace,
                  medical applications, load leveling and
                  storage
 
 Batteries
        we develop and market for the HEV market and other automotive applications
        must
        meet high performance requirements including long battery life and safety.
        We
        believe we will also be able to utilize our technology we developed for HEV
        applications for military, aerospace and medical applications as these markets
        also have stringent life and safety requirements.
 
 We
        are
        also working with nationally recognized research institutes such as Argonne
        National Laboratory and commercial material developers to develop and evaluate
        the best compounds for use with our battery technologies.
 
 *Key
        Advantages of our Technology for HEVs*
 
 We
        believe that our planned Li-ion battery products will have several key
        advantages over existing technology as a result of our proprietary technology
        and our planned highly automated manufacturing method:
 
 ··
              High
                  power··
              Compact
                  design··
              High
                  level of safety··
              Long
                  life and reliability··
              Good
                  temperature performance - at both low and high
                  temperatures··
              Advanced
                  electronics control and battery management
                  system
  *Our
        Planned Products*
 
 Our
        primary products will consist of batteries and battery packs for HEVs. Battery
        packs consist of multiple battery cells that are linked together and controlled
        by electronic circuits that manage the battery pack’s operation and monitor its
        performance and safety compliance. Our Li-ion battery packs will be developed
        in
        accordance with HEV specifications and the particular specifications of the
        HEV
        manufacturers. We obtained significant battery pack design and production
        capability from Delphi as part of our joint venture with them, and this includes
        significant know-how in systems integration of battery packs in to
        HEVs.
 
 Additional
        (Non-HEV) Applications - Specialty Markets
 
 EnerDel
        is pursuing opportunities in the U.S. for military, aerospace, medical and
        industrial applications of its technologies. We are pursuing these specialty
        markets initially through government development grants and contracts that
        we
        are awarded for new battery solutions. EnerDel has been awarded three grants
        (from Department of Energy (“DOE”) and Department of Defense (“DOD”) through the
        federal appropriations process over the last two years. We are in the process
        of
        finalizing the contract for the first of these grants with a defense agency,
        the
        Office of Naval Research (ONR), which entails the development of a complete
        battery pack. The other two grants were recently awarded, and we are completing
        the final proposal work in collaboration with the appropriate defense agency.
        We
        believe that the technologies we develop for these contracts could be
        commercialized for revenue opportunities in government and non-government
        sectors. We intend to pursue opportunities in non-HEV markets using our own
        cell
        technology or incorporate cells from other manufacturers in our battery pack
        as
        appropriate.
 
 5
 
 Our
        low
        voltage battery pack design is intended to power transmitters and receivers
        used
        in asset tracking applications.  Engineering samples of this product have
        been developed and we are currently testing them in our facility in
        Indianapolis.  Based on initial test data, we believe this product can
        offer a significant improvement in useful life compared to the lead-acid
        and
        NiMH batteries prevalent in asset tracking applications today.  Because
        batteries used in asset tracking applications can not typically be recharged
        frequently, lead acid batteries rapidly deteriorate and fail to provide the
        required energy.  We believe the longer life of our batteries will give our
        planned asset tracking battery pack a competitive advantage.
 
 Lithium
        Electronic Battery Management Controllers (“LECs”)
 
 We
        have
        designed two families of lithium battery management systems to provide control,
        optimization and advanced user features for batteries and battery packs.
        The two
        families are:
 
 ·
            Low
                Voltage (8 - 16V) Controls - 12V4 type for asset tracking and other
                lower
                voltage applications.  ·
            High
                Voltage Distributed Controls (HEV) - for HEV and other automotive
                applications. 
 Through
        the use of algorithms implemented through electronic circuitry, these
        controllers are designed to regulate the operation of our batteries and battery
        packs to make them operate more efficiently and safely. Our LECs are designed
        to
        regulate cell voltage limits and cell temperature limits and provide protection
        from overcharge. They are also designed to indicate the state of charge and
        overall condition of the cells and/or pack, as well as provide a data bus
        for
        digital communications. The LEC monitors each cell’s condition, and maintains
        the voltage balance among the cells making up the battery in order to optimize
        cell life. Based on customer requirements, the LEC may also be programmed
        to
        optimize charging, discharging and other operating characteristics or
        application features.
 
 *Our
        Market*
 
 Our
        primary market will be batteries and battery packs for HEVs. According to
        hybridcars.com and R.L. Polk & Co, estimated sales of HEVs in North America
        in 2006 was about 254,000 compared to 199,000 in 2005, an increase of 28%.
        Forecasts for the size and growth of this market vary widely. We believe
        this
        market will grow significantly over the next several years. A Booz Allen
        Hamilton report estimates that by 2015 80% of all cars sold in the U.S. will
        a
        hybrid variety. While there are other forecasts with varying levels of sales,
        all of them estimate significant growth in sale of hybrid vehicles. Many
        auto
        makers are already producing or have announced plans to produce HEVs in the
        near
        future. Increasingly, production of HEVs is being moved to the United States,
        which is considered the largest market for HEVs today and in the future,
        and we
        believe that our plan to provide a reliable U.S.-based manufacturing source
        for
        HEV batteries will be well received by auto makers producing HEVs in the
        United
        States
 
 In
        reaction to dramatic increases in energy prices, the federal government,
        automotive industry and consumers are seeking alternative energy solutions
        that
        reduce the cost of energy and dependence on foreign carbon-based energy sources
        such as oil and gas. The HEV is a readily available technology that helps
        accomplish these goals. We expect the automotive industry participants to
        increase production of HEVs as quickly as possible, and many have announced
        such
        plans, although consumer demand will greatly determine the ultimate production
        rates. Toyota has been leading the production of HEVs, but a number of other
        automobile manufacturers have introduced HEVs currently sold in the United
        States, including Honda, General Motors, Lexus and Ford. Other manufacturers,
        including Daimler-Chrysler, Nissan, BMW, Volkswagen, Audi and Porsche, have
        reported that they will develop and market HEV models.
 
 Toyota
        has stated that it is planning to sell 1,000,000 HEVs per year by 2012 and
        that it will offer HEV versions of all of its car models in the future
        as it revamps all of its models (Nikkei Net Interactive, April 1, 2006).
          In addition, Toyota has announced plans to begin production of the
        hybrid version of the Toyota Camry in the United States in 2007.  Since its
        launch in 2006 the Toyota Camry Hybrid has become the second highest selling
        HEV
        in the United States behind only the Toyota Prius and ahead of the Honda
        Civic.
        Toyota is currently the largest producer of HEVs, with an 80% market share
        in
        the United States, followed by Honda and Ford with market shares of
        approximately 11% and 9%, respectively.  Subaru, Nissan and Mitsubishi have
        recently produced concept cars that use Li-ion batteries. Subaru and Mitsubishi
        showed Li-ion powered electric vehicles at the Electric Vehicle Symposium
        (EVS-22) in Yokohama, Japan in December 2006, and Nissan showed a Fuel Cell
        Vehicle with a Li-ion battery both at the Tokyo Motor Show in October 2005
        and
        at EVS-22 in Yokohama, Japan in December 2006. Furthermore, Toyota stated
        in a
        Business Week interview in February 2007 that it intends to introduce Li-Ion
        batteries in its 2007 and 2008 models.
  6
 
 Mr.
        Hideo
        Takeshita of the Institute of Information Technology, Ltd. has predicted
        that Li-ion cell demand for power tools, one of our planned secondary markets,
        will rise ten-fold between 2005 and 2013, to 300,000,000 cells (Takeshita
        Presentation, IIT, September 18, 2005). He estimated the total demand for
        Li-ion
        cells in 2005 was been estimated to be approximately 1.7 billion cells, which
        he
        predicted would grow to approximately 2.9 billion cells in 2013 (Takeshita
        Presentation, IIT, September 18, 2005).
 
 In
        addition to the HEV market, we intend to pursue other alternative vehicle
        battery markets as they develop, such as Electric Vehicles (EVs), and Plug-in
        Hybrid Electric Vehicles (P-HEVs).
 
 *HEVs*
 
 HEVs
        are
        cars that are powered by a combination of an electric motor and a combustion
        engine. HEVs use a gasoline engine as the primary source of propulsion, and
        an
        electric motor powered by battery provides additional power when needed. In
        addition, HEVs can use the electric motor as the sole source of propulsion
        for
        low-speed, low-acceleration driving, such as in stop-and-go traffic or for
        backing up. This electric-only driving mode further increases fuel
        efficiency.
 
 Some
        factors that we believe will drive US demand for HEVs are: (1) rapidly
        increasing prices for gasoline and related products; (2) increasing emphasis
        on
        reducing dependence on fossil fuels (including government sponsored incentives);
        (3) the resurgence of “green” or environmentally friendly thinking in large
        segments of the U.S. population; and (4) overall economic pressures that
        are
        causing many consumers to look for lower cost alternatives for basic power
        needs.
 
 The
        market for HEVs is in the early stages of its evolution and the predictions
        vary
        greatly as to what share HEVs will gain of the total automobile market. Total
        light vehicle sales in the U.S. market are approximately 17,000,000 to
        18,000,000 units per year. In 2005, an R.L. Polk analyst predicted that HEVs
        will account for up to 35% of the U.S. auto market by 2015. There
        are a number
        of
        other reports predicting HEV market share range from as low as 4% to 5% of
        the
        market in 2012 (JD Power & Associates) to 80% of the market in 2015 (Booz
        Allen Hamilton) **.** EnerDel’s
        initial primary market focus will be U.S. production operations of HEV
        manufacturers. We believe that U.S. auto makers that manufacture HEVs in
        the
        United States will prefer to source HEV components from U.S.
        suppliers.
 
 *Additional
        Battery Markets*
 
 We
        are
        exploring opportunities for our planned products in the following markets:
        uninterrupted power supply (“UPS”) and backup power, electric propulsion for
        wheel chairs and other personal mobility devices, military and aerospace
        applications and medical devices. We have defined these markets collectively
        as
        the “Specialty Market”.
 
 We
        are
        also working on the application of our Li-ion technologies in remote asset
        tracking applications, including tracking construction and military equipment,
        containers or other items considered of value that are important to track.
        Existing battery technologies for tracking devices are based primarily on
        lead-acid and NiMH batteries, which have limited life and are expensive and
        time-consuming to replace. High energy density Li-ion batteries offer longer
        life, reduced lifetime cost and potentially greater reliability.
 
 *Government
        Projects*
 
 We
        are
        pursuing government-funded battery research and development opportunities
        that
        we believe will help fund and promote our development efforts. These include
        projects funded by the DOE and the Department of Defense ("DOD"). We believe
        these projects involve development of technology that would be applicable
        to and
        relevant for our target markets, especially the HEV market and military
        applications.
  7
 
 In
        the
        first half of 2006, we were awarded a Phase 1 contract from the United States
        Advanced Battery Consortium (USABC), a part of the United States Council
        for
        Automotive Research (USCAR), an organization founded by DaimlerChrysler,
        Ford
        and General Motors that works with the Department of Energy (DOE) to strengthen
        America’s auto industry through cooperative development of advanced
        technologies. USABC pursues the development of high power and high energy
        storage technologies to provide future generations of electric, hybrid electric
        and fuel cell vehicle applications with significantly increased range and
        performance at a cost competitive with gasoline-powered vehicles. The focus
        of
        the twelve month, 50% cost-sharing Phase 1 contract that EnerDel was awarded,
        under which the USABC will provide funding to match EnerDel up to $502,000
        of
        its research and development costs, is to demonstrate that EnerDel’s technology
        meets USABC performance goals in larger format cells. EnerDel met its milestones
        under this Phase 1 contract and made scheduled interim deliveries of cells
        to
        USABC in late November 2006 and February 2007 for their testing and evaluation.
        The cells delivered in November 2006 have undergone independent testing by
        Idaho
        National Laboratory (INL). The test results from INL demonstrate that the
        technology meets or exceeds the performance goals that were set by the USABC
        for
        battery technologies for power assist hybrid electric vehicles. The test
        results
        for the samples submitted in February 2007 are expected to be received in
        April
        2007. This is the first phase of what is expected to be a three phase program.
        EnerDel anticipates it will be awarded a Phase 2 cost-sharing development
        contract in May 2007.
 
 The
        U.S.
        Congress has also appropriated $1,000,000 for use by a military facility
        to fund
        a project for EnerDel's development of asset tracking applications using
        Li-ion
        battery technologies. We have submitted a proposal to the Office of Naval
        Research (ONR), which is the military agency to which the congressional
        appropriation has been allocated. We have recently received a formal contract
        offer in the amount of $853,600. We expect to reach a final agreement on
        the
        scope of work and contract terms with ONR in April 2007 and start work as
        soon
        as the contract terms are completed.
 
 *P-HEVs*
 
 The
        P-HEV
        generally refers to a car that is based on a hybrid concept and has a battery
        that powers an electric motor, as well as a combustion engine. In contrast
        to
        the HEV, the P-HEV uses a battery as its primary energy source, and the
        combustion engine is available for situations where the battery is
        depleted.  The combustion engine then propels the car and recharges the
        battery, with the car operating as a regular HEV. In order to recharge the
        battery, the user would connect the P-HEV car to an electric outlet, either
        at
        home or at work or other places where access to the electric grid is provided,
        when the car is parked.
 
 P-HEV
        batteries will generally be much larger and will have a higher capacity than
        batteries for the HEV. As a result, batteries with high energy density cells
        (density is the overall amount of energy available for expending over time)
        are
        essential for use in P-HEVs, while batteries with high power (rapid discharge
        rate/charge capability) are favored for HEVs. A study by the HEV Working
        Group
        (led by the Electric Power Research Institute (EPRI) entitled
“Plug-In HEVs” (presented by Dean Taylor of Southern California Edison on
        August 21, 2003 to an EPRI-led HEV Working Group) estimates that a mid-size
        sedan with a combustion engine consumes over 500 gallons of gasoline annually.
        A
        comparable car with a P-HEV system with a battery offering a 60 mile range
        could
        potentially reduce the annual gasoline consumption to under 100 gallons,
        i.e. a
        reduction of over 80%. The potential for comparable reduction in use of gasoline
        was also shown for a compact sedan, mid-size SUV and full-size SUV.
 
 Li-ion
        batteries with the size and weight required to work effectively in P-HEVs
        are
        still under development, and we are also exploring solutions in this area.
        There
        is increased focus from federal and state governments on the potential of
        the
        PHEV and this is a technology that we expect will receive substantial federal
        and state funding in the coming years. General Motors announced at the Los
        Angeles Auto Show in General Motors announced at the Los Angeles Auto Show
        in
        December 2006 that they would develop a PHEV based on the Saturn Vue Green
        Line
        model for 2009. As battery technology and hybrid technology in particular
        advance, we believe that P-HEVs could present a viable growth market/product
        opportunity for EnerDel.
 
 *Potential
        Customers*
 
 Our
        potential customers are primarily industrial corporations, including major
        auto
        manufacturers. We also plan to market our products to agencies and departments
        of the U.S. government for research grants and contract work. In the battery
        business, the selling cycle is generally quite long. There is ordinarily
        an
        iterative, interactive process in which the customer tests and evaluates
        prototypes or samples, and the supplier then modifies the product
        characteristics to match the particular requirements of the customer involved.
        Due to the long battery life required by the auto manufacturers, this testing
        and evaluation could take several years and include the delivery of samples,
        prototypes and final product. In addition, the procurement cycle for auto
        makers
        is quite long due to the requirements for design and retooling associated
        with
        new auto models, as a result of the need to assure conformity with automotive
        engineering and safety requirements and the complexity of the auto manufacturing
        process in general.
  8
 
 Once
        we
        have established that our proposed products meet a customer's specifications,
        we
        must establish that we have the ability to manufacture the specific product
        in
        sufficient volumes to be cost-effective and with the required quality. This
        process accentuates the importance of product and process engineering, areas
        in
        which we believe we have a competitive advantage over other Li-ion manufacturers
        because of the high level of experience of our team of engineers and management
        in these particular areas.
 
 At
        this
        time, we cannot predict the extent to which our sales, if any, will be dependent
        on a single customer or small group of customers. However, given the limited
        number of expected HEV automotive manufacturers and our focus on them as
        our
        primary market, it is reasonable to believe that the bulk of our expected
        sales
        will be concentrated in a very small number of customers.
 
 We
        intend
        to offer our products to military and aerospace markets as well as several
        “niche” markets for asset tracking, medical and other uses, which may mitigate
        the risks of customer concentration inherent in the HEV market. The sales
        cycle
        in these segments may also be lengthy depending on the longevity requirement
        for
        the specific application. We expect customers in these segments will also
        perform thorough testing and evaluation of samples and prototypes before
        approving a final product.
 
 Customers
        for our planned asset tracking products include both government and commercial
        users. Government agencies or departments and companies that ship large amounts
        of product, have large fleets of vehicles, deal in containerized storage
        or
        transport and/or have significant assets that are widely dispersed and/or
        sensitive or valuable are all potential customers for devices (either on
        a new
        or replacement basis) that facilitate tracking of such assets.
 
 *Sales
        and Marketing*
 
 We
        plan
        to market our Li-ion battery products through internal marketing and technical
        sales personnel. Our marketing activities are currently conducted by our
        management team, but we expect to establish a business development team starting
        in 2007.
 
 We
        plan
        to hire qualified sales engineers and project managers at our Indianapolis
        facility with automotive industry experience to complement our existing team
        of
        engineers. We intend to establish customer specific and dedicated teams over
        time to address our customers’ needs in an effective manner and in anticipation
        of their requirements, consistent with automotive procurement cycle
        timing.
  EnerDel
        intends to enter into a strategic relationship with a leading Tier 1 supplier
        or
        other industrial company that is pursuing the hybrid systems business as
        a
        supplier to the automotive industry. We believe that marketing relationships
        with automotive OEMs will be an important component to our success.
 
 *Competition*  ******
 
 Competition
        in the battery industry currently is, and is expected to remain, intense
        and
        fierce. The competition ranges from development stage companies to major
        domestic and international companies, many of which have financial, technical,
        marketing, sales, manufacturing, distribution and other resources significantly
        greater than ours. We compete against companies producing lithium batteries
        as
        well as other non-rechargeable and rechargeable battery technologies. We
        compete
        on the basis of design flexibility, performance, reliability and cost. Through
        our technology partnership with EnerStruct, we have access to expertise in
        battery manufacturing that we believe would be difficult to reproduce without
        substantial time and expense in the non-rechargeable battery
        market.
  9
 
 Key
        factors that we believe will shape the HEV market in the United States and
        competition for market share include:
 
 ·
            Performance
                level of HEV Li-ion battery packs in relation to current NiMH battery
                packs  ·
            Longevity
                and reliability (estimated battery life requirements range from 8-15
                years) and recyclability  ·
            Space
                displacement and weight - auto makers are seeking to reduce size
                and
                weight in future generations of HEV
                batteries  ·
            Reputation
                for safety given the sensitivity in the auto industry to safety issues
                generally and the history of safety concerns involving non-automotive
                Li-ion battery applications  ·
            Cost
                of battery packs, both absolutely and in relation to overall automobile
                cost to the consumer  ·
            Reliability
                and convenience of supply - both U.S. and foreign auto makers have
                indicated a heightened interest in having local U.S. sources of HEV
                batteries; this is in large part due to the cost and regulatory
                difficulties of importing complete HEV battery packs into North America
                from foreign manufacturing locations and the traditional auto maker
                requirement of having several sources of supply for its basic automotive
                subsystems 
 The
        traditional Li-ion industry is dominated by major Asian battery manufacturers
        such as Matsushita (Panasonic), Sanyo, Sony, Toshiba and NEC of Japan, and
        LG
        Chemical and Samsung SDI of Korea. Each of these competitors has a significant
        investment and market share in consumer electronics (notebook computers,
        cell
        phones and other personal electronic devices), which historically has been
        the
        main market for Li-ion batteries. In addition, there are a number of smaller
        development companies such as Valence, A123 and Electro Energy (EEI) in the
        United States and Electrovaya in Canada that compete in this market. Additional
        potential competitors in Li-ion markets based in the United States are Saft,
        Eagle Picher, UltraLife and Yardney. There are also a growing number of battery
        developers in China, which have a low cost manufacturing base due to low
        labor
        costs and use of semi-automatic manufacturing process.
 
 Johnson
        Controls, Inc., one of the world’s largest suppliers of automotive subsystems to
        major auto makers, recently announced its intent to enter the Li-ion based
        HEV
        battery market, and has partnered with Saft of France. Johnson Controls/Saft
        has
        been awarded a Phase 2 contract from the USABC. This on one hand shows their
        willingness to commit resources and on the other hand the confidence USABC
        has
        in their commitment and ability to do so. A number of other companies have
        also
        indicated their intent to develop and market lithium-based batteries for
        HEV
        use **.** A123, a
        privately-held company based in Massachusetts, is pursuing a different Li-ion
        technology. They have principally pursued the power tool market, but near
        the
        end of 2006 announced that they will be pursuing the automotive market as
        well.
        A123 has recently been awarded a Phase 2 contract from the USABC. On December
        18, 2005, it was reported that Toyota would accelerate efforts to develop
        a
        reliable and cost-effective Li-ion battery to power hybrid motor vehicles
        in a
        joint venture with Panasonic EV. Currently Toyota owns a majority (60%) interest
        in the JV.
 
 Although
        other market competitors may attempt to take advantage of the growth of the
        lithium battery market, the lithium battery industry has certain technological
        and economic barriers to entry. The development of technology, equipment
        and
        manufacturing techniques and the operation of a facility for the automated
        production of lithium batteries require large capital expenditures, which
        may
        deter new entrants from commencing production.
 
 *Battery
        Market Technology Trends*
 
 We
        plan
        to operate in selected segments of the “rechargeable” battery market.
        Rechargeable batteries are distinguished from “primary” (or “non-rechargeable”
batteries, which are disposed of after their power output is exhausted or
        “multi-charge” batteries which are rechargeable for a very limited number of
        times). There are four main types of rechargeable battery technologies:
        lead-acid (also defined as Pb), nickel-cadmium (NiCd), NiMH and
        Li-ion.
 
 Rechargeable
        batteries have been in commercial use since lead-acid batteries were
        introduced over a century ago. The main market for lead-acid batteries is
        storage and output of power for starting automobiles and running vehicle
        electrical-based systems. Lead-acid batteries are also used in a number of
        other
        applications, including industrial applications such as data back-up systems
        for
        buildings.
  10
 
 NiCd
        battery technology was introduced in the 1960s and used extensively in aerospace
        applications. This technology coincided with and was eventually used in the
        development of portable electronic devices. As newer technologies have been
        introduced, the NiCd technology has been used mainly in power tools and toy
        applications. NiCd batteries are limited essentially to a single type of
        battery
        chemistry. Nickel oxyhydroxide is used as the positive electrical source
        and
        Cadmium is used as the negative electrical source.
 
 NiMH
        battery technology was introduced in the late 1980s and improved on the NiCd
        technology by replacing cadmium (a toxic material) with a metal hydride
        solution, alleviating the environmental concerns associated with cadmium
        and
        reducing the so-called “memory effect” that plagued NiCd batteries (if NiCd
        batteries were not fully discharged before recharging, they tended to lose
        capacity in subsequent recharges). NiMH provides some additional variations
        of
        battery chemistries beyond those of NiCd. NiMH and NiCd have similar performance
        characteristics; however, NiMH batteries also provide higher energy density
        than
        NiCd batteries. Energy density is a measure of how much energy can be extracted
        from a battery per unit of battery weight or volume. This feature is considered
        very important for many applications.
 
 Li-ion
        technology was introduced in 1991-92 by Sony for use in consumer electronic
        devices. The main advantage of Li-ion technology is that it provides a higher
        energy density than the nickel-based technologies, which means that a Li-ion
        cell contains more energy than a comparable nickel-based cell per unit of
        volume
        or weight. A further advantage of Li-ion technology is that it has a higher
        nominal voltage than nickel-based technologies (3.6-3.7 Volts versus 1.2
        Volts),
        which allows fewer cells to be used to produce the same amount of power.
        It is
        also more durable at elevated temperatures (greater than 40oC). Li-ion battery
        technology is capable of using a very wide variety of chemistries and therefore
        provides a more flexible solution for many different types of applications.
        Generally, Li-ion batteries provide significantly more energy per unit of
        size
        and weight than its predecessor technologies, NiMH and Ni-Cd.
 
 One
        challenge associated with Li-ion technology is that if a Li-ion battery is
        “overcharged” it can overheat and present a safety risk. Battery chemistry and
        battery systems integration are the key to preventing Li-ion batteries from
        overcharging. Batteries containing Li-ion cells are generally fitted with
        electronics that regulate the charge and discharge of the cells to ensure
        they
        occur within safety and performance defined limits. Li-ion cells must also
        be
        designed to mitigate risks if overheating occurs. EnerDel has patents for
        devices and systems that perform these functions. We believe that our experience
        with lithium electronic controllers and systems controls will enable us to
        control safety risk so that it is within industry standard limits.
 
 Various
        basic battery technologies discussed above have gradually been adopted in
        the
        same order set forth above, by the portable electronics industry, with each
        technology supplanting the previous one. For example, today virtually all
        notebook computers and cell phones use Li-ion batteries although they initially
        used NiCd batteries, progressing to NiMH before adopting Li-ion
        technology.
 
 We
        believe that a similar type of fundamental transition will take place in
        the HEV
        market. Today, virtually all HEVs use NiMH-based batteries. We expect that
        within the next decade HEV automotive manufacturers will switch completely
        to
        Li-ion because of the advantages Li-ion batteries offer over NiMH.
 
 *Intellectual
        Property*
 
 EnerDel
        has 30 patents issued in the United States, 20 patents issued in the Ukraine
        (most of which have associated international applications) and 72 pending
        patents applications, all relating to Li-ion battery or related technologies.
        The majority of these were obtained from Delphi when EnerDel was formed,
        and
        were issued during a period of several years preceding the formation of EnerDel.
        The majority of the issued patents will expire 20 years from the date of
        issuance. Of EnerDel's issued patents, one will expire in 2015, one will
        expire
        in 2018, one will expire in 2019 and the remaining patents will expire during
        the period from 2020 to 2024. EnerDel continues to file patent applications,
        as
        appropriate, to protect its interests in new inventions. We require our
        employees to sign confidentiality and work-for-hire agreements. We also enter
        into confidentiality agreements with third parties before discussing sensitive
        information with them.
 
 EnerDel
        also has rights to license high-rate battery technologies and associated
        manufacturing processes developed by its technology partner, EnerStruct,
        as
        described below.
  11
 
 *Our
        Technology Partnership with EnerStruct*
 
 We
        and
        ITOCHU Corporation formed EnerStruct, Inc., a Japanese corporation, in August
        2003 when ITOCHU Corporation also purchased 14,000,000 shares of our common
        stock. At that time, EnerStruct licensed various Li-ion battery technologies
        from ITOCHU and from Ener1 Battery. Ener1 Battery transferred these rights
        to
        EnerDel in October 2004. For the past two years, EnerStruct has been performing
        research and development for rechargeable, high-rate Li-ion battery technologies
        and associated high volume, highly automated mass production
        technologies.
 
 Since
        EnerStruct’s inception, we have worked closely with it to advance each company’s
        high-rate battery capabilities and potential market opportunities for products
        and applications incorporating those capabilities. In April 2005, we entered
        into an agreement with EnerStruct that has made it possible for us to focus
        our
        technologies on the emerging large market for HEV power modules. Under this
        agreement, EnerStruct agreed to further develop for EnerDel advanced Li-ion
        battery cell technology with high-rate capability and a highly automated,
        modular technique for manufacturing these battery cells. EnerStruct also
        agreed
        to assist EnerDel in optimizing EnerDel’s primary and secondary battery cell
        manufacturing facilities, assist EnerDel in making plans for utilizing
        EnerStruct’s high-rate Li-ion battery technology on a production scale and
        assist NanoEner in developing a pilot line using its VDS process.
 
 EnerStruct
        delivered battery cell prototypes to EnerDel in late 2005 and into 2006,
        and has
        been an important source of coated electrodes since late 2005. These coated
        electrodes have been used to assemble cells that have been tested and evaluated
        at EnerDel. The coating technology employed by EnerStruct is of very high
        quality. EnerStruct has also constructed cell production machine prototypes
        that
        are being tested in EnerStruct’s facilities. EnerDel has continued this design
        and development work with EnerStruct during 2006. EnerStruct also hired
        additional process engineers in Japan to support its efforts for us in Japan
        and
        the United States.
 
 EnerStruct
        also agreed to provide technical consulting services to EnerDel, including
        the
        services of several highly experienced process engineers who were active
        in
        developing, designing and installing advanced, automated Li-ion battery
        production facilities for some of the world’s largest manufactures, including
        Sony and Sanyo.
 
 *Research
        and Development*
 
 During
        2006 and 2005, EnerDel spent $3,780,000 and $5,570,000, respectively, on
        research and development. We believe that the technologies we are developing
        will allow us to produce batteries for both high power and high capacity.
        We are
        working with national laboratories here in the United States and worldwide
        material developers to develop their materials for mass manufacturing. We
        believe application of our own treatments to these materials will improve
        their
        suitability for our specific battery applications. We have substantial knowledge
        of coating technology, which involves the coating of electrodes with lithium
        ions and other active materials; our employees' expertise in this area dates
        back to the introduction of Li-ion technology in Japan in the early 1990s.
        We
        believe this expertise gives us a competitive advantage in this
        area.
 
 Developing
        new battery materials and chemistry combinations can require substantial
        capital. Therefore, we will seek to continue to work closely with national
        laboratories and universities in this area in order to spread the costs of
        this
        research. Our primary focus will continue to be development of commercially
        viable battery cells, emphasizing production engineering and cell
        design.
 
 *Manufacturing*
 
 Our
        goal
        is to develop a battery cell that is well-suited for mass manufacturing and
        a
        manufacturing process that is as close to fully automated as possible. This
        is
        necessary to minimize labor requirements that could materially adversely
        affect
        our ability to be cost competitive. We have adopted production technology
        that
        combines known battery manufacturing processes with those from other high
        technology production processes. In order to accomplish our business plan
        of
        becoming a leading U.S. based manufacturer of Li-ion batteries for HEVs,
        we will
        need to purchase approximately $20,000,000 of production and testing equipment
        at our Indianapolis pilot plant over the next two years.
 
 12
 
 We
        believe that our cell manufacturing process, developed through our technology
        partnership with EnerStruct, will give us a significant cost advantage due
        to
        its high degree of automation and accuracy which will enable us to manufacture
        batteries with high quality, reliability and yields (i.e., percentage of
        product
        that passes quality standards), and achieve cost competitive production and
        acceptance in the automotive market.
 
 *Engineering
        and Manufacturing Capabilities*
 
 Our
        Li-ion battery engineering team has strong skill bases in the material
        evaluation, coating process, electrode assembly process, formation process
        and
        cell design areas, which we believe are keys to developing products and
        establishing and maintaining a strong Li-ion battery manufacturing operation.
        As
        noted above, we also have access to manufacturing process engineering know-how
        through our technology partnership with EnerStruct. Our systems engineering
        experience includes all major areas of battery cell, battery pack and battery
        electronics design, testing and integration.
 
 *Testing
        and Quality Control*
 
 Consistent
        with industry practice, we perform a wide range of safety and other testing
        for
        our planned battery products. This includes testing for performance under
        nail
        penetration, bar crush, impact, overcharge, overdischarge, short circuit,
        thermal cycling, vibration, shock, altitude, salt, fog and humidity. All
        of our
        planned products will be tested to determine if they meet industry standards
        and
        safety requirements.
 
 In
        the
        battery business, particularly in the case of lithium batteries, safety is
        a
        paramount concern. The potential for batteries to overheat, explode and react
        to
        stress or impact must be carefully evaluated and eliminated to the fullest
        extent possible. Our batteries and battery packs are designed to include
        three
        distinct and independent levels of safety protection: (1) cells are designed
        so
        that internal shut-down separators cause improperly operating cells to be
        shut
        down; (2) our cells have electronic controls of cell charge and discharge
        functions, temperature monitoring and circuitry; and (3) thermal shielding
        case
        materials surround the outside of the battery pack. ****
 
 *Raw
        Materials and Suppliers*
 
 Initially,
        we expect to source many of our raw materials for our batteries from companies
        in Asia with whose quality and procedures we are most familiar. As we are
        actively pursuing development of new types of materials for use in our
        batteries, our sources of supply for such materials may change over
        time.
 
 Longer
        term, we expect to source a significant portion of our raw materials from
        U.S.
        sources. We expect to work closely with U.S. government laboratories and
        university technical laboratories in refining new materials qualifications
        and
        performance and take those requirements to U.S. suppliers. We have a strategic
        relationship with PrioVista Laboratories, Inc., a materials science and
        industrial incubator company owned by Ener1 Group, ITOCHU and EnerStruct
        that
        provides, among other things, for our right of first refusal and most favored
        customer prices and terms for new materials that PrioVista develops or acquires
        for Li-ion batteries. We expect to continue to work closely with PrioVista
        and
        select national laboratories in developing and producing new electrode and
        other
        materials that could have significant positive impact on the performance
        of our
        batteries.
 
 *Facilities*
 
 We
        have
        two Li-ion battery related facilities. One facility is located in Fort
        Lauderdale, Florida, which was used mostly for research and development of
        prototype battery products, but is no longer is use by us. Our second facility
        is in Indianapolis, Indiana, where cell development, engineering of battery
        pack/systems integration activities and prototype manufacturing are conducted.
        These operations include integration of battery cells with electronic systems
        into a complete battery pack. The Fort Lauderdale facility has three prototype
        lines and a testing laboratory, plus office space within a building of about
        22,000 square feet. The Indianapolis facility we used throughout 2006 has
        been
        designed for cell and battery manufacturing on a larger scale.
 
 Beginning
        in October 2004, EnerDel subleased 44,000 square feet of manufacturing space
        and
        12,000 square feet of office space in Indianapolis, Indiana from Delphi
        Automotive Systems, LLC for approximately $46,000 per month. Delphi has filed
        for protection under Chapter 11 of the U.S. bankruptcy statutes and rejected
        its
        prime lease in that proceeding. In February 2006, EnerDel entered into a
        month-to-month lease of the facilities with Universal Tool & Engineering
        Company, Inc. (“UTE”), the owner of the property. We are currently involved
        in litigation with UTE with respect to the lease for this facility and
        EnerDel has announced its intention to vacate the facility and relocate
        its operations. EnerDel is currently evaluating alternative facilities. We
        believe suitable locations in the same area are available; however, a relocation
        would disrupt operations and delay our product development efforts until
        new
        facilities are fully operational. In the event we are required to relocate
        EnerDel’s operations, EnerDel’s product development plan would likely be delayed
        by three to six months which could delay or affect its ability to meet the
        milestone targets contained in this development plan. Such disruptions can
        be
        minimized if the court grants EnerDel a reasonable time to vacate
        the property.
  13
 
 **Our
        Fuel Cell Business**
 
 *Overview*
 
 EnerFuel
        plans to produce fuel cell products and provide fuel cell related services,
        including fuel cell testing services. A fuel cell is an electrochemical energy
        conversion device. There are many types of fuel cells; each using a different
        chemistry. We focus primarily on the type of fuel cell known as the “PEM” or
        proton exchange membrane fuel cell. Like a battery, a fuel cell is an
        electrochemical device that converts chemical potential energy into electricity.
        Unlike a battery, the stored energy is not within the device itself but is
        within a separate fuel which is converted to electrical power within the
        fuel
        cell. As long as chemicals flow into the cell, electricity flows out of the
        cell. In contrast, all of a battery’s chemicals are stored inside the battery,
        which means that a battery eventually runs out of energy, at which time it
        is
        either disposed of or recharged from an external energy source.
 
