UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549





FORM
10-K





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





For the
fiscal year ended December 31, 2009





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 001-34050





Ener1,
Inc.


(Exact
name of registrant as specified in its charter)


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


1540
Broadway, Suite 25C


New
York, New York 10036


(Address of principal
executive offices) (Zip Code)





Registrant’s
telephone number, including area code           
(212)
920-3500





Securities
      registered pursuant to section 12(b) of the Act:Title
      of each class
            
            Name
      of each exchange on which registeredCommon
      stock, par value $0.01 per share
            
            Nasdaq
      Global Market





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


NONE


Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.


Yes o No R


Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.


Yes o No R





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


Yes R Noo





Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Website, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405
of this chapter) during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such files).


Yes o Noþ





Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (§232.405 of this chapter) is not contained herein, and will not
be contained, to the best of registrant’s knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K.


o





Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company.  See the definitions of “large accelerated filer,” “accelerated
filer” and “smaller reporting company” in Rule 12b-2 of the Exchange
Act.





Large
      accelerated filer
                o
                Accelerated
      filer RNon-accelerated
      filer
                o (Do not
      check if a smaller reporting company)
                Smaller
      reporting company o





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


Yes o No R





As of
June 30, 2009, the aggregate market value of the registrant’s common stock held
by non-affiliates of the registrant was $271,310,000 based on the closing price
on that date.





APPLICABLE
ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY


PROCEEDINGS
DURING THE PRECEDING FIVE YEARS:





Indicate
by check mark whether the registrant has filed all documents and reports
required to be filed by Sections 12, 13 or  15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.


Yes o No o





(APPLICABLE
ONLY TO CORPORATE REGISTRANTS)





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





Class
                  Outstanding as of March 8, 2010Common
      stock, par value $0.01 per share
                  125,426,644







Ener1,
Inc.





FORM
10-K





For the
year ended December 31, 2009





INDEX




PagePART
      IItem
      1.
                Business
                2Item
      1A.
                Risk
      Factors
                12Item
      1B.
                Unresolved
      Staff Comments
                23Item
      2.
                Properties
                23Item
      3.
                Legal
      Proceedings
                23Item
      4.
                Reserved
                23PART
      IIItem
      5.
                Market
      for Registrant’s Common Equity, Related Stockholder Matters andIssuer
      Purchases of Equity Securities
                24Item
      6.
                Selected
      Financial Data
                27Item
      7.
                Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
                28Item
      7A.
                Quantitative
      and Qualitative Disclosures about Market Risk
                40Item
      8.
                Financial
      Statements and Supplementary Data
                40Item
      9.
                Changes
      in and Disagreements with Accountants on Accounting and Financial
      Disclosure
                84Item
      9A.
                Controls
      and Procedures
                84Item
      9B.
                Other
      Information
                85PART
      IIIItem
      10.
                Directors,
      Executive Officers and Corporate Governance
                86Item
      11.
                Executive
      Compensation
                93Item
      12.
                Security
      Ownership of Certain Beneficial Owners and Management andRelated
      Stockholder Matters
                99Item
      13.
                Certain
      Relationships and Related Transactions, and Director
      Independence
                101Item
      14.
                Principal
      Accounting Fees and Services
                103PART
      IVItem
      15.
                Exhibits,
      Financial Statement Schedules
                105Signatures
                113









Ener1,
Inc. and its consolidated subsidiaries are hereinafter sometimes referred to as
“Ener1,” “the Company,” “the Registrant,” “we,” “our,” or “us.”





Cautionary
Statement Concerning Forward-Looking Information





We have
made forward-looking statements in this Annual Report including, without
limitation, statements concerning our financial outlook for 2010 and beyond,
estimates and projections, statements relating to our business plans, objectives
and expected operating results, and the assumptions upon which those statements
are based, all of which are “forward-looking statements” within the meaning of
the Private Securities Litigation Reform Act of 1995, Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended.





Forward-looking
statements may appear throughout this Annual Report, including, without
limitation, the following sections: “Business,” “Management’s Discussion and
Analysis of Financial Condition and Results of Operations,” and “Risk
Factors.”  Any statements contained in these sections that are not
statements of historical fact may be deemed forward-looking statements. Our
forward-looking statements may be identified by words such as “believe,”
“project,” “expect,” “think,” “anticipate,” “intend,” “estimate,” “future,”
“opportunity,” “plan,” “may,” “should,” “will,” “would,” “will be,” “will
continue,” “will likely result,” or similar expressions. You should understand
that these forward-looking statements are based on current expectations and
assumptions that are subject to risks and uncertainties, which may cause actual
results to differ materially from those expressed or implied in the
forward-looking statements.





A
detailed discussion of risks and uncertainties that could cause actual results
and events to differ materially from such forward-looking statements is included
in the section entitled “Risk Factors” (refer to Part I, Item 1A).  We
undertake no obligation to update or revise publicly any forward-looking
statements, whether as a result of new information, future events, or
otherwise.





PART
I




Item
1.      Business





Business
Overview





We are
engaged primarily in the business of designing, developing and
manufacturing high-performance, rechargeable, lithium-ion batteries and battery
systems for energy storage.  In 2010, we anticipate commencing volume
production of large format cells and battery packs for electric vehicles. 
This is in addition to our existing volume production of cells for electronics
markets.  We expect to begin shipment of battery packs to Think Global AS
of Oslo, Norway (“Think Global”) for the Think City electric vehicle in the
second quarter of 2010.  We are also continuing to work with Volvo
Corporation (“Volvo”) to begin expected production of battery packs for the
Volvo C30 electric vehicle in the first quarter of 2011.  We are also
continuing activities to design and manufacture prototype battery packs for
tests by customers in the transportation, stationary power and military
markets.  We are further continuing research activities to develop future
generations of battery cell chemistries that can improve the power, density and
life of large format batteries.





Potential
end markets for large format batteries include transportation, stationary power
(energy storage for utilities and renewable energy, such as wind and solar
power, in addition to battery backup systems for the home) and military
applications.  Our small cell markets include battery packs for consumer
and industrial electronics including hand-held scanners and two-way
radios.  In the transportation markets, we are developing systems to power
the next generation of hybrid, plug-in hybrid and electric vehicles (HEVs, PHEVs
and EVs).  This technology is also being developed for other transportation
markets including buses and trucks as well as alternative transportation
vehicles.




- 2
-





In 2010,
we anticipate completing the first phase of a major expansion of our battery
cell production capacity at our manufacturing facilities in Indiana.  In
February 2010, we entered into a lease for a new facility in Indiana with an
option to purchase that facility, which will facilitate the planned production
capacity expansion.  In February 2010, the Department of Energy (“DOE”)
formally approved a grant to us under the Automotive Battery Manufacturing
Initiative (“ABMI”) program awarded in August 2009 under the stimulus package in
the amount of $118.5 million, the funds from which will be used to finance this
capacity expansion.  The ABMI grant requires us to match each dollar of
grant money with a dollar of our own investment.  We plan to spend
approximately $63 million in the United States and $12 million in Korea to meet
our expected increased demand requirements.  We expect $31.5 million to be
funded by and under the ABMI grant award.  In addition, we continue to work
with the DOE on our application for low interest loans under the Advanced
Technology Vehicle Manufacturing Incentives Program (“ATVM”) for further
expansion of battery production capacity.  Our most recent application is
seeking a loan currently estimated to be between $275 million and $300
million.  The ATVM loan program requires us to match each eighty cents of
loan money with twenty cents of our own investment.  Funds received
pursuant to the ATVM loan program are restricted to the purchase of equipment
and are subject to terms and conditions for equipment grants by
the DOE.





We
believe that delivering safe battery solutions which deliver high energy density
and long life will be critical to success in this industry.  We use
multiple chemistries to achieve these objectives based upon the customers’
requirements for power and energy.





We also
conduct research and development activities on fuel cells and nano coating
processes.





Development
of our Business





Company
History





Ener1,
Inc. (“Ener1”) is a Florida corporation, founded in 1985 and headquartered in
New York, New York.  Ener1 Group, Inc., a privately held company (“Ener1
Group”), acquired an 80% stake in our company in early 2002 and changed the name
from Boca Research to Ener1. At December 31, 2009, Ener1 Group owned
approximately 52% of our outstanding common stock and two of our nine directors
are affiliated with Ener1 Group.  At December 31, 2009, Bzinfin, S.A.,
(“Bzinfin”) the owner of 68.5% of the common stock of Ener1 Group, directly
owned approximately 3% of our outstanding common stock.





Since
2002, we have engaged in research, development and production of lithium-ion
batteries.  In October 2004, we acquired an 80.5% interest in the
lithium-ion battery operations of Delphi Corporation (“Delphi”) located in
Indianapolis, Indiana, and formed EnerDel, Inc. (“EnerDel”) to conduct our
battery development business.  In August 2008, we took full ownership of
the EnerDel subsidiary by acquiring the 19.5% interest held by Delphi for
2,857,143 shares of Ener1 common stock.  We also revised the exercise price
of certain warrants held by Delphi exercisable into 750,000 shares of Ener1
common stock from $7.00 per share to $5.25 per share.





In 2005,
we began working on the development of lithium titanate (“LTO”) based chemistry
for HEV batteries under the United States Advanced Battery Consortium (“USABC”)
program, a consortium of Ford, General Motors and Chrysler with funding provided
by the DOE. We are currently working on a Phase II grant for LTO cell
development.  We are also developing an LTO battery for PHEVs, but with a
different cathode material, under an award from the DOE which is being managed
by the USABC.  We have also developed cells using other lithium-ion
chemistries.  In 2010, we expect to commence commercial production of a
battery for the Think City electric vehicle that uses a chemistry consisting of
a hard carbon anode and a mixed oxide lithium-ion cathode.





In 2007,
pursuant to a Supply Agreement (the “Supply Agreement”) with Think Global, we
began developing a lithium-ion battery pack designed specifically for the Think
City electric vehicle.  Think Global refinanced its operations in August
2009 after reorganization under Norwegian law. In August 2009, we participated
in a $43 million investment in Think Holdings, AS, a Norwegian limited liability
company (“Think Holdings”) the controlling shareholder in Think Global, and
committed to invest $19 million in exchange for voting and equity rights of
approximately 34% and 32%, respectively. We completed the third and final
tranche in this investment in February 2010.   In September 2009, we
revised and replaced the existing Supply Agreement with Think Global, which
provided us with, among other rights, an exclusive right to supply battery packs
and a right of first refusal with respect to battery supplies from competing
battery suppliers.




- 3
-





Our
research and development activities continue. However, we are
commencing manufacturing and production of our lithium-ion batteries. 
Through 2009, we have invested approximately $30 million in equipment and
building improvements to establish cell manufacturing and battery pack assembly
capacity in our Indiana facilities. In 2010, we plan to complete the first phase
of a major expansion of our battery cell production capacity at our
manufacturing facilities in Indiana.  In February 2010, we entered into a
lease for a new facility in Indiana with an option to purchase that facility,
which we expect will facilitate our planned production capacity
expansion.  In February 2010, the DOE formally approved a grant to us
under the ABMI program awarded in August 2009 under the stimulus
package in the amount of up to $118.5 million, the funds from which
we expect to help finance this capacity expansion.  We plan to spend
approximately $63 million in the United States and $12 million in Korea to
provide additional production capacity. We expect $31.5 million to be
funded under the ABMI grant award.  At December 31, 2009, we had committed
to purchase approximately $29 million of equipment during 2010.





In
October 2008, we acquired approximately 83% of Enertech International, Inc.,
(“Enertech”), a Korean based manufacturer of lithium-ion batteries, which
ownership we have subsequently increased to 89%.  The acquisition expanded
our production capabilities by adding Enertech’s 145,000 square foot
lithium-ion battery manufacturing plant and production equipment located in
South Korea.  Enertech has expertise in manufacturing flat or prismatic
batteries which are used in our battery packs and has been supplying cells,
based on EnerDel’s design, for the Think Global battery packs, which we expect
to begin shipping in the second quarter of 2010.





In March
2010, we formed Ener1 Europe, S.A.S. (“Ener1 Europe”), a wholly-owned subsidiary
of Ener1.  Ener1 Europe is headquartered in Paris, France and is primarily
focusing on business development activities and our European customer
programs.





CorporateFinancingDevelopments





During
2007 and 2008, we took steps to improve our balance sheet and increase the
trading volume of our common stock   In November 2007, we raised $29.4
million in a private placement of common stock to institutional investors. 
During 2008, we converted our outstanding Debentures and Notes due to Ener1
Group and outstanding Series B Preferred Stock into Ener1 common stock, and we
redeemed our Series A preferred stock for cash.  During 2008,
investors in our November 2007 private placement exercised warrants resulting
in additional net proceeds of $29.7 million.





In April
2008, we completed a one for seven reverse stock split of our
common stock. Our common stock began trading on the American Stock Exchange
on May 8, 2008, and began trading on the NASDAQ stock market on January 2, 2009
under the symbol HEV.





On
December 29, 2008, we entered into a line of credit agreement with Ener1 Group,
our majority shareholder, for $30.0 million over a period of 18 months. 
Through February 28, 2010, we had borrowed $16.8 million under the line of
credit.





On
January 7, 2009, we filed a registration statement on Form S-3 to register
securities in an amount of up to $100 million for potential future
issuance.  The registration statement became effective on February 5,
2009.  In September 2009, we completed an “at the market” offering of $40
million of our common stock pursuant to the registration
statement.  At the market offerings give us the discretion when and at what
price to sell our common stock, subject to certain conditions.  In February
2010, we filed a prospectus to sell up to an additional $60 million in an “at
the market” offering pursuant to the registration statement.  Through
February 28, 2010, we have sold $3.1 million of the $60 million
offering.





Operating
Segments





We have
three operating segments: battery, fuel cell and nanotechnology.  Our
battery business develops and markets advanced lithium-ion batteries.  The
fuel cell business develops and markets fuel cells and fuel cell systems. 
The nanotechnology business develops nanotechnology related manufacturing
processes and materials.  Financial information for the years ended
December 31, 2009, 2008 and 2007 regarding our operating segments, including
geographic information, is incorporated by reference from Note 20, “Segments,”
to our Consolidated Financial Statements.




- 4
-





Our
Battery Business





We
develop and manufacture lithium-ion battery systems for EVs, HEVs, and
PHEVs.  We serve the transportation and stationary power market segments in
North America, Europe and Asia and the military markets in the United
States.  We manufacture and assemble our batteries in our United
States-based and Korea-based plants, and currently are increasing EnerDel’s
global production capacity of cells in both countries.  Ultimately, we
envision a hub-and-spoke model for manufacturing and distribution, basing cell
manufacturing in our Indianapolis and Korean facilities and locating pack
assembly closer to our customers worldwide to reduce transportation costs and
increase customer response times.





In the
transportation sector, we expect that due to (1) volatility in oil prices, (2)
government initiatives to increase fuel efficiency, (3) worldwide efforts to
reduce dependence upon oil, and (4) government initiatives to reduce CO2 emissions,
demand will grow significantly for EVs, PHEVs, and HEVs over the next 10
years.  We believe that strategic and national security considerations will
also play a role in this anticipated trend.  The National Highway
Transportation Safety Administration’s (NHTSA) has established an increased
Corporate Average Fuel Economy (“CAFÉ”) standard of 34.1 miles per gallon which
now includes light duty trucks.   We believe that electrification of
the automobile will be critical to main-line auto manufacturers achieving this
new CAFÉ standard. President Obama has set a goal of having one million PHEVs
and EVs in the United States by 2015.





Government Programs
Promoting HEVs and Advanced Batteries





United
States government programs are funding a significant increase in investment in
the domestic battery business and related supplier markets, and we are directly
benefiting from these programs as a United States-based
manufacturer.





We
believe that the demand for our product in the transportation and stationary
power markets is greatly affected by the price of oil.  According to the
Energy Information Administration, refiner acquisition price for domestic oil
increased to a peak monthly average of $129.03 per barrel in June 2008 compared
to $50.77 per barrel in January 2007.  Refiner gasoline prices increased
from $1.57 to $3.42 per gallon during this same period.  Subsequently, due
in great part to lower worldwide demand and worldwide recession, oil and refiner
gasoline prices declined to $37.67 per barrel and $1.06 per gallon in December
2008 and increased to $71.25 and $1.99 in December 2009.





We
believe that the volatility in energy prices is traceable directly to worldwide
economic activity, and we expect that oil prices will increase again after the
worldwide recession ends and economic growth resumes.  The current
administration of the United States government has identified energy
independence and reduction of greenhouse gasses as critical initiatives, and has
approved funding of a number of grant and loan programs that will specifically
benefit the transportation and stationary power battery markets.  These
programs are in a large part specifically targeted at domestic manufacturers of
batteries and related suppliers.





In
February 2009, the United States government approved a stimulus plan which
included $2 billion of grants for the development of advanced battery
manufacturing capability under the ABMI.   The program provides grants
that support the construction of United States-based battery manufacturing
infrastructure for lithium-ion and other advanced batteries used in electric
drive vehicles. The program’s goal is to create a domestic battery manufacturing
capability to support broad implementation of new hybrid and electric drive
vehicles.





In
December 2008, we applied for a $480 million loan under the ATVM to increase our
battery manufacturing capacity in Indiana.  The ATVM was created under
Section 136 of the Energy Independence and Security Act of 2007.  As a
result of grants we were awarded under the ABMI, we have resubmitted our most
recent application and are now seeking a loan currently estimated to be between
$275 million and $300 million under the ATVM program.  We continue to
provide diligence and customer information to the DOE pursuant to the
application process.




- 5
-





Principal
Products





Transportation
Products





Our
primary transportation products consist of lithium-ion batteries and battery
packs for HEVs, PHEVs, EVs and other vehicles such as trucks and buses. 
Automotive battery packs consist of multiple battery cells that are combined in
a module.  Modules are linked together and controlled by a battery
management system that manages the battery pack’s operations and monitors its
performance and safety compliance.  Our battery cells have a prismatic
design and are flat, rather than round, offering a more compact design. 
EnerDel is an end-to-end solutions provider that develops and manufactures
everything from the cells to the completed battery pack.  Automotive
manufacturers have particular specifications for different vehicles related to
performance, size, form factor and weight.





HEVs are
cars that are powered by a combination of a battery-powered electric motor and a
combustion engine. HEVs use a gasoline engine as the primary source of
propulsion, and battery power during acceleration, for start-stop
functions, regenerative braking and in some models for limited electric drive
only mode. Well known HEVs include the Toyota Prius and Honda Civic.  The
PHEV generally is a hybrid car that runs primarily on battery power and uses the
combustion engine for situations where the battery is depleted and to recharge
the battery. The battery can be recharged at an electric outlet wherever
access to the electric grid is provided. The most well known PHEV concept car is
the Chevrolet Volt, which is expected to be available in 2010.  The
industry estimates that as many as 85% of American drivers drive less than 40
miles per day, and that an affordable PHEV that has a pure electric range of 40
miles would result in a significant reduction of oil consumption.  EVs are
cars that use battery power as the sole source of energy and do not have a
combustion engine.  Like PHEVs, the battery is recharged at an electric
outlet and is currently being designed to travel 70 to 200 miles on battery
power before requiring recharging.   Well known EVs currently being
designed or produced include the Think City, the Nissan Leaf, and the Tesla
Roadster.  There are efforts by organizations, including utility companies,
governments and independent companies such as Project Better Place to develop
charging stations for PHEVs and EVs.





PHEV and EV
Batteries





Batteries
for PHEVs and EVs are high energy density batteries which are designed to
provide energy for longer periods, but do not generally have the “burst” power
capability of high-rate/high-power batteries.  PHEV and EV batteries
generally use the same chemistry, but EVs require more cells, for capacity and
energy reasons, than a PHEV.





We have
developed a high energy density battery using a hard carbon anode and a mixed
oxide cathode to produce a 24.5 kWh (kilowatt hour) battery pack for the Think
City electric vehicle and the Volvo C30 electric vehicle.  These cells are
being tested by other customers in a variety of pack configurations.  We
are conducting research and development of a second generation battery for EVs
and PHEVs using LTO chemistry.  Our high energy density cell technology and
EV pack design have undergone various performance and safety testing, and
lifetime testing is ongoing.





HEV
Batteries





In
addition to our hard carbon lithium-ion chemistry, we are continuing research
and development of LTO chemistry for HEVs and PHEVs. We believe LTO
chemistry provides for safe, high-power (a fast charge and discharge rate)
performance and a battery that runs efficiently in a wide range of cold and warm
temperatures.  Our HEV cells do not generate significant heat during
periods of high charge and discharge, unlike consumer electronic lithium-ion
batteries that use graphite anodes and cobalt based cathodes.  We continue
to modify and test our chemistries to improve the longevity of the
battery.





Battery
Packs





Our
experienced automotive battery pack engineering design team provides a total
systems solution with a “plug-and-play” battery pack system.  Our design is
modular, which makes any servicing less complicated, and incorporates safety and
cooling features designed into the pack.  We design our own software for
battery management.




- 6
-





Other Potential
Markets





The
following chart indicates some of the potential markets that we believe may be
available for technologies that we are developing for the automotive battery
sector:





Battery
      Categories
                    
                    Automotive
      Applications
                    
                    Other
      ApplicationsHigh
      Power Battery
                    
                    HEV
                      (light
      vehicles, tanks, buses and others)
                    
                    Power
      tools, marine motors, load leveling, back-up power (UPS- uninterrupted
      power supply), auxiliary power and mobility devicesHigh
      Capacity Battery
                    
                    PHEV
      and EV
                    
                    Military
      applications (power vests, Unmanned Aerial Vehicles (UAVs), aerospace,
      medical applications, load leveling and
storage




Stationary
Power





We
believe that stationary power represents a developing market opportunity for
EnerDel. In November 2009, we announced that we would be supplying batteries for
a smart grid program announced by the DOE. We will supply batteries for five
one-megawatt power systems that will be used by Portland General Electric to
help manage peak demand and smooth the variations in power from renewable
sources like wind and solar.  We believe that lithium-ion battery
technologies we are developing will have future applications as backup power for
homes and use in storing energy for renewable power sources such as wind, solar
and geothermal.  Electrical utilities will be able to utilize battery
applications to balance demands from the electrical grid, effectively charging
batteries during low periods of demand and utilizing them during peak
periods.  Effective deployment of this technology could reduce the demand
for additional electric generating capacity in the United States and regions
around the world.





Military
Applications





EnerDel
is currently working towards a 2010 completion of three Defense Logistics Agency
(“DLA”) funded research programs.  The DLA is the Department of Defense’s
(“DOD”) largest logistics combat support agency, providing worldwide logistics
support.  The programs include two Unmanned Aerial Vehicle (“UAV”) battery
material programs and a Phase II award for further development of an asset
tracking battery system.  In 2008, we completed work under the first phase
of the asset tracking battery system.  In September 2009, EnerDel was
awarded $1.3 million in funding from the Tank Automotive Research Development
Engineering Center (“TARDEC”) for development and delivery of battery systems
designed for a research platform version of the High Mobility Multi-purpose
Wheeled Vehicle (the “Humvee”), the XM-1124.  In 2009, EnerDel also began
work on a $5 million, three year cooperative development agreement with the DOE
and Argonne National Laboratory for a redox shuttle electrolyte additive. 
Redox shuttle electrolyte additives are used to prevent battery overcharging,
and could simplify cell overcharge protection circuitry.





Small
Cell





Enertech
specializes in “small cell” technology, and manufactures electrodes for other
battery manufacturers, commercial battery packs, prismatic cells, and lithium
polymer batteries that are used in security systems and GPS systems. 
Enertech also manufactures battery packs for hand-held scanning devices and
two-way radios sold in the United States.  The plant has achieved Korean
ISO-9002 and TL9000 certifications.  Enertech also manufactures large
format cells for automotive applications specified by EnerDel.




- 7
-





Sales
and Marketing





We expect
a significant portion of our early customers to be based in Europe, where EVs
and PHEVs are expected to gain early consumer acceptance due to higher energy
prices, carbon emission legislation and driving patterns.  During 2009, we
established a sales and engineering support office in Europe and in March 2010
we formed Ener1 Europe, which is being managed by our Executive Vice President
of sales and marketing.  The European sales team is supported by the United
States based engineering group.  We presently have sales persons in the
Netherlands, Germany and France, and expect to expand our European presence in
2010.  Our sales and engineering team supports existing customers such
as Think Global, as well as engineering development activities for other
potential production customers.





In the
United States, we market our products through a combination of our own sales
force, executive level meetings with potential customers, and attendance at
trade shows.  Due to the emerging nature of the large format lithium-ion
battery market, our public, media and government relations efforts are also
important to provide exposure to our potential customers and ultimately the
consumer and to increase awareness for our products and our company.  Our
sales team includes sales persons with automotive experience and sales engineers
within our engineering group.  In addition, our engineering and management
team participated in sales presentations and business development during
2009.  We also have salespeople in the government and stationary power
markets.  Sales in the automotive sector are generally conducted through
direct interaction with the engineering platform teams at the automotive and
tier one suppliers.  Technical specifications for products are established
by the automotive companies and tier one suppliers, and competitive bidding is
often used as a mechanism for awarding some contracts.  Traditionally,
automotive companies often source the same product from more than one
supplier.  However, the industry is in the early development phase, and
product standardization has not been introduced.  Initially, we expect many
contracts to be sole sourced until standardization develops.





Enertech’s
small cell sales and marketing team includes a direct sales force and support
staff of fifteen persons in Korea, a sales manager in Europe and a sales manager
and sales engineer in the United States.





Customers





Our
prospective and current customers for large format cell battery packs are
original equipment manufacturers, or OEMs, in the light and heavy duty
industries, as well as tier one suppliers to automotive, truck and bus
OEMs.  Our prospective customers in the stationary power markets are
utilities, renewable energy suppliers such as wind, solar and geothermal
installers, and homeowners.  Our relationships with the government
include the DOD and other departments of the United States government, from
which we may seek research grants and development contracts.  Our customers
in the small cell market include large consumer product companies in the
telephone and the hand-held scanner markets.  We consider Symbol
Technologies (Motorola) to be a significant customer in our small cell
business.





In the
large format prismatic cell market, we expect that Think Global will be a
significant customer in 2010.  In addition, we are currently engaged with
customers on over 30 development or production programs in transportation
(automotive, bus and heavy duty), stationary power, military, government, and
other industrial energy storage customers.  These projects involve
customers in North America, Asia Pacific, and Europe.  Within stationary
power, we have a demonstration project with Portland General Electric for a
smart grid application. In transportation markets, we expect to begin shipping
EV battery packs for the Think City EV in the second quarter of 2010.  In
addition, we expect to begin shipping EV battery packs in the first quarter of
2011 for Volvo’s production intent C30 electric vehicle.  Other programs
under development include, an electric bus program in Japan with Hokkaido
Electric Power Company (“HEPCO”)  (a low carbon transportation system
project with Mazda, Family Mart, and ITOCHU), a zero emissions bus program with
AC Transit, EV conversion programs with a national postal service, and  a
specialty vehicle conversion.  In the military market we have a project
with TARDEC for an HEV vehicle application.  Within the government sector
we have programs with the DLA within the DOD as well as multiple programs with
the Department of Energy.  In addition we have research and development
programs with USABC, Nissan, ITOCHU, and Kyushu Electric Power Company, Inc.
(“KEPCO”) (demonstration of fast charge technology).




- 8
-





In the
automotive and utility markets, the selling cycle is generally quite long. There
is ordinarily an iterative, interactive process in which the customer tests and
evaluates prototypes or samples (cells and/or packs), and the supplier then
modifies the product characteristics to achieve the customer’s requirements. Due
to the long battery life required by the automotive manufacturers, this testing
and evaluation could take several years and includes the delivery of samples,
prototypes and final products.  In addition, the procurement cycle for
automotive makers is quite long due to the requirements for design and retooling
associated with new automobile models.





Automotive
companies often purchase system solutions from tier one suppliers, such as
Continental Systems, Bosch, Delphi and Johnson Controls.  Our sales and
marketing efforts are directed to the automotive companies and the tier one
suppliers.




The sales
cycle for military markets may also be lengthy depending on the longevity
requirement for the specific application.  We expect product development
under these programs to undergo thorough testing and evaluation of samples and
prototypes before approving a final product, which may extend over relatively
long periods of 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, PHEV and EV automotive manufacturers and our focus on them as our
primary market. We believe that the bulk of our expected sales will be
concentrated in a small number of customers.





Competition




Competition
in the battery industry is, and is expected to remain, intense. This 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-ion batteries for portable
electronics in high volume, as well as other non-rechargeable and rechargeable
battery technologies. We compete on the basis of performance, cost and
reliability.  Toyota, the industry leader in the production of HEVs, and
other battery manufacturers, such as NEC, Johnson Controls, A123 Systems,
Hitachi and Compact Power have significant development programs for lithium-ion
batteries for North American and European automotive manufacturers. Like
EnerDel, Johnson Controls, A123 Systems and Compact Power are all participants
in the USABC HEV and PHEV battery development programs.  Toyota/Panasonic
and Nissan/NEC have lithium-ion development programs to supply batteries for
their own HEV production.  Toyota owns a controlling interest in Panasonic,
and in December 2009, Panasonic acquired controlling ownership of Sanyo, which
is the largest producer of commercial battery cells.  Other collaborations
include: Bosch-Samsung, Daimler-Evonik-Litec, Continental-ENAX, GS
Yuasa-Mitsubishi and Nissan-NEC under the name AESC.  In China, BYD has
stated their intention to introduce an EV using their own battery.




There are
a number of smaller development companies such as Valence and Electro Energy
(EEI) in the United States and Electrovaya in Canada that compete in this
market.  Additional potential competitors in lithium-ion commercial and
military markets based in the United States are Saft, Eagle Picher, UltraLife
and Yardney. There are also battery developers in China and Korea, which have a
low cost manufacturing base due to low labor costs and use of semi-automatic
manufacturing processes.  There are numerous other companies who are
developing batteries, some of which recently stated they intend to supply
batteries for HEVs.




- 9
-




Battery
Capacity





Under our
2010 capital expenditure plans for Indiana and Korea, we are taking
actions with the aim of increasing our cell and battery pack
production capacity throughout the year to reach capacity levels by October 2010
that would enable us to produce the equivalent of 1,000 EV packs per
month.





We intend
to produce battery cells in our Indianapolis and Mount Comfort, Indiana and
our South Korea facilities.  We lease approximately 92,000 square feet in
Indianapolis, Indiana, where we conduct cell development, engineering and
prototype manufacturing.  The facility includes 68,000 square feet of
manufacturing space and 24,000 square feet of office space.





On
February 9, 2010, we entered into a two-year lease for 211,500 square feet of
industrial space in the western half of a building located in Mount Comfort,
Hancock County, Indiana.  We have a right of first refusal to lease 211,500
square feet of additional space in the building.  We also have an option to
purchase the building, which option expires on December 31, 2011 (the “Purchase
Option Period”). If the Purchase Option is exercised on or before December 31,
2010, the purchase price would be $15.5 million, and will increase by $40,000
per month thereafter until the Purchase Option is exercised up to a maximum
purchase price of $16.0 million. If EnerDel fails to exercise the Purchase
Option by the expiration of the Purchase Option Period, the landlord has the
right to require EnerDel to enter into a fifteen year lease for all of Building
1.





We lease
31,000 square feet of manufacturing assembly space in Noblesville,
Indiana.  This facility is being used for battery pack assembly and related
battery pack engineering and testing activities.





We own a
145,000 square foot lithium-ion manufacturing facility in Chungcheongbuk-do,
Korea.  During the first half of 2010, Enertech will be producing 100% of
our cell requirements for the Think City EV at this facility.  We estimate
that cell production in Indiana will commence in June 2010 after the
installation and testing of additional end-of-line assembly and formation
equipment.





We lease
11,000 square feet of small cell pack assembly and sales and administrative
space in Hackensack, New Jersey.




Research
and Development





During
2009, 2008 and 2007, we spent $30.8 million, $22.9 million and $11.9
million, respectively, on research and development net of proceeds from grants
of $3.7 million, $3.8 million and $0.9 million, respectively.





Raw
Materials and Suppliers





A primary
material used in our battery is lithium, which is currently believed to be in
adequate worldwide supply.  According to the U. S. Geological Survey,
Mineral Commodity Summaries, January 2010, the primary source of lithium
is from brine and the largest producing countries of lithium are Chile,
Australia, China and Argentina.  Estimated mining reserves are 38,000 tons
located in the United States and 9.9 million tons located in other
countries.  Annual worldwide consumption in 2008 was an estimated 18,000
tons.  Lithium consumption is expected to increase as the HEV and EV
markets expand over the next ten years, and eventually new sources of lithium
will need to be developed to meet this increased demand.  An estimated 23%
of global lithium consumption is for batteries.





We
continually evaluate prospective suppliers’ material, and require high quality
material with small particle sizes measured in nanometers.  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. 
We work with Argonne National Laboratory and commercial material developers to
develop and evaluate the best quality lithium compounds for use with our battery
technologies.




- 10
-





Our
EnerFuel Business





Our
EnerFuel subsidiary, located in West Palm Beach, Florida, is working on
developing a hydrogen fuel cell range extender for PHEVs and has created a high
temperature fuel cell stack which was incorporated into an EV based on the Scion
xB platform.  Other planned products are in early stages of development and
completion of prototypes will require additional time, effort and funding. 
EnerFuel’s net loss after corporate allocations was $3.7 million for the year
ending December 31, 2009.





Our
NanoEner Business





Our
NanoEner subsidiary, located in Fort Lauderdale, Florida, has built prototype
equipment that utilizes a proprietary vapor deposition and solidification
(“VDS”) process for depositing materials onto battery electrodes as part of the
battery cell manufacturing process.  NanoEner is developing electrodes
produced using this process for testing and is still in the research and
development phases.  Our planned products are still under development and
will require significant capital to continue testing and research. 
NanoEner’s net loss after corporate allocations was $1.2 million for the year
ending December 31, 2009.





Intellectual
Property





Ener1 has
40 issued United States patents, 14 foreign patents and has 144 pending and
published United States, Patent Cooperation Treaty and other international
patent applications relating to lithium-ion batteries, fuel cells,
nanotechnology and other related technologies. Many of these patents 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 filing or the earliest priority
date, as applicable. Ener1 continues to file patent applications, as
appropriate, to protect its interests in new inventions. We have a policy of
requiring our employees to sign confidentiality, inventions and other
agreements, as well as a policy of entering into confidentiality agreements with
third parties before disclosing any proprietary information to
them.




Our
means of protecting our proprietary rights may not be adequate and our
competitors may independently develop technology or products that are similar to
ours or that compete with ours. Patent, trademark, and trade secret laws afford
only limited protection for our technology platform and products. The laws of
many countries may not protect our proprietary rights to as great an extent as
do the laws of the United States. Despite our efforts to protect our proprietary
rights, unauthorized parties may attempt to operate under aspects of our
intellectual property or products or to obtain and use information that we
regard as proprietary. Third parties may also design around our proprietary
rights, which may render our protected technology and products less valuable, if
the design around is favorably received in the marketplace. In addition, if any
of our products or technology is covered by third-party patents or other
intellectual property rights, we could be subject to various legal actions. We
cannot assure you that our technology and products do not infringe patents held
by others or that they will not in the future.
  Litigation
may be necessary to enforce our intellectual property rights, to protect our
trade secrets, to determine the validity and scope of the proprietary rights of
others, or to defend against claims of infringement, invalidity,
misappropriation, or other claims. Any such litigation could result in
substantial costs and diversion of our resources. Moreover, any settlement of or
adverse judgment resulting from such litigation could require us to obtain a
license to continue to make, use or sell the products or technology that is the
subject of the claim, or otherwise restrict or prohibit our use of the
technology.
  Employees





At
December 31, 2009, we had 515 full time employees.  We have no
employees under collective bargaining agreements.





Available
Information


Our
company Internet address is www.ener1.com We make available free of charge a
variety of information where investors can easily find information about us
including
our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports
on Form 8-K and any amendments to those reports, as soon as reasonably
practicable after such material is electronically filed with, or furnished to,
the Securities and Exchange Commission (the “SEC”).




The
information found on our Internet site is not a part of this or any other report
we file with or furnish to the SEC and is not incorporated by reference into
this Annual Report.





You may
read and copy any document we file with the SEC at the SEC's public reference
room at 100 F Street, N.E., Washington, DC 20549.  Please call the SEC at
1-800-SEC-0330 for information on the public reference room. The SEC maintains
an Internet site that contains reports, proxy and information statements, and
other information that issuers (including Ener1) file electronically with the
SEC.  The address of the SEC’s Internet site is http://www.sec/gov.





- 11
-





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 United States Department of
Transportation and other governmental departments and international agencies. We
will be required to comply with applicable regulations before we can ship our
products on a commercial basis. We may need to obtain approvals for the storage
or transportation of our batteries and of flammable or hazardous fuels before we
are able to deliver some of our systems. Future legislation and/or other
regulation concerning the transportation and storage of batteries and hydrogen
fuel and other fuels associated with fuel cells is expected in the
future.





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.





In
manufacturing our products, we are subject to environmental laws and regulations
which, over time, 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.




Item
1A.    Risk Factors





There are
numerous and varied risks and uncertainties, known and unknown, that may prevent
us from achieving our goals.  The risks described below are not the only
ones we will face.  If any of these risks actually occur, our business,
financial condition, results of operations, cash flows, and the trading price of
our common stock may be materially and adversely affected.





We
will need additional capital to fund our development and production
activities which may not be accessible on attractive terms or at
all.




For the
last several years, we have financed our operations and capital expenditures
through the sale of our securities and by borrowing money. Our ability to obtain
additional financing will be subject to a number of factors, including market
conditions, commercial acceptance of our products, our operating performance and
the terms of our existing indebtedness. 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
transaction 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 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. If we do not obtain adequate short-term
working capital and long-term financing, we would have to curtail our
development and production activities and adopt an alternative operating model
to continue as a going concern.




- 12
-





We
have a history of operating losses.




We have
experienced operating losses since 1997, and have incurred negative cash flows
from operations since 1999. Cash used in operations for the years ended December
31, 2009, 2008 and 2007 was $40.7 million, $24.1 million and $26.7 million,
respectively. We expect that we will continue to incur negative operating cash
flows and require additional cash to fund our operations and implement our
business plan. The continued development of our technology and products will
require significant additional capital investment.





We
may never complete the research and development of commercially viable
products.




We are
developing a number of products that involve new technologies.  While we
have substantially completed the development of a lithium-ion battery pack
for an electric vehicle and a prototype of our lithium-ion battery pack for
hybrid electric vehicles, we continue to work on other projects which are in
various stages of development including testing new lithium-ion chemistries for
automotive, truck, bus, stationary power, military and other applications. 
We do not know when or whether we will successfully complete research and
development of our products. If we are unable to develop commercially
viable products, we will not be able to generate sufficient revenue to become
profitable. We must complete substantial additional research and development in
connection with these other projects 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.




If
we are unable to develop, manufacture and market products that improve upon
existing battery technology and gain market acceptance, our business may be
adversely affected.
  We are
researching, developing, manufacturing and selling lithium-ion batteries and
battery systems. The market for advanced rechargeable batteries is at a
relatively early stage of development, and the extent to which our lithium-ion
batteries will be able to meet our customers' requirements and achieve
significant market acceptance is uncertain. Rapid and ongoing changes in
technology and product standards could quickly render our products less
competitive, or even obsolete if we fail to continue to improve the performance
of our battery chemistry and systems. Other companies that are seeking to
enhance traditional battery technologies have recently introduced or are
developing batteries based on nickel metal-hydride, liquid lithium-ion and other
emerging and potential technologies. These competitors are engaged in
significant development work on these various battery systems. One or more new,
higher energy rechargeable battery technologies could be introduced which could
be directly competitive with, or superior to, our technology. The capabilities
of many of these competing technologies have improved over the past several
years. Competing technologies that outperform our batteries could be developed
and successfully introduced, and as a result, there is a risk that our products
may not be able to compete effectively in our target markets. If our battery
technology is not adopted by our customers, or if our battery technology does
not meet industry requirements for power and energy storage capacity in an
efficient and safe design our batteries may not gain market
acceptance.
  Our
working capital requirements involve estimates based on demand expectations and
may decrease or increase beyond those currently anticipated, which could harm
our operating results and financial condition.
  In order
to fulfill the product delivery requirements of our customers, we plan for
working capital needs in advance of customer orders. As a result, we base our
funding and inventory decisions on estimates of future demand. If demand for our
products does not increase as quickly as we have estimated or drops off sharply,
our inventory and expenses could rise, and our business and operating results
could suffer. Alternatively, if we experience sales in excess of our estimates,
our working capital needs may be higher than those currently anticipated. Our
ability to meet this excess customer demand depends on our ability to arrange
for additional financing for any ongoing working capital shortages, since it is
possible that cash flow from sales will lag behind these investment
requirements.
  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 are developing technologies, products and services related to
lithium-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 new and developing markets and we do not
know the extent to which these products and technologies will be widely
accepted. We currently have one commercially developed product, although we have
not yet produced it in commercial quantities. We must be able to develop
additional commercially viable products 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 adequate
marketing capabilities in order to sell our products. 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


·         
government funding of electric vehicle technologies


·         
emergence of newer, more competitive technologies and products





- 13
-





We
have limited 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, while we
recently acquired a lithium-ion battery cell manufacturer in South Korea, we
have no experience manufacturing any of our planned products on a commercial
basis. We are developing new battery products that will require 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
are expanding our equipment production capacity worldwide and are subject to all
of the risks associated with purchasing, installing and efficiently operating
such equipment as well as achieving production economies from projected
increased efficiencies.





