UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549


_________________


FORM
10-K





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


For
the fiscal year ended December 31, 2008





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


For the
transition period from ____________ to ____________





Commission
File Number 0-21138





Ener1,
Inc.


(Exact
name of registrant as specified in its charter)


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





1540
Broadway, Suite 25C


New
York, New York 10036


(Address of principal
executive officers) (Zip code)





(212) 920-3500


(Registrant’s
telephone number, including area code)





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


NONE





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


COMMON
STOCK, par value $0.01 per share


(Title of
class)





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


Yes  ̈ No x





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


Yes  ̈ No x





Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.  Yes x No  ̈





Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (§229.405 of this chapter) is not contained herein, and will not
be contained, to the best of the 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 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  x
                    
                    Non-accelerated filer   ̈
                    
                    Smaller reporting company  x


Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act).  Yes o No x





As of
March 6, 2009, the aggregate market value of the registrant’s common stock held
by non-affiliates of the registrant was $121,604,000 based on the closing price
on that date.  As of March 6, 2009, there were 113,474,085 shares of
common stock outstanding.





ENER1,
INC.


ANNUAL
REPORT ON FORM 10-K


FOR
THE YEAR ENDED DECEMBER 31, 2008





INDEX





PagePART
      IItem
      1
                      
                      Business
                      
                      2Item
      1A
                      
                      Risk
      Factors
                      
                      12Item
      1B
                      
                      Unresolved
      Staff Comments
                      
                      20Item
      2
                      
                      Properties
                      
                      20Item
      3
                      
                      Legal
      Proceedings
                      
                      21Item
      4
                      
                      Submission
      of Matters to a Vote of Security Holders
                      
                      21PART
      IIItem
      5
                      
                      Market
      for Registrant’s Common Equity, Related Stockholder Matters andIssuer
      Purchases of Equity Securities
                      
                      22Item
      6
                      
                      Selected
      Financial Data
                      
                      24Item
      7
                      
                      Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
                      
                      24Item
      7A
                      
                      Quantitative
      and Qualitative Disclosures about Market Risk
                      
                      36Item
      8
                      
                      Financial
      Statements and Supplementary Data
                      
                      36Item
      9
                      
                      Changes
      in and Disagreements with Accountants on Accounting and Financial
      Disclosure
                      
                      79Item
      9A
                      
                      Controls
      and Procedures
                      
                      79Item
      9B
                      
                      Other
      Information
                      
                      79PART
      IIIItem
      10
                      
                      Directors,
      Executive Officers and Corporate Governance
                      
                      80Item
      11
                      
                      Executive
      Compensation
                      
                      84Item
      12
                      
                      Security
      Ownership of Certain Beneficial Owners and Management andRelated
      Stockholder Matters
                      
                      89Item
      13
                      
                      Certain
      Relationships and Related Transactions, and Director
      Independence
                      
                      91Item
      14
                      
                      Principal
      Accounting Fees and Services
                      
                      92PART
      IVItem
      15
                      
                      Exhibits,
      Financial Statement Schedules
                      
                      94Signatures
                      
                      101





PART
I





Unless
the context requires otherwise, references in this report to “Ener1,” “we,”
“us,” the “Company” and “our” refer to Ener1, Inc. and its consolidated
subsidiaries.





Item
1.    Business





Business
Overview





We are
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.  We also conduct research on and
develop 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, 2008, Ener1 Group owned
approximately 57% of our outstanding common stock and two of our nine directors
are affiliated with Ener1 Group.  At December 31, 2008, Bzinfin, S.A.,
the owner of 66% of the common stock of Ener1 Group, directly owned
approximately 2.8% 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 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 U.S. Department of Energy (“DOE”).  We are also developing a
LTO battery for PHEVs, but with a different cathode material, under an award
from the DOE which is being managed by the USABC.





In early
2007, we received independent test results that showed that our battery provided
high power capability, charges and discharges rapidly (“C” rate), and performed
well in cold temperatures among other positive results. The power C rate and
cold temperature characteristics are particularly advantageous for HEVs, whereas
PHEVs and EVs require higher energy density to provide longer lasting
energy.   Our HEV lithium-ion cells are undergoing extensive
testing as we work to improve battery life and high temperature performance, and
the results of the tests are being evaluated by our prospective customers and
the USABC.  In June 2007, based upon the positive test results, we
began a plan to accelerate the effort to commercialize our
products.  We developed a working prototype HEV battery pack using the
LTO cell.  We installed the pack into an HEV and obtained independent
test results in 2008 that our battery outperformed the incumbent nickel metal
hydride (NiMH) battery; the pack was installed using the existing limiting
software controls associated with the NiMH battery.





In 2007,
pursuant to a $70 million Supply Agreement (the “Supply Agreement”) with Think
Global AS of Oslo, Norway (“Think”), we began developing a lithium-ion battery
pack designed specifically for the Think City electric vehicle.  The
first generation battery for this EV uses a hard carbon anode and a mixed oxide
cathode.  During 2008, we delivered to Think prototype battery packs
and additional battery packs for in-vehicle testing in Norway.