 A
        fuel
        cell provides a direct current voltage that can be used as a source of
        electrical power. Fuel cells are usually classified by the type of electrolyte
        they use. In a PEM fuel cell, the exchange of protons from the anode to the
        cathode is achieved by a solid, water-bearing membrane electrolyte impregnated
        with a strong acid. A PEM fuel cell typically uses hydrogen and oxygen to
        generate power. The hydrogen gas diatomic molecules are split by a catalyst
        (typically platinum) to release the hydrogen’s electrons to the external circuit
        and provide power. The protons move through the water in the membrane via
        diffusion and combine with the oxygen on the other side of the membrane to
        form
        water. This reaction of the oxygen with the hydrogen occurs spontaneously
        at
        room temperature due to an oxygen ionizing catalyst on the oxygen side of
        the
        membrane. The oxygen is typically sourced from air running through the fuel
        cell.
 
 A
        single
        fuel cell produces only a small amount of voltage, so typically fuel cells
        are
        arranged in stacks to achieve useful levels of voltage. The resulting device
        is
        commonly called a “fuel cell stack.”
 
 Fuel
        cells in general and PEM fuel cells in particular, have gained increasing
        attention in recent years as a potentially inexpensive and environmentally
        safe
        alternative source of energy. Increasing costs for fossil fuels and concern
        for
        the environment continue to drive fuel cell industry development. This is
        due to
        the fact that hydrogen is a commonly occurring element that can be liberated
        from the molecules it is found in using a number of different energy sources.
        Hydrogen, for example, is in water and all hydrocarbons. A device called
        an
        electrolyzer can use the reverse of the fuel cell reaction to convert water
        to
        hydrogen using electric power. If this electric power is renewably sourced
        then
        the hydrogen is a renewable fuel that can be used to power a variety of products
        that consumers desire to use off the power grid, from cell phones to cars.
        A
        number of issues, including the high cost and increasing rarity of platinum,
        a
        key material used in fuel cells, and the lack of a hydrogen supply
        infrastructure, have slowed the use of fuel cells.
 
 We
        began
        research and development in fuel cells in September 2004 and have filed seven
        patent applications relating to fuel cell devices, systems and processes,
        one of
        which has been issued. Our fuel cell subsidiary, EnerFuel, operates primarily
        from office and industrial space in West Palm Beach, Florida with a second
        facility in Fort Lauderdale, Florida. We substantially restructured our fuel
        cell activities and operations as of January 2006, including hiring a president
        for EnerFuel who has over 10 years of fuel cell industry experience in
        management and operations.
 
 In
        2006,
        EnerFuel generated $100,000 revenue, primarily from service revenue related
        to a
        $200,000, one-year contract for the design and engineering of a fuel cell
        demonstration unit for unmanned aerial vehicles by American Science and
        Technology (AST). EnerFuel launched its first product, a fuel cell humidifier,
        in June 2006, sales of which have been minimal to date. In addition, it has
        been
        awarded a Department of Energy (DOE) and state funded matching research grant
        by
        the Florida Hydrogen Initiative (FHI) for fuel cell development of $550,000.
        Grants for research and development are offset against the costs of
        development.
  14
 
 *Planned
        Products and Services*
 
 EnerFuel
        plans to commercialize a sequence of fuel cell products as quickly as possible
        by using a building-block approach based on some common elements. EnerFuel’s
        planned products will expand on a common base, but will be designed to function
        as standalone products as well, providing a broad-based product platform
        while
        EnerFuel continues research and development of additional new products and
        services.
 
 To
        implement this strategy, EnerFuel is developing a range of fuel cell products
        and services. Products in development include fuel cell stacks and fuel cell
        stack components, fuel cell systems, components for fuel cell systems and
        integrated products containing fuel cell systems. Fuel cell stacks include
        both
        high and low temperature PEM fuel cells. A fuel cell system consists of a
        fuel
        cell and the other components required to convert chemical energy of a fuel
        into
        electricity. Integrated products are formed by adding hardware to a fuel
        cell
        system such that it is capable of providing some end-user function, such
        as an
        uninterruptible power supply (UPS). Many of our planned products are in an
        early
        stage of development and completion of prototypes will require additional
        time,
        effort and funding. However, our time-phased strategy for the development
        of
        fuel cell products and services allows us to gradually build on our
        technological capabilities and generate near term revenue and cash flow.
 
 EnerFuel
        is developing a versatile remote and/or portable wireless camera powered
        by its
        own fuel cell/chemical hydride fuel technology. Together with other power
        sources (like battery and solar power), this camera is designed to have power
        supply for up to one year of normal operations, weigh far less and cost less
        than half as much as the closest competing product. We expect to start shipping
        this product in 2007.
  EnerFuel
        is also developing what it believes will be the next generation of
        high-temperature fuel cells. These products are intended to address the fuel
        cell industry's need for fuel cells that are smaller and less costly and
        complex
        than those currently available. We believe EnerFuel’s planned high temperature
        PEM fuel cell application will be differentiated from existing fuel cells
        both
        as a result of its ability to operate at high temperatures and reduced cost
        through elimination of expensive catalyst materials.
 
 EnerFuel
        is also working on a new design for a modular PEM fuel cell. We believe this
        approach will improve two basic concerns of today’s fuel cells: reliability and
        reparability. Each cell within the overall fuel cell would be self-contained
        (not stack dependent), unlike today’s standard designs. This would also reduce
        problems in stack sealing or flow distribution. Another advantage to this
        approach is that it would enable different stack sizes with the same cell
        design. This, in turn, would limit the need to re-develop cells for each
        stack
        size and allow us to pursue many fuel cell different market segments
        simultaneously by quickly adapting different fuel cell stack configurations
        using our stack-independent fuel cells. EnerFuel plans to focus on a simple,
        compact, inexpensive design in order to make its planned products mass
        producible, allow individual cell replacement to minimize stack replacements
        and
        make the product generally more repairable and recyclable.
 
 Our
        services may include demonstration projects (such as the FHI project),
        technology development, design, fabrication, assembly and testing of fuel
        cell
        components, membrane electrode assembly ("MEA") performance and failure analysis
        and software development related to fuel cell operations.
 
 *Our
        Markets*
 
 Forecasts
        for size and growth of the markets for fuel cell products vary. We believe
        the
        overall markets for fuel cell products will experience substantial growth
        in the
        coming years. Global Information, Inc., in a study entitled “World Fuel Cell to
        2009,” published in May 2005, has estimated that overall demand for all types of
        fuel cell products combined will rise from $375 million in 2005 to $2.5 billion
        in 2009 and $13.5 billion in 2014 **.**
 
 EnerFuel
        is pursuing several emerging market sectors within the overall fuel cell
        market.
        These include the markets for portable power, auxiliary power, distributed
        power
        and backup power devices and systems. The market for portable power encompasses
        a variety of market segments from powering military equipment to powering
        OEM
        devices ranging from lawnmowers to robotics. The auxiliary power market supplies
        auxiliary power units that provide electricity used in a vehicle, such as
        a
        long-haul truck or boat, for applications other than propulsion. The distributed
        power market provides customers with the ability to generate power on-site.
        Uses
        of backup power range from providing assurance that applications will continue
        to function in the unlikely event of a blackout to augmenting unreliable
        power
        grids in many countries on a daily basis. ****
  15
  EnerFuel’s
        potential market opportunities also include the market for remote sensors
        for
        video cameras (visible, infrared, ultraviolet), weather instrumentation and
        tsunami and earthquake detection, among others.
 
 In
        the
        backup power supply market, the lack of an established hydrogen fuel supply
        infrastructure (i.e., availability of hydrogen supplies and transmission
        network) is less important as fuel is only consumed during power interruptions.
        We also believe that there is and will continue to be a high demand for fuel
        cells in nations with limited and unreliable power grids. We believe that
        fuel
        cells have several advantages over batteries in this market, including better
        energy storage, as well as advantages over internal combustion engines,
        including less noise and fumes and increased reliability.
  *Competition*
 
 There
        are
        many companies in the fuel cell business generally that are larger and/or
        have
        greater resources than EnerFuel, such as Ballard, Plug Power, UTC and ReliOn.
        Some of these companies have been in the fuel cell industry for longer then
        EnerFuel and have more available capital and greater technical, marketing,
        sales, manufacturing, distribution and other resources than we do. We believe
        that EnerFuel's competitive advantages include, in addition to those it plans
        to
        design into its proposed products discussed above, its experienced technical
        team and its building block product development approach, which we believe
        will
        make it possible for EnerFuel to get its proposed products into the market
        more
        quickly than the competition.
 
 Within
        the fuel cell market, there are companies that operate in many areas of fuel
        cell technology and others that operate in narrowly defined areas, such as
        development and marketing of fuel cell stacks or PEMs or MEAs (membrane
        electrode assemblies). EnerFuel’s competition consists of mainly pure stack or
        pure membrane companies. Unlike these companies, EnerFuel works in both stacks *and* membranes, and we believe it will be able to optimize both aspects in ways
        its
        competitors that do not operate in both sectors cannot, because of the technical
        performance connections between these two components. Stack competitors include:
        Ballard, Plug Power, UTC and ReliOn. Membrane competitors include: Gore,
        DuPont,
        DeNora, Asahi Glass and PEMEAS. We believe that PEMEAS is the only company
        with
        commercially available high temperature MEAs at this time. EnerFuel plans
        to use
        low cost materials and is researching the possibility of eliminating platinum
        as
        a catalyst which would give it a competitive advantage.
 
 We
        believe products based on EnerFuel’s technology will have several competitive
        advantages. These include:
 
 · Smaller, lighter weight, high temperature fuel cell
  · New, more attainable modular approach
  · Flexible design and easier reparability
  · Lower cost materials used in production
  · Lower cost MEA’s for EnerFuel Stacks
  · Membrane material is recycled to lower costs
 
 *Customers
        and Potential Customers*
 
 In
        June
        2006, EnerFuel launched its first product, a fuel cell humidifier. Sales
        of this
        product during 2006 were not significant. Hydrogen fuel cells produce
        electricity, heat and water. Even though water is produced in this reaction,
        the
        fuel cell membranes can dry out under certain conditions due to the increase
        in
        the temperature of the air from the heat produced by the fuel cell. Air at
        higher temperatures takes up more water, so much as to often exceed the amount
        of water produced by the fuel cell. Since water is used as a transport media
        for
        the hydrogen protons in the fuel cell membrane, the fuel cell will cease
        functioning if the membranes become too dry. On the other hand, if too much
        water is introduced into the fuel cell the air channels will flood, blocking
        the
        flow of air through the fuel cell passages and thus also ceasing fuel cell
        function. What is needed by the fuel cell is just the right amount of water
        addition. A device called a “humidifier” is typically installed in the system
        for this purpose. Some humidifiers in the past have not been reliable. This
        situation provided an opportunity for EnerFuel to demonstrate its ability
        to
        produce a reliable product. In June of 2006 two standard versions of humidifiers
        were launched into the market place and have subsequently been purchased
        by many
        of our prominent peers. EnerFuel is continuing to work with these customers
        to
        size new humidifier units for their particular needs in terms of size and
        other
        parameters. One such custom humidifier was developed and shipped to a customer
        in 2006.
  16
 
 In
        2005,
        we were notified by the Florida Hydrogen Initiative of an award to EnerFuel
        of a
        50% cost-share contract under which the Florida state government and U.S.
        Department of Energy will provide $550,000 over 18 months to fund EnerFuel's
        research and product development. EnerFuel will also be required to use the
        same
        amount of its own funds in performing the contract. The final contract was
        executed in October 2006. The contract requires EnerFuel to design and implement
        a 10kW (kilowatt) fuel cell system using the chemical energy in waste orange
        peels to power a highway rest stop on the Florida Turnpike. This program
        is
        expected to demonstrate EnerFuel’s ability to develop and deploy complex fuel
        cell systems.
 
 In
        2006,
        we were awarded a $200,000 contract by Chicago-based, American Science and
        Technology (AST) for fuel cell system design work. The contract requires
        EnerFuel to design and deliver a 100 watt high-temperature PEM fuel cell
        system
        under the Aviation Applied Technology Directorate (AATD) of the United States
        Army. The goal of that program is to develop light weight fuel cells for
        mobile
        robotics applications. EnerFuel commenced work on the one-year program in
        August
        2006. This contract represents an opportunity for EnerFuel to establish
        relationships with other technology developers, and to lay the foundation
        for
        future work in the U.S. government contract arena.
 
 EnerFuel
        has also performed a limited amount of subcontract services for a large company
        in the fuel cell sector, and has submitted several proposals for product
        development work and services. EnerFuel plans to emphasize seeking work from
        customer proposals over the next several months in order to establish a revenue
        base to fund future operations and additional product development. This is
        part
        of our overall company strategy to increase our focus on revenue while
        continuing to develop our planned future products.
 
 *Technical
        Resources*
 
 Our
        management and engineering staff has technology expertise in the following
        areas:
 
 · Proton exchange membrane fuel cell (PEMFC) membrane electrode assembly
        (MEA)
  · Fuel cell stack design
  · Fuel cell system integration
  · Fuel cell system controls development
  · Reformat gas processing
  · Fuel processing
  · Fuel cell failure analysis and mechanisms
  · Electrolyzers (membrane, hardware, controls)
 
 Our
        West
        Palm Beach facility, leased in January 2006, is fully equipped for fuel cell
        development operations. Over time we have purchased over $200,000 in fuel
        cell-specific engineering and development equipment for that
        facility.
 
 *Intellectual
        Property*
 
 EnerFuel
        has one issued patent and six pending patents, all related to fuel cell and
        related technologies. The issued patent will expire in 2025 after 20 years.
        The
        patent applications cover, among other things, intellectual property relating
        to
        method and apparatus for cold-starting of a PEM fuel cell, shut down of a
        PEM
        fuel cell, startup of a PEM fuel cell and other aspects of PEM fuel cell
        operation. EnerFuel’s development team continues to perform research and plans
        to file additional patent applications as appropriate.
 
 EnerFuel’s
        president and engineering team have developed substantial fuel cell know-how
        gained from their collective experience in fuel cell research and
        development.
  17
 
 We
        require our employees to sign confidentiality and work-for-hire agreements.
        We
        also enter into confidentiality agreement with third parties before discussing
        sensitive information with them.
 
 *Sources
        of Supply*
 
 EnerFuel
        sources fuel cell membranes from DuPont custom machined and/or molded bipolar
        plates from Imperial Custom Molding seals from E&T Plastics of Florida,
        Inc., and fittings, tubing and gages from Accutech Instrumentation. We believe
        that we can access alternate sources of supply for all of our major materials
        needs.
 
 *Research
        and Development*
 
 During
        2006 and 2005 EnerFuel spent $2,008,000 and $1,154,000, respectively, on
        research and development. During 2005, our research and development emphasized
        fuel cell control systems and similar components. In 2006, we refocused our
        research and development toward more specific products that have both near
        term
        and long term sales potential. In 2007, we will continue our focus on promising
        products including commercializing our proprietary chemical hydride process
        for
        portable hydrogen generation.
 
 *Facilities*
 
 EnerFuel
        leases two facilities: its headquarters in West Palm Beach, Florida (7,160
        square feet) and facilities in Fort Lauderdale, Florida (6,413 square feet).
        Both facilities have offices and fuel cell specific laboratory space and
        equipment. The West Palm Beach facility also has a complete machine shop
        and is
        equipped with routed de-ionized water, cooling water, clean compressed air,
        hydrogen and other gases.
  **Our
        Nanotechnology Operations**
 
 *Overview*
 
 Our
        nanotechnology operations currently consist of targeted research and development
        efforts to develop our patent pending vapor deposition and solidification
        (VDS)
        process. VDS is a manufacturing process for depositing materials in
        microscopically thin layers on substrates used to form manufactured components.
        Initially, we have been testing our VDS process for use in building lithium
        battery electrodes, including the high-rate battery technology which we have
        been developing with EnerStruct. The VDS process is designed to facilitate
        precise deposition of the manufacturing materials so as to increase efficiency
        and speed of production while also increasing performance of the battery
        electrode by enhancing conductivity and producing increased electrical
        current.
 
 Our
        VDS
        process is implemented with computer controls to monitor and regulate key
        aspects of manufacturing at a precise micro-level. We believe that, if
        successful, this process may be useful in production of many other types
        of
        products in addition to battery components. Generally, control of the
        micron-level aspects of manufacturing using nanotechnology deposition processes
        allows for production of components that have special properties, facilitating
        stronger, lighter and more uniform coatings.
 
 We
        have
        set up a prototype manufacturing and testing facility in Fort Lauderdale,
        which
        has produced samples of lithium battery electrodes for evaluation internally
        and
        externally.
 
 We
        are
        also working at NanoEner to develop a new generation of electrodes capable
        of
        delivering a super high rate of discharge while reducing the weight of the
        electrodes. These nano-electrodes do not require binding and conductive
        additives which are commonly used in the industry; instead, they use
        nano-structures to accomplish the bonding. We expect that these electrodes
        will
        have about 30% more energy and deliver it faster than the conventional
        electrodes. In addition, the electrodes are expected to deliver excellent
        mechanical strength, improved charge time, lower weight and higher safety;
        all
        qualities that we believe will greatly benefit the consumer.
  *Application
        of Nanotechnology to Batteries*
 
 We
        have
        researched the application of our VDS technology to production of batteries
        on a
        prototype basis. Our VDS process uses a special chamber into which we put
        a
        battery “substrate” (which is the material upon which we deposit materials to
        build battery electrodes). Through a highly calibrated and flexible computer
        control program that allows micromanagement of key process parameters, we
        are
        able to precisely control the formation of battery electrodes. The VDS process
        makes it possible to add the electrode materials and precisely control their
        structure on the substrate for a smoother, more even and more complete coverage
        of the substrate surface, with less surface imperfections. We believe that
        this
        process produces electrodes that have higher conductivity of electric current,
        which results in greater power output from the electrode. We believe that
        the benefits of this production process for battery electrodes may
        include:
  ·Efficient
          use of electrode materials to minimize waste
 18
 
  · Manufacturing
            at the “nano level” (<100 nanometers) for greater
            precision
  · Low
            cost, rapid production of high-rate battery electrodes
  · Higher
            possible battery discharge rates due to greater transmission of
            current
  · Reduced
            costs due to (i) reduction of additives and process steps (i.e., coating,
            plasticizers, baking) and (ii) fewer cells required in multi-cell
            packs
  · Higher
            average current
  · Excellent
              adhesion and surface characteristics of electrodes
 *Intellectual
        Property*
 
 We
        have
        three nanotechnology-based patent applications pending, including one covering
        our VDS “thin films” deposition process. We have also licensed our VDS
        technology to EnerStruct for nonexclusive use in Japan. One of the patent
        applications is a utility application, and the other two are provisional
        applications.
 
 We
        require our employees to sign confidentiality and work-for-hire agreements.
        We
        also enter into confidentiality agreement with third parties before discussing
        sensitive information with them.
 
 *Competition*
 
 There
        are
        numerous companies involved in the nanotechnology field and the term
“nanotechnology” has a broad range of descriptions. We have defined our
        participation in this field initially in terms of the above-described efforts
        in
        lithium battery development. We believe that among the other companies
        participating in the nanotechnology field, there are many with greater
        financial, technical, marketing, sales, manufacturing, distribution and other
        resources than our company.
 
 *Research
        and Development*
 
 During
        2006 and 2005 NanoEner spent $654,000 and $791,000, respectively, on research
        and development to pursue technologies for nanomaterials and nanomanufacturing,
        focusing on applying nanotechnology to improving the performance of Li-ion
        battery electrodes.
 
 *Facilities*
 
 NanoEner
        leases 1,720 square feet of industrial and office space approximately one
        mile
        from our headquarters in Fort Lauderdale, Florida. This space is used for
        NanoEner’s prototype equipment and research and development.
  **Government
        Regulation and Approvals**
 
 Certain
        aspects of production and transportation of batteries and fuel cells and
        their
        components or raw materials are regulated on the international, federal,
        state,
        and local levels, as well as by private commercial organizations. Transportation
        of battery products is regulated by the U.S. Department of Transportation
        and
        other governmental departments and agencies. Compliance with applicable
        regulations is required before we can ship our products on a commercial basis.
        We may need to obtain approvals for the storage or transportation of flammable
        or hazardous fuels before we are able to deliver some of our planned fuel
        cell
        systems. Future legislation and/or other regulation concerning the
        transportation and storage of hydrogen fuel and other fuels associated with
        fuel
        cells is expected in the future.
  19
 
 We
        may be
        required to obtain certifications on our products and systems from
        product-safety testing and certification organizations such as “QPL” (Qualified
        Parts Laboratory - Crane, Indiana) and “UL” (Underwriters Laboratory), before we
        can sell them generally or to specific markets. Certain certifications may
        not
        be required for products imbedded into systems (e.g., for certain OEM
        applications).
 
 Future
        legislation and/or other regulation concerning the transportation and storage
        of
        hydrogen fuel and other fuels associated with fuel cells are expected in
        the
        future. As a result of any such legislation or regulation, we may need to
        obtain
        governmental approval for the storage or transportation of flammable or
        hazardous fuels before transporting fuel cell systems to our
        customers.
 
 In
        addition to the foregoing, we must comply with all applicable environmental
        and
        safety regulations. These regulations may become more stringent, increasing
        the
        cost of compliance and the risk of failure to comply. In particular, there
        are
        environmental laws that provide for strict, unlimited liability in connection
        with releases of “hazardous substances.” In the manufacturing of batteries and
        components and materials for batteries (and to a lesser extent in our fuel
        cell
        and nanotechnology operations), we may use hazardous substances that are
        regulated under these environmental laws. Our battery operations are currently
        classified as a “small quantity generator of hazardous waste” and must operate
        in accordance with the applicable regulations. Air emissions from our battery
        operation are regulated under an operating permit issued at the local level.
        Compliance requirements are identified in the permit. At this time, our costs
        for maintaining environmental, health and safety compliance are not
        significant.
  **Additional
        Information**
 
 We
        electronically file reports with the Securities and Exchange Commission (the
        "SEC"), including annual reports on Form 10-KSB, quarterly reports on Form
        10-QSB, current reports on Form 8-K and amendments to such reports. The
        reports we file with or furnish to the SEC are available free of charge on
        our
        Internet web site as soon as reasonably practicable after we electronically
        file
        such material with, or furnish it to, the SEC. The
        public may also read and copy any materials that we file with or furnish
        to the
        SEC at the SEC's Public Reference Room at 450 Fifth Street, N.W., Washington,
        D.C. 20549. The public may obtain information on the operation of the Public
        Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also maintains
        an
        internet site that contains reports, proxy and information statements, and
        other
        information regarding issuers that file electronically with the SEC at *http://www.sec.gov* .
  20
  **ITEM
        2: PROPERTIES**
 
 *Description
        of Properties*
 
 Our
        headquarters are located in an office building in Fort Lauderdale, Florida
        under
        a lease that became effective in February 2004. The facility was finished
        to our
        office layout specifications. The lease of this 8,183 square foot office
        space
        expires February 28, 2009. The monthly rent plus common area charges currently
        total approximately $19,000 and are subject to annual increases.
 
 In
        2005,
        we established a corporate office in New York City, comprised of approximately
        6,600 square feet under a lease with monthly rent of $35,520, including
        operating expenses. Effective February 1, 2006, Ener1 Group assumed the payment
        obligations under this lease. In January 2007, the lease was terminated without
        obligation.
 
 On
        February 5, 2007, Ener1 entered into a short-term lease for office space
        in New
        York City for monthly rent of $6,750 on a month-to-month lease with a minimum
        lease term of three months. The rent expense is shared equally between
        Ener1 and Ener1 Group such that each party pays $3,375 of the monthly
        rent.
 
 Ener1
        Battery owns a battery research and development facility, consisting of land
        and
        a 22,000 square foot building located in Fort Lauderdale, Florida. The building
        is in good condition and has been modified to suit our operations. The Fort
        Lauderdale facility has been used exclusively by EnerDel under a lease entered
        into in October 2004. In the second quarter of 2006, EnerDel moved its Fort
        Lauderdale operations and personnel to its Indianapolis, Indiana facility.
        Ener1
        Battery has guaranteed the performance of our obligations under our senior
        secured convertible debentures due January 2009 (the "2004 Debentures").
        The
        Fort Lauderdale land, building and equipment are pledged as collateral to
        secure
        the obligations of Ener1 Battery under this guarantee. As of December 31,
        2006,
        $19,700,000 in aggregate principal amount of the 2004 Debentures was
        outstanding.
 
 Beginning
        in October 2004, EnerDel subleased 44,000 square feet of manufacturing space
        and
        12,000 square feet of office space in Indianapolis, Indiana from Delphi
        Automotive Systems, LLC for approximately $46,000 per month. Delphi has filed
        for protection under Chapter 11 of the U.S. bankruptcy statutes and rejected
        its
        prime lease in that proceeding. In February 2006, EnerDel entered into a
        verbal
        month-to-month lease of the facilities with Universal Tool & Engineering
        Company, Inc. (“UTE”), the owner of the property. See “Legal Proceedings” for
        discussion of the lawsuits between us and UTE.
 
 EnerFuel
        leases 7,600 square feet of industrial and office space in West Palm Beach,
        Florida under a lease that began in January 2006 and expires December 31,
        2007.
        We have the option to extend the lease for two renewal terms of five years
        each.
        This space is used primarily for research and development of fuel cell products
        and also serves as EnerFuel’s administrative offices and primary services
        facility. EnerFuel also leases approximately 3,200 square feet of industrial
        and
        office space approximately one mile from our headquarters in Fort Lauderdale,
        Florida for $4,700 per month. This lease expires on August 30, 2008. This
        space
        is used primarily for certain hardware development projects.
 
 NanoEner
        leases 1,720 square feet of industrial and office space approximately one
        mile
        from our headquarters in Fort Lauderdale, Florida for a monthly rent of $1,900.
        This space is used for NanoEner’s prototype equipment and research and
        development. The lease expired in July 2006 and space is now leased on a
        month-to-month basis.
 
 *Investment
        Policies*
 
 We
        do not
        have specific limitations on the percentage of our assets that may be invested
        in any one investment or any specific limitation on the types of investments
        we
        may make. There is no specific shareholder vote requirement regarding changes
        in
        this policy. Generally, we acquire assets primarily for operating purposes
        and
        not for capital gains or income *per
        se* .
  21
  **ITEM
        3: 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.
 
 Beginning
        in October 2004, EnerDel subleased 44,000 square feet of manufacturing space
        and
        12,000 square feet of office space in Indianapolis, Indiana from Delphi
        Automotive Systems, LLC. Delphi has filed for protection under Chapter 11
        of the
        U.S. bankruptcy statutes and rejected its prime lease in that proceeding.
        In
        February 2006, EnerDel entered into a month-to-month lease of the facilities
        with Universal Tool & Engineering Company, Inc. (“UTE”), the owner of the
        property, and began to negotiate the terms of a new, direct five-year lease
        with
        UTE. In January 2007, EnerDel reached a tentative agreement with UTE on the
        financial terms of a lease and began working with UTE on the terms of a
        definitive lease agreement.
 
 On
        March
        12, 2007, 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.
 
 The
        unjust enrichment and breach of contract claims both relate to leasehold
        improvements that UTE made for Delphi under the prime lease between UTE and
        Delphi. Under its sublease with Delphi, EnerDel had an obligation to pay
        approximately $487,000 of the cost of such improvements to Delphi on January
        24,
        2007, the end of the sublease term. We contend that when Delphi rejected
        the
        sublease (and the prime lease) in 2006 as part of its bankruptcy proceedings,
        the obligation to pay Delphi $487,000 became null and void. UTE claims that
        it
        entered into an oral contract directly with EnerDel pursuant to which EnerDel
        agreed to pay $487,000 directly to UTE. We dispute this allegation and believe
        it is unlikely that UTE will prevail on this claim. In addition, we believe
        it
        is unlikely that UTE will prevail on its unjust enrichment and breach of
        contract claims.
 
 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
        has
        filed a motion indicating its intent to vacate the property and relocate
        its
        operations, and requesting unspecified damages.
 
 EnerDel
        is currently evaluating alternative facilities. We believe suitable locations
        in
        the same area are available; however, a relocation would disrupt operations
        and
        delay our product development efforts until new facilities are fully
        operational. In the event we are required to relocate EnerDel’s operations,
        EnerDel’s product development plan would likely be delayed by three to six
        months which could delay or affect its ability to meet the milestone targets
        contained in this development plan. Such disruptions can be minimized if
        we are
        granted reasonable time to vacate the property.
 
 **ITEM
        4: SUBMISSION OF MATTERS TO A VOTE FOR SECURITY HOLDERS**
 
 **None**
  22
  **PART
        II**
  **ITEM
        5: MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
        SMALL BUSINESS ISSUER PURCHASE OF EQUITY SECURITIES**
 
 Since
        April 6, 2006 our stock has been listed on the Over-the-Counter Bulletin
        Board.
        Previously, from December 22, 2005 to April 6, 2006, the principal market
        for
        our stock was the Pink Sheets. Prior to that, the principal market for our
        stock
        was the Over-the-Counter Bulletin Board during the period from October 2001
        through December 21, 2005. On April 3, 2007, the closing price of our common
        stock on the Over-the-Counter Bulletin Board was $0.29 per share.
 
 The
        OTC
        Electronic Bulletin Board is a regulated quotation service that displays
        real-time quotes, last-sale prices and volume information in OTC equity
        securities.
 
 The
        following table sets forth the high and low prices for our common stock for
        the
        periods from January 1, 2004 through December 21, 2005 and from April 6,
        2006
        through December 31, 2006, on the OTC Electronic Bulletin Board, and
        as reported by the OTC Pink Sheets for the period from December 22,
        2005 through April 6, 2006. The quotations reflect inter-dealer prices, without
        retail mark-up, mark-down or commission and may not represent actual
        transactions.
 
 **Year**
              
              **Fiscal
                  Quarter Ended**
              
              **High**
              
              
              **Low**2004
              
              March
                  31, 2004
              $
              2.00
              
              $
              0.65June
                  30, 2004
              
              1.00
              
              
              0.45September
                  30, 2004
              
              0.75
              
              
              0.42December
                  31, 2004
              
              1.06
              
              
              0.422005
              
              March
                  31, 2005
              
              0.97
              
              
              0.53June
                  30, 2005
              
              0.64
              
              
              0.28September
                  30, 2005
              
              0.64
              
              
              0.13December
                  30, 2005
              
              0.60
              
              
              0.062006
              
              March
                  31, 2006
              
              0.45
              
              
              0.13June
                  30, 2006
              
              0.50
              
              
              0.28September
                  30, 2006
              
              0.50
              
              
              0.23December
                  31, 2006
              
              0.35
              
              
              0.19
  As
        of
        March 31, 2007, there were 438,991,830 shares of common stock outstanding
        held
        by approximately 300 shareholders of record. The number of shareholders of
        record does not include beneficial owners of common stock whose shares are
        held
        in the names of various dealers, clearing agencies, banks, brokers and other
        fiduciaries.
 
 We
        have
        not paid any cash dividends during the last two fiscal years and do not
        anticipate paying any cash dividends on our common stock.
 
 The
        terms
        of our senior secured convertible debentures restrict our ability to pay
        dividends on our common stock until we have met certain milestones set forth
        in
        the debentures or until less than $100,000 in aggregate principal amount
        of the
        debentures remains outstanding.
  23
  **ITEM
        6: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
        OPERATIONS**
 
 *The
        following Management’s Discussion and Analysis of Financial Condition and
        Results of Operations contain ”forward-looking statements” within the meaning of
        Section 27A of the Securities Act, and Section 23E of the Securities Exchange
        Act of 1934, as amended,* including statements *about our beliefs and expectations. There are many risks and uncertainties
        that
        could cause actual results to differ materially from those discussed in the
        forward-looking statements. Potential factors that could cause actual results
        to
        differ materially from those discussed in any forward-looking statements
        include, but are not limited to, those stated below under the headings
“Cautionary Statement Concerning Forward-Looking Statements” and “Risk Factors”
as well as those described from time to time in our filings with the Securities
        and Exchange Commission* .
 
 *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 filings with
        the
        Securities and Exchange Commission and the consolidated financial statements
        and
        the related notes included in this Annual 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.
 
 In
        June
        2005, we restructured EnerDel's operations based on a change in strategy
        to
        focus development and marketing efforts on U.S.-based production of Li-ion
        batteries for U.S. HEV manufacturing customers. This change in strategy was
        based on our determination that the high-rate-of-discharge battery technology
        and automated manufacturing process technologies we were able to acquire
        from
        EnerStruct would enable us to pursue the emerging market for HEV batteries
        more
        effectively. At this time, we discontinued all work on the Bellcore technology
        EnerDel had acquired from Delphi, which we determined EnerDel could not
        commercialize on a profitable basis due to the cost and complexity of the
        manufacturing process required.
 
 As
        a
        result of the decision in 2005 to refocus EnerDel's technology development
        efforts on Li-ion batteries for the HEV market and to cease using certain
        manufacturing equipment, we wrote down the value of these manufacturing assets
        and incurred a charge of $10,527,000. We also expensed a substantial amount
        of
        battery-related equipment in 2004 as a result of our determination that certain
        production equipment would be used for research and development ("R&D")
        purposes only.
 
 During
        the second half of 2005, we decided to consolidate our development engineering
        and production activities in our Indianapolis, Indiana facility. During the
        last
        year we built a pilot production line to produce sample cells and we intend
        to add additional equipment to produce completed products for HEVs. In
        order to execute these plans, we currently expect that during the next two
        years
        we will need to make capital expenditures of $20,000,000 and increase our
        research and development expenses to approximately $10,000,000 annually.
        We will
        need to raise a minimum of $40,000,000 over the next two years to implement
        this
        strategy, plus an additional $20,000,000 for administration and financing
        costs.
        We intend to raise this 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.
 
 We
        restructured EnerFuel's fuel cell business plan and operations in January
        2006.
        EnerFuel now focuses on developing what it believes will be the next generation
        of high-temperature fuel cells intended to address the fuel cell industry's
        need
        for fuel cells that are smaller and less costly and complex. EnerFuel has
        hired
        a president with ten years of experience building a start-up fuel cell company
        and expanded its development team by hiring engineers with experience at
        a major
        fuel cell industry participant. As part of the restructuring, EnerFuel also
        acquired additional fuel cell development equipment and leased a fuel cell
        development facility set up specifically for fuel cell operations and has
        moved
        most of its operations there. EnerFuel is pursuing fuel cell related
        opportunities in the portable power, auxiliary power, distributed power and
        backup power markets.
  24
 
 NanoEner,
        our nanotechnology subsidiary, has built prototype equipment that utilizes
        our
        patent pending vacuum deposition and solidification (“VDS”) process for
        depositing nanostructured materials onto battery electrodes as part of the
        battery cell manufacturing process. We are currently evaluating NanoEner's
        operations and business prospects in order to determine whether to continue
        to
        pursue our nanotechnology operations as a separate line of business. We are
        also
        evaluating NanoEner’s capabilities of providing nanotechnology to our other
        business units.
 
 Currently,
        we generate minimal revenue from sales of EnerFuel’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.
 
 We
        need
        additional capital to fund our current and planned operations and intend
        to
        raise additional financing. During 2006, Ener1 Group, our controlling
        shareholder, funded our operations through the exercise of warrants,
        purchase of convertible notes and loan advances in order to provide us with
        working capital. We received the following funds from Ener1 Group during
        2006:
        $5,520,000 upon the exercise of warrants to purchase Ener1 common stock,
        $6,455,000 from the proceeds of convertible notes issued by Ener1 and loan
        advances of $4,428,000.
 