We have
begun purchasing new equipment to increase our production capacity in the United
States, which is partially funded under grants from the DOE.  Noncompliance
with DOE protocols would delay or eliminate reimbursement of certain
costs.  If the related program is ended, we could relinquish control of the
assets to the DOE.  While we have constrained the level of purchases in the
first year of the grant, we expect during the next three years to purchase a
substantial amount of equipment.  The equipment procurement process and
installation and integration of the equipment is subject to delays. 
Achieving rated capacities of such equipment is subject to additional risks and
the equipment may never reach the projected capacity.  Some of the assembly
equipment is recently designed by our engineers and manufactured to our
specifications by independent equipment manufacturers, and achieving projected
machine efficiencies is dependent upon the equipment operating as
designed.  In addition, our competitors may be purchasing equipment similar
or identical to our manufacturing equipment, and as a result of the increase
demand for such equipment, there may be shortages of required equipment or
delays in our receipt of equipment, which could result in delays in our
production schedules.  Delays in the start-up of production could adversely
impact our financial results.  Delays in production deliveries also could
adversely impact the financial results of our customers because of delays in the
delivery of vehicles to their customers.  Failure to reach projected
machine efficiencies could result in higher production costs than planned and
therefore could have a material adverse impact on our financial
results.





We areentering a new industry andincreasing our
production substantially to meet new and potential customer requirements and are
subject to all of the risks associated with increasing production
activities. We are
beginning production in a new industry with new processes and our ability
to achieve profitabilityis dependent upon achievinglower costs of materials
andprojected economies
of scalefrom increasing
manufacturing quantities, and failing to achieve
sucheconomies of scale and reduction in
manufacturing costs could materially adversely affect our financial
performance.





We are
beginning high volume production of new products in a new industry that does not
have a significant history of production experience.  We have produced the
component parts for our battery packs in limited production quantities in Korea
and for prototype packs in limited quantities in the United States. As
demands increases for a product, we transfer these processes and systems to, and
replicate and scale these processes and systems in our high-volume manufacturing
facilities. We are ramping up to begin high volume production in Korea and
the United States. If we are unable to effectively and quickly
transfer, replicate and scale these manufacturing processes and systems, we may
be able to meet our customer's product quality and quantity requirements and
lower our cost of goods sold and our results of operations could
be adversely affected.  Our ability to
achieve profitability is dependent upon achieving lower costs of raw
materials resulting from increased savings from volume purchasing. Our supply
chain will also be experiencing a sharp increase in demand for its products and
will be experiencing similar production ramp up activities. We
cannot assure you that we will achieve the material, labor and machine cost
reductions associated with higher purchasing power and higher production, and
failure to achieve these cost reductions could adversely impact our financial
results.  There is no assurance that a domestic supply business will
develop and that costs would decline from such development.




- 14
-




Problems
in our manufacturing and assembly processes could limit our ability to produce
sufficient batteries to meet the demands of our customers.
  Regardless
of the process technology used, the manufacturing and assembly of safe,
high-power batteries and battery systems is a highly complex process that
requires extreme precision and quality control throughout a number of production
stages. Any defects in battery packaging, impurities in the electrode materials
used, contamination of the manufacturing environment, incorrect welding, excess moisture, equipment failure or other difficulties
in the manufacturing process could cause batteries to be rejected, thereby
reducing yields and affecting our ability to meet customer
expectations.
  As we
scale up our production capacity, we may experience production problems that may
limit our ability to produce a sufficient number of batteries to meet the
demands of our customers. If these or other production problems occur and we are
unable to resolve them in a timely fashion, our business could suffer and our
reputation may be harmed.


We
expect to fund a significant amount of our capital expenditures with funds
provided by DOE grants and loan programs.  The grant and loan programs
require that we match the DOE portion with our funds, and that we comply with
the terms and conditions of the programs.  The terms and conditions for our
loan application have not yet been finalized and the loan terms may require that
we draw grant funds before we gain access to the loan funds.  We will need
to raise capital or borrow funds to fund our share of the capital expenditures
under both the loan and grant program, and raising capital will result in
dilution to our existing shareholders.





We have
been formally awarded $118.5 million in funds under the DOE ABMI grant
program.  We also have pending an application under the DOE ATVM loan
program pursuant to which we are seeking a loan currently estimated to be
between $275 million and $300 million.  The grant requires that we match
the grant award by spending one dollar on qualifying capital expenditures and
other costs for each dollar reimbursed under the grant, and the loan program
requires that we match the loan by spending $0.20 on qualifying capital
expenditures and other costs for each $0.80 of the loan.  We will need to
raise debt or equity capital to fund our share of the capital expenditures under
both the loan and grant program, and raising equity capital will result in
dilution to our existing shareholders.  Our application and supplemental
materials under the loan program have been under review at the
DOE.  We cannot assure you that the final loan will be
approved in full or in part, or that the terms and conditions for borrowing
under the facility will be acceptable to us.  If the loan is not approved
or is approved in a substantially reduced dollar amount, we would have to
curtail our future expansion plans.  We cannot assure you that we will
be able to choose the order of funds that we may receive under the grant or the
loan.  To the extent that funds must be drawn entirely under the grant
first, we will have a higher matching requirement and will need to raise more
debt or equity capital in the near future compared to what we would have to
raise if we could draw funds under the loan first.  Access to both grant
and loan funds will also be conditioned on our compliance with the terms and
conditions of the grant and loan programs.





We
may provide warranty coverage and product recall coverage for some of our
products, and we do not have historical experience to project possible warranty
or recall claims and costs.  If warranty or recall claims are significantly
higher than our initial projections, our financial results could be adversely
affected.





We expect
to provide warranty coverage under certain automotive and grid storage battery
pack sales that could range from 3-5 years, and may include, a warranty that our
product complies with the agreed upon specifications developed with the end
user, that there are no defects in our products, and that our product will have
a certain power capacity during the life of the product.  We may also be
required to provide product recall coverage.  We are selling new products
in a new industry that does not have a significant history of product use. 
While we have tested batteries and battery packs in a controlled environment, we
have not tested large numbers of batteries and packs for extended periods of
time.  Other customer protection provisions, such as return rights, could
also delay our recognition of revenue.  We expect to establish a
warranty provision based upon our expected warranty claims, but we
cannot assure you that this provision will be sufficient. 
Therefore, our financial results could vary based upon our actual
experience relative to how we account for any expected warranty claims. 
Furthermore, a significant warranty claim or product recall experience could
materially adversely affect our financial results.





We
could experience product liability costs that could materially adversely affect
our financial results.





Batteries
contain chemicals and other products including lithium, hydrogen
and acid-based electrolytes that, if used improperly or charged and
discharged improperly, could result in serious injuries and damage to property
from fire or otherwise.  Batteries when charged can cause electric shock if
not used properly.  Accidents
involving our products could materially impede market acceptance and demand for,
or heighten regulatory scrutiny of, our products.  In addition, the
manufacture and use of batteries could result in product liability
claims.  Damages which we might incur as a result of product liability
claims against us could be substantial, beyond the limits of our insurance
coverage and could threaten our survival as a going concern. We also may have
exposure to possible third-party claims that our batteries caused damages to
other products or caused serious injuries.  n addition, our business
could be harmed from negative publicity if serious accidents are attributable to
battery products regardless of whose battery product was involved.




- 15
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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 power, energy capacity, technology and product design 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
performance or 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
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 may
need to enter into strategic relationships in order to complete our current
product development and commercialization plans. We may also require partners to
assist in the distribution, servicing and supply of key components for our
anticipated fuel cell products 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 existing shareholders. 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.




We
rely on third parties to develop and provide key components for our
products.




We rely
on third-party suppliers to develop and supply key components for 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, we may be unable to obtain
substitute sources of these components to the extent our suppliers use
technology or manufacturing processes that are proprietary.





We do not
know when or whether we will secure long-term supply relationships with any
suppliers or whether such relationships will be on costs and 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.





Demand
for lithium and other raw materials may affect future prices and availability of
raw materials.




The
demand for lithium and other commodities may increase as the projected demand
for hybrid and electric vehicles increases which could lead to higher prices for
our raw materials.  Global supply disruptions caused by political or other
dislocations could also lead to shortages and higher prices. Our inability
to acquire raw materials such as lithium on commercially reasonable terms, or at
all, would delay and/or increase the cost of manufacturing our products and
result in a significant adverse effect on our profitability.




- 16
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We
face high levels of competition and may be unable to compete
successfully.




The
markets in which we intend to market and sell our products are highly
competitive. A number of companies located in Asia, the United States and
elsewhere are developing and plan to manufacture battery and fuel cell
technologies and other energy products that compete with our technologies and
planned products. We also face competition from companies that are focused on
traditional energy sources, such as oil and natural gas, as well as those that
develop alternative energy technologies such as solar power, wind power,
ethanol, biofuels and fuel cells.





The
developers of traditional and alternative energy technologies include, 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.





A
significant amount of public and private funding is directed toward the
development of traditional and alternative energy generation, distribution and
storage. The resulting technologies may render some of our planned products less
attractive or obsolete.





We
intend to offer lithium-ion batteries to the automotive industry, which is a
very competitive and cost focused industry. We have no automotive industry
experience.




Supplying
lithium-ion batteries to the automotive industry carries significant risks. 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 the power, energy, cost, weight and size of such
components. The ability of domestic automobile manufacturers to adopt new
battery technologies will depend on many factors outside our control, including
their ability to develop related vehicle platforms. If the industry does not
accept lithium-ion battery technology, or if our lithium-ion batteries do not
meet industry requirements for battery power, energy, cost, weight, size and
other characteristics, our batteries will not gain market
acceptance.




Our
financial results may vary significantly from period-to-period due to the long
and unpredictable sales cycles for some of our products, and the seasonality of
certain end markets into which we sell our products, which may lead to
volatility in our stock price.
  The size
and timing of our revenue from sales to our customers is difficult to predict
and is market dependent. Our sales efforts often require us to educate our
customers about the use and benefits of our products, including their technical
and performance characteristics. Customers typically undertake a significant
evaluation process that has in the past resulted in a lengthy sales cycle for
us, typically many months. In some markets such as the transportation market,
there is usually a significant lag time between the design phase and commercial
production. We spend substantial amounts of time and money on our sales efforts
and there is no assurance that these investments will produce any sales within
expected time frames or at all. Given the potentially large size of battery
development and supply contracts, the loss of or delay in the signing of a
contract or a customer order could reduce significantly our revenue in any
period. Since most of our operating and capital expenses are incurred based on
the estimated number of design wins and their timing, they are difficult to
adjust in the short term. As a result, if our revenue falls below our
expectations or is delayed in any period, we may not be able to reduce
proportionately our operating expenses or manufacturing costs for that period,
and any reduction of manufacturing capacity could have long-term implications on
our ability to accommodate future demand.
  In
addition, since our batteries and battery systems are incorporated into our
customers' products for sale into their respective end markets, our business is
exposed to the seasonal demand that may characterize some of our customers' own
product sales. Because many of our expenses are based on anticipated levels of
annual revenue, our business and operating results could also suffer if we do
not achieve revenue consistent with our expectations for this seasonal
demand.
  As a
result of these factors, we believe that quarter-to-quarter comparisons of our
operating results are not necessarily meaningful and that these comparisons
cannot be relied upon as indicators of future performance. Moreover, our
operating results may not meet expectations of equity research analysts or
investors. If this occurs, the trading price of our common stock could fall
substantially either suddenly or over time.
  Declines
in product prices may adversely affect our financial results.
  Our
business is subject to intense price competition worldwide, which makes it
difficult for us to maintain product prices and achieve adequate profits. Such
intense price competition may adversely affect our ability to achieve
profitability, especially during periods of decreases in demand. In addition,
because of their purchasing size, our larger automotive customers can influence
market participants to compete on price terms. If we are not able to offset
pricing reductions resulting from these pressures by improved operating
efficiencies and reduced expenditures, those pricing reductions may have an
adverse impact on our business.


One
customer comprises a significant amount of our expected revenue in the near
term, and the failure of that customer to continue as an ongoing business is
likely to adversely affect our near term profitability and cash
flow.




We
entered into an amended Supply Agreement with Think Global (“Think”) to supply
lithium-ion battery packs for the Think City electric vehicle commencing in
2010. We are also an investor in Think and have voting power of approximately
34% of their equity.  We expect Think will become a significant customer in
2010 and 2011, and a delay in deliveries of battery packs to Think or delays in
Think’s start-up plans and financing activities would adversely affect our
expected 2010 and 2011 revenues and could have a material adverse effect on our
business.  Think is increasing production and entering new markets, and
faces the risks associated with the launch of a new vehicle including achieving
production levels, managing production costs, managing their supply chain,
financing the costs associated with increased production and higher working
capital requirements, gaining consumer acceptance, delivering vehicles on time,
servicing new customers, warranty claims and other issues related to
manufacturing, selling and servicing automobiles.




- 17
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The
United States and global automobile industry has recently experienced a
significant decline in worldwide sales, large losses, and liquidity issues which
may affect our future sales and the development of the electric vehicle
industry.




Our
business depends on and is directly affected by the general state of the United
States and global automobile industry. The effect of the continued economic
difficulties of the major auto manufacturers on our business is unclear. Several
automotive companies were sold or closed in 2009, and two large United States
automotive companies reorganized under the bankruptcy laws.  Several large
automotive companies have sold or discontinued brands of automobiles.  It
is possible that additional companies may enter into a restructuring, which
could be government mandated, privately negotiated, or conducted within the
context of bankruptcy proceedings. It is possible that the ownership of our
prospective customers could change and affect our supply agreements and
development activities.  The impact of any such restructuring on the
automobile industry and its suppliers is unclear and difficult to predict.
Possible effects could include reduced spending on alternative energy systems
for automobiles, a delay in the introduction of new hybrid and electric
vehicles, and a delay in the conversion of batteries to lithium-ion chemistry,
each of which would have a material adverse effect on our business.





Oil
prices have been extremely volatile and trends to convert to electric and hybrid
electric vehicles may be adversely affected by any perceived significant
reduction in gasoline prices.




Oil and
gasoline prices have beenextremely volatile we
expect and the possibility of continuing volatility to persist. Drops in
gasoline prices lower the perception in government and the private sector that
cheaper, more readily available energy alternatives should be developed and
produced. Lower oil prices also decrease the cost of existing energy
technologies, making them more competitive with alternative products such as
lithium-ion batteries. If oil prices decline, the demand for hybrid and electric
vehicles may decrease which would have a material adverse effect on our
business.





Failure
of our planned products to pass testing could negatively impact demand for our
planned products.




We may
encounter difficulties 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. 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 of our products.





Regulatory
and other changes in the energy industry may adversely affect our ability to
produce, and may reduce demand for, our planned products.




Federal,
state, local and foreign government laws, regulations and policies concerning
the energy industry may heavily influence the market for our technologies and
products. A change in the current regulatory environment 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, 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.




Business
practices in Korea may entail greater risk and dependence upon the personal
relationships of senior management than is common in North America, and
therefore some of our agreements with other parties in China and Korea could be
difficult or impossible to enforce.
  The
business culture of Korea is, in some respects, different from the business
cultures in Western countries and may present some difficulty for Western
investors reviewing contractual relationships among companies in Korea and
evaluating the merits of an investment. Personal relationships among business
principals of companies and business entities in Korea may be very significant
in their business cultures. In some cases, because so much reliance is based
upon personal relationships, written contracts among businesses in Korea may be
less detailed and specific than is commonly accepted for similar written
agreements in Western countries. In some cases, material terms of an
understanding are not contained in the written agreement but exist as oral
agreements only. In other cases, the terms of transactions which may involve
material amounts of money are not documented at all. In addition, in contrast to
Western business practices where a written agreement specifically defines the
terms, rights and obligations of the parties in a legally-binding and
enforceable manner, the parties to a written agreement in Korea may view that
agreement more as a starting point for an ongoing business relationship which
will evolve and require ongoing modification. As a result, written agreements in
Korea may appear to the Western reader to look more like outline agreements that
precede a formal written agreement. While these documents may appear incomplete
or unenforceable to a Western reader, the parties to the agreement in Korea may
feel that they have a more complete understanding than is apparent to someone
who is only reading the written agreement without having attended the
negotiations. As a result, contractual arrangements in Korea may be more
difficult to review and understand.


- 18
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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, or damage to or
destruction of property and natural resources. Our insurance policies may not
adequately reimburse us for costs incurred in defending, settling and paying
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 we
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 and other combustible
materials. Accidents involving our products could materially impede market
acceptance and demand for, or heighten regulatory scrutiny of, our products.
Damages which we might incur as a result of product liability claims against us
could be substantial, beyond the limits of our insurance coverage, and could
threaten our survival as a going concern.




Future
acquisitions may disrupt our business, distract our management and reduce the
percentage ownership of our shareholders.




As part
of our business strategy, we may seek to acquire complementary technologies,
products, expertise and/or other valuable assets. We may be unable, however, to
identify suitable acquisition candidates or, if we do identify suitable
candidates, we may not be able to complete the acquisitions on commercially
acceptable terms or at all. If we issue equity securities as part of an
acquisition transaction, the percentage ownership of our then current
shareholders may be reduced. Once we’ve acquired a business, we may have to
devote a significant amount of time and management and financial resources to
successfully integrate the business into our existing operations in a timely and
non-disruptive manner, and may be unable to do so. An acquisition may not
produce the desired revenues, earnings or business synergies that were
anticipated prior to concluding the transaction, which could cause our business
and financial condition to be materially and adversely affected. As a result of
an 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 and profitability.





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. 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. 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 patents or patent applications. 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, our patents may be challenged or invalidated.
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.




- 19
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In
addition, we do not know whether the United States 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 possible that our competitors or others will adopt trademarks
similar to ours, thereby impeding our ability to maintain our brand identity and
possibly leading to customer confusion.




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 legal action 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 could require us to spend a substantial amount of
our financial resources.




If we are
found to be infringing third party proprietary rights, we could be required to
pay substantial royalties and/or damages. 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 require us to
spend significant resources to develop or acquire non-infringing
intellectual property.





We
rely, in part, on contractual provisions to protect our trade secrets and
proprietary knowledge.




We rely
on trade secrets to protect our proprietary technologies, especially where we do
not believe patent protection is appropriate or obtainable. However, trade
secrets are difficult to protect.  We rely in part on confidentiality
agreements with our employees, contractors, consultants, outside scientific
collaborators and other advisors to protect our trade secrets and other
proprietary information. Confidentiality agreements to which we are party
may be breached, in which case we may not have adequate remedies. Our trade
secrets may become publicly available 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.









We
face risks associated with our plans to market, distribute and service our
products internationally.




We have
limited experience developing and no experience manufacturing or distributing
products that will be sold in the United States or international markets. Our
success in international markets will depend, in part, on our ability to
secure relationships with foreign sub-distributors, and to manufacture products
that meet foreign regulatory and commercial standards. 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 commercialize our technology
effectively.




Contracts
we enter into with government agencies are subject to the risk of termination at
the option 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 which 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.




- 20
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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.





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.





We
may be unable to manage rapid growth effectively.




We expect
to expand our manufacturing capabilities, accelerate the commercialization of
our products and enter a period of growth, all of which will place a significant
strain on our senior management team and our financial and other resources. Our
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 growth effectively
will require us to continue to improve our operations and 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.





Credit
market volatility and illiquidity may affect our ability to raise capital to
finance our operations, plant expansion and growth.




The
credit markets have experienced extreme volatility during the last year, and
worldwide credit markets have remained illiquid despite injections of capital by
the Federal government and foreign governments.  Despite the capital
injections and government actions, banks and  other lenders, such as
equipment leasing companies, have significantly increased credit requirements
and reduced the amounts available to borrowers.  Companies with low credit
ratings may not have access to the debt markets until liquidity improves, if at
all.  If current credit market conditions do not improve, we may not be
able to access debt or leasing markets to finance our plant expansion
plans.




We
may be unable to access the equity capital markets.




The
equity markets have experienced significant and rapid declines in values during
the last year, and institutional investors have experienced large losses. In
addition, many mutual funds and hedge funds need to maintain high levels of
liquidity to meet redemption demands.  As a result of the loss or
restriction of funds for investment, the market for offerings of our stock may
be limited.





- 21
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Future
sales of our common stock may adversely affect our common stock
price.




If a
large number of shares of our common stock are sold in the public market or if
we issue a large number of shares in connection with future acquisitions or
financings, particularly if we issue shares at a discount to the then current
market price, the price of our common stock could decline
significantly.





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 shareholder 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, our board of directors, without further
shareholder approval, may issue additional series of preferred stock that could
have the effect of delaying, deterring or preventing a change in control. 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.





Our
principal shareholders have substantial control over our affairs.




Ener1
Group and Bzinfin beneficially own a majority of our outstanding common stock.
Two of Ener1 Group’s board members, who are also senior executives of Ener1
Group, are also members of our Board of Directors and are our Chief
Executive Officer and Senior Technical Advisor.  Ener1 Group has the
ability to control virtually all matters submitted to a vote of our
shareholders, including an increase of our authorized shares, the
election and removal of our directors and any merger, consolidation or sale of
all or substantially all of our assets. In addition, Ener1 Group, through its
ability to elect a majority of the members of our Board of Directors, may
dictate the management of our business and affairs. This concentration of
ownership could have the effect of delaying, deferring or preventing an increase
in our authorized shares, a change in control or impeding a merger or
consolidation, takeover or other business combination which other shareholders
may view favorably.  If the Company does not have sufficient authorized
shares, then this may have an adverse affect on our stock price and could
materially and adversely affect the Company, its financial condition and its
ability going forward to raise capital through the equity markets and
otherwise.




- 22
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Item
1B.    Unresolved Staff Comments.





None





Item
2.       Properties.





Our
corporate headquarters have been located in New York, New York since August
2008, where we lease 3,500 square feet of office space pursuant to a lease
expiring in March 2013.  Prior to August 2008, our corporate headquarters
were located in Fort Lauderdale, Florida.





We lease
approximately 353,000 square feet of industrial, warehouse and office space used
primarily for the manufacturing and production of battery cells, battery pack
assembly, and research and development of battery and fuel cell products. 
The leases for property, located in Indiana, New Jersey and Florida, expire at
varying times from December 2010 through February 2017 and may contain renewal
options and/or purchase options.  From time to time, we may enter into
short-term leases, on a month-to-month basis, for industrial and/or office
space.





We also
own land and a building in Fort Lauderdale, Florida containing approximately
19,000 square feet of industrial and office space.  We utilize a portion of
this facility for administrative personnel, certain hardware development
projects, and nanotechnology research and development projects.  Our
Enertech subsidiary owns land and a building in South Korea containing a 145,000
square foot manufacturing plant and adjacent office space.  This facility
is used for manufacturing and production of battery cells.




Item
3.       Legal Proceedings.





We may
receive communications from time to time alleging various claims. These claims
may include, but are not limited to, employment matters, collection of accounts
payable, product liability claims and allegations that certain of our
products infringe the patent rights of other third parties. We cannot predict
when such claims may be made, the outcome of any such claims or the effect of
any such claims on our operating results, financial condition or cash flows. As
of December 31, 2009, there are no material pending legal
proceedings.




Item
4.       Reserved.




- 23
-





PART
II





Item
      5.
            Market
      for Registrant’s Common Equity, Related Stockholder Matters and Issuer
      Purchases of Equity Securities.





Market
Information and Holders





Effective
January 2, 2009, our common stock began trading on the Nasdaq Global Market
under the symbol “HEV.”  From May 8, 2008 through December 31, 2008, our
common stock was traded on the American Stock Exchange under the symbol
“HEV.”  Prior to May 8, 2008, our common stock was listed on the OTC
Electronic Bulletin Board (“OTC”). The OTC is a regulated quotation service that
displays real-time quotes, last-sale prices and volume information in OTC equity
securities.  The OTC quotations reflect inter-dealer prices, without retail
mark-up, mark-down or commission and may not represent actual
transactions.





The
following table sets forth the high and low sales prices for our common
stock for the periods indicated as reported by the OTC for the period from
January 1, 2008 through May 7, 2008, the American Stock Exchange for the period
from May 8, 2008 through December 31, 2008, and the Nasdaq Global Market for the
year ended December 31, 2009.


Year
                        
                        Quarter Ended
                        
                        High
                        
                        
                        Low2008
                        
                        March
      31, 2008
                        
                        
                        $9.24
                        
                        
                        
                        $4.06June
      30, 2008
                        
                        
                        $9.05
                        
                        
                        
                        $4.90September
      30, 2008
                        
                        
                        $8.50
                        
                        
                        
                        $5.17December
      31, 2008
                        
                        
                        $9.49
                        
                        
                        
                        $6.002009
                        
                        March
      31, 2009
                        
                        
                        $7.90
                        
                        
                        
                        $2.35June
      30, 2009
                        
                        
                        $7.10
                        
                        
                        
                        $4.94September
      30, 2009
                        
                        
                        $7.90
                        
                        
                        
                        $4.90December
      31, 2009
                        
                        
                        $7.33
                        
                        
                        
                        $4.68




On March
8, 2010, the closing price of our common stock on the NASDAQ was $4.30 per share
and there were 125,426,644 shares of common stock issued and outstanding held by
approximately 277 shareholders of record. This number does not include
persons whose shares are held of record by a bank, brokerage house or clearing
agency, but does include such banks, brokerage houses and clearing
agencies.





Effective
April 24, 2008, we completed a one-for-seven reverse stock split. 
Effective August 11, 2008, we amended our Articles of Incorporation to increase
the number of authorized shares of common stock by 15,000,000 shares, which
resulted in total authorized shares of common stock of 150,714,286. 
Effective December 31, 2008, we further amended our Articles of Incorporation to
increase the number of authorized shares of common stock by 25,000,000 shares,
for a total authorized number of shares of common stock of
175,714,286.





Dividend
Policy


We have
not paid any cash dividends on our common stock and we have no current intention
to pay any cash dividends on our common stock in the foreseeable
future.




- 24
-





Securities
authorized for issuance under equity compensation plans





The
following table provides information regarding common stock authorized for
issuance under Ener1’s equity compensation plans as of December 31,
2009:





EQUITY COMPENSATION PLAN INFORMATIONPlan 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
                                    
                                    
                                    3,063,313
                                    
                                    
                                    
                                    $3.84
                                    
                                    
                                    
                                    2,062,701Equity
      compensation plans not approvedby
      security holders
                                    
                                    
                                    1,410,347
                                    
                                    
                                    
                                    $3.70
                                    
                                    
                                    
                                    -Total
                                    
                                    
                                    4,473,660
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    2,062,701





Our
equity compensation plans that have been approved by our shareholders are: (i)
the Director Plan, (ii) the 2002 Plan and (iii) the 2007 Plan, (collectively
referred to herein as the “Plans”).  Under the Plans, 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 Plans, currently the Compensation
Committee of the Board of Directors, from a class of employees, officers and
non-employee directors and other service providers who render valuable
contributions to Ener1.  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 ratably over three years of continuous
service and have either a five-year or ten-year term.





Our
equity compensation plans that have not been approved by our shareholders are:
(i) the CEO Option Plan, (ii) the Advisory Committee Option Plan, (iii) the 2004
Advisory Committee Option Plan, (iv) the EnerDel Officer Plan, and (v) the
EnerStruct Employee Plan.  These plans represent individual options granted
to employees and committee members not under the Plans, as described
above.  No new options are expected to be issued from these
plans.





Performance
Graph


The
following graph shows a comparison of cumulative total shareholder return on
Ener1’s common stock for the last five years with the cumulative total return on
the Russell 1000 Index and PowerShares Wilderhill Clean Energy Portfolio Fund
(the “Clean Energy Fund”).  The comparison assumes $100 was invested on
January 1, 2005 in Ener1’s common stock and, for the Russell 1000 Index and
PowerShares Wilderhill Clean Energy Portfolio Fund, assumes reinvestment of
dividends. The Company has not paid any dividends during this period.  The
Clean Energy Fund, which we believe to be the fund closest to our business,
commenced sales in March 2005.




- 25
-


The
comparisons depicted in the above graph are required by the SEC and are not
intended to be indicative of future price performance of our stock. The
performance graph shall not be deemed to be "soliciting material" or to be
"filed" with the SEC, nor shall such information be incorporated by reference
into any future filing by the Company under the Securities Act or the Exchange
Act, except to the extent that the Company specifically incorporates the graph
by reference in such filing.





Recent
sales of unregistered securities and use of proceeds





Sales of unregistered
securities




All of
the following issuances were private placements of our securities in accordance
with Section 4(2) of the Securities Act of 1933, as amended and/or Regulation D
under the Securities Act: (i) February 2009, issued 24,243 shares of Ener1
common stock as compensation to an independent third party for investment
banking services totaling approximately $0.2 million and (ii) from May 2008
through June 2009, issued 56,937 shares of Ener1 common stock totaling
approximately $0.4 million in connection with a master lease
agreement.





Use of proceeds from
registered securities





We filed
a registration statement on Form S-3 to register the resale of the shares issued
in connection with the Enertech acquisition and the shares underlying the
warrants and to register securities up to $100 million for future issuance in
our capital raising activities.  The registration statement became
effective on February 5, 2009.  The Commission file number assigned to the
registration statement is 333-156609.





In
January 2010, we entered into a secondary Open Market Sale Agreement (the
“Secondary Open Market Sale Agreement”) with Jefferies to sell shares up to an
aggregate of $60.0 million.  We began selling shares in February 2010 and
through March 8, 2010, we sold 919,055 shares at an average price of $4.43 per
share for net proceeds of $3.9 million after deducting $0.2 million in
expense.




- 26
-





Item
6.       Selected Financial Data.





The
selected financial data presented below for the five years in the period ended
December 31, 2009, was derived from our audited consolidated financial
statements. This information should be read in conjunction with the consolidated
financial statements and related notes and Management's Discussion and Analysis
of Financial Condition and Results of Operations.  Certain amounts for 2006
and 2005 have been adjusted for the calculation of amortization of debt discount
and deferred financing costs associated with our 2004 Debentures, 2005
Debentures and Series A Preferred Stock.





Financial
highlights, in thousands, except per share data:





2009
                
                
                (1)
                  2008
                
                
                2007
                
                
                2006
                
                
                2005Net
      sales
                
                $
                34,800
                
                
                $
                6,848
                
                
                $
                280
                
                
                $
                100
                
                
                $
                60Loss
      from operations
                
                
                (49,436
                )
                
                
                (33,905
                )
                
                
                (21,046
                )
                
                
                (26,410
                )
                
                
                (33,149
                )Other
      income (expenses)
                
                
                (2,050
                )
                
                
                (17,432
                )
                
                
                (41,646
                )
                
                
                (15,114
                )
                
                
                55,849Net
      income (loss) attributable to Ener1, Inc.  (2)
                
                
                (51,004
                )
                
                
                (52,460
                )
                
                
                (63,938
                )
                
                
                (43,133
                )
                
                
                24,270Basic
      net income (loss) per share (3)
                
                $
                (0.44
                )
                
                $
                (0.51
                )
                
                $
                (1.02
                )
                
                $
                (0.70
                )
                
                $
                0.40Cash
      and cash equivalents
                
                
                14,314
                
                
                
                11,229
                
                
                
                24,826
                
                
                
                291
                
                
                
                2,306Total
      assets
                
                
                174,407
                
                
                
                141,731
                
                
                
                32,745
                
                
                
                8,060
                
                
                
                11,029Long
      term obligations (4)
                
                
                15,922
                
                
                
                7,261
                
                
                
                11,158
                
                
                
                13,137
                
                
                
                3,344Redeemable
      preferred stock
                
                
                -
                
                
                
                -
                
                
                
                7,822
                
                
                
                20,583
                
                
                
                16,894Total
      Ener1, Inc. stockholders' equity (deficit) (4)
                
                
                117,999
                
                
                
                106,413
                
                
                
                (493
                )
                
                
                (41,241
                )
                
                
                (68,749
                )


(1)
            The
      operating results of Enertech have been included since November 1, 2008,
      the accounting effective date of the
  acquisition.





(2)
            On
      January 1, 2009, we implemented a new accounting standard that changed the
      accounting for and reporting of minority interest, now referred to as
      noncontrolling interest.  This standard requires the presentation of
      net income or loss attributable to the noncontrolling interest separately
      from the net income or loss attributable to Ener1, Inc. for all periods
      presented.





(3)
            Per
      share amounts have been adjusted to reflect the one for seven reverse
      stock split on April 24, 2008.





(4)
            On
      January 1, 2009, we adopted a new accounting standard which changed the
      manner in which we determine if an instrument is indexed to the company’s
      own stock which resulted in a reduction of total stockholders’ equity of
      $13.2 million and included in long term obligations, at December 31, 2009,
      are derivative liabilities of $6.9
million




- 27
-





Item
7.       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 ("MD&A") was prepared to provide the reader with a
view and perspective of our businesses through the eyes of management and should
be read in conjunction with our Consolidated Financial Statements and the
accompanying notes to those financial statements.





Executive
Summary





We are
engaged primarily in the business of designing, developing and
manufacturing high-performance, rechargeable lithium-ion batteries and battery
systems for energy storage.  End markets include transportation, stationary
power (energy storage for utilities and renewable energy such as wind and solar
power in addition to battery backup systems for the home), military applications
and small cell markets.  In the transportation markets, we are developing
systems to power the next generation of hybrid, plug-in hybrid and electric
vehicles (HEVs, PHEVs and EVs).  This technology is also being developed
for other transportation markets including buses and trucks as well as
alternative transportation vehicles.  In addition, our Enertech subsidiary
specializes in small cell technology and manufactures electrodes for other
battery manufacturers, commercial battery packs, prismatic cells and lithium
polymer batteries and also manufactures large format cells for automotive
applications. We also conduct research and development of fuel cells and nano
coating processes.





Our goal
is to become the leading United States-based developer and manufacturer of
advanced, safe, high-performance lithium-ion battery systems for EVs, HEVs, and
PHEVs, and for related non-automotive, stationary power and military
markets.  Our intention is to supply our products to the transportation and
stationary power market segments in North America, Europe and Asia and the
military markets in the United States.  We initially plan to manufacture
and assemble our batteries in our United States-based Indianapolis and
Korea-based plants, and to increase EnerDel’s global production capacity of
cells as required.  Ultimately, we envision a hub-and-spoke model for
manufacturing and distribution, basing cell manufacturing in our Indianapolis
and Korean facilities and locating pack assembly closer to our customers to
reduce transportation expense.





- 28
-





In late
2009, Enertech began increasing production of large format cells used in our
lithium-ion battery systems produced by EnerDel while continuing to manufacture
small cell batteries, electrodes and other existing products. In 2010, we plan
to invest $12.0 million for additional manufacturing equipment and capacity
expansion at our existing Enertech facility.





In the
beginning of 2010, EnerDel began ramping up its production of EV batteries in
preparation for the pending volume production of the Think City vehicle being
manufactured by Think Global.  The battery packs will be assembled in our
Indiana facilities and are expected to begin shipping in the second quarter of
this year.





We
anticipate commencing production of battery packs to be used in the Volvo C30 EV
when that vehicle goes into its scheduled production in the first quarter of
2011.





In
addition, we have completed the process which allows us to begin utilizing funds
under the $118.5 million federal grant awarded in August 2009 by the United
States Department of Energy (DOE), which requires us to spend one dollar of our
own funds for every incentive dollar we receive. We will implement the plan set
forth in the grant application as part of our 2010 capital expansion strategy
with an estimated $63.0 million investment in manufacturing equipment for our
new production facility in Mt. Comfort, Indiana, as well as additional equipment
and capacity for our existing locations, with installation scheduled to begin in
March 2010.





We also
have a pending application for a long-term, low-interest loan under the Advanced
Technology Vehicle Manufacturing Incentive Program (“ATVM”) to increase our
battery manufacturing capacity at our Indiana facilities.  We are currently
seeking a loan estimated to be between $275 million and $300 million. 
Under the ATVM, companies are required to contribute 20% of the loan amount to
the program award.  We expect the ATVM application and award will be
expedited by the completion of the federal grant process.





Financial
Highlights





In
January 2009, we purchased an additional ownership interest in Enertech by
issuing 385,936 shares of Ener1 common stock, valued at approximately $2.6
million, increasing our ownership from 83% to 89% on a fully diluted
basis.





We filed
a registration statement to, among other things, register securities of Ener1 up
to $100 million for future issuance in our capital raising activities.  The
registration statement became effective on February 5, 2009 and in May 2009 we
began selling shares of Ener1 common stock pursuant to an Open Market Sale
Agreement (the “Primary Open Market Sale Agreement”) with Jefferies &
Company, Inc. (“Jefferies”) and through September 2009 sold 5,951,032 shares for
an aggregate of $40.0 million, at an average price of $6.72 per share. 
After deducting fees and expenses of $1.6 million, we received net proceeds of
$38.4 million from the sale of these shares.





In
January 2010, we entered to a secondary Open Market Sale Agreement (the
“Secondary Open Market Sale Agreement”) with Jefferies to sell shares of Ener1
common stock for an aggregate of $60.0 million.  We began selling shares in
February 2010 and through March 8, 2010, we sold 919,055 shares at an average
price of $4.43 per share for net proceeds of $3.9 million after deducting $0.2
million in expense.





In August
2009, we entered into a Securities Investment and Subscription Agreement with
Think Holdings, AS, a Norwegian limited liability company (“Think
Holdings”).  Think Holdings is the majority owner of Think Global AS
(“Think Global”), the Norwegian electric car manufacturer and customer of
EnerDel.  From September 2009 through February 2010, Ener1 purchased
10,826,640 shares of Think Holdings Series B Convertible Preferred Stock for
approximately $19.0 million.




- 29
-




We also
entered into a Purchase and Assignment Agreement with Bzinfin to acquire
approximately $3.0 million of debt pursuant to a loan facility with Think Global
and warrants to purchase 3,600,000 shares of common stock of Think Global, (the
“Bridge Loan”).  As consideration, we issued 896,986 shares of Ener1
common stock, valued at approximately $5.8 million.  We have exchanged
the Bridge Loan for approximately 1,809,000 shares of Think Holdings Series B
Convertible Preferred Stock and warrants to purchase additional shares of Think
Holdings Series B Convertible Preferred Stock.  The total number of
warrants is based on a predetermined percentage of Think Holdings fully diluted
share capital.





In
December 2008, we entered into a Line of Credit Agreement, (the “LOC Agreement”)
with Ener1 Group to establish a line of credit in the aggregate principal amount
of $30.0 million.  In August 2009, Ener1 Group entered into a Novation
and Assignment agreement with Bzinfin whereby Ener1 Group assigned to Bzinfin
all of its rights and obligations under the LOC Agreement.  Simultaneously,Ener1entered intoan Amended and Restated Line of Credit
Agreement (the “A&R LOC Agreement”)providingBzinfin, among other rights,the right to convertthe first$8.0 million ofprincipaland relatedunpaid interest intoshares of Ener1common stock at an exercise price of
$5.00 per share andany
remainingprincipaland relatedunpaid interest intoshares of Ener1common stock at an exercise price of $6.00 per
share.





Results
of Operations





The following information has been
derived from our audited consolidated financial statements for the years ended
December 31, 2009, 2008 and 2007 and is presented in thousands.  We
completed the acquisition of Enertech during the fourth quarter of 2008 and have
included the results of their operations since November 1,
2008.





Change
                        
                        
                        ChangeYears
      Ended December 31,
                        
                        
                        2009
      vs. 2008
                        
                        
                        2008
      vs. 20072009
                        
                        
                        2008
                        
                        
                        2007
                        
                        
                        $
                        
                        
                        %
                        
                        
                        $
                        
                        
                        %Net
      sales
                        
                        $
                        34,800
                        
                        
                        $
                        6,848
                        
                        
                        $
                        280
                        
                        
                        $
                        27,952
                        
                        
                        
                        408%
                        
                        
                        $
                        6,568
                        
                        
                        
                        2346%Cost
      of sales
                        
                        
                        30,732
                        
                        
                        
                        4,661
                        
                        
                        
                        -
                        
                        
                        
                        26,071
                        
                        
                        
                        559%
                        
                        
                        
                        4,661
                        
                        
                        
                        n/aGross
      profit
                        
                        
                        4,068
                        
                        
                        
                        2,187
                        
                        
                        
                        280
                        
                        
                        
                        1,881
                        
                        
                        
                        86%
                        
                        
                        
                        1,907
                        
                        
                        
                        681%Operating
      expenses:General
      and administrative
                        
                        
                        17,653
                        
                        
                        
                        11,578
                        
                        
                        
                        8,265
                        
                        
                        
                        6,075
                        
                        
                        
                        52%
                        
                        
                        
                        3,313
                        
                        
                        
                        40%Research
      and development, net
                        
                        
                        30,770
                        
                        
                        
                        22,902
                        
                        
                        
                        11,948
                        
                        
                        
                        7,868
                        
                        
                        
                        34%
                        
                        
                        
                        10,954
                        
                        
                        
                        92%Warrant
      modification expense
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        583
                        
                        
                        
                        -
                        
                        
                        
                        n/a
                        
                        
                        
                        (583
                        )
                        
                        
                        -100%Depreciation
      and amortization
                        
                        
                        5,081
                        
                        
                        
                        1,612
                        
                        
                        
                        530
                        
                        
                        
                        3,469
                        
                        
                        
                        215%
                        
                        
                        
                        1,082
                        
                        
                        
                        204%Total
      operating expenses
                        
                        
                        53,504
                        
                        
                        
                        36,092
                        
                        
                        
                        21,326
                        
                        
                        
                        17,412
                        
                        
                        
                        48%
                        
                        
                        
                        14,766
                        
                        
                        
                        69%Loss
      from operations
                        
                        
                        (49,436
                        )
                        
                        
                        (33,905
                        )
                        
                        
                        (21,046
                        )
                        
                        
                        (15,531
                        )
                        
                        
                        46%
                        
                        
                        
                        (12,859
                        )
                        
                        
                        61%Other
      income (expenses):Interest
      expense
                        
                        
                        (5,810
                        )
                        
                        
                        (21,778
                        )
                        
                        
                        (30,216
                        )
                        
                        
                        15,968
                        
                        
                        
                        -73%
                        
                        
                        
                        8,438
                        
                        
                        
                        -28%Interest
      income
                        
                        
                        150
                        
                        
                        
                        480
                        
                        
                        
                        121
                        
                        
                        
                        (330
                        )
                        
                        
                        -69%
                        
                        
                        
                        359
                        
                        
                        
                        297%Other
                        
                        
                        294
                        
                        
                        
                        189
                        
                        
                        
                        (14
                        )
                        
                        
                        105
                        
                        
                        
                        56%
                        
                        
                        
                        203
                        
                        
                        
                        -1450%Gain
      (loss) on derivative liabilities
                        
                        
                        3,527
                        
                        
                        
                        3,936
                        
                        
                        
                        (11,537
                        )
                        
                        
                        (409
                        )
                        
                        
                        -10%
                        
                        
                        
                        15,473
                        
                        
                        
                        -134%Loss
      on foreign currency transactions
                        
                        
                        (211
                        )
                        
                        
                        (259
                        )
                        
                        
                        -
                        
                        
                        
                        48
                        
                        
                        
                        -19%
                        
                        
                        
                        (259
                        )
                        
                        
                        n/aTotal
      other income (expenses)
                        
                        
                        (2,050
                        )
                        
                        
                        (17,432
                        )
                        
                        
                        (41,646
                        )
                        
                        
                        15,382
                        
                        
                        
                        -88%
                        
                        
                        
                        24,214
                        
                        
                        
                        -58%Loss
      before income taxes
                        
                        
                        (51,486
                        )
                        
                        
                        (51,337
                        )
                        
                        
                        (62,692
                        )
                        
                        
                        (149
                        )
                        
                        
                        0%
                        
                        
                        
                        11,355
                        
                        
                        
                        -18%Income
      tax expense (benefit)
                        
                        
                        19
                        
                        
                        
                        (184
                        )
                        
                        
                        -
                        
                        
                        
                        203
                        
                        
                        
                        -110%
                        
                        
                        
                        (184
                        )
                        
                        
                        n/aNet
      loss
                        
                        
                        (51,505
                        )
                        
                        
                        (51,153
                        )
                        
                        
                        (62,692
                        )
                        
                        
                        (352
                        )
                        
                        
                        1%
                        
                        
                        
                        11,539
                        
                        
                        
                        -18%Net
      income (loss) attributable to to noncontrolling interest
                        
                        
                        (501
                        )
                        
                        
                        1,307
                        
                        
                        
                        1,246
                        
                        
                        
                        (1,808
                        )
                        
                        
                        -138%
                        
                        
                        
                        61
                        
                        
                        
                        5%Net
      loss attributable to Ener1, Inc.
                        