- 2
-


In
October 2008, we received a $34,000,000 purchase order from Think under the
Supply Agreement.  The purchase order is subject to meeting certain
milestones including technical and mileage accumulation tests.  Think
announced in December 2008 that it needs additional working capital funding in
order to continue production of its vehicles and that it was filing for
protection from creditors under Norwegian law. Ener1 Group, our majority
shareholder, is one of several lenders who have provided interim financing to
Think to allow them to focus their efforts towards the next stages of the
restructuring process, which include raising permanent equity capital and
returning to volume production.  Ener1 Group has provided
approximately $3,573,000 in bridge financing to Think.





In August
2008, the Indiana Economic Development Corporation granted performance based tax
credits up to $7,125,000 and training grants up to $58,000 for
EnerDel.  The offer includes $6,800,000 in Economic Development for a
Growing Economy (“EDGE”) tax credits based on the creation of new jobs and up to
$325,000 in possible tax credits under the Hoosier Business Investment Tax
Credit Program.  The amount of tax credits that we will receive will
depend on the number of jobs we are able to create through the year
2012.





In
September 2008, we were awarded $5,495,000 in research and development contracts
with the Department of Defense to create advanced battery solutions for military
applications and $984,000 in research and development contracts with the DOE to
develop high energy batteries for hybrid buses.  We expect to perform
and invoice pursuant to these contracts during 2009.





Currently,
our activities are beginning to shift from research and development to
manufacturing and production of our lithium-ion batteries.  We have
invested approximately $30 million in equipment and building improvements to
establish cell manufacturing and battery pack assembly capacity in our Indiana
facilities.  We have extended the lease for our Indianapolis facility
for an additional five years through February 2017 and entered into a new lease
with an option to purchase for 31,000 square feet of pack assembly space in
Noblesville, Indiana through July 2013





In
October 2008, we acquired approximately 83% of the fully diluted capital stock
of Enertech International, Inc., (“Enertech”), a Korean based manufacturer of
lithium-ion batteries, for $600,000 cash, 5,000,000 shares of Ener1 common stock
and warrants to purchase up to 2,560,000 shares of Ener1 common stock at an
exercise price of $7.50 per share.  The warrants are immediately
exercisable and expire in October 2010.  The acquisition expands our
production capabilities with Enertech’s 200,000 square foot lithium-ion battery
manufacturing plant and production equipment located in South
Korea.  Enertech, through its United States-based subsidiary, Emerging
Power, leases 11,000 square feet of office, battery pack assembly and
warehousing space in Hackensack, New Jersey.  On January 6, 2009, we
purchased an additional ownership interest in Enertech by issuing 385,936 shares
of Ener1 common stock valuated at approximately $2.6 million increasing our
ownership, on a fully diluted basis, to 89%.  Enertech has specific
expertise in manufacturing flat or prismatic batteries which are used in our
battery packs and has been supplying cells, based on EnerDel’s design, to
EnerDel for prototype and sample packs used for Think for testing during the
last year.





Corporate
Developments





During
2007 and 2008, we took steps to improve our balance sheet and improve our public
company profile including increasing the liquidity and 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, Notes due to Ener1 Group and
outstanding Series B Preferred Stock into Ener1 common stock, and we redeemed
the Series A preferred stock for cash.  During 2008, investors in our
November 2007 private placement exercised warrants resulting in new capital of
$29.7 million. At December 31, 2008, our total assets and stockholders’ equity
had increased to $142 million and $103 million, respectively, compared to $31
million and negative $7 million at December 31, 2007.





In April
2008, we completed a 1 for 7 reverse stock split of Ener1’s common stock, and
our stock began trading on the American Stock Exchange.   On
January 2, 2009, we began trading on the NASDAQ stock market.  To
accommodate recent share issuances and to provide additional shares for future
capital raises and/or acquisitions, we increased the authorized number of common
shares by 40,000,000 shares to 175,714,286 shares.


- 3
-


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 or until
we complete a public equity offering, whichever occurs first.  In
February 2009, we borrowed $5.0 million from this line of credit.  Our
ability to draw on the line of credit is subject to certain conditions and
limitations.





On
January 7, 2009, we filed a registration statement on Form S-3 to register the
resale of the shares issued to the sellers in the Enertech transaction, as well
as the shares issuable upon the exercise of the warrants and to register debt
and equity securities in an amount of up to $100 million for potential future
issuance.  The registration statement became effective on February 5,
2009.





Our
Battery Business





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.  We also intend to serve 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 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
worldwide to reduce transportation costs.





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 foreign 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) April 2008
report on proposed CAFÉ standards projected that HEVs could rise to 19% of the
U.S. market by 2015, from just 2% of the market in 2007.  Further, the
United States Congress recently issued guidance to domestic auto manufacturers
to accelerate production of new fuel-efficient vehicles, and President Obama has
set a goal of having 1 million PHEVs and EVs in the United States by
2015.  In President Obama’s first address to Congress, he stated that
he does not want the batteries to be imported from outside the United States
underscoring the importance of a domestic source for advanced battery
production.





Government Programs
Promoting HEVs and Advanced Batteries





We expect
that the United States government programs will fund a significant increase in
investment in the domestic battery business and related supplier markets, and
that we will benefit from these programs as a United States-based
manufacturer.