 In
        2007,
        Ener1 Group has continued to fund our operations on a limited basis through
        the
        exercise of warrants and loan advances. Between January 1, 2007 and April
        2,
        2007, we received the following funds from Ener1 Group: $5,205,000 upon the
        exercise of warrants to purchase Ener1 common stock, and loan advances of
        $2,250,000. In consideration for the exercise by Ener1 Group of the warrants
        prior to their expiration dates, we lowered the exercise prices of these
        warrants.
 
 We
        have issued
        subordinated, convertible notes to Ener1 Group in the aggregate amount of
        $11,960,000, representing our obligation to repay a portion of the amounts
        advanced to us by Ener1 Group during 2006 and 2007. The principal amount
        of
        these notes includes financing fees of $600,000. These notes bear interest
        at
        the rate of 10% per annum. All interest accrues until the maturity of the
        notes
        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 our obligations
        under
        the senior secured convertible debentures due 2009 (“the Debentures”)
        have been
        satisfied. The notes are subordinated to the rights of the holders of our
        Debentures. Once all of our obligations under the Debentures have been
        satisfied, the notes will be convertible at Ener1 Group's option into 23,920,000
        shares of Ener1 common stock at the conversion price of $0.50 per share.
        Ener1
        Group may accelerate the amounts due under the notes if none of the Debentures
        are outstanding and certain bankruptcy events occur with respect to our company.
 
 In
        connection with these notes, we issued to Ener1 Group immediately exercisable
        warrants to purchase up to 9,000,000 shares of our common stock at an exercise
        price of $0.40 per share, immediately exercisable warrants to purchase up
        to
        38,000,000 shares of our common stock at an exercise price of $0.50 per share
        and immediately exercisable warrants to purchase up to 27,000,000 shares
        of our
        common stock at an exercise price of $0.60 per share. These warrants have
        a
        five-year term.
 
 Ener1
        Group has advanced us an additional $2,428,000 during 2006 and 2007. We have
        not
        yet established, the terms upon which we will repay these funds to Ener1
        Group.
 
 We
        have
        no commitment from Ener1 Group to provide any further funding to
        us.
 
 Ener1
        Group owns approximately 86% of our outstanding common stock and five of
        our
        directors and four of our executive officers are affiliated with Ener1 Group.
        The above-described financing transactions were approved by a committee of
        the
        independent members of our board of directors.
 
 Our
        consolidated financial statements included in this Annual Report 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 $191,944,000 and
        a
        working capital deficit of $13,735,000 as of December 31, 2006. 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. Management believes that our ability to raise additional funds for
        our
        operations and further execute our business plan has been adversely affected
        by
        our previous inability to sell securities in the public markets, or keep
        the
        registration statements registering the resale of certain securities effective,
        as a result of the need to restate our financial statements during 2006,
        as
        described below.
  25
 
 The
        terms
        of the Registration Rights Agreements executed in connection with the issuance
        of our 5% Senior Secured Convertible Debentures due 2009, issued in January
        2004
        (the “2004 Debentures”) and our 7.5% Senior Secured Convertible Debentures due
        2009, issued in March 2005 (the “2005 Debentures”) required us to register the
        resale of the common stock underlying the 2004 Debentures and associated
        warrants until January 20, 2006 and requires us to register the resale of
        the
        common stock underlying the 2005 Debentures and associated warrants until
        March
        14, 2007. In addition, the Registration Rights Agreement for the 2005
        Debentures requires us to maintain a listing for our common stock on the
        OTC
        Bulletin Board or major exchange. If either of those registration statements
        were not available for use at any time during the required periods or we
        failed
        to maintain the required stock listing, we were required to make certain
        payments to the purchasers of the 2004 and/or 2005 Debentures, as the case
        may
        be (the “registration delay expenses”).
 
 The
        registration statement for the 2005 Debentures was not available for use
        from
        November 21, 2005 through September 8, 2006, and the registration statement
        for
        the 2004 Debentures was not available for use from November 21, 2005 through
        September 12, 2006 (the required registration period for the 2004 Debentures
        and
        resulting accrual of registration delay expenses ended on January 20, 2006).
        As
        a result of our failure to file timely reports with the Securities and Exchange
        Commission, our stock was delisted from the OTC Bulletin Board from December
        22,
        2005 to April 6, 2006. As a result of these events, as of December 31, 2006
        we
        had incurred a total of $2.7 million in registration delay expenses under
        the
        2004 and 2005 Debentures.
 
 As
        of
        April 4, 2007, $1,600,000 of the registration delay expenses have been 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. The remaining amount
        owed
        to the holder for registration delay expenses is $145,000. On April 4, 2007,
        the
        holder agreed to continue to forbear until May 4, 2007 from taking any action
        with respect to the remaining $145,000 of registration delay expenses owed
        to
        this holder if we remain in compliance with the Forbearance Agreement during
        this time.
 
 As
        of
        April 4, 2007, in addition to the $145,000 owed to the holder described above,
        we have not paid registration delay expenses of $926,000 to the remaining
        holders of the 2004 and 2005 Debentures. We have not entered into a forbearance
        agreement with, nor have we received a default notice from, any of the remaining
        holders. See “Risk Factors - We have not made certain payments required under
        our senior secured convertible debentures and the holders of such debentures
        may
        declare a default under the debentures.”
 
 ***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.
 
 *Accounting
        for Derivative Instruments*
 
 Statement
        of Financial Accounting Standard (“SFAS”) No. 133, “Accounting for Derivative
        Instruments and Hedging Activities,” as amended, requires all derivatives to be
        recorded on the balance sheet at fair value. These derivatives, including
        embedded derivatives in our structured borrowings, are separately valued
        and
        accounted for on our balance sheet. Fair values for exchange-traded securities
        and derivatives are based on quoted market prices. Where market prices are
        not
        readily available, fair values are determined using market based pricing
        models
        incorporating readily observable market data and requiring judgment and
        estimates.
  26
 
 The
        pricing model we use for determining fair values of our derivatives is the
        Black-Scholes Pricing Model. Valuations derived from this model are subject
        to
        ongoing internal and external verification and review. The model uses
        market-sourced inputs such as interest rates, exchange rates and option
        volatilities. Selection of these inputs involves management’s judgment and may
        impact net income.
 
 In
        September 2000, the Emerging Issues Task Force issued EITF 00-19, "Accounting
        for Derivative Financial Instruments Indexed to and Potentially Settled in,
        a
        Company's Own Stock" ("EITF 00-19"), which requires freestanding contracts
        that
        are settled in a company's own stock, including warrants to purchase common
        stock, to be designated as an equity instrument, asset or a liability. Under
        the
        provisions of EITF 00-19, a contract designated as an asset or a liability
        must
        be carried at fair value on a company’s balance sheet, with any changes in fair
        value recorded in the company’s results of operations. A contract designated as
        an equity instrument must be included within equity, and no fair value
        adjustments are required. In accordance with EITF 00-19, in December 2005,
        we
        determined that several of the outstanding warrants to purchase our common
        stock
        and the embedded conversion feature of several of our financial instruments,
        including our 2004 Debentures and 2005 Debentures, should be separately
        accounted for as liabilities. We had not classified these derivative liabilities
        as such in our historical financial statements. In order to reflect these
        changes, we restated our financial statements for the years ended December
        31,
        2004 and 2005 to record the fair value of these warrants and conversion features
        on our balance sheet and record unrealized changes in the values of these
        derivatives in our consolidated statement of operations as “Gain (loss) on
        derivative liabilities.”
 
 We
        use
        the Black-Scholes pricing model for determining the fair value of our warrant
        derivative liabilities and the conversion feature of the preferred stock.
        We use
        a lattice valuation model to value the compound embedded derivative features
        in
        the 2004 Debentures and 2005 Debentures. As a result, we report the value
        of
        these derivatives as current liabilities net on our balance sheet and we
        report
        changes in the value of these derivatives as non-operating gains or losses
        on
        our statement of operations. The value of derivatives is required to be
        recalculated (and resulting non-operating gains or losses reflected in our
        statement of operations and resulting adjustments to the associated liability
        amounts reflected on our balance sheet) on a quarterly basis.
  *Share-Based
        Payments*
  Effective
        January 1, 2006, Ener1 adopted the fair value recognition provisions of SFAS
        No.
        123R, “Share-Based Payment,” and related interpretations (“SFAS 123R”) using the
        modified-prospective transition method. Accordingly, results for the prior
        periods have not been restated. Under that method, compensation cost recognized
        in 2006 includes (a) compensation costs for all share-based payments
        granted prior to, but not yet vested as of, December 31, 2005 based on the
        grant
        date fair value estimated in accordance with the original provisions of SFAS
        123
        and (b) compensation cost for all share-based payments granted on or
        subsequent to January 1, 2006, based on the grant-date fair value estimated
        in
        accordance with the provisions of SFAS 123R. Compensation cost is being
        recognized on a straight-line basis over the requisite service period for
        the
        entire award in accordance with the provisions of SFAS 123R.
 
 *Accounting
        for Long-Lived Assets*
 
 We
        account for the impairment and disposition of long-lived assets in accordance
        with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived
        Assets.” In accordance with SFAS No. 144, long-lived assets are reviewed for
        impairment whenever events or changes in circumstances indicate that the
        carrying amount of the asset may not be recoverable. An asset is considered
        impaired if the sum of the undiscounted cash flows we estimate will be generated
        by that asset is less than their carrying value.
 
 **Results
        of Operations for Years Ended December 31, 2006 and 2005**
 
 *Net
        income (loss)* .
        We
        reported a net loss of $41,305,000 for the year ended December 31, 2006,
        a
        decrease of $69,909,000 when compared to net income of $28,604,000 for the
        year
        ended December 31, 2005.
  27
 
 Our
        net
        loss for the year ended December 31, 2006 includes a loss on derivative
        liabilities of $146,000 and our net income for the year ended December 31,
        2005
        includes a gain on derivative liabilities of $70,849,000. The decrease in
        gain on derivative liabilities of $70,995,000 accounts for substantially
        all of
        the year-over-year difference in net income (loss). The gain on derivative
        liabilities in 2005 resulted from non-cash changes in the accounting value
        of
        freestanding and embedded derivative liabilities, primarily due to declines
        in
        the market price of our common stock.
  *Losses
        from operations* .
        We
        reported losses from operations of $26,410,000 for the year ended December
        31,
        2006, a decrease of $6,739,000 when compared to losses from operations of
        $33,149,000 for the year ended December 31, 2005. The decrease in operating
        losses was attributable primarily to a $12,660,000 decrease in research and
        development expenses, partially offset by a $6,068,000 increase in general
        and
        administrative costs. We had no significant sales from continuing operations
        in
        2005 or 2006. Sales reported primarily related to sales of fuel cell services.
 
 *Research
        and development (“R&D”) expenses.* Our
        R&D expenses were $6,442,000 and $19,042,000 for the years ended December
        31, 2006 and 2005, respectively. R&D expenses for 2005 include a charge of
        $10,527,000 for the **** value
        of
        battery production assets that were charged to R&D expenses as a result of our
        decision in 2005 to dedicate our Fort Lauderdale battery plant to R&D
        activities and
        a
        charge of $1,000,000 for costs associated with a research and development
        contract with EnerStruct, Inc. Exclusive of these charges, R&D expenses
        decreased $1,073,000, or 14%, from $7,515,000 in 2005 to $6,442,000 in 2006.
        This decrease primarily resulted from decreased R&D activities related to
        EnerDel’s lithium-ion battery development activities.
 
 R&D
        expenses for fiscal 2006 included $3,780,000 of expenses incurred in connection
        with our battery business, $2,008,000 of expenses incurred in connection
        with
        our fuel cell business, and $654,000 of expenses incurred in connection with
        our
        nanotechnology business. R&D expenses for fiscal 2005 included $5,570,000 of
        expenses incurred in connection with our battery business, $1,154,000 of
        expenses incurred in connection with our fuel cell business, and $791,000
        of
        expenses incurred in connection with our nanotechnology business. Overall,
        R&D materials and equipment expense decreased $1,003,000 from $1,848,000 in
        2005 to $875,000 in 2006.
  *General
          and administrative (“G&A”) expenses.* G&A
          decreased $3,132,000, or 23%, to $10,477,000 in 2006 compared to $13,609,000
          in
          2005. This decrease was due to $1,447,000 lower salaries,
          bonuses and related benefits for executive management and cost
          containment efforts under which expenses for outside services decreased
          $381,000, travel expenses decreased by $323,000 and insurance decreased
          by
          $214,000. In addition, downsizing and disposal activities in 2006 were
          $311,000
          lower than in 2005.
 
 *Warrant
          modification expense* .
          Warrant
          modification expense of $9,200,000 for the year ended December 31, 2006
          resulted
          from modifications
          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.
 *Provision
        for income taxes.* The
        effective tax rate in 2006 and 2005 was zero percent. The gain on derivative
        liability is not considered income for federal income tax purposes. As a
        result,
        we reported a net operating loss (“NOL”) for tax purposes, and the NOL was
        entirely offset by an increase in the deferred tax asset valuation allowance.
 
 *Interest
        expense.* Interest
        expense was $10,376,000 and $9,936,000 in 2006 and 2005, respectively, an
        increase of $440,000, or 4%. Interest payments were $3,680,000 and $3,786,000
        for fiscal 2006 and 2005, respectively; non-cash interest expense related
        to the
        amortization of financing costs and bond discounts was $5,027,000 and $6,140,000
        for fiscal 2006 and 2005, respectively; and non-cash interest expense related
        to
        accrued interest for convertible notes and advances due to Ener1 Group was
        $1,669,000 and $0 for fiscal 2006 and 2005, respectively. The
        principal reason for the increase in interest expense for 2006 over 2005
        was the
        inclusion of a full twelve months of interest on the 2005 Debentures, and
        an
        increase in the interest rate to 15% on both the 2004 Debentures and 2005
        Debentures.
 
 **Liquidity
        and Capital Resources**
 
 At
        December 31, 2006, we had a working capital deficit of $13,735,000, ($6,573,000
        excluding derivative liabilities). Our available cash at December 31, 2006
        was
        $67,000. We
        used
        $17,126,000 of cash for operating activities in 2006, which was funded through
        beginning cash available of $2,082,000 and financing activities of $16,378,000.
        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 $5,520,000, the issuance of $6,000,000
        of convertible notes with detachable warrants, the issuance of a $455,000
        convertible note and loan advances of $4,428,000.
  28
 
 In
        2007, we
        received proceeds of $5,205,000 upon the exercise of warrants by Ener1 Group
        to
        purchase Ener1 common stock, and loan advances of $2,250,000 from Ener1 Group.
        In consideration for the exercise by Ener1 Group of the warrants prior to
        their
        expiration, we lowered the exercise prices of these warrants. The
        proceeds were used for working capital purposes, including a payment of
        $350,000 of registration delay expenses to a holder of our debentures
        with whom we entered into a Forbearance Agreement, under which the holder
        agreed to forbear until April 2, 2007 from taking any action related to the
        non-payment of  registration delay expenses owed to this holder following
        the payment. In addition, we owe $926,000 of registration delay expense to
        the
        other holders of the 2004 Debentures and 2005 Debentures.
 
 As
        of
        March 29, 2007, we had less than $150,000 cash available and a working capital
        deficit of approximately $13,162,000 ($6,000,000 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 at the end of each quarter.
 
 From
        March 30, 2007 through April 2,  2007,
        we
        received advances of $2,250,000 from Ener1 Group which we used for the interest
        payments of $1,272,000 due April 2, 2007 and certain operating expenses.
        On
        April 4, 2007, we paid $150,000 for registration delay expenses to one of
        the
        holders of our debentures under which the holder agreed to forbear until
        May 4,
        2007 from taking any action related to the non-payment of $145,000 of remaining
        registration delay expenses owed this holder following this payment. 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.
 
 In
        January 2007, we agreed to file a registration statement to register the
        resale
        of 5,000,000 shares of our common stock underlying warrants we issued to
        Credit
        Suisse and 20,000,000 shares of common stock sold to Credit Suisse by Ener1
        Group. We filed the registration statement on February 14, 2007. Under the
        terms
        of the applicable Registration Rights Agreement, if such a registration
        statement is not declared effective by the SEC within 120 days of January
        5,
        2007, we will be liable for registration default payments equal to 1% of
        the
        purchase price of the securities for each 30 day period until the registration
        default is cured.
 
 **Cautionary
        Statement Concerning Forward-Looking Statements**
 
 We
        have
        made forward-looking statements in this Annual Report and make forward looking
        statements in our press releases that are subject to risks and uncertainties.
        Forward-looking statements include information that is not purely historic
        fact
        and include, without limitation, statements concerning our financial outlook
        for
        2007 and beyond, our possible or assumed future results of operations generally,
        and other statements and information regarding assumptions about our revenues,
        cash flow from operations, available cash, operating costs, capital and other
        expenditures, financing plans, capital structure, contractual obligations,
        legal
        proceedings and claims, future economic performance, management’s plans, goals
        and objectives for future operations and growth and markets for our planned
        products and stock. The sections of this Annual Report which contain
        forward-looking statements include “Business,” “Properties,” “Legal
        Proceedings,” “Management’s Discussion and Analysis of Financial Condition and
        Results of Operations” and our consolidated financial statements and related
        notes.
  29
 
 Our
        forward-looking statements are also identified by words such as “believes,”
“expects,” “thinks,” “anticipates,” “intends,” “estimates” or similar
        expressions. You should understand that these forward-looking statements
        are
        necessarily estimates reflecting our judgment, not guarantees of future
        performance. They 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 factors discussed
        in
“Risk Factors” below and 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.  Accordingly, you should not place undue reliance on
        forward-looking statements, which speak only as of the date of this Annual
        Report. All subsequent written and oral forward-looking statements attributable
        to us or any person acting on our behalf are expressly qualified in their
        entirety by the cautionary statements contained or referred to in this section.
        We do not undertake any obligation to release publicly any revisions to these
        forward-looking statements to reflect events or circumstances after the date
        of
        this Annual Report or to reflect the occurrence of unanticipated
        events.
 
 **RISK
        FACTORS**
 
 In
        addition to the other information in this Annual Report, readers should consider
        carefully the following factors that may affect our future
        performance.
 
 **We
        will need additional capital, which may not be accessible on attractive terms
        or
        at all.**
 
 For
        the
        last several years, we have financed our operations through the sale of our
        securities and by borrowing money. We will need to raise additional funds
        through public or private financing. Our ability to obtain additional financing
        will be subject to a number of factors, including market conditions, our
        operating performance and the terms of our existing indebtedness. The terms
        of
        our senior secured convertible debentures limit our ability to incur additional
        debt because any such additional debt we incur must be contractually
        subordinated, as to payment and liquidation, to the payment in full of the
        debentures. We cannot assure you that we will be able to raise additional
        funds
        on terms favorable to us or at all. If we raise additional funds through
        the
        sale of equity or convertible debt securities, your ownership percentage
        of our
        common stock will be reduced. In addition, any such transactions may dilute
        the
        value of our common stock. We may have to issue securities that have rights,
        preferences and privileges senior to our common stock. The terms of any
        additional indebtedness may include restrictive financial and operating
        covenants that would limit our ability to compete and expand. Our failure
        to
        obtain any required future financing could materially and adversely affect
        our
        financial condition. Our ability to obtain financing from government grants
        and
        public financing is subject to the availability of funds under applicable
        government programs and approval of our applications to participate in such
        programs. We cannot assure you that our efforts to obtain such funds from
        these
        government sources will be successful. Our failure to obtain any required
        future
        financing could materially and adversely affect our financial
        condition.
 
 **We
        have a history of operating losses.**
 
 We
        have
        experienced net operating losses since 1997, incurred negative cash flows
        from
        operations since 1999 and, as of December 31, 2006, had an accumulated
        deficit of $191,944,000. Cash used in operations for the years ended December
        31, 2006 and 2005 was $17,126,000 and $24,333,000, respectively. We expect
        that
        we will continue to incur negative cash flows and require additional cash
        to
        fund our operations and implement our business plan. The continued development
        of our energy-related technology and products will require significant
        additional capital investment.
  30
 **We
          have not made certain payments required under our senior secured convertible
          debentures and the holders of such debentures may demand payment, and if
          payment
          arrangements are not made they could declare a default under the
          debentures.**
 We
        incurred $2,671,000 of registration delay expenses owed to the holders of
        our
        senior secured convertible debentures because registration statements
        registering the resale of the common stock underlying these debentures were
        not
        effective and available for use as required by the terms of such debentures.
        We
        have not paid $2,221,000 of these expenses as of December 31, 2006 and
        $1,071,000 as of April 4, 2007, and the holders of the debentures may send
        us
        notice of a default under the debentures as a result of such non-payment
        and
        require us to redeem the debentures, together with accrued interest, at
        the redemption prices set forth in the Debentures. We cannot assure you
        that we would be able to borrow or otherwise obtain the funds required to
        repay
        all amounts due under the debentures in the event these amounts are declared
        due. If we were not able to repay these amounts, the debenture holders could
        foreclose on the collateral securing our obligations under the debentures,
        which
        includes the stock we own in EnerDel. One of our debenture holders has agreed
        not to exercise any default remedies available as a result of our non-payment
        of
        the registration delay expenses through May 4, 2007. This agreement to forbear
        is conditioned upon our compliance with certain conditions and we cannot
        assure
        you that we will be able to comply with all of these conditions.
 
 **Our
        financial statements include substantial non-operating gains or losses resulting
        from required quarterly revaluation under GAAP of our outstanding derivative
        instruments.**
 
 Generally
        accepted accounting principles in the United States require that we report
        the
        value of certain derivatives in instruments we have issued as current
        liabilities on our balance sheet and report changes in the value of these
        derivatives as non-operating gains or losses on our statement of
        operations. The value of the derivatives is required to be recalculated (and
        resulting non-operating gains or losses reflected in our statement of operations
        and resulting adjustments to the associated liability amounts reflected on
        our
        balance sheet) on a quarterly basis. The valuations are based upon a
        number of factors and estimates including estimates based upon management's
        judgment. Certain of the derivative values are directly correlated to
        the value of our common stock. Due to the nature of the required
        calculations and the large number of shares of our common stock involved
        in such
        calculations, changes in our common stock price and or changes in management's
        assumptions may result in significant changes in the value of the derivatives
        and resulting gains and losses on our statement of operations.
 
 **The
        terms of our senior secured convertible debentures issued in January 2004
        and
        March 2005 restrict our operations.**
 
 Our
        senior secured convertible debentures issued in January 2004 and March 2005,
        both due 2009, contain restrictive covenants that limit our ability to, among
        other things: dispose of assets; incur debt; pay dividends; repurchase our
        capital stock and debt securities; create liens on our assets; and, engage
        in
        transactions with our affiliates.
 
 These
        covenants may significantly limit our ability to respond to changing business
        and economic conditions and to secure additional financing, and we may be
        prevented from engaging in transactions that might be considered important
        to
        our business strategy or otherwise beneficial to us.
 
 **We
        may never complete the research and development of commercially viable products.**
 
 Although
        we have conducted other business activities in the past, we have only in
        the
        past five years reorganized our activities to focus on the development of
        alternative energy products and services (primarily Li-ion batteries and
        fuel
        cells). We do not know when or whether we will successfully complete research
        and development of commercially viable energy products. If we are unable
        to
        develop commercially viable products, we will not be able to generate sufficient
        revenue to become profitable. The commercialization of our products depends
        on
        our ability to control the costs of manufacturing, and we cannot assure you
        that
        we will be able to sufficiently control these costs. We must complete
        substantial additional research and development before we will be able to
        manufacture a commercially viable battery product in commercial quantities.
        In
        addition, while we are conducting tests to predict the overall life of our
        products, we may not have tested our products over their projected useful
        lives
        prior to large-scale commercialization. As a result, we cannot be sure that
        our
        products will last as long as predicted, and, if they do not, we may incur
        liability under warranty claims.
 
 31
 
 **We
        have an unproven business plan.**
 
 We
        have
        an unproven business plan and do not expect to be profitable for the next
        several years. We have shifted our business from providing engineering services
        and interactive products to focus primarily on developing technologies, products
        and services related to Li-ion batteries, fuel cells and nanotechnology.
        Before
        investing in our securities, you should consider the challenges, expenses
        and
        difficulties that we will face as a company seeking to develop and manufacture
        new products.
 
 **Viable
        markets for our products may never develop, may take longer to develop than
        we
        anticipate or may not be sustainable.**
 
 Our
        energy products and technologies target emerging markets and we do not know
        the
        extent to which our technologies and products will be accepted. We do not
        currently have any commercially viable products. We must be able to develop
        a
        commercially viable product for our business to succeed. If a viable market
        fails to develop or develops more slowly than we anticipate, we may be unable
        to
        recover the losses we will have incurred to develop our products and may
        be
        unable to achieve profitability. We will need to develop or acquire adequate
        marketing and manufacturing capabilities in order to develop a commercially
        successful product. In addition, the development of a viable market for our
        products may be impacted by many factors which are partly or totally out
        of our
        control, including:
 
 ·
              ·The
                  cost competitiveness of our products·
              ·Consumer
                  reluctance to try a new product·
              ·Consumer
                  perceptions of our products’ safety·
              ·Regulatory
                  requirements·
              ·Barriers
                  to entry created by existing energy providers·
              ·Emergence
                  of newer, more competitive technologies and
                  products
 
 **We
        have no experience manufacturing battery, fuel cell or nanotechnology-based
        products on a large-scale commercial basis and may be unable to do
        so.**
 
 Since
        2002, we have focused primarily on research and development and have no
        experience manufacturing any of our planned products on a commercial basis.
        We
        are developing new battery products that will use high volume battery
        manufacturing processes and equipment. We have no experience using such
        equipment for the products we are developing. We do not know whether or when
        we
        will be able to develop efficient, low-cost manufacturing capabilities and
        processes that will enable us to manufacture our products in commercial
        quantities while meeting the quality, price, engineering, design and production
        standards required to successfully market our products. Our failure to develop
        such manufacturing processes and capabilities could have a material adverse
        effect on our business, financial condition, results of operations and
        prospects.
 
 **We
        may not meet our development and commercialization milestones.**
 
 We
        have
        established product development and commercialization milestones that we
        use to
        assess our progress toward developing commercially viable products. These
        milestones relate to technology and design improvements as well as to dates
        for
        achieving development goals. To gauge our progress, we plan to operate, test
        and
        evaluate our products. If our systems or products exhibit technical defects
        or
        are unable to meet cost or performance goals, including power output, useful
        life and reliability, our commercialization schedule could be delayed and
        potential purchasers of our initial commercial battery and energy products
        may
        decline to purchase them. We cannot assure you that we will successfully
        achieve
        our milestones in the future or that any failure to achieve these milestones
        will not result in potential competitors gaining advantages in our target
        market. Failure to meet our development and commercialization milestones
        might
        have a material adverse effect on our operations and our stock price.
  **We
        may be unable to establish relationships with third parties for aspects of
        product development, manufacturing, distribution and servicing and the supply
        of
        key components for our products.**
 
 We
        will
        need to enter into additional strategic relationships in order to complete
        our
        current product development and commercialization plans. We will also require
        partners to assist in the distribution, servicing and supply of components
        for
        our anticipated fuel cell products which are in development. If we are unable
        to
        identify or enter into satisfactory agreements with potential partners, we
        may
        not be able to complete our product development and commercialization plans
        on
        schedule or at all. We may also need to scale back these plans in the absence
        of
        needed partners, which would adversely affect our future prospects. In addition,
        any arrangement with a strategic partner may require us to make large cash
        payments to the partner, issue a significant amount of equity securities
        to the
        partner, provide the partner with the opportunity to have representation
        on our
        board of directors, agree to exclusive purchase or other arrangements with
        the
        partner and/or commit significant financial resources to fund our product
        development efforts in exchange for their assistance or the contribution
        to us
        of intellectual property. Any such issuance of equity securities would reduce
        the percentage ownership of our then current stockholders. While we have
        entered
        into relationships with suppliers of some key components for our products,
        we do
        not know when or whether we will secure supply relationships for all required
        components and subsystems for our products, or whether such relationships
        will
        be on terms that will allow us to achieve our objectives. Our business,
        prospects, results of operations and financial condition could be harmed
        if we
        fail to secure relationships with entities that can develop or supply the
        required components for our products and provide the required distribution
        and
        servicing support. Additionally, the agreements governing our current
        relationships allow for termination by our partners under some
        circumstances.
 
 32
  **We
        will rely on third parties to develop and provide key components for our
        products.**
 
 We
        will
        rely on third party suppliers to develop and supply key components that we
        will
        use in our products. If those suppliers fail to develop and supply these
        components in a timely manner or at all, or fail to develop or supply components
        that meet our quality, quantity or cost requirements, and we are unable to
        obtain substitute sources of these components on a timely basis or on terms
        acceptable to us, we may not be able to manufacture our products. In addition,
        to the extent that our supply partners use technology or manufacturing processes
        that are proprietary, we may be unable to obtain comparable components from
        alternative sources.
 
 We
        do not
        know when or whether we will secure long-term supply relationships with any
        suppliers or whether such relationships will be on terms that will allow
        us to
        achieve our objectives. Our business, prospects, results of operations and
        financial condition could be harmed if we fail to secure long-term relationships
        with entities that will supply the required components for our battery and
        energy related products.
 
 **We
        face high levels of competition and may be unable to compete
        successfully.**
 
 The
        markets in which we intend to compete are highly competitive. There are a
        number
        of companies located in the United States, Canada and abroad that are developing
        battery and fuel cell technologies and other energy products that will compete
        with our technologies and planned products. Some of our competitors are much
        larger than we are and may have the manufacturing, marketing and sales
        capabilities to complete research, development and commercialization of
        commercially viable products more quickly and effectively than we
        can.
 
 Not
        only
        do we face competition from other companies that are developing battery and
        fuel
        cell technologies, but we also face competition from companies that provide
        energy products based on traditional energy sources, such as oil and natural
        gas. We also face competition from companies that are developing energy products
        based on alternative energy sources as a significant amount of public and
        private funding is currently directed toward development of a number of types
        of
        distributed generation technology, including microturbines, solar power,
        wind
        power and other types of fuel cell technologies. Technological advances in
        alternative energy products, improvements in the electric power grid or other
        fuel cell technologies may make some of our planned products less attractive
        or
        render them obsolete. There are many companies engaged in all areas of
        traditional and alternative energy generation in the United States, Canada
        and
        abroad, including, among others, major electric, oil, chemical, natural gas,
        batteries, generators and specialized electronics firms, as well as
        universities, research institutions and foreign government-sponsored companies.
        Many of these entities have substantially greater financial, research and
        development, manufacturing and marketing resources than we do.
 
 **We
        intend to offer Li-ion batteries to the automotive industry, which is a very
        competitive and cost focused industry. We have no automotive industry
        experience.**
 
 Supplying
        Li-ion batteries to the automotive industry has significant risks for a new
        company. We will be competing against much larger suppliers that have greater
        financial, marketing and other resources; more experience in low cost, high
        volume manufacturing operations; existing relationships with automotive
        purchasing and engineering development departments; and increased ability
        to
        take advantage of economies of scale in purchasing raw materials than we
        have.
        The automotive industry is extremely competitive and competition to supply
        vehicle components to manufacturers focuses on cost, weight and size of such
        components. The ability of domestic automobile manufacturers to adopt new
        battery technologies for HEVs will depend on many factors outside our control,
        including their ability to develop HEV vehicle platforms. If the HEV industry
        does not accept Li-ion battery technology, or if our Li-ion batteries do
        not
        meet industry requirements for battery cost, weight and size, our batteries
        will
        not gain market acceptance.
 
 33
  **Failure
        of our planned products to pass testing could negatively impact demand for
        our
        planned products.**
 
 We
        may
        encounter problems and delays during testing of our planned products for
        a
        number of reasons, including the failure of our technology or the technology
        of
        third parties, as well as our failure to maintain and service our planned
        products properly. Many of these potential problems and delays are beyond
        our
        control. Any problem or perceived problem with test results for our planned
        products could materially harm our reputation and impair market acceptance
        of,
        and demand for, any products that we make.
 
 **Regulatory
        and other changes in the energy industry may adversely affect our ability
        to
        produce, and reduce demand for, our planned products.**
 
 The
        market for our technologies and products may be heavily influenced by federal,
        state, local and foreign government laws, regulations and policies concerning
        the energy industry. A change in the current regulatory policies could make
        it
        more difficult or costly for us to develop, manufacture or market our products.
        Any such changes could also deter further investment in the research and
        development of alternative energy sources, including fuel cells, which could
        significantly reduce demand for our technologies and products. We cannot
        predict
        how changes in regulation or other industry changes will affect the market
        for
        our products or impact our ability to distribute, install and service our
        products.
 
 **We
        could be liable for environmental damages resulting from our research,
        development or manufacturing**  **operations.**
 
 Our
        business exposes us to the risk that harmful substances may escape into the
        environment, resulting in personal injury or loss of life, damage to or
        destruction of property, and natural resource damage. Our insurance policies
        may
        not adequately reimburse us for costs incurred in defending and settling
        environmental damage claims, and in some instances, we may not be reimbursed
        at
        all. Our business is subject to numerous federal, state and local laws and
        regulations that govern environmental protection and human health and safety.
        These laws and regulations have changed frequently in the past and it is
        reasonable to expect there will be additional changes in the future. If our
        operations do not comply with current or future environmental laws and
        regulations, we may be required to make significant unanticipated capital
        and
        operating expenditures to bring our operations into compliance. If we fail
        to
        comply with applicable environmental laws and regulations, governmental
        authorities may seek to impose fines and penalties on us or to revoke or
        deny
        the issuance or renewal of operating permits and private parties may seek
        damages from us. Under those circumstances, we might be required to curtail
        or
        cease operations, conduct site remediation or other corrective action, or
        pay
        substantial damage claims.
 
 **Our
        products may use materials that are inherently dangerous substances which
        could
        subject our business to product liability claims.**
 
 Our
        energy technologies and products may use lithium, hydrogen or other materials
        that could leak and combust if ignited by another source. These technologies
        and
        products expose us to potential product liability claims relating to dangers
        that are inherent in lithium, hydrogen and products that use either. Hydrogen
        is
        a flammable gas and therefore a potentially dangerous product. Hydrogen is
        typically generated from gaseous and liquid fuels that are also flammable
        and
        dangerous, such as propane, natural gas or methane, in a process known as
        reforming. Natural gas and propane could leak into a residence or commercial
        location and combust if ignited by another source. In addition, our products
        may
        operate at high temperatures, which could expose us to potential liability
        claims, in the event of accidents involving combustion or explosion. Accidents
        involving our products or other hydrogen-based products could materially
        impede
        widespread market acceptance and demand for, or heighten regulatory scrutiny
        of,
        our products. In addition, we might be held responsible for damages beyond
        the
        scope of our insurance coverage. We also cannot predict whether we will be
        able
        to maintain our insurance coverage on acceptable terms.
 
 34
  **Product
        liability or defects could negatively impact our results of
        operations.**
 
 Any
        liability we incur for damages resulting from malfunctions or design defects
        of
        our products could be substantial and could materially adversely affect our
        business, financial condition, results of operations and prospects. In addition,
        a publicized actual or perceived problem could adversely affect the market’s
        perception of our products resulting in a decline in demand for our products
        and
        could divert the attention of our management, which may materially and adversely
        affect our business, financial condition, results of operations and
        prospects.
 