                        $
                        (51,004
                        )
                        
                        $
                        (52,460
                        )
                        
                        $
                        (63,938
                        )
                        
                        $
                        1,456
                        
                        
                        
                        
                        
                        
                        $
                        11,478




- 30
-


2009 as compared to
2008





Net sales,
Cost of sales and Gross Profit


Net sales have increased from the sale
of prototype EV battery packs to our European customers and the acquisition of
Enertech.  Enertech’s sales have decreased approximately 7% during
2009, on a pro forma basis, due to an overall decline in demand for batteries
due to poor worldwide economic conditions and the impact of foreign currency
fluctuations.  The average foreign currency exchange rate of the
Korean Won for the year ended December 31, 2009 declined approximately 16% when
compared to the same period in 2008.





Cost of sales have increased due to the
acquisition of Enertech and the costs are increasing at a higher rate than net
sales as fixed costs of production, such as depreciation expense, are not
reduced ratably with production volume.  Included in cost of sales is
depreciation expense of approximately $2.6 million for the year ended December
31, 2009.





General and administrative
expenses


General
and administrative expense increased primarily due to the increase in salaries
and benefits of $3.4 million, of which $2.4 million is attributable to the
acquisition of Enertech and $0.8 million is for incentive bonuses and stock
based compensation.  Legal and professional fees increased $1.8
million, of which $1.2 million is for investor, government, media and public
relations.  Travel and facilities related expenses increased $1.0
million, of which approximately 50% is due to the Enertech
acquisition.





These
increases have been partially offset by a decrease in bad debt expense of $0.7
million due to the collection of previously reserved doubtful
accounts.





Research and development
expenses


Research
and development expenses increased primarily due to an increase in salaries and
benefits of $6.2 million directly related to the increase in our workforce and
$1.1 million for increases in incentive bonuses and stock based
compensation.  Facilities related expenses increased approximately
$1.0 million primarily due to rent and utilities for our Noblesville, Indiana
facility and professional fees increased $0.7 million related to legal fees
incurred for filing, maintaining and protection of our patents and
technology.





These
increases have been partially offset by a decrease in materials and
non-capitalized equipment of $2.0 million. Enertech comprises less than 1.0% of
the research and development expenses.





We
present proceeds from our cost sharing arrangements with federal government
agencies as a reduction of research and development
expenses.  Proceeds received under these contracts were $3.7 million
and $3.8 million for the years ended December 31, 2009 and 2008,
respectively.





Depreciation and
amortization


Amortization
increased $1.6 million related to intangible assets capitalized in connection
with our acquisitions during 2008 and depreciation expense, included in
operating expenses, increased $1.9 million directly related to the increase in
our property and equipment.





Interest
expense


Interest
expense represents a combination of cash and non-cash interest related to our
deferred financing costs, borrowings with banks, capital leases and other debt
instruments as well as debt issuances costs.





The cash
and non-cash components of interest expense are (in thousands):





Years
      Ended December
      31,
                      
                      
                      2009
      vs.
      20082009
                      
                      
                      2008
                      
                      
                      $
                      
                      
                      %Cash
                      
                      $
                      973
                      
                      
                      $
                      421
                      
                      
                      $
                      552
                      
                      
                      
                      131
                      %Non-cash
                      
                      
                      4,837
                      
                      
                      
                      21,357
                      
                      
                      
                      (16,520
                      )
                      
                      
                      -77
                      %Total
      interest expense
                      
                      $
                      5,810
                      
                      
                      $
                      21,778
                      
                      
                      $
                      (15,968
                      )
                      
                      
                      -73
                      %




- 31
-


Of the
total $4.8 million in non-cash interest expense for the year ended December 3,1
2009, $4.6 million or 96% represents the amortization of deferred financing
costs and debt issuance costs associated with the fair value of warrants and the
beneficial conversion feature associated with our borrowings pursuant to the LOC
and A&R LOC Agreements.  The remaining estimated future
straight-line amortization of these deferred financing costs and debt issuance
costs are estimated to be $2.2 million during 2010.





The
overall decrease in interest expense is primarily due to reduced principal and
interest on convertible notes and debenture instruments which where were
converted into shares of Ener1 common stock during the first quarter of
2008.





Gain (loss) on derivative
liabilities


Upon the
adoption of new accounting standards, we concluded certain warrants containing
down round provisions and convertible bonds issued by our Enertech subsidiary
should be treated as derivative liabilities effective January 1, 2009, which has
resulted in a gain on derivative liabilities of $3.5 million during the year
ended December 31, 2009.





Loss on foreign currency
transactions


Foreign
currency transactions are transactions denominated in a currency other than the
entity’s functional currency.  Foreign currency transactions may
produce receivables or payables that are fixed in terms of the amount of foreign
currency that will be received or paid.  A change in exchange rates of
the functional currency in which a transaction is denominated increases or
decreases the expected cash flow creating a foreign currency transaction gain or
loss.





2008 as compared to
2007





Net sales,
Cost of sales and Gross Profit


Net sales increased approximately $0.9
million from the sale of prototype EV battery packs to our European
customers.  Net sales from Enertech of $5.7 million coupled with the
$4.7 million in cost of sales contributed a gross profit of approximately $1.0
million, or 18%.  Included in cost of sales is depreciation expense of
approximately $0.4 million for the year ended December 31,
2008.





General and administrative
expenses


General
and administrative expense increased primarily due to an increase in legal and
professional fees of $1.1 million, of which $0.7 million is for investor,
government, media and public relations.  Salaries increased $0.9
million, of which $0.4 million is due to the acquisition of Enertech and $0.5
million is due to an increase in stock based compensation.  Bad debt
expense increased $0.5 million for one specifically identified customer and
licenses and fees increased $0.3 million, primarily for the listing of our
common stock on both the American Stock Exchange and the Nasdaq Global
Market.





Research and development
expenses


Research
and development expenses increased primarily due to an increase in salaries and
related benefits of $5.7 million which included an increase of $1.1 million in
stock based compensation.  Production materials increased $2.3
million, net of reimbursements and outside services related to the production of
prototypes increased $1.3 million.  Travel related expenses increased
$0.7 million.





We
present proceeds from our cost sharing arrangements with federal government
agencies as a reduction of research and development
expenses.  Proceeds received under these contracts were $3.8 million
and $0.9 million for the years ended December 31, 2008 and 2007,
respectively.





Depreciation and
amortization


Amortization
increased $0.5 million related to intangible assets capitalized in connection
with our acquisitions during the fourth quarter of 2008 and depreciation
expense, included in operating expenses, increased $0.5 million directly related
to the increase in our property and equipment.




- 32
-


Interest
expense


Interest
expense represents a combination of cash and non-cash interest related to our
deferred financing costs, borrowings with banks, capital leases and other debt
instruments as well as debt issuances costs.





The cash
and non-cash components of interest expense are (in thousands):





Years Ended December 31,
                    
                    
                    2008 vs. 20072008
                    
                    
                    2007
                    
                    
                    $
                    
                    
                    %Cash
                    
                    $
                    421
                    
                    
                    $
                    7,062
                    
                    
                    $
                    (6,641
                    )
                    
                    
                    -94
                    %Non-cash
                    
                    
                    21,357
                    
                    
                    
                    23,154
                    
                    
                    
                    (1,797
                    )
                    
                    
                    -8
                    %Total
      interest expense
                    
                    $
                    21,778
                    
                    
                    $
                    30,216
                    
                    
                    $
                    (8,438
                    )
                    
                    
                    -28
                    %





The
overall decrease in interest expense is primarily due to reduced principal and
interest on convertible notes and debenture instruments which were converted
into shares of Ener1 common stock during the first quarter of
2008.  As a result of the conversions of all outstanding obligations
under the convertible notes and debenture instruments, all security interests in
the property of Ener1 were released.





Gain (loss) on derivative
liabilities


The
conversion feature of our debenture instruments and related warrants were
required to be treated separately as derivative liabilities.  When the
debenture instruments were converted into shares of Ener1 common stock, during
the first quarter of 2008, they no longer were treated as derivative liabilities
and the fair value of each derivative, including the warrant derivative, was
marked to market and a gain of $3.9 million was recorded.





Loss on foreign currency
transactions


Foreign
currency transactions are transactions denominated in a currency other than the
entity’s functional currency.  Foreign currency transactions may
produce receivables or payables that are fixed in terms of the amount of foreign
currency that will be received or paid.  A change in exchange rates of
the functional currency in which a transaction is denominated increases or
decreases the expected cash flow creating a foreign currency transaction gain or
loss.





Liquidity
and Capital Resources





Cash
Flow Summary





The following information has been
derived from our audited consolidated financial statements for the years ended
December 31, 2009, 2008 and 2007 and is presented in thousands.  We
completed the acquisition of Enertech during the fourth quarter of 2008 and have
included the results of their operations since November 1,
2008.





Cash and
cash equivalents increased by $3.1 million during the year ended December 31,
2009. The change in cash and cash equivalents is as follows (in
thousands):





2009
                    
                    
                    2008
                    
                    
                    2007Net
      loss
                    
                    $
                    (51,505
                    )
                    
                    $
                    (51,153
                    )
                    
                    $
                    (62,692
                    )Non-cash
      items
                    
                    
                    13,590
                    
                    
                    
                    23,492
                    
                    
                    
                    39,772(Decrease)
      increase in working capital items
                    
                    
                    (2,771
                    )
                    
                    
                    3,540
                    
                    
                    
                    (3,772
                    )Operating
      activities
                    
                    
                    (40,686
                    )
                    
                    
                    (24,121
                    )
                    
                    
                    (26,692
                    )Investing
      activities
                    
                    
                    (29,112
                    )
                    
                    
                    (13,775
                    )
                    
                    
                    (495
                    )Financing
      activities
                    
                    
                    73,030
                    
                    
                    
                    24,112
                    
                    
                    
                    51,722Effects
      of exchange rates on cash and cash equivalents
                    
                    
                    (147
                    )
                    
                    
                    187
                    
                    
                    
                    -Net
      increase (decrease) in cash and cash equivalents
                    
                    $
                    3,085
                    
                    
                    $
                    (13,597
                    )
                    
                    $
                    24,535Cash
      and cash equivalents - beginning balance
                    
                    
                    11,229
                    
                    
                    
                    24,826
                    
                    
                    
                    291Cash
      and cash equivalents - ending balance
                    
                    $
                    14,314
                    
                    
                    $
                    11,229
                    
                    
                    $
                    24,826




- 33
-





Operating Activities





Cash used
in operating activities is primarily driven by our net loss, adjusted for
non-cash items and changes in working capital.  Non-cash items consist
primarily of depreciation and amortization, stock-based compensation and
interest expense, which are partially offset by the gain on derivative
liabilities.





Net cash
used in operating activities increased $16.6 million during the year ended
December 31, 2009, as compared to 2008.  Non-cash items decreased $9.9
million and working capital items decreased $6.3 million.  The
decrease in certain operating assets and liabilities is primarily due to the
decrease in accounts payable and accrued expenses partially offset by the
decrease in inventories and accounts receivable.





Net cash
used in operating activities decreased $2.6 million during the year ended
December 31, 2008, as compared to 2007.  Net loss decreased $11.5
million in 2008 due primarily to the payment of $10.2 million in preferred
dividends during 2007.  Non-cash items decreased $16.3 million
primarily due to the gain on derivative liabilities of $3.9 million in 2008 as
compared to the loss of $11.5 million during 2007.  Working capital
items increased $7.3 million primarily due to the increase in accounts payable
and accrued expenses partially offset by the increase in accounts receivable due
to the slow paying nature of certain federal government agencies with whom we
have cost sharing arrangements.  Subsequent to December 31, 2008, we
collected approximately $1.6 million, or 96% of our government based accounts
receivable.





Investing activities





Net cash
used in investing activities for the year ended December 31, 2009 was $29.1
million, compared to $13.8 million for the year ended December 31,
2008.  The increase is primarily due to the investment in Think
Holdings’ Series B Preferred Stock of $13.3 million during
2009.  Purchases of property, plant and equipment increased $0.5
million as we continue to upgrade and increase the capacity at our manufacturing
facilities in Indiana and Korea.





Net cash
used in investing activities increased $13.3 million during the year ended
December 31, 2008 from $0.5 million for the year ended December 31,
2007.  This increase relates primarily to the planned increase in
capacity and upgrade of production equipment at our manufacturing facilities in
Indiana and Korea.  During 2008, capital expenditures and equipment
deposits increased $13.5 million.  These increases were partially
offset by the $5.0 million cash received in acquisitions, less $1.1 million in
direct costs of acquisitions.





Financing activities





Net cash
provided by financing activities for the year ended December 31, 2009 was $73.0
million, compared to $24.1 million for the same period ended
2008.  The increase is due to proceeds from sales of Ener1 common
stock of $58.4 million and an increase in proceeds from borrowings of $16.2
million during the year ended December 31, 2009.  These increases have
been partially offset by a decrease in proceeds from the exercise of options and
warrants of $30.3 million during the same period.





In May
2009, we entered into the Primary Open Market Sale Agreement to sell $40.0
million in shares of Ener1 common stock and through September 2009, we raised
net proceeds of $38.4 million from our participation in the Primary Open Market
Sale Agreement.  In December 2009, we entered into a Stock Purchase
Agreement with ITOCHU to sell $20.0 million in shares of Ener1 common
stock.





In
January 2010, we entered into the Secondary Open Market Sale Agreement to sell
up to $60.0 million in shares of Ener1 common stock.  We began selling
shares on February 3, 2010 and through March 8, 2010, we raised net proceeds
totaling $3.9 million.





Net cash
provided by financing activities decreased $27.6 million during the year ended
December 31, 2008 primarily due to the decrease in selling activities of Ener1
common stock.  This decrease is partially offset by the increase in
proceeds from exercises of warrants totaling $25.8 million during
2008.  We also spent $8.0 million during the year ended 2008 for the
redemption of EnerDel’s Series A
Preferred Stock.




- 34
-


Management’s Assessment ofLiquidity





We
continue to manage our business to develop our products and establish our
manufacturing capacity at a level to attract customers while reserving the
expansion of our capacity and workforce until such time as we receive firm
customer orders.  In addition to our available cash on hand, sources
of liquidity include committed credit lines for equipment purchases and
operating expenses as well as access to the public debt and equity
markets.  We continue to balance our cash and financing uses through
investment in our planned operations, equipment purchases, acquisition activity
and redemption of certain securities.





We
anticipate that United States government programs will fund a significant
increase in investment in the domestic battery business and related supplier
markets, and we will benefit from these programs due to our presence as a United
States-based manufacturer.  Funds received pursuant to these
government programs are designated to increase our battery manufacturing
capacity.





In
January 2010, we completed the process to begin utilizing funds under the $118.5
million grant awarded in August 2009.  We will begin utilizing these
funds as part of our 2010 capital expansion with an estimated $63.0 million
investment in our new production facility in Mt. Comfort, Indiana, and to fund
the purchase of additional equipment and capacity expansion at our existing
locations.





We also
have pending an application under the DOE ATVM loan program under which we are
seeking a loan currently estimated to be between $275 million and $300 million
to increase our battery manufacturing capacity in Indiana.  Under the
ATVM, companies are required to contribute 20% of the loan amount to the program
award, with credit given for invested capital in the project to date in
accordance with the terms and conditions of the ATVM loan.  We
continue to provide information and due diligence requests to the DOE in
accordance with the application process.  The ATVM was created under
Section 136 of the Energy Independence and Security Act of 2007.





We expect
to receive $7.4 million from our active cost-sharing arrangements with the DOD,
DOE and the USABC through September 2012, which will reduce our future research
and development expense.





Our
ability to access the public debt and equity markets and the related cost of
these activities may be affected by market conditions and our credit rating.
During the past year, the market has experienced significant price and volume
fluctuations.  To date, we have not experienced any limitations in our
ability to access these sources of liquidity, although the recent upheaval
experienced by the debt and equity markets may adversely affect our ability to
procure future financing.





We
believe we have access to sufficient capital to continue our planned operations
for 12 months from our balance sheet date of December 31, 2009.  We
plan to utilize the proceeds from our Secondary Open Market Sale Agreement
and our A&R LOC and other possible sources to fund operations and the
purchase of certain production equipment and manufacturing plant
assets.  Enertech has access to loan facilities with several banks for
short-term working capital and equipment purchases and we plan to invest
approximately $12.0 million in Enertech during 2010 to facilitate their working
capital and equipment purchase requirements.




- 35
-


Contractual
Obligations





A summary
of payments due for our contractual obligations and commitments, as of December
31, 2009, is presented below (in thousands):





AfterContractual
      cash obligations
                    
                    2010
                    
                    
                    2011
                    
                    
                    2012
                    
                    
                    2013
                    
                    
                    2014
                    
                    
                    2014
                    
                    
                    TotalConvertible
      line of credit (1)
                    
                    $
                    12,481
                    
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    12,481Short-term
      borrowings (1), (2)
                    
                    
                    13,001
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    13,001Long-term
      borrowings (1), (2)
                    
                    
                    -
                    
                    
                    
                    4,282
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    4,282Convertible
      bonds (1)
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    385
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    385Capital
      lease obligations (1)
                    
                    
                    2,716
                    
                    
                    
                    2,713
                    
                    
                    
                    271
                    
                    
                    
                    6
                    
                    
                    
                    2
                    
                    
                    
                    -
                    
                    
                    
                    5,708Operating
      lease obligations
                    
                    
                    1,164
                    
                    
                    
                    1,039
                    
                    
                    
                    1,059
                    
                    
                    
                    731
                    
                    
                    
                    568
                    
                    
                    
                    1,277
                    
                    
                    
                    5,838Capital
      expenditures (3)
                    
                    
                    29,010
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    29,010Totals
                    
                    $
                    58,372
                    
                    
                    $
                    8,034
                    
                    
                    $
                    1,330
                    
                    
                    $
                    1,122
                    
                    
                    $
                    570
                    
                    
                    $
                    1,277
                    
                    
                    $
                    70,705








(1)
            Includes
      principal payments and expected interest payments based on the terms of
      the obligations.


(2)
            Certain
      bank deposits, land, buildings and equipment are pledged as collateral to
      guarantee payment.


(3)
            Approximately
      $21.9 million will qualify for reimbursement under the $118.5 grant
      awarded in August 2009 and expected proceeds under the ATVM
      loan.





Off-Balance Sheet
Financing





We do not
have any significant relationships with entities often referred to as structured
finance or special purpose entities, which would have been established for the
purpose of facilitating off-balance sheet arrangements. As such, we are not
exposed to any financing, liquidity, market or credit risk that could arise if
we had engaged in such relationships.





Application of Critical Accounting
Policies





Our
consolidated financial statements are prepared in accordance with accounting
principles generally accepted in the United States of America (“US
GAAP”).  Preparing financial statements requires management to make
estimates, judgments and assumptions regarding uncertainties that may affect the
reported amounts of assets, liabilities, revenue, and expenses.  These
estimates, judgments and assumptions are affected by management’s application of
accounting policies.  We base our estimates, judgments and assumptions
on historical experience and other relevant factors that are believed to be
reasonable under the circumstances.  In any given reporting period,
our actual results may differ from the estimates, judgments and assumptions used
in preparing our consolidated financial statements.





Critical
accounting policies for us include impairment of intangible assets, goodwill and
long-lived assets, revenue recognition, stock-based compensation, accounting for
income taxes and derivative instruments.





Our
critical accounting policies are described in the notes to our consolidated
financial statements.  This summary of critical accounting policies is
presented to assist in understanding our consolidated financial statements and
the major estimates, judgments and assumptions used.  Management
believes the following are its most critical accounting policies because they
require more significant judgments and estimates in preparation of its
consolidated financial statements.




- 36
-


Impairment of Long-lived
Assets


Our
long-lived assets are reviewed for possible impairment whenever events or
circumstances indicate the carrying value of our long-lived assets, including
property and equipment, as well as intangible assets, may be
impaired.  We take into consideration indicators such as: reductions
in demand, a significant economic slowdown in the industry or underperformance
of the asset or a significant adverse change in the manner or extent to which
the asset is used.





If such
circumstances indicate a potential impairment may exist, we then evaluate the
recoverability of the carrying value of the asset based on estimated
undiscounted cash flow projections to be generated from such
asset.  If the undiscounted cash flow projections indicate an
impairment occurred then the carrying value of the assets being evaluated is
written down to the estimated fair value.





All of
our long-lived assets are subject to depreciation or amortization.  No
impairment of long-lived assets has been identified during any of the periods
presented since indicators of impairment were not present.





Impairment of
Goodwill


Goodwill
represents the difference, if any, between the purchase price paid for an
acquisition and the fair value of the net assets acquired in a business
combination.  Goodwill is tested for impairment at the reporting unit
level (operating segment or one level below an operating segment) annually,
unless an event occurs that indicates a potential impairment
exists.





The
performance of the impairment test involves a two-step process. The first step
involves comparing the fair values of the applicable reporting units with their
aggregate carrying values, including goodwill. We generally determine the fair
value of our reporting units using the income approach methodology of valuation
that includes the discounted cash flow method.  This valuation method
requires a projection of revenue, operating expenses, and capital expenditures
over a five to ten year period.  In addition, management estimates the
weighted average cost of capital to determine an appropriate discount
rate.  If the carrying amount of a reporting unit exceeds the
reporting unit’s fair value, we perform the second step of the goodwill
impairment test to determine the amount of impairment loss. The second step
involves comparing the implied fair value of the affected reporting unit’s
goodwill with the carrying value of that goodwill.





Our
annual impairment test was performed on October 1, 2009 and indicated our
goodwill was not impaired.  At December 31, 2009, our recorded
goodwill was $51.0 million which has been assigned to the battery
segment.  Changes in our projections, a decrease in our revenue
estimates or an increase in the discount rate by more than 15 percentage points
could decrease the estimated fair value of our reporting units and result in a
future impairment of goodwill.





Revenue
Recognition


Revenue
is recognized when persuasive evidence of a sales arrangement exists, the price
is fixed or determinable, title and risk of loss are transferred, collectibility
is reasonably assured, product returns are reasonably estimable and there are no
remaining significant obligations or customer acceptance
requirements.  Revenue from product sales is recognized at the time of
shipment when title transfers and risk of loss occurs.  Ener1 offers
customers a right of return and reserves for such returns are estimated using
historical information.





During
the year ended December 31, 2009, our net sales consist primarily of battery
related sales from our Enertech operations and a small amount of battery
prototype sales from our EnerDel subsidiary.  At Enertech, sales are
recorded when title passes to the customer which is at the delivery point for
domestic sales and at the receipt point of bill of lading for export
sales.  Currently, Enertech does not provide discounts, rebates,
product guarantees or warranties.  We expect, in the future, that
EnerDel will be providing a limited warranty on sales of battery packs for EVs,
PHEVs and HEVs.  The terms of such warranties and other post-shipment
obligations may be negotiated on a customer by customer basis and we will
establish the appropriate policies and accounting treatment based on such
negotiations and final agreements.  We also expect that our customers
will test a significant number of battery packs prior to
acceptance.


- 37
-


Proceeds
from cost-sharing arrangements with federal government agencies and grants from
foreign government agencies are generally recognized as a reduction of research
and development expenses.  Revenue in 2008 from cost-sharing
arrangements with commercial entities was generally recognized using the
percentage of completion method.  To date, these cost-sharing
arrangements with commercial entities have been for the development and sale of
a customer specified prototype and the costs incurred are classified as research
and development expenses.





We expect
to receive proceeds from grants with federal government agencies,
during 2010, related to assets which we anticipate being recorded
as deferred revenue and recognized as income over the periods and in proportions
in which depreciation on the assets is charged.





Stock Based
Compensation


Employee
and non-employee stock based compensation cost is measured at the grant date
based on the fair value of the award and is recognized as expense over the
requisite service period, usually three years, using the straight-line
method.  We make certain assumptions in order to value and expense our
stock based compensation.  In connection with valuing stock options,
we use a Black-Scholes option pricing model, which requires us to estimate
certain subjective assumptions.  The key assumptions we make are: the
expected term of the award, the expected forfeitures, and the dividend
yield.  We review our valuation assumptions periodically and, as a
result, may change our valuation assumptions used to value stock based
compensation awards granted in the future.  Such changes may result in
a significant change in the expense we recognize in connection with such
awards.





Income
Taxes


Income
tax expense includes domestic and foreign income taxes.  Certain
income and expenses are not reported in tax returns and financial statements in
the same year. The tax effect of such temporary differences is reported as
deferred income taxes.  We also recognized future tax benefits
associated with tax loss and credit carryforwards as deferred tax
assets.  We establish valuation allowances on a jurisdictional basis
when, in the opinion of management, it is more likely than not that the deferred
tax assets will not be realized.  Realization of the future tax
benefit related to the deferred tax asset is dependent on many factors,
including our ability to generate taxable income within the period during which
the temporary differences reverse, the outlook for the economic environment in
which we operate and the overall future industry outlook.





Derivative
Instruments


Our
foreign subsidiary has derivative instruments for managing exposure to foreign
currency primarily to hedge the foreign exchange risk arising from accounts
receivable from domestic subsidiaries.  These derivative instruments
are measured at fair value and gains or losses from changes in the fair value
are recognized in earnings, as they are not designated as hedges.





Certain freestanding warrants that
contain down round provisions were issued during 2004 and
2005.Previously, these warrants were classifiedinequity.After evaluatingthe applicationof newly issued US GAAP, these warrantswereno longerdeemed to be indexed to Ener1’s common
stock and on January 1, 2009 werereclassified as a derivative
liability.Any
time we issue securities that are deemed to be dilutive to the warrants
containing down round provisions, the number of shares of Ener1 stock required
to be issued upon the exercise of these warrants will
increase.





Convertible bonds, originally issued in
January 2008, which haveastrike price denominated in
a foreign currency, were acquired in connection with the Enertech acquisition
during the fourth quarter of 2008.  After evaluatingthe applicationof newly issued US GAAP, theconversion feature was bifurcated and
recorded as a derivative liability on January 1, 2009.  As foreign
currency rates fluctuate, the number of shares of Enertech stock to be issued
upon conversion could increase.





We have recorded the fair value of the
warrants and convertible bonds that are classified as derivative liabilities in
our balance sheet at fair value with changes in the value of these derivatives
reflected in the consolidated statements of operations as gain or loss on
derivative liabilities.  These derivative instruments are not
designated as hedging instruments.




- 38
-


Recently Adopted Accounting
Standards





Effective
January 1, 2009, we adopted new accounting guidance for determining whether an
instrument or an embedded feature is indexed to our own stock.  The
new guidance has affected the accounting for (i) certain freestanding warrants
that contain exercise price adjustment features (“down round provisions”) and
(ii) convertible bonds issued by our foreign subsidiary with a strike price
denominated in a foreign currency.





We
adopted new accounting guidance on disclosures about derivative instruments and
hedging activities on January 1, 2009.  The new guidance impacts
disclosures only and requires additional qualitative and quantitative
information on the use of derivatives and their impact on an entity’s financial
statements.





In
January 2009, we adopted new accounting guidance on business
combinations.  The new guidance requires an acquiring company to
measure all assets acquired and liabilities assumed, including contingent
considerations and all contractual contingencies, at fair value as of the
acquisition date. In addition, an acquiring company is required to capitalize
in-process research and development and either amortize it over the life of the
product, or write it off if the project is abandoned or impaired.  The
adoption of this guidance did not have a material impact on the financial
statements.





On
January 1, 2009, we adopted new accounting guidance on fair value
measurements.  This new guidance defines fair value, establishes a
framework for measuring fair value in generally accepted accounting principles
and expands disclosures about fair value measurements





On
January 1, 2009, we adopted new accounting guidance that requires the issuer of
certain convertible debt instruments that may be settled in cash on conversion
to separately account for the debt and equity components in a manner that
reflects the issuer’s non-convertible debt borrowing rate.  The
adoption of this standard did not have a material impact on the financial
statements.We continue to examine
our convertible debt instruments for applicability under this
guidance.





In June
2009, we adopted new guidance which requires disclosures about fair value of
financial instruments in interim as well as in annual financial
statements.





In
September 2009, we adopted the Financial Accounting Standards Board (“FASB”)
Accounting Standards Codification (the “Codification”), as the single source of
authoritative nongovernmental US GAAP.  The adoption of this standard
did not have a material impact on the financial statements.




Future
Adoption of Accounting Standards





In June
2009, the FASB issued new accounting guidance which amends previously issued
accounting guidance for the consolidation of variable interest entities to
require an enterprise to determine whether its variable interest gives it a
controlling financial interest in a variable interest entity.  This
new standard has broad implications and may affect how we account for the
consolidation of equity method investments and other agreements and purchase
arrangements.  Under this revised guidance, more entities may meet the
definition of a variable interest entity.  We have evaluated all
entities that fall within the scope of this amended guidance to determine
whether we may be required to consolidate additional entities on January 1,
2010, which is the effective date and determined that the adoption of this
standard will not have a material impact on our financial
statements.




- 39
-


Item 7A.
            Quantitative and Qualitative
      Disclosure About Market Risk





We have
international operations which exposes us to foreign currency exchange
risks.





When we
conduct our business in foreign countries, our earnings and cash flow are
subject to fluctuations in foreign currency exchange rates.  We also
face transactional currency exposures that arise when our foreign subsidiaries
enter into transactions denominated in currencies other than their own local
currency. The loss on foreign currency transactions during the years ended
December 31, 2009 and 2008 were $0.2 million and $0.3 million,
respectively.





In
addition, we are exposed to fluctuations in foreign exchange rates from
translating the results of our Korean and Japanese operations to the United
States dollar.  At December 31, 2009 and 2008, the translation
adjustment recognized as accumulated comprehensive income was $4.9 million and
$1.5 million, respectively.





We do not
have any long term supply agreements at this time but we are exposed to risk
when purchases are denominated in a foreign currency.  Currently, the
majority of our principal suppliers are based in China, Japan and Korea and we
may not be able to negotiate payment terms that are denominated in United States
dollars.  As a result, any future decline in the United States dollar
against the Chinese Yuan, the Japanese Yen or the Korean Won, will increase the
amount we may have to pay and could have material impact on our financial
statements.





To date,
we have not entered into any derivative financial instruments for purposes of
reducing our exposure to adverse fluctuations in foreign currency exchange
rates.





We are
not exposed to market risk from changes in interest rates due to the fixed
nature of interest rates associated with our debt instruments.





Item
      8.
            Financial
      Statements





Financial Statements


PageReport of Independent Registered
      Public Accounting Firm
                    
                    41Report of Independent Registered
      Public Accounting Firm
                    
                    42Consolidated Balance
      Sheets as of December
      31, 2009 and 2008
                    
                    43Consolidated Statements of
      Operationsfor the
      years ended December 31, 2009, 2008 and 2007
                    
                    44Consolidated Statementsof Stockholders'Equity (Deficit) and Comprehensive
      Income (Loss)for the years ended December 31,
      2009, 2008 and 2007
                    
                    45Consolidated Statements of Cash
      Flowsfor the years
      ended December 31, 2009, 2008 and 2007
                    
                    46Notes to Consolidated Financial
      Statements
                    
                    47Selected Quarterly Financial Data
      (Unaudited) for the years ended December 31, 2009 and
      2008
                    
                    83




- 40
-





Report of Independent Registered Public
Accounting Firm





TotheBoard of Directors andStockholders of Ener1,
Inc.





In our opinion, the accompanying
consolidated balance sheetas of December 31, 2009and the related consolidated statements
of operations, stockholders' equity(deficit)and cash flowsfor the year then endedpresent fairly, in all material
respects, the financial position of Ener1, Inc. and its subsidiaries at December
31, 2009, and the results of their operations and their cash flows for the yearthenended in conformity with accounting
principles generally accepted in the United States of America.  Also
in our opinion, the Company maintained, in all material respects, effective
internal control over financial reporting as of December 31, 2009, based on
criteria established inInternal Control -
Integrated Frameworkissued
by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO).  The Company's management is responsible for these financial
statements, for maintaining effective internal control over financial reporting
and for its assessment of the effectiveness of internal control over financial
reporting, included in "Management's Report on Internal Control Over Financial
Reporting" appearing under Item 9A.  Our responsibility is to express
opinions on these financial statements and on the Company's internal control
over financial reporting based on our integrated audit.  We conducted
our audit in accordance with the standards of the Public Company Accounting
Oversight Board (United States).  Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement and whether effective internal
control over financial reporting was maintained in all material
respects.  Our audit of the financial statements included examining,
on a test basis, evidence supporting the amounts and disclosures in the
financial statements, assessing the accounting principles used and significant
estimates made by management, and evaluating the overall financial statement
presentation.  Our audit of internal control over financial reporting
included obtaining an understanding of internal control over financial
reporting, assessing the risk that a material weakness exists, and testing and
evaluating the design and operating effectiveness of internal control based on
the assessed risk.  Our audit also included performing such other
procedures as we considered necessary in the circumstances. We believe that our
audit provides a reasonable basis for our opinions.





As discussed in Note 2 to the
consolidated financial statements, the Company changed the manner in which it
determines whether an instrument is indexed to the Company's own stock in
2009.





A company’s internal control over
financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted
accounting principles.  A company’s internal control over financial
reporting includes those policies and procedures that (i) pertain to the
maintenance of records that, in reasonable detail, accurately and fairly reflect
the transactions and dispositions of the assets of the company; (ii) provide
reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (iii) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use, or disposition of the
company’s assets that could have a material effect on the financial
statements.





Because of its inherent limitations,
internal control over financial reporting may not prevent or detect
misstatements.  Also, projections of any evaluation of effectiveness
to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.





/s/ PricewaterhouseCoopers
LLP


Indianapolis,Indiana


March11, 2010


- 41
-


REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM





To the
Board of Directors


Ener1,
Inc.


New York,
New York





We have
audited the accompanying consolidated balance sheets of Ener1, Inc. (the
"Company") as of December 31, 2008 and the related consolidated statements of
operations, stockholders' equity (deficit) and cash flows for each of the two
years in the period ended December 31, 2008.  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,
2008, and the results of its operations and its cash flows for each of the two
years in the period ended December 31, 2008 in conformity with accounting
principles generally accepted in the United States of America.





/s/  MALONEBAILEY,
LLP


www.malone-bailey.com


Houston,
Texas





March 12,
2009


- 42
-


ENER1, INC.


CONSOLIDATED BALANCE
SHEETS


(in thousands, except per share data)


December 31,2009
                    
                    
                    2008ASSETSCurrent
      assetsCash
      and cash equivalents
                    
                    $
                    14,314
                    
                    
                    $
                    11,229Restricted
      cash
                    
                    
                    3,668
                    
                    
                    
                    2,976Accounts
      receivable, net of allowance of $865 and $915
                    
                    
                    6,350
                    
                    
                    
                    7,006Inventories,
      net of provision for obsolescence of $1,296 and $483
                    
                    
                    10,415
                    
                    
                    
                    10,202Prepaid
      expenses and other current assets
                    
                    
                    2,020
                    
                    
                    
                    1,199Total
      current assets
                    
                    
                    36,767
                    
                    
                    
                    32,612Property
      and equipment, net of accumulated depreciation of$8,340 and
      $2,728
                    
                    
                    52,903
                    
                    
                    
                    39,513Deferred
      financing costs, net of amortization of $177 and $0
                    
                    
                    268
                    
                    
                    
                    5,088Intangible
      assets, net of accumulated amortization of $2,736 and $568
                    
                    
                    13,230
                    
                    
                    
                    15,246Investment
      in unconsolidated entity
                    
                    
                    19,177
                    
                    
                    
                    -Goodwill
                    
                    
                    51,019
                    
                    
                    
                    48,674Other
                    
                    
                    1,043
                    
                    
                    
                    598Total
      assets
                    
                    $
                    174,407
                    
                    
                    $
                    141,731LIABILITIES
      AND STOCKHOLDERS' EQUITYCurrent
      liabilitiesAccounts
      payable and accrued expenses
                    
                    $
                    14,268
                    
                    
                    $
                    16,322Income
      taxes payable
                    
                    
                    329
                    
                    
                    
                    318Convertible
      line of credit and accrued interest due to related party, net of discounts
      of $1,965 and $0
                    
                    
                    10,516
                    
                    
                    
                    -Short-term
      borrowings
                    
                    
                    13,001
                    
                    
                    
                    9,414Capital
      lease obligations, current portion
                    
                    
                    2,372
                    
                    
                    
                    2,003Total
      current liabilities
                    
                    
                    40,486
                    
                    
                    
                    28,057Other
      long-term payables
                    
                    
                    1,281
                    
                    
                    
                    1,093Deferred
      income tax liabilities
                    
                    
                    402
                    
                    
                    
                    397Derivative
      liabilities
                    
                    
                    6,871
                    
                    
                    
                    -Long-term
      borrowings
                    
                    
                    4,282
                    
                    
                    
                    795Capital
      lease obligations, less current portion
                    
                    
                    2,701
                    
                    
                    
                    4,580Convertible
      bonds
                    
                    
                    385
                    
                    
                    
                    396Total
      liabilities
                    
                    
                    56,408
                    
                    
                    
                    35,318Commitments
      and contingenciesStockholders'
      equityCommon
      stock, $0.01 par value, 175,714,286 shares authorized, 124,375,196 and
      113,074,478 issued and outstanding, respectively
                    
                    
                    1,245
                    
                    
                    
                    1,132Paid
      in capital
                    
                    
                    451,592
                    
                    
                    
                    397,080Accumulated
      other comprehensive income
                    
                    
                    4,860
                    
                    
                    
                    1,510Accumulated
      deficit
                    
                    
                    (341,505
                    )
                    
                    
                    (296,826
                    )Total
      Ener1, Inc. stockholders' equity
                    
                    
                    116,192
                    
                    
                    
                    102,896Noncontrolling
      interest
                    
                    
                    1,807
                    
                    
                    
                    3,517Total
      stockholders' equity
                    
                    
                    117,999
                    
                    
                    
                    106,413Total
      liabilities and stockholders' equity
                    
                    $
                    174,407
                    
                    
                    $
                    141,731





The
accompanying notes are an integral part of the Consolidated Financial
Statements.


- 43
-


ENER1, INC.


CONSOLIDATED STATEMENTS OF
OPERATIONS


(In thousands except per share
data)





Year Ended December 31,2009
                
                
                2008
                
                
                2007Net
      sales
                
                $
                34,800
                
                
                $
                6,848
                
                
                $
                280Cost
      of sales
                
                
                30,732
                
                
                
                4,661
                
                
                
                -Gross
      profit
                
                
                4,068
                
                
                
                2,187
                
                
                
                280Operating
      expenses:General
      and administrative
                
                
                17,653
                
                
                
                11,578
                
                
                
                8,265Research
      and development, net
                
                
                30,770
                
                
                
                22,902
                
                
                
                11,948Warrant
      modification expense
                
                
                -
                
                
                
                -
                
                
                
                583Depreciation
      and amortization
                
                
                5,081
                
                
                
                1,612
                
                
                
                530Total
      operating expenses
                
                
                53,504
                
                
                
                36,092
                
                
                
                21,326Loss
      from operations
                
                
                (49,436
                )
                
                
                (33,905
                )
                
                
                (21,046
                )Other
      income (expense):Interest
      expense
                
                
                (5,810
                )
                
                
                (21,778
                )
                
                
                (30,216
                )Interest
      income
                
                
                150
                
                
                
                480
                
                
                
                121Other
                
                
                294
                
                
                
                189
                
                
                
                (14
                )Gain
      (loss) on derivative liabilities
                
                
                3,527
                
                
                
                3,936
                
                
                
                (11,537
                )Loss
      on foreign currency transactions
                
                
                (211
                )
                
                
                (259
                )
                
                
                -Total
      other income (expense)
                
                
                (2,050
                )
                
                
                (17,432
                )
                
                
                (41,646
                )Loss
      before income taxes
                
                
                (51,486
                )
                
                
                (51,337
                )
                
                
                (62,692
                )Income
      tax expense (benefit)
                
                
                19
                
                
                
                (184
                )
                
                
                -Net
      loss
                
                
                (51,505
                )
                
                
                (51,153
                )
                
                
                (62,692
                )Net
      income (loss) attributable to noncontrolling interest
                
                
                (501
                )
                
                
                1,307
                
                
                
                1,246Net
      loss attributable to Ener1, Inc.
                
                
                (51,004
                )
                
                
                (52,460
                )
                
                
                (63,938
                )Preferred
      dividends
                
                
                -
                
                
                
                -
                
                
                
                (10,227
                )Net
      loss attributable to common shareholders
                
                $
                (51,004
                )
                
                $
                (52,460
                )
                
                $
                (74,165
                )Net
      loss per share attributable to Ener1, Inc.:Basic
                
                $
                (0.44
                )
                
                $
                (0.51
                )
                
                $
                (1.02
                )Diluted
                
                $
                (0.45
                )
                
                $
                (0.51
                )
                
                $
                (1.02
                )Weighted
      average shares outstanding for Ener1, Inc.:Basic
                
                
                116,655
                
                
                
                103,382
                
                
                
                72,922Diluted
                
                
                116,711
                
                
                
                103,382
                
                
                
                72,922





The
accompanying notes are an integral part of the Consolidated Financial
Statements.


- 44
-


ENER1, INC.


CONSOLIDATED STATEMENTSOF STOCKHOLDERS'EQUITY (DEFICIT)


FOR THE YEARS ENDED DECEMBER 31,
2007, 2008and 2009


(In thousandsexcept share data)


Accumulated
                  
                  
                  
                  
                  
                  
                  
                  
                  TotalOther
                  
                  
                  
                  
                  
                  
                  
                  
                  Stockholders'Common
      Stock
                  
                  
                  Paid
      in
                  
                  
                  Comprehensive
                  
                  
                  Accumulated
                  
                  
                  Noncontrolling
                  
                  
                  EquityShares
                  
                  
                  Amount
                  
                  
                  Capital
                  
                  
                  Income
                  
                  
                  Deficit
                  
                  
                  Interest
                  
                  
                  (Deficit)Balance
      December 31, 2006
                  
                  
                  59,623,153
                  
                  
                  $
                  596
                  
                  
                  $
                  141,085
                  
                  
                  $
                  -
                  
                  
                  $
                  (182,922
                  )
                  
                  $
                  -
                  
                  
                  $
                  (41,241
                  )Net
      loss (including preferred dividends payable to noncontrolling interest
      charged to paid in capital)
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (1,246
                  )
                  
                  
                  -
                  
                  
                  
                  (62,692
                  )
                  
                  
                  -
                  
                  
                  
                  (63,938
                  )Shares
      issued for exercise of options and warrants
                  
                  
                  5,943,293
                  
                  
                  
                  59
                  
                  
                  
                  9,847
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  9,906Shares
      sold for cash, net of costs
                  
                  
                  15,200,545
                  
                  
                  
                  152
                  
                  
                  
                  41,974
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  42,126Shares
      issued in connection with EnerStruct
                  
                  
                  533,333
                  
                  
                  
                  5
                  
                  
                  
                  928
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  933Shares
      issued for senior debenture conversions
                  
                  
                  4,304,006
                  
                  
                  
                  43
                  
                  
                  
                  22,167
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  22,210Shares
      issued for Series B preferred stock conversions
                  
                  
                  6,661,641
                  
                  
                  
                  68
                  
                  
                  
                  8,566
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  8,634Shares
      issued in payment of services
                  
                  
                  331,207
                  
                  
                  
                  3
                  
                  
                  
                  587
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  590Accretion
      of discount on preferred stock
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (783
                  )
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (783
                  )Warrants
      issued to UTE
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  18
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  18Warrants
      issued to related party in connection with debt placement
      services
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  3,236
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  3,236Warrant
      modification expense
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  583
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  583Reduction
      in derivative liability related to conversions of senior
      debentures
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  8,556
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  8,556Accrued
      dividends on preferred stock
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (1,066
                  )
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (1,066
                  )Deemed
      preferred stock dividends
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  8,378
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  8,378Stock-based
      compensation expense
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  1,365
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  1,365Balance
      December 31, 2007
                  
                  
                  92,597,178
                  
                  
                  $
                  926
                  
                  
                  $
                  244,195
                  
                  
                  $
                  -
                  
                  
                  $
                  (245,614
                  )
                  
                  $
                  -
                  
                  
                  $
                  (493
                  )Comprehensive
      loss:Net
      loss (including preferred dividends payable to noncontrolling interest
      charged to paid in capital)
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (1,248
                  )
                  
                  
                  -
                  
                  
                  
                  (51,212
                  )
                  
                  
                  59
                  
                  
                  
                  (52,401
                  )Translation
      adjustment
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  1,510
                  
                  
                  
                  -
                  
                  
                  
                  91
                  
                  
                  
                  1,601Total
      comprehensive income (loss)
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  150
                  
                  
                  
                  (50,800
                  )Shares
      issued for exercise of options and warrants
                  
                  
                  6,326,839
                  
                  
                  
                  63
                  
                  
                  
                  30,917
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  30,980Shares
      issued for debt origination costs
                  
                  
                  55,700
                  
                  
                  
                  1
                  
                  
                  
                  385
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  386Shares
      issued for payment of services
                  
                  
                  24,243
                  
                  
                  
                  -
                  
                  
                  
                  200
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  200Shares
      issued for conversions of senior debentures
                  
                  
                  2,257,741
                  
                  
                  
                  23
                  
                  
                  
                  12,068
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  12,091Shares
      issued for conversions of Ener1 Group convertible notes
                  
                  
                  3,955,634
                  
                  
                  
                  40
                  
                  
                  
                  13,805
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  13,845Shares
      issued for acquisition of Enertech
                  
                  
                  5,000,000
                  
                  
                  
                  50
                  
                  
                  
                  36,775
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  3,367
                  
                  
                  
                  40,192Warrants
      issued for acquisition of Enertech
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  8,781
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  8,781Shares
      issued for acquisition of remaining 19.5% interest in the EnerDel
      subsidiary
                  
                  
                  2,857,143
                  
                  
                  
                  29
                  
                  
                  
                  31,564
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  31,593Reduction
      in derivative liability related to conversion of senior
      debentures
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  6,208
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  6,208Intrinsic
      value of beneficial conversion feature for Ener1 Group convertible
      notes
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  3,608
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  3,608Warrants
      issued to related party in connection with inducement to convert
      debt
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  680
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  680Warrants
      issued to related party for commitment fee for revolving line of credit
      facility
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  5,088
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  5,088Redemption
      of EnerDel Series A Preferred Stock
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  1,070
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  1,070Stock-based
      compensation expense
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  2,984
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  2,984Balance
      December 31, 2008
                  
                  
                  113,074,478
                  
                  
                  $
                  1,132
                  
                  
                  $
                  397,080
                  
                  
                  $
                  1,510
                  
                  
                  $
                  (296,826
                  )
                  
                  $
                  3,517
                  
                  
                  $
                  106,413Comprehensive
      loss:Net
      loss
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (51,004
                  )
                  
                  
                  (501
                  )
                  
                  
                  (51,505
                  )Translation
      adjustment
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  3,264
                  
                  
                  
                  -
                  
                  
                  
                  107
                  
                  
                  
                  3,371Total
      comprehensive loss
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (394
                  )
                  
                  
                  (48,134
                  )Shares
      sold for cash, net of costs
                  
                  
                  9,187,278
                  
                  
                  
                  92
                  
                  
                  
                  58,352
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  58,444Shares
      issued for exercise of options and warrants
                  
                  
                  829,281
                  
                  
                  
                  8
                  
                  
                  
                  697
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  705Shares
      issued for additional noncontrolling interest
                  
                  
                  385,936
                  
                  
                  
                  4
                  
                  
                  
                  1,264
                  
                  
                  
                  86
                  
                  
                  
                  -
                  
                  
                  
                  (1,354
                  )
                  
                  
                  -Shares
      issued for debt origination costs
                  
                  
                  1,237
                  
                  
                  
                  -
                  
                  
                  
                  8
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  8Shares
      issued for investment in unconsolidated entity
                  
                  
                  896,986
                  
                  
                  
                  9
                  
                  
                  
                  5,821
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  5,830Cumulative
      effect of change in accounting principle
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (19,521
                  )
                  
                  
                  -
                  
                  
                  
                  6,325
                  
                  
                  
                  38
                  
                  
                  
                  (13,158
                  )Reduction
      in derivative liability
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  2,818
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  2,818Warrants
      issued to related party as borrowing fees under a line of credit
      agreement
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  1,703
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  1,703Early
      extinguishment of related party debt
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (3,553
                  )
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (3,553
                  )Other
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (18
                  )
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (18
                  )Beneficial
      conversion feature on related party debt
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  2,816
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  2,816Stock-based
      compensation expense
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  4,125
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  4,125Balance
      December 31, 2009
                  
                  
                  124,375,196
                  
                  
                  $
                  1,245
                  
                  
                  $
                  451,592
                  
                  
                  $
                  4,860
                  
                  
                  $
                  (341,505
                  )
                  
                  $
                  1,807
                  
                  
                  $
                  117,999





The
accompanying notes are an integral part of the Consolidated Financial
Statements.


- 45
-


ENER1, INC.


CONSOLIDATED STATEMENTS OF CASH
FLOWS


(In thousands)


Year
      Ended December 31,2009
                
                
                2008
                
                
                2007Operating
      activities:Net
      loss
                
                $
                (51,505
                )
                
                $
                (51,153
                )
                
                $
                (62,692
                )Adjustments
      to reconcile net loss to cash used in operating
activities:(Gain)
      loss on derivative liabilities
                
                
                (3,527
                )
                
                
                (3,936
                )
                
                
                11,537Non-cash
      accretion of discounts on debentures and notes
                
                
                987
                
                
                
                17,728
                
                
                
                21,543Non-cash
      interest expense related to financing costs
                
                
                2,946
                
                
                
                2,398
                
                
                
                1,675Non-cash
      interest expense on related party debt
                
                
                -
                
                
                
                279
                
                
                
                1,237Non-cash
      inducement for debt conversions and equity investments
                
                
                -
                
                
                
                883
                
                
                
                583Depreciation
      and amortization
                
                
                7,668
                
                
                
                2,020
                
                
                
                530Stock-based
      compensation expense
                
                
                4,125
                
                
                
                2,983
                
                
                
                1,684Other
      non-cash expenses
                
                
                1,391
                
                
                
                1,137
                
                
                
                983Changes
      in certain operating assets and liabilities:Accounts
      receivable
                
                
                1,175
                
                
                
                (1,222
                )
                
                
                50Inventories
                
                
                (310
                )
                
                
                (1,050
                )
                
                
                -Accounts
      payable and accrued expenses
                
                
                (1,721
                )
                
                
                5,405
                
                
                
                (1,710
                )Interest
      payable
                
                
                -
                
                
                
                -
                
                
                
                (1,300
                )Changes
      in current assets, liabilities and other, net
                
                
                (1,915
                )
                
                
                407
                
                
                
                (812
                )Net
      cash used in operating activities
                
                
                (40,686
                )
                
                
                (24,121
                )
                
                
                (26,692
                )Investing
      activities:Capital
      expenditures and equipment deposits
                
                
                (14,590
                )
                
                
                (14,115
                )
                
                
                (569
                )Investment
      in unconsolidated entity
                
                
                (13,347
                )
                
                
                -
                
                
                
                -Cash
      paid for acquisition
                
                
                -
                
                
                
                (600
                )
                
                
                -Cash
      received in acquisition
                
                
                -
                
                
                
                5,028
                
                
                
                -Direct
      costs for acquisitions
                
                
                -
                
                
                
                (1,121
                )
                
                
                -Restricted
      cash
                
                
                (1,240
                )
                
                
                (2,976
                )
                
                
                -Other
                
                
                65
                
                
                
                9
                
                
                
                74Net
      cash used in investing activities
                
                
                (29,112
                )
                
                
                (13,775
                )
                
                
                (495
                )Financing
      activities:Proceeds
      from sale of stock, net of costs
                
                
                58,444
                
                
                
                -
                
                
                
                42,126Proceeds
      from borrowings, related party
                
                
                12,086
                
                
                
                -
                
                
                
                -Proceeds
      from borrowings
                
                
                5,942
                
                
                
                1,802
                
                
                
                5,177Proceeds
      from exercise of options and warrants
                
                
                705
                
                
                
                30,980
                
                
                
                5,206Redemption
      of EnerDel Series A Preferred Stock
                
                
                -
                
                
                
                (8,000
                )
                
                
                -Repayment
      of borrowings, related party
                
                
                (336
                )
                
                
                (315
                )
                
                
                (787
                )Repayment
      of borrowings and capital leases
                
                
                (4,588
                )
                
                
                (355
                )
                
                
                -Other
                
                
                777
                
                
                
                -
                
                
                
                -Net
      cash provided by financing activities
                
                
                73,030
                
                
                
                24,112
                
                
                
                51,722Effect
      of exchange rates on cash and cash equivalents
                
                
                (147
                )
                
                
                187
                
                
                
                -Net
      increase (decrease) in cash and cash equivalents
                
                
                3,085
                
                
                
                (13,597
                )
                
                
                24,535Cash
      and cash equivalents - beginning balance
                
                
                11,229
                
                
                
                24,826
                
                
                
                291Cash
      and cash equivalents - ending balance
                
                $
                14,314
                
                
                $
                11,229
                
                
                $
                24,826Cash
      paid during the year for:Interest
                
                $
                973
                
                
                $
                421
                
                
                $
                7,062Income
      taxes
                
                
                127
                
                
                
                2
                
                
                
                -Supplemental
      Disclosure of Non-cash Investing and Financing ActivitiesNon-cash
      investing and financing activities:Cumulative
      effect of change in accounting principle on accumulated
      deficit
                
                $
                6,325
                
                
                $
                -
                
                
                $
                -Cumulative
      effect of change in accounting principle on paid in
capital
                
                
                (19,521
                )
                
                
                -
                
                
                
                -Shares
      issued for conversion of senior debentures
                
                
                -
                
                
                
                11,715
                
                
                
                22,210Shares
      issued for conversion of senior debentures interest
                
                
                -
                
                
                
                174
                
                
                
                -Reduction
      in derivative liability
                
                
                2,818
                
                
                
                6,208
                
                
                
                8,556Shares
      issued for conversion of convertible notes
                
                
                -
                
                
                
                11,960
                
                
                
                -Shares
      issued for conversion of convertible notes interest
                
                
                -
                
                
                
                1,885
                
                
                
                -Beneficial
      conversion value in connection with related party debt
                
                
                2,816
                
                
                
                3,608
                
                
                
                -Early
      extinguishment of related party debt
                
                
                (3,553
                )
                
                
                -
                
                
                
                -Warrants
      issued in connection with advances of related party debt
                
                
                1,703
                
                
                
                -
                
                
                
                -Warrants
      issued in connection with the commitment of related party
    debt
                
                
                -
                
                
                
                5,088
                
                
                
                3,236Shares
      issued for purchase of equity investment
                
                
                5,830
                
                
                
                -
                
                
                
                -Shares
      issued for acquisitions
                
                
                1,354
                
                
                
                59,254
                
                
                
                -Warrants
      issued for acquisitions
                
                
                -
                
                
                
                8,781
                
                
                
                -Warrants
      modified for acquisitions
                
                
                -
                
                
                
                195
                
                
                
                -Transaction
      costs related to acquisitions
                
                
                -
                
                
                
                655
                
                
                
                -Reduction
      in accounts payable with acquisition of noncontrolling
      interest
                
                
                -
                
                
                
                163
                
                
                
                -Short-term
      borrowings pursuant to equipment purchases
                
                
                2,773
                
                
                
                -
                
                
                
                -Borrowings
      pursuant to capital lease obligations
                
                
                472
                
                
                
                7,209
                
                
                
                -Shares
      issued for capital lease obligations
                
                
                8
                
                
                
                385
                
                
                
                -Redemption
      of EnerDel Series A Preferred Stock
                
                
                -
                
                
                
                1,071
                
                
                
                -Shares
      issued for Series B preferred stock conversions
                
                
                -
                
                
                
                -
                
                
                
                8,634Accrued
      dividends on preferred stock
                
                
                -
                
                
                
                -
                
                
                
                (1,066
                )Deemed
      preferred stock dividends
                
                
                -
                
                
                
                -
                
                
                
                8,378Accretion
      of discounts on preferred stock
                
                
                -
                
                
                
                -
                
                
                
                (783
                )Cashless
      exercise of options and warrants
                
                
                -
                
                
                
                -
                
                
                
                1Notes
      payable issued for settlement of leasehold
                
                
                -
                
                
                
                -
                
                
                
                509Warrants
      issued for settlement of leasehold
                
                
                -
                
                
                
                -
                
                
                
                18Notes
      payable issued for purchased research and development
                
                
                -
                
                
                
                -
                
                
                
                370Reduction
      of accounts payable for stock and notes payable
                
                
                -
                
                
                
                -
                
                
                
                429Reduction
      of advances for exercise of warrants
                
                
                -
                
                
                
                -
                
                
                
                4,700





The
accompanying notes are an integral part of the Consolidated Financial
Statements.


- 46
-




ENER1,
INC.


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS





Note
1 – Nature of the Business





Ener1,
Inc. (“Ener1,” “the Company,” “the Registrant,” “we,” “our” or “us”) operates
primarily in the business of designing, developing and manufacturing
high-performance, rechargeable lithium-ion batteries and battery systems for
energy storage.  End markets include transportation, stationary power,
military applications and small cell markets.  In the transportation
markets, we are developing systems to power the next generation of hybrid,
plug-in hybrid and electric vehicles (HEVs, PHEVs and EVs).  This
technology is also being developed for other transportation markets including
buses and trucks as well as alternative transportation vehicles.  Our
Enertech subsidiary also specializes in small cell technology and manufactures
electrodes for other battery manufacturers, commercial battery packs, prismatic
cells, lithium polymer batteries, and large format cells for automotive
applications. We also conduct research on and develop fuel cells and nano
coating processes.





Ener1, a
Florida corporation, was founded in 1985 and is headquartered in New York, New
York.  In January 2002, Ener1 Group, Inc. (“Ener1 Group”) acquired a
majority interest in Ener1 and, as of December 31, 2009, owns approximately 52%
of the outstanding common stock of Ener1.





Ener1 is
the parent company to its wholly-owned subsidiaries; (i) EnerDel, Inc.
(“EnerDel”) a Delaware corporation, (ii) EnerFuel, Inc. (“EnerFuel”) a Delaware
corporation, (iii) NanoEner, Inc. (“NanoEner”) a Florida corporation, (iv)
EnerDel Japan, Inc. (“EnerDel Japan”), a Japanese corporation, (v) Ener1 Battery
Company (“Battery Company”) a Florida corporation, and (vi) Ener1 Europe, S.A.S.
(“Ener1 Europe”) a French corporation.  Ener1 currently holds an 89%
interest in Enertech International, Inc. (“Enertech”), a Korean
corporation.  Enertech has a wholly-owned subsidiary, Emerging Power,
Inc., a New Jersey corporation.





·
            EnerDel, located in
      Indianapolis, Indiana, develops lithium-ion batteries for automotive,
      military and other industrial uses.  EnerDel was formed in
      October 2004 when Ener1 combined its lithium-ion battery assets with
      assets of Delphi Automotive Systems, LLC and Delphi Technologies, Inc.
      (collectively referred to herein as “Delphi”) into a newly organized
      corporation, in which Ener1 received an 80.5% ownership interest and
      Delphi received the remaining 19.5% ownership interest.  In
      August 2008, Ener1 acquired the remaining 19.5% interest in
      EnerDel.  See further discussion in Note 3 –
      Acquisitions.





·
            Enertechmanufactures
      lithium-ion battery cells with facilities and equipment located in
      Chungcheongbuk-do, South Korea and Hackensack, New
      Jersey.  Enertech was incorporated in March 2001 under the laws
      of the Republic of Korea.  In October 2008, Ener1 acquired
      approximately 83% of the fully diluted capital stock of Enertech and in
      January 2009 purchased additional ownership interest increasing our
      ownership, on a fully diluted basis, from 83% to 89%.  See
      further discussion in Note 3 –
Acquisitions.





·
            EnerFuel, located in
      West Palm Beach, Florida develops fuel cell products and provides fuel
      cell related technical services.  EnerFuel was formed in October
      2004.





·
            NanoEner, located in
      Fort Lauderdale, Florida is building prototype equipment that utilizes
      technology for depositing materials onto battery electrodes as part of the
      battery cell manufacturing process.  NanoEner was formed in
      April 2004.





·
            EnerDel Japan was formed
      in September 2007 after the termination of the joint venture with
      EnerStruct, Inc., (“EnerStruct”) to continue Ener1’s Japanese operations
      in pursuit of technology development and marketing opportunities for
      lithium-ion batteries in Japan.  EnerStruct, a Japanese joint
      venture, was formed in August 2003 and terminated in September 2007 by the
      owners of the joint venture.





·
            Ener1 Battery Company
      was formed in March 2001 and currently does not have any
      operations.  Certain real estate and equipment assets used by
      Ener1 are held by the Battery
Company.





·
            Ener1 Europe, S.A.S. was
      formed in March 2010 to focus on business development activities and
      customer programs in Europe.  Ener1 Europe is headquartered in
      Paris, France.




- 47
-





ENER1,
INC.


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS





Note
2 – Significant Accounting Policies





Accounting
Policies


The
financial statements and accompanying notes are prepared in accordance with
accounting principles generally accepted in the United States of
America.





Principles
of Consolidation


Our
consolidated financial statements include the accounts of all wholly-owned and
majority-owned domestic and foreign subsidiaries.  Amounts pertaining
to the noncontrolling interests held by third parties in the operating results
and financial position of our majority-owned subsidiaries are reported as a
component of stockholders’ equity separate from Ener1’s
equity.  Intercompany transactions and balances are eliminated in
consolidation.





Equity
investments in which we exercise significant influence but do not exercise
control are accounted for using the equity method.  Investments in
which we are not able to exercise significant influence over the investee and
which do not have readily determinable fair values are accounted for under the
cost method.  Investments in which we exercise significant influence
but do not exercise control and the investment is not deemed to be
“in-substance” common stock are accounted for using the cost
method.





Certain
amounts for 2008 and 2007 have been reclassified to conform to the 2009
presentation.  All share amounts and per share amounts have been
adjusted for the impact of a one-for-seven reverse stock split on April 24,
2008.





Foreign
Currencies


Subsidiaries
located outside the United States of America use the local currency as the
functional currency. We translate assets and liabilities denominated in foreign
currencies using exchange rates in effect at the balance sheet date and equity
accounts at the historical exchange rates.  We translate revenues and
expenses using the average exchange rates during the
year.  Translation adjustments resulting from this process are shown
as a separate component of accumulated other comprehensive income within
stockholders’ equity.  Foreign currency transaction gains and losses
are reported in other income (expense) in the statements of
operations.





Use
of Estimates


Preparation
of financial statements in accordance with accounting principles generally
accepted in the United States of America (US GAAP) requires management to make
estimates and assumptions that may affect reported amounts presented and
disclosed in our consolidated financial statements.  Significant
estimates and assumptions in these consolidated financial statements require the
exercise of judgment and are used for, but not limited to, revenue recognition
and related allowances, derivative liabilities, inventories, impairments of
long-lived assets including intangible assets, impairments of goodwill, income
taxes including the valuation allowance for deferred tax assets, valuation of
long-lived assets, research and development, contingencies and litigation, as
well as stock-based payments, warrants, valuation of beneficial conversion
feature, if any, on convertible securities and other financing matters. Due to
the inherent uncertainty involved in making these estimates, actual results
reported in future periods may be different from these estimates.





Cash
and Cash Equivalents


Ener1
considers liquid instruments purchased with original maturity of three months or
less to be cash and cash equivalents.  The carrying amounts reflected
in our consolidated balance sheets for cash and cash equivalents approximate
fair value due to the short-term maturity of these investments.





Restricted
Cash


Restricted
cash represents amounts maintained with foreign banks that are (i) pledged to
guarantee performance pursuant to borrowings or (ii) provisional attachments
from Korean courts in connection with alleged third party claims.




- 48
-





ENER1,
INC.


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS





Accounts
Receivable and Allowance for Doubtful Accounts


Trade
accounts receivable are recorded at the invoice amount, which approximates fair
value.  The allowance for doubtful accounts reflects our best estimate
of probable credit losses inherent in the accounts receivable.  We
determine the allowance based on historical collection experience, aging status
and financial condition of specific customers.  We write off account
balances against the allowance in the period we determine it is probable that
the receivable balance is not collectible.  Activity in the allowance
for doubtful accounts was as follows (in thousands):





December 31,2009
                  
                  
                  2008Balance,
      beginning of year
                  
                  $
                  915
                  
                  
                  $
                  340Provision
      for bad debt expense
                  
                  
                  36
                  
                  
                  
                  604Reversal
      of allowance
                  
                  
                  (112
                  )
                  
                  
                  (28
                  )Other
                  
                  
                  26
                  
                  
                  
                  (1
                  )Balance,
      end of year
                  
                  $
                  865
                  
                  
                  $
                  915





The
reversal of allowance in 2009 represents the collection of an account that was
fully allowanced during 2008.  One customer accounts for approximately
50% and 59% of the allowance at December 31, 2009 and 2008,
respectively.  Based on the information available, management believes
the allowance for doubtful accounts at December 31, 2009 is adequate. However,
actual write-offs may exceed the recorded allowance.





Inventories


Inventories
are stated at the lower of cost or market, with cost determined under the
first-in, first-out method, except for inventories at foreign subsidiaries which
are determined using the weighted average method.  Included in
inventories are raw materials and finished goods used in the production of
prototypes, which are charged to research and development expense when
consumed.  The following table presents the components of inventories
(in thousands):





December 31,2009
                    
                    
                    2008Raw
      materials and supplies
                    
                    $
                    5,090
                    
                    
                    $
                    4,750Work
      in process
                    
                    
                    1,164
                    
                    
                    
                    783Finished
      goods
                    
                    
                    5,457
                    
                    
                    
                    5,15211,711
                    
                    
                    
                    10,685less:
      provision for obsolescence
                    
                    
                    (1,296
                    )
                    
                    
                    (483
                    )$
                    10,415
                    
                    
                    $
                    10,202





The
Company provides for obsolete or slow-moving inventory based on management’s
analysis of inventory levels and future sales forecasts at the end of each
accounting period.





Property
and Equipment


Property
and equipment is recorded at cost and depreciated using the straight-line method
over the useful lives of the assets, based on the following
estimates:





Buildings
      and improvements
                
                30 -
      39 yearsLeasehold
      improvements
                
                Shorter
      of estimated useful life or term of leaseMachinery
      and equipment
                
                5 -
      10 yearsOffice
      equipment, furniture and other
                
                3 -
      7 yearsVehicles
                
                4 -
      7 years





Expenditures
for major renewals and betterments that extend the useful lives of property and
equipment are capitalized. Expenditures for maintenance and repairs are charged
to expense as incurred.




- 49
-





ENER1,
INC.


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS





At the
inception of a lease, the agreement is evaluated to determine whether the lease
will be accounted for as an operating or capital lease. The term of the lease
used for this evaluation includes renewal option periods only in instances in
which the exercise of the renewal option can be reasonably assured or failure to
exercise such option would result in an economic penalty.





Deferred
Financing Costs


In
December 2008, as a commitment fee pursuant to a $30.0 million Line of Credit
Agreement (the “LOC Agreement”), Ener1 issued warrants to Ener1 Group to
purchase up to 1,250,000 shares of Ener1 common stock and recorded the fair
value of approximately $5.1 million as deferred financing costs.  On
August 26, 2009, Ener1 entered into an Amended and Restated Line of Credit
Agreement (the “A&R LOC Agreement”) with Ener1 Group and Bzinfin, S.A.
(“Bzinfin”), the owner of a majority of the common stock of Ener1 Group, whereby
Bzinfin, the new lender, extended the maturity date of the loans, among other
amendments, to July 1, 2010.





The
A&R LOC Agreement is with a different lender than the original LOC
Agreement.  As a result, the remaining unamortized balance in deferred
financing costs, as of August 26, 2009, of approximately $2.9 million was
charged to paid in capital as early extinguishment of debt.





In
connection with the A&R LOC Agreement, Ener1 issued to Bzinfin warrants to
purchase up to 125,000 shares of Ener1 common stock at an exercise price of
$8.25 per share.  The warrants are immediately exercisable and expire
three years after the date of grant.  We used a Black-Scholes pricing
model to value the warrants and the fair value of $445,000 has been recorded as
deferred financing costs.  These costs are amortized to interest
expense over the term of the A&R LOC Agreement and totaled $177,000 in 2009
and the remaining $267,000 will be expensed during 2010.





See Note
19, Related Party Transactions for additional information regarding the A&R
LOC Agreement.





Goodwill,
Intangible and Other Long-Lived Assets


Goodwill
represents the difference, if any, between the purchase price paid for an
acquisition and the fair value of the net assets acquired in a business
combination.  Goodwill is tested for impairment at the reporting unit
level (operating segment or one level below an operating segment) annually,
unless an event occurs that indicates a potential impairment
exists.





Intangible
assets consist of patents, technology and customer relationships acquired during
2008 and are amortized using the straight-line method over their estimated
period of benefit, ranging from two to 10 years.  We evaluate the
recoverability of intangible assets periodically when indicators of impairment,
such as reductions in demand or significant economic slowdowns in industry are
present.  All of our intangible assets are subject to
amortization.  No impairments of intangible assets have been
identified during any of the periods presented.





Our
long-lived assets are reviewed for possible impairment whenever events or
circumstances indicate the carrying value of the asset may not be
recoverable.  We evaluate the recoverability of the carrying value of
our long-lived assets based on estimated undiscounted cash flows to be generated
from such assets.  If the undiscounted cash flow indicates impairment
occurred then the carrying value of the assets evaluated is written down to the
estimated fair value of those assets.





Assumptions
and estimates are used to develop these cash flow projections.  A
significant change in these estimates or assumptions may affect the carrying
value of long-lived assets and could result in an impairment
charge.




- 50
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ENER1,
INC.


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS





Other
Long-Term Payables


The
components of other long-term payables were as follows (in
thousands):





December 31,2009
                    
                    
                    2008Refundable
      government grants (Enertech)
                    
                    $
                    274
                    
                    
                    $
                    161Severance
      benefits (Enertech)
                    
                    $
                    1,007
                    
                    
                    
                    932$
                    1,281
                    
                    
                    $
                    1,093





Certain
grants received from the Korean government are refundable, depending on the
successful development and commercialization of the technology or products, and
a company receiving such government grant is required to refund approximately
20% of the grants received.





In
accordance with the laws of the Republic of Korea, after one year of service,
employees and directors of Enertech are entitled to receive a lump-sum payment
upon termination of their employment with Enertech based on the length of
service and rate of pay at the time of termination.  The annual
severance benefit charged to expense is calculated based on the net change in
the accrued severance benefit payable at the balance sheet date.





Derivative
Instruments


Our
foreign subsidiary has derivative instruments for managing exposure to foreign
currency primarily to hedge the foreign exchange risk arising from accounts
receivable from domestic subsidiaries.  These derivative instruments
are measured at fair value and gains or losses from changes in the fair value
are recognized in earnings, as they are not designated as hedges.





Certain
freestanding warrants that contain down round provisions were issued during 2004
and 2005.  Previously, these warrants were classified in
equity.  After evaluating the application of newly issued US GAAP,
these warrants were no longer deemed to be indexed to Ener1’s common stock and
on January 1, 2009 were reclassified as a derivative liability.  Any
time we issue securities that are deemed to be dilutive to the warrants
containing down round provisions, the number of shares of Ener1 stock required
to be issued upon the exercise of these warrants will increase.





Convertible
bonds, originally issued in January 2008, which have a strike price denominated
in a foreign currency, were acquired in connection with the Enertech acquisition
during the fourth quarter of 2008.  After evaluating the application
of newly issued US GAAP, the conversion feature was bifurcated and recorded as a
derivative liability on January 1, 2009.  As foreign currency rates
fluctuate, the number of shares of Enertech stock to be issued upon conversion
could increase.





We have
recorded the fair value of the warrants and convertible bonds that are
classified as derivative liabilities in our balance sheet at fair value with
changes in the value of these derivatives reflected in the consolidated
statements of operations as gain or loss on derivative
liabilities.  These derivative instruments are not designated as
hedging instruments.





Fair
Value of Financial Instruments


The
carrying value of short-term financial instruments, including cash and cash
equivalents, accounts receivable, inventories, accounts payable and accrued
expenses, short-term borrowings and capital lease obligations approximate fair
value due to the relatively short period to maturity for these
instruments.  The long-term borrowings approximate fair value since
the related rates of interest approximates current market rates.





Concentrations
of credit risk


Financial
instruments that potentially expose Ener1 to concentrations of credit risk
consist primarily of cash and cash equivalents, restricted cash and accounts
receivable.  Ener1 continually monitors the financial institutions
that hold the cash and cash equivalents.   The emphasis is
primarily on safety of principal and secondarily on maximizing yield on those
funds.  Diversifying our cash and cash equivalents among
counterparties minimizes exposure to any one of these entities.




- 51
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ENER1,
INC.
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


Ener1
maintains cash balances at several banks.  Accounts at domestic
institutions are insured by the Federal Deposit Insurance Corporation (FDIC) up
to $250,000 and the Temporary Liquidity Guarantee Program, as instituted by the
FDIC and the Temporary Guarantee Program for Money Market Funds as instituted by
the United States Treasury.  Accounts at foreign institutions are
insured by the Korean Federal Deposit Insurance Corporation (KFDIC) up to
approximately $50,000.  From time to time we may maintain balances
with a financial institution in excess of the insured amounts.





Primarily
with the acquisition of Enertech in late 2008, customers who account for 10% or
more of net sales were as follows (in thousands):





Sales
      for the years ended December 31,2009
                        
                        
                        
                        
                        
                        2008
                        
                        
                        
                        
                        
                        2007Symbol
      Technologies, Inc. (Motorola)
                        
                        $
                        6,794
                        
                        
                        
                        20
                        %
                        
                        $
                        1,682
                        
                        
                        
                        25
                        %
                        
                        
                        N/A
                        
                        
                        
                        0
                        %Think
      Global
                        
                        
                        125
                        
                        
                        
                        0
                        %
                        
                        
                        941
                        
                        
                        
                        14
                        %
                        
                        
                        76
                        
                        
                        
                        27
                        %





Revenue
Recognition


Revenue
is recognized when persuasive evidence of a sales arrangement exists, the price
is fixed or determinable, title and risk of loss are transferred, collectibility
is reasonably assured, product returns are reasonably estimable and there are no
remaining significant obligations or customer acceptance
requirements.  Revenue from product sales is recognized at the time of
shipment when title transfers and risk of loss occurs.  Ener1 offers
customers a right of return and reserves for such returns are estimated using
historical information.





During
the year ended December 31, 2009, our net sales consist primarily of battery
related sales from our Enertech operations and a small amount of battery
prototype sales from our EnerDel subsidiary.  At Enertech, sales are
recorded when title passes to the customer which is at the delivery point for
domestic sales and at the receipt point of bill of lading for export
sales.  Currently, Enertech does not provide discounts, rebates,
product guarantees or warranties.  We expect, in the future, that
EnerDel will be providing a limited warranty on sales of battery packs for
electric and hybrid electric vehicles.  The terms of such warranties
and other post-shipment obligations may be negotiated on a customer by customer
basis and we will establish the appropriate policies and accounting treatment
based on such negotiations and final agreements.  We also expect that
our customers will test a significant number of battery packs prior to
acceptance.





Proceeds
from cost-sharing arrangements with federal government agencies and grants from
foreign government agencies are generally recognized as a reduction of research
and development expenses.  Revenue in 2008 from cost-sharing
arrangements with commercial entities is generally recognized using the
percentage of completion method.  To date, these cost-sharing
arrangements with commercial entities have been for the development and sale of
a customer specified prototype and the costs incurred are classified as research
and development expenses.





We expect
to receive proceeds from grants with federal government agencies, during 2010,
related to assets which we anticipate being recorded as deferred revenue and
recognized as income over the periods and in proportions in which depreciation
on the assets is charged.





Cost
of Sales


Cost of
sales includes manufacturing and distribution costs for products sold,
depreciation, inventory valuation adjustments and costs associated with the
delivery of products.  Depreciation expense included in cost of sales
for the years ended December 31, 2009, 2008 and 2007 was approximately $2.6
million, $0.4 million and $0, respectively.




- 52
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ENER1,
INC.


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS





Research
and Development


Research
and development expenses include payroll, employee benefits, stock-based
compensation and other direct and indirect costs associated with product
development.  Research and development expenses also include the cost
of equipment and other assets used in research and development activities,
including a reasonable allocation of overhead expenses associated with various
research and development programs.





Research
and development costs are expensed as incurred, unless they meet generally
accepted accounting criteria for deferral and amortization.  Ener1
reassesses whether it has met the relevant criteria for deferral and
amortization at each reporting date.  To date, no research and
development costs have been deferred.





Research
and developments costs are presented net of proceeds received from research and
development contracts with governmental agencies in the amount of approximately
$3.7 million, $3.8 million and $0.9 million, for the years ended December 31,
2009, 2008 and 2007, respectively.





Stock
Based Compensation


Ener1
accounts for stock based compensation issued to employees and non-employees in
accordance with US GAAP.  Under these principles, stock based
compensation cost is measured at the grant date based on the fair value of the
award and is recognized as expense over the requisite service period, usually
three years, using the straight-line method.





Income
Taxes


Income
tax expense includes domestic and foreign income taxes.  Certain
income and expenses are not reported in tax returns and financial statements in
the same year. The tax effect of such temporary differences is reported as
deferred income taxes.  We also recognized future tax benefits
associated with tax loss and credit carryforwards as deferred tax
assets.  We establish a valuation allowance when, in the opinion of
management, it is more likely than not that the deferred tax assets will not be
realized.  Realization of the future tax benefit related to the
deferred tax asset is dependent on many factors, including our ability to
generate taxable income within the period during which the temporary differences
reverse, the outlook for the economic environment in which we operate and the
overall future industry outlook.





We
performed analysis of uncertain tax positions and recorded approximately $0.3
million as a provision for estimated liabilities as of December 31, 2009 and
2008.





Subsequent
Events


In
accordance with applicable accounting standards for the disclosure of events
that occur after the balance sheet date but before the financial statements are
issued, we have evaluated all events or transactions that occurred after
December 31, 2009 up through the date we issued these financial
statements.





Recently
Adopted Accounting Standards





Effective
January 1, 2009, we adopted new accounting guidance for determining whether an
instrument or an embedded feature is indexed to our own stock.  The
new guidance has affected the accounting for (i) certain freestanding warrants
that contain exercise price adjustment features (“down round provisions”) and
(ii) convertible bonds issued by our foreign subsidiary with a strike price
denominated in a foreign currency.  See Note 12, Derivative
Instruments and Fair Value of Financial Instruments for additional information
regarding the impact on our financial statements from the adoption of this
guidance.




- 53
-





ENER1,
INC.


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS





We
adopted new accounting guidance on disclosures about derivative instruments and
hedging activities on January 1, 2009.  The new guidance impacts
disclosures only and requires additional qualitative and quantitative
information on the use of derivatives and their impact on an entity’s financial
statements.  See Note 12, Derivative Instruments and Fair Value of
Financial Instruments regarding our derivative instruments.





On
January 1, 2009, we adopted new accounting guidance on business
combinations.  The new guidance requires an acquiring company to
measure all assets acquired and liabilities assumed, including contingent
considerations and all contractual contingencies, at fair value as of the
acquisition date. In addition, an acquiring company is required to capitalize
in-process research and development and either amortize it over the life of the
product, or write it off if the project is abandoned or impaired.  The
adoption of this guidance did not have a material impact on our financial
statements.





On
January 1, 2009, we adopted new accounting guidance on fair value
measurements.  This new guidance defines fair value, establishes a
framework for measuring fair value in generally accepted accounting principles
and expands disclosures about fair value measurements. See Note 12, Derivative
Instruments and Fair Value of Financial Instruments for additional information
regarding our financial assets and liabilities measured at fair value on a
recurring basis.





On
January 1, 2009, we adopted new accounting guidance that requires the issuer of
certain convertible debt instruments that may be settled in cash on conversion
to separately account for the debt and equity components in a manner that
reflects the issuer’s non-convertible debt borrowing rate.  The
adoption of this standard did not have a material impact on the financial
statements. We continue to examine our convertible debt instruments for
applicability under this guidance.





In June
2009, we adopted new guidance which requires disclosures about fair value of
financial instruments in interim as well as in annual financial statements. See
Note 12, Derivative Instruments and Fair Value of Financial Instruments for this
information.





In
September 2009, we adopted the Financial Accounting Standards Board (“FASB”)
Accounting Standards Codification (the “Codification”), as the single source of
authoritative nongovernmental Generally Accepted Accounting Principles, in the
United States of America.  The adoption of this standard did not have
a material impact on our financial statements.