 **Future
        acquisitions may disrupt our business, distract our management and reduce
        the
        percentage ownership of our stockholders.**
 
 As
        part
        of our business strategy, we may seek to acquire complementary technologies,
        products, expertise and/or other valuable assets. However, we may not be
        able to
        identify suitable acquisition candidates. If we do identify suitable candidates,
        we may not be able to complete the acquisitions on commercially acceptable
        terms
        or at all. We may not be able to successfully integrate the acquired business
        into our existing business in a timely and non-disruptive manner. We may
        have to
        devote a significant amount of time and management and financial resources
        to do
        so. Even with this investment of management and financial resources, an
        acquisition may not produce the desired revenues, earnings or business
        synergies. In addition, an acquisition may reduce the percentage ownership
        of
        our then current stockholders. If we fail to integrate the acquired business
        effectively or if key employees of that business leave, the anticipated benefits
        of the acquisition would be jeopardized. The time, capital and management
        and
        other resources spent on an acquisition that fails to meet our expectations
        could cause our business and financial condition to be materially and adversely
        affected. In addition, as a result of any acquisition, we may incur
        non-recurring charges and be required to amortize significant amounts of
        intangible assets, which could adversely affect our results of
        operations.
 
 **We
        may not be able to protect the intellectual property upon which we depend
        and we
        could incur substantial costs defending against claims that our products
        infringe on the proprietary rights of others.**
 
 Our
        ability to compete effectively will depend, in part, on our ability to protect
        our proprietary technologies, systems designs and manufacturing processes.
        We
        rely on patents, trademarks, and policies and procedures related to
        confidentiality to protect our intellectual property. However, some of our
        intellectual property is not covered by any patent or patent application.
        Moreover, we do not know whether any of our pending patent applications will
        issue or, in the case of patents issued or to be issued, that the claims
        allowed
        are or will be sufficiently broad to protect our technology or processes.
        Even
        if all of our patent applications are issued and are sufficiently broad,
        our
        patents may be challenged or invalidated. We could incur substantial costs
        in
        prosecuting or defending patent infringement suits or otherwise protecting
        our
        intellectual property rights. While we have attempted to safeguard and maintain
        our proprietary rights, we do not know whether we have been or will be
        completely successful in doing so. Moreover, patent applications filed in
        foreign countries may be subject to laws, rules and procedures that are
        substantially different from those of the United States, and any resulting
        foreign patents may be difficult and expensive to enforce. In addition, we
        do
        not know whether the U.S. Patent & Trademark Office will grant federal
        registrations based on our pending trademark applications. Even if federal
        registrations are granted to us, our trademark rights may be challenged.
        It is
        also possible that our competitors or others will adopt trademarks similar
        to
        ours, thus impeding our ability to build brand identity and possibly leading
        to
        customer confusion. We could incur substantial costs in prosecuting or defending
        trademark infringement suits.
 
 Further,
        our competitors may independently develop or patent technologies or processes
        that are substantially equivalent or superior to ours. If we are found to
        be
        infringing third party proprietary rights, we could be required to pay
        substantial royalties and/or damages, and we do not know whether we will
        be able
        to obtain licenses to use the intellectual property at issue on acceptable
        terms, if at all. Failure to obtain needed licenses could delay or prevent
        the
        development, manufacture or sale of our products, and could necessitate the
        expenditure of significant resources to develop or acquire non-infringing
        intellectual property.
 
 35
  Asserting,
        defending and maintaining our intellectual property rights could be difficult
        and costly and failure to do so may diminish our ability to compete effectively
        and may harm our operating results. We may need to pursue lawsuits or other
        legal action in the future to enforce our intellectual property rights, to
        protect our trade secrets and domain names and to determine the validity
        and
        scope of the proprietary rights of others. If third parties prepare and file
        applications for trademarks used or registered by us, we may oppose those
        applications and be required to participate in proceedings to determine priority
        of rights to the trademark. Similarly, competitors may have filed applications
        for patents, may have received patents and may obtain additional patents
        and
        proprietary rights relating to products or technology that block or compete
        with
        ours. We may have to participate in interference proceedings to determine
        the
        priority of invention and the right to a patent for the technology. Litigation
        and interference proceedings, even if they are successful, are expensive
        to
        pursue and time consuming, and we could use a substantial amount of our
        financial resources in either case.
 
 **We
        rely, in part, on contractual provisions to protect our trade secrets and
        proprietary knowledge.**
 
 Confidentiality
        agreements to which we are party may be breached, and we may not have adequate
        remedies for any breach. Our trade secrets may also become known without
        breach
        of such agreements or may be independently developed by competitors. Our
        inability to maintain the proprietary nature of our technology and processes
        could allow our competitors to limit or eliminate any competitive advantages
        we
        may have.
 
 **Our
        business depends on retaining and attracting highly capable management and
        operating personnel.**
 
 Our
        success depends in large part on our ability to retain and attract management
        and operating personnel, our officers and other key employees. Our business
        requires a highly skilled specialized workforce, including scientists,
        engineers, researchers and manufacturing and marketing professionals, who
        are in
        high demand and are often subject to competing offers. To retain and attract
        key
        personnel, we use various measures, including employment agreements, a stock
        incentive plan and incentive bonuses for key employees. These measures may
        not
        be enough to retain and attract the personnel we need or to offset the impact
        on
        our business of the loss of the services of key officers or employees. We
        have
        experienced recent executive management turnover, and could face difficulty
        hiring and retaining qualified senior executives.
 
 **We
        face risks associated with our plans to market, distribute and service our
        products internationally.**
 
 We
        may
        market, distribute and service our products internationally. We have limited
        experience developing and no experience manufacturing our products to comply
        with the commercial and legal requirements of international markets. Our
        success
        in international markets will depend, in part, on our ability and our partners
’
ability to secure relationships with foreign sub-distributors, and our
        ability to manufacture products that meet foreign regulatory and commercial
        requirements. Additionally, our planned international operations are subject
        to
        other inherent risks, including potential difficulties in enforcing contractual
        obligations and intellectual property rights in foreign countries and
        fluctuations in currency exchange rates.
 
 **Government
        contracts could restrict our ability to effectively commercialize our
        technology.**
 
 Contracts
        we enter into with government agencies are subject to the risk of termination
        at
        the convenience of the contracting agency and potential disclosure of our
        confidential information to third parties. Under the Freedom of Information
        Act,
        any documents that we have submitted to the government or to a contractor
        under
        a government funding arrangement may be subject to public disclosure that
        could
        compromise our intellectual property rights unless these documents are exempted
        as trade secrets or as confidential information, appropriately legended by
        us,
        and treated accordingly by such government agencies.
 
 As
        a
        government contractor, we must comply with and are affected by federal
        government regulations relating to the formation, administration and performance
        of government contracts. These regulations will affect how we do business
        with
        our customers and may impose added costs on our business. Any failure to
        comply
        with applicable laws and regulations could result in contract termination,
        price
        or fee reductions or suspension or debarment from contracting with the federal
        government.
 
 In
        addition, federal government agencies routinely audit government contracts.
        These agencies review a contractor’s performance on its contract, pricing
        practices, cost structure and compliance with applicable laws, regulations
        and
        standards. These audits may occur several years after completion of the audited
        work. An audit could result in a substantial adjustment to our revenues because
        any costs found to be improperly allocated to a specific contract will not
        be
        reimbursed, while improper costs already reimbursed must be refunded. If
        a
        government audit uncovers improper or illegal activities, we may be subject
        to
        civil and criminal penalties and administrative sanctions, including termination
        of contracts, forfeiture of profits, suspension of payments, fines and
        suspension or debarment from doing business with federal government agencies.
        In
        addition, our reputation could be harmed if allegations of impropriety were
        made
        against us.
 
 36
  **We
        may be unable to manage rapid growth effectively.**
 
 We
        expect
        to expand our manufacturing capabilities rapidly, accelerate the
        commercialization of our products and enter a period of rapid growth, which
        will
        place a significant strain on our senior management team and our financial
        and
        other resources. The proposed expansion will expose us to increased competition,
        greater overhead, marketing and support costs and other risks associated
        with
        the commercialization of a new product. Our ability to manage our rapid growth
        effectively will require us to continue to improve our operations, to improve
        our financial and management information systems and to train, motivate and
        manage our employees. Difficulties in effectively managing the budgeting,
        forecasting and other process control issues presented by such a rapid expansion
        could harm our business, prospects, results of operations and financial
        condition.
 
 **Our
        stock price has been and could remain volatile.**
 
 The
        market price of our common stock has historically experienced and may continue
        to experience significant volatility. Our progress in developing and
        commercializing our products, our quarterly operating results, announcements
        of
        new products by us or our competitors, our perceived prospects, changes in
        securities analysts’ recommendations or earnings estimates, changes in general
        conditions in the economy or the financial markets, adverse events related
        to
        our strategic relationships and other developments affecting us or our
        competitors could cause the market price of our common stock to fluctuate
        substantially. In addition, in recent years, the stock market, and in particular
        the market for technology-related stocks, has experienced significant price
        and
        volume fluctuations. This volatility has affected the market prices of
        securities issued by many companies for reasons unrelated to their operating
        performance and may adversely affect the price of our common stock. In addition,
        we may be subject to additional securities class action litigation as a result
        of volatility in the price of our common stock, which could result in
        substantial costs and diversion of management’s attention and resources and
        could harm our stock price, business, prospects, results of operations and
        financial condition.
  **Our
        principal stockholder has substantial control over our
        affairs.**
 
 Ener1
        is
        controlled by Ener1 Group, which owns approximately 86% of our outstanding
        common stock. Three of Ener1 Group’s board members are also members of our Board
        of Directors and a fourth Ener1 board member acts as a Strategic Advisor
        to
        Ener1 Group. Four of our senior executives, including the Chief Executive
        Officer and Chief Financial Officer, and two of our directors are also
        executives of Ener1 Group. Ener1 Group has the ability to exert substantial
        influence over all matters submitted to a vote of the stockholders of Ener1,
        including the election and removal of directors and any merger, consolidation
        or
        sale of all or substantially all of our assets. In addition, Ener1 Group
        may
        dictate the management of our business and affairs. This concentration of
        ownership could have the effect of delaying, deferring or preventing a change
        in
        control or impeding a merger or consolidation, takeover or other business
        combination which you, as a stockholder, may view favorably.
  **Future
        sales of our common stock may adversely affect our common stock
        price.**
 
 If
        our
        stockholders sell a large number of shares of common stock or if we issue
        a
        large number of shares in connection with future acquisitions or financings,
        the
        market price of our common stock could decline significantly. In addition,
        the
        perception in the public market that our stockholders might sell a large
        number
        of shares of common stock could cause a decline in the market price of our
        common stock.
 
 37
  **Our
        certificate of incorporation and Florida law could adversely affect our common
        stock price.**
 
 Provisions
        of our certificate of incorporation and Florida law could discourage potential
        acquisition proposals and could delay or prevent a change in control of us.
        These provisions could diminish the opportunities for a stockholder to
        participate in tender offers, including tender offers at a price above the
        then
        current market value of our common stock. These provisions may also inhibit
        fluctuations in the market price of our common stock that could result from
        takeover attempts. In addition, the Board of Directors, without further
        stockholder approval, may issue additional series of preferred stock that
        could
        have the effect of delaying, deterring or preventing a change in control
        of us.
        The issuance of additional series of preferred stock could also adversely
        affect
        the voting power of the holders of common stock, including the loss of voting
        control to others.
  38
  **ITEM
        7: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA**
 
 **Financial
        Statements**
 **Page**Report
                  of Independent Registered Public Accounting Firm
              
              
              **40**Consolidated
                  Balance Sheets
              
              
              **41**Consolidated
                  Statements of Operations
              
              
              **42**Consolidated
                  Statements of Stockholders' Equity
              
              
              **43**Consolidated
                  Statements of Cash Flows
              
              
              **44**Notes
                  to Consolidated Financial Statements
              
              
              **45**
  39
  
 **REPORT
        OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**
 
 To
        the
        Board of Directors
 Ener1,
        Inc.
 Fort
        Lauderdale, Florida
 
 We
        have
        audited the accompanying consolidated balance sheets of Ener1, Inc. and
        subsidiaries (the "Company") as of December 31, 2006 and 2005 and the related
        consolidated statements of operations, stockholders' deficit, and cash flows
        for
        each of the two years in the period ended December 31, 2006. These financial
        statements are the responsibility of the Company's management. Our
        responsibility is to express an opinion on these financial statements based
        on
        our audits.
 
 We
        conducted our audits in accordance with standards of the Public Company
        Accounting Oversight Board (United States). Those standards require that
        we plan
        and perform the audits to obtain reasonable assurance about whether the
        financial statements are free of material misstatement. An audit includes
        examining, on a test basis, evidence supporting the amounts and disclosures
        in
        the financial statements. An audit also includes assessing the accounting
        principles used and significant estimates made by management, as well as
        evaluating the overall financial statement presentation. We believe that
        our
        audits provide a reasonable basis for our opinion.
 
 In
        our
        opinion, the financial statements referred to above present fairly, in all
        material respects, the financial position of the Company, as of December
        31,
        2006 and 2005, and the results of its operations and its cash flows for each
        of
        the two years in the period ended December 31, 2006 in conformity with
        accounting principles generally accepted in the United States of
        America.
 
 The
        accompanying financial statements have been prepared assuming that the Company
        will continue as a going concern. As discussed in Note 2 to the financial
        statements, the Company has suffered recurring losses from operations, has
        negative cash flow from operations, and has an accumulated deficit, which
        raises
        substantial doubt about its ability to continue as a going concern. Management's
        plans regarding these matters also are described in Note 2. The financial
        statements do not include any adjustments that might result from the outcome
        of
        this uncertainty.
 
 
 MALONE
        & BAILEY, PC
 www.malone-bailey.com
 Houston,
        Texas
 
 April
        4,
        2007
 
  40
 
 ENER1,
        INC. AND SUBSIDIARIES
 CONSOLIDATED
        BALANCE SHEETS
 (dollars
        in thousands)
 **December
                    31,**
                
                **December
                    31,****2006**
                
                **2005****ASSETS**Current
                    assetsCash
                    and equivalents, including restricted cash of $224
                
                $
                291
                
                $
                2,306Accounts
                    receivable
                
                
                152
                
                
                -Prepaid
                    expenses and other current assets
                
                
                248
                
                
                189Due
                    from related parties
                
                
                -
                
                
                157Total
                    current assets
                
                
                691
                
                
                2,652Property
                    and equipment, net
                
                
                3,554
                
                
                3,042Investment
                    in EnerStruct, Inc.
                
                
                40
                
                
                805Deferred
                    debenture and note costs, net of amortization of $3,369 and
                    $2,082
                
                
                2,812
                
                
                3,748Other
                
                
                71
                
                
                202Total
                    assets
                
                $
                7,168
                
                $
                10,449**LIABILITIES
                    AND STOCKHOLDERS' DEFICIT**Current
                    liabilitiesCurrent
                    portion of installment loan
                
                
                27
                
                
                24Accounts
                    payable and accrued expenses
                
                
                5,937
                
                
                2,969Liabilities
                    of discontinued operations
                
                
                -
                
                
                307Interest
                    payable
                
                
                1,300
                
                
                -Derivative
                    liabilities
                
                
                7,162
                
                
                54,979Total
                    current liabilities
                
                
                14,426
                
                
                58,279Long-term
                    portion of installment loan
                
                
                39
                
                
                67Convertible
                    notes, advances and accrued interest due to related party,net
                    of discounts of $3,663 and $0
                
                
                7,939
                
                
                -$19,700
                    convertible debentures, net of discount of $11,780 and
                    $13,970
                
                
                7,920
                
                
                5,730$14,225
                    convertible debentures, net of discount of $8,856 and
                    $10,064
                
                
                5,369
                
                
                4,161Total
                    liabilities
                
                
                35,693
                
                
                68,237Redeemable
                    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
                
                
                6,576
                
                
                4,967Series
                    B Preferred, $.01 par value, 180,000 shares authorized,152,500
                    shares issued and outstanding; liquidation preference
                    $15,250
                
                
                15,162
                
                
                13,188Minority
                    interest
                
                
                -
                
                
                -Commitments
                    and contingencies**STOCKHOLDERS'
                    DEFICIT**Common
                    stock, $.01 par value, 750,000,000 shares authorized417,349,560
                    and 347,455,751 issued and outstanding, respectively
                
                
                4,174
                
                
                3,475Paid
                    in capital
                
                
                137,507
                
                
                72,830Accumulated
                    deficit
                
                
                (191,944
                )
                
                (152,248
                )Total
                    stockholders' deficit
                
                
                (50,263
                )
                
                (75,943
                )Total
                    liabilities and stockholders' deficit
                
                $
                7,168
                
                $
                10,449
  See
        notes
        to consolidated financial statements.
  41
  ENER1,
        INC. AND SUBSIDIARIES
 CONSOLIDATED
        STATEMENTS OF OPERATIONS
 (In
        thousands except per share data)
 **Year
                    Ended December 31,****2006**
                
                **2005**Net
                    sales
                
                $
                100
                
                $
                60Cost
                    of sales
                
                
                -
                
                
                -Gross
                    profit
                
                
                100
                
                
                60Operating
                    expenses:General
                    and administrative
                
                
                10,477
                
                
                13,609Research
                    and
                    development
                
                
                6,442
                
                
                19,042Warrant
                    modification expense
                
                
                9,200
                
                
                -Depreciation
                      and amortization
                
                
                391
                
                
                558Total
                    operating expenses
                
                
                26,510
                
                
                33,209Loss
                    from operations
                
                
                (26,410
                )
                
                (33,149
                )Other
                    income (expense):Interest
                    expense
                
                
                (10,376
                )
                
                (9,936
                )Registration
                    delay expenses
                
                
                (2,016
                )
                
                (645
                )Equity
                    in loss of EnerStruct, Inc.
                
                
                (765
                )
                
                (380
                )Other
                
                
                17
                
                
                295Gain
                    (loss) on derivative liabilities
                
                
                (146
                )
                
                70,849Total
                    other income (expense)
                
                
                (13,286
                )
                
                60,183Income
                    (loss) before income taxes
                
                
                (39,696
                )
                
                27,034Income
                    taxes
                
                
                -
                
                
                -Net
                    income (loss) before minority interest
                
                
                (39,696
                )
                
                27,034Minority
                    interest
                
                
                (1,609
                )
                
                1,570Net
                    income (loss)
                
                
                (41,305
                )
                
                28,604Preferred
                    stock dividends
                
                
                (1,974
                )
                
                (2,926
                )Net
                    income (loss) attributable to common shareholders
                
                $
                (43,279
                )
                $
                25,678Net
                    income (loss) per share, basic
                
                $
                (0.11
                )
                $
                0.07Net
                    (loss) per share, diluted
                
                $
                (0.11
                )
                $
                (0.02
                )Weighted
                    average shares outstanding - basic
                
                
                401,534
                
                
                347,456Weighted
                    average shares outstanding - diluted
                
                
                401,534
                
                
                433,028
 
 See
        notes
        to consolidated financial statements.
  42
  ENER1,
        INC. AND SUBSIDIARIES
 CONSOLIDATED
        STATEMENTS OF STOCKHOLDERS' DEFICIT
 FOR
        THE
        YEARS ENDED DECEMBER 31, 2005 and 2006
 (In
        thousand except share data)
 Common
                    Stock
                
                AdditionalPaid
                    In
                
                AccumulatedShares
                
                Amount
                
                Capital
                
                Deficit
                
                TotalBalance
                    December 31, 2004
                
                
                347,455,751
                
                $
                3,475
                
                $
                76,675
                
                $
                (182,892
                )
                $
                (102,742
                )Stock
                    options issued for servicesand
                    compensation due to variable options
                
                
                -
                
                
                -
                
                
                1,080
                
                
                -
                
                
                1,080Delphi
                    minority interest in EnerDel
                
                
                -
                
                
                -
                
                
                (18
                )
                
                -
                
                
                (18
                )Accretion
                    of discount on preferred stock
                
                
                -
                
                
                -
                
                
                (1,865
                )
                
                -
                
                
                (1,865
                )Accrued
                    dividends on preferred stock
                
                
                -
                
                
                -
                
                
                (1,065
                )
                
                -
                
                
                (1,065
                )Warrants
                    issued in connection with debtplacement
                    services
                
                
                -
                
                
                -
                
                
                213
                
                
                -
                
                
                213Dividend
                    of Splinex shares
                
                
                -
                
                
                -
                
                
                -
                
                
                (150
                )
                
                (150
                )Net
                    income (including preferred dividendspayable
                    to minority interest owner chargedto
                    paid in capital)
                
                
                -
                
                
                -
                
                
                (2,190
                )
                
                30,794
                
                
                28,604Balance
                    December 31, 2005
                
                
                347,455,751
                
                
                3,475
                
                
                72,830
                
                
                (152,248
                )
                
                (75,943
                )Employee
                    stock options exercised
                
                
                619,314
                
                
                6
                
                
                (6
                )
                
                -
                
                
                -Warrants
                    exercised in connection with services
                
                
                148,718
                
                
                2
                
                
                (2
                )
                
                -
                
                
                -Shares
                    issued in payment of services
                
                
                125,777
                
                
                1
                
                
                46
                
                
                -
                
                
                47Stock-based
                    compensation expense
                
                
                -
                
                
                -
                
                
                1,641
                
                
                -
                
                
                1,641Accretion
                    of discount on preferred stock
                
                
                -
                
                
                -
                
                
                (907
                )
                
                -
                
                
                (907
                )Accrued
                    dividends on preferred stock
                
                
                -
                
                
                -
                
                
                (1,067
                )
                
                -
                
                
                (1,067
                )Warrants
                    exercised by Ener1 Group
                
                
                69,000,000
                
                
                690
                
                
                4,830
                
                
                -
                
                
                5,520Warrant
                    modification expense
                
                
                -
                
                
                -
                
                
                9,200
                
                
                -
                
                
                9,200Fair
                    value adjustment for elimination ofderivatives
                    - warrants
                
                
                -
                
                
                -
                
                
                22,096
                
                
                -
                
                
                22,096Fair
                    value adjustment for conversion ofderivatives
                    - warrants
                
                
                -
                
                
                -
                
                
                26,449
                
                
                -
                
                
                26,449Warrants
                    issued to related party in connectionwith
                    debt placement services
                
                
                -
                
                
                -
                
                
                4,006
                
                
                -
                
                
                4,006Net
                    loss (including preferred dividendspayable
                    to minority interest owner chargedto
                    paid in capital)
                
                
                -
                
                
                -
                
                
                (1,609
                )
                
                (39,696
                )
                
                (41,305
                )Balance
                    December 31, 2006
                
                
                417,349,560
                
                $
                4,174
                
                $
                137,507
                
                $
                (191,944
                )
                $
                (50,263
                )
 See
        notes
        to consolidated financial statements.
  43
  ENER1,
        INC. AND SUBSIDIARIES
 CONSOLIDATED
        STATEMENTS OF CASH FLOWS
 (In
        thousands)
 **Year
                    Ended December 31,****2006**
                
                **2005**Net
                    income (loss)
                
                $
                (41,305
                )
                $
                28,604Adjustments
                    to reconcile net income (loss) to cash used in operating
                    activities:Loss
                    (gain) on derivative liabilities
                
                
                146
                
                
                (70,849
                )Minority
                    interest in losses and preferred dividends of consolidated
                    subsidiary
                
                
                1,609
                
                
                (1,570
                )Research
                    and development assets expensed
                
                
                364
                
                
                10,602Accretion
                    of discounts on debentures and notes
                
                
                3,741
                
                
                4,963Non-cash
                    interest expense related to financing costs
                
                
                1,286
                
                
                1,177Non-cash
                    interest expense related to convertible notes and advancesfrom
                    related party
                
                
                369
                
                
                -Depreciation
                    and amortization
                
                
                391
                
                
                558Compensation
                    expense for stock options
                
                
                1,641
                
                
                1,080Equity
                    in loss from investment in EnerStruct
                
                
                765
                
                
                380Assets
                    transferred under Warrant Exercise Agreement
                
                
                10,127
                
                
                -Changes
                    in current assets and liabilities
                
                
                3,740
                
                
                722Net
                    cash used in operating activities
                
                
                (17,126
                )
                
                (24,333
                )Investing
                    Activities - capital expenditures, net
                
                
                (1,267
                )
                
                (813
                )Financing
                    Activities:Proceeds
                    from convertible notes and advances from related party, net of
                    costs
                
                
                10,883
                
                
                -Proceeds
                    from exercise of warrants
                
                
                5,520
                
                
                -Repayment
                    of bank installment loan
                
                
                (25
                )
                
                (23
                )Proceeds
                    from issuance of senior secured debenture, net of costs
                
                
                -
                
                
                13,134Proceeds
                    from sale of preferred stock
                
                
                -
                
                
                250Net
                    cash provided by financing activities
                
                
                16,378
                
                
                13,361Net
                    decrease in cash and equivalents
                
                
                (2,015
                )
                
                (11,785
                )Cash
                    and cash equivalents - beginning balance
                
                
                2,306
                
                
                14,091Cash
                    and cash equivalents - ending balance
                
                $
                291
                
                $
                2,306**Supplemental
                    Disclosure of Cash Flow Information**Cash
                    paid during the year for:Interest
                
                $
                3,680
                
                $
                3,786Income
                    taxes
                
                
                -
                
                
                -Non-cash
                    investing and financing activities:Adjustment
                    for elimination of derivatives as fair value - warrants
                
                $
                22,096
                
                $
                -Adjustment
                    for conversion of derivatives as fair value - warrants
                
                
                26,449
                
                
                -Warrants
                    issued in connection with the issuance of debt
                
                
                4,006
                
                
                213Accrued
                    dividends on preferred stock
                
                
                1,067
                
                
                1,066Accretion
                    of discounts on preferred stock
                
                
                907
                
                
                1,860Spin-off
                    of Splinex shares
                
                
                -
                
                
                150
  See
        notes
        to consolidated financial statements.
  44
 
 ENER1,
        INC. AND SUBSIDIARIES
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS
 
 1.  NATURE
        OF
        BUSINESS
 
 Ener1,
        Inc. ’s
        ("Ener1" or the "Company") 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, Inc. (“Ener1 Group”) acquired a majority interest in
        the Company and owns approximately 85% of the outstanding common stock of
        the
        Company as of December 31, 2006.
 
 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. The
        Company and ITOCHU have each licensed to EnerStruct some of their respective
        battery technologies for use in Japanese markets.
 
 On
        October 26, 2004, Ener1 and each of Delphi Automotive Systems, LLC and Delphi
        Technologies, Inc. (collectively, “Delphi”) contributed certain assets to a
        newly organized Delaware corporation, EnerDel, Inc. Ener1 received 80.5%
        of
        EnerDel’s common stock. Delphi received 19.5% of EnerDel's common stock, 8,000
        shares of EnerDel’s
        Series A Preferred Stock, warrants with a seven year term to purchase up
        to 1.75
        million shares of Ener1's common stock for $0.70 per share, and warrants
        with a
        seven year term to purchase up to 5.25 million shares of Ener1’s common stock
        for $1.00 per share. All
        of
        the Company’s Li-ion battery business has been conducted through EnerDel since
        its formation.
 
 The
        Company formed NanoEner on April 2, 2004 to develop new markets and applications
        for Ener1’s proprietary technologies to manufacture nanomaterials. The Company
        formed EnerFuel on October 29, 2004 to conduct the Company’s fuel cell related
        operations.
 
 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 December 31, 2006, the Company has an accumulated deficit
        of
        $191,944,000 and working capital deficit of $13,735,000 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 additional financing will be required to fund Ener1's
        planned operations through that time. Ener1 requires additional financing
        to
        continue its operations. 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.
 
 In
        2006,
        the Company relied on its controlling shareholder, Ener1 Group, for adequate
        funding to sustain operations on a month-to-month basis and has continued
        to
        rely on Ener1 Group in 2007. There is no assurance that Ener1 Group will
        continue to provide funding in amounts sufficient to maintain the current
        levels
        of activities, if at all. Subsequent to December 31, 2006, the Company has
        obtained interim operating funding from Ener1 Group through the exercise
        of
        certain warrants to purchase Ener1 common stock and loan advances in amounts
        sufficient to meet the immediate working capital requirements but not in
        amounts
        sufficient to meet its 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 during 2007. 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.
  45
 
 3.  SIGNIFICANT
        ACCOUNTING POLICIES
 
 *Principles
        of Consolidation.* The
        accompanying consolidated financial statements include Ener1, Inc. and its
        wholly-owned subsidiaries and its majority (80.5%) owned subsidiary, EnerDel.
        Intercompany accounts and transactions have been eliminated in consolidation.
        EnerDel, NanoEner and EnerFuel have ongoing operations. The Company’s 42%
        investment in EnerStruct is accounted for using the equity method.
 
 *Use
        of Estimates* .
        The
        preparation of consolidated financial statements in conformity with accounting
        principles generally accepted in the United States of America requires
        management to make estimates and assumptions that affect the reported amounts
        of
        assets and liabilities and disclosure of contingent assets and liabilities
        at
        the date of the financial statements and the reported amounts of revenues
        and
        expenses during the reporting period. Actual results could differ materially
        from those estimates.
 
 *Cash
        and Cash Equivalents* .
        The
        Company considers liquid instruments purchased with a maturity of three months
        or less to be cash and cash equivalents. The Company may, in the normal course
        of operations, maintain cash balances in excess of federally insured limits.
        Restricted cash in the amount of $224,0000 represents cash in a bank account
        securing a letter of credit on the New York City office lease that was
        terminated in February 2007. The cash became unrestricted on March 22,
        2007.
 
 *Property
        and Equipment* .
        Property and equipment are recorded at cost. Expenditures for major betterments
        and additions are charged to the asset accounts, while replacement, maintenance
        and repairs, which do not extend the lives of the respective assets, are
        charged
        to expense in the period incurred.
 
 Depreciation
        and amortization are computed using the straight-line method over the estimated
        useful lives of the assets, which are as follows (in years):
 **Asset
                    Category**
                
                **Years**Building
                    and improvements
                
                
                39Leasehold
                    improvements
                
                
                5
                *Battery
                    plant equipment
                
                
                10Machinery
                    and equipment
                
                
                5Office
                    equipment, furniture and other
                
                
                5Computers
                    and software
                
                
                3
  *
                    Lesser of the life of the lease or five years
 *Long-
        Lived Assets* .
        The
        Company accounts for the impairment and disposition of long-lived assets
        in
        accordance with Statement of Financial Accounting Standard No. 144, “Accounting
        for the Impairment or Disposal of Long-Lived Assets.” ("SFAS No. 144"). In
        accordance with SFAS No. 144, long-lived assets to be held are reviewed for
        impairment whenever events or changes in circumstances indicate that the
        carrying amount of the asset may not be recoverable. An asset is considered
        impaired when the sum of the undiscounted cash flows estimated to be generated
        by the asset is less than its carrying value.
 
 *Earnings
        Per Share* .
        Basic
        net earnings (loss) per common share are computed by dividing net earnings
        (loss) applicable to common shareholders by the weighted-average number of
        common shares outstanding during the period. Diluted net earnings (loss)
        per
        common share is determined using the weighted-average number of common shares
        outstanding during the period, adjusted for the dilutive effect of common
        stock
        equivalents. In periods when losses are reported, the weighted-average number
        of
        common shares outstanding excludes common stock equivalents, because their
        inclusion would be anti-dilutive.
 
 The
        dilutive effect of outstanding stock options and warrants is reflected in
        diluted earnings per share by application of the treasury stock method. The
        dilutive effect of outstanding convertible securities is reflected in
        diluted earnings per share by application of the if-converted
        method.
 
 46
  *Accounting
        for Share-Based Payment* .
        Prior
        to December 31, 2005, Ener1 accounted for its stock-based compensation plans
        under the recognition and measurement provisions of APB Opinion No. 25,
“Accounting for Stock Issued to Employees,” and related Interpretations, (“APB
        25”) as permitted by SFAS No. 123, “Accounting for Stock-Based
        Compensation” (“SFAS 123”).
  Effective
        January 1, 2006, Ener1 adopted the fair value recognition provisions of SFAS
        No.
        123R, “Share-Based Payment,” and related Interpretations (“SFAS 123R”) using the
        modified-prospective transition method. Under that method, compensation cost
        recognized in 2006 includes (a) compensation cost for all share-based
        payments granted prior to, but not yet vested as of, December 31, 2005 based
        on
        the grant date fair value estimated in accordance with the original provisions
        of SFAS 123 and (b) compensation cost for all share-based payments granted
        on or subsequent to January 1, 2006, based on the grant-date fair value
        estimated in accordance with the provisions of SFAS 123R. Compensation cost
        is
        being recognized on a straight-line basis over the requisite service period
        for
        the entire award in accordance with the provisions of SFAS 123R. Results
        for the
        prior periods have not been restated.
 
 *Research
        and Development Costs* .
        Research and Development costs, including the cost of equipment and other
        assets
        used in research and development activities that do not have alternative
        future
        use, are expensed as incurred.
 
 *Income
        Taxes* .
        The
        Company provides for income taxes in accordance with the liability method.
        Deferred income tax assets and liabilities are computed for differences between
        the financial statement carrying values and the tax bases of assets and
        liabilities and carryforwards that will result in taxable or deductible amounts
        in the future based on enacted tax laws and rates applicable to the periods
        in
        which the differences are expected to affect taxable income. Valuation
        allowances are established when necessary to reduce deferred tax assets to
        the
        amount more likely than not to be realized. Income tax expense or benefit
        is the
        tax payable or refundable for the period plus or minus the change during
        the
        period in deferred tax assets and liabilities.
 
 Ener1
        calculates its income taxes as if it filed a separate return. Ener1 Group
        files
        a consolidated federal income tax return and certain state income tax returns
        which include Ener1 and its subsidiaries. Ener1 and Ener1 Group have adopted
        a
        tax sharing agreement which provides for the allocation of income taxes between
        the two groups. I ntergroup
        tax payments are made only when a payment is required or a refund is received
        on
        the consolidated tax return of Ener1 Group. When determining any Federal
        income
        tax payments due by Ener1 in any year, for purposes of the tax allocation
        agreement, Ener1 shall be credited the tax benefit of all of Ener1’s net
        operating losses generated after January 3, 2003 plus the tax benefit of
        any of
        Ener1’s net operating losses generated before January 3, 2003 that are allowable
        under the Internal Revenue Code, plus any payments Ener1 has made under the
        tax
        allocation agreement, less any payments Ener1 has received under the tax
        allocation agreement.
 
 *Reclassifications* .
        Certain
        prior year amounts have been reclassified to conform to the fiscal 2006
        presentation.
 
 *Fair
        Value of Financial Instruments* .
        The
        carrying value of cash and cash equivalents, trade receivables, accounts
        payable
        and accrued expenses and other liabilities approximates fair value due to
        the
        short term maturity of these instruments or the fact that they are carried
        at
        fair value, as applicable. The carrying value of the installment loan
        approximates fair value as the interest rates are not significantly different
        from the current market rates available to the Company for similar type loans.
        The face value of the senior secured convertible debentures and the stated
        value
        of the redeemable preferred stock approximate fair value.
 
 *Foreign
        Currency Transactions* .
        The
        Company has no significant foreign currency transactions.
 
 *Accounting
        for Derivative Instruments* .
        Statement of Financial Accounting Standard (“SFAS”) No. 133, “Accounting for
        Derivative Instruments and Hedging Activities,” as amended, requires all
        derivatives to be recorded on the balance sheet at fair value. These
        derivatives, including embedded derivatives in the Company’s structured
        borrowings, are separately valued and accounted for on the Company’s balance
        sheet. Fair values for exchange-traded securities and derivatives are based
        on
        quoted market prices. Where market prices are not readily available, fair
        values
        are determined using market based pricing models incorporating readily
        observable market data and requiring judgment and estimates.
  47
 
 In
        September 2000, the Emerging Issues Task Force issued EITF 00-19, "Accounting
        for Derivative Financial Instruments Indexed to and Potentially Settled in,
        a
        Company's Own Stock," ("EITF 00-19") which requires freestanding contracts
        that
        are settled in a company's own stock, including common stock warrants, to
        be
        designated as an equity instrument, asset or a liability. Under the provisions
        of EITF 00-19, a contract designated as an asset or a liability must be carried
        at fair value on a company’s balance sheet, with any changes in fair value
        recorded in the company’s results of operations. A contract designated as an
        equity instrument must be included within equity, and no fair value adjustments
        are required from period to period. In accordance with SFAS No. 133 and EITF
        00-19, certain of the Company’s warrants to purchase common stock and the
        embedded conversion feature of several of the Company’s financial instruments
        are separately accounted for as liabilities. The fair value of these warrants
        and conversion features are shown on the Company’s balance sheet and the
        unrealized changes in the values of these derivatives are shown in the Company’s
        consolidated statement of operations as “Gain (loss) on derivative
        liabilities.”
 
 The
        Company’s 5% Senior Secured Convertible Debentures due January 20, 2009 (the
‘2004 Debentures”) and 7.5% Senior Secured Convertible Debentures due March 14,
        2009 (the “2005 Debentures”) both contain more than one embedded derivative
        feature which SFAS 133 requires be accounted for as derivatives. 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 convert 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.
 
 For
        instruments with a single derivative, such as the Company's warrants and
        the
        conversion feature derivatives of the Non-Voting, Cumulative and Redeemable
        Series A Convertible Preferred Stock issued by EnerDel (“Series A Preferred
        Stock”) and the Series B Convertible Preferred Stock issued by the Company
        (“Series B Preferred Stock”), the Company uses the Black-Scholes
        pricing model for determining the fair values of the derivatives. For
        instruments with compound embedded derivatives, such as the Company's 2004
        Debentures and 2005 Debentures, the Company uses a lattice valuation model
        to value the derivatives. The Company believes the application of the
        Black-Scholes Model provides the most reliable valuation of single derivatives,
        and the lattice model provides the ability to value compound embedded
        derivatives.
 
 ***Lattice
        Valuation Model***
 
 The
        Company valued the compound embedded derivatives in the 2004 Debentures and
        2005 Debentures using a lattice valuation 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. The Company
        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, the Company 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.
  48
 
 ***Black-Scholes
        Valuation Model***
 
 The
        Company used the Black-Scholes pricing model to determine the fair values
        of the
        conversion feature derivatives of its warrants and preferred stock. 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.  In particular, the Company uses
        volatility rates based upon the closing stock price of the Company’s common
        stock.  The Company uses a risk free interest rate which is the U. S.
        Treasury bill rate for a security with a maturity that approximates the
        estimated expected life of the derivative or security.
 
 ***Recently
        Issued Accounting Pronouncements and Interpretations***
 
 In
        July
        2006, the Financial Accounting Standards Board (“FASB”) issued FASB
        Interpretation No. 48, “Accounting for Uncertainty in Income Taxes—an
        Interpretation of FASB Statement No. 109” (“FIN 48”), which clarifies the
        accounting for uncertainty in income tax positions. This Interpretation requires
        that the Company recognize in its financial statements the impact of a tax
        position if that position is more likely than not of being sustained on audit,
        based on the technical merits of the position. The provisions of FIN 48 are
        effective for the Company on January 1, 2007, with the cumulative effect
        of the
        change in accounting principle, if any, recorded as an adjustment to opening
        retained earnings. The Company is currently evaluating the impact of adopting
        FIN 48 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.
 
 4.PROPERTY
        AND EQUIPMENT
 
 Property
        and equipment consisted of the following at December 31, 2006 and 2005 (in
        thousands):
 **2006**
                
                **2005**Building
                    and building improvements
                
                $
                1,551
                
                $
                1,551Leasehold
                    improvements
                
                
                971
                
                
                789Machinery
                    and equipment
                
                
                1,049
                
                
                330Office
                    equipment, furniture and other
                
                
                838
                
                
                864Total
                    cost
                
                
                4,409
                
                
                3,534Less
                    accumulated depreciation
                
                
                (855
                )
                
                (492
                )Net
                    property, plant, and equipment
                
                $
                3,554
                
                $
                3,042
 
 In
        2006
        and 2005, the Company expensed $364,000 and $10,527,000, respectively, of
        equipment that is currently used in research and development. This equipment
        was
        expensed to research and development expense in accordance with SFAS No.
        2,
“Accounting for Research and Development Costs,” which requires that assets to
        be used in R&D activities are to be immediately charged to income unless an
        alternative future use for the asset exists. The land, building and certain
        machinery and equipment owned by the Battery Company (which machinery and
        equipment is used exclusively by EnerDel) are pledged as security under the
        terms of the 2004 Debentures.
 
 Depreciation
        and amortization expense for property and equipment for the years ended December
        31, 2006 and 2005 was $391,000 and $558,000, respectively.
 
 5.    
        INVESTMENT IN ENERSTRUCT
  In
        2003,
        Ener1 invested $2,003,000 in EnerStruct, Inc., a Japanese company, in exchange
        for an initial 49% ownership interest. ITOCHU Corporation invested $1,100,000
        plus equipment totaling approximately $500,000 for an initial 51% ownership
        interest. Through December 31, 2006, Ener1’s investment in EnerStruct was
        reduced by $1,963,000 which represents Ener1’s share of EnerStruct losses
        through that date. As a result of subsequent investments in EnerStruct by
        ITOCHU
        and SBIC, a Japanese investment bank, Ener1’s interest in EnerStruct has been
        reduced to 42% at April 30, 2006 and at December 31, 2006.
  At
          December 31, 2006, the Company’s investment in EnerStruct had a carrying value
          of $40,000 as compared to an underlying equity in net assets of $473,000,
          primarily due to a difference between the ownership interests in equity
          agreed
          upon between Ener1 and ITOCHU versus their relative capital
          contributions.
  49
 
 In
        April
        2005, EnerDel entered into an agreement with EnerStruct, under which EnerDel
        paid EnerStruct $1,000,000 in prepayment for engineering services related
        to
        optimization of EnerDel’s planned lithium battery production and further
        development of EnerStruct’s high-rate battery technology. If development of this
        technology is successfully completed, use of such technology would be licensed
        to EnerDel on terms set forth in the agreement and certain other terms to
        be
        negotiated under a separate agreement at that time. The $1,000,000 payment
        was
        expensed in 2005.
 
 Summarized
        financial information of EnerStruct is as follows as of December 31, 2006
        and
        2005 and for the years then ended is as follows (in thousands):
 **2006**
                
                **2005**Cash
                
                $
                105
                
                $
                624Total
                    assets
                
                
                1,853
                
                
                1,354Total
                    liabilities
                
                
                726
                
                
                260Net
                    loss
                
                
                (1,439
                )
                
                (783
                )
 6.  ACCOUNTS
        PAYABLE AND ACCRUED EXPENSES
 
 Accounts
        payable and accrued expenses principally consist of the following at December
        31, 2006 and 2005 (in thousands):
 **2006**
                
                **2005**Accounts
                    payable
                
                $
                2,514
                
                $
                1,409Accrued
                    registration delay expenses
                
                
                2,221
                
                
                644Accrued
                    compensation and benefits
                
                
                490
                
                
                225Accrued
                    severance
                
                
                350
                
                
                200Accrued
                    other
                
                
                362
                
                
                491Total
                    accounts payable and accrued expenses
                
                $
                5,937
                
                $
                2,969
  7.INCOME
        TAXES
 
 The
        Company has deferred tax assets of $49,125,000 and $38,240,000 at December
        31,
        2006 and 2005, respectively, which are completely offset by valuation
        allowances. The deferred tax assets reflect a reduction of approximately
        $17,000,000 to reflect the limits on the Company’s ability to use net operating
        loss carryforwards in existence in January 2002 due to the change in control
        that occurred in 2002.
  50
  Deferred
        income tax assets in the accompanying balance sheet as of December 31, 2006
        and
        2005 are attributable to the following items (in thousands):
 **2006**
                
                **2005**Federal
                    and state net operating loss carryforwards
                
                $
                36,302
                
                $
                23,200R&D
                    expense taken on equipment and intellectual property
                
                
                8,584
                
                
                9,707Impairment
                    losses
                
                
                2,300
                
                
                3,119Goodwill
                
                
                2,001
                
                
                2,277Other
                
                
                (62
                )
                
                (63
                )Gross
                    deferred tax asset
                
                
                49,125
                
                
                38,240Valuation
                    allowance
                
                
                (49,125
                )
                
                (38,240
                )Net
                    deferred tax asset
                
                $
                -
                
                $
                -
 The
        Company has federal and Florida net operating loss (“NOL”) carryforwards
        available to offset future taxable income of approximately $89,000,000 and
        $135,000,000 at December 31, 2006, respectively, and approximately $52,000,000
        and $102,000,000 at December 31, 2005, respectively. The federal NOL
        carryforwards will begin to expire in 2018, while the Florida NOL carryforwards
        will begin to expire in 2011. The federal NOL carryforwards exclude $50,677,000
        of carryforwards in existence at the time of change in ownership in January
        2002
        which are subject to substantial restrictions and may only be utilized to
        offset
        approximately $40,000 of annual taxable income, as well as any unrealized
        appreciation on assets existing at the time of the ownership change.
 
 A
        valuation allowance is established when it is more likely than not that some
        portion of the Company’s deferred tax assets will not be realized. Management
        has evaluated the available evidence about the Company’s future taxable income
        and other possible sources of realization of deferred tax assets, and as
        a
        result, the valuation allowance was increased by the full amount of the tax
        benefit from the net operating loss in the years ended December 31, 2005
        and
        2006. The valuation allowance recorded in the financial statements reduces
        deferred tax assets to an amount that represents management’s best estimate of
        the amount of such deferred tax assets that more likely than not will be
        realized.
 
 The
        components of income taxes (benefit) in the accompanying statements of
        operations are as follows:
 **2006**
                
                
                **2005**Federal:Current
                
                $
                -
                
                $
                -Deferred
                
                
                -
                
                
                -Total
                
                $
                -
                
                $
                -
  51
 The
        Company's effective income tax rate differs from the statutory federal rate
        of
        35% as follows:
  **2006**
                
                **2005**Statutory
                    rate applied to income before taxes
                
                
                35.0
                %
                
                35.0
                %Non-taxable
                    items:Derivative
                    income
                
                
                -0.4
                %
                
                -262.1
                %Accretion
                    of discounts
                
                
                9.4
                %
                
                18.4
                %Warrant
                    modification expense
                
                
                23.2
                %
                
                -State
                    income tax net of federal tax benefit
                
                
                3.3
                %
                
                3.3
                %Increase
                    in valuation allowance
                
                
                -70.5
                %
                
                205.4
                %Total
                    income tax provision
                
                
                0.0
                %
                
                0.0
                %
  8.  DERIVATIVES
 
 Ener1
        evaluated the features of 1) a convertible note and warrants to purchase
        up to
        9,000,000 shares issued to Ener1 Group on June 30, 2006 (“Group Note I”), 2)
        warrants to purchase up to 20,000,000 shares issued to Ener1 Group on June
        30,
        2006 under a warrant exercise agreement and 3) a convertible note and warrants
        to purchase up to 18,000,000 shares issued to Ener1 Group on September 30,
        2006
        (“Group Note II”), and determined that the instruments were not derivatives
        under SFAS 133 and EITF 00-19. The convertible notes were deemed to be
        conventional convertible debt under EITF 00-19 and therefore were accounted
        for
        as convertible instruments under EITF Issue 00-27, “Application of Issue No.
        98-5 to Certain Convertible Instruments” (“EITF 00-27”).
 
 Ener1
        previously evaluated the application of SFAS 133 and EITF 00-19 for the
        following:
  ·
              ·the
                  2004 Debentures conversion, interest rate adjustment, registration
                  delay
                  expenses, redemption premium, forced conversion default premium
                  and change
                  in control premium features;·
              ·warrants
                  to purchase common stock associated with the 2004 Debentures (the
                  "2004
                  Debenture Warrants");·
              ·the
                  2005 Debentures conversion, interest rate adjustment, registration
                  delay
                  expenses, default premium and change in control premium
                  features;·
              ·warrants
                  to purchase common stock associated with the 2005 Debentures (the
                  "2005
                  Debenture Warrants");·
              ·EnerDel
                  Series A Preferred Stock conversion feature;·
              ·warrants
                  to purchase common stock issued to Delphi Corporation (the "Delphi
                  Warrants");·
              ·Series
                  B Preferred Stock conversion feature;·
              right to require Ener1
                Group to
                purchase shares of  Series B Preferred Stock (the “Series B Preferred
                Stock Put”);·
              ·warrants
                  to purchase common stock issued to the purchasers of the Series
                  B
                  Preferred Stock (the "Series B Preferred Stock
                  Warrants");·
              ·warrants
                  to purchase common stock issued to Ener1 Group, Inc. in connection
                  with
                  the acquisition by Ener1 Group, Inc. of Ener1 Battery Company
                  from Ener1 Group, Inc. (“Battery Warrants”); and·
              ·warrants
                  to purchase common stock issued to Ener1 Group in connection with
                  the
                  exchange of stock, notes and warrants for debt (the "Exchange
                  Warrants").
 
 Based
        on
        the guidance in SFAS 133 and EITF 00-19, Ener1 concluded all of these
        instruments, other than the conversion feature of the Series B Preferred
        Stock,
        were required to be initially 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, 2005 Debentures and Series
        A
        Preferred Stock as embedded derivatives. Ener1 is required 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 (loss) on derivative liabilities.”
  52
 
 Ener1
        previously determined that the Battery Warrants were a derivative liability
        under EITF 00-19 because share settlement of these warrants was not within
        the
        control of Ener1 as a result of the facts that: (1) the holder of the Battery
        Warrants was the controlling shareholder of Ener1, and (2) the Battery Warrants
        contained dilution protection features, with no limit or cap on the number
        of
        shares that could be issued under the Battery Warrants. Therefore, Ener1
        could
        not conclude that it had sufficient authorized and unissued shares to issue
        the
        number of shares potentially issuable under the Battery Warrants. Ener1 also
        determined that it could not conclude it had sufficient authorized and unissued
        shares to issue the number of shares required under the other warrants
        subsequently issued by Ener1 as described above. As a result, Ener1 determined
        that these warrants would also be treated as derivative liabilities because
        Ener1 could not conclude that it had sufficient authorized and unissued shares
        to settle the potential share issuances required under these warrants as
        long as
        the Battery Warrants were outstanding.
 
 As
        of
        June 30, 2006, the Battery Warrants had been fully exercised. As a result,
        Ener1
        determined that it could conclude that it had sufficient authorized and unissued
        shares to issue the number of shares required under the other warrants described
        above and, therefore, all of these warrants, other than the 2005 Debenture
        Warrants, should not be treated as derivative liabilities as of June 30,
        2006.
        The fair value of these warrants was marked to market on the date they no
        longer
        were accounted for as derivatives and derivative gain or loss was recorded.
        The
        balance of the derivative liability was then recorded as a contribution to
        paid
        in capital on June 30, 2006. Ener1 determined that the conversion and other
        derivative features of the 2004 Debentures and 2005 Debentures and the 2005
        Debenture Warrants should continue to be treated as derivative liabilities
        as of
        June 30, 2006.
 
 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
        as of
        December 31, 2005 and the impact on the balance sheet and statements of
        operations as of December 31, 2006 are as follows (in thousands):
 **2006****2006**
                
                **Contribution****December
                    31,**
                
                **December
                    31,**
                
                **Gain**
                
                **to
                    Paid In****2005**
                
                **2006**
                
                **(Loss)**
                
                **Capital**2004
                    Debentures conversion
                
                $
                5,980
                
                $
                3,753
                
                $
                2,227
                
                $
                -2004
                    Debenture Warrants
                
                
                3,520
                
                
                -
                
                
                (3,361
                )
                
                6,880
                
                
                (b)2005
                    Debenture conversion
                
                
                4,555
                
                
                2,442
                
                
                2,113
                
                
                -2005
                    Debenture Warrants
                
                
                2,205
                
                
                967
                
                
                1,237
                
                
                -Delphi
                    Warrants
                
                
                2,660
                
                
                -
                
                
                (228
                )
                
                2,888
                
                
                (b)Series
                    B Preferred Stock Warrants
                
                
                3,135
                
                
                -
                
                
                (593
                )
                
                3,728
                
                
                (b)Series
                    B Preferred Stock Put
                
                
                (496
                )
                
                -
                
                
                88
                
                
                -
                
                
                (a)Battery
                    Warrants
                
                
                26,220
                
                
                -
                
                
                (229
                )
                
                26,499
                
                
                (c)Debt
                    Exchange Warrants
                
                
                7,200
                
                
                -
                
                
                (1,400
                )
                
                8,600
                
                
                (b)$
                54,979
                
                $
                7,162
                
                $
                (146
                )
                $
                48,595
  53
  (a)
              The
                  Series B Preferred Stock Put was terminated on March 30, 2006 and
                  has no
                  value on December 31, 2006.
 (b)
            As
                a result of the conversion of all of the Battery Warrants on June
                30,
                2006, these warrants were deemed to no longer be derivatives under
                SFAS
                133 and EITF 00-19. The warrants were valued at fair value on June
                30,
                2006 with a corresponding gain or loss on derivatives. The remaining
                derivative liability was then recorded as a contribution to paid
                in
                capital on that date.  (c)
            The
                Battery Warrants were exercised at various dates during the six months
                ended June 30, 2006, and there were no remaining unexercised Battery
                Warrants at June 30, 2006. Each Battery Warrant was valued at fair
                value
                on the date of exercise and a corresponding derivative gain or loss
                was
                recorded. The remaining derivative liability was recorded as a
                contribution to paid in capital on that date. Proceeds from exercise
                of
                the warrants were also recorded as paid in
                capital. 
 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 and the conversion feature of the preferred stock. Ener1
        uses a lattice valuation model to value the compound embedded derivative
        features in the 2004 Debentures and 2005 Debentures.
 
 *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.
 54


The
        fair
        value of the compound derivative embedded in the 2004 Debentures as of December
        31, 2006 and 2005 determined using the lattice valuation model were based
        on the
        following management assumptions:


**2004
                  Debentures****December
                  31, 2006**
              
              **December
                  31,****2005*****Assumptions:***The
                  price of Ener1's common stock would increase at a rate commensurate
                  with
                  the cost of equity, with a volatility of:
              
              
              100
              %
              
              120
              %Percent
                  likelihood that Ener1 would not be in default of its obligations
                  under the
                  registration 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
                  if
                  the stock price reached $1.75:
              
              
              95
              %
              
              95
              %The
                  holders of the 2004 Debentures would convert the 2004 Debentures
                  if the
                  registration rights agreement was effective, Ener1 was not in default
                  under the 2004 Debentures, and Ener1's common stock price
                  was:
              
              $
              3.50
              
              $
              3.50Ener1
                  would redeem the 2004 Debentures following the third anniversary
                  of the
                  issue date if Ener1's common stock price reached:
              
              $
              1.50
              
              $
              1.50Percent
                  likelihood that Ener1 would be able to obtain alternative financing
                  that
                  would enable it to redeem the 2004 Debentures, increasing 2.5%
                  per quarter
                  to a maximum of 25%:
              
              
              0
              %
              
              0
              %Percent
                  likelihood that Ener1's common stock would be listed on an exchange
                  increasing 10% quarterly to a maximum of 90%:
              
              
              0
              %
              
              0
              %




Based
      on
      these management assumptions, the fair value of these embedded derivatives
      as of
      December 31, 2006 and 2005 were calculated by management to be $3,753,000
      and $5,980,000, respectively.




55





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




**2005
                  Debentures****December
                  31, 2006**
              
              **December
                  31, 2005*****Assumptions:***The
                  price of Ener1's common stock would increase at a rate commensurate
                  with
                  the cost of equity, with a volatility of:
              
              
              100
              %
              
              120
              %Percent
                  likelihood that Ener1 would not be in default of its obligations
                  under the
                  registration 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
              
              
              0.893Percent
                  likelihood that Ener1 would force the conversion of the 2005 Debentures
                  if
                  the Ener1 common stock price reached $1.50:
              
              
              95
              %
              
              95
              %The
                  holders of the 2005 Debentures would convert the 2005 Debentures
                  if the
                  registration rights agreement was effective, Ener1 was not in default
                  under the 2004 Debentures and Ener1's common stock price
                  reached:
              
              $
              1.75
              
              $
              1.75Ener1
                  would redeem the 2005 Debentures following the third anniversary
                  of the
                  issue date if Ener1's common stock price reached:
              
              $
              1.25
              
              $
              1.25Percent
                  likelihood that Ener1 would be able to obtain alternative financing
                  that
                  would enable it to redeem the 2005 Debentures, increasing 2.5%
                  per quarter
                  to a maximum likelihood of 25%:
              
              
              0
              %
              
              0
              %Percent
                  likelihood that Ener1's common stock would be listed on an exchange
                  and
                  meet 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 December 31, 2006 and 2005 were calculated by
      management to be $2,442,000 and $4,555,000, 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
      valued the asset value of the Series B Preferred Stock Put using the
      Black-Scholes pricing model with the assistance of a valuation consultant.
      The model uses a number of inputs including the value of the Series B Preferred
      Stock Warrants and the cost of alternative financing in order to compute the
      value of the Series B Preferred Stock Put. The assumptions used in the
      Black-Scholes valuation model were: a risk free interest rate of 4.0%; the
      current stock price at date of issuance of $0.65 per share; the exercise price
      of the warrants of $1.25 and $1.50; the term of ten years; volatility of 450%;
      and dividend yield of 0.0%. The Series B Preferred Stock Put was terminated
      on
      March 30, 2006 pursuant to the Warrant Exercise Agreement described in Note
      12.
      Accordingly, the Series B Preferred Stock Put had no value at December 31,
      2006.





Ener1
      used the Black-Scholes pricing model to determine the fair values of the
      warrants and the conversion feature derivatives of its preferred stocks. 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 135% during the four years ended December
      31,
      2006.




56




The
      following table shows the volatility, risk free rate
      and market price used in the calculation of the Black-Scholes call value for
      each derivative at issuance date and at the end of each year and at December
      31,
      2006:


**Issue
                  Date**
              
              **Volatility**
              
              **Risk-Free
                  Interest Rate**
              
              **Market**
                **Price**
              
              **Term
                  in**
                **Years****Valuation
                  inputs at issuance date for:**2004
                  Debenture Warrants
              
              
              1/21/2004
              
              
              296%
              
              
              3.5%
              
              $
              1.65
              
              
              102005
                  Debenture Warrants
              
              
              3/11/2005
              
              
              135%
              
              
              3.5%
              
              $
              0.75
              
              
              5EnerDel
                  Series A Preferred Stock
              
              
              10/20/2004
              
              
              207%
              
              
              1.8%
              
              $
              0.66
              
              
              3
                  mos.Delphi
                  Warrants
              
              
              10/20/2004
              
              
              207%
              
              
              1.8%
              
              $
              0.66
              
              
              7Series
                  B Preferred Stock Warrants
              
              
              10/15/2004
              
              
              207%
              
              
              1.8%
              
              $
              0.65
              
              
              10Debt
                  Exchange Warrants
              
              
              11/14/2003
              
              
              296%
              
              
              1.0%
              
              $
              0.98
              
              
              10**Valuation
                  inputs at:**December
                  31, 2003
              
              
              
              
              
              296%
              
              
              4.3%
              
              $
              1.40December
                  31, 2004
              
              
              
              
              
              155%
              
              
              4.1%
              
              $
              0.85December
                  31, 2005
              
              
              
              
              
              145%
              
              
              4.1%
              
              $
              0.39December
                  31, 2006
              
              
              
              
              
              135%
              
              
              4.7%
              
              $
              0.23
  9.  DEBT





*$19,700,000
      CONVERTIBLE DEBENTURES*





On
      January 20, 2004, Ener1 issued $20,000,000 in aggregate principal amount of
      senior secured convertible debentures due January 20, 2009 (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 December
      31 ,
      2006,
      the adjusted conversion price was $1.13 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 December 31, 2006, the adjusted
      exercise price was $2.13 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.





Interest
      expense for the 2004 Debentures was $2,997,000 and $2,918,000 for the years
      ended December 31, 2006 and 2005, 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 December
      31, 2006 have been paid except for the $755,000 quarterly interest payments
      due
      December 31, 2006, which were paid on January 5, 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
      December 31, 2006.





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 Convertible Debentures. In the event of any “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.




57





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 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 have been accrued for the period November 22, 2005 through January
      20,
      2006, when the registration requirement for the 2004 Debentures expired.





As
      of
      December 31, 2006, $450,000 of the registration delay expenses has been 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. The remaining amount
      owed
      to that holder for registration delay expenses related to the 2004 Debentures
      and 2005 Debentures as of December 31, 2006 totaled $1,295,000. Under the terms
      of a Forbearance Agreement effective January, 19, 2007, that holder agreed
      to
      forbear from taking any action against Ener1 related to the non-payment of
      the
      remaining registration delay expenses until March 2, 2007. Upon execution of
      the
      Forbearance Agreement, Ener1 Group deposited $650,000 into escrow on behalf
      of
      the Company for the benefit of the holder, which exercised its right to apply
      the payment to the registration delay expenses upon the expiration of the
      Forbearance Agreement on March 2, 2007. Effective March 14, 2007, Ener1 entered
      into a new Forbearance Agreement with the holder under which Ener1 paid an
      additional $350,000 of the registration delay expenses and the holder agreed
      to
      continue to forbear from taking any action against Ener1 until April 2, 2007
      with respect to the remaining $295,000 of registration delay expenses owed
      to
      this holder if the Company remained in compliance with the Forbearance Agreement
      during this time. On April 4, 2007, the Company paid an additional $150,000
      of
      the registration delay expenses to the holder to extend the forbearance period
      until May 4, 2007.





As
      of
      April 4, 2007, in addition to the $145,000 owed to the holder described above,
      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.





Ener1
      is
      accounting for the conversion option in the 2004 Debentures as a derivative
      liability in accordance with Statement of Financial Accounting Standards
      (“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 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 2004 Debenture warrants
      were
      treated as a derivative liability until June 30, 2006 at which time Ener1
      determined that it had sufficient available authorized and unissued shares
      as a
      result of the exercise of certain other previously issued warrants.




*$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 now 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 December 31, 2006, the
      conversion price was $0.93 per share. The warrants issued in connection with
      the
      issuance of the 2005 Debentures 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 December 31, 2006, the adjusted exercise price was $1.06 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 December 31, 2006, the adjusted exercise price was $1.15 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 exercise price of $1.00 per share to the placement agent
      for the 2005 Debentures.




58




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.





Interest
      expense for the 2005 Debentures was $1,950,000 and $868,000 for the years ended
      December 31,2006 and 2005, 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 December 31, 2006 have
      been
      paid, except for the $545,000 quarterly interest payments due December 31,
      2006,
      which were paid on January 5, 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 December 31, 2006.





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 are not available for use during the two year period from March
      2005
      to March 2007 or Ener1’s common stock is not listed or quoted on the OTC
      Bulletin Board, Ener1 is 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 had 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.





As
      of
      December 31, 2006, $450,000 of the registration delay expenses has been paid
      to
      one of the holders of $9.5 million of the 2004 Debentures and $10.0 million
      of
      the 2005 Debentures. The remaining amount owed to that holder for registration
      delay expenses related to the 2004 Debentures and 2005 Debentures as of December
      31, 2006 totaled $1,295,000. Under the terms of a Forbearance Agreement
      effective January, 19, 2007, that holder agreed to forbear from taking any
      action against Ener1 related to the non-payment of the remaining registration
      delay expenses until March 2, 2007. Upon execution of the Forbearance Agreement,
      Ener1 Group deposited $650,000 into escrow on behalf of Ener1for the benefit
      of
      the holder, which exercised its right to apply the payment to the registration
      delay expenses upon the expiration of the Forbearance Agreement on March 2,
      2007. Effective March 14, 2007, Ener1 entered into a new Forbearance Agreement
      with the holder under which Ener1 paid an additional $350,000 of the
      registration delay expenses and the holder agreed to continue to forbear from
      taking any action against Ener1 until April 2, 2007 with respect to the
      remaining $295,000 of registration delay expenses owed to this holder if the
      Company remained in compliance with the Forbearance Agreement during this time.
      On April 4, 2007, the Company paid an additional $150,000 of the registration
      delay expenses to the holder to extend the forbearance period to May 4,
      2007.





As
      of
      April 4, 2007, in addition to the $145,000 owed to the holder described above,
      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.





59




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 after which the Company fails to own less than 50% of the 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
      event
      of Fundamental Change has occurred.





Ener1
      is
      accounting for the conversion option in the 2005 Debentures as derivative
      liabilities 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 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.





10.  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.





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).




When
      the
      term of the conversion feature expired in January 2005 with no value, the
      remaining liability of $1,183,000 was recorded as a reduction in the
      derivative liability and a corresponding gain on derivative liability was
      recorded for the first quarter of 2005.





The
      Series B 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 features are 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 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 over a period of one year. The Series A Preferred Stock is reported
      as temporary equity in accordance with EITF D-98 as the redemption features
      are
      not solely within the control of Ener1.





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.




60





*Ener1,
      Inc. Series B Convertible Preferred Stock*





In
      October 2004, Ener1 sold 150,000 shares of Series B Convertible Preferred Stock
      (“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. Ener1 is accounting for the warrants
      in
      accordance with SFAS 133 and EITF 00-19. 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 agreement,
      if
      Ener1 requires Ener1 Group to purchase any of the Series B Preferred Stock
      and
      warrants pursuant to this agreement, Ener1 is required to pay Ener1 Group a
      fee
      equal to one-third of the aggregate purchase price for the securities purchased
      in return for the 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 Battery Warrants prior to the expiration date of
      the
      warrants. The above Series B Preferred Stock issued by the Company remained
      outstanding as of December 31, 2006.





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.





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, “Classification and Measurement of Redeemable Securities”
(“EITF 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 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.




61





The
      following are the components of redeemable preferred stock as of December 31,
      2006 (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
              
              
              2,929
              
              
              3,089Cumulative
                  dividends
              
              
              1,450
              
              
              2,337Carrying
                  value as of December 31, 2006
              
              $
              6,576
              
              $
              15,162


11.  MINORITY
      INTEREST





The
      consolidated financial statements include 100% of the assets and liabilities
      of
      EnerDel, and the ownership interest of Delphi, the minority investor, is
      recorded as a minority interest. The consolidated statement of operations
      includes 100% of the operations of EnerDel, and the minority interest income
      equal to 19.5% of EnerDel’s operating losses and 100% of the dividends on the
      Series A Preferred Stock, which is owned by Delphi, is reflected in minority
      interest income.





Ener1
      recorded a minority interest in consolidated subsidiaries representing the
      19.5%
      equity ownership in EnerDel held by Delphi at the date of the initial
      capitalization of EnerDel in October 2004. The minority interest balance sheet
      amount was reduced by minority interest income in 2004 and 2005 equal to
      19.5% of EnerDel’s annual operating losses. Minority interest income was reduced
      by the dividends and accretion on the Series A Preferred Stock in the
      amount of $1,609,000 and $2,406,000 for the years ended December 31, 2006 and
      2005, respectively. The minority interest balance sheet amount was reduced
      to zero as of September 2005 as a result of the minority interest in the
      cumulative losses, and no additional minority interest income or loss will
      be
      recorded until the minority interest account returns to a positive balance.
      Ener1 is accreting the discount on the Series A Preferred Stock to the face
      amount of $8,000,000 through the earliest redemption date in October
      2008.





12.    
      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. Two
      of
      the Company’s directors, Dr. Peter Novak and Mike Zoi, collectively beneficially
      own 31% of the outstanding common stock of Ener1 Group, which owns approximately
      86% of the outstanding common stock of the Company. Effective October
      3, 2006, Ener1 entered into an agreement with Ener1 Group under which Ener1
      Group agreed to pay 53% of the total salary and related costs for Victor Mendes,
      who was the Chief Executive Officer of Ener1 and Chairman of the Board of Ener1
      Group from October 3, 2006 until October 26, 2006. Effective October 12, 2006,
      Ener1 entered into an agreement with Ener1 Group under which Ener1 Group agreed
      to pay 31% of the total salary and related costs for Ajit Habbu, who became
      at
      that time the Chief Financial Officer of Ener1 and the Chief Financial Officer
      of Ener1 Group.





62




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
      expired in September 2010, was terminated with the landlord in February 2007
      without obligation. Ener1 expensed $60,000 of leasehold improvements made to
      this office space during the quarter ended March 31, 2006. At December 31,
      2006,
      the lease payments on the office space were secured by a letter of credit issued
      on behalf of Ener1. The letter of credit was secured by a cash collateral
      account of $224,000 and still in effect as of December 31, 2006. The letter
      of
      credit was cancelled in February 2007 and the cash collateral was released
      on
      March 22, 2007.





*Series
      B Preferred Stock Put*





On
      October 15, 2004, 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, at a purchase price of $100.00 per share (or an aggregate purchase
      price of $3,000,000), 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 agreement, if Ener1 requires Ener1 Group to purchase any of
      the
      Series B Preferred Stock and warrants pursuant to this agreement, Ener1 is
      required to pay Ener1 Group a fee equal to one third of the aggregate purchase
      price for the securities purchased by Ener1 Group in return for Ener1 Group’s
      assistance in arranging a prior sale of Series B Preferred Stock.
      In February 2005, at Ener1’s request, Ener1 Group purchased 2,500 of
      Ener1’s Series B Preferred Stock and warrants to purchase 138,890 shares of
      Ener1’s common stock, for $250,000, and Ener1 paid Ener1Group a fee of $83,333.
      In consideration of Ener1 Group’s exercise of certain warrants prior to their
      expiration as described below, Ener1 agreed on March 30, 2006 to terminate
      this
      obligation in connection with the exercise of the Battery Warrants as described
      under “Warrant Exercise Agreement” below.





*Warrant
      Exercise Agreement*





On
      March
      30, 2006, the Company and Ener1 Group entered into an agreement (the “Warrant
      Exercise Agreement”), under which: 1) Ener1 Group agreed to exercise the
      remainder of the ten-year warrants issued by the Company to Ener1 Group in
      2002
      in connection with Ener1’s acquisition of Ener1 Battery Company from Ener1 Group
      (the “Battery Warrants”); 2) the Company agreed to transfer its entire equity
      interest in Ener EL to Ener1 Group; 3) the Company and Ener1 Group terminated
      the letter agreement dated October 15, 2004 regarding Ener1 Group’s commitment
      to purchase shares of the Company’s Series B Preferred Stock and warrants to
      purchase Ener1 stock; 4) the Company and Ener1 Group agreed to release each
      other from outstanding obligations with respect to intercompany services
      provided by each company to the other as of March 30, 2006; and 5) the Company
      and Ener1 Group agreed that after Ener1 Group exercises the remaining balance
      of
      the Battery Warrants to purchase up to 24,500,000 shares of Ener1’s common
      stock, the Company would issue to Ener1 Group a new, immediately exercisable,
      ten-year warrant to purchase up to 20,000,000 shares of Ener1 common stock
      at an
      exercise price of $0.50 per share.





Ener1
      expensed the following amounts: 1) $115,000 in connection with the transfer
      of
      Ener1’s entire equity interest in Ener EL to Ener1 Group, which was recorded at
      fair value which approximated the carrying value, 2) $584,000 representing
      the
      fair value of the Series B Preferred Stock Put that was terminated, and 3)
      $228,000 of intercompany receivables.