Recently
Issued Accounting Standards


In June
2009, the FASB issued new accounting guidance which amends previously issued
accounting guidance for the consolidation of variable interest entities to
require an enterprise to determine whether its variable interest gives it a
controlling financial interest in a variable interest entity.  This
new standard has broad implications and may affect how we account for the
consolidation of equity method investments and other agreements and purchase
arrangements.  Under this revised guidance, more entities may meet the
definition of a variable interest entity.  We have evaluated all
entities that fall within the scope of this amended guidance to determine
whether we may be required to consolidate additional entities on January 1,
2010, which is the effective date and determined that the adoption of this
standard will not have a material impact on our financial
statements.




- 54
-





ENER1,
INC.


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS





Note
3 – Acquisitions





Enertech
International, Inc.


We
acquired Enertech on October 24, 2008 and as consideration in the acquisition,
we paid $0.6 million in cash and issued 5,000,000 shares of Ener1 common stock
and warrants to purchase 2,560,000 shares of Ener1 common stock at an exercise
price of $7.50 per share. The warrants are immediately exercisable, contain a
cashless exercise provision and expire in October 2010.  In addition,
we incurred $1.2 million of third party transaction costs for total purchase
consideration of $47.4 million.   The following table presents
the components of the purchase consideration (in thousands):





Cash
                    
                    $
                    600Common
      stock
                    
                    
                    36,825Warrants
      to purchase common stock
                    
                    
                    8,781Transaction
      costs
                    
                    
                    1,202Total
      Estimated Purchase Consideration
                    
                    $
                    47,408





The
purchase price attributable to the 5,000,000 shares of Ener1 common stock was
estimated by management based on the average closing price of Ener1’s common
stock, as reported on the American Stock Exchange, for the five day period
before and after October 16, 2008, the date that the terms of the acquisition
were announced.  Based on the average closing price of our common
stock of $7.36 per share, approximately $36.8 million of the purchase price was
attributable to the common stock.





The
purchase price attributable to the warrants to purchase up to 2,560,000 shares
of Ener1 common stock was estimated by management on the date of grant using a
Black-Scholes option valuation model.  Based on the fair value of the
warrants of $3.43 per share, approximately $8.7 million of the purchase price
was attributable to the warrants.  The fair value of the warrants was
estimated with the following key assumptions:





Grant
      date
                                
                                October
      24, 2008Stock
      Price
                                
                                $
                                7.00
      per shareStrike
      Price
                                
                                $
                                7.50
      per shareExpiration
      date
                                
                                October
      24, 2010Risk
      free interest rate
                                
                                
                                1.57
                                %Expected
      volatility
                                
                                
                                95.24
                                %Expected
      dividend yield
                                
                                
                                0.00
                                %





On
January 7, 2009, Ener1 filed a registration statement to register the resale of
the shares issued in the acquisition, as well as the shares issuable upon the
exercise of the warrants and the registration statement became effective on
February 5, 2009.





In
January 2009, we purchased an additional ownership interest in Enertech by
issuing 385,936 shares of Ener1 common stock valued at approximately $2.6
million based on the closing stock price of $6.73 per share on the effective
date of the closing.   As a result, the ownership interest in
Enertech increased from 83% to 89%, on a fully diluted basis and has been
accounted for as an equity transaction.  See Note 18, Noncontrolling
Interest.





The
following unaudited pro forma condensed combined financial information is based
on the historical financial statements of Ener1 and Enertech after giving effect
to the acquisition of Enertech. The unaudited pro forma condensed combined
statements of operations for the twelve months ended December 31, 2008 is
presented as if the acquisition had taken place on January 1, 2008 by combining
the historical results of Ener1 and Enertech.




- 55
-





ENER1,
INC.


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS





The
unaudited pro forma condensed combined results were as follows:





Ener1,
Inc.


Unaudited
Pro Forma Condensed Combined Statements of Operations


For
the Year Ended December 31, 2008


(In
thousands, except share data)





Historical
                  Ener1 Year
                  Ended
                  December 31,
                  2008
                
                
                Historical
                  Enertech Ten
                  Months Ended
                  October 31,
                  2008
                
                
                Pro Forma
                  Adjustments
                
                
                Pro Forma
                  Condensed
                  CombinedNet
      sales
                
                $
                6,848
                
                
                $
                35,600
                
                
                $
                (2,721
                )(a)
                
                $
                39,727Cost
      of sales
                
                
                4,661
                
                
                
                30,912
                
                
                
                
                
                
                
                35,573Gross
      profit
                
                
                2,187
                
                
                
                4,688
                
                
                
                (2,721
                )
                
                
                4,154Operating
      expense
                
                
                36,092
                
                
                
                4,633
                
                
                
                (2,191
                )(a),(b)
                
                
                38,534Total
      other expenses
                
                
                (17,432
                )
                
                
                (3,969
                )
                
                
                (667
                )(c)
                
                
                (22,068
                )Income
      tax expense (benefit)
                
                
                (184
                )
                
                
                271
                
                
                
                
                
                
                
                87Net
      income (loss)
                
                
                (51,153
                )
                
                
                (4,185
                )
                
                
                (1,197
                )
                
                
                (56,535
                )Net
      income (loss) attributable to noncontrolling interest
                
                
                1,307
                
                
                
                -
                
                
                
                (915
                )(d)
                
                
                392Net
      income (loss)  attributable to Ener1, Inc.
                
                $
                (52,460
                )
                
                $
                (4,185
                )
                
                $
                (282
                )
                
                $
                (56,927
                )Preferred
      stock dividends
                
                
                -
                
                
                
                -
                
                
                
                
                
                
                
                -Net
      loss attributable to common shareholders of Ener1, Inc.
                
                $
                (52,460
                )
                
                $
                (4,185
                )
                
                $
                (282
                )
                
                $
                (56,927
                )Weighted
      average shares outstanding
                
                
                103,382
                
                
                
                
                
                
                
                5,000
                (e)
                
                
                108,382Net
      income (loss) per share-basic and diluted
                
                $
                (0.51
                )
                
                
                
                
                
                
                
                
                
                $
                (0.53
                )





(a)
            Reduce
      net sales and operating expenses for intercompany transactions relating to
      purchases by Ener1 of products from
Enertech.


(b)
            Increase
      to depreciation and amortization from the fair value of certain tangible
      and identifiable intangible assets for ten months.  Two months
      are included in the historical Ener1
total.


(c)
            Increase
      to interest and discount expense relating to convertible bonds for ten
      months.  Two months are included in the historical Ener1
      total.


(d)
            Net
      income (loss) attributable to noncontrolling interest reflects an
      adjustment to the allocable portion of pro forma net income
      (loss).


(e)
            Adjustment
      to record the weighted average impact of 5,000,000 shares of Ener1 common
      stock issued in connection with the acquisition of
    Enertech.





The
following unaudited pro forma condensed combined financial information is based
on the historical financial statements of Ener1 and Enertech after giving effect
to the acquisition of Enertech. The unaudited pro forma condensed combined
statements of operations for the twelve months ended December 31, 2007 is
presented as if the acquisition had taken place on January 1, 2007 by combining
the historical results of Ener1 and Enertech.




- 56
-





ENER1,
INC.


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS





The
unaudited pro forma condensed combined results were as follows:





Ener1,
Inc.


Unaudited
Pro Forma Condensed Combined Statements of Operations


For
the Year Ended December 31, 2007


(In
thousands, except share data)





Historical
                  Ener1 Year
                  Ended
                  December 31,
                  2007
                
                
                Historical
                  Enertech Year
                  Ended
                  December 31,
                  2007
                
                
                Pro Forma
                  Adjustments
                
                
                Pro Forma
                  Condensed
                  CombinedNet
      sales
                
                $
                280
                
                
                $
                58,418
                
                
                $
                (288
                )(a)
                
                $
                58,410Cost
      of sales
                
                
                -
                
                
                
                49,147
                
                
                
                -
                
                
                
                49,147Gross
      profit
                
                
                280
                
                
                
                9,271
                
                
                
                (288
                )
                
                
                9,263Operating
      expense
                
                
                21,326
                
                
                
                6,006
                
                
                
                461
                (a),(b)
                
                
                27,793Total
      other expenses
                
                
                (41,646
                )
                
                
                (1,027
                )
                
                
                1,537
                (c)
                
                
                (41,136
                )Income
      tax expense (benefit)
                
                
                -
                
                
                
                (167
                )
                
                
                -
                
                
                
                (167
                )Net
      income (loss)
                
                
                (62,692
                )
                
                
                2,071
                
                
                
                788
                
                
                
                (59,833
                )Net
      income (loss) attributable to noncontrolling interest
                
                
                1,246
                
                
                
                43
                
                
                
                486
                (d)
                
                
                1,775Net
      income (loss)  attributable to Ener1, Inc.
                
                $
                (63,938
                )
                
                $
                2,028
                
                
                $
                302
                
                
                $
                (61,608
                )Preferred
      stock dividends
                
                
                (10,227
                )
                
                
                -
                
                
                
                -
                
                
                
                (10,227
                )Net
      loss attributable to common shareholders of Ener1, Inc.
                
                $
                (74,165
                )
                
                $
                2,028
                
                
                $
                302
                
                
                $
                (71,835
                )Weighted
      average shares outstanding
                
                
                72,922
                
                
                
                
                
                
                
                5,000
                (e)
                
                
                77,922Net
      income (loss) per share-basic and diluted
                
                $
                (1.02
                )
                
                
                
                
                
                
                
                
                
                $
                (0.92
                )





(a)
            Reduce
      net sales and operating expenses for intercompany transactions relating to
      purchases by Ener1 of products from
Enertech.


(b)
            Increase
      to depreciation and amortization from the fair value of certain tangible
      and identifiable intangible assets.


(c)
            Reduction
      of interest and discount expense for intercompany transactions relating to
      convertible bonds and bonds with
warrants.


(d)
            Net
      income (loss) attributable to noncontrolling interest reflects an
      adjustment to the allocable portion of pro forma net income
      (loss).


(e)
            Adjustment
      to record the weighted impact of 5,000,000 shares of Ener1 common stock
      issued in connection with the acquisition of
  Enertech.




- 57
-





ENER1,
INC.


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS





Noncontrolling
Interest in EnerDel, Inc.


In August
2008, we acquired the remaining 19.5% interest in our EnerDel subsidiary from
Delphi.  The aggregate purchase price consisted of 2,857,143 shares of
Ener1 common stock and a revised exercise price of certain warrants held by
Delphi, from $7.00 per share to $5.25 per share (the
“Consideration”).  In exchange for the Consideration, Delphi
transferred to Ener1 its equity interest in EnerDel and relinquished its right
to appoint a member to the Board of Directors of EnerDel.





The
aggregate purchase price was valued at approximately $32.0 million, including
$22.4 million for the shares of Ener1 common stock based on the closing price
reported by the American Stock Exchange for the five day period including two
days before and two days after August 12, 2008, the date of acquisition, $9.0
million for the forgiveness of inter-company payables, net of inter-company
receivables, $0.2 million for the revised exercise price of certain warrants
held by Delphi and $0.4 million in direct costs of the acquisition.





The
allocation of the purchase price was based on estimates and valuations which
were obtained to provide an estimate for the fair market value of certain assets
received as well as in-process research and development.  No amounts
were allocated to in-process research and development as the technology
demonstrated alternative uses in different applications.  As a result,
$13.8 million was allocated to specifically identifiable intangible assets in
the form of patented and unpatented technology with an estimated useful life of
10 years, and the remaining $18.2 million was recorded to goodwill, which has
been assigned to the battery segment.





Ener1 has
recorded a deferred tax liability of approximately $5.2 million on the temporary
difference related to the patented and unpatented
technology.  However, Ener1 also has existing deferred tax assets from
its net operating losses (“NOLs”) which are covered by a full valuation
allowance.  Ener1 has determined that the deferred tax liability
created from the temporary difference is sufficient to support the realization
of the existing deferred tax assets.  Accordingly, a portion of the
valuation allowance, equivalent to the deferred tax liability, has been
released.  The recognition of the deferred tax liability and the
partial release of the valuation allowance had no impact on
goodwill.




Note
4 – Earnings per Share





Net loss
per share basic is calculated by dividing net loss by the weighted average
number of common shares outstanding during the period. Net loss per share
diluted is calculated by reflecting the potential dilution that occurs if
options or warrants are exercised or debt is converted into common stock and the
effect of the exercise or conversion on the net loss per
share.  Following is a reconciliation of net loss attributable to
Ener1 and weighted average common shares outstanding for purposes of calculating
basic and diluted loss per share (in thousands):





Years Ended December 31,2009
                    
                    
                    2008
                    
                    
                    2007Net
      loss for basic loss per share
                    
                    $
                    (51,004
                    )
                    
                    $
                    (52,460
                    )
                    
                    $
                    (74,165
                    )Adjustment
      for derivative gain (loss)
                    
                    
                    (1,949
                    )
                    
                    
                    -
                    
                    
                    
                    -Net
      loss for diluted loss per share
                    
                    $
                    (52,953
                    )
                    
                    $
                    (52,460
                    )
                    
                    $
                    (74,165
                    )Weighted
      average number of common shares outstanding:Basic
                    
                    
                    116,655
                    
                    
                    
                    103,382
                    
                    
                    
                    72,922Effect
      of dilutive warrants
                    
                    
                    56
                    
                    
                    
                    -
                    
                    
                    
                    -Diluted
                    
                    
                    116,711
                    
                    
                    
                    103,382
                    
                    
                    
                    72,922Loss
      per common share attributable to Ener1, Inc.:Basic
                    
                    $
                    (0.44
                    )
                    
                    $
                    (0.51
                    )
                    
                    $
                    (1.02
                    )Diluted
                    
                    $
                    (0.45
                    )
                    
                    $
                    (0.51
                    )
                    
                    $
                    (1.02
                    )




- 58
-





ENER1,
INC.


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS





The
following amounts were not included in the calculation of net loss per share
because their effects were anti-dilutive or the securities were not in the money
(in thousands):





Years Ended December 31,2009
                  
                  
                  2008
                  
                  
                  2007Stock
      options
                  
                  
                  3,473
                  
                  
                  
                  3,958
                  
                  
                  
                  459Warrants
                  
                  
                  18,561
                  
                  
                  
                  27,758
                  
                  
                  
                  3,651Restricted
      stock
                  
                  
                  40
                  
                  
                  
                  -
                  
                  
                  
                  -Convertible
      instruments
                  
                  
                  2,365
                  
                  
                  
                  -
                  
                  
                  
                  6,071Total
                  
                  
                  24,439
                  
                  
                  
                  31,716
                  
                  
                  
                  10,181





Note
5 – Property and Equipment





The
components of property and equipment were as follows (in
thousands):





Useful
      life
                      
                      
                      December 31,(in years)
                      
                      
                      2009
                      
                      
                      2008Land
                      
                      
                      
                      
                      $
                      2,091
                      
                      
                      $
                      1,966Building
      and building improvements
                      
                      30
      - 39
                      
                      
                      
                      5,704
                      
                      
                      
                      5,381Machinery
      and equipment
                      
                      5 -
      10
                      
                      
                      
                      33,884
                      
                      
                      
                      19,314Office
      equipment, furniture and other
                      
                      3 -
      7
                      
                      
                      
                      2,999
                      
                      
                      
                      2,137Leasehold
      improvements
                      
                      1 -
      10
                      
                      
                      
                      9,929
                      
                      
                      
                      7,966Construction
      in progress
                      
                      n/a
                      
                      
                      
                      6,636
                      
                      
                      
                      5,47761,243
                      
                      
                      
                      42,241Less
      accumulated depreciation
                      
                      
                      
                      
                      
                      (8,340
                      )
                      
                      
                      (2,728
                      )$
                      52,903
                      
                      
                      $
                      39,513





Property
and equipment are stated at cost. Depreciation is computed on the straight-line
method over the estimated useful lives of the assets.  Construction in
progress includes deposits for equipment being constructed by third parties
specifically for our use.  Depreciation on these assets will commence
when we place the assets in service.  Depreciation expense for the
years ended December 31, 2009, 2008 and 2007 was approximately $5.5 million,
$1.5 million and $0.5 million, respectively.





Assets
recorded under capital leases were approximately $7.7 million and $7.2 million
at December 31, 2009 and 2008, respectively.





Note
6 – Intangible Assets





The
components of intangible assets, all of which are finite-lived, were as follows
(in thousands):





Useful
                      
                      
                      As
      of December 31, 2009
                      
                      
                      As
      of December 31, 2008life
                      
                      
                      Carrying
                      
                      
                      Accumulated
                      
                      
                      
                      
                      
                      Carrying
                      
                      
                      Accumulated(in
      yrs)
                      
                      
                      Amount
                      
                      
                      Amortization
                      
                      
                      Net
                      
                      
                      Amount
                      
                      
                      Amortization
                      
                      
                      NetPatented
      and unpatented technology
                      
                      10
                      
                      
                      $
                      13,905
                      
                      
                      $
                      (1,920
                      )
                      
                      $
                      11,985
                      
                      
                      $
                      13,900
                      
                      
                      $
                      (460
                      )
                      
                      $
                      13,440Electric
      vehicle battery technology
                      
                      4.2
                      
                      
                      
                      1,137
                      
                      
                      
                      (318
                      )
                      
                      
                      819
                      
                      
                      
                      1,056
                      
                      
                      
                      (42
                      )
                      
                      
                      1,014Customer
      relationships
                      
                      2.2
                      
                      
                      
                      924
                      
                      
                      
                      (498
                      )
                      
                      
                      426
                      
                      
                      
                      858
                      
                      
                      
                      (66
                      )
                      
                      
                      792$
                      15,966
                      
                      
                      $
                      (2,736
                      )
                      
                      $
                      13,230
                      
                      
                      $
                      15,814
                      
                      
                      $
                      (568
                      )
                      
                      $
                      15,246





- 59
-


ENER1,
INC.


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS





Certain
intangible assets are subject to foreign currency translation and the
translation adjustment is recorded as a component of accumulated other
comprehensive income within stockholders’ equity in the consolidated balance
sheets.  During the year ended December 31, 2009, the carrying amounts of
certain intangible assets were adjusted as a result of foreign currency
translations totaling approximately $0.2 million due to fluctuations in the
Korean Won, the local currency of Enertech.





Intangible
asset amortization expense was approximately $2.1 million and $0.6 million for
the years ended December 31, 2009 and 2008, respectively.  The
following table reflects the estimated future amortization expense related to
intangible assets as of December 31, 2009 (in thousands):





Year
      Ended December 31,2010
                        
                        $
                        2,0352011
                        
                        
                        1,6502012
                        
                        
                        1,6302013
                        
                        
                        1,3842014
                        
                        
                        1,364Thereafter
                        
                        
                        5,167$
                        13,230





Note
7 – Goodwill





The
changes in the carrying amount of goodwill for 2009 and 2008 are summarized
below (in thousands):





December 31,2009
                      
                      
                      2008Balance,
      beginning of year
                      
                      $
                      48,674
                      
                      
                      $
                      -Purchase
      price allocation
                      
                      
                      -
                      
                      
                      
                      47,192Purchase
      price adjustments
                      
                      
                      2
                      
                      
                      
                      702Translation
      and other
                      
                      
                      2,343
                      
                      
                      
                      780Balance,
      end of year
                      
                      $
                      51,019
                      
                      
                      $
                      48,674





Goodwill
is tested for impairment at the reporting unit level (operating segment or one
level below an operating segment) in the fourth quarter of each year, unless an
event occurs that would cause us to believe the value is impaired at an interim
date.  Our first annual impairment test was performed on October 1,
2009 and indicated the fair value of each operating segment exceeded the book
value, including goodwill.  As such, the goodwill is not subject to
impairment.





The
performance of the impairment test involves a two-step process. The first step
involves comparing the fair values of the applicable reporting units with their
aggregate carrying values, including goodwill. We determine the fair value of
our reporting units using the income approach methodology of valuation that
includes the discounted cash flow method.  If the carrying amount of a
reporting unit exceeds the reporting unit’s fair value, we perform the second
step of the goodwill impairment test to determine the amount of impairment loss.
The second step involves comparing the implied fair value of the affected
reporting unit’s goodwill with the carrying value of that goodwill.





We
continue to evaluate whether events and circumstances have occurred that
indicate the balance of goodwill may not be recoverable.  Such
evaluations for impairment are significantly impacted by estimates of future
revenues, costs and expenses as well as other factors.  A significant
change in these estimates could result in an impairment of
goodwill.





- 60
-





ENER1,
INC.


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS





Note
8 – Accounts Payable and Accrued Expenses





The
components of accounts payable and accrued expenses were as follows (in
thousands):





December
      31,2009
                      
                      
                      2008Accounts
      payable
                      
                      $
                      9,847
                      
                      
                      $
                      12,825Accrued
      compensation and benefits
                      
                      
                      1,376
                      
                      
                      
                      1,194Customer
      advances
                      
                      
                      1,130
                      
                      
                      
                      561Accrued
      other
                      
                      
                      1,915
                      
                      
                      
                      1,742$
                      14,268
                      
                      
                      $
                      16,322





Note
9 – Short-Term and Long-Term Borrowings





Short-term
borrowings


Short-term
borrowings consist of the following (in thousands):





December 31,Interest rate
                          
                          
                          2009
                          
                          
                          2008Payment
      plan
                          
                          
                          n/a
                          
                          
                          $
                          1,029
                          
                          
                          $
                          -Letters
      of credit
                          
                          3.35% -
      4.86%
                          
                          
                          
                          881
                          
                          
                          
                          1,716Trade
      financing
                          
                          6.24% -
      6.98%
                          
                          
                          
                          10,391
                          
                          
                          
                          7,298Line
      of credit
                          
                          
                          7.85%
                          
                          
                          
                          700
                          
                          
                          
                          400$
                          13,001
                          
                          
                          $
                          9,414





The
payment plan is denominated in United States Dollars, is for purchased machinery
and equipment and is scheduled to be paid in full by March 2010.  A
member of the board of directors of Ener1 also serves as a member of the board
of directors of the company from which we purchased this machinery and
equipment.  This director abstained from the vote of the members of
the board of directors of Ener1 in passing the resolution to purchase said
equipment.





The
letters of credit and trade financing agreements are denominated in Korean Won
and the total amount available at December 31, 2009 was approximately $17.1
million of which $10.4 million was outstanding, based on the year end exchange
rate of 1,167,60.  The amounts are scheduled for repayment at various
times throughout 2010.





The line
of credit is denominated in United States Dollars and the total amount available
at December 31, 2009 was $1.0 million of which $0.7 million was
outstanding.  The loan is scheduled to mature in April
2010.





Certain
bank deposits, land, buildings and equipment are pledged as collateral for the
above loans.





Long-term
borrowings


Long-term
borrowings consist of an equipment loan denominated in Korean
Won.  The loan bears interest at 7.85% and matures in October
2011.  Certain bank deposits, land and buildings are pledged as
collateral to guarantee payment.





- 61
-





ENER1,
INC.


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS





Note
10 – Leases





We lease
certain machinery, production equipment, warehouses, facilities, office space
and vehicles pursuant to lease agreements that have been classified as either
capital in nature or operating.  Pursuant to a master equipment lease,
we have issued 56,937 shares of Ener1 common stock valued at approximately $0.4
million and recorded $0.1 million directly to interest expense and $0.3 million
as debt discount.





At
December 31, 2009, we are obligated under 15 separate lease agreements for
certain machinery and production equipment totaling $7.7 million, including the
bargain purchase option which management intends to exercise.  Assets
under these capital leases are recorded as part of property and equipment in the
accompanying balance sheets.





The
following table summarizes the activity on our capital leases (in
thousands):





December 31,2009
                        
                        
                        2008Balance,
      beginning of year
                        
                        $
                        6,583
                        
                        
                        $
                        -Borrowings
                        
                        
                        472
                        
                        
                        
                        7,209Repayments
                        
                        
                        (2,070
                        )
                        
                        
                        (355
                        )Debt
      issuance costs
                        
                        
                        (8
                        )
                        
                        
                        (281
                        )Amortization
      of debt issuance costs
                        
                        
                        96
                        
                        
                        
                        10Balance,
      end of year
                        
                        
                        5,073
                        
                        
                        
                        6,583less:
      current portion
                        
                        
                        (2,372
                        )
                        
                        
                        (2,003
                        )Long
      term capital lease obligation
                        
                        $
                        2,701
                        
                        
                        $
                        4,580





Following
is a summary of the future minimum lease payments due under capital and
operating leases, with terms of more than one year at December 31, 2009,
together with the net present value of the minimum payments due under capital
leases (in thousands):





Capital
                          Leases
                        
                        
                        Operating
                          LeasesYears
      Ending December 31,2010
                        
                        $
                        2,716
                        
                        
                        $
                        1,1642011
                        
                        
                        2,713
                        
                        
                        
                        1,0392012
                        
                        
                        271
                        
                        
                        
                        1,0592013
                        
                        
                        6
                        
                        
                        
                        7312014
                        
                        
                        2
                        
                        
                        
                        568Thereafter
                        
                        
                        -
                        
                        
                        
                        1,277Total
      minimum lease payments
                        
                        
                        5,708
                        
                        
                        $
                        5,838less:
      amounts representing interest
                        
                        
                        (635
                        )Present
      value of net minimum lease payments
                        
                        
                        5,073





Rent
expense under these leases totaled approximately $1.9 million, $1.5 million and
$1.1 million in 2009, 2008 and 2007, respectively.





- 62
-




ENER1,
INC.
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS





Note 11 – Income Taxes





Ener1’s
income tax expenses are composed of domestic and foreign income taxes depending
on the relevant tax jurisdiction.  The components of loss before
income taxes and income tax expense (benefit) are as follows (in
thousands):





2009
                          
                          
                          2008
                          
                          
                          2007Loss
      before income taxes:United
      States
                          
                          $
                          (46,497
                          )
                          
                          $
                          (51,263
                          )
                          
                          $
                          (62,692
                          )Foreign
                          
                          
                          (4,989
                          )
                          
                          
                          (74
                          )
                          
                          
                          -Total
      loss before income taxes
                          
                          $
                          (51,486
                          )
                          
                          $
                          (51,337
                          )
                          
                          $
                          (62,692
                          )Current
      income taxes:United
      States
                          
                          $
                          207
                          
                          
                          $
                          (86
                          )
                          
                          $
                          -Foreign
                          
                          
                          180
                          
                          
                          
                          -
                          
                          
                          
                          -Total
      current income taxes
                          
                          $
                          387
                          
                          
                          $
                          (86
                          )
                          
                          $
                          -Deferred
      income taxes:United
      States
                          
                          $
                          (78
                          )
                          
                          $
                          4
                          
                          
                          $
                          -Foreign
                          
                          
                          (290
                          )
                          
                          
                          (102
                          )
                          
                          
                          -Total
      deferred income taxes
                          
                          $
                          (368
                          )
                          
                          $
                          (98
                          )
                          
                          $
                          -Total
      income tax benefit
                          
                          $
                          19
                          
                          
                          $
                          (184
                          )
                          
                          $
                          -





A summary
of Ener1’s deferred tax assets and liabilities are attributable to the following
items (in thousands):





December 31,2009
                              
                              
                              2008Deferred
      tax assets:Net
      operating loss carryforwards
                              
                              $
                              97,757
                              
                              
                              $
                              75,090R&D
      expense taken on equipment and intellectual property
                              
                              
                              3,024
                              
                              
                              
                              3,369Impairment
      losses
                              
                              
                              4,890
                              
                              
                              
                              5,262Compensation
      and benefit accruals
                              
                              
                              3,339
                              
                              
                              
                              1,029Depreciation
      and amortization
                              
                              
                              143
                              
                              
                              
                              523Other
                              
                              
                              1,257
                              
                              
                              
                              1,065Gross
      deferred tax asset
                              
                              
                              110,410
                              
                              
                              
                              86,338Valuation
      allowance
                              
                              
                              (105,588
                              )
                              
                              
                              (81,111
                              )Deferred
      tax asset, net
                              
                              
                              4,822
                              
                              
                              
                              5,227Deferred
      tax liability:Intangible
      assets
                              
                              
                              (4,822
                              )
                              
                              
                              (5,437
                              )Other
                              
                              
                              (402
                              )
                              
                              
                              (187
                              )Gross
      deferred tax liability
                              
                              
                              (5,224
                              )
                              
                              
                              (5,624
                              )Net
      deferred tax liability
                              
                              $
                              (402
                              )
                              
                              $
                              (397
                              )





- 63
-





ENER1,
INC.


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS





A
valuation allowance on deferred income tax assets is established when it is more
likely than not that some portion of the deferred tax assets will not be
realized. Realization of the future tax benefit related to the deferred tax
asset is dependent on many factors, including our ability to generate taxable
income within the period during which the temporary differences reverse, the
outlook for the economic environment in which we operate and the overall future
industry outlook.  Based upon the analysis of these factors, we
have recorded a valuation allowance of approximately $105.6 million and
$81.1 million for the years ended December 31, 2009 and 2008,
respectively.





Ener1 has
net operating loss (“NOL”) carryforwards available to offset future taxable
income of approximately $237.3 million and $187.4 million at December 31, 2009
and 2008, respectively. The Federal NOL carryforwards will begin to expire in
2018 and certain state NOL carryforwards will begin to expire in
2011.  The Federal NOL carryforward includes $50.7 million of
carryforwards in existence at the time of change in ownership in January 2002,
which is subject to substantial restrictions and may only be utilized to
offset approximately $0.4 million of annual taxable income, as well as any
unrealized appreciation on assets existing at the time of the ownership
change.





Our
effective income tax rate differs from the statutory federal rate of 35% as
follows:





2009
                      
                      
                      2008
                      
                      
                      2007Statutory
      rate applied to income before taxes
                      
                      
                      35.0
                      %
                      
                      
                      35.0
                      %
                      
                      
                      35.0
                      %Non-taxable
      items:Derivative
      income
                      
                      
                      2.4
                      %
                      
                      
                      -2.7
                      %
                      
                      
                      6.4
                      %Accretion
      of discounts
                      
                      
                      -0.7
                      %
                      
                      
                      12.1
                      %
                      
                      
                      12.0
                      %Other
                      
                      
                      -0.2
                      %
                      
                      
                      0.1
                      %
                      
                      
                      0.1
                      %State
      income tax net of federal tax benefit
                      
                      
                      5.5
                      %
                      
                      
                      3.3
                      %
                      
                      
                      3.3
                      %Foreign
      income tax benefit at different rate
                      
                      
                      0.0
                      %
                      
                      
                      0.4
                      %
                      
                      
                      0.0
                      %Increase
      in valuation allowance
                      
                      
                      -42.0
                      %
                      
                      
                      -48.6
                      %
                      
                      
                      -56.8
                      %Total
      income tax provision
                      
                      
                      0.0
                      %
                      
                      
                      -0.4
                      %
                      
                      
                      0.0
                      %





At
December 31, 2009, no provision has been made for United States federal and
state income taxes on cumulative foreign earnings, which are expected to be
permanently reinvested outside of the United States indefinitely.  Upon
distribution of those earnings, if any, in the form of dividends or otherwise,
the Company could be subject to United States income taxes (with a possible
adjustment for foreign tax credits), state income taxes, and withholding taxes
payable to the foreign jurisdiction.  Determination of the amount of the
deferred tax liability, if any, that may be due if such earnings were to be
distributed is not practicable.





On
January 1, 2007, we adopted new accounting guidance which provides for a
recognition threshold that a tax position is required to meet before being
recognized in the financial statements and provides guidance on the
derecognition, measurement, classification, interest and penalties, accounting
in interim periods, disclosure and transition rules.





Management
believes we have not taken any tax positions that, if challenged, would have a
material effect on the financial statements or the effective tax rates during
the years ended December 31, 2009, 2008 and 2007.  In connection with
the Enertech acquisition, we performed an analysis for uncertain tax positions
of Enertech and recorded approximately $0.3 million as a provision for uncertain
tax positions.  There is no accrued interest expense or penalties
relating to the unrecognized tax benefit during any of the periods
presented.  When applicable, we record interest and penalties on
unrecognized tax benefits as interest expense.





We are
subject to income taxes in the United States of America and foreign
jurisdictions, as well as various states.  Judgment is required in
determining our worldwide provision for income taxes and recording the related
assets and liabilities.  In the ordinary course of business, there are
several transactions and estimates where the ultimate tax determination is
uncertain.  Ener1 is open to examination by the Internal Revenue
Service and various states in which we file for years 1998 to
present.  These tax years are still open to audit as net operating
losses incurred in those years may be subject to examination.  Ener1
is currently not under any income tax examinations.





- 64
-





ENER1,
INC.


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS





A
reconciliation of the beginning and ending amount of unrecognized tax benefits
is as follows:





Balance
      at December 31, 2007
                      
                      $
                      -Additions
      based on tax positions related to prior years
                      
                      
                      264Balance
      at December 31, 2008
                      
                      $
                      264Additions
      based on tax positions related to the current year
                      
                      
                      25Additions
      based on tax positions related to prior years
                      
                      
                      40Balance
      at December 31, 2009
                      
                      $
                      329





Note
12 – Derivative Instruments and Fair Value of Financial Instruments





Derivative
Instruments


Certain
freestanding warrants that contain down round provisions were issued in
conjunction with our capital raises during 2004 and 2005.  Previously,
these warrants were classified in equity.  After evaluating the
application of US GAAP, these warrants were no longer deemed to be indexed to
Ener1’s common stock and on January 1, 2009 were reclassified as a derivative
liability.  Any time we issue securities that are deemed to be
dilutive to the warrants containing down round provisions, the number of shares
of Ener1 stock required to be issued upon the exercise of these warrants will
increase.





The
convertible bonds, originally issued in January 2008, which have a strike price
denominated in a foreign currency, were acquired in connection with the Enertech
acquisition during the fourth quarter of 2008.  After evaluating the
application of US GAAP, the conversion features of the convertible bonds
denominated in a foreign currency was bifurcated and recorded as a derivative
liability on January 1, 2009.   As foreign currency rates
fluctuate, the number of shares of Enertech stock to be issued upon conversion
could increase.





The
senior secured convertible debentures and certain warrants associated with the
debentures, originally issued in 2004 and 2005, have conversion features that
was previously bifurcated and recorded as a derivative
liability.  During the three months ended March 31, 2008, the
debentures converted into shares of Ener1 common stock and were no longer
treated as derivative liabilities, including the certain warrants associated
with the debentures.





We record
the fair value of derivative instruments in our consolidated balance sheet and
reflect the changes in fair value as gain or loss on derivative
liabilities.  Our derivative instruments are not designated as hedging
instruments.





Lattice Valuation
Model





Freestanding
Warrants


We have
valued the freestanding warrants that contain down round provisions using a
lattice valuation model, with the assistance of a valuation consultant, for
which management understands the methodologies. This model incorporates
transaction details such as Ener1’s stock price, contractual terms, maturity,
risk free interest rates, as well as assumptions about future financings,
volatility, and warrant holder behavior on key dates, including warrant exercise
dates and period end reporting dates.





The
primary assumptions include projected annual volatility of 94% and holder
exercise targets at 150% of the exercise price for the warrants expiring in 2010
and 200% of the exercise price for the warrants expiring in 2014, decreasing as
the warrants approach maturity.  Based on these assumptions, the fair
value of the warrant derivatives as of January 1, 2009 was estimated by
management to be approximately $13.2 million.  Amounts previously
recorded to paid in capital associated with these warrants of approximately
$19.5 million were reversed and the remaining $6.3 million was recorded as a
cumulative adjustment to accumulated deficit.





- 65
-





ENER1,
INC.


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS





During
2009, certain warrants containing down round provisions were exercised or the
provision expired and the warrants were no longer treated as derivative
liabilities.  The fair value of the derivative liability associated
with these warrants was marked to market and a gain or loss on derivative
liability was recorded.  The balance of the derivative liability
associated with these warrants of $2.8 million was recorded as a contribution to
paid in capital on the same date.  The fair value of the remaining
warrant derivatives as of December 31, 2009 was estimated by management to be
approximately $6.9 million based on management’s assumptions including, but not
limited to, projected annual volatility of 85% and holder exercise targets at
150% of the exercise price for the warrants expiring in 2010 and 200% of the
exercise price for the warrants expiring in 2014, decreasing as the warrants
approach maturity.





The
foregoing 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 assumptions could materially
affect the valuation.





Debentures


We
previously valued the compound embedded derivative features in the senior
secured convertible debentures using a lattice valuation model, with the
assistance of a valuation consultant, for which management understands the
methodologies. This model incorporates transaction details such as Ener1’s stock
price, volatility, contractual terms, as well as assumptions about future
financings, and debenture holder behavior on key dates, including conversion
dates and period end reporting dates.





Black-Scholes Valuation
Model





Convertible
Bonds


We use a
Black-Scholes pricing model to determine the fair value of the convertible
bonds.  This model uses market sourced inputs such as interest rates,
stock price and volatility, the selection of which requires management’s
judgment.  The convertible bond is convertible into shares of common
stock of our Enertech subsidiary, not shares of Ener1 common
stock.  As a result, stock prices were estimated using the average
stock price of four comparable Korean companies, which operate in the same
industry and are similar in size to Enertech, with a 30% liquidity
discount.  Volatility was estimated using the average volatility of
the same four comparable Korean companies.  Interest rates represent
the Korean government bond rate for securities with a maturity that approximates
the estimated expected life of the derivative.





The fair
value of the convertible bonds on key dates, including the issuance date and
period end reporting dates was estimated using the following assumptions of
management:





Volatility
                    
                    
                    Interest Rate
                    
                    
                    Stock Price
                    
                    
                    Term in
                      YearsJanuary
      25, 2008
                    
                    
                    53.2
                    %
                    
                    
                    5.3
                    %
                    
                    $
                    0.54
                    
                    
                    
                    5.0January
      1, 2009
                    
                    
                    56.6
                    %
                    
                    
                    3.8
                    %
                    
                    $
                    0.30
                    
                    
                    
                    4.1March
      31, 2009
                    
                    
                    58.3
                    %
                    
                    
                    4.7
                    %
                    
                    $
                    0.47
                    
                    
                    
                    3.8June
      30, 2009
                    
                    
                    59.2
                    %
                    
                    
                    4.6
                    %
                    
                    $
                    0.50
                    
                    
                    
                    3.6September
      30, 2009
                    
                    
                    60.7
                    %
                    
                    
                    4.8
                    %
                    
                    $
                    0.52
                    
                    
                    
                    3.3December
      22, 2009
                    
                    
                    61.2
                    %
                    
                    
                    4.8
                    %
                    
                    $
                    0.37
                    
                    
                    
                    3.1December
      31, 2009
                    
                    
                    61.2
                    %
                    
                    
                    4.9
                    %
                    
                    $
                    0.43
                    
                    
                    
                    3.1





We own a
percentage of the outstanding balance of the convertible bonds and as a result
have eliminated a percentage of the derivative liability and the loss on
derivative liability in consolidation and recorded a $38,000 cumulative effect
of change in accounting principle to noncontrolling interest.  Based
on these assumptions, the remaining derivative liability, as of December 31,
2009 is $29,000 and the loss on derivative liability for the year ended December
31, 2009 was approximately $9,000.





- 66
-





ENER1,
INC.


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS





The
foregoing 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.





Debenture
Warrants


The fair
value of the derivative liabilities associated with the debenture warrant
derivative was determined using a Black-Scholes pricing model.  This
model uses market sourced inputs such as interest rates, stock price and
volatility, the selection of which requires management’s judgment.  We
used a risk free interest rate which was the United States Treasury bill rate
for securities with a maturity that approximated the expected life of a
derivative or security and the closing market price of our common stock on the
date when the derivative was valued at fair value.  We used our
volatility rates based upon the closing price of our common stock since
January 2002, when Ener1 underwent a change in control.





Fair
Value of Financial Instruments


Fair
value is defined as the exchange price that would be received for an asset or
paid to transfer a liability (an exit price) in the principal or most
advantageous market for the asset or liability in an orderly transaction between
market participants on the measurement date. A fair value hierarchy is used
which requires an entity to maximize the use of observable inputs and minimize
the use of unobservable inputs when measuring fair value. The three levels of
inputs that may be used to measure fair value are described as
follows:




Level 1 – Quoted prices
in active markets for identical assets or liabilities.




Level 2 – Observable
inputs other than Level 1 prices, such as quoted prices for similar assets
or liabilities; or other inputs that are observable or can be corroborated by
observable market data for substantially the full term of the assets or
liabilities.




Level 3 – Unobservable
inputs that are supported by little or no market activity and that are financial
instruments whose values are determined using pricing models, discounted cash
flow methodologies, or similar techniques, as well as instruments for which the
determination of fair value requires significant judgment or estimation. Our
Level 3 liabilities consist of the derivative liabilities associated with
certain freestanding warrants that contain down round provisions and convertible
bonds with a strike price denominated in a foreign currency.





If the
inputs used to measure the financial assets and liabilities fall within more
than one level described above, the categorization is based on the lowest level
input that is significant to the fair value measurement of the
instrument.





Financial Assets and
Liabilities Measured at Fair Value on a Recurring Basis


The
following table summarizes the financial assets and liabilities measured at fair
value during the year ended December 31, 2009 (in thousands):





Carrying
                  
                  
                  Fair
      Value Measurements UsingValue
                  
                  
                  Level
      1
                  
                  
                  Level
      2
                  
                  
                  Level
      3
                  
                  
                  TotalWarrant
      derivative
                  
                  $
                  6,842
                  
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  6,842
                  
                  
                  $
                  6,842Convertible
      bond derivative
                  
                  
                  29
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  29
                  
                  
                  
                  29Total
      Derivative Liabilities
                  
                  
                  
                  
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  6,871
                  
                  
                  $
                  6,871





Level 3
Valuation Techniques


Financial
assets are considered Level 3 when their fair values are determined using
pricing models, discounted cash flow methodologies or similar techniques and at
least one significant model assumption or input is unobservable.  Our
Level 3 liabilities consist of the derivative liabilities associated with
certain freestanding warrants that contain down round provisions and convertible
bonds with a strike price denominated in a foreign currency.