On
      June
      30, 2006, Ener1 Group completed the exercise of the remaining Battery Warrants
      and the Company issued the 20,000,000 warrants described above to Ener1 Group
      and recorded the fair value of these warrants of $9,200,000 as an expense on
      June 30, 2006, the day they were issued. During the six months ended June 30,
      2006, Ener1 Group purchased 69,000,000 shares of Ener1’s common stock upon
      exercise of the Battery Warrants at an exercise price of $0.08 per share for
      an
      aggregate exercise price of $5,520,000. The expiration date of the exercised
      warrants was 2012. Paid in capital increased $31,279,000 during the year ended
      December 31, 2006 due to the exercise of the Battery Warrants comprised of
      $4,830,000 from the proceeds in excess of the par value of the Common Stock
      and
      $26,449,000 from the fair value of the Battery Warrant derivative at the
      dates of exercise.





*Ener1
      Group 2006 Convertible Notes and Warrants*





From
      June
      29, 2006 through December 31, 2006, Ener1 Group loaned Ener1 an aggregate amount
      of $11,233,000. The Company’s obligation to repay Ener1 Group has been recorded
      as subordinated convertible debt under notes issued in the amount of $3,250,000
      (“Group Note I”), $3,100,000 (“Group Note II”) and $455,000 (Group Note III”).
      The remaining $4,428,000 advanced by Ener1 Group during 2006 (“Group Advances”)
      has been classified as long-term debt as the Company expects to issue additional
      subordinated convertible notes in 2007 representing its obligation to repay
      these Group Advances (in the aggregate, the “Group Notes and Advances”). The
      Company issued a subordinated convertible note for $4,250,000 of the Group
      Advances in February 2007. The net loan proceeds of $10,883,000 have been used
      for working capital.





63




Under
      the
      terms of Group Note I and Group Note II, Ener1 agreed to pay $250,000 and
      $100,000, respectively, as financing fees to Ener1 Group; the amounts have
      been
      added to the principal balance of the notes payable and recorded as deferred
      financing costs which are being amortized over the life of the notes. The notes
      bear interest at the rate of 10% per annum. Upon issuance, Group Note I and
      Group Note II included embedded derivative liabilities and beneficial conversion
      features which, when bifurcated into and valued as separate liabilities,
      resulted in discount to the notional debt amount of the notes. After giving
      effect to the discount, the effective rate of interest at December 31, 2006
      was
      45.2% for Group Note I and 71.5% for Group Note II. All interest accrues until
      the maturity of the notes on April 15, 2009, at which time all principal and
      accrued interest are payable in full. The notes are subordinated to the rights
      of the holders of the 2004 Debentures and 2005 Debentures. Once all of Ener1's
      obligations under the 2004 Debentures and 2005 Debentures have been satisfied,
      the notes will be convertible at Ener1 Group's option into shares of Ener1’s
      common stock at the conversion price of $0.50 per share. Ener1 Group may
      accelerate the amounts due under the notes if none of the 2004 or 2005
      Debentures are outstanding and certain default or bankruptcy events occur with
      respect to Ener1.





In
      connection with Group Note I, Ener1 issued to Ener1 Group immediately
      exercisable warrants to purchase up to 9,000,000 shares of Ener1’s common stock
      at an exercise price of $0.50 per share. These warrants have a five year term.
      In connection with Group Note II, Ener1 issued to Ener1 Group immediately
      exercisable warrants to purchase up to 9,000,000 shares of Ener1’s common stock
      at an exercise price of $0.40 per share and 9,000,000 shares of Ener1’s common
      stock at an exercise price of $0.60 per share. These warrants have a five-year
      term.





Ener1
      is
      accounting for the warrant and conversion features of Group Note I and Group
      Note II in accordance with EITF 00-27. The proceeds of Group Note I and Group
      Note II 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 the Group Notes I and II. For Group Note I, the model
      assumes a risk-free interest rate of 5.1%, the current stock price at date
      of
      issuance of $0.47 per share, the exercise price of the warrants of $0.50 per
      share, the term of five years and volatility of 141%. For Group Note II, the
      model assumes a risk-free interest rate of 4.6%, the current stock price at
      date
      of issuance of $0.31 per share, the exercise price of the warrants of $0.40
      per
      share and $0.60 per share, the term of five years and volatility of 138%. Ener1
      recorded a discount to each convertible note equal to the relative fair value
      of
      the warrants, which is being amortized over the life of each note as interest
      expense. The intrinsic value of the conversion feature was $1,602,000 and
      $1,032,000 for Group Note I and Group Note II, respectively, at the dates 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.





Under
      the
      terms of Group Note III, the note bears interest at the rate of 10% per annum.
      All interest accrues until the maturity of the note on April 15, 2009, at which
      time all principal and accrued interest are payable in full. The note is
      subordinated to the rights of the holders of the 2004 Debentures and 2005
      Debentures. Once all of Ener1's obligations under the 2004 Debentures and 2005
      Debentures have been satisfied, the note will be convertible at Ener1 Group's
      option into shares of Ener1’s common stock at the conversion price of $0.50 per
      share. Ener1 Group may accelerate the amounts due under the notes if none of
      the
      2004 or 2005 Debentures are outstanding and certain default or bankruptcy events
      occur with respect to Ener1. No warrants were issued in connection with this
      note.





The
      components of the Group Notes and Advances at December 31, 2006 are as follows
      (in thousands):





64




**Group
                  Note**
                **I**
              
              **Group
                  Note**
                **II**
              
              **Group
                  Note**
                **III**
              
              **Group**
                **Advances**
              
              **Total
                  Group Notes and Advances**Note
                  proceeds and advances
              
              $
              3,000
              
              $
              3,000
              
              $
              455
              
              $
              4,428
              
              $
              10,883Financing
                  fees
              
              
              250
              
              
              100
              
              
              -
              
              
              -
              
              
              350Total
                  notes and advances
              
              
              3,250
              
              
              3,100
              
              
              455
              
              
              4,428
              
              
              11,233Discount
                  equal to relative fair value of warrants
              
              
              (1,797
              )
              
              (2,209
              )
              
              -
              
              
              -
              
              
              (4,006
              )Accretion
                  of discount
              
              
              226
              
              
              117
              
              
              -
              
              
              -
              
              
              343Accrued
                  interest payable at maturity
              
              
              166
              
              
              119
              
              
              6
              
              
              78
              
              
              369Balance
                  at December 31, 2006
              
              $
              1,845
              
              $
              1,127
              
              $
              461
              
              $
              4,506
              
              $
              7,939




Ener1,
      Ener1's wholly-owned subsidiary, Ener1 Acquisition Corp. (“Acquisition Sub”),
      and Splinex Technology, Inc. (“Splinex”), a related party, entered into a Merger
      Agreement dated as of June 9, 2004, providing for the merger of Acquisition
      Sub
      with and into Splinex. Upon closing in January 2005, Ener1 received 5,000,000
      shares of Splinex common stock. Ener1 declared a dividend to distribute these
      5,000,000 shares of Splinex common stock to its shareholders of record on
      January 17, 2005. In exchange for the 5,000,000 shares, Ener1 paid $150,000
      of
      the expenses incurred in connection with the registration under the Securities
      Act of the distribution of these shares to Ener1's shareholders. Ener1 recorded
      a dividend of $150,000, which amount represented the value of the Splinex common
      stock on the date the dividend was declared. A director of Ener1, Dr. Peter
      Novak, is a director of Splinex. Dr. Novak was also the president of Splinex
      from its inception February 7, 2004 to August 31, 2004 and became the Chairman
      of Splinex on September 1, 2005. A former director and officer of Ener1, Mr.
      Fitzgerald was the chairman and a director of Splinex; he resigned as chairman
      and director of Splinex in December 2005. Messrs.
      Novak and Zoi also beneficially own an aggregate of 25% of the voting membership
      interests (and an aggregate of 25.5% of the economic membership interests)
      of
      Splinex, LLC, which currently holds 63% of the outstanding common stock of
      Splinex.





13. STOCK-BASED
      COMPENSATION





At
      December 31, 2006, Ener1 had seven 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”);
      options issued to its former chief executive officer during his employment
      (the
“CEO Option Plan”); the EnerDel Officer Plan; the Advisory Committee Plan; the
      2004 Advisory Committee Plan; and the EnerStruct Employee Plan.





In
      2006,
      the Board of Directors adopted the 2007 Plan and reserved 33,360,347 shares
      of
      common stock for issuance in connection with grants under the plan. The 2007
      Plan provides that no more than 5,000,000 shares of common stock may be issued
      to any employee in any one calendar year. Under the 2007 Plan, incentive stock
      options, nonqualified stock options, stock appreciation rights, restricted
      stock, restricted stock units and deferred stock units may be issued to persons
      selected by the administrators of the Plan from a class of employees, officers
      and non-employee directors and other service providers who render valuable
      contributions to the Company. Option awards are generally granted with an
      exercise price equal to the market price of the Company’s common stock at the
      date of grant; those option awards generally vest based on three years of
      continuous service and have ten-year contractual terms. Options to purchase
      11,500,000 shares at a weighted-average exercise price of $0.23 per share were
      outstanding under the 2007 Stock Option Plan as of December 31, 2006; these
      options may not be exercised unless and until the 2007 Plan is approved by
      the
      shareholders of the Company and will be void if the 2007 Plan is not approved. Options
      granted under the 2007 Plan expire no later than ten years from the date of
      grant.





In
      2002,
      the Board of Directors and shareholders of Ener1 adopted the 2002 Plan and
      reserved 6,836,503 shares of common stock for issuance in connection with grants
      under the plan. The 2002 Plan provides that no more than 1,500,000 shares of
      common stock may be issued to any employee in any one calendar year. Under
      the
      2002 Plan, incentive stock options or nonqualified stock options may be issued
      to persons selected by the administrators of the Plan from a class of employees,
      officers, and consultants, including non-employees who render valuable
      contributions to the Company. Option awards are generally granted with an
      exercise price equal to the market price of the Company’s common stock at the
      date of grant; those option awards generally vest based on three years of
      continuous service and have ten-year contractual terms. Options to purchase
      5,080,000 shares at a weighted-average exercise price of $0.36 per share were
      outstanding under the 2002 Stock Option Plan as of December 31, 2006. Options
      granted under the 2002 Plan expire no later than ten years from the date of
      grant.





65




In
      2002,
      the Board of Directors and shareholders of Ener1 adopted the 2002 Non-Employee
      Director Stock Participation Plan (the “Director Stock Plan”) and reserved
      2,000,000 shares of common stock for issuance in connection with grants under
      the plan. The plan provides for each non-employee director first elected to
      the
      Board of Directors to receive an automatic grant of nonqualified stock options
      for 10,000 shares on the date of his or her election. The two current
      non-employee directors, Mr. Karl Gruns and Mr. Ludovico Manfredi, received
      grants of nonqualified stock options when first elected to the Board of
      Directors and receive additional grants of options to purchase 50,000 shares
      each December 31. Additional annual grants, their exercise price and other
      terms
      of any additional option awards are determined by the Board of Directors.
      Options to purchase 610,000 shares at a weighted-average exercise price of
      $0.47
      per share were outstanding under the Director Stock Plan as of December 31,
      2006. Options to purchase 100,000 shares issued under the plan were cancelled
      or
      exercised in 2006 and no options were cancelled or exercised in 2005.





Under
      an
      employment agreement effective September 8, 2003, the Company granted stock
      options to its chief executive officer (the “CEO Option Plan”). In September
      2003, the Company granted stock options to purchase 9,716,716 shares of common
      stock at an exercise price of $0.30 per share, vesting ratably over a period
      of
      36 months, beginning October 1, 2003. On December 31, 2004, the Company granted
      stock options to purchase 5,159,943 shares of common stock at an exercise price
      of $0.97 per share which vest ratably in each of the following 24 months. The
      Company did not record any compensation expense related to these options because
      the exercise price exceeded the market price of the Company’s common stock on
      the date of grant. On December 31, 2005, the Company granted stock options
      to
      purchase 2,706,958 shares of common stock at an exercise price of $0.54 per
      share which vest ratably in equal installments in each of the following 24
      months. The Company did not record any compensation expense related to these
      options because the exercise price exceeded the market price of the Company’s
      common stock on the date of grant. All of these options have a term of ten
      years. On December 31, 2005, 9,867,513 options were vested under the CEO Option
      Plan. On the date of the chief executive officer’s termination on January 9,
      2006, options to purchase 10,465,205 shares were vested at a weighted-average
      exercise price of $0.48 per share under the CEO Option Plan.





Effective
      October 1, 2005, an officer of EnerDel was granted an option to purchase
      1,000,000 shares of Ener1, Inc. common stock in a separate option plan (the
      “EnerDel Officer Plan”) at the exercise price of $0.49 per share, vesting 25% on
      each of the first four anniversaries of the date of the grant. The officer’s
      right to exercise this option is subject to EnerDel achieving certain revenue
      thresholds, none of which have been met as of December 31, 2006.





The
      Company has issued 220,000 options to two individuals under an option plan
      (the
“Advisory Committee Plan”) and 100,000 to one individual under an option plan
      (the “2004 Advisory Committee Plan”) to individuals who are non-board members of
      an advisory committee to its Board of Directors. The options under the Advisory
      Committee Plan have a weighted-average exercise price of $0.79, vest over two
      years and expire in December 2013. The options under the 2004 Advisory Committee
      Plan have an exercise price of $0.60, vest over three years and expire in August
      2014.





In
      May
      2004, the Company awarded options to purchase 300,000 shares of the Company’s
      common stock to two employees of ITOCHU for their services to EnerStruct (the
      “EnerStruct Employee Plan”). The options have an exercise price of $0.50 per
      share, vest over five years and expire in May 2014. **





EnerDel
      cancelled plans to establish a stock option plan under which it would have
      issued options to purchase shares of EnerDel common stock as incentive
      compensation to its employees. Instead, certain eligible EnerDel employees
      received options under the 2007 Plan in December 2006, subject to shareholder
      approval of the 2007 Plan.





*Adoption
      of New Accounting Guidance and Transition*




66





Prior
      to
      December 31, 2005, Ener1 accounted for its option plans under the recognition
      and measurement provisions of APB Opinion No. 25, “Accounting for Stock
      Issued to Employees,” and related Interpretations, (“APB 25”) as permitted by
      SFAS No. 123, “Accounting for Stock-Based Compensation” (“SFAS 123”).




Effective
      January 1, 2006, Ener1 adopted the fair value recognition provisions of SFAS
      No.
      123R, “Share-Based Payment,” and related Interpretations using the
      modified-prospective transition method. Under that method, compensation cost
      recognized in the first quarter of 2006 includes (a) compensation cost for
      all share-based payments granted prior to, but not yet vested as of, December
      31, 2005 based on the grant date fair value estimated in accordance with the
      original provisions of SFAS 123 and (b) compensation cost for all
      share-based payments granted on or subsequent to January 1, 2006, based on
      the
      grant-date fair value estimated in accordance with the provisions of SFAS 123R.
      Compensation cost is being recognized on a straight-line basis over the
      requisite service period for the entire award in accordance with the provisions
      of SFAS 123R. Results for the prior periods have not been restated.





*Pro
      Forma Information Under SFAS 123 for Periods Prior to 2006*





Until
      January 1, 2006, Ener1 accounted for stock options under the intrinsic value
      method specified in APB 25 and adopted the disclosure-only provisions of SFAS
      123 for periods prior to January 1, 2006. Accordingly, compensation cost for
      prior reported periods has been recognized for grants under the stock option
      plans only when the exercise prices of employee stock options were less than
      the
      market prices or fair values of the underlying stock on the date of
      grant.





The
      table
      below illustrates the effect on net earnings and earnings per share if Ener1
      had
      applied the fair value recognition provisions of SFAS 123 to options granted
      in
      the year ended December 31, 2005 (in thousands):


**2005**Net
                  income, as reported
              
              $
              28,604Add
                  stock-based compensation determined under intrinsic value-based
                  method
              
              
              1,080Less
                  stock-based compensation determined under fair value-based
                  method
              
              
              (2,707
              )Net
                  income, pro forma
              
              
              26,977Preferred
                  stock dividends
              
              
              (2,926
              )Net
                  income attributable to common shareholders, pro forma
              
              $
              24,051Net
                  income per share, pro forma basic
              
              $
              0.07Net
                  (loss) per share, pro forma diluted
              
              $
              (0.02
              )


*Valuation
      and Expense Information under SFAS 123R*





As
      a
      result of adopting SFAS 123R on January 1, 2006, Ener1’s loss before income
      taxes and net loss for the year ended December 31, 2006 was $1,433,000 higher
      than if it had continued to account for share-based compensation under APB
      25.
      Basic loss per share for the year ended December 31, 2006 would have been
      $(0.10) if Ener1 had not adopted SFAS 123R, compared to reported basic loss
      per
      share of $(0.11). Ener1 recorded share-based compensation costs of $1,641,000
      for the year ended December 31, 2006.





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 December 31, 2006 and are adjusted annually to 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.





67


*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 December 31, 2006 was 4.2%.





*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 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 119%.





*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 December 31, 2006 is as follows:


**Options**
              
              **Number
                  of**
                **Options**
              
              **Weighted**
                **Average
                  Price**
              
              **Average**
                **Remaining**
                **Contractual**
                **Term
                  in Years**
              
              **Intrinsic**
                **Value**Outstanding
                  at December 31, 2005
              
              
              24,605,617
              
              $
              0.53Granted
              
              
              15,860,000
              
              $
              0.25Exercised
              
              
              (933,333
              )
              $
              0.10Forfeited
                  or expired
              
              
              (10,257,079
              )
              $
              0.61Outstanding
                  at December 31, 2006
              
              
              29,275,205
              
              $
              0.36
              
              
              8.7
              
              $
              88,000Exercisable
                  at December 31, 2006
              
              
              12,922,655
              
              $
              0.47
              
              
              7.3
              
              $
              70,000




The
      weighted average fair value of the options granted during 2006 and 2005 was
      estimated at $0.23 per share and $0.36 per share, respectively, using the
      Black-Scholes option-pricing model with the following weighted- average
      assumptions: no dividend yield, expected volatility of 136% and 172%,
      respectively, weighted-average risk-free interest rate of approximately 4.7%
      and
      3.8%, respectively, and expected lives of three to ten years.





The
      Company granted options to purchase 15,860,000 shares in 2006. Employees
      exercised options to purchase a total of 933,333 shares during 2006.
      The total intrinsic value of these shares on the date of exercise was
      $215,000. As of December 31, 2006, there was $2,345,000 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.





*Performance
      Share Option Plan*





On
      October 1, 2005, an officer of EnerDel was granted an option to purchase
      1,000,000 shares of Ener1 common stock at the exercise price of $0.49 per share,
      vesting 25% on each of the first four anniversaries of the date of the grant.
      The officer’s right to exercise this option is subject to EnerDel achieving
      certain revenue thresholds. The performance goals are not expected to be met
      at
      this time, and no compensation cost has been recognized in the year ended
      December 31, 2006 in connection with this plan.





68








14.  WARRANTS





At
      December 31, 2006 and 2005, the Company had the following warrants
      outstanding:





**Number
                  of Shares****Warrant
                  Holder**
              
              **Grant
                  Date**
              
              **December
                  31,**
                **2006**
              
              **December
                  31,**
                **2005**
              
              **Exercise**
                **Price**
              
              **Expiration**
                **Date**Battery
                  Warrants - Ener1 Group
              
              
              09/06/02
              
              
              -
              
              
              69,000,000
              
              $
              0.08
              
              
              09/06/12Debt
                  Exchange Warrants - Ener1 Group
              
              
              11/14/03
              
              
              8,806,147
              
              
              8,806,147
              
              $
              2.00
              
              
              11/14/13
              
              
              (a
              )Debt
                  Exchange Warrants - Ener1 Group
              
              
              11/14/03
              
              
              8,806,146
              
              
              8,806,146
              
              $
              1.50
              
              
              11/14/13
              
              
              (a)(b
              )Debt
                  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
              
              
              11/14/13Consultant
              
              
              01/08/04
              
              
              -
              
              
              200,000
              
              $
              0.10
              
              
              01/08/062004
                  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
              
              
              69,445
              
              $
              1.25
              
              
              02/14/15
              
              
              (c
              )Series
                  B Preferred - Ener1 Group
              
              
              02/11/05
              
              
              69,445
              
              
              69,445
              
              $
              1.50
              
              
              02/14/15
              
              
              (c
              )2005
                  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
              
              
              20,000,000
              
              
              -
              
              $
              0.50
              
              
              06/30/11
              
              
              (d
              )2006
                  Group Note I - Ener1 Group
              
              
              08/11/06
              
              
              9,000,000
              
              
              -
              
              $
              0.50
              
              
              08/11/112006
                  Group Note II - Ener1 Group
              
              
              09/30/06
              
              
              9,000,000
              
              
              -
              
              $
              0.40
              
              
              09/30/112006
                  Group Note II - Ener1 Group
              
              
              09/30/06
              
              
              9,000,000
              
              
              -
              
              $
              0.60
              
              
              09/30/11Total
                  Warrants Outstanding
              
              
              
              
              
              107,931,471
              
              
              130,131,471




(a)
      On
      January 5, 2007, the exercise price for 16,000,000 warrants was adjusted to
      $0.25 per share and the expiration date was modified to January 5, 2007 in
      consideration of early warrant exercise and investment by Ener1 Group in Ener1.




(b)
        On
        February 21, 2007, the exercise price for 1,612,293 warrants remaining after
        the
        January 5, 2007 warrant exercise warrant was adjusted to $0.25 per share
        and the
        expiration date was modified to February 21, 2007 in consideration of early
        exercise and investment by Ener1 Group in Ener1.




(c)
        On
        February 21, 2007, the exercise price was adjusted to $0.25 per share and
        the
        expiration date was modified to February 21, 2007 in consideration of early
        warrant exercise and investment by Ener1 Group in Ener1.




(d)
        On
        February 21, 2007, the exercise price for 3,071,864 warrants was adjusted
        to
        $0.25 per share and the expiration date was modified to February 21, 2007
        in
        consideration of early warrant exercise and investment by Ener1 Group in
        Ener1.




In
      January 2004, the Company issued warrants to purchase 200,000 shares of common
      stock at an exercise price of $0.10 per share to a consultant for services.
      The
      warrants were exercised in January 2006.





In
      January 2004, in connection with the issuance of the 2004 Debentures, the
      Company issued warrants to purchase 1,920,000 shares of common stock to the
      placement agent engaged by the Company. The warrants have an exercise price
      of
      $2.51 and expire 10 years from the grant date. The value of these warrants
      at
      the time of the grant of approximately $3,053,000 was included in additional
      paid in capital as offering costs and is being amortized using the effective
      interest method over the remaining term of the underlying debt.





69




In
      March
      2005, in connection with the issuance of the 2005 Debentures, the Company issued
      warrants to purchase up to 426,750 shares of common stock to the placement
      agent
      engaged by the Company. The warrants have an exercise price of $0.75 per share
      and expire 10 years from the grant date. The value of these warrants at the
      time
      of the grant of approximately $213,000 was included in additional paid in
      capital as offering costs and is being amortized using the effective interest
      method over the remaining term of the underlying debt.





During
      the six months ended June 30, 2006, Ener1 Group purchased 69,000,000 shares
      of Ener1’s common stock upon exercise of the Battery Warrants at an exercise
      price of $0.08 per share for an aggregate exercise price of $5,520,000 under
      the
      terms of a Warrant Exercise Agreement.





In
      June
      2006, in connection with the completion of the exercise of the Battery Warrants
      by Ener1 Group under the Warrant Exercise Agreement, the Company issued to
      Ener1
      Group warrants to purchase up to 20,000,000 shares of common stock at an
      exercise price of $0.50 per share, expiring 10 years from the grant date. The
      Company recorded the fair value of these warrants of $9,200,000 as an expense
      on
      June 30, 2006, the date they were issued.





In
      August
      2006, in connection with the issuance of Group Note I, the Company issued to
      Ener1 Group warrants to purchase up to 9,000,000 shares of common stock to
      Ener1
      Group at an exercise price of $0.50 per share, expiring five years from the
      grant date. The value of these warrants at the time of the grant of
      approximately $1,797,000 was included 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.





In
      September 2006, in connection with the issuance of Group Note II, the Company
      issued to Ener1 Group warrants to purchase up to 9,000,000 shares of common
      stock at an exercise price of $0.40 per share and warrants to purchase up to
      9,000,000 shares of common stock at an exercise price of $0.60 per share,
      expiring five years from the grant date. The value of these warrants at the
      time
      of the grant of approximately $2,210,000 was included 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.





15.  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 from 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 December 31, 2006 or 2005,
      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:




70




**Year
                  Ended December 31,****2006**
              
              **2005**Weighted
                  Average Shares Outstanding - Basic
              
              
              401,534,076
              
              
              347,455,751Plus
                  net shares from assumed conversion of warrantsunder
                  treasury stock method
              
              
              -
              
              
              58,176,471Plus
                  shares from assumed conversion of covertible instruments:2004
                  Debentures
              
              
              -
              
              
              11,380,0002005
                  Debentures
              
              
              -
              
              
              16,016,260Weighted
                  Average Shares Outstanding - Diluted
              
              
              401,534,076
              
              
              433,028,482


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:




**Year
                  Ended December 31,****2006**
              
              **2005**Stock
                  options that were not in the money
              
              
              -
              
              
              9,768,901Stock
                  options excluded because effect was anti-dilutive
              
              
              -
              
              
              5,721,981Warrants
                  that were not in the money
              
              
              -
              
              
              60,931,471Plus
                  shares from assumed conversion of covertible instruments:2004
                  Debentures
              
              
              -
              
              
              -2005
                  Debentures
              
              
              -
              
              
              -Total
                  options, warrants and convertiblesecurities
                  excluded from weighted average shares
              
              
              -
              
              
              76,422,353





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):


**Year
                  Ended December 31,****2006**
              
              **2005**Net
                  income (loss) as reported
              
              $
              (41,305
              )
              $
              28,604Less
                  preferred stock dividends and accretion
              
              
              (1,974
              )
              
              (2,926
              )Add
                  interest expense and accretion of discount onconvertible
                  debentures
              
              
              -
              
              
              8,749Less
                  derivative gain on convertible debentures
              
              
              -
              
              
              (11,827
              )Less
                  derivative gain on warrants
              
              
              -
              
              
              (31,740
              )Net
                  loss computed for diluted earnings per share
              
              $
              (43,279
              )
              $
              (9,140
              )




16.  COSTS
      ASSOCIATED WITH EXIT OR DISPOSAL ACTIVITIES




On
      June
      23, 2005 EnerDel decided to acquire new battery cell and automated battery
      cell
      manufacturing technology for high-rate batteries from EnerStruct, Ener1's joint
      venture with ITOCHU. In connection with this decision, EnerDel began
      restructuring its manufacturing facilities in Indianapolis and Fort Lauderdale
      to use the new battery cell and automated battery cell manufacturing technology.
      The employment of a total of 37 employees was terminated in Indianapolis and
      Fort Lauderdale, and Ener1 determined that the equipment in the Fort Lauderdale
      facility would be used for R&D activities going forward. As such, Ener1
      charged the remaining net book value of the Fort Lauderdale's facility equipment
      of approximately $10,527,000 to R&D expenses. EnerDel incurred exit and
      disposal costs during 2005 associated with these changes in the amount of
      $1,040,000. These costs were predominantly severance and contract termination
      costs. In accordance with SFAS No. 146, “Accounting for Costs Associated with
      Exit or Disposal Activities,” these costs are included in results of operations
      as research and development and general and administrative
      expenses.





17.  SEGMENT
      REPORTING




71





As
      of
      December 31, 2006, 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 is developing
      nanotechnology related manufacturing processes and materials.





The
      accounting policies of the segments are the same as those described in the
      “Summary of Significant Accounting Policies.” 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) :


**2006**
              
              **2005****Net
                  sales:**Battery
              
              $
              -
              
              $
              45Fuel
                  Cell
              
              
              100
              
              
              15Total
                  net sales
              
              $
              100
              
              $
              60**Interest
                  expense:**Corporate
              
              $
              10,376
              
              $
              9,936**Depreciation
                  and amortization expense:**Corporate
              
              
              169
              
              
              127Battery
              
              
              198
              
              
              416Fuel
                  Cell
              
              
              15
              
              
              8Nanotechnology
              
              
              9
              
              
              7Total
                  depreciation and amortization expense
              
              $
              391
              
              $
              558**Net
                  income (loss):**Corporate
              
              
              (31,364
              )
              
              48,307Battery
              
              
              (6,863
              )
              
              (16,802
              )Fuel
                  Cell
              
              
              (2,336
              )
              
              (1,636
              )Nanotechnology
              
              
              (742
              )
              
              (1,265
              )Net
                  income (loss)
              
              $
              (41,305
              )
              $
              28,604**Assets:**Corporate
              
              
              3,487
              
              
              5,937Battery
              
              
              3,510
              
              
              4,338Fuel
                  Cell
              
              
              104
              
              
              141Nanotechnology
              
              
              67
              
              
              33Total
                  assets
              
              $
              7,168
              
              $
              10,449**Capital
                  expenditures:**Corporate
              
              
              10
              
              
              243Battery
              
              
              1,239
              
              
              387Fuel
                  Cell
              
              
              4
              
              
              108Nanotechnology
              
              
              14
              
              
              75Total
                  capital expenditures
              
              $
              1,267
              
              $
              813




18.  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.





72




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
      has
      filed a motion indicating its intent to vacate the property and relocate its
      operations, and requests unspecified damages. EnerDel believes that it is
      unlikely that UTE will prevail on its claims and intends to vigorously defend
      against these claims.





*Lease
      Commitments*





Approximate
      future payments for all operating leases for years subsequent to December 31,
      2006 are as follows (in thousands):


2007
              
              $
              3692008
              
              
              2672009
              
              
              2332010
              
              
              39Total
              
              $
              908




The
      2006
      table includes three months of rent payments in 2007 totaling $141,000 for
      rent
      under month-to-month leases.





19.    
      SUBSEQUENT EVENTS





*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 related to 1) the sale by Ener1
      Group of 20,000,000 shares of Ener1 unregistered common stock owned by Ener1
      Group 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
      addition, 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.




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. Under the terms of the applicable
      Registration Rights Agreement, if such a registration statement is not declared
      effective by the SEC within 120 days of January 5, 2007, the Company will be
      liable for registration default payments equal to 1% of the purchase price
      of
      the securities for each 30 day period until the registration default is cured.





*Warrant
      Exercises by Ener1 Group*





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.




73




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
      to
      $0.25 per share the exercise prices of the warrants, ranging from $1.50 to
      $0.50
      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
      net
      proceeds will be used for working capital purposes.





*Forbearance
      Agreements*





Effective
      January 19, 2007, the Company entered into a Forbearance Agreement with one
      of
      the holders of $9.5 million of the 2004 Debentures and $10.0 million of the
      2005
      Debentures. Under the terms of the Forbearance Agreement, that holder agreed
      to
      forbear from taking any action against the Company related to the non-payment
      of
      the registration delay expenses until March 2, 2007. Upon execution of the
      Forbearance Agreement, Ener1 Group deposited $650,000 into escrow on behalf
      of
      Ener1 for the benefit of the holder, which exercised its right to apply the
      payment to the registration delay expenses upon the expiration of the
      Forbearance Agreement on March 2, 2007.





Effective
      March 14, 2007, the Company entered into a new Forbearance Agreement with the
      same holder of $9.5 million of the 2004 Debentures and $10.0 million of the
      2005
      Debentures. Upon execution of the Forbearance Agreement, the Company paid
      $350,000 of the registration delay expenses to the holder and the holder agreed
      to continue to forbear from taking any action against the Company until April
      2,
      2007 with respect to the remaining $295,000 of registration delay expenses
      owed
      to this holder if the Company remained in compliance with the Forbearance
      Agreement during this time. On April 4, 2007, the Company paid an additional
      $150,000 of the registration delay expenses to the holder to extend the
      forbearance period to May 4, 2007.





*Loans
      and Advances from Ener1 Group*





On
      January 19, 2007, the Company issued a subordinated, convertible note to Ener1
      Group in the principal amount of $655,000 (“Group Note IV”) in
      connection with a Forbearance Agreement with one of its debenture holders.
      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.




On
      February 13, 2007, the Company issued a subordinated, convertible note to Ener1
      Group in the principal amount of $4,500,000 (“Group Note V”), which represents
      Group Advances made to the Company from September 20, 2006 through December
      30,
      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. 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.





74




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.





From
      March 30, 2007 through April 2, 2007, the Company received loan advances of
      $2,250,000 from Ener1 Group. $1,272,000 of the funds was used for interest
      payments due on April 2, 2007 to the holders of the 2004 Debentures and 2005
      Debentures. Following this advance, the Company owed Ener1 Group $2,428,000
      for
      remaining Group Advances, the terms for which have not yet been
      established.





*EnerDel
      Lawsuit*





In
      January 2007, EnerDel reached a tentative agreement with Universal Tool &
Engineering Company, Inc. (“UTE”), the landlord of its Indianapolis, Indiana
      production facility, on the financial terms of a new, direct five-year lease
      and
      began working with UTE on the terms of a definitive lease
      agreement.





On
      March
      12, 2007, 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.





The
      unjust enrichment and breach of contract claims both relate to leasehold
      improvements that UTE made for Delphi under the prime lease between UTE and
      Delphi. Under its sublease with Delphi, EnerDel had an obligation to pay
      approximately $487,000 of the cost of such improvements to Delphi on January
      24,
      2007, the end of the sublease term. The Company contends that when Delphi
      rejected the sublease (and the prime lease) in 2006 as part of its bankruptcy
      proceedings, the obligation to pay Delphi $487,000 became null and void. UTE
      claims that it entered into an oral contract directly with EnerDel pursuant
      to
      which EnerDel agreed to pay $487,000 directly to UTE. The Company disputes
      this
      allegation and believes it is unlikely that UTE will prevail on this claim.
      In
      addition, the Company believes it is unlikely that UTE will prevail on its
      unjust enrichment and breach of contract claims.





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
      has
      filed a motion indicating its intent to vacate the property and relocate its
      operations, and requests unspecified damages.





EnerDel
      is currently evaluating alternative facilities. The Company believes suitable
      locations in the same area are available; however, a relocation would disrupt
      operations and delay EnerDel’s product development efforts until new facilities
      are fully operational. In the event the Company is required to relocate
      EnerDel’s operations, EnerDel’s product development plan would likely be delayed
      by three to six months which could delay or affect its ability to meet the
      milestone targets contained in this development plan. Such disruptions can
      be
      minimized if EnerDel is granted reasonable time to vacate the property.





75




**ITEM
      8: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
      DISCLOSURE**





None .





**ITEM
      8A: CONTROLS AND PROCEDURES**





As
      of
      December 31, 2006, 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 December
      31, 2006 such disclosure controls and procedures need improvement and may be
      considered “not effective.”





As
      previously disclosed, during 2006 we
      identified deficiencies in our internal controls and inadequacies in our
      disclosure controls relating to the calculation of diluted earnings or loss
      per
      share, accounting for redeemable preferred stock as temporary equity, accounting
      for compound embedded derivatives in our debentures, valuing warrants issued
      with the 2004 Debentures, recording the value of our right to require Ener1
      Group to purchase shares of our Series B Preferred Stock and reflecting the
      dividend paid under EnerDel’s Series A Preferred Stock as a reduction in
      minority interest income.  As a result of the identification of these
      deficiencies, we amended our Annual Report on Form 10-KSB for the period ended
      December 31, 2005, as well as our Quarterly Reports on Form 10-QSB for the
      periods ended March 31, 2006, September 30, 2005, June 30, 2005 and March 31,
      2005. In addition, during our evaluation as of December 31, 2006, we identified
      deficiencies in our internal controls and inadequacies in our disclosure
      controls regarding the calculation of discount and interest accretion on
      redeemable preferred stock and debentures.





We
      have
      implemented additional processes and procedures throughout 2006, including
      during the fourth quarter, 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 Chief Financial Officer was hired in October 2006, 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.





**ITEM
      8B: OTHER INFORMATION**





None.





76








**PART
      III**




**ITEM
      9; DIRECTORS, OFFICERS AND CONTROL PERSONS**





The
      term
      of office of each of our directors will expire at our next shareholders meeting.
      Our directors and executive officers are as follows:




**Name**
            
            **Age**
            
            **Position**Charles
                Gassenheimer
            
            33
            
            Director,
                Vice Chairman of the BoardMarshall
                Cogan
            
            69
            
            DirectorKarl
                Gruns
            
            59
            
            DirectorLudovico
                Manfredi
            
            45
            
            DirectorPeter
                Novak
            
            54
            
            Director,
                Chief Executive OfficerMike
                Zoi
            
            40
            
            Director,
                Vice PresidentCurtis
                Wolfe
            
            43
            
            General
                Counsel, SecretaryAjit
                Habbu
            
            52
            
            Chief
                Financial OfficerUlrik
                Grape
            
            46
            
            Executive
                Vice PresidentRex
                Hodge
            
            41
            
            Executive
                Vice President





**Charles
      Gassenheimer** has been
      one of our directors since January 2006 and our Vice Chairman since October
      2006, and he was our Chairman from January 2006 through October 2006. He has
      also been the Chief Executive Officer and a director of Ener1 Group since
      January 2006. From 2002 through 2005, Mr. Gassenheimer was Portfolio Manager
      of
      Satellite Asset Management's Convertible Arbitrage Division and Managing
      Director and Portfolio Manager of its Private Investment Group. From 2001
      through 2002, he was a Portfolio Manager and head of the distressed securities
      investment group at Tribeca Investments (Citigroup Global Investments). Mr.
      Gassenheimer has also been a Vice President with Credit Suisse First Boston,
      where he served as Investment Manager of a proprietary hedge fund focused on
      private investments in public equity securities, and a Turnaround Management
      Consultant at Coopers & Lybrand. Mr. Gassenheimer has a B.A. in Economics
      from the University of Pennsylvania.





**Marshall
      S. Cogan** has been
      a director of our company since February 2006. He also has been a strategic
      advisor to Ener1 Group since January 2006.  Since July 2004, he has been
      Chairman and a director of Greystone Logistics.  Since 1986, Mr.
      Cogan has been a member of the board of trustees for N.Y.U. Medical Center
      and a trustee of the Museum of Modern Art.   Previously Mr. Cogan was
      a Director of Sheller Globe, a manufacturer of steering wheels and related
      automotive components. He founded and was Chairman of United Auto Group,
      and was Chairman of Knoll International, Sheller Globe, Foamex
      International and the '21' Club.  Mr. Cogan received his B.A. and M.B.A.
      from Harvard University.





**Karl
      Gruns,** a
      Certified Public Accountant, has been a director of our company since August
      1999 and chairman of our Audit Committee since 2002. Since 2001, Mr. Gruns
      has
      owned and operated a management consulting practice in Germany for international
      clients. From 1998 to 2001, he was Chief Financial Officer of Infomatec
      Integrated Information Systems AG. Previously, Mr. Gruns owned and operated
      an
      audit and consulting practice, and he was formerly with KPMG Certified Public
      Accountants in the United States and Germany. He is currently Chairman
      of Sellexx AG, a privately held corporation in Munich, Germany. Mr. Gruns
      received his degree in Business Administration, with a major in Accountancy,
      from Northern Illinois University.





**Ludovico
      Manfredi** has been
      a director of our company and member of the Audit Committee since April 2005.
      Since 2000, Mr. Manfredi has been employed as a marketing and business
      development executive for Cheyne Capital, a London-based hedge fund management
      company. He is responsible for Cheyne Capital’s European strategic relationships
      and business development activities. Prior to joining Cheyne Capital, from
      1997
      through 1999, Mr. Manfredi founded and managed Newfield Group, a company active
      in soft commodities and investments in South America, the Caribbean and Western
      Europe. Previously, Mr. Manfredi worked in commodities trading with the European
      trading firms of Sucres et Denrees in Paris and Riz et Denrees in Paris and
      New
      York. Mr. Manfredi has an M.B.A from the Wharton School of Business, University
      of Pennsylvania, with a concentration in Finance and he received his initial
      degree from Institut d’Etudes Politiques de Paris, with a major in Economics and
      Finance.





77




**Dr.
      Peter Novak** has been
      a director of our company since February 2002 and Chief Executive Officer since
      December 2006. Since 2001, he has been the Chief Technology Officer and a
      director of Ener1 Group. Since 1991, Dr. Novak has worked with Mike Zoi,
      focusing on bringing advanced electronic technologies to market. In 1998, Dr.
      Novak worked with Mr. Zoi to form Ener1 s.r.l. Dr. Novak has been the “sole
      administrator”, a position equivalent to president, and sole director, for Ener1
      s.r.l. Ener1 s.r.l. commenced development of a research, development and
      production facility for advanced lithium metal batteries in Italy in 1998.
      For
      the next three years, Dr. Novak worked with Mr. Zoi to manage the start-up
      business operations of Ener1 s.r.l. Dr. Novak was, during that period, and
      is
      now, primarily responsible for technology development. In that capacity, he
      performed and supervised research and development, developed numerous
      technologies for which patent applications are now in process at the United
      States Patent and Trademark office and elsewhere. In 2001, Dr. Novak and Mr.
      Zoi
      formed Ener1 Group. As Chief Technology Officer of Ener1 Group, he is
      responsible for all technology development, licensing and patent matters. He
      also assists in the management of the business affairs of Ener1 Group. Dr.
      Novak
      graduated from the Ural Polytechnic Institute, Physics and Technical Department
      specializing in experimental nuclear physics, and has a doctoral degree in
      solid-state physical chemistry.





**Mike
      Zoi** has been
      a director of our company since February 2002, and a vice president since
      February 13, 2007.  Since 2001, he has been the President and a director of
      Ener1 Group. Since 1991, Mr. Zoi has worked with Dr. Peter Novak, focusing
      on
      bringing advanced electronic technologies to market. In 1998, Mr. Zoi worked
      with Dr. Novak to form Ener1 s.r.l., an Italian company developing a research,
      development and production facility for advanced lithium metal batteries in
      Italy. For the next three years, Mr. Zoi worked with Dr. Novak to manage the
      start-up business operations of Ener1 s.r.l., including negotiations with
      potential licensees for the technology, obtaining grant and loan financing
      for
      the start-up business, and relationships with vendors. In 2001, Mr. Zoi and
      Dr.
      Novak formed Ener1 Group.




**Curtis
      Wolfe** has been
      our general counsel and secretary since December 2006. Mr. Wolfe is also
      executive vice president, secretary and general counsel for Ener1 Group and
      general counsel of Splinex Technology, Inc., an affiliate of
      Ener1, and has held those positions since 2004. Prior to joining Ener1
      Group, Mr. Wolfe was a partner at the law firm Steel Hector & Davis LLP
      where he practiced law from 1998 to 2004. While at Steel Hector, Mr. Wolfe
      built a practice focusing on complex corporate transactions, including mergers
      and acquisitions, finance and intellectual property with an expertise in
      software licensing. Prior to 1998, Mr. Wolfe practiced law in the business
      and finance department of Ballard Spahr Andrews & Ingersoll in Philadelphia,
      Pennsylvania. Mr. Wolfe is admitted to practice law in Florida, Delaware and
      Pennsylvania. Mr. Wolfe has served on the board of directors of the Zoological
      Society of Florida since 2002 and served from 2002 until 2004 on the executive
      committee and board of directors of the Miami-Dade County Beacon Council, Inc.,
      Miami-Dade County, Florida’s official economic development agency.
      Mr. Wolfe holds a Juris Doctor degree from the University of Iowa College
      of Law and a Bachelor of Integrated Studies degree in English, Mathematics
      and
      Latin American Studies from Weber State University in Ogden, Utah.





**Ajit
      Habbu** has been
      our Chief Financial Officer since October 2006. Mr. Habbu is also
      Chief Financial Officer of Ener1 Group. Prior to joining Ener1, Mr.
      Habbu was Executive Vice President and Chief Financial Officer of Vixia, LLC,
      a
      provider of process solutions and support services for healthcare organizations,
      using radio frequency identification and ultrasound technologies. From 1999
      to
      2005, Mr. Habbu was with Recall Corporation, a global document management
      business with operations in 22 countries, where he served as Senior Vice
      President and Chief Financial Officer. From 1983 to 1999, Mr. Habbu was with
      IBM
      Corporation, where he served in a number of executive positions, including
      Chief
      Financial Officer of its Education Business Unit. Mr. Habbu holds a B.S. degree
      in Chemical Engineering from the Indian Institute of Technology, an M.S. degree
      in Systems and Industrial Engineering from the University of Iowa, and an M.B.A.
      with a concentration in Financial and International Business from the University
      of Chicago.





**Ulrik
      Grape** has been
      our Executive Vice President since January 2006. He was Chief Executive Officer
      of EnerDel from October 2005 to January 2006, at which time he became President
      of EnerDel. From 2004 to 2005, Mr. Grape was Business Development Manager for
      Gold Peak Industries (N.A.), Inc. in connection with a joint venture between
      Gold Peak and Danionics A/S. From 1994 to 2004, Mr. Grape was employed by
      Danionics A/S, an international lithium battery company headquartered in
      Denmark, where he was Sales and Marketing Director and Vice President, U.S.
      Prior to that, he was Managing Director for Volund A/S, a privately held Danish
      industrial group manufacturing mobile access platforms and other structures,
      and
      Associate at Trap & Kornum A/S, a mergers and acquisition firm operating in
      the Scandinavian market. Mr. Grape earned a Bachelor's degree in International
      Politics and Affairs from Georgetown University and a Masters of Business
      Administration degree from French business school INSEAD.





78




**Rex
      Hodge** has been
      our Executive Vice President and President of EnerFuel since January 2006. **** From
      1993 to 2005, Mr. Hodge was employed by Anuvu, Inc., which he founded and for
      which he served as President and Chief Executive Officer. Anuvu developed
      fuel-cell products for cars, trucks, scooters and boats. Prior to founding
      Anuvu, Mr. Hodge was employed for six years by the Aerojet Propulsion Division
      of GenCorp, where he was a Project Engineer. At Aerojet, he developed fuel
      cells
      using rocket technology. Mr. Hodge is a graduate of the University of California
      at Davis, with a B.S. degree in mechanical engineering.





**Meetings
      of the Board of Directors**





The
      board
      of directors held seven meetings during 2006 and six meetings during
      2005.





**Committees
      of the Board of Directors**





The
      board
      of directors has established two standing committees to assist it in discharging
      its responsibilities: the Audit Committee and the Governance and Nominating
      Committee.





The
      Audit
      Committee reviews our accounting functions, operations and management, our
      financial reporting process and the adequacy and effectiveness of our internal
      controls and internal auditing methods and procedures. The Audit Committee
      represents the Board in overseeing our financial reporting processes, and,
      as
      part of this responsibility, consults with our independent public accountants
      and with personnel from our internal audit and financial staffs with respect
      to
      corporate accounting, reporting, and internal control practices. The Audit
      Committee recommends to the board the appointment of our independent public
      accountants and is responsible for oversight of our independent public
      accountants. The Audit Committee held ten meetings during 2006 and eight
      meetings during 2005.


Our
      Audit
      Committee has two members: Mr. Karl Gruns and Mr. Ludovico Manfredi. Both are
      “independent” as defined under Rule 4200(a) (15) of the National Association of
      Securities Dealers’ (“NASD”) Listing Standards for NASDAQ-listed companies. The
      Board has determined Mr. Gruns meets the SEC criteria of an “audit committee
      financial expert,” as defined in Regulation S-B, Item
      407(d)(5)(ii).





The
      Governance and Nominating Committee is responsible for recommending to the
      full
      board candidates for officer positions and vacancies on the board. Mr. Gruns
      is
      currently the sole member of this committee. The Governance and Nominating
      Committee did not meet during 2006 or 2005.





**Code
      of Ethics**





During
      the year ended December 31, 2004 we adopted a Code of Ethics, which remains
      in
      effect. The code applies to our officers and directors. The code provides
      written standards that are reasonably designed to deter wrongdoing and promote:
      (1) honest and ethical conduct, including the ethical handling of actual or
      apparent conflicts of interests between personal and professional relationships;
      (2) full, fair, accurate, timely and understandable disclosure in reports and
      documents that we file with or submit to the SEC or in other public
      communications we make; (3) compliance with applicable laws, rules and
      regulations; (4) prompt reporting of internal violations of the code; and (5)
      accountability for the adherence to the code **.**





**Section
      16(a) Beneficial Ownership Reporting Compliance**





Section
      16(a) of the Securities Exchange Act of 1934, as amended, requires our officers
      and directors and persons who beneficially own more than 10% of our common
      stock
      to file with the SEC initial reports of ownership and reports of changes in
      ownership of our common stock. Based solely upon our review of copies of such
      forms we have received, and other information available to us, to the best
      of
      our knowledge:





During
      2006, Ener1 Group failed to file 22 reports, each reporting one transaction.





79





**ITEM
      10: EXECUTIVE COMPENSATION**





**Summary
      Compensation Table**





The
      following table sets forth information regarding the compensation paid during
      2006 to all individuals serving during that time as our Chief Executive Officer
      and each of our two additional most highly compensated executive officers
      who were serving as executive officers on December 31, 2006, and one
      additional individual who was an executive during the year 2006 (whom we refer
      to collectively as the “named executive officers”).


**Name
                  and Principal Position**
              
              **Year**
              
              **Salary
                  ($)**
              
              **Bonus
                  ($)**
              
              **Stock
                  Awards ($)**
              
              
              
              **Option
                  Awards ($)**
              
              
              **All
                  Other Compen- sation ($)**
              
              
              **Total
                  ($)**Dr.
                  Peter Novak
              
              
              2006
              
              $
              250,010
              
              $
              -
              
              $
              -
              
              
              
              $
              -
              
              
              
              $
              53,944
              
              (10)
              
              $
              303,954Chief
                  Executive Officer (1)Kevin
                  Fitzgerald
              
              
              2006
              
              
              54,733
              
              
              -
              
              
              -
              
              
              
              
              -
              
              
              
              
              -
              
              
              
              
              54,733Former
                  Chief Executive Officer (2)Victor
                  Mendes
              
              
              2006
              
              
              37,243
              
              
              -
              
              
              -
              
              
              
              
              -
              
              
              
              
              -
              
              
              
              
              37,243Former
                  Chief Executive Officer (3)Ajit
                  Habbu
              
              
              2006
              
              
              46,875
              
              
              -
              
              
              -
              
              
              
              
              725,000
              
              (7)
              
              
              -
              
              
              
              
              771,875Chief
                  Financial Officer (4)Rex
                  Hodge
              
              
              2006
              
              
              234,422
              
              
              -
              
              
              -
              
              
              
              
              274,680
              
              (8)
              
              
              -
              
              
              
              
              509,102Executive
                  Vice PresidentGerard
                  A. Herlihy
              
              
              2006
              
              
              179,300
              
              
              -
              
              
              99,000
              
              (9)
              
              
              -
              
              
              
              
              -
              
              
              
              
              278,300Former
                  Chief Financial Officer (5)Ronald
                  Stewart
              
              
              2006
              
              
              191,155
              
              
              -
              
              
              -
              
              
              
              
              -
              
              
              
              
              9,072
              
              (11)
              
              
              200,227Former
                  Chief Executive Officer,former
                  General Counsel andformer
                  Secretary (6)




(1)
            Dr.
                Novak was appointed Chief Executive Officer on December 28, 2006.
                Prior to
                December 28, 2006, Dr. Novak provided services to us as an employee,
                for
                which he was paid $250,000 annually.  Dr. Novak is also a
                director.  He does not receive any compensation from us for his
                services as a director. Dr. Novak’s salary was increased to $430,000
                annually effective December 28, 2006.(2)
            Mr.
                Fitzgerald was Chief Executive Officer from September 8, 2003 through
                January 9, 2006.(3)
            Mr.
                Mendes was Chief Executive Officer from October 3, 2006 through October
                26, 2006.  The amount of salary shown excludes the portion of Mr.
                Mendes’ salary which was paid by Ener1 Group under an agreement entered
                into on October 3, 2006 in exchange for his services as Chairman
                of the
                Board of Directors of Ener1 Group.(4)
            Mr.
                Habbu was appointed Chief Financial Officer on October 16, 2006.
 The
                amount of salary shown excludes the portion of Mr. Habbu’s salary which
                was paid by Ener1 Group under an agreement entered into on October
                3, 2006
                in exchange for his services as Chief Financial Officer of Ener1
                Group.(5)
            Mr.
                Herlihy was Chief Financial Officer from January 27, 2006 through
                October
                16, 2006. Mr. Herlihy is also the President of Splinex Technology
                Inc., an
                affiliate of Ener1, Inc.




80




(6)
            Mr.
                Stewart was appointed Chief Executive Officer from January 9, 2006
                through
                October 3, 2006 and from November 1, 2006 through December 21, 2006,
                at
                which time he resigned. In addition, he served as interim Chief Financial
                Officer from January 6, 2006 through January 27, 2006.(7)
            In
                accordance with SFAS 123R, the value of the incentive stock options
                were
                determined using a Black-Scholes model. The assumptions made in the
                valuation of the option grant included volatility of 137%, risk-free
                interest rate of 4.8%, stock price on the date of grant of $0.31,
                and an
                expected life of 6.5 years.(8)
            In
                accordance with SFAS 123R, the value of 300,000 incentive stock
                options were determined using a Black-Scholes model. The assumptions
                made
                in the valuation of the option grant included volatility of 135%,
                a
                risk-free interest rate of 4.5%, a stock price on the date of grant
                of
                $0.23 and an expected life of 6.5 years. The value of 1,200,000
                performance options was determined using a lattice valuation model
                with a
                volatility of 100%, risk-free interest rate of 4.7%, stock price on
                the date of grant of $0.23, and an expected life of ten
                years.(9)
            Mr.
                Herlihy received a grant of 300,000 shares of common stock which
                were
                valued at the closing market price of $0.33 per share on October
                12, 2006,
                the date of grant, in accordance with SFAS 123R.(10)
            Includes
                $20,697 for employee life insurance premiums, $31,560 car lease payments
                and $1,687 for car insurance payments.(11)
            Car
                allowance.





**Employment
      Agreements**





Effective
      October 12, 2006, Ener1 entered into an employment agreement with Mr. Habbu,
      under which Mr. Habbu will serve at its Chief Financial Officer. Mr. Habbu's
      salary under the agreement is initially $325,000 per year, of which $100,000
      will be paid by Ener1 Group in accordance with a separate arrangement between
      Ener1 Group and Ener1. The employment agreement has a term of five years and
      may
      be terminated with or without cause (as defined in the agreement) by Ener1.
      In
      the event of a termination without cause, Ener1 must provide 90 days notice
      and
      the agreement calls for Ener1 to pay Mr. Habbu severance in the form of his
      base
      salary for a period of six months. The agreement calls for Mr. Habbu to be
      awarded an option to purchase 2,500,000 shares of Ener1 common stock, which
      will
      vest 30%, 30% and 40%, respectively, on the first three anniversaries of the
      date of grant.





On
      September 8, 2003, we entered into an Employment Agreement with Kevin P.
      Fitzgerald, who was our Chief Executive Officer and Chairman of our Board of
      Directors until he was dismissed in January 2006. The agreement provided that
      if
      Mr. Fitzgerald's employment was terminated for any reason (other than fraud,
      theft or other crimes of moral turpitude), we (or the shareholders of Ener1
      Group), if requested by Mr. Fitzgerald, would pay him the amount equal to the
      difference between the aggregate exercise price of any vested options to
      purchase our common stock and fair market value of our common stock. If Mr.
      Fitzgerald's employment was terminated without cause (as defined in the
      agreement) he was entitled to receive severance payments equal to two years'
      base salary. Mr. Fitzgerald agreed not to compete with us for two years
      following termination of his employment, unless he terminated his employment
      for
      good reason (as defined in the agreement). Mr. Fitzgerald filed a complaint
      against us alleging breach of his employment agreement. In January 2007, we
      reached a settlement with Mr. Fitzgerald which resulted in total payment
      obligations of $350,000 to settle all of the claims.





In
      January 2006, we agreed with Splinex that Mr. Herlihy, our Chief Financial
      Officer from January 27, 2006 through October 16, 2006, would devote
      substantially all of his time to his role at Ener1, but that he will continue
      to
      serve as the President and Chief Financial Officer of Splinex. In 2006,
      we paid approximately 76% of Mr. Herlihy's aggregate annual salary of
      $250,000 from the two companies, and Splinex paid 24% from the date of
      his employment on January 27, 2006.





81





**OUTSTANDING
      EQUITY AWARDS AT FISCAL YEAR-END 2006**


**Option
                    Awards****Name**
                
                **Number
                    of Securities Underlying Unexercised Options (#) Exercisable**
                
                **Number
                    of Securities Underlying Unexercised Options (#) Unexercisable**
                
                
                
                **Equity
                    Incentive Plan Awards: Number of Securities Underlying Unexercised
                    Unearned Options (#)**
                
                
                
                **Option
                    Exercise Price ($)**
                
                **Option
                    Expiration Date**Dr.
                    Peter Novak
                
                
                -
                
                
                -
                
                
                
                
                
                -
                
                
                
                
                
                -Kevin
                    Fitzgerald
                
                
                7,557,446
                
                
                -
                
                
                
                
                
                -
                
                
                
                
                
                0.30
                
                
                09/08/132,794,969
                
                
                -
                
                
                
                
                
                -
                
                
                
                
                
                0.97
                
                
                12/31/14112,790
                
                
                -
                
                
                
                
                
                -
                
                
                
                
                
                0.54
                
                
                12/31/15Victor
                    Mendes
                
                
                -
                
                
                -
                
                
                
                
                
                -
                
                
                
                
                
                -Ajit
                    Habbu
                
                
                -
                
                
                2,500,000
                
                
                (1
                )
                
                -
                
                
                
                
                
                0.31
                
                
                10/16/16Rex
                    Hodge
                
                
                -
                
                
                300,000
                
                
                (2
                )
                
                -
                
                
                
                
                
                0.21
                
                
                12/21/16-
                
                
                -
                
                
                
                
                
                1,200,000
                
                
                (3
                )
                
                0.21
                
                
                12/21/16Gerard
                    A. Herlihy
                
                
                -
                
                
                -
                
                
                
                
                
                -
                
                
                
                
                
                -Ronald
                    Stewart
                
                
                -
                
                
                -
                
                
                
                
                
                -
                
                
                
                
                
                -




(1)
        Vests
        750,000 shares on 10/16/07, 750,000 shares on 10/16/08 and 1,000,000 shares
        on
        10/16/09
  (2)
        Vests
        100,000 shares on 12/31/06, 12/31/07 and 12/31/08
  (3)
        Vests
        400,000 shares on 12/31/07, 12/31/08 and 12/31/09; the options contain
        additional milestones which
        must be met before they can be exercised.





82





**2006
      DIRECTOR COMPENSATION**


**Name**
              
              **Fees
                  Earned or Paid in Cash ($)**
              
              **Stock
                  Awards ($)**
              
              **Option
                  Awards ($)**
              
              
              
              **All
                  Other Compensation ($)**
              
              **Total
                  ($)**Karl
                  Gruns (1)
              
              
              40,000
              
              
              -
              
              
              10,500
              
              (3)
              
              
              2,500
              
              
              53,000Ludovico
                  Manfredi (2)
              
              
              40,000
              
              
              -
              
              
              10,500
              
              (3)
              
              
              -
              
              
              50,500Charles
                  Gassenheimer (5)
              
              
              -
              
              
              -
              
              
              -
              
              
              
              
              -
              
              
              -Marshall
                  Cogan (5)
              
              
              -
              
              
              -
              
              
              95,000
              
              (4)
              
              
              -
              
              
              95,000Mike
                  Zoi (5)
              
              
              -
              
              
              -
              
              
              -
              
              
              
              
              250,000
              
              
              250,000





(1)
                Independent non-executive directors earned director fees of $40,000
                for
                the 2006 calendar year, of which $30,000 was paid to Mr. Gruns in
                December
                2006 and $10,000 was paid in January 2007. Other compensation includes
                amounts earned in 2006 for his services on specific projects as an
                independent director which were paid in January 2007.(2)
                Independent non-executive directors earned director fees of $40,000
                for
                the 2006 calendar year, of which $20,000 was paid to Mr. Manfredi in
                January 2007 and $10,000 in February 2007.(3)
                In accordance with SFAS 123R, the value of the stock options were
                determined using a Black-Scholes model. The assumptions made in the
                valuation of option grants included volatility of 135%, a risk-free
                interest rate of 4.7%, stock price on the date of grant of $0.23
                and an
                expected life of 6.5 years.(4)
                In accordance with SFAS 123R, the value of the stock option were
                determined using a Black-Scholes model. The assumptions made in the
                valuation of the option grant included volatility of 147%, a risk-free
                interest rate of 4.5%, stock price on the date of grant of $0.40
                and an
                expected life of 6.5 years.(5)
                Directors that are not independent do not receive any compensation
                for
                their services as directors.  We paid Mr. Zoi $250,000 in 2006 for
                his services to us as a consultant.




83





**Compensation
      of Directors**





Mr.
      Gruns, as an independent, non-executive director, earns $7,500 per calendar
      quarter for his services as our director, plus $2,500 per quarter for his
      services as Chairman of our Audit Committee and specific cash amounts for his
      services on specific projects as an Independent Director. During 2006, Mr.
      Gruns
      earned $30,000 for his services as a director in 2006, $10,000 for his services
      as Chairman of the Audit Committee and $2,500 for his services on specific
      projects as an Independent Director. He was paid $30,000 of the fees in December
      2006 and $12,500 of the fees in January 2007. He also receives 50,000
      options to purchase our common stock each year as part of his director’s
      compensation for each year in which he serves as our director, vesting one
      year
      from date of grant.  In December 2006, he was awarded an option to purchase
      up to 50,000 shares at an exercise price of $0.23.





Mr.
      Manfredi, as an independent, non-executive director, earns $10,000 per quarter
      for his services as our director, including his participation as a member of
      our
      Audit Committee. He was paid $20,000 of the $40,000 director fees in January
      2007 and $10,000 in February 2007. Mr. Manfredi received upon his appointment
      as
      director an option to purchase 110,000 shares of our common stock at an exercise
      price of $0.70, vesting in three equal annual installments. He also
      receives 50,000 additional stock options (beginning December 31,
      2006 **)** for each
      year of service as one of our directors. In December 2006, he was awarded an
      option to purchase up to 50,000 shares at an exercise price of $0.23.





Mr.
      Gassenheimer became the Vice Chairman of our company in January 2006.
      He currently does not receive a salary or other compensation from our
      company.





Mr.
      Cogan
      became a director of our company in February 2006. He currently does not
      receive a salary or other compensation from our company. In February 2006,
      Mr.
      Cogan was awarded an option to purchase up to 250,000 shares at an exercise
      price of $0.40 per share, vesting in three equal annual
      installments.





All
      directors are reimbursed for expenses incurred to attend Board and Committee
      meetings. Other than as described in these paragraphs, our directors do not
      receive compensation for their services as directors.





84


**ITEM
      11: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
      STOCKHOLDER MATTERS**





**Equity
      Compensation Plan Information**





The
      following table provides information regarding common stock authorized for
      issuance under Ener1‘s equity compensation plans as of December 31, 2006:


**Plan
                  Category**
              
              **(a)**
                **Number
                  of Securities to be Issued Upon Exercise of Outstanding Options,
                  Warrants,
                  and Rights**
              
              **(b)**
                **Weighted-Average
                  Exercise Price of Outstanding Options, Warrants, and Rights**
              
              **(c)**
                **Number
                  of Securities Remaining Available for Future Issuance Under Equity
                  Compensation Plans (excluding securities reflected in column (a))**Equity
                  Compensation Plans Approvedby
                  Security Holders
              
              
              5,690,000
              
              $
              0.37
              
              
              1,528,170Equity
                  Compensation Plans Not Approvedby
                  Security Holders
              
              
              23,585,205
              
              $
              0.36
              
              
              21,860,347Total
              
              
              29,275,205
              
              
              
              
              
              23,388,517




Six
      of
      our equity compensation plans have not been approved by our shareholders, the
      2007 Plan, the CEO Option Plan, the Advisory Committee Option Plan, the 2004
      Advisory Committee Option Plan, the EnerDel Officer Plan, and the EnerStruct
      Employee Plan.





Under
      the
      2007 Plan, incentive stock options, nonqualified stock options, stock
      appreciation rights, restricted stock, restricted stock units and deferred
      stock
      units may be issued to persons selected by the administrators of the Plan from
      a
      class of employees, officers and non-employee directors and other service
      providers who render valuable contributions to Ener1. The 2007 Plan provides
      that no more than 5,000,000 shares of common stock may be issued to any employee
      in any one calendar year. Option awards are generally granted with an exercise
      price equal to the market price of our common stock at the date of grant; those
      option awards generally vest based on three years of continuous service and
      have
      ten-year contractual terms. Options to purchase 11,500,000 shares at a
      weighted-average exercise price of $0.23 per share were outstanding under the
      2007 Stock Option Plan as of December 31, 2006; these options may not be
      exercised unless and until the 2007 Plan is approved by the shareholders of
      Ener1 and will be void if the 2007 Plan is not approved. Options
      granted under the 2007 Plan expire no later than ten years from the date of
      grant.





Under
      the
      CEO Option Plan, and in accordance with his employment agreement, on September
      8, 2003, we issued to Kevin Fitzgerald, our former Chief Executive Officer,
      an
      option to purchase 9,716,716 shares of our common stock at an exercise price
      of
      $0.30 per share, vesting ratably in equal amounts on the first day of each
      month
      for a period of 36 months, beginning October 1, 2003. Under this option plan,
      on
      December 31, 2004, we also issued to Mr. Fitzgerald an option to purchase
      5,159,943 shares of our common stock, at an exercise price of $0.97 per share,
      vesting ratably in each of the 24 months following December 31, 2004. On
      December 31, 2005, we issued to Mr. Fitzgerald an option to purchase 2,706,958
      shares of our common stock, at an exercise price of $0.54 per share, vesting
      ratably in each of the 24 months following that date. No additional shares
      are
      reserved for issuance in connection with this plan.





Options
      to purchase a total of 220,000 shares have been granted in connection with
      our
      Advisory Committee Option Plan; no additional shares are reserved for issuance
      in connection with this plan. This plan provides for the grant of options to
      members of our Advisory Committee, or to the entities with whom our Advisory
      Committee members are affiliated. The members of our Advisory Committee provide
      advice to our executives and Board of Directors regarding industry matters
      and
      company marketing strategy. The terms of these option grants were determined
      by
      our Board of Directors, in their sole discretion, including, without limitation,
      the number of shares subject to an option and the applicable exercise price,
      vesting schedule and term. Each of the options granted under this plan has
      a
      ten-year term, vests over a two-year period and an exercise price equal to
      fair
      market value of our common stock on the date of grant.





85




Options
      to purchase of 100,000 shares have been granted in connection with the 2004
      Advisory Committee Option Plan; no additional shares are reserved for issuance
      in connection with this plan. This plan provides for the grant of options to
      a
      member of our Advisory Committee. The members of our Advisory Committee provide
      advice to our executives and Board of Directors regarding industry matters
      and
      company marketing strategy. The terms of this option grant were determined
      by
      our Board of Directors, in their sole discretion, including, without limitation,
      the number of shares subject to the option and the applicable exercise price,
      vesting schedule and term. The option granted under this plan has a ten-year
      term, vests over a three-year period and an exercise price equal to fair market
      value of our common stock on the date of grant.





We
      granted an option to Mr. Ulrik Grape, President of EnerDel, in accordance with
      his employment agreement under the EnerDel Officer Plan, to purchase 1,000,000
      shares of our common stock, vesting 25% per year, with an exercise price equal
      to fair market value on the date of grant. Mr. Grape may not exercise any
      portion of this option until EnerDel reports target revenue equal to $1.5
      million for 2005 and $7.0 million for 2006. If EnerDel's revenue falls short
      of
      these target(s) by 20% or more, the options may not be exercised until EnerDel’s
      revenue reaches more than 80% of the target revenue for 2006. The target revenue
      was not met for 2006 or 2005. This option has a ten-year term. No additional
      shares are reserved for issuance in connection with this plan.





In
      2004,
      we granted options to acquire 300,000 shares of common stock to two employees
      of
      EnerStruct under the EnerStruct Employee Plan. The options have an exercise
      price of $0.50 per share, vest over five years and expire in May 2014. No
      additional shares are reserved for issuance in connection with this
      plan.





86








**Security
      Ownership of Certain Beneficial Owners and Management**





The
      table
      below contains information as of March 31, 2007 about stockholders whom we
      believe are the beneficial owners of more than five percent (5%) of our
      outstanding common stock, as well as information regarding stock ownership
      by
      our directors, named executive officers who are currently serving as our
      officers and our directors and executive officers as a group. Except as
      described below, we know of no person that beneficially owns more than 5% of
      our
      outstanding common stock. As of March 31, 2007, 438,991,830 shares of common
      stock were outstanding. Except as otherwise noted below, each person or entity
      named in the following table has the sole voting and investment power with
      respect to all shares of our common stock that he, she or it beneficially owns.
      Except as otherwise noted below, the address of each person or entity named
      in
      the following table is c/o Ener1, Inc., 500 West Cypress Creek Road, Suite
      100,
      Fort Lauderdale, Florida 33309.


**Amount
                  Of**
              
              
              
              **Percent****Beneficial**
              
              
              
              **Of****Name**
              
              **Ownership**
              
              
              
              **Class**Ener1
                  Group, Inc.
              
              
              437,787,561
              
              (1)
              
              85.9
              %Peter
                  Novak
              
              
              3,751,791
              
              (2)
                  (10)
              
              *Charles
                  Gassenheimer
              
              
              2,500,000
              
              (3)
              
              *Marshall
                  Cogan
              
              
              83,333
              
              (4)
              
              *Karl
                  Gruns
              
              
              270,000
              
              (5)
              
              *Ludovico
                  Manfredi
              
              
              73,333
              
              (6)
              
              *Mike
                  Zoi
              
              
              834,206
              
              (7)
                  (10)
              
              *Ajit
                  Habbu
              
              
              -
              
              
              
              *Rex
                  Hodge
              
              
              100,000
              
              (8)
              
              *Directors
                  and officers as a group (9) (10) (ten persons)
              
              
              7,712,663
              
              
              1.7
              %


Notes:
 
 *
        Less
        than 1%
  (1)
              Includes
                  70,928,136 shares issuable under outstanding warrants exercisable
                  duringthe
                  60 day period following March 31, 2007.
 (2)
              Includes
                  1,939,562 shares issuable under outstanding warrants exercisable
                  duringthe
                  60 day period following March 31, 2007.
 (3)
              Includes
                  500,000 shares issuable under outstanding warrants exercisable
                  duringthe
                  60 day period following March 31, 2007.
 (4)
              Includes
                  83,333 shares issuable under outstanding warrants exercisable
                  duringthe
                  60 day period following March 31, 2007.
 (5)
              Includes
                  220,000 shares issuable under outstanding options exercisable
                  duringthe
                  60 day period following March 31, 2007.
 (6)
              Includes
                  73,333 shares issuable under outstanding options exercisable
                  duringthe
                  60 day period following March 31, 2007.
 (7)
              Includes
                  434,330 shares issuable under outstanding warrants exercisable
                  duringthe
                  60 day period following March 31, 2007.
 (8)
              Includes
                  100,000 shares issuable under outstanding options exercisable
                  duringthe
                  60 day period following March 31, 2007.
 (9)
              Includes
                  3,364,372 shares issuable under outstanding warrants and options
                  exercisableduring
                  the 60 day period following March 31,
                  2007.
 (10)
              The
                  amount shown does not include common stock beneficially owned by
                  Ener1
                  Group, Inc.,a
                  company of which Dr. Novak and Mr. Zoi are directors. Dr. Novak
                  and Mr.
                  Zoi disclaimbeneficial
                  ownership of any Ener1 common stock beneficially owned by Ener1
                  Group,
                  Inc.
  87




**ITEM
      12: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS**





*Ener1
      Group Ownership and Director and Officer Affiliations*





Ener1
      Group, Inc. owns 86% of our outstanding capital stock. Mr. Zoi and Dr. Novak
      are
      each an officer, director and beneficial owner of Ener1 Group. Charles
      Gassenheimer, Vice Chairman of Ener1, is Chief Executive Officer and a
      director of Ener1 Group. Marshall Cogan, a director of Ener1, was a
      strategic advisor to Ener1 Group. Ajit Habbu, our Chief Financial Officer,
      is
      also the Chief Financial Officer of Ener1 Group. Curtis Wolfe, our General
      Counsel and Secretary, is also General Counsel of Ener1 Group.