- 67
-





ENER1,
INC.


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS





The
following table provides a summary of the changes in fair value, including net
transfers in and/or out, of all financial instruments measured at fair value on
a recurring basis using significant unobservable inputs (in
thousands):





TotalConvertible
                        
                        
                        
                        
                        
                        DerivativeWarrants
                        
                        
                        Bonds
                        
                        
                        Debentures
                        
                        
                        LiabilitiesBalance,
      January 1, 2008
                        
                        
                        $
                        3,983
                        
                        
                        $
                        -
                        
                        
                        $
                        6,161
                        
                        
                        $
                        10,144Total
      realized/unrealized (gains) or losses:Included
      in other income (expense)
                        
                        
                        (336
                        )
                        
                        
                        -
                        
                        
                        
                        (3,600
                        )
                        
                        
                        (3,936
                        )Included
      in stockholders' equity
                        
                        
                        (3,647
                        )
                        
                        
                        -
                        
                        
                        
                        (2,561
                        )
                        
                        
                        (6,208
                        )Purchases,
      issuances and settlements
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -Transfers
      in and/or out of Level 3
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -Balance,
      December 31, 2008
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -Balance,
      January 1, 2009 (a)
                        
                        $
                        13,196
                        
                        
                        $
                        16
                        
                        
                        $
                        -
                        
                        
                        $
                        13,212Total
      realized/unrealized (gains) or losses:Included
      in other income (expense)
                        
                        
                        (3,536
                        )
                        
                        
                        9
                        
                        
                        
                        -
                        
                        
                        
                        (3,527
                        )Included
      in other comprehensive income
                        
                        
                        -
                        
                        
                        
                        4
                        
                        
                        
                        -
                        
                        
                        
                        4Included
      in stockholders' equity
                        
                        
                        (2,818
                        )
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        (2,818
                        )Purchases,
      issuances and settlements
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -Transfers
      in and/or out of Level 3
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -Balance,
      December 31, 2009
                        
                        
                        $
                        6,842
                        
                        
                        $
                        29
                        
                        
                        $
                        -
                        
                        
                        $
                        6,871




(a)
              After
      evaluating the application of US GAAP, certain warrants were no longer
      deemed to be indexed to Ener1’s common stock and were reclassified as a
      derivative liability and the conversion features of the convertible bonds
      denominated in a foreign currency was bifurcated and recorded as a
      derivative liability.


The
carrying value of short-term financial instruments, including cash and cash
equivalents, accounts receivable, inventories, accounts payable and accrued
expenses, short-term borrowings and capital lease obligations approximate fair
value due to the relatively short period to maturity for these
instruments.  The long-term borrowings approximate fair value since
the related rates of interest approximates current market rates.





Note
13 – Convertible Bonds, Convertible Debentures and Convertible
Notes





Convertible
Bonds


As part
of the acquisition of Enertech on October 31, 2008, Ener1 assumed certain
convertible bonds with original terms beginning prior to its acquisition
date.  On January 25, 2008, Enertech issued a $9.2 million convertible
bond maturing January 25, 2013 which is convertible into common stock of
Enertech at a conversion price of 750 per share, in Korean Won. According
to the bond agreement, the conversion ratio is fixed to 11,564,092 shares if
fully converted.  The bonds have a conversion period from April 2008
through December 2012. The convertible bonds accrue interest at 8.5% per annum
which is payable at maturity if the bonds are not converted prior to their
maturity.





The
conversion options were analyzed under applicable accounting standards and it
was determined that the beneficial conversion feature had no intrinsic value at
the inception date and did not meet the definition of an embedded
derivative.  Therefore the conversion feature was not bifurcated from
the host instrument at the date of issuance.  On January 1, 2009, in
accordance with newly adopted accounting standards the conversion feature
denominated in a foreign currency was bifurcated and recorded as a derivative
liability.  See Note 12 –Derivative Instruments and Fair Value of
Financial Instruments.





- 68
-





ENER1,
INC.


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS




We
originally owned 96% of the outstanding balance of the convertible bonds and in
December 2009, we converted $6.9 million of the outstanding
principal.  At December 31, 2009 we owned approximately 84% of the
remaining balance and have eliminated the principal and related interest in
consolidation.  The remaining outstanding convertible bond, as of
December 31, 2009, is as follows (in thousands):





Maturity
      date
                        
                        January 2013Coupon
      rate
                        
                        
                        0
                        %Yield
      to maturity (annual)
                        
                        
                        8.50
                        %Convertible
      bond
                        
                        $
                        38add:
      long-term accrued interest
                        
                        
                        347Total
                        
                        
                        385less:
      current portion
                        
                        
                        -Long-term
      portion
                        
                        $
                        385





2004
Senior Secured Convertible Debentures


In
January 2004, Ener1issued $20.0 million in principal for the 2004 Debentures and
issued warrants to purchase 2,285,715 shares of Ener1’s common stock. The net
proceeds of the issuances were $18.5 million.





During
the three months ended March 31, 2008, the outstanding principal and interest of
approximately $9.8 million was converted into 1,815,583 shares of Ener1 common
stock, at an average conversion price of $5.37 per share and we recorded
approximately $0.2 million for inducement to convert debt.





The 2004
Debentures were originally convertible at a price of $8.75 per share, which had
been adjusted for dilutive issuances of common stock.  The warrants
had an original exercise price of $17.57 per share, which has been adjusted to
$8.65 per share, as of December 31, 2009, for dilutive issuances of common
stock.  These warrants are exercisable at any time through January
2014.





At
inception, we had been accounting for the conversion option as a derivative
liability.  The terms of the 2004 Debentures included several features
that Ener1 was required to account for as derivatives.  These
derivatives were bundled together as a single, compound embedded derivative
instrument which was bifurcated and accounted for separately from the
debenture.  Upon completion of conversion during the first quarter of
2008, the compound embedded derivative liabilities were treated as a
contribution to paid in capital.





2005
Senior Secured Convertible Debentures


In March
2005, Ener1 issued $14.2 million in principal for the 2005 Debentures and issued
warrants to purchase 1,016,072 shares of Ener1’s common stock. The net proceeds
of the issuances were $13.1 million.





During
the three months ended March 31, 2008, the outstanding principal and interest of
approximately $2.1 million was converted into 442,158 shares of Ener1 common
stock, at a conversion price of $4.83 per share.





The 2005
Debentures were originally convertible at a price of $7.00 per share, which has
been adjusted for dilutive issuances of common stock.  The warrants
were divided into Series A and Series B.  The Series A warrants to
purchase up to 609,643 shares of Ener1 common stock had an original exercise
price of $8.05 per share, which has been adjusted to $5.25 per share, as of
December 31, 2009, for dilutive issuances of common stock.  The Series
B warrants to purchase up to 406,429 shares of Ener1 common stock had an
original exercise price of $8.75 per share, which has been adjusted to $5.60 per
share, as of December 31, 2009, for dilutive issuances of common
stock.  The warrants are exercisable at any time through March
2010.





We had
been accounting for the conversion option as a derivative
liability.  The terms of the 2005 Debentures included several features
that Ener1 was required to account for as derivatives.  These
derivatives were bundled together as a single, compound embedded derivative
instrument which was bifurcated and accounted for separately from the
debenture.  Upon completion of conversion during the first quarter of
2008, the compound embedded derivative liabilities were treated as a
contribution to paid in capital.





- 69
-





ENER1,
INC.


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS





Convertible
Notes and Warrants


During
2006 and 2007, we borrowed $11.9 million from Ener1 Group, a related party, and
recorded subordinated convertible debt pursuant to notes issued (the “Group
Notes”), with interest at 10% per annum.





In
connection with the Group Notes, we issued to Ener1 Group immediately
exercisable warrants to purchase up to 7,446,877 shares of Ener1’s common stock
at exercise prices ranging from $2.80 to $4.20 per share, which was subsequently
reduced to $2.10 per share in 2007 and we recorded $0.6 million for warrant
modification expense.  All warrants have a five-year
term.





The Group
Notes were subordinated to the rights of the holders of the 2004 and 2005
Debentures. Once the 2004 and 2005 Debentures were converted in 2008, Ener1
Group exercised their conversion option and converted the outstanding principal
and accrued interest of approximately $13.8 million into 3,955,634 shares of
Ener1 common stock, at a conversion price of $3.50 per share.





As an
inducement for Ener1Group’s conversion, we issued to Ener1 Group warrants to
purchase up to 142,858 shares of Ener1 common stock with an exercise price of
$5.95 per share.  The warrants are exercisable at any time through
March 26, 2013 and the fair value of $0.7 million was recorded as inducement to
convert debt.





Ener1 had
been accounting for the warrants and conversion features of the Group Notes as a
beneficial conversion feature.  We recorded a discount to the Group
Notes equal to the relative fair value of the warrants which was amortized to
interest expense over the life of the Group Notes.  No entry was made
to record the value of the conversion feature because the ability of the holder
to convert was contingent upon Ener1’s repayment of the 2004 and 2005 Debentures
which was considered outside the holders’ control.  As a result of the
conversion of the outstanding principal under the 2004 and 2005 Debentures,
effective March 26, 2008, the contingency over the conversion feature was
resolved and the intrinsic value of the conversion feature, at the date of
issuance of $3.6 million was recorded as a credit to paid in
capital.  The unamortized discount related to the fair value of the
warrants and the beneficial conversion feature, as of March 26, 2008 of $5.2
million and $3.6 million, respectively, was recorded to interest
expense.





Note
14 – Redeemable Preferred Stock





In
October 2004, Delphi purchased 8,000 shares of Non-Voting, Cumulative and
Redeemable Series A Preferred Stock issued by EnerDel (“Series A Preferred
Stock”) plus warrants to purchase up to 1,000,000 shares of Ener1common stock
for $8.0 million.  Of the 1,000,000 warrants issued, 250,000 are
exercisable at $4.90 per share and 750,000 were exercisable at $7.00 per share,
which was later reduced to $5.25 per share in connection with the purchase of
the remaining interest in EnerDel.  The warrants are exercisable at
any time through October 2011.





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 31st.  The
dividends are cumulative.  Payment of dividends had been restricted by
the terms of the 2004 Debentures and 2005 Debentures, to which the Series A
Preferred Stock was subordinate.  As a result of the conversion of all
of the 2004 and 2005 Debentures, payment of dividends is no longer
restricted.





In August
2008, in connection with the purchase of the remaining 19.5% interest in
EnerDel, the Series A Preferred Stock was redeemed from Delphi for $8.0 million
in cash and a gain on early extinguishment of $1.1 million was recorded to paid
in capital as the redemption feature was not solely within the control of Ener1
or Delphi.  Upon payment of the $8.0 million, accrued and unpaid
dividends were deemed to be paid in full.





- 70
-





ENER1,
INC.


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS





The
following are the components of Series A Preferred Stock on August 12, 2008, the
redemption date, in thousands):





Face
      value
                          
                          $
                          8,000Less
      initial fair value of warrant derivative
                          
                          
                          (4,620
                          )Less
      initial fair value of  conversion option
                          
                          
                          (1,183
                          )Fair
      value at date of issue
                          
                          
                          2,197Accumulated
      accretion of discounts
                          
                          
                          4,358Cumulative
      dividends
                          
                          
                          2,516Carrying
      value as of August 12, 2008
                          
                          $
                          9,071Cash
      paid for redemption
                          
                          
                          8,000Gain
      on early redemption
                          
                          $
                          1,071





Note
15 – Sales of Common Stock





Open
Market Sale Agreement


In May
2009, we entered into an Open Market Sale Agreement (the “Primary Open Market
Sale Agreement”) with Jefferies & Company, Inc. (“Jefferies”), pursuant to
which we may offer and sell shares of Ener1’s common stock with an aggregate
sales price of up to $40.0 million.  Sales of the shares are executed
by means of ordinary brokers’ transactions on the Nasdaq Global Market at market
prices, privately negotiated transactions, crosses or block
transactions.  Under the terms of the Primary Open Market Sale
Agreement, we could also sell shares to Jefferies as a principal for its own
account at a price agreed upon at the time of sale.  The compensation
to Jefferies for sales of common stock sold pursuant to the Primary Open Market
Sale Agreement was 5.0% of the gross proceeds of the sales price per share for
the first $13.5 million of shares sold and 3.0% of the gross proceeds of the
sales price per share in excess of $13.5 million.





We sold
5,951,032 shares at an average of $6.72 per share for an aggregate sales price
of $40.0 million between May and September 2009 pursuant to the Primary Open
Market Sale Agreement.  After deducting fees and expenses of $1.6
million, we received net proceeds of $38.4 million from the sale of these
shares.





In
January 2010, we entered into a secondary Open Market Sale Agreement (the
“Secondary Open Market Sale Agreement”) with Jefferies to sell shares of Ener1
common stock with an aggregate sales price of up to $60.0 million under the same
terms and conditions as the Primary Open Market Sale Agreement, compensation to
Jefferies will be 3.0% of the gross proceeds of the sales price per
share.  We began selling shares in February 2010 and through March 8,
2010 we sold 919,055 shares at an average price of $4.43 per share for net
proceeds of $3.9 million, after deducting $0.2 million of expenses.





Note
16 – Stock Based Compensation





At
December 31, 2009, we had seven active stock-based compensation plans which
provide for the granting of incentive and non-incentive stock options,
restricted stock and bonuses to officers, directors, employees and
consultants.  The Compensation Committee of the Board of Directors
administers the plans and has the authority to determine the recipients to whom
awards will be made, the terms of the vesting and forfeiture, the amounts of the
awards and other terms.  Under the terms of the plans, the option
price approved by the Compensation Committee shall not be less than the fair
market value of Ener1 common stock at the date of grant.





Performance
options are granted as target awards and are earned based on specifically
identified performance criteria and are subject to forfeiture if such
performance criteria are not met.  Upon achievement of the performance
criteria, the options will become earned and will usually vest one-third per
year over a three year period.  We also award incentive options from
time to time which generally vest over a three year
period.  Compensation expense is recorded on a straight line basis
over the vesting periods and is based on the amount of awards expected to be
earned and vested.





- 71
-





ENER1,
INC.


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS





Restricted
stock is granted from time to time to certain employees and the restriction
usually lapses over a period of one to three years thereafter on the anniversary
of the date of grant, provided the recipient remains an
employee.  Compensation expense is determined at the grant date, based
on the closing price of our common stock, and is recorded on a straight line
basis over the restriction period.





Compensation
expense (net of estimated forfeitures) related to our stock based compensation
plans for the years ended December 31, 2009, 2008 and 2007 was approximately
$4.0 million, $3.0 million and $ 1.4 million, respectively.  The total
unrecognized compensation expense (net of estimated forfeitures) related to
nonvested awards is approximately $3.4 million and is expected to be expensed in
future years as follows (in thousands):





2010
                  
                  
                  2011
                  
                  
                  2012
                  
                  
                  TotalUnrecognized
      compensation expense
                  
                  $
                  1,973
                  
                  
                  $
                  1,084
                  
                  
                  $
                  310
                  
                  
                  $
                  3,367





If there
are any modifications or cancellations of the underlying nonvested awards, we
may be required to accelerate, increase or cancel any remaining unearned
compensation expense. Future compensation expense and unrecognized compensation
expense may increase to the extent that additional equity awards are
granted.





A summary
of the activity in our stock option plans is as follows:





Options
                  
                  
                  Weighted
                    average
                    exercise price
                  
                  
                  Weighted
                    average
                    remaining
                    contractual life
                  
                  
                  Aggregate
                    intrinsic valueBalance,
      December 31, 2006
                  
                  
                  4,182,231
                  
                  
                  $
                  2.55
                  
                  
                  
                  6.7
                  
                  
                  $
                  94,158Granted
                  
                  
                  1,222,599
                  
                  
                  
                  3.74Exercised
                  
                  
                  (14,286
                  )
                  
                  
                  0.00Forfeited
      or expired
                  
                  
                  (731,900
                  )
                  
                  
                  2.12Balance,
      December 31, 2007
                  
                  
                  4,658,644
                  
                  
                  $
                  2.94
                  
                  
                  
                  5.8
                  
                  
                  $
                  13,289,766Granted
                  
                  
                  458,940
                  
                  
                  
                  5.72Exercised
                  
                  
                  (647,848
                  )
                  
                  
                  2.01Forfeited
      or expired
                  
                  
                  (362,114
                  )
                  
                  
                  3.33Cancelled
                  
                  
                  (150,001
                  )
                  
                  
                  1.88Balance,
      December 31, 2008
                  
                  
                  3,957,621
                  
                  
                  $
                  3.34
                  
                  
                  
                  4.5
                  
                  
                  $
                  14,713,862Granted
                  
                  
                  1,327,500
                  
                  
                  
                  4.75Exercised
                  
                  
                  (324,897
                  )
                  
                  
                  2.17Forfeited
      or expired
                  
                  
                  (117,064
                  )
                  
                  
                  4.79Cancelled
                  
                  
                  (369,500
                  )
                  
                  
                  4.05Balance,
      December 31, 2009
                  
                  
                  4,473,660
                  
                  
                  $
                  3.80
                  
                  
                  
                  4.0
                  
                  
                  $
                  11,840,919Exercisable,
      December 31, 2007
                  
                  
                  2,740,062
                  
                  
                  $
                  3.01
                  
                  
                  
                  5.9
                  
                  
                  $
                  7,862,550Exercisable,
      December 31, 2008
                  
                  
                  2,765,297
                  
                  
                  $
                  3.14
                  
                  
                  
                  4.4
                  
                  
                  $
                  11,111,705Exercisable,
      December 31, 2009
                  
                  
                  3,177,195
                  
                  
                  $
                  3.32
                  
                  
                  
                  3.8
                  
                  
                  $
                  9,903,443





The
intrinsic value of options exercised during the years ended December 31, 2009,
2008 and 2007, was approximately $1.4 million, $3.4 million and $25,000,
respectively.





- 72
-





ENER1,
INC.


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS





The
weighted average fair value of non-vested options and restricted stock since
January 1, 2009 is as follows:





Non-vested,
      January 1, 2009
                                
                                
                                1,192,324
                                
                                
                                $
                                3.30Granted
                                
                                
                                1,327,500
                                
                                
                                
                                3.60Vested
                                
                                
                                (736,795
                                )
                                
                                
                                3.35Forfeited
                                
                                
                                (117,064
                                )
                                
                                
                                1.89Cancelled
                                
                                
                                (369,500
                                )
                                
                                
                                3.17Non-vested,
      December 31, 2009
                                
                                
                                1,296,465
                                
                                
                                $
                                3.84





WeightedRestricted
                    
                    
                    averageStock
                    
                    
                    fair
      valueNon-vested,
      January 1, 2009
                    
                    
                    -
                    
                    
                    
                    -Granted
                    
                    
                    40,000
                    
                    
                    
                    6.19Non-vested,
      December 31, 2009
                    
                    
                    40,000
                    
                    
                    $
                    6.19





The fair
value of each option grant was estimated on the date of grant using the
Black-Scholes option pricing model with the following key
assumptions:





Years Ended December 31,2009
                    
                    
                    2008
                    
                    
                    2007Expected
      term (in years)
                    
                    
                    4 -
      5
                    
                    
                    
                    3 -
      4
                    
                    
                    
                    5 -
      6.5Risk
      free interest rate
                    
                    
                    1.22%
      - 2.12%
                    
                    
                    
                    1.55%
      - 3.72%
                    
                    
                    
                    3.46%
      - 4.6%Expected
      volatility
                    
                    
                    102%
      - 117%
                    
                    
                    
                    113%
      - 129%
                    
                    
                    
                    129%
      - 131%Dvidend
      yield
                    
                    
                    0%
                    
                    
                    
                    0%
                    
                    
                    
                    0%





Expected
term


The
expected term represents the period over which the stock options are expected to
be outstanding. It has been determined using the “simplified method” described
in SAB 110, which is based on a calculation that determines the midpoint between
the vesting date and the end of the contractual term.





Risk
free interest rate


The risk
free interest rate assumption is based on the implied yield currently available
on United States treasury issues with a remaining term equivalent to the
expected term of the stock options.





- 73
-





ENER1,
INC.


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS





Expected
volatility


The
expected volatility assumptions are based upon the weekly closing stock price of
Ener1’s common stock since January 2002, when Ener1 underwent a change in
control.  We determined that share prices prior to January 2002 do not
reflect the ongoing business valuation of our operations.





Dividend
yield


We do not
intend to pay dividends on our common stock in the foreseeable future.
Accordingly, we use a dividend yield of zero in our assumptions.





The
following table summarizes stock option information for options outstanding at
December 31, 2009:





Options OutstandingExercise price
                        range
                      
                      Number
      of
                        options
                      
                      
                      Weighted
                        average
                        exercise price
                      
                      
                      Weighted
                        average
                        remaining
                        contractual life
                      
                      
                      Aggregate
                        instrinsic value$0.49
      - $1.61
                      
                      
                      857,255
                      
                      
                      $
                      1.60
                      
                      
                      
                      2.1
                      
                      
                      $
                      4,066,016$2.10
      - $4.20
                      
                      
                      2,004,546
                      
                      
                      
                      2.87
                      
                      
                      
                      4.6
                      
                      
                      
                      6,961,088$4.83
      - $4.90
                      
                      
                      480,644
                      
                      
                      
                      4.90
                      
                      
                      
                      3.3
                      
                      
                      
                      694,000$5.18
      - $6.79
                      
                      
                      929,071
                      
                      
                      
                      6.51
                      
                      
                      
                      4.7
                      
                      
                      
                      119,815$7.15
      - $7.63
                      
                      
                      202,144
                      
                      
                      
                      7.33
                      
                      
                      
                      3.7
                      
                      
                      
                      -Totals
                      
                      
                      4,473,660
                      
                      
                      $
                      3.80
                      
                      
                      
                      4.0
                      
                      
                      $
                      11,840,919





The
following table summarizes stock option information for options exercisable at
December 31, 2009:





Options ExercisableExercise
                        price range
                      
                      Number of
                        options
                      
                      
                      Weighted
                        average
                        exercise price
                      
                      
                      Weighted
                        average
                        remaining
                        contractual life
                      
                      
                      Aggregate
                        instrinsic value$0.49
      - $1.61
                      
                      
                      814,323
                      
                      
                      $
                      1.60
                      
                      
                      
                      2.1
                      
                      
                      $
                      3,862,948$2.10
      - $4.20
                      
                      
                      1,417,735
                      
                      
                      
                      2.48
                      
                      
                      
                      4.6
                      
                      
                      
                      5,470,027$4.83
      - $4.90
                      
                      
                      360,973
                      
                      
                      
                      4.90
                      
                      
                      
                      3.3
                      
                      
                      
                      520,272$5.18
      - $6.79
                      
                      
                      469,163
                      
                      
                      
                      6.62
                      
                      
                      
                      4.9
                      
                      
                      
                      50,196$7.15
      - $7.63
                      
                      
                      115,001
                      
                      
                      
                      7.42
                      
                      
                      
                      3.7
                      
                      
                      
                      -Totals
                      
                      
                      3,177,195
                      
                      
                      $
                      3.32
                      
                      
                      
                      3.8
                      
                      
                      $
                      9,903,443





- 74
-





ENER1,
INC.


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS





Note
17 - Warrants





A summary
of the activity for warrants, all of which are currently exercisable, is as
follows:





Warrants
                          
                          
                          Weighted
                            average
                            exercise price
                          
                          
                          Weighted
                            average
                            remaining
                            contractual
                            life
                          
                          
                          Aggregate
                            intrinsic valueBalance,
      December 31, 2006
                          
                          
                          15,418,788
                          
                          
                          $
                          4.83
                          
                          
                          
                          5.6
                          
                          
                          $
                          -Granted
                          
                          
                          23,553,969
                          
                          
                          
                          3.36Exercised
                          
                          
                          (5,660,437
                          )
                          
                          
                          2.42Surrendered
                          
                          
                          (1,210,318
                          )
                          
                          
                          9.50Balance,
      December 31, 2007
                          
                          
                          32,102,002
                          
                          
                          $
                          4.00
                          
                          
                          
                          3.3
                          
                          
                          $
                          67,633,630Granted
                          
                          
                          3,952,858
                          
                          
                          
                          7.68Exercised
                          
                          
                          (5,725,007
                          )
                          
                          
                          5.25Forfeited
      or expired
                          
                          
                          (2,571,429
                          )
                          
                          
                          5.25Balance,
      December 31, 2008
                          
                          
                          27,758,424
                          
                          
                          $
                          4.10
                          
                          
                          
                          3.2
                          
                          
                          $
                          95,607,859Granted
                          
                          
                          712,500
                          
                          
                          
                          8.25Exercised
                          
                          
                          (863,678
                          )
                          
                          
                          2.67Balance,
      December 31, 2009
                          
                          
                          27,607,246
                          
                          
                          $
                          4.23
                          
                          
                          
                          2.2
                          
                          
                          $
                          75,389,036





The fair
value of each warrant grant was estimated on the date of the grant using the
Black-Scholes option pricing model with the following key
assumptions:





Years
      Ended December 31,2009
                    
                    
                    2008
                    
                    
                    2007Expected
      term (in years)
                    
                    
                    2 -
      3
                    
                    
                    
                    2 -
      5
                    
                    
                    
                    0.5
      - 5Risk
      free interest rate
                    
                    
                    0.81%
      - 1.57%
                    
                    
                    
                    0.78%
      - 1.78%
                    
                    
                    
                    3.43%
      - 4.92%Expected
      volatility
                    
                    
                    94%
      - 100%
                    
                    
                    
                    93%
      - 128%
                    
                    
                    
                    130%
      - 135%Dvidend
      yield
                    
                    
                    0%
                    
                    
                    
                    0%
                    
                    
                    
                    0%





Expected
term


The
expected term represents the period over which the warrants are expected to be
outstanding.





Risk-free
interest rate


The risk
free interest rate assumption is based on the implied yield currently available
on United States treasury issues with a remaining term equivalent to the
expected term of the warrants.





Expected
volatility


The
expected volatility assumptions are based upon the weekly closing stock price of
Ener1’s common stock since January 2002, when Ener1 underwent a change in
control.  We determined that share prices prior to January 2002 do not
reflect the ongoing business valuation of our operations.





Dividend
yield


We do not
intend to pay dividends on our common stock in the foreseeable future.
Accordingly, we use a dividend yield of zero in our assumptions.





- 75
-





ENER1,
INC.


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS





The
following table summarizes warrant information for warrants outstanding, all of
which are currently exercisable at December 31, 2009:





Warrants Outstanding and ExercisableExercise price range
                  
                  Number of
                    warrants
                  
                  
                  Weighted
                    average
                    exercise price
                  
                  
                  Weighted
                    average
                    remaining
                    contractual life
                  
                  
                  Aggregate
                    instrinsic value$2.10
      - $2.80
                  
                  
                  18,166,712
                  
                  
                  $
                  2.31
                  
                  
                  
                  2.3
                  
                  
                  $
                  73,291,317$4.83
      - $5.95
                  
                  
                  2,016,929
                  
                  
                  $
                  5.30
                  
                  
                  
                  1.2
                  
                  
                  
                  2,097,719$7.50
      - $8.88
                  
                  
                  6,808,217
                  
                  
                  $
                  8.10
                  
                  
                  
                  2.0
                  
                  
                  
                  -$10.50
      - $17.57
                  
                  
                  615,388
                  
                  
                  $
                  14.62
                  
                  
                  
                  4.4
                  
                  
                  
                  -27,607,246
                  
                  
                  $
                  4.23
                  
                  
                  
                  2.2
                  
                  
                  $
                  75,389,036





Note
18 – Noncontrolling Interest




The
following table reconciles equity attributable to noncontrolling interest
related to Enertech, our majority-owned subsidiary (in thousands):





December 31,2009
                    
                    
                    2008Balance,
      beginning of year
                    
                    $
                    3,517
                    
                    
                    $
                    -Capital
      contribution
                    
                    
                    -
                    
                    
                    
                    3,367Net
      income (loss) attributable to noncontrolling interest
                    
                    
                    (501
                    )
                    
                    
                    59Cumulative
      effect of change in accounting principle
                    
                    
                    38
                    
                    
                    
                    -Translation
      adjustments
                    
                    
                    107
                    
                    
                    
                    91Reduction
      in noncontrolling interest
                    
                    
                    (1,354
                    )
                    
                    
                    -Balance,
      end of year
                    
                    $
                    1,807
                    
                    
                    $
                    3,517





The
reduction in noncontrolling interest of approximately $1.4 million represents
the decrease in Ener1’s paid in capital for the purchase of 1,625,000 shares of
Enertech common stock on January 6, 2009.





Enertech
has a share-based compensation plan in which stock options are granted to
Enertech’s directors and employees who have contributed to Enertech’s
operations.  As of December 31, 2009 and 2008, there are 869,500 and
475,000 stock options outstanding which represent 2.8% and 1.6%, on a fully
diluted basis, of the outstanding ownership of Enertech,
respectively.





Noncontrolling
Interest in EnerDel


In 2004,
at the initial date of capitalization, Ener1 received an 80.5% equity ownership
interest in EnerDel and the consolidated financial statements include 100% of
the assets and liabilities of EnerDel, and the ownership interest of Delphi, the
noncontrolling investor, was originally recorded as a noncontrolling interest.
The noncontrolling interest balance sheet amount was reduced to zero during
2005 as a result of EnerDel’s cumulative losses, and no additional interest in
income or losses was recorded.





The
consolidated statement of operations includes 100% of the operations of EnerDel,
and the noncontrolling interest 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,
was reflected as net income attributable to noncontrolling interest totaling
$1,248,000 and $1,246,000 for the years ended December 31, 2008 and
2007.  The Series A Preferred Stock was redeemed in August
2008.





- 76
-





ENER1,
INC.


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS





Note
19 – Related Party Transactions





Investment
in Unconsolidated Entity


On August
24, 2009, we entered into a Securities Investment and Subscription Agreement
with Think Holdings, AS, a Norwegian limited liability company (“Think
Holdings”).  Think Holdings is the majority owner of Think Global AS
(“Think Global”), the Norwegian electric car manufacturer and customer of
EnerDel.  Ener1 has committed to purchase 10,826,640 shares of Series
B Convertible Preferred Stock for approximately $19.0 million.  The
investment will be made pursuant to three closings and as of December 31, 2009,
Ener1 has purchased 7,466,535 shares for approximately $13.0
million.





On August
26, 2009, Ener1 entered into a Purchase and Assignment Agreement with Bzinfin to
acquire approximately $3.0 million of debt pursuant to a loan facility with
Think Global and warrants to purchase 3,600,000 shares of common stock of Think
Global, (the “Bridge Loan”).  As consideration, Ener1 issued to
Bzinfin 896,986 shares of Ener1 common stock, valued at approximately $5.8
million.  Ener1 has exchanged the Bridge Loan for 1,809,419 shares of
Think Holdings Series B Convertible Preferred Stock and warrants to purchase
additional shares of Think Holdings Series B Convertible Preferred
Stock.  The total number of warrants is based on a predetermined
percentage of Think Holdings fully diluted share capital.





As of
December 31, 2009, we own approximately 28% of Think Holdings on a fully diluted
basis, which assumes the conversion and exercise of all outstanding
securities.  In accordance with accounting standards the investment
will be accounted for under the cost method as the Series B Convertible
Preferred Stock is not considered in-substance common stock.





On
February 3, 2010, we participated in the third closing of the Think Series B
Preferred shares and purchased an additional 3,360,105 shares for approximately
$5.8 million.





Convertible
Line of Credit


In
December 2008, we entered into the LOC Agreement with Ener1 Group to establish a
line of credit in the aggregate principal amount of $30.0 million for a period
of 18 months or until we complete a public equity offering, whichever occurs
earlier. All amounts borrowed under the LOC Agreement bear interest at 8% per
annum.  We are further obligated to issue to Ener1 Group warrants to
purchase shares of Ener1 common stock each time an advance is made under the LOC
Agreement equal to the amount of the advance divided by $20, with an exercise
price equal to $8.25 per share.  All warrants are immediately
exercisable and expire two years after issuance.





On August
26, 2009, Ener1 Group entered into a Novation and Assignment agreement with
Bzinfin, the owner of a majority of the common stock of Ener1 Group, whereby
Ener1 Group assigned to Bzinfin all of its rights and obligations under the LOC
Agreement.  Bzinfin owns approximately 3% of the outstanding shares of
Ener1 common stock and is a 68.5% shareholder of Ener1 Group.





Simultaneously,
Ener1 entered into the A&R LOC Agreement providing Bzinfin, among other
rights, the right to convert the first $8.0 million of principal and related
unpaid interest into shares of Ener1 common stock at an exercise price of $5.00
per share and any remaining principal and related unpaid interest into shares of
Ener1 common stock at an exercise price of $6.00 per share.  Based on
the closing stock price of Ener1 on August 26, 2009, a beneficial conversion
value of approximately $2.8 million was recorded as a reduction in proceeds and
is amortized to interest expense over the remaining 10 month term of the A&R
LOC Agreement, using the effective interest method.





The
A&R LOC Agreement is with a different lender than the original LOC
Agreement.  As a result, the unamortized debt discount, related to the
fair value of 512,500 warrants previously issued, of $0.7 million as of August
26, 2009, was charged to paid in capital as early extinguishment of
debt.





- 77
-




ENER1,
INC.
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS




In August
2009, we classified a $1.5 million working capital advance from Bzinfin under
the A&R LOC Agreement and in accordance with the terms of the agreement
issued to Bzinfin warrants to purchase up to 75,000 shares of Ener1 common stock
at an exercise price of $8.25 per share.  These warrants are
immediately exercisable and expire two years from the date of
grant.  Using a Black-Scholes pricing model, the estimated fair value
of $0.2 million was recorded as a reduction in proceeds and is amortized to
interest expense over the remaining 10 month term of the A&R LOC
Agreement.





The
components of the convertible line of credit balance as of December 31, 2009 are
as follows (in thousands, except warrants):





Convertible
                        Line of CreditProceeds
      from advances
                      
                      $
                      11,750Beneficial
      conversion feature, net
                      
                      
                      (1,829
                      )Fair
      value of warrants, net
                      
                      
                      (136
                      )Accrued
      interest payable at maturity
                      
                      
                      731Balance,
      December 31, 2009
                      
                      $
                      10,516Warrants
      issued
                      
                      
                      75,000Fair
      value of warrants
                      
                      $
                      227





The
following summarizes the amortization of debt discount to interest expense
during the year ended December 31, 2009 (in thousands):





Beneficial
                  
                  
                  FairConversion
                  
                  
                  Value ofFeature
                  
                  
                  WarrantsOriginal
      discount
                  
                  $
                  2,816
                  
                  
                  $
                  227Amortized
      to interest expense
                  
                  
                  (987
                  )
                  
                  
                  (91
                  )Balance,
      December 31, 2009
                  
                  $
                  1,829
                  
                  
                  $
                  136





The
unamortized balance at December 31, 2009 will be amortized to interest expense
during the six months ended June 30, 2010.





In
February 2010, we borrowed $5.0 million under the A&R LOC Agreement and, in
accordance with the terms of the agreement, issued to Bzinfin warrants to
purchase up to 250,000 shares of Ener1 common stock at an exercise price of
$8.25 per share.  These warrants are immediately exercisable and
expire two years from the date of grant.  Using a Black-Scholes
pricing model, the estimated fair value of $0.3 million was recorded as a
reduction in proceeds and will be amortized to interest expense over the
remaining 5 month term of the A&R LOC Agreement.





Transactions
with Ener1 Group


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





In
October 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,
the former Chief Financial Officer and Chief Administrative Officer of Ener1 and
the former Chief Financial Officer of Ener1 Group.  This agreement
ceased in January 2008.





- 78
-





ENER1,
INC.


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS





In
February 2007, Ener1 entered into an agreement with Ener1 Group to reimburse
Ener1 Group for $300,000 of salary and related costs for Charles Gassenheimer
and effective January 2008 this amount was increased to $500,000.  In
August 2008, Mr. Gassenheimer was appointed Chief Executive Officer of Ener1 in
addition to his role as Chairman of the Board of Directors of
Ener1.  The terms of the agreement have not been further amended as
Mr. Gassenheimer is not receiving additional compensation for this added
responsibility.





Note
20 - Segments





Segments
are designed to allocate resources internally and provide a framework for
management responsibility. Operating segments are defined as components of an
enterprise about which separate financial information is available that is
evaluated regularly by the chief operating decision maker, or decision making
group, in deciding how to allocate resources and in assessing performance. Our
chief operating decision maker is our Chief Executive Officer.





We have
identified three reportable operating segments: battery, fuel cell and
nanotechnology.  The battery business develops and markets advanced
lithium-ion batteries. The fuel cell business develops and markets fuel cells
and fuel cell systems. The nanotechnology business develops nanotechnology
related manufacturing processes and materials.





Transactions
between segments, consisting principally of product sales and purchases, are
recorded at the consummated sales price.  The accounting policies of
the segments are the same as those described in the Summary of Significant Accounting
Policies.





The
following table provides summarized financial information regarding our
reportable operating segments (in thousands):





- 79
-




ENER1,
INC.
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS




Years ended December 31,2009
                                                                                          
                                                                                          
                                                                                          2008
                                                                                          
                                                                                          
                                                                                          2007Net
      sales:Corporate
                                                                                          
                                                                                          $
                                                                                          220
                                                                                          
                                                                                          
                                                                                          $
                                                                                          85
                                                                                          
                                                                                          
                                                                                          $
                                                                                          -Battery
                                                                                          
                                                                                          
                                                                                          34,573
                                                                                          
                                                                                          
                                                                                          
                                                                                          6,730
                                                                                          
                                                                                          
                                                                                          
                                                                                          101Fuel
      Cell
                                                                                          
                                                                                          
                                                                                          7
                                                                                          
                                                                                          
                                                                                          
                                                                                          33
                                                                                          
                                                                                          
                                                                                          
                                                                                          179Total
      Net Sales
                                                                                          
                                                                                          $
                                                                                          34,800
                                                                                          
                                                                                          
                                                                                          $
                                                                                          6,848
                                                                                          
                                                                                          
                                                                                          $
                                                                                          280Depreciation
      and amortization expense:Corporate
                                                                                          
                                                                                          $
                                                                                          191
                                                                                          
                                                                                          
                                                                                          $
                                                                                          219
                                                                                          
                                                                                          
                                                                                          $
                                                                                          116Battery
                                                                                          
                                                                                          
                                                                                          7,378
                                                                                          
                                                                                          
                                                                                          
                                                                                          1,730
                                                                                          
                                                                                          
                                                                                          
                                                                                          376Fuel
      Cell
                                                                                          
                                                                                          
                                                                                          72
                                                                                          
                                                                                          
                                                                                          
                                                                                          53
                                                                                          
                                                                                          
                                                                                          
                                                                                          27Nanotechnology
                                                                                          
                                                                                          
                                                                                          27
                                                                                          
                                                                                          
                                                                                          
                                                                                          18
                                                                                          
                                                                                          
                                                                                          
                                                                                          11Total
      depreciation and amortization expense
                                                                                          
                                                                                          $
                                                                                          7,668
                                                                                          
                                                                                          
                                                                                          $
                                                                                          2,020
                                                                                          
                                                                                          
                                                                                          $
                                                                                          530Interest
      expense:Corporate
                                                                                          
                                                                                          $
                                                                                          4,553
                                                                                          
                                                                                          
                                                                                          $
                                                                                          21,687
                                                                                          
                                                                                          
                                                                                          $
                                                                                          30,216Battery
                                                                                          
                                                                                          
                                                                                          1,257
                                                                                          
                                                                                          
                                                                                          
                                                                                          91
                                                                                          
                                                                                          
                                                                                          
                                                                                          -Fuel
      Cell
                                                                                          
                                                                                          
                                                                                          -
                                                                                          
                                                                                          
                                                                                          
                                                                                          -
                                                                                          
                                                                                          
                                                                                          
                                                                                          -Nanotechnology
                                                                                          
                                                                                          
                                                                                          -
                                                                                          
                                                                                          
                                                                                          
                                                                                          -
                                                                                          
                                                                                          
                                                                                          
                                                                                          -Total
      interest expense
                                                                                          
                                                                                          $
                                                                                          5,810
                                                                                          
                                                                                          
                                                                                          $
                                                                                          21,778
                                                                                          
                                                                                          
                                                                                          $
                                                                                          30,216Corporate
      allocations:Corporate
                                                                                          
                                                                                          $
                                                                                          (11,870
                                                                                          )
                                                                                          
                                                                                          $
                                                                                          (11,987
                                                                                          )
                                                                                          
                                                                                          $
                                                                                          (17,814
                                                                                          )Battery
                                                                                          
                                                                                          
                                                                                          10,625
                                                                                          
                                                                                          
                                                                                          
                                                                                          8,800
                                                                                          
                                                                                          
                                                                                          
                                                                                          11,958Fuel
      Cell
                                                                                          
                                                                                          
                                                                                          946
                                                                                          
                                                                                          
                                                                                          
                                                                                          2,570
                                                                                          
                                                                                          
                                                                                          
                                                                                          4,315Nanotechnology
                                                                                          
                                                                                          
                                                                                          299
                                                                                          
                                                                                          
                                                                                          
                                                                                          617
                                                                                          
                                                                                          
                                                                                          
                                                                                          1,541$
                                                                                          -
                                                                                          
                                                                                          
                                                                                          $
                                                                                          -
                                                                                          
                                                                                          
                                                                                          $
                                                                                          -Net
      loss attributable to Ener1, Inc.Corporate
                                                                                          
                                                                                          $
                                                                                          (885
                                                                                          )
                                                                                          
                                                                                          $
                                                                                          (16,159
                                                                                          )
                                                                                          
                                                                                          $
                                                                                          (34,255
                                                                                          )Battery
                                                                                          
                                                                                          
                                                                                          (45,210
                                                                                          )
                                                                                          
                                                                                          
                                                                                          (27,943
                                                                                          )
                                                                                          
                                                                                          
                                                                                          (20,014
                                                                                          )Fuel
      Cell
                                                                                          
                                                                                          
                                                                                          (3,692
                                                                                          )
                                                                                          
                                                                                          
                                                                                          (6,587
                                                                                          )
                                                                                          
                                                                                          
                                                                                          (7,132
                                                                                          )Nanotechnology
                                                                                          
                                                                                          
                                                                                          (1,217
                                                                                          )
                                                                                          
                                                                                          
                                                                                          (1,771
                                                                                          )
                                                                                          
                                                                                          
                                                                                          (2,537
                                                                                          )Net
      loss attributable to Ener1, Inc.
                                                                                          
                                                                                          $
                                                                                          (51,004
                                                                                          )
                                                                                          
                                                                                          $
                                                                                          (52,460
                                                                                          )
                                                                                          
                                                                                          $
                                                                                          (63,938
                                                                                          )At
      December 31,2009
                                                                                          
                                                                                          
                                                                                          2008Assets:Corporate
                                                                                          
                                                                                          $
                                                                                          30,959
                                                                                          
                                                                                          
                                                                                          $
                                                                                          10,910Battery
                                                                                          
                                                                                          
                                                                                          142,864
                                                                                          
                                                                                          
                                                                                          
                                                                                          130,169Fuel
      Cell
                                                                                          
                                                                                          
                                                                                          438
                                                                                          
                                                                                          
                                                                                          
                                                                                          488Nanotechnology
                                                                                          
                                                                                          
                                                                                          146
                                                                                          
                                                                                          
                                                                                          
                                                                                          164Total
      assets
                                                                                          
                                                                                          $
                                                                                          174,407
                                                                                          
                                                                                          
                                                                                          $
                                                                                          141,731





Ener1
records proceeds from cost-sharing grants as a reduction of research and
development expenses.  Proceeds from grants were $3.7 million, $3.8
million and $0.9 million for the years ended December 31, 2009, 2008 and 2007,
respectively.