On
      October 3, 2006, Ener1 entered into an agreement with Ener1 Group under which
      Ener1 Group agreed to pay 53% of Ener1’s salary and related costs for Mr. Victor
      Mendes for services Mr. Mendes would perform as Chairman of the Board of
      Directors for Ener1 Group. Mr. Mendes was Chief Executive Officer of Ener1
      from
      October 3, 2006 through October 26, 2006.




On
      October 3, 2006, Ener1 entered into an agreement with Ener1 Group under which
      Ener1 Group agreed to pay 31% of Ener1’s salary and related costs for Mr. Ajit
      Habbu for services Mr. Habbu would perform as Chief Financial Officer of Ener1
      Group. Mr Habbu became the Chief Financial Officer of Ener1 on October 16,
      2006.





*Tax
      Allocation Agreement with Ener1 Group*





Ener1
      and
      Ener1 Group are parties to a tax allocation agreement dated March 1, 2006 which
      provides for the allocation of income taxes between the two groups. Intergroup
      tax payments are made only when a payment is required or a refund is received
      on
      the consolidated tax return of Ener1 Group. When determining any federal income
      tax payments due by Ener1 in any year, for purposes of the tax allocation
      agreement, Ener1 is credited for the tax benefit of all of Ener1’s net operating
      losses generated after January 3, 2003 plus the tax benefit of any Ener1 net
      operating losses generated before January 3, 2003 that are allowable under
      the
      Internal Revenue Code, plus any payments Ener1 has made under the tax allocation
      agreement, less any payments Ener1 has received under the tax allocation
      agreement. Both Ener1 Group and Ener1 have had net operating losses for all
      periods since Ener1 Group acquired a majority of Ener1's common stock, and
      no
      intergroup tax payments have been made to date.





*Warrant
      Exercise Agreement*





On
      March
      30, 2006, we and Ener1 Group entered into an agreement (the “Warrant Exercise
      Agreement”), under which: (1) Ener1 Group agreed to exercise the remainder of
      the ten-year warrants issued by us to Ener1 Group in 2002 in connection with
      our
      acquisition of Ener1 Battery Company from Ener1 Group (the “Battery Warrants”);
      (2) we agreed to transfer our entire equity interest in Ener EL to Ener1 Group;
      (3) we and Ener1 Group terminated the letter agreement between Ener1 Group
      and
      us dated October 15, 2004 regarding Ener1 Group’s commitment to purchase shares
      of our Series B Preferred Stock and warrants to purchase Ener1 stock; (4) we
      and
      Ener1 Group agreed to release each other from outstanding obligations with
      respect to intercompany services provided by each company to the other as of
      March 30, 2006; and (5) we and Ener1 Group agreed that after Ener1 Group
      exercises the remaining balance of the Battery Warrants to purchase 24,500,000
      shares of our common stock, we would issue to Ener1 Group a new, immediately
      exercisable, ten-year warrant to purchase 20,000,000 shares of Ener1 common
      stock at an exercise price of $0.50 per share. On June 30, 2006, Ener1 Group
      completed the exercise of the remaining Battery Warrants and we issued the
      20,000,000 warrants described above to Ener1 Group. During the six months ended
      June 30, 2006, Ener1 Group purchased 69,000,000 shares upon exercise of the
      Battery Warrants for an aggregate exercise price of $5,520,000.





*Intercompany
      Services Between Ener1 and Ener1 Group*





Ener1
      Group and its subsidiaries have from time to time used various services and
      employees of ours and we have billed Ener1 Group and its subsidiaries for the
      actual cost of these services and employees. Similarly, we have from time to
      time used various services and employees of Ener1 Group and its subsidiaries
      and
      Ener1 Group has billed us for the actual cost of these services and employees.
      During 2004, Ener1 Group and its subsidiaries billed us $8,000 and we billed
      Ener1 Group and its subsidiaries $8,000, in each case for services and employees
      of the other party. During 2005, Ener1 Group and its subsidiaries billed us
      $110,000 and we billed Ener1 Group and its subsidiaries $3,000, in each case
      for
      services and employees of the other party. As of December 31, 2005, the net
      balance due to us from Ener1 Group and its subsidiaries was $103,000. Pursuant
      to the Warrant Exercise Agreement, we cancelled $228,000 in intercompany
      billings to Ener1 Group on March 30, 2006.





88




*Loans
      and Advances from Ener1 Group*





Ener1
      Group has made various loans, advances and capital contributions to us since
      it
      first acquired a majority interest in Ener1 in early 2002. All such loans as
      of
      November 2003 were cancelled or paid at that time, except for accrued interest
      on some of those loans, for which we issued promissory notes to Ener1 Group,
      Mr.
      Zoi and Dr. Novak in aggregate principal amount of approximately $1,000,000
      representing the accrued interest. These notes were paid in full using the
      proceeds of our issuance in January 2004 of our senior secured convertible
      debentures due January 2009.





From
      June
      29, 2006 through December 31, 2006, Ener1 Group made various advances totaling
      $10,883,000. During 2006, $6,455,000 of these advances were converted into
      subordinated convertible notes to Ener1 Group as follows:





On
      June
      30, 2006, we issued a subordinated, convertible note to Ener1 Group in the
      principal amount of $3,250,000, which amount included $250,000 paid as a
      financing fee to Ener1 Group. The net loan proceeds of $3,000,000, of which
      $2,629,000 was received at June 30, 2006 and $371,000 was received in July
      2006,
      were used for working capital. The note bears interest at the rate of 10% per
      annum. All interest accrues until the maturity of the note on April 15, 2009,
      at
      which time all principal and accrued interest are payable in full. The note
      is
      subordinated to the rights of the holders of the 2004 Debentures and 2005
      Debentures. 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 6,500,000 shares of our 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 our company.





In
      connection with the June 30, 2006 note, we issued to Ener1 Group immediately
      exercisable warrants to purchase up to 9,000,000 shares of our common stock
      at an exercise price of $0.50 per share. These warrants have a five-year
      term.





We
      issued
      an additional subordinated, convertible note to Ener1 Group on August 9, 2006
      in
      the principal amount of $750,000 in connection with a forbearance agreement
      with
      one of our debenture holders. The proceeds were used to make interest
      payments due under the 2004 and 2005 Debentures on September 30, 2006. This
      note
      was issued with the same terms and conditions as the June 30, 2006 note
      discussed above, including the maturity date. No warrants were issued in
      connection with this note. Ener1 Group advanced $375,000 against this note
      on
      August 9, 2006 and the balance on August 15, 2006, in accordance with the terms
      of the forbearance agreement and the associated Interest Payment Deposit
      Agreement.





On
      August
      29, 2006, Ener1 Group canceled the August 9, 2006 note described above in the
      principal amount of $750,000 and issued a new convertible promissory note to
      Ener1 Group in the principal amount of $3,100,000, which amount included
      $100,000 paid as a financing fee to Ener1 Group, representing our obligation
      to
      repay all funds borrowed from Ener1 Group during August 2006.  This note
      was issued with the same terms and conditions as the August 9, 2006 note
      discussed above, except that the note is convertible into a total of 6,200,000
      shares of our common stock at a conversion price of $0.50 per share.  In
      connection with the issuance of the August 29, 2006 note, we also issued
      warrants to Ener1 Group to purchase up to 18,000,000 shares of common stock
      (9,000,000 shares may be purchased at an exercise price of $0.60 per share
      and
      9,000,000 shares may be purchased at an exercise price of $0.40 per
      share).  The warrants have a five-year term.





On
      November 9, 2006, we issued a subordinated, convertible note to Ener1 Group
      in
      the principal amount of $455,000 in
      connection with a Forbearance Agreement with one of our debenture holders.
      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. Ener1 Group paid the debenture holder $5,000 for legal fees
      and
      deposited $450,000 into escrow on behalf of Ener1 for the benefit of the holder,
      which exercised its right to apply the payment to the registration delay
      expenses upon the expiration of the Forbearance Agreement on December 24, 2006.





89




From
      January 1, 2007 through April 2, 2007, Ener1 Group made various advances
      totaling $2,905,000. During 2007, $4,905,000 of these advances, including
      $4,250,000 of advances made in 2006, were converted into subordinated
      convertible notes to Ener1 Group as follows:





On
      January 19, 2007, we issued a subordinated, convertible note to Ener1 Group
      in
      the principal amount of $655,000 in
      connection with a Forbearance Agreement with one of our debenture holders.
      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. Ener1 Group paid the holder $5,000 for legal fees and deposited
      $650,000 into an escrow account on behalf of Ener1 for the benefit of the
      holder, which exercised its right to apply the payment to the registration
      delay
      expenses upon the expiration of the Forbearance Agreement on March 2, 2007.





On
      February 13, 2007, we issued a subordinated, convertible note to Ener1 Group
      in
      the principal amount of $4,500,000, which represents loans and advances made
      to
      us from September 20, 2006 through December 31, 2006. The principal amount
      of
      the note includes a financing fee of $250,000. The net loan proceeds of
      $4,250,000 were used for working capital. The note bears interest at the rate
      of
      10% per annum. 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 our 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
      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. 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 our
      company.





In
      connection with the February 13, 2007 note, we issued to Ener1 Group immediately
      exercisable warrants to purchase up to 9,000,000 shares of our common stock
      at
      an exercise price of $0.50 per share and immediately exercisable warrants to
      purchase up to 18,000,000 shares of our common stock at an exercise price of
      $0.60 per share. These warrants have a five-year term.





As
      of
      April 2, 2007, Ener1 owed Ener1 Group $2,428,000 for loan advances, the terms
      for which have not yet been established.





Ener1
      Group owns approximately 86% of our outstanding common stock and four of our
      directors and four of our executive officers are affiliated with Ener1 Group.
      The above-described financing transactions were approved by the independent
      members of our Board of Directors.





*Warrant
      Exercises by Ener1 Group*





On
      January 5, 2007, Ener1 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.





Following
      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.





On
      February 21, 2007, Ener1 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
                1,612,293
                warrants from $1.50 to $0.25, 69,445 warrants from $1.50 to $0.25,
                69,445
                warrants from $1.25 to $0.25 and 3,071,864 warrants from $0.50 per
                share
                to $0.25 per share; and




90


·
            change
                the expiration dates for the above warrants to February 21,
                2007.





Following
      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.





*Payments
      to Mr. Zoi and Dr.
      Novak*





In
      2006
      and 2005, we paid each of Dr. Novak and Mr. Zoi annual compensation of $250,000.
      We also paid $36,485 and $48,934 in 2005 for life insurance
      benefits for Dr. Novak and Mr. Zoi, respectively. In 2006, we paid $20,697
      for life insurance benefits for Dr. Novak. We paid $31,560 in 2006 and 2005
      for automobile lease payments for Peter Novak. Presently, Dr. Novak is
      our Chief Executive Officer, for which he receives a salary of $430,000 per
      year.





*Series
      B Preferred Stock*





We
      entered into an agreement dated October 15, 2004 with Ener1 Group under which
      Ener1 Group is required, at our option, to purchase, for an aggregate purchase
      price of $3,000,000, up to 30,000 shares of our Series B Preferred Stock plus
      warrants to purchase (1) up to 833,334 shares of our common stock at an exercise
      price of $1.50 and (2) up to 833,334 shares of our common stock at an exercise
      price of $2.00. The agreement also provided that Ener1 Group was entitled to
      be
      paid $1 for every $3 in proceeds from such purchases. Pursuant to that
      agreement, in February 2005, at our request, Ener1 Group purchased, for an
      aggregate purchase price of $250,000 (1) 2,500 shares of our Series B
      Preferred stock, (2) warrants to purchase up to 69,445 shares of our common
      stock at an exercise price of $1.50 per share and (3) warrants to purchase
      up to
      69,445 shares of our common stock at an exercise price of $2.00 per share.
      Pursuant to the agreement, in connection with this purchase transaction, we
      paid
      Ener1 Group $83,333. This agreement was terminated on March 30, 2006 pursuant
      to
      the Warrant Exercise Agreement.





*Merger
      of Ener1 Acquisition Corp. into Splinex Technology Inc.*





In
      January 2005, in accordance with an Agreement and Plan of Merger dated as of
      June 9, 2004, as amended, Ener1 Acquisition Corp., our wholly-owned subsidiary,
      was merged with and into Splinex Technology Inc. In the merger, we received
      5,000,000 shares of Splinex common stock and declared a dividend to distribute
      these shares to our shareholders of record as of January 17, 2005. We agreed
      to
      pay up to $150,000 of expenses incurred in connection with the Registration
      Statement filed by Splinex to register our dividend of the shares of Splinex
      common stock issued in the merger. As of February 1, 2006, approximately 63%
      of
      Splinex’s outstanding common stock is owned by Splinex, LLC. Two of our
      directors, Dr. Peter Novak and Mike Zoi, beneficially own an aggregate of 25%
      of
      the voting membership interests (and an aggregate of 25.5% of the economic
      membership interests) of Splinex, LLC. One of our directors, Dr. Peter Novak,
      is
      also a director of Splinex. Dr. Novak was also the President of Splinex from
      its
      inception February 7, 2004 to August 31, 2004 and became the Chairman on
      September 1, 2005. Kevin Fitzgerald, our former Chief Executive Officer, was
      also a director of Splinex until December 2005. Gerard A. Herlihy,
      President and Chief Financial Officer of Splinex, was our Chief Financial
      Officer from January 27, 2006 to October 16, 2006.





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





On
      January 5, 2007, Ener1, Ener1 Group and Credit Suisse entered into a purchase
      agreement, a warrant agreement and a registration rights agreement pursuant
      to
      which:




·
              Ener1
                  Group sold 20,000,000 shares of Ener1 common stock to Credit Suisse
                  in
                  exchange for $5,000,000 cash
                  consideration;
 ·
              Ener1
                  issued to Credit Suisse warrants to purchase 5,000,000 shares of
                  Ener1
                  common stock with an exercise price of $0.30 per share and a term
                  of five
                  years;
 ·
              Ener1
                  agreed to register the resale of the shares sold to, and the shares
                  underlying the warrants issued to, Credit Suisse;
                  and
 ·
              Ener1
                  Group agreed to invest $4,000,000 of the consideration received
                  from
                  Credit Suisse in Ener1 securities.
 91




Under
      the
      terms of the purchase agreement, Credit Suisse can require Ener1 Group to
      repurchase up to 50% of the number of purchased shares at a price equal to
      $0.25
      per share for a period of 18 months following the closing date of January 5,
      2007 (the “Repurchase Right”). The Repurchase Right expires in the event that
      Credit Suisse either receives net proceeds from the sale of any of the
      securities of at least $2,500,000 or exercises the warrant in part or in whole.
      If the Repurchase Right is exercised by Credit Suisse Securities, the number
      of
      shares underlying the common stock warrant at that time will decrease by fifty
      percent.





*Transactions
      Among Ener1, Ener1 Group and Charles Gassenheimer*





On
      January 5, 2007, Charles Gassenheimer, the Vice Chairman and a director of
      Ener1
      and the Chief Executive Officer and a director of Ener1 Group, invested $500,000
      in Ener1 common stock and warrants, which amount was payable to him under his
      employment agreement with Ener1 Group. The investment was made on the same
      terms
      and conditions as the January 5, 2007 Credit Suisse investment, except that
      Mr.
      Gassenheimer was not entitled to the repurchase right granted to Credit Suisse.
      For his investment, Mr. Gassenheimer received:




·
              2,000,000
                  shares of Ener1 common stock from Ener1
                  Group;
  ·
              a
                  five-year warrant from Ener1 to purchase up to 500,000 shares of
                  Ener1
                  common stock at an exercise price of $0.30 per share;
                  and
  ·
                Ener1's
                    agreement to register the resale of the shares transferred by
                    Ener1 Group
                    to Mr. Gassenheimer and the shares underlying the warrant issued
                    by Ener1
                    to Mr. Gassenheimer.







92





**ITEM
      13: 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.
  93
   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, 2004.4.9
              
              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 Ener
                  1 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.
  94
  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, 2007.10.1
              
              1992
                  Non-Employee Director Stock Option Plan, incorporated by reference
                  to
                  Exhibit 10.1 of the Registrant’s Registration Statement on Form SB-2
                  (Registration No. 333-124745), filed May 9, 2005.10.2
              
              2002
                  Stock Participation Plan incorporated by reference to Exhibit C
                  of the
                  Registrant's Schedule 14A filed on April 15, 2002.10.3
              
              2002
                  Non-Employee Director Stock Participation Plan incorporated by
                  reference
                  to Exhibit D of the Registrant’s Schedule 14A filed on May 15,
                  2002.10.4
              
              Employment
                  Agreement by the Registrant and Kevin P. Fitzgerald, dated September
                  8,
                  2003, incorporated by reference to Exhibit 10.6 to the Registrant’s
                  Quarterly Report on Form 10-QSB for the quarter ended September
                  30,
                  2003.10.5
              
              License
                  and Royalty Agreement by and among the Registrant, Ener1 Battery
                  Company
                  and ITOCHU Corporation, dated July 25, 2003, incorporated by reference
                  to
                  Exhibit 10.2 to the Registrant’s Quarterly Report on Form 10-QSB for the
                  quarter ended September 30, 2003.10.6
              
              Shareholders
                  Agreement by and between ITOCHU and the Registrant, dated July
                  25, 2003,
                  incorporated by reference to Exhibit 10.5 to the Registrant’s Quarterly
                  Report on Form 10-QSB for the quarter ended September 30,
                  2003.10.7
              
              Amendment
                  to Subscription and Investment Agreement by ITOCHU Corporation
                  and the
                  Registrant, dated January 31, 2004, incorporated by reference to
                  Exhibit
                  10.20 to the Registrant’s Annual Report on Form 10-KSB for the period
                  ended December 31, 2003.10.8
              
              Securities
                  Purchase Agreement, dated as of January 16, 2004 by and among Ener1,
                  Inc.
                  and the entities whose names appear on the signature pages thereof,
                  incorporated by reference to Exhibit 10.1 to the Registrant's Current
                  Report on Form 8-K dated January 21,
                  2004.
  95
  10.9
              
              Security
                  Agreement dated as of January 16, 2004 by and among Ener1 Battery
                  Company
                  and the entities whose names appear on the signature pages thereof,
                  incorporated by reference to Exhibit 10.2 to the Registrant's Current
                  Report on Form 8-K dated January 21, 2004.10.10
              
              Subsidiary
                  Guaranty dated January 16, 2004 made by Ener1 Battery Company in
                  favor of
                  the Investors named therein, incorporated by reference to Exhibit
                  10.3 to
                  the Registrant’s Current Report on Form 8-K dated January 21,
                  2004.10.11
              
              Mortgage,
                  Security Agreement and Assignment of Leases and Rents dated January
                  16,
                  2004 by Ener1 Battery Registrant to Satellite Asset Management,
                  L.P.,
                  incorporated by reference to Exhibit 10.4 to the Registrant’s Current
                  Report on Form 8-K dated January 21, 2004.10.12
              
              Waiver
                  Agreement dated January 2004 by and between the Registrant and
                  Ener1
                  Group, Inc. incorporated by reference to Exhibit 10.31 to the Registrant’s
                  Annual Report on Form 10-KSB for the period ended December 31,
                  2003 filed
                  on March 31, 2004.10.13
              
              EnerDel,
                  Inc. Formation, Subscription and Stockholders’ Agreement entered into by
                  and between Delphi Automotive Systems LLC and Ener1, Inc., dated
                  as of
                  October 20, 2004 incorporated by reference to Ener1, Inc.’s Form 8-K filed
                  on October 26, 2004.10.14
              
              Form
                  of Subscription Agreement dated as of October 15, 2004, by and
                  between
                  Ener1, Inc. and various investors for the purchase of 150,000 shares
                  of
                  Ener1, Inc.’s Series B 7% Convertible Preferred Stock, incorporated by
                  reference to Exhibit 10.20 to Registrant’s Annual Report on Form 10-KSB
                  for the period ending December 31, 2004.10.15
              
              Sublease
                  Agreement dated as of October 20, 2004, is entered into by and
                  between
                  Delphi Automotive Systems LLC and EnerDel, Inc, incorporated by
                  reference
                  to Exhibit 10.21 to Registrant’s Annual Report on Form 10-KSB for the
                  period ending December 31, 2004.10.16
              
              Lease
                  Agreement dated October 20, 2004 between Ener1 Battery Company
                  and
                  EnerDel, Inc, incorporated by reference to Exhibit 10.22 to Registrant’s
                  Annual Report on Form 10-KSB for the period ending December 31,
                  2004.10.17
              
              Bill
                  of Sale dated October 20, 2004, by Delphi Automotive Systems LLC
                  in favor
                  of EnerDel, Inc. in favor of transactions contemplated by the Formation,
                  Subscription and Shareholders’ Agreement of EnerDel, Inc. dated as of
                  October 20, 2004 by and among Delphi, Ener1 Inc. and EnerDel, incorporated
                  by reference to Exhibit 10.23 to Registrant’s Annual Report on Form 10-KSB
                  for the period ending December 31, 2004.10.18
              
              Delphi
                  Technologies, Inc. Assignment of Certain Inventions or Improvements
                  dated
                  October 20, 2004, incorporated by reference to Exhibit 10.24 to
                  Registrant’s Annual Report on Form 10-KSB for the period ending December
                  31, 2004.10.19
              
              License
                  Agreement by and between Delphi Technologies, Inc. and EnerDel,
                  Inc. by
                  reference to Exhibit 10.25 to Registrant’s Annual Report on Form 10-KSB
                  for the period ending December 31, 2004.10.20
              
              Ener1
                  Battery Company Assignment of Intellectual Property to EnerDel,
                  Inc, dated
                  October 20, 2004, incorporated by reference to Exhibit 10.26 to
                  Registrant's Annual Report on Form 10-KSB for the period ending
                  December
                  31, 2004.10.21
              
              License
                  Agreement dated October 20, 2004 by and between Ener1, Inc. and
                  EnerDel,
                  Inc, incorporated by reference to Exhibit 10.27 to Registrant's
                  Annual
                  Report on Form 10-KSB for the period ending December 31,
                  2004.10.22
              
              Ener1
                  Daughter Enterprise with Foreign Investments of Ener1 Battery Company
                  Assignment of Intellectual Property to EnerDel, Inc, incorporated
                  by
                  reference to Exhibit 10.28 to Registrant's Annual Report on Form
                  10-KSB
                  for the period ending December 31,
                  2004.
  96
  10.23
              
              Option
                  to Purchase Agreement dated October 20, 2004 between EnerDel, Inc.;
                  Ener1,
                  Inc.; and Ener1 Battery Company, incorporated by reference to Exhibit
                  10.29 to Registrant's Annual Report on Form 10-KSB for the period
                  ending
                  December 31, 2004.10.24
              
              Ener1
                  Services Agreement effective October 20, 2004 by and between EnerDel,
                  Inc.
                  and Ener1, Inc, incorporated by reference to Exhibit 10.30 to Registrant’s
                  Annual Report on Form 10-KSB for the period ending December 31,
                  2004.10.25
              
              Engineering
                  Services Agreement effective October 20, 2004 by and between EnerDel,
                  Inc.
                  and Delphi Automotive Systems LLC, incorporated by reference to
                  Exhibit
                  10.31 to Registrant’s Annual Report on Form 10-KSB for the period ending
                  December 31, 2004.10.26
              
              Transition
                  Services Agreement dated as of October 20, 2004 entered into by
                  and
                  between Delphi Automotive Systems LLC and EnerDel, Inc, incorporated
                  by
                  reference to Exhibit 10.32 to Registrant’s Annual Report on Form 10-KSB
                  for the period ending December 31, 2004.10.27
              
              Assignment/Assumption
                  of License Agreement dated October 20, 2004, among Ener1, Inc.,
                  Ener1
                  Battery Company and EnerDel, Inc., incorporated by reference to
                  Exhibit
                  10.34 of the Registrant’s Annual Report on Form 10-KSB for the period
                  ending December 31, 2004.10.28
              
              Form
                  of Securities Purchase Agreement, dated as of March 11, 2005 by
                  and among
                  Ener1, Inc. and the purchasers of Ener1's 7.5% Senior Secured Convertible
                  Debentures and Warrants to purchase shares of common stock, incorporated
                  by reference to Exhibit 10.1 of the Registrant’s current report on Form
                  8-K filed March 15, 2005.10.29
              
              Form
                  of Security 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 10.2 of the Registrant’s current
                  report on Form 8-K filed March 15, 2005.10.30
              
              Form
                  of Intercreditor Agreement dated as of March 11, 2004, among Ener1,
                  Inc.,
                  the purchasers of Ener1's 7.5% Senior Secured Convertible Debentures
                  and
                  the purchasers of Ener1, Inc.’s 7.5% Senior Secured Convertible
                  Debentures, incorporated by reference to Exhibit 10.3 of the Registrant’s
                  current report on Form 8-K filed March 15, 2005.10.31
              
              Employment
                  Agreement by Registrant and Pankaj Dhingra dated December 1, 2004,
                  incorporated by reference to Exhibit 10.38 pf the Registrant’s Annual
                  Report on Form 10-KSB for the period ended December 31,
                  2004.10.32
              
              Agreement
                  and Plan of Merger, dated as of June 9, 2004 by and among Ener1,
                  Inc.,
                  Ener1 Acquisition Corp. and Splinex Technology Inc. incorporated
                  by
                  reference to Exhibit 2.1 to the registration statement on Form
                  S-1 filed
                  by Splinex Technology Inc. on June 24, 2004.10.33
              
              First
                  Amendment, dated as of October 7, 2004, to Agreement and Plan of
                  Merger,
                  dated as of June 9, 2004 by and among Ener1, Inc., Ener1 Acquisition
                  Corp.
                  and Splinex Technology Inc., incorporated by reference to Exhibit
                  10.3 of
                  Amendment No. 1 to Ener1's Quarterly Report on Form 10-QSB/A for
                  the
                  period ending September 30, 2004.10.34
              
              Subscription
                  Agreement, dated as of October 15, 2004, between the Registrant
                  and Cofis
                  Compagnie Fiduciaire S.A. incorporated by reference to Exhibit
                  10.20 the
                  Registrant’s Annual Report on Form 10-KSB for the period ending December
                  31, 2004.10.35
              
              Ener1,
                  Inc. Form of Option Grant Agreement Under Employment Agreement
                  with Kevin
                  P. Fitzgerald, incorporated by reference to Exhibit 10.39 of Registrant’s
                  Registration Statement on Form SB-2 (Registration No. 333-124745),
                  filed
                  May 9, 2005.
  97
  10.36
              
              Agreement
                  between EnerDel, Inc. and EnerStruct, Inc., entered into as of
                  April 12,
                  2005, incorporated by reference to Exhibit 10.40 of Registrant’s
                  Registration Statement on Form SB-2 (Registration No. 333-124745),
                  filed
                  May 9, 2005.10.37
              
              Form
                  of Stock Option Agreement under the Registrant’s 2002 Non-Employee
                  Director Stock Participation Plan, incorporated by reference to
                  Exhibit
                  10.41 of Registrant’s Registration Statement on Form SB-2 (Registration
                  No. 333-124745), filed May 9, 2005.10.38
              
              Form
                  of Director Appointment Letter, incorporated by reference to Exhibit
                  10.42
                  of Registrant’s Registration Statement on Form SB-2 (Registration No.
                  333-124745), filed May 9, 2005.10.39
              
              Letter
                  Agreement between the Registrant and Ener1 Group, Inc., dated October
                  15,
                  2004, regarding a financing commitment provided by Ener1 Group,
                  Inc. to
                  the Registrant, incorporated by reference to Exhibit 10.43 of Registrant’s
                  Registration Statement on Form SB-2 (Registration No. 333-124745),
                  filed
                  May 9, 2005.10.40
              
              Director
                  Appointment Letter Agreement between the Registrant and Carlos
                  E.
                  Mendez-Penate, dated October 11, 2004, incorporated by reference
                  to
                  Exhibit 10.44 of Registrant’s Registration Statement on Form SB-2
                  (Registration No. 333-124745), filed May 9, 2005.10.41
              
              Indemnification
                  Agreement between the Registrant, Carlos E. Mendez-Penate and Coudert
                  Brothers LLP, dated October 11, 2004, incorporated by reference
                  to Exhibit
                  10.45 of Registrant’s Registration Statement on Form SB-2 (Registration
                  No. 333-124745), filed May 9, 2005.10.42
              
              Option
                  Agreement between Ener1, Inc. and Ulrik Grape dated October 1,
                  2005,
                  incorporated by reference to Exhibit 10.42 of Registrant's Annual
                  Report
                  on Form 10-KSB for the period ended December 31, 2005.10.43
              
              Employment
                  Agreement between EnerDel, Inc. and Ulrik Grape dated October 1,
                  2005,
                  incorporated by reference to Exhibit 10.43 of Registrant's Annual
                  Report
                  on Form 10-KSB for the period ended December 31, 2005.10.44
              
              Tax
                  Allocation Agreement dated March 1, 2006 between the Registrant
                  and Ener1
                  Group, Inc. incorporated by reference to Exhibit 10.44 of Registrant's
                  Annual Report on Form 10-KSB for the period ended December 31,
                  2005.10.45
              
              Forbearance
                  Agreement between the Registrant, Ener 1 Group, Inc. and Satellite
                  Asset
                  Management, L.P., dated August 9, 2006 incorporated by reference
                  to
                  Exhibit 10.45 of Registrant's Form SB2/A filed September 3,
                  2006.10.46
              
              Purchase
                  Agreement dated January 5, 2007, by and among Ener1 Group, Inc.,
                  Ener1,
                  and Credit Suisse Securities (USA) LLC incorporated herein by reference
                  to
                  Exhibit 10.01 to Registrant’s current report on Form 8-K dated January 8,
                  2007.10.47
              
              Warrant
                  Exercise Agreement, dated as of March 30, 2006, by and between
                  the Company
                  and Ener1 Group, Inc., incorporated by reference to Exhibit 10.1
                  of
                  Registrant's Current Report on Form 8-K dated April 5,
                  2006.14.
              
              Code
                  of Ethics, incorporated by reference to Exhibit 14.0 of Registrant's
                  Annual Report on Form 10-KSB for the period ended December 31,
                  2004.21.
              
              Subsidiaries
                  of the Registrant, incorporated by reference to Exhibit 21 of Registrant's
                  Annual Report on Form 10-KSB for the period ended December 31,
                  2005.23.
              
              Consent
                  of Malone & Bailey, P.C.*
  98
  31.1
              
              Rule
                  13a-14(a)/15(d)-14(a) Certification of Chief Executive
                  Officer.*31.2
              
              Rule
                  13a-14(a)/15(d)-14(a) Certification of Chief Financial
                  Officer.*32.1
              
              Section
                  1350 Certification of Chief Executive Officer.*32.2
              
              Section
                  1350 Certification of Chief Financial
                  Officer.*




*
      Filed
      herewith





99





**ITEM
      14: PRINCIPAL ACCOUNTANT FEES AND SERVICES**





**Year
      ended December 31, 2006**





*Audit
      Fees* : The
      aggregate fees, including expenses, billed by our principal accountant in
      connection with the audit of our consolidated financial statements for the
      most
      recent fiscal year and for the review of our financial information included
      in
      our Annual Report on Form 10-KSB, and our quarterly reports on Form 10-QSB
      during the fiscal year ending December 31, 2006, were $465,763.





*Audit-Related
      Fees* :
      The
      aggregate fees, including expenses, billed by our principal accountant for
      services reasonably related to the audit for the year ended December 31, 2006
      were $0.





*Tax
      Fees* :
      The
      aggregate fees, including expenses, billed by our principal accountant for
      services reasonably related to tax services during the year 2006 were
      $0.





*All
      Other Fees* :  The
      aggregate fees, including expenses, billed for all other services rendered
      to us
      by our principal accountant during year 2006 were $0.





**Year
      ended December 31, 2005**





*Audit
      Fees* : The
      aggregate fees, including expenses, billed by our principal accountant in
      connection with the audit of our consolidated financial statements for the
      most
      recent fiscal year and for the review of our financial information included
      in
      our Annual Report on Form 10-KSB, and our quarterly reports on Form 10-QSB
      during the fiscal year ending December 31, 2005, were $347,077.





*Audit-Related
      Fees* :
      The
      aggregate fees, including expenses, billed by our principal accountant for
      services reasonably related to the audit for the year ended December 31, 2005
      were $0.





*Tax
      Fees* :
      The
      aggregate fees, including expenses, billed by our principal accountant for
      services reasonably related to tax services during the year 2005 were
      $8,751.





*All
      Other Fees* :  The
      aggregate fees, including expenses, billed for all other services rendered
      to us
      by our principal accountant during year 2005 were $0.





The
      Audit
      Committee approved the engagement of our auditors, Malone & Bailey, PC, for
      the audit of our 2005 and  2006 financial statements before we engaged them
      to provide services.





100





SIGNATURES





Pursuant
      to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
      1934, the registrant has duly caused this report to be signed on its behalf
      by
      the undersigned, thereunto duly authorized.


**Ener1, Inc.**Date:
                April 6, 2007
            By:
            /s/ Dr.
              Peter
              NovakDr.
                Peter Novak
              Chief
                Executive Officer




Pursuant
      to the requirements of the Securities Exchange Act of 1934, this report has
      been
      signed below by the following persons on behalf of the registrant and in the
      capacities and on the dates indicated.





**Signature******
            
            **Title**
            
            **Date******/s/
                Dr. Peter Novak
            
            Chief
                Executive Officer, Director
            
            April
                6, 2007Dr.
                Peter Novak
            
            (Principal
                Executive Officer)/s/Charles
                Gassenheimer
            
            Vice
                Chairman of the Board, Director
            
            April
                6, 2007Charles
                Gassenheimer/s/
                Ajit Habbu
            
            Chief
                Financial Officer
            
            April
                6, 2007Ajit
                Habbu
            
            (Principal
                Financial Officer andPrincipal
                Accounting Officer)Director
            
            April
                6, 2007Marshall
                Cogan/s/
                Karl Gruns
            
            Director
            
            April
                6, 2007Karl
                Gruns/s/
                Ludovico Manfredi
            
            Director
            
            April
                6, 2007Ludovico
                Manfredi/s/
                Mike Zoi
            
            Director
            
            April
                6, 2007Mike
                Zoi




101