- 80
-





ENER1,
INC.


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS








Years ended December 31,2009
                                                    
                                                    
                                                    2008
                                                    
                                                    
                                                    2007Net
      sales:U.S.
                                                    
                                                    $
                                                    22,915
                                                    
                                                    
                                                    $
                                                    4,877
                                                    
                                                    
                                                    $
                                                    280South
      Korea
                                                    
                                                    
                                                    24,306
                                                    
                                                    
                                                    
                                                    5,544
                                                    
                                                    
                                                    
                                                    -Intersegment
      transfers
                                                    
                                                    
                                                    (12,421
                                                    )
                                                    
                                                    
                                                    (3,573
                                                    )
                                                    
                                                    
                                                    -Total net sales
                                                    
                                                    $
                                                    34,800
                                                    
                                                    
                                                    $
                                                    6,848
                                                    
                                                    
                                                    $
                                                    280Net
      income (loss) attributable to Ener1, Inc.U.S.
                                                    
                                                    $
                                                    (47,079
                                                    )
                                                    
                                                    $
                                                    (52,710
                                                    )
                                                    
                                                    $
                                                    (63,938
                                                    )South
      Korea
                                                    
                                                    
                                                    (1,016
                                                    )
                                                    
                                                    
                                                    638
                                                    
                                                    
                                                    
                                                    -Intersegment
      transfers
                                                    
                                                    
                                                    (2,909
                                                    )
                                                    
                                                    
                                                    (388
                                                    )
                                                    
                                                    
                                                    -Net loss attributable to Ener1, Inc.
                                                    
                                                    $
                                                    (51,004
                                                    )
                                                    
                                                    $
                                                    (52,460
                                                    )
                                                    
                                                    $
                                                    (63,938
                                                    )At
      December 31,2009
                                                    
                                                    
                                                    2008Assets:U.S.
                                                    
                                                    $
                                                    111,702
                                                    
                                                    
                                                    $
                                                    77,114South
      Korea
                                                    
                                                    
                                                    62,705
                                                    
                                                    
                                                    
                                                    64,617Total assets
                                                    
                                                    $
                                                    174,407
                                                    
                                                    
                                                    $
                                                    141,731





Note
21 – Commitments and Contingencies





Litigation


Ener1 may
receive communications from time to time alleging various claims. These claims
may include, but are not limited to, employment matters, collections of accounts
payable, product liability claims, and allegations that certain of our
products infringe the patent rights of other third parties.  Ener1
cannot predict when such claims may be made, the outcome of any such claims or
the effect of any such claims on our operating results, financial condition, or
cash flows.  As of December 31, 2009, there were no material pending
legal proceedings.





Purchase
Commitments


Ener1 has
purchase orders and commitments with various suppliers to purchase machinery and
equipment.  These commitments are not recorded in the accompanying
consolidated balance sheets and totaled approximately $29.0 million as of
December 31, 2009.





Other
Commitments


In August
2009, we established the terms and conditions of the 2009 Annual Incentive
Program (the “2009 Program”) to provide individuals participating in the 2009
Program the ability to earn an incentive bonus, ranging from 5% to 150% of the
individual’s base salary, depending on their position at Ener1 and the
achievement of certain targets with respect to Ener1’s financial results. 
As of December 31, 2009, we may be committed to pay approximately $0.8 million
which is recorded in the accompanying financial statements.





In August
2009, we were awarded a grant for $118.5 million pursuant to the American
Recovery and Reinvestment Act (“ARRA”) which is administered by the Department
of Energy.  The proceeds from the grant will be used to purchase
production equipment, in 2010 and beyond, to maximize our capacity at our
existing facilities and to develop and equip an additional manufacturing
facility in Mt. Comfort, Indiana.  We will be required to spend one
dollar of our own funds for every incentive dollar we receive.





- 81
-





ENER1,
INC.


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS




Note
22 – Subsequent Events





On February 9, 2010, EnerDel entered into a two-year lease (the
“Lease”) for approximately 211,500 square feet of industrial space in Mount
Comfort, Indiana.  The annual base rent under the two-year term of the
Lease is $0.8 million.  EnerDel has a first right of refusal to
lease an additional 211,500 square feet and an exclusive and irrevocable option
to purchase the building which expires in December 2011.  The purchase
price is $15.5 million if the purchase option is exercised before December 31,
2010 and increases, in increments of $40,000 per month thereafter until the
purchase option is exercised up to a maximum of $16.0 million.  If
EnerDel fails to exercise the purchase option by the expiration date, there may
be an obligation to enter into a 15 year lease.





In
February 2010, Ener1 issued purchase orders and commitments for approximately
$24 million for machinery and equipment.





On March
1, 2010, we received the first reimbursement pursuant to the ABMI grant totaling
approximately $2.5 million.





- 82
-





SELECTED
QUARTERLY FINANCIAL DATA


UNAUDITED




(In
thousands, except per share amounts)





Quarter Ended
                    
                    Mar. 31
                    
                    
                    June 30
                    
                    
                    Sep. 30
                    
                    
                    Dec. 31
                    
                    
                    TotalFiscal
      Year 2009Net
      sales
                    
                    $
                    8,192
                    
                    
                    $
                    7,537
                    
                    
                    $
                    8,117
                    
                    
                    $
                    10,954
                    
                    
                    $
                    34,800Gross
      profit
                    
                    
                    1,389
                    
                    
                    
                    1,177
                    
                    
                    
                    424
                    
                    
                    
                    1,078
                    
                    
                    
                    4,068Net
      loss attributable to Ener1, Inc.
                    
                    
                    (7,308
                    )
                    
                    
                    (12,861
                    )
                    
                    
                    (15,837
                    )
                    
                    
                    (14,998
                    )
                    
                    
                    (51,004
                    )Net
      loss per share attributable to Ener1, Inc.:Basic
                    
                    $
                    (0.06
                    )
                    
                    $
                    (0.11
                    )
                    
                    $
                    (0.14
                    )
                    
                    $
                    (0.13
                    )
                    
                    $
                    (0.44
                    )Diluted
                    
                    $
                    (0.08
                    )
                    
                    $
                    (0.11
                    )
                    
                    $
                    (0.14
                    )
                    
                    $
                    (0.12
                    )
                    
                    $
                    (0.45
                    )Fiscal
      Year 2008Net
      sales
                    
                    $
                    97
                    
                    
                    $
                    437
                    
                    
                    $
                    39
                    
                    
                    $
                    6,275
                    
                    
                    $
                    6,848Gross
      profit
                    
                    
                    97
                    
                    
                    
                    437
                    
                    
                    
                    39
                    
                    
                    
                    1,614
                    
                    
                    
                    2,187Net
      loss attributable to Ener1, Inc.
                    
                    
                    (22,900
                    )
                    
                    
                    (8,038
                    )
                    
                    
                    (9,120
                    )
                    
                    
                    (12,402
                    )
                    
                    
                    (52,460
                    )Net
      loss per share attributable to Ener1, Inc.:Basic
      and diluted
                    
                    $
                    (0.25
                    )
                    
                    $
                    (0.08
                    )
                    
                    $
                    0.09
                    
                    
                    $
                    (0.27
                    )
                    
                    $
                    (0.51
                    )





- 83
-





Item
      9.
            Changes
      in and Disagreements with Accountants on Accounting and Financial
      Disclosure





None





Item
      9A.
            Controls
      and Procedures





Evaluation of Disclosure Controls and Procedures





The
Company maintains disclosure controls and procedures that are designed to ensure
that information required to  be disclosed in the reports the Company
files or submits under the Securities Exchange Act of 1934, as amended
("Exchange Act"), is recorded, processed, summarized , and reported within the
time periods specified in the Commission's rules and forms and that such
information is accumulated and communicated to the Company's management
including the Chief Executive Officer and the Chief Financial Officer, as
appropriate, to allow timely decisions regarding required
disclosure.





As of
December 31, 2009, we carried out an evaluation of the effectiveness of the
design and operation of our disclosure controls and procedures as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e). 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 this evaluation,
our Chief Executive Officer and Chief Financial Officer have concluded
that as of December 31, 2009, such disclosure controls and procedures were
effective.





Management’s
Report on Internal Control Over Financial Reporting





Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting for the Company (as defined in Exchange Act
Rules 13a-15(f) and 15d-15(f)). Internal control over financial reporting is a
process to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles and includes those
policies and procedures that (i) pertain to the maintenance of records that in
reasonable detail, accurately and fairly reflect the transactions and
dispositions of our assets; (ii) provide reasonable assurance that transactions
are recorded as necessary to permit the preparation of our financial statements
in accordance with generally accepted accounting principles, and that receipts
and expenditures of the Company are being made only in accordance with
authorizations of management and directors of the Company; and (iii) provide
reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use or disposition of the Company’s assets that could have a
material effect on our financial statements.





Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements.  Also, projections of any evaluation
of effectiveness to future periods are subject to the risk that controls may
become inadequate because of changes in conditions, or that the degree of
compliance with the policies and procedures may deteriorate.





Management
of the Company has assessed the effectiveness of the Company’s internal control
over financial reporting as of December 31, 2009.  In making its
assessment of internal control over financial reporting, management used the
criteria described inInternal
Control – Integrated Framework, issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO). Based on this
evaluation, management concluded that the Company’s internal control over
financial reporting was effective as of December 31, 2009.





The
effectiveness of the Company’s internal control over financial reporting as of
December 31, 2009 has been audited by PricewaterhouseCoopers LLP, an
independent registered public accounting firm, as stated in their report which
is included herein.





- 84
-





Changes
in Internal Control over Financial Reporting





There
were changes in internal control over financial reporting during the quarter
ended December 31, 2009 that have materially affected, or are reasonably likely
to materially affect, the Company’s internal control over financial reporting,
surrounding the remediation of the previously disclosed material weakness over
the accounting for infrequent and unusual transactions.  During the
fourth quarter, the Company revised its procedures for concluding on the proper
accounting for infrequent and unusual transactions.  Specifically, we
have adopted procedures including:


·
              Thorough
      research and analysis of authoritative accounting literature to identify
      the appropriate accounting treatment for infrequent and unusual
      transactions and


·
              Consultation
      with external advisors, as deemed necessary, to validate the Company’s
      conclusions.





Item
      9B.
            Other
      Information


None





- 85
-





PART
III





Item
10.         Directors, Executive
Officers and Corporate Governance





Directors
and Executive Officers





Each of
our directors has been appointed to the Board until such time as he resigns or
is replaced.  Our directors and executive officers, together with
biographical summaries and business experience during the past five years and
directorships of other corporations, are set forth below.




Name
                                                      
                                                      Age
                                                      
                                                      PositionCharles
      Gassenheimer
                                                      
                                                      36
                                                      
                                                      Director,
      Chief Executive Officer and Chairman of the BoardKenneth
      Baker
                                                      
                                                      62
                                                      
                                                      DirectorMarshall
      Cogan
                                                      
                                                      72
                                                      
                                                      DirectorMark
      D’Anastasio
                                                      
                                                      55
                                                      
                                                      DirectorElliot
      Fuhr
                                                      
                                                      50
                                                      
                                                      DirectorKarl
      Gruns
                                                      
                                                      62
                                                      
                                                      DirectorLudovico
      Manfredi
                                                      
                                                      48
                                                      
                                                      DirectorPeter
      Novak
                                                      
                                                      57
                                                      
                                                      DirectorThomas
      Snyder
                                                      
                                                      65
                                                      
                                                      DirectorGerard
      Herlihy
                                                      
                                                      57
                                                      
                                                      Chief
      Financial OfficerNaoki
      Ota
                                                      
                                                      43
                                                      
                                                      Chief
      Operating OfficerUlrik
      Grape
                                                      
                                                      49
                                                      
                                                      Executive
      Vice President; President, Ener1 EuropeNicholas
      Brunero
                                                      
                                                      31
                                                      
                                                      Vice
      President and General CounselJeffrey
      Seidel
                                                      
                                                      47
                                                      
                                                      Chief
      Strategy OfficerRichard
      Stanley
                                                      
                                                      53
                                                      
                                                      President,
      EnerDel,
Inc.




Charles Gassenheimer has been
our Chief Executive Officer since August 2008 and our Chairman of the Board of
Directors since November 2007.  He has served as a Director since
January 2006.  Mr. Gassenheimer has also been serving as 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.





Kenneth Baker has been a
Director of our company since July 2007.  He also serves on the
Nomination and Governance Committee as well as the Chairman of the Compensation
Committee of the Board of Directors.  Since November 1999, Mr. Baker
has served as president and chief executive officer and member of the board of
trustees of Altarum Institute, a nonprofit research institute in the areas of
national defense, homeland security and environment.  Prior to that,
he served as an executive at General Motors for over 30 years until his
retirement in 1999, including vice president of global research and development
and program manager of electric vehicles.  He was the founding
chairman of the USABC, the organization partially funding our lithium-ion
battery development.  Mr. Baker graduated with a bachelor of science
in mechanical engineering from Clarkson University.  He currently
serves on the board of directors and is a member of the audit and compensation
committees for AeroVironment, Inc. and Millenium Cell, Inc.





Marshall Cogan has been a
Director of our company since February 2006. He also has been a strategic
advisor to Ener1 Group during 2006.  For the last five years, Mr. Cogan has
been a private equity investor.  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 Bachelor’s of Arts and Masters of Business Administration
from Harvard University.




- 86
-




Mark D’Anastasio has been a
Director of our company since August 2008.  Mr. D’Anastasio is a
strategic communications advisor to multinational corporations and government
institutions globally. He is founder and president of Washington, D.C.-based
Emerging Markets Communication (EMC). Mr. D’Anastasio’s work is spread across
rising post-socialist, ‘base-of-the-pyramid’ and dynamic economies of Asia, and
has included pioneering assignments supporting some of the most sweeping
international economic changes of the past twenty years. EMC, a limited
liability company, specializes in market entry, commercial dispute resolution,
corporate and CEO positioning, government relations, federal compliance issues
and sovereign external communications. Prior to establishing EMC in 2000, Mr.
D’Anastasio was a managing director at the global communications consultancy
Burson-Marsteller, where he chaired the International Development Practice, and
he has served in a number of other high-profile commercial and non-commercial
positions, including as a communications policy advisor to foreign governments
at Harvard University. He began his career as a business and financial
journalist and held international staff positions at Business Week magazine and
The Wall Street Journal. Mr. D’Anastasio holds a Bachelor’s degree from
Dartmouth College and Masters degrees from Yale University and Columbia
University.





Elliot Fuhr has been a
Director of our company since January 2008.  Mr. Fuhr serves on the
Audit Committee of the Board of Directors as well as the Nomination and
Governance Committee and the Compensation Committee.  As a Senior
Managing Director at FTI Consulting, Inc. since August 2002, Mr. Fuhr
specializes in assisting senior management and boards of directors in the areas
of performance improvement, financial and operational restructuring, mergers and
acquisitions, divestitures, business planning and rapid implementation
projects.  He has broad industry experience including engagements with
automotive, apparel, retail, technology, manufacturing, services, chemical, and
oil and gas companies. Mr. Fuhr has led or is leading several FTI firm-wide
initiatives, including Business Quality, Learning and Education, Business
Performance Improvement and Key Client programs. He has over 24 years of
experience in consulting and restructuring businesses. Mr. Fuhr was previously a
partner at PricewaterhouseCoopers LLP in the Business Recovery Services division
and held several chemical engineering positions at Exxon.





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. He
also serves as a member of the Compensation Committee.  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 a Masters in Business Administration 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.





- 87
-





Dr. Peter Novak has been our
President since November 2007 and our Chief Technology Officer since August 2008
until his resignation as President and Chief Technology Officer on March 9,
2010.  He remains as an employee, with the title Senior Technical
Advisor, and a member of the Board of Directors.  He has served as a
Director of our company since February 2002 and as Chief Executive Officer from
December 2006 to August 2008.  Since 2001, he has been the Chief
Technology Officer and a director of Ener1 Group. Since 1991, Dr. Novak has
focused on bringing advanced electronic technologies to market. In 1998, Dr.
Novak worked 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 managed 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 pending or issued at the United States Patent and Trademark Office and
elsewhere. In 2001, Dr. Novak 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.





Thomas Snyder has been a
Director of our company since July 2007 and serves as Chairman of the Nomination
and Governance Committee.  Mr. Snyder served as the president from
1994 and the chief executive officer from 2000 through 2006 of Remy
International in Anderson, Indiana.  Mr. Snyder led the management
buyout of Delco Remy from General Motors in 1994.  Since July 2007, he
has served as the president of Ivy Tech Community College of Indiana, a mid-west
educational institution with over 100,000 enrolled students.  Mr.
Snyder graduated from Kettering University with a degree in mechanical
engineering and holds a Masters degree in Business Administration from Indiana
University.





Gerard Herlihy has been our
Chief Financial Officer since November 2007 and from January 2006 through
October 2006.  During the period from October 2006 to November 2007,
Mr. Herlihy had been directing Ener1’s media and investor relations and external
reporting.  From June 2004 to December 31, 2007, he served as chief
financial officer of Splinex Technology Inc., an affiliate of Ener1 and from
September 2005 to December 31, 2007 he additionally served as president of
Splinex Technology.  Mr. Herlihy’s previous positions included chief
financial and administrative officer of a publicly held truck and automotive
parts supplier, managing director of corporate finance at an investment bank and
auditor at a national public accounting firm. Mr. Herlihy has a Masters of
Business Administration degree from the Harvard Business School and a Bachelor
of Science degree from the University of Rhode Island and is a Certified Public
Accountant (inactive status).





Naoki Ota has been our Chief
Operating Officer since November 2007.  Mr. Ota has been the President
and Chief Operating Officer of our EnerDel subsidiary since July
2005.  He has over 15 years of management, technical, operations and
marketing experience in lithium-ion battery production and related industries.
From May 2004 to April 2005, Mr. Ota was senior manager of technology marketing
for Hitachi Chemical Research Center, Inc. After 8 years of experience in the
lithium-ion business in Japan from 1991 to 1999, he was with Quallion, LLC, a
manufacturer of batteries for medical implants and aerospace applications. At
Quallion, from November 1999 to March 2004, Mr. Ota held senior management
positions in advanced material resources, application engineering and marketing
and strategic planning.  He also has experience as a consultant for
sourcing advanced materials for lithium batteries and other electrochemical
devices. Mr. Ota earned a Bachelor of Applied Chemistry degree from Osaka
Prefacture University, Japan.





- 88
-





Ulrik Grape has been our
Executive Vice President and Chief Executive Officer of EnerDel since January
2006. On March 9, 2010, Mr. Grape relinquished his title as Chief Executive
Officer of EnerDel.  In September 2009, Mr. Grape was appointed
President of Ener1 Europe.   This division was created to meet
growing demand for electric drive and battery technology among top European
automakers as well as other business opportunities involving energy storage
applications.  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.





Nicholas Brunero has been our
Vice President and General Counsel since January 2010, and was previously Vice
President and Deputy General Counsel from March 2008 to December 2009.  Mr.
Brunero also serves as Corporate Secretary and as a member of Ener1’s
Intellectual Property Committee.  From 2003 to 2008, Mr. Brunero was an
attorney at the law firm of Duval & Stachenfeld LLP in New York, where his
practice focused primarily on the representation of financial institutions and
individuals in connection with commercial litigations, NASD and NYSE securities
arbitrations, and SEC and FINRA investigations. Mr. Brunero received his
Bachelors of Arts degree from Bates College and his Juris Doctorate degree from
Brooklyn Law School.





Jeffrey Seidel joined Ener1 in
October 2008 as Vice President of Corporate Strategy and in January 2010 was
promoted to Chief Strategy Officer.  Prior to joining Ener1, Mr.
Seidel spent 19 years with Credit Suisse, where he was global head of
convertible research.  He had additional responsibilities for
proprietary risk management of convertible bonds including growth companies from
the alternative energy sector.  Mr. Seidel has a Bachelor’s degree in
Economics from Kenyon College and a Masters of Business Administration in
Finance and International Business from New York University.





Richard Stanley has been the
President of EnerDel since September 2009.  Mr. Stanley has 30 years
global manufacturing and management experience and a record of creating new
business lines. Previously, Mr. Stanley served as president of Remy, Inc., the
largest division of Remy International, where he oversaw organic growth, new
customer development and corporate acquisitions. At Remy, Mr. Stanley also
gained experience in emerging markets and technologies working in the field of
hybrid vehicle supply and has spent the past two years at ATC Technology
Corporation, as president of their drivetrain division.  Prior to
serving as president, Mr. Stanley was vice president and general manager of
automotive systems at Remy International. Mr. Stanley holds a B.S. in Mechanical
Engineering from the Rose-Hulman Institute of Technology, and an M.S. in
Manufacturing Management from Kettering University.





- 89
-





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 reports of beneficial ownership and changes in beneficial ownership of
our common stock with the SEC on Forms 3, 4 and 5.  Officers,
directors and greater than 10% stockholders are required by SEC regulation to
furnish us with copies of all Section 16(a) forms they file.





Based
solely upon our review of copies of such reports (and amendments thereto) which
we have received during the year ended December 31, 2009, and written
representations of the persons required to file said reports, we believe that
all reporting persons complied with these reporting requirements during fiscal
year 2009 except for the following late reports, each of which was due to
administrative error: Ener1 Group filed a delinquent Form 4 in September 2009 to
report transfers of warrants from January through August 2009;
Bzinfin  filed a delinquent Form 4 in September 2009 to report
receipt  of warrants from May through August 2009; two stock option
awards for Charles Gassenheimer which were subsequently reported on delinquent
Form 4’s in March and November 2009; one stock option award and one forfeiture
of stock options for Gerard Herlihy which were subsequently reported on
delinquent Form 4’s in March and August 2009; one stock option award and four
forfeitures of stock options for Naoki Ota which were subsequently reported on
delinquent Form 4’s in March 2009, August 2009 and March 2010; one stock option
award and four forfeitures of stock options for Ulrik Grape which were
subsequently reported on delinquent Form 4’s in March 2009, August 2009 and
March 2010 and sales of our common stock by Mr. Grape which was subsequently
reported on delinquent Form 4 in November 2009; and a delinquent Form 4 for
Thomas Snyder for a stock option award for December 2008 which was subsequently
reported in March 2010.





Code
of Ethics





In March
2008, we adopted an amendment to our Business Code of Conduct (the “Code”),
which was originally adopted in 2004.  The Code applies to our
officers, directors and all of our employees. The Code provides written
standards that are reasonably designed to deter wrongdoing and to 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) the prompt internal reporting of violations of the Code to an
appropriate person identified in the Code; and (5) accountability for adherence
to the Code. Our Code was amended to include more detailed information on our
policies, including, among others, policies on protecting proprietary or
confidential information, and how to report potential violations
of any of our policies.  A copy of the Code is available on
our website,http://www.ener1.com,
and is otherwise available in print to any shareholder who requests
it.





Corporate
Governances





Our Board
of Directors (the “Board”) is entrusted with and responsible for the oversight
of Ener1 in an honest, fair, diligent and ethical manner.  The Board
believes that good corporate governance is critical to fulfilling the Company’s
obligations to our shareholders.  Our culture demands integrity and an
unyielding commitment to strong internal practices and policies.  We
have the highest confidence in our financial reporting, our underlying system of
internal controls and our people, who undertake their responsibilities with the
highest level of ethical standards.  Our corporate governance
principles and guidelines, committee charters, the Code, whistle blower policy
and other governance-related policies are available on our website.





- 90
-





Independence





Our Board
consists of a majority of directors who qualify as independent directors
(“Independent Directors”) pursuant to the rules adopted by the SEC applicable to
the corporate governance standards for companies listed on the NASDAQ Stock
Exchange.





Each
year, our Board reviews whether members meet the definition of independence in
accordance with applicable SEC and NASDAQ rules.





In
February 2010, our Nomination and Governance Committee reviewed each Director’s
response to a Directors and Officers questionnaire asking about, among other
things, his relationships with the Company (and those of their immediate family
members) and other potential conflicts and determined that all Directors, except
for Mr. Gassenheimer, who serves as our Chairman of the Board and Chief
Executive Officer, Dr. Novak, who serves as our Senior Technical Advisor
and Mr. D’Anastasio, who provides consulting services, qualify as
independent.





In March
2010, the board appointed Thomas Snyder as Lead Director of the Board in light
of the fact that Mr. Gassenheimer serves as both Chief Executive Officer of the
Company and Chairman of the Board.  The duties of the Lead Director
shall entail, among other things, being the chairman of all Board meetings at
which the Chairman is not present, responding to shareholders and other
stakeholder questions that are directed to the Lead Director or other
Independent Directors, and calling and acting as the Chairman of meetings among
Independent Directors.





Board of Directors and
Committees





Our Board
held seven meetings (four in person and three telephonically) during
2009.  The independent members of the Board also met in executive
session without management on at least two occasions.





Our
corporate governance principles and charters describe how the Board should
conduct its oversight responsibilities in protecting and representing our
Company’s shareholders.  Under these principles, our Board has
established three standing committees.   Some of the significant
functions performed by these committees, and the members of the Board currently
serving on these committees, are as follows:





Audit
Committee


Our Audit
Committee has three members: Mr. Gruns, who serves as the Chairperson, Mr.
Manfredi and Mr. Fuhr. All members are Independent
Directors.   The Board has determined Mr. Gruns meets the SEC
criteria and definition of an “audit committee financial expert.” The Audit
Committee assists the Board in fulfilling its oversight responsibilities with
respect to our accounting and financial reporting processes and audits of our
financial statements by monitoring the integrity of our financial statements,
the independence and qualifications of our external auditors, our system of
internal controls, the performance of our external auditors and our compliance
with laws, regulations and our code of conduct.




The Audit
Committee also reviews and approves all related party transactions. The Audit
Committee will only approve a related party transaction if it determines that
the terms of the transaction are fair to, and in the best interest of, the
Company. In this respect, the Audit Committee uses the overriding “arms length
transaction” criteria to analyze the following factors, in addition to any other
factors it deems appropriate depending on the circumstances, in determining
whether to approve a related party transaction: (i) fairness of the terms for
the Company as related to market and current industry practice;  (ii)
whether the transaction is in the Company’s best interest; (iii) materiality of
the transaction as related to the Company and estimated third party judgment;
(iv) role of the related party in the transaction; (v) structure of the
transaction; and (vi) interests of all related parties in the transaction.
Approval of a related party transaction may be conditioned upon the Company and
the related party taking certain recommended actions that the Audit Committee
deems appropriate and necessary, including, without limitation, any or all of
the following: (i) limiting the duration or magnitude of the transaction by
changing specific terms; (ii) requiring that information about the related party
transaction be documented and that reports reflecting the nature and amount of
the transaction be delivered to the Audit Committee on a regular basis; and
(iii) appointing a Company representative to monitor various aspects of the
related party transaction.




The Audit
Committee met 21 times during 2009.  The Audit Committee’s charter is
available on our website at http://www.ener1.com.





Compensation
Committee


Our
Compensation Committee has three members: Mr. Baker, who serves as the
Chairperson, Mr. Manfredi and Mr. Fuhr.  All members are Independent
Directors.  The Compensation Committee administers and determines
eligibility for, and makes awards under, our stock based compensation
plans.  The Committee also reviews and evaluates our executive
compensation packages, including salaries, bonus participation percentages and
other compensation as deemed necessary.  The Compensation Committee
met five times during 2009.  The Compensation Committee’s charter is
available on our website at http://www.ener1.com.




- 91
-





Nomination
and Governance Committee


Our
Nomination and Governance Committee has three members: Mr. Snyder, Mr. Baker and
Mr. Fuhr.  Mr. Snyder served as Chairman of the Nomination and
Governance Committee in 2009.  In March 2010, Mr. Fuhr was appointed
by the Board as Chairman of the Nomination and Governance Committee, in order to
allow Mr. Snyder more time to focus his efforts on other responsibilities at the
Board and Company level.  All members are Independent
Directors.  The Nomination and Governance Committee assists the Board
by recommending candidates for officer positions and vacancies on the Board,
developing and recommending corporate governance principles and taking
leadership roles in shaping our corporate governance. The Nomination and
Governance Committee has discussed the makeup of the Board
during various executive sessions among the Independent Directors
only, and has reaffirmed its position that the Board be diverse in all
areas, including but not limited to experience, business sector, age, geography,
gender and ethnicity.  The Board confirmed that the current structure
meets the Nomination and Governance Committee objectives; but as
the Company continues to grow, the Nomination and
Governance Committee will further evaluate candidates that can
contribute to the overall diversity and effectiveness of the
Board.  The Nomination and Governance Committee met three times during
2009.





The
following table sets forth information regarding Directors’ compensation during
2009 (in thousands):


Name
                
                Board
                  retainer
                
                Committee
      chaired
                
                Committee
                  chair fees
                
                
                All other
                  compensation
                  (1)
                
                
                Total fees
                  earned or
                  paid in
cashKenneth
    Baker
                
                $
                40,000
                
                Compensation
                
                $
                10,000
                
                
                $
                -
                
                
                $
                50,000Marshall
    Cogan
                
                $
                40,000
                
                
                
                $
                -
                
                
                $
                -
                
                
                $
                40,000Mark
      D'Anastasio
                
                $
                -
                
                
                
                $
                -
                
                
                $
                1,030,130
                
                
                $
                1,030,130Elliot Fuhr
                
                $
                40,000
                
                
                
                $
                -
                
                
                $
                -
                
                
                $
                40,000Karl Gruns
                
                $
                40,000
                
                Audit
                
                $
                10,000
                
                
                $
                -
                
                
                $
                50,000Ludovico
      Manfredi
                
                $
                40,000
                
                
                
                $
                -
                
                
                $
                -
                
                
                $
                40,000Thomas
    Snyder
                
                $
                40,000
                
                Nomination
      and Governance
                
                $
                10,000
                
                
                $
                -
                
                
                $
                50,000





(1) Mr.
Mark D’Anastasio is not an Independent Director as we pay him through his
company Emerging Markets Communications for government and media relations
consulting services.  Included in this amount is a one-time bonus of
$350,000 approved by the Board.  He does not receive any other
compensation for his services other than reimbursement for travel related
expenses to attend meetings.





Each
Independent Director was paid $40,000, in cash, as the annual Board retainer fee
and reimbursed for travel expenses to attend Board and committee
meetings.  Independent Directors who also serve as a committee
chairperson were paid $10,000, in cash, as the annual committee chair
fee.  Each Independent Director is also entitled to participate in our
equity compensation plans which provide for the grant of stock options for each
year the Director serves as member of the Board, at an exercise price equal to
the fair market value of our common stock on the date of grant.





- 92
-





Item 11.
            Executive
      Compensation





Compensation
Discussion and Analysis





Objectives and principles of
Ener1’s Executive Compensation Program


The
executive compensation program is designed to achieve the following
objectives:





·
            Attract,
      motivate and retain talented executives critical to the success of the
      Company and the execution of the business
  strategy;


·
            Establish
      performance objectives that link incentive compensation to the achievement
      of key operating goals and strategic goals;
and


·
            Provide
      compensation that aligns the long-term interest of the executives with
      shareholders through long-term equity
  incentives.





The
Compensation Committee of the Board considers the following in discharging their
responsibilities to the Company and the shareholders:





·
            Establish
      and review the overall compensation philosophy of the Company to ensure
      clear ties to shareholder interests and appropriately factor in and
      balance any risks that may exist in connection with compensation packages
      for executives at the Company.


·
            Review
      and approve corporate goals and objectives relevant to the executives’
      compensation including performance
objectives.


·
            When
      necessary and deemed appropriate, engage outside compensation consulting
      firms to assist in evaluating appropriate compensation packages and
      benchmarking, and to consider the Company’s overall and specific
      compensation strategy and packages relative to companies in comparable
      industries and of the same relative size to our
  Company.


·
            Evaluate
      the performance of the executives in light of the established criteria
      and, based on such evaluation, review and approve the annual salary,
      bonus, stock options and other benefits, direct and indirect, of the
      executives.


·
            Upon
      receipt from the Chief Executive Officer of the annual summary evaluations
      of the performance of other executive officers, review and approve their
      annual salary, bonus, stock option and other benefits, direct and
      indirect.


·
            Approve
      the grant of stock options company-wide, and recommend the adoption or
      changes to the Company’s stock option plans to the shareholders for
      approval, when required.


·
            In
      connection with executive compensation
plans:


·
            review
      and recommend to the Board new executive compensation
      programs;


·
            review
      the operations of the Company's executive compensation programs to
      determine whether they are properly coordinated and achieving their
      intended purpose;


·
            establish
      and review policies for the administration of executive compensation
      programs; and


·
            take
      steps to modify any executive compensation program that yields payments
      and benefits that are not reasonably related to executives and corporate
      performance.


·
            Review
      recommendations from the Chief Executive Officer for management succession
      planning, when necessary.


·
            Review
      and make recommendations to the Board, or approve any contracts or other
      transactions with current or former executive officers of the Company,
      including consulting arrangements, employment contracts, severance or
      termination arrangements.




- 93
-





Compensation Program
Elements


Our
executive compensation program consists of three principal elements: base
salary, annual bonus and long-term equity incentive compensation in the form of
stock options and/or restricted stock awards.  All officers, except
for Dr. Peter Novak, who received only a base salary in 2009, participate in
each element of the program at different levels or percentages.  One
of the Company’s goals is to make sure that our compensation program is in line
with compensation plans for companies in comparable industries and of the same
relative size to our Company.





Base
salary


Base
salary is reviewed annually.  It is the only portion of the
executive’s compensation that is fixed.  Base salary is normally in
the median range of base salaries of individuals with similar positions in
comparable industries to our Company.





Annual
bonus


Annual
bonus opportunities are designed to link executive pay to certain financial
targets.  These bonuses are based on the annual salary multiplied by
the participation percentage assigned to each level, multiplied by a factor
based on the achievement of the selected financial targets.  For
example:





$
                              500,000
                              
                              Annual
      Base Salary paid during the year100
                              %
                              Participation
      Percentage0.5
                              
                              Payout
      Factor based on achievement of goals$
                              250,000
                              
                              Annual
      Bonus




Each
participant is assigned a participation rate based on their position with the
Company.  The participation rates for 2009, expressed as a percentage
of base salary, were:





Charles
      Gassenheimer
                  
                  
                  100
                  %Gerard
      Herlihy
                  
                  
                  25
                  %Richard
      Stanley
                  
                  
                  50
                  %Ulrik
      Grape
                  
                  
                  25
                  %Dr.
      Peter Novak
                  
                  
                  N/A





The payout factor is based on the
achievement of a predetermined amount of gross revenues or the overachievement
thereof.  For 2009, based on the gross revenue of the Company, only
one-half of the above target percentages will be paid out as annual
bonuses.





Long-term equity incentive
compensation


Stock based compensation in the form of
stock options and/or restricted stock awards is designed to align the interests
of its executives with the interest of its shareholders and to reward executives
for the achievement of long term strategic objectives.  These awards
may be incentive based with vesting determined only by time served and/or
performance based and tied to achievement of specified goals or
objectives.





Compensation
Committee Interlocks and Insider Participation


Our
Compensation Committee has three members: Mr. Baker, who serves as the
Chairperson, Mr. Manfredi and Mr. Fuhr.  All members are Independent
Directors.





Compensation Committee
Report


The
Compensation Committee of the Board has reviewed and discussed the Compensation
Discussion and Analysis section with management and, based on such reviews and
discussion, have recommended to the Board that the Compensation Discussion and
Analysis section be included in the Company’s Annual Report on Form 10-K for the
fiscal year ended December 31, 2009.





Respectfully
      submitted,Kenneth
      Baker, ChairmanLudovico
      ManfrediElliot
      Fuhr




This
Section is not "soliciting materials" is not deemed "filed" with the SEC and is
not to be incorporated by reference in any filing of the Company under the
Securities Exchange Act of 1934, as amended (the Exchange Act), or the
Securities Act of 1933, as amended (the Securities Act), whether made before or
after the date hereof and irrespective of any general incorporation language in
any such filing.


- 94
-





Summary Compensation
Table





The
following table sets forth information concerning the compensation of the Named
Executive Officers during the year ended December 31, 2009, 2008 and
2007.





Name
      and principal position
                                          
                                          Year
                                          
                                          Salary
                                            ($)
                                          
                                          
                                          Bonus
                                            ($)
                                          
                                          
                                          Stock
      awards
                                            ($)
                                          
                                          
                                          Option
      awards
                                            ($)
                                          
                                          
                                          All
      Other
                                            Compensation
                                            ($)
                                          
                                          
                                          Total
                                            ($)Charles
      Gassenheimer
                                          
                                          2009
                                          
                                          $
                                          500,000
                                          
                                          
                                          $
                                          250,000
                                          (6)
                                          
                                          
                                          -
                                          
                                          
                                          $
                                          1,660,000
                                          (7)
                                          
                                          $
                                          -
                                          
                                          
                                          $
                                          2,410,000Chief
      Executive Officer (1)
                                          
                                          2008
                                          
                                          
                                          500,000
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          500,0002007
                                          
                                          
                                          300,000
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          610,004
                                          (7)
                                          
                                          
                                          -
                                          
                                          
                                          
                                          910,004Gerard
      Herlihy
                                          
                                          2009
                                          
                                          
                                          250,000
                                          
                                          
                                          
                                          31,250
                                          (6)
                                          
                                          
                                          -
                                          
                                          
                                          
                                          107,100
                                          (8)
                                          
                                          
                                          -
                                          
                                          
                                          
                                          388,350Chief
      Financial Officer (2)
                                          
                                          2008
                                          
                                          
                                          250,000
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          170,003
                                          (8)
                                          
                                          
                                          -
                                          
                                          
                                          
                                          420,0032007
                                          
                                          
                                          200,000
                                          
                                          
                                          
                                          12,500
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          305,002
                                          (8)
                                          
                                          
                                          -
                                          
                                          
                                          
                                          517,502Richard
      Stanley
                                          
                                          2009
                                          
                                          
                                          105,000
                                          
                                          
                                          
                                          26,250
                                          (6)
                                          
                                          $
                                          207,000
                                          (9)
                                          
                                          
                                          484,000
                                          (9)
                                          
                                          
                                          -
                                          
                                          
                                          
                                          822,250Executive
      Vice President (3)
                                          
                                          2008
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -2007
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -Ulrik
      Grape
                                          
                                          2009
                                          
                                          
                                          300,000
                                          
                                          
                                          
                                          37,500
                                          (6)
                                          
                                          
                                          -
                                          
                                          
                                          
                                          107,100
                                          (10)
                                          
                                          
                                          -
                                          
                                          
                                          
                                          444,600Executive
      Vice President (4)
                                          
                                          2008
                                          
                                          
                                          300,000
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          170,003
                                          (10)
                                          
                                          
                                          -
                                          
                                          
                                          
                                          470,0032007
                                          
                                          
                                          250,000
                                          
                                          
                                          
                                          25,000
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          366,003
                                          (10)
                                          
                                          
                                          -
                                          
                                          
                                          
                                          641,003Dr.
      Peter Novak
                                          
                                          2009
                                          
                                          
                                          430,000
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          5,950
                                          (11)
                                          
                                          
                                          435,950Chief
      Technology Officer
                                          
                                          2008
                                          
                                          
                                          430,000
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          5,950
                                          (11)
                                          
                                          
                                          435,950and
      President (5)
                                          
                                          2007
                                          
                                          
                                          415,540
                                          
                                          
                                          
                                          215,000
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          35,599
                                          (11)
                                          
                                          
                                          666,139










(1)
              Mr.
      Gassenheimer was appointed Chief Executive Officer since August 2008 in
      addition to his role as Chairman of the
Board.
 
 (2)
              Mr.
      Herlihy has been our Chief Financial Officer since November 2007 and for
      the period from January 2006 through October 2006.  During the
      period from October 2006 through October 2007, Mr. Herlihy had been
      directing our media and investor relations and external
      reporting.
 
 (3)
              Mr.
      Stanley has been the President of EnerDel since September
      2009.
 
 (4)
              Mr.
      Grape has been our Executive Vice President since January
      2006.
 
 (5)
              Dr.
      Novak was appointed Chief Technology Officer in August 2008 when he
      resigned as Chief Executive Officer. Dr. Novak retained his title as
      President until March 9, 2010, when he resigned as Chief Technology
      Officer and President. Dr. Novak continues to serve as a member of the
      Board and an employee of Ener1. He does not receive any
      compensation for his services as a
  Director.
  (6)
              In
      August 2009, the Board approved the terms and conditions of the 2009
      Annual Incentive Program, which allows participating individuals to earn a
      cash incentive bonus, depending on their position and achieving certain
      financial related targets as discussed in the Compensation Discussion and
      Analysis.  These amounts were earned, but not paid as of
      December 31, 2009.
 
 (7)
              During
      2009 and 2007, Mr. Gassenheimer was awarded options to purchase up to
      400,000 shares and  142,857 shares, respectively of our common
      stock.  The fair value of each option was estimated on the
      date  of grant using the Black-Scholes option pricing
      model.  Cross-reference is made to Part II, Item 8, Note 16,
      Stock Based Compensation for assumptions made in the valuation of these
      options.
 
 (8)
              During
      2009, 2008 and 2007, Mr. Herlihy was awarded options to purchase up to
      35,000 shares, 35,715  shares and 71,429 shares, respectively,
      of our common stock.  The fair value of each option was
      estimated  on the date of grant using the Black-Scholes option
      pricing model.  Cross-reference is made to Part
      II,  Item 8, Note 16, Stock Based Compensation for assumptions
      made in the valuation of these
options.




- 95
-




(9)
              During
      2009, Mr. Stanley was awarded 30,000 shares of restricted stock and the
      fair value was determined  at the grant date, based on the
      closing price of our common stock.  The restriction on the
      shares vests ratably over three years.  Also, in 2009 Mr.
      Stanley was awarded options to purchase up to 100,000 shares of our common
      stock.  The fair value of the option was estimated on the date
      of grant using the Black-Scholes  option pricing
      model.  Cross-reference is made to Part II, Item 8, Note 16,
      Stock Based Compensation for assumptions made in the valuation of these
      options.
 
 (10)
              During
      2009, 2008 and 2007, Mr. Grape was awarded options to purchase up to
      35,000 shares, 35,715  shares and 85,715 shares, respectively,
      of our common stock.  The fair value of each option was
      estimated  on the date of grant using the Black-Scholes option
      pricing model.  Cross-reference is made to Part
      II,  Item 8, Note 16, Stock Based Compensation for assumptions
      made in the valuation of these options.  During 2009, 2008 and
      2007, Mr. Grape forfeited performance options to purchase up to 17,143
      shares, 25,714  shares and 8,572 shares of our common stock,
      respectively.
 
 (11)
              Represents
      employee life insurance premiums paid in 2009, 2008 and 2007 and
      automobile related  payments in
2007.




The
following table supplements the disclosures set forth in columns titled Stock
Awards and Option Awards of the Summary Compensation Table:


Grants of Plan-Based AwardsName
                            
                            Grant date
                            
                            All other
                              stock
                              awards:
                              Number of
                              shares of
                              stock or
                              units (#)
                            
                            
                            All other
                              option
                              awards:
                              Number of
                              securities
                              underlying
                              options (#)
                            
                            
                            Exercise or
                              base price
                              of options
                              awards
                              ($/Sh)
                            
                            
                            Grant date
                              fair value of
                              stock and
                              options
                              awards
                              (1)Charles
      Gassenheimer
                            
                            2/17/2009
                            
                            
                            -
                            
                            
                            
                            200,000
                            
                            
                            $
                            4.05
                            
                            
                            $
                            652,0005/19/2009
                            
                            
                            -
                            
                            
                            
                            200,000
                            
                            
                            $
                            6.55
                            
                            
                            $
                            1,008,000Gerard
      Herlihy
                            
                            2/17/2009
                            
                            
                            -
                            
                            
                            
                            35,000
                            
                            
                            $
                            4.05
                            
                            
                            $
                            107,100Richard
      Stanley
                            
                            9/14/2009
                            
                            
                            30,000
                            
                            
                            
                            -
                            
                            
                            $
                            6.90
                            
                            
                            $
                            207,0009/14/2009
                            
                            
                            -
                            
                            
                            
                            100,000
                            
                            
                            $
                            6.90
                            
                            
                            $
                            484,000Ulrik
      Grape
                            
                            2/17/2009
                            
                            
                            -
                            
                            
                            
                            35,000
                            
                            
                            $
                            4.05
                            
                            
                            $
                            107,100Dr.
      Peter Novak
                            
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            $
                            -
                            
                            
                            $
                            -





(1)
            The
      grant date fair value of stock awards reflects the full market value (the
      closing of Ener1 common stock on the NASDAQ) on the date of
      grant.  The grant date fair value of option awards was estimated
      using the Black-Scholes option pricing model.  Cross-reference
      is made to Part II, Item 8, Note 16, Stock Based Compensation for
      assumptions made in the valuation of these
  options.




- 96
-





In
addition to the foregoing grants, each Named Executive Officer, except for Dr.
Novak, participates in the 2009 Program, as described in the Compensation
Discussion and Analysis.  The 2009 Program is designed to link
executive pay to the achievement of certain financial targets of the
Company.  Each participant is assigned a participation rate as a
percentage of salary for purposes of calculating bonus payouts, if
any.  For purposes of the 2009 Program the financial target is based
on gross revenues, as defined in the 2009 Program.  The calculation of
the amount payable under the 2009 Program, as described in the Compensation
Discussion and Analysis, is based on factors that could range from 0.5 to 1.5 in
increments of 0.5.





The
following table is intended to supplement and enhance the understanding of
equity compensation that has been previously awarded and remains
outstanding.  There have been no options exercised, during the last
fiscal year end, by any Named Executive Officers and no shares of restricted
stock vested during the last fiscal year end for any Named Executive
Officers.





OUTSTANDING
EQUITY AWARDS AT FISCAL YEAR-END





Options
      awards
                        
                        Stock
      AwardsName
                        
                        Number
      of
                          securities
                          underlying
                          unexercised
                          options
      (#)
                          exercisable
                        
                        
                        (1)
                          Number
      of
                          securities
                          underlying
                          unexercised
                          options
      (#)
                          unexercisable
                        
                        
                        (2)
                          Equity
      incentive
                          plan
      awards:
                          number
      of
                          securities
                          underlying
                          unexercised
                          unearned
                          options
      (#)
                        
                        
                        Option
                          exercise
                          price
                          ($)
                        
                        Option
                          expiration
                          date
                        
                        (4)
                          Equity
      incentive
                          plan
      awards:
                          number
      of
                          unearned
                          shares,
      units or
                          other
      rights that
                          have
      not vested
                          (#)
                        
                        
                        (5)
                          Equity
      incentive
                          plan
      awards:
                          market
      or
                          payout
      value of
                          unearned
                          shares,
      units or
                          other
      rights that
                          have
      not vested
                          ($)Charles
      Gassenheimer
                        
                        
                        142,858
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        $
                        4.90
                        
                        12/19/12
                        
                        
                        -
                        
                        
                        
                        -Charles
      Gassenheimer
                        
                        
                        200,000
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        $
                        4.05
                        
                        02/17/14
                        
                        
                        -
                        
                        
                        
                        -Charles
      Gassenheimer
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        200,000
                        
                        
                        $
                        6.55
                        
                        05/19/14
                        
                        
                        -
                        
                        
                        
                        -Gerard
      Herlihy
                        
                        
                        35,715
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        $
                        2.17
                        
                        10/16/16
                        
                        
                        -
                        
                        
                        
                        -Gerard
      Herlihy
                        
                        
                        47,620
                        
                        
                        
                        23,809
                        
                        
                        
                        -
                        
                        
                        $
                        4.90
                        
                        12/19/12
                        
                        
                        -
                        
                        
                        
                        -Gerard
      Herlihy
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        35,000
                        
                        
                        $
                        4.05
                        
                        02/17/14
                        
                        
                        -
                        
                        
                        
                        -Richard
      Stanley
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        100,000
                        
                        
                        $
                        6.90
                        
                        9/14/2014
                        
                        
                        30,000
                        
                        
                        $
                        190,200Ulrik
      Grape
                        
                        
                        35,715
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        $
                        2.17
                        
                        10/16/16
                        
                        
                        -
                        
                        
                        
                        -Ulrik
      Grape
                        
                        
                        28,571
                        
                        
                        
                        14,286
                        
                        
                        
                        -
                        
                        
                        $
                        4.90
                        
                        12/19/12
                        
                        
                        -
                        
                        
                        
                        -Ulrik
      Grape
                        
                        
                        45,714
                        
                        
                        
                        2,857
                        
                        
                        
                        -
                        
                        
                        $
                        1.61
                        
                        12/21/11
                        
                        
                        -
                        
                        
                        
                        -Ulrik
      Grape
                        
                        
                        28,572
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        $
                        1.61
                        
                        12/21/11
                        
                        
                        -
                        
                        
                        
                        -Ulrik
      Grape
                        
                        
                        142,858
                        (3)
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        $
                        3.43
                        
                        10/01/15
                        
                        
                        -
                        
                        
                        
                        -Ulrik
      Grape
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        35,000
                        
                        
                        $
                        4.05
                        
                        02/17/14
                        
                        
                        -
                        
                        
                        
                        -Dr.
      Peter Novak
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        $
                        -
                        
                        
                        
                        
                        -
                        
                        
                        
                        -





(1)
            Options
      will vest in December 2010.





(2)
            Unearned
      options are subject to specifically identified performance
      criteria.  Upon achievement of the performance criteria, the
      options will become earned and will vest one-third per year over a three
      year period.





(3)
            Options
      are not exercisable until annual revenue of our EnerDel subsidiary exceeds
      $5.6 million.  This revenue target has not yet been
      met.





(4)
            During
      2009, restricted shares were awarded.  The restriction on the
      shares vest ratably over three
years.





(5)
            The
      price used to calculate the market value of outstanding shares was $6.34,
      the closing price of Ener1 common stock on the Nasdaq Global Market on
      December 31, 2009, the last trading day of the
  year.




- 97
-





Employment
Agreements and Other Compensation Arrangements





In the
event of a change of control, as defined in our active stock option plans,
outstanding awards of options, restricted shares or other forms of stock based
compensation become immediately exercisable and vested.





Charles
Gassenheimer


In
February 2007, Ener1 entered into an agreement with Ener1 Group to reimburse
Ener1 Group for $300,000 of Mr. Gassenheimer’s annual compensation, paid by
Ener1 Group.  Such reimbursement amount was determined and approved by
the Board of Ener1.  In January 2008, the Board approved an increase
in the reimbursement amount from $300,000 to $500,000 based on an increase in
the amount of time Mr. Gassenheimer dedicates to matters of Ener1.





Gerard
Herlihy


Mr.
Herlihy’s annual salary has been $250,000 for the last three
years.  In 2007, Splinex Technology, Inc., (“Splinex”) a related
party, paid $50,000 of Mr. Herlihy’s salary for time Mr. Herlihy dedicated to
matters of Splinex.





Richard
Stanley


In
September 2009, as part of Mr. Stanley’s compensation package, he was provided
with the following, in the event of a termination without cause: (i)
a severance payout equal to six month’s salary and the immediate vesting of
the 30,000 shares of restricted stock awarded in September 2009.





Ulrik
Grape


In July
2005, EnerDel entered into an employment agreement with Mr. Grape, pursuant
to which Mr. Grape was to serve as its Chief Executive
Officer.  Mr. Grape’s salary under the agreement was initially
$250,000 per year.  In the event of a termination without cause or
termination by Mr. Grape with good reason (as defined in the agreement), Mr.
Grape is entitled to a severance payout of his base salary for a period of six
months.





In
December 2007, the Board increased Mr. Grape’s salary from $250,000 to $300,000
in recognition of his contributions to the Company and the expanded role
undertaken in the area of global sales, marketing and business development for
Ener1.




- 98
-





Item
      12.
            Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters





Security Ownership of Certain Beneficial
Owners and Management





The table
set forth below contains information as of February 24, 2010, regarding the
beneficial ownership of Ener1 common stock held by stockholders whom we believe
beneficially own more than five percent (5%) and each Director, each executive
officer named in the summary compensation table and our Directors and named
executive officers as a group, regardless of beneficial ownership
percentages.





As of
February 24, 2010, 124,879,282 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 Ener1 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., 1540 Broadway, Suite 25C, New York, New York 10036.





Amount
      Of
                          
                          
                          
                          PercentBeneficial
                          
                          
                          
                          ofName
                          
                          Ownership
                          
                          
                          
                          ClassEner1
      Group, Inc.
                          
                          
                          77,408,551
                          
                          (1)
                          
                          
                          56.1
                          %Bzinfin,
      S.A.
                          
                          
                          11,485,182
                          
                          (2)
                          
                          
                          8.7
                          %Anchorage
      Capital Master Offshore, Ltd.
                          
                          
                          8,354,427
                          
                          (3)
                          
                          
                          6.7
                          %610
      Broadway, 6th Floor, New York, NY 10012Morgan
      Stanley & Co., Incorporated
                          
                          
                          7,050,277
                          
                          (4)
                          
                          
                          5.6
                          %1585
      Broadway, New York, NY 10036Charles
      Gassenheimer
                          
                          
                          860,001
                          
                          (5) (16)
                          
                          
                          *Kenneth
      Baker
                          
                          
                          31,072
                          
                          (6)
                          
                          
                          *Marshall
      Cogan
                          
                          
                          14,405
                          
                          (7)
                          
                          
                          *Mark
      D'Anastasio
                          
                          
                          -
                          
                          
                          
                          
                          *Elliot
      Fuhr
                          
                          
                          31,072
                          
                          (8)
                          
                          
                          *Karl
      Gruns
                          
                          
                          57,739
                          
                          (9)
                          
                          
                          *Ludovico
      Manfredi
                          
                          
                          34,882
                          
                          (10)
                          
                          
                          *Dr.
      Peter Novak
                          
                          
                          535,970
                          
                          (11) (16)
                          
                          
                          *Thomas
      Snyder
                          
                          
                          31,072
                          
                          (12)
                          
                          
                          *Gerard
      Herlihy
                          
                          
                          150,691
                          
                          (13)
                          
                          
                          *Rick
      Stanley
                          
                          
                          -
                          
                          
                          
                          
                          *Ulrik
      Grape
                          
                          
                          163,027
                          
                          (14)
                          
                          
                          *Directors
      and officers as a group (twelve persons)
                          
                          
                          1,909,931
                          
                          (15)
                          
                          
                          1.5
                          %*
      Less than 1%







Notes are
on the following page.





- 99
-




Notes:


(1)
            Includes
      12,989,137 shares issuable under outstanding warrants exercisable during
      the 60 day period following February 24,
2010.


(2)
            Includes
      4,399,585 shares issuable under outstanding warrants exercisable and
      3,271,887 shares issuable upon the conversion of convertible debt during
      the 60 day period following February 24,
2010.


(3)
            Includes
      228,572 shares issuable under outstanding warrants exercisable during the
      60 day period following February 24, 2010.  The information
      reported is pursuant to Schedule 13G filed by Anchorage Capital Masters
      Offshore, Ltd. on February 16,
2010.


(4)
            The
      information reported is pursuant to Schedule 13G filed by Morgan Stanley
      on February 12, 2010.


(5)
            Includes
      554,287 shares issuable under outstanding options and warrants exercisable
      the 60 day period following February 24,
2010.




(6)
            Includes
      31,072 shares issuable under outstanding options exercisable during the 60
      day period following February 24,
2010.


(7)
            Includes
      14,405 shares issuable under outstanding options exercisable during the 60
      day period following February 24,
2010.


(8)
            Includes
      31,072 shares issuable under outstanding options exercisable during the 60
      day period following February 24,
2010.


(9)
            Includes
      50,596 shares issuable under outstanding options exercisable during the 60
      day period following February 24,
2010.


(10)
            Includes
      34,882 shares issuable under outstanding options exercisable during the 60
      day period following February 24, 2010.(11)
            Includes
      279,054 shares issuable under outstanding warrants exercisable during the
      60 day period following February 24,
2010.


(12)
            Includes
      31,072 shares issuable under outstanding options exercisable during the 60
      day period following February 24,
2010.


(13)
            Includes
      107,834 shares issuable under outstanding options exercisable during the
      60 day period following February 24,
2010.


(14)
            Includes
      163,027 shares issuable under outstanding options exercisable during the
      60 day period following February 24,
2010.


(15)
            Includes
      1,678,944 shares issuable under outstanding options and warrants
      exercisable during the 60 day period following February 24,
      2010.


(16)
            The
      amount shown does not include common stock beneficially owned by Ener1
      Group, a company of which Charles Gassenheimer and Dr. Novak are
      directors, and Dr. Novak is a shareholder.  Mr. Gassenheimer
      owns warrants to purchase shares of Ener1 Group.  Mr.
      Gassenheimer and Dr. Novak disclaim beneficial ownership of any Ener1
      common stock beneficially owned by Ener1
Group.




- 100
-





Item 13.
            Certain Relationships and Related
      Transactions, and Director
Independence





Ener1
Group Ownership





Bzinfin,
S.A. a 68.5% shareholder of Ener1 Group, owns approximately 52% of Ener1’s
outstanding common stock.  Boris Zingarevich is an indirect beneficial
owner of Bzinfin.  Dispositive and voting power over the shares of
Ener1 common stock that is held by Ener1 Group is exercised by the board of
directors of Ener1 Group, which consists of Charles Gassenheimer, Dr. Peter
Novak, Mike Zoi, Boris Zingarevich, and Mikhail Zingarevich.





Services
between Ener1 and Ener1 Group





We
operate under an agreement where we reimburse Ener1 Group for $500,000 of Mr.
Gassenheimer’s annual compensation, paid by Ener1 Group.  Such
reimbursement amount was determined and approved by the Board of
Ener1.  Any increases or decreases to the reimbursement amount, based
on changes in the amount of time Mr. Gassenheimer dedicates to matters of Ener1,
are approved by the Board.





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
costs 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 costs of these services and
employees.  During 2009, Ener1 Group and its subsidiaries billed us
approximately $533,000 and we billed Ener1 Group and its subsidiaries
approximately $38,000, in each case for services and employees of the other
party.





Investment
in Unconsolidated Entity





In August
2009, we entered into a Securities Investment and Subscription Agreement with
Think Holdings, AS, a Norwegian limited liability company (“Think
Holdings”).  Think Holdings is the majority owner of Think Global AS
(“Think Global”), the Norwegian electric car manufacturer and customer of
EnerDel.  Ener1 has committed to purchase 10,826,640 shares of Series
B Convertible Preferred Stock for approximately $19.0 million.  The
investment will be made pursuant to three closings and as of December 31, 2009,
Ener1 has purchased 7,466,535 shares for approximately $13.0
million.





In August
2009, we entered into a Purchase and Assignment Agreement with Bzinfin to
acquire approximately $3.0 million of debt pursuant to a loan facility with
Think Global and warrants to purchase 3,600,000 shares of common stock of Think
Global, (the “Bridge Loan”).  As consideration, Ener1 issued to
Bzinfin 896,986 shares of Ener1 common stock, valued at approximately $5.8
million.  Ener1 has exchanged the Bridge Loan for 1,809,419 shares of
Think Holdings Series B Convertible Preferred Stock and warrants to purchase
additional shares of Think Holdings Series B Convertible Preferred
Stock.  The total number of warrants is based on a predetermined
percentage of Think Holdings fully diluted share capital.





On February 3, 2010, we participated in
the third closing of the Think Series B Preferred shares and purchased an
additional 3,360,105shares
for approximately $5.8 million.





Supply
Agreement





In August
2009, EnerDel entered into an amended supply agreement (the “Amended Supply
Agreement”) with Think Global to be the exclusive supplier of lithium-ion
batteries to Think Global, commencing on the date of the Supply Agreement and
ending six months after Think Global commences full scale production (the
“Exclusivity Period”).  During the two year period after the end of
the Exclusivity Period, Think Global will purchase certain minimum volume
percentages from EnerDel for the European and North American
markets.





- 101
-





Convertible
Line of Credit





In
December 2008, we entered into the LOC Agreement with Ener1 Group to establish a
line of credit in the aggregate principal amount of $30.0 million for a period
of 18 months or until we complete a public equity offering, whichever occurs
earlier. All amounts borrowed under the LOC Agreement bear interest at 8% per
annum.  We are further obligated to issue to Ener1 Group warrants to
purchase shares of Ener1 common stock each time an advance is made under the LOC
Agreement equal to the amount of the advance divided by $20, with an exercise
price equal to $8.25 per share.  All warrants are immediately
exercisable and expire two years after issuance.





In August
2009, Ener1 Group entered into a Novation and Assignment agreement with Bzinfin,
the owner of a majority of the common stock of Ener1 Group, whereby Ener1 Group
assigned to Bzinfin all of its rights and obligations under the LOC
Agreement.  Simultaneously,Ener1 entered intothe A&R LOC AgreementprovidingBzinfin, among other rights,the right to convertthe first$8.0 million ofprincipaland relatedunpaid interest intoshares of Ener1

common stock at an exercise price of
$5.00 per share andany
remainingprincipaland relatedunpaid interest intoshares of Ener1common stock at an exercise price of $6.00 per
share.  Based on the closing stock price of Ener1 on August 26, 2009,
a beneficial conversion value of approximately $2.8 million was recorded as a
reduction in proceeds and is amortized to interest expense over the remaining 10
month term of the A&R LOC Agreement, using the effective interest
method.





In August
2009, we classified a $1.5 million working capital advance from Bzinfin under
the A&R LOC Agreement and in accordance with the terms of the agreement
issued to Bzinfin warrants to purchase up to 75,000 shares of Ener1 common stock
at an exercise price of $8.25 per share.  These warrants are
immediately exercisable and expire two years from the date of
grant.  Using a Black-Scholes pricing model, the estimated fair value
of $0.2 million was recorded as a reduction in proceeds and is amortized to
interest expense over the remaining 10 month term of the A&R LOC
Agreement.





The
components of the convertible line of credit balance as of December 31, 2009 are
as follows (in thousands, except warrants):


Convertible
                    Line of CreditProceeds
      from advances
                  
                  $
                  11,750Beneficial
      conversion feature, net
                  
                  
                  (1,829
                  )Fair
      value of warrants, net
                  
                  
                  (136
                  )Accrued
      interest payable at maturity
                  
                  
                  731Balance,
      December 31, 2009
                  
                  $
                  10,516Warrants
      issued
                  
                  
                  75,000Fair
      value of warrants
                  
                  $
                  227




In February 2010, we borrowed $5.0
millionunder the A&R
LOC Agreementand, in accordance with the terms of the agreement, issued
to Bzinfin warrants to purchase up to 250,000 shares of Ener1 common stock at an
exercise price of $8.25 per share.  These warrants are immediately
exercisable and expire two years from the date of grant.  Using a
Black-Scholes pricing model, the estimated fair value of $0.3 million was
recorded as a reduction in proceeds and will be amortized to interest expense
over the remaining 5 month term of the A&R LOC Agreement.





Transactions
with Ener1 Group, as with all related party transactions, are approved by the
Audit Committee of the Board.




- 102
-





Item 14.
            Principal Accounting Fees and
      Services





Change
in Independent Registered Public Accounting Firm





The
accounting firm of MaloneBailey, LLP (“MB”) served as Ener1’s independent
registered public accounting firm for the first and second quarter of 2009 and
all of 2008.  As previously disclosed in a Current Report on Form 8-K,
on August 18, 2009, PricewaterhouseCoopers LLP (“PwC”) was engaged as Ener1’s
independent registered public accounting firm for the year ended December 31,
2009.





Prior to
August 2009, neither the Company nor anyone on its behalf consulted with PwC
regarding either the application of accounting principles to a specified
transaction, either completed or proposed; or the type of audit opinion that
might be rendered on the Company’s financial statements, nor has PwC provided to
the Company a written report or oral advice that was an important factor
considered by the Company in reaching a decision as to any accounting, auditing
or financial reporting issue, or any matter that was the subject of a
disagreement or a reportable event set forth in Item 304(a)(1)(iv) and (v),
respectively, of Regulation S-K.





The Audit
Committee recommended and approved of the dismissal of MB as Ener1’s independent
registered public accounting firm.  The Audit Committee notified MB in
August 2009 that it was dismissed as Ener1’s independent registered public
accounting firm to audit the Company’s consolidated financial statements for the
fiscal year ending December 31, 2009.





During
the two most recent fiscal years and through August 18, 2009, there were no
disagreements with MB, whether or not resolved, on any matter of accounting
principles or practices, financial statement disclosure, or auditing scope or
procedure, which, if not resolved to MB’s satisfaction, would have caused it to
make reference to the subject matter of the disagreement in connection with its
report on the Company’s financial statements.  During the fiscal years
ended December 31, 2008 and 2007 and during the interim period ending August 18,
2009, there were no “reportable events” as described in Item 304(a)(1)(v) of
Regulation S-K.





Audit
Committee Pre-Approval Policies and Procedures





Our Audit
Committee reviews and pre-approves all audit and permissible non-audit services
to be provided by the independent registered public accounting
firm.  Non-audit services may include audit-related services, tax
services and other services not prohibited by the SEC rules on auditor
independence.  The Audit Committee annually reviews and may
pre-approve up to $50,000, individually, for audit-related services, tax
services and other non-audit related services without prior discussion of the
nature and scope of the services to be provided.  The term of any such
pre-approval is usually for the Company’s fiscal year unless a different time
period is specifically identified.





The Audit
Committee has provided the Chairman of the Audit Committee with the authority to
approve audit and non-audit services, with fees of less than $50,000, with a
summary of such services provided to the other members of the Audit Committee at
its next scheduled meeting.





Audit
Fees





Audit
fees include fees for professional services performed for the audit of our
annual financial statements, review of financial statements included in our SEC
filings, proxy statements, and responses to SEC comment letters, if
any.   The total fees billed by PwC for professional services
rendered in connection with the audit of the 2009 annual consolidated financial
statements were $487,000.  PwC began serving as the independent
registered public accounting firm beginning with the third quarter of
2009.  These fees also covered the audit of the effectiveness of our
internal control over financial reporting at December 31, 2009, the services for
the related reviews of consolidated financial statements included in the Form
10-Q for the third quarter of 2009 and the services that are normally provided
by the independent registered public accounting firm in connection with
statutory and regulatory filings or engagements related to periods in
2009.




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The total
fees billed by MB for professional audit services were $423,000 in 2008 and
$180,000 in 2009.  These fees covered the audit of the 2008
consolidated financial statements and the effectiveness of its internal control
over financial reporting at December 31, 2008 and for the first and second
quarter of 2009 and the services normally provided by the independent registered
public accounting firm in connection with statutory and regulatory filings or
engagements related to periods in 2008 and earlier.





Audit-Related
Fees





There
were no audit-related fees for assurance and related services that are
reasonably related to the performance of the audit or review of the consolidated
financial statements not reported under “Audit Fees” above for the third quarter
and the remainder of the year in 2009.  There were no fees paid to MB
for these services for the first and second quarter of 2009 or for all of
2008.





Tax
Fees





The
aggregate fees billed by PwC for professional services rendered for tax
compliance, tax advice and tax planning were $24,000 for 2009.  There
were no fees paid to MB for these services for the first and second quarter of
2009 or for all of 2008.  These amounts represent tax planning
services for our foreign operations.





All
Other Fees





There
were no fees billed by PwC for professional services rendered that were not
related to one of the foregoing categories for the third quarter and the
remainder of the year in 2009.  There were no fees paid to MB for
other services for the first and second quarter of 2009 or for all of
2008,




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PART IV





Item 15.
            Exhibits, Financial Statement
      Schedules





2.1
            Purchase
      Agreement, entered into on October 16, 2008, by and between Ener1, Inc.
      and TVG Asian Communications Fund, L.P. and Rosebud Securities Limited to
      acquire 83% ownership interest in Enertech International, Inc.,
      incorporated herein by reference to Exhibit 10.1 to Registrant’s Current
      Report on Form 8-K dated October 30,
2008.





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,
      SEC File No. 000-21138.





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, SEC File No. 000-21138.





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, SEC File
      No. 000-21138.





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, SEC File No.
  000-21138.





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, SEC File No.
      000-21138.





3.7
            Amendment
      to By-laws 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, SEC File No.
000-21138.





3.8
            Articles
      of Amendment to Amended and Restated Articles of Incorporation,
      incorporated by reference to Exhibit B of the Registrant's Schedule 14C
      filed December 10, 2007.





3.9
            Articles
      of Amendment to Amended and Restated Articles of Incorporation,
      incorporated by reference to Exhibit 3.8 of the Registrant’s Current
      Report on Form 8-K filed April 24,
2008.





3.10
            Articles
      of Amendment to Amended and Restated Articles of Incorporation,
      incorporated by reference to Exhibit B of the Registrant’s Schedule 14C
      filed July 22, 2008.





3.11
            Articles
      of Amendment to Amended and Restated Articles of Incorporation,
      incorporated by reference to Exhibit B of the Registrant’s Schedule 14C
      filed December 11, 2008.





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, SEC File No. 000-21138.





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,
      SEC File No. 000-21138.





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, SEC File No.
      000-21138.




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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, SEC File No. 000-21138.





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, SEC File No. 000-21138.





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, SEC File No.
      000-21138.





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, SEC File No.
000-21138.





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, SEC File No.
    000-21138.





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, SEC File No. 000-21138.





4.10
            Form
      of Warrant to Purchase Common Stock of the Registrant 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, SEC File No.
  000-21138.





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, SEC File No.
      000-21138.





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, SEC File No.
      000-21138.





4.14
            Form
      of Convertible Note issued to Ener1 Group, Inc. on June 30, 2006 and
      August 30, 2006, for $3,250,000 incorporated by reference to Exhibit 4.16
      of Registrant's Quarterly Report on Form 10-QSB, filed August 21,
      2006.





4.15
            Warrant
      issued to Ener1 Group, Inc. dated June 30, 2006 to purchase 9,000,000
      shares of Common Stock of the Registrant incorporated by reference to
      Exhibit 4.17 of Registrant's Quarterly Report on Form 10-QSB, filed August
      21, 2006.





4.16
            Warrant
      issued to Ener1 Group, Inc. dated June 30, 2006 to purchase 20,000,000
      shares of Common Stock of the Registrant incorporated by reference to
      Exhibit 4.18 of Registrant's Quarterly Report on Form 10-QSB, filed August
      21, 2006.





4.17
            Form
      of Warrant to Purchase Common Stock of Ener1, Inc. issued to Ener1 Group
      on August 29, 2006, incorporated by reference to Exhibit 4.17 of
      Registrant's Form SB-2/A filed September 3,
  2006.





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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 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.





4.22
            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.





4.23
            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.





4.24
            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.





4.25
            $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.





4.26
            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.





4.27
            Warrant
      issued to Charles Gassenheimer dated January 5, 2007 to purchase 500,000
      shares of common stock of the Registrant, incorporated by reference to
      Exhibit 4.28 to the Registrant’s Registration Statement on Form SB-2 filed
      on February 13, 2007.





4.28
            Convertible
      Promissory Note for $455,000 issued to Ener1 Group, Inc., dated November
      9, 2006 incorporated by reference to Exhibit 4.29 of Registrant’s
      Quarterly Report on Form 10-QSB for the period ending March 31,
      2007.





4.29
            Convertible
      Promissory  Note for $655,000 issued to Ener1 Group, Inc., dated
      November 9, 2006 incorporated by reference to Exhibit 4.30 of Registrant’s
      Quarterly Report on Form 10-QSB for the period ending March 31,
      2007.





4.30
            Form
      of Registration Rights Agreement among Ener1, Inc., Ener1 Group, Inc. and
      Enable Growth and Enable Opportunity dated May 10, 2007 filed in the
      registration statement on Form SB-2A on September 4,
  2007.





4.31
            Form
      of Securities Purchase Agreement among Ener1, Inc., Ener1 Group, Inc. and
      Enable Growth and Enable Opportunity dated May 10, 2007 filed in the
      registration statement on Form SB-2A on September 4,
  2007.





4.32
            Series
      B Stock Amendment Agreement between Ener1, Inc., Ener1 Group, Inc. and
      Cofis Compagnie Fiduciaire S.A. dated October 4, 2007 incorporated by
      reference to Exhibit 4.30  to the Registrant’s Current Report on
      Form 8-K dated October 4, 2007.





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4.33
            Amended
      Certificate of Designation of Series B Convertible Preferred Stock of
      Ener1, Inc., dated October 10, 2007 incorporated by reference to Exhibit
      4.30 of Registrant’s Quarterly Report on Form 10-QSB, filed November 14,
      2007.





4.34
            Form
      of Warrant to purchase 57,600,000 shares of Common Stock of the
      Registrant, issued to certain investors named therein, dated November 19,
      2007, incorporated by reference to Exhibit 10.3 to the Registrant’s
      Current Report on Form 8-K dated November 20,
  2007.





4.35
            Registration
      Rights Agreement dated November 19, 2007, by and between Ener1, Inc. and
      certain investors named therein, incorporated by reference to Exhibit 10.2
      to the Registrant’s Current Report on Form 8-K dated November 20,
      2007.





4.36
            Form
      of Warrant to Purchase Common Stock of the Registrant issued pursuant to
      Series B Stock Amendment Agreement between Ener1, Inc., Ener1 Group, Inc.
      and Cofis Compagnie Fiduciaire S.A., incorporated by reference to Exhibit
      4.32 of the Registrant’s Annual Report on Form 10-KSB for the period ended
      December 31, 2007 filed on March 12,
2008.





4.37
            Warrant
      issued to Alpha Class Investments, Ltd., dated October 24, 2008, to
      purchase 2,560,000 shares of Common Stock of the Registrant at a price per
      share of $7.50, incorporated by reference to Exhibit 4.1 to the
      Registrant’s Current Report on Form 8-K dated October 30,
      2008.





4.38
            Warrant
      to Purchase Common Stock of Ener1, Inc. under Line of Credit Agreement
      dated December 29, 2008, incorporated by reference to Exhibit 4.1 to the
      Registrant’s Current Report on Form 8-K dated December 30,
      2008.





10.1
            2002
      Stock Participation Plan incorporated by reference to Exhibit C of the
      Registrant's Schedule 14A filed on April 15, 2002, SEC File No.
      000-21138.





10.2
            2002
      Non-Employee Director Stock Participation Plan incorporated by reference
      to Exhibit D of the Registrant’s Schedule 14A filed on May 15, 2002, SEC
      File No. 000-21138.





10.3
            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, SEC File No.
  000-21138.





10.4
            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, SEC File
      No. 000-21138.





10.5
            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, SEC File No.
000-21138.





10.6
            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, SEC File No.
      000-21138.





10.7
            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, SEC File No.
      000-21138.





10.8
            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, SEC
      File No. 000-21138.




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10.
      9
            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, SEC File No.
      000-21138.





10.10
            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, SEC
      File No. 000-21138.





10.11
            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, SEC File No.
000-21138.





10.12
            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, SEC File No.
      000-21138.





10.13
            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, SEC
      File No. 000-21138.





10.14
            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, SEC File No.
      000-21138.





10.15
            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, SEC File No. 000-21138.





10.16
            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, SEC File No.
      000-21138.





10.17
            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, SEC File No. 000-21138.





10.18
            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, SEC File
      No. 000-21138.





10.19
            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, SEC File No.
      000-21138.





10.20
            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, SEC File No.
000-21138.





10.21
            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, SEC
      File No. 000-21138.





10.22
            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, SEC File No.
000-21138.





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10.23
            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, SEC File No.
      000-21138.





10.24
            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, SEC File No.
  000-21138.





10.25
            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, SEC File No.
  000-21138.





10.26
            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, SEC File No.
      000-21138.





10.27
            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, SEC File No.
      000-21138.





10.28
            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.





10.29
            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.





10.30
            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.





10.31
            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.





10.32
            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.





10.33
            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.





10.34
            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.





10.35
            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.





10.36
            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.




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10.
      37
            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.





10.38
            Securities
      Purchase Agreement dated November 19, 2007, by and between Ener1, Inc. and
      certain investors named therein, incorporated herein by reference to
      Exhibit 10.1 to the Registrant’s Current Report on Form 8-K dated November
      20, 2007.





10.39
            Commercial
      Lease between EnerDel, Inc. and Universal Tool & Engineering Company,
      dated March 1, 2007 incorporated herein by reference to Exhibit 10.1 to
      the Registrant’s Quarterly Report on Form 10-QSB filed November 14,
      2007.





10.40
            Purchase
      Money Financing Agreement for Additional Improvements between EnerDel,
      Inc. and Universal Tool & Engineering Company, dated March 1, 2007
      incorporated herein by reference to Exhibit 10.2 of the Registrant’s
      Quarterly Report on Form 10-QSB filed November 14,
  2007.





10.41
            Supply
      Agreement dated October 15, 2007, by and between EnerDel, Inc. and Think
      Global of Oslo, Norway incorporated herein by reference to Exhibit 10.50
      to Registrant’s Form 8-K dated October 15,
2007.





10.42
            Line
      of Credit Agreement dated December 29, 2008, incorporated herein by
      reference to Exhibit 10.1 to Registrant’s Current Report on Form 8-K dated
      December 31, 2008.





10.43
            Tax
      Allocation Agreement dated May 7, 2009 by and between Ener1, Inc. and
      certain subsidiaries named therein, incorporated herein by reference to
      Exhibit 10.44 to Registrant’s Form 10-Q dated May 11,
  2009.





10.44
            2002
      Stock Participation Plan as amended May 7, 2009, incorporated herein by
      reference to Exhibit 10.44 to Registrant’s Form 10-Q dated May 11,
      2009.





10.45
            2002
      Non-Employee Director Stock Participation Plan as amended May 7, 2009,
      incorporated herein by reference to Exhibit 10.44 to Registrant’s Form
      10-Q dated May 11, 2009.





10.46
            Ener1,
      Inc. 2007 Stock Incentive Plan as amended May 7, 2009, incorporated herein
      by reference to Exhibit 10.44 to Registrant’s Form 10-Q dated May 11,
      2009.





10.47
            Open
      Market Sale Agreement dated May 22, 2009 by and between Ener1, Inc. and
      Jefferies & Company, Inc., incorporated herein by reference to Exhibit
      1.1 to Registrant’s Current Report on Form 8-K dated May 22,
      2009.





10.48
            Reimbursement
      Agreement dated January 1, 2009 by and between Ener1 Group, Inc. and
      Ener1, Inc. for the reimbursement of annual compensation for the Chief
      Executive Officer of Ener1, Inc., incorporated herein by reference to
      Exhibit 10.48 to Registrant’s Form 10-Q dated August 6,
    2009.





10.49
            Securities
      Investment and Subscription Agreement ("SISA") with Think Holdings, SA
      dated August 24, 2009, incorporated by reference to Exhibit 1.1 to
      Registrant’s Current Report on Form 8-K dated August 27,
    2009.





10.50
            Purchase
      and Assignment Agreement with Bzinfin dated August 25, 2009, incorporated
      by reference to Exhibit 1.2 to Registrant’s Current Report on Form 8-K
      dated August 27, 2009.





10.51
            Supply
      Agreement with Think Global dated August 25, 2009, incorporated by
      reference to Exhibit 1.3 to Registrant’s Current Report on Form 8-K dated
      August 27, 2009.





10.52
            Amended
      and Restated Line of Credit Agreement by and between Ener1, Ener1 Group
      and Bzinfin dated August 26, 2009, incorporated by reference to Exhibit
      1.4 to Registrant’s Current Report on Form 8-K dated August 27,
      2009.





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10.53
            Assistance
      Agreement for a grant under the Automotive Battery Manufacturing
      Initiative issued by the United States Department of Energy dated January
      29, 2010.*





14.1
            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, SEC
      File No. 000-21138.





14.2
            Business
      Code of Conduct, as adopted by the Board of Directors of the Registrant on
      February 19, 2008 which replaces the Code of Ethics incorporated herein by
      reference to Exhibit 14.1 of the Registrant’s Annual Report on Form 10-KSB
      for the period ended December 31,
2007.





21
            Subsidiaries
      of the Registrant.*





23.1
            Consent
      of MaloneBailey, LLP*





23.2
            Consent
      of PricewaterhouseCoopers LLP *





31.1
            Rule
      13a-14(a)/15d-14(a) Certification of Chief Executive
    Officer.*





31.2
            Rule
      13a-14(a)/15d-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





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-





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.Dated: March11, 2010
            
            by:
            /s/Charles
      GassenheimerCharles
      GassenheimerChief 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/ Charles Gassenheimer
            
            Chief
      Executive Officer, Chairman
            
            March
      11, 2010Charles
      Gassenheimer
            
            (Principal
      Executive Officer)/s/ Gerard A. Herlihy
            
            Chief
      Financial Officer
            
            March
      11, 2010Gerard
      A. Herlihy
            
            (Principal
      Financial Officer and Principal Accounting Officer)/s/ Kenneth Baker
            
            Director
            
            March
      7, 2010Kenneth
      Baker/s/ Marshall Cogan
            
            Director
            
            March
      5, 2010Marshall
      Cogan/s/ Mark D’Anastasio
            
            Director
            
            March
      8, 2010Mark
      D’Anastasio/s/ Elliot Fuhr
            
            Director
            
            March
      8, 2010Elliot
      Fuhr/s/ Karl Gruns
            
            Director
            
            March
      11, 2010Karl
      Gruns/s/ Ludovico Manfredi
            
            Director
            
            March
      11, 2010Ludovico
      Manfredi/s/ Peter Novak
            
            Director
            
            March
      8, 2010Peter
      Novak/s/ Thomas Snyder
            
            Director
            
            March
      5, 2010Thomas
      Snyder




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