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, domestic oil prices increased to a peak monthly
average of $133.88 per barrel in June 2008 compared to $65.49 per barrel in
January 2006.  Refiner gasoline prices increased from $1.75 to $3.42
per gallon during this same period.  Subsequently, due in great part
to lower worldwide demand, oil and refiner gasoline prices declined to $41.68
per barrel and $1.29 per gallon in January 2009.





Despite
the volatility in energy prices, including  the recent decrease in
energy prices, 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 specifically targeted at domestic
manufacturers of batteries and related suppliers.


- 4
-


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 this plan, the DOE's National Energy
Technology Laboratory announced that it intends to issue, on behalf of the DOE
Office of Energy Efficiency and Renewable Energy (EERE), a Funding Opportunity
Announcement entitled the "Automotive Battery Manufacturing
Initiative.”  The program will provide 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 Advanced Technology
Vehicle Manufacturing Incentive Program (“ATVM”) to increase our battery
manufacturing capacity in Indiana.  We are currently providing
additional information to the DOE pursuant to the application
process.  The ATVM was created under Section 136 of the Energy
Independence and Security Act of 2007.   In addition, there are
other loan guarantee programs available under Title XVII of the of the Energy
Policy Act of 2005 for projects that reduce air pollutants or man-made
greenhouse gas emissions, and that employ new or significantly improved
technologies compared to commercial technologies currently in service in the
United States.  The guarantee program specifically includes guarantees
for production facilities for fuel-efficient vehicles, including HEVs. We have
not applied for guarantees under the Title XVII program.





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
operation and monitors its performance and safety compliance.  EnerDel
is an end-to-end solutions provider that develops and manufactures from 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. The battery can be recharged at an electric outlet at home or at
work or other places where 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 late 2010.  The industry estimates that as many as 85% of
American drivers drive less than 40 miles per day, and that an affordable 40
mile range PHEV 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 at home or at work or other places
where access to the electric grid is provided.  EVs are currently
being designed to travel 70 to 200 miles on battery power before requiring
recharging.  The most well known EVs currently being designed are the
Think City and Tesla Roadster.  Utility companies are working with
automotive companies to develop charging stations that will extend the range of
PHEVs and EVs.


- 5
-


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 (capacity and
energy) than a PHEV.





We have
developed a high energy density battery using a hard carbon anode and a mixed
oxide cathode to produce a 26 kWh (kilowatt hour) battery pack for the Think
City vehicle.  This pack solution is also being tested by other
customers, and a 12 kWh pack with similar architecture has been developed for an
in-vehicle PHEV testing program with a European automotive
company.  We intend to develop a second generation battery for EVs and
PHEVs using LTO that will have many of the advantages of our LTO battery
designed for HEVs.  We were awarded a $2.5 million cost-share
development contract by the USABC (funded by the DOE) to develop this battery
technology.  Under cost sharing arrangements we typically perform work
and invoice the agency for 50% of the costs we incur.





Our high
energy density cell technology and EV pack design have undergone various
performance and safety testing, and lifetime testing is now
ongoing.  We believe we are now ready to begin volume manufacturing
using this technology upon our receipt of firm purchase orders. The technology
has undergone various performance and safety testing, and lifetime testing is
now ongoing.





HEV
Batteries





We have
developed a battery pack system for HEVs which we believe is safer than other
lithium-ion battery systems currently under development.  We believe
that the safety of battery pack systems will become a critical consideration for
automotive manufacturers.  Our HEV battery using LTO chemistry has
been designed to provide safe, high power (fast charge and discharge rate) which
runs efficiently in a wide temperature range, including cold
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 chemistry to improve the longevity of the
battery, particularly under high temperatures.





We
believe that the key advantages of our lithium-ion battery for HEVs
include:





·
            Safer
      chemistry related to thermal
issues.


·
            Power
      chemistry which is well suited for
HEVs.


·
            Operational
      in cold temperatures (-32 degrees
Celsius).


·
            Suitable
      charge and discharge
characteristics.


·
            Performance
      over a wide temperature range.


·
            Design
      advantages – our batteries have a prismatic design and are flat, rather
      than wound, offering a more compact
design.


·
            Low
      heat generation which results in less expensive vehicle thermal management
      system costs.


·
            Assembly
      and maintenance advantages because our batteries can be transported and
      installed at a low state of charge.


·
            Domestic
      capacity (Indiana) near United States-based automotive
      industry





Battery
Packs





We
believe that we have a significant product advantage over traditional small cell
manufacturers due to our experienced automotive battery pack engineering design
team.  We believe that we provide a total systems solution with a
plug-and-play battery pack system.  Our design is modular, which makes
servicing less complicated, and incorporates safety and cooling features
designed into the pack.  We design our own software for battery
management, and in cases where volume justifies the expenditure, have the
ability to replace circuit board components with integrated
circuits.


- 6
-


Other
Markets


We
believe that our EV battery cells will have adequate energy and power capability
at the end of their useful life in automotive applications that will allow them
to be used in other industrial applications such as stationary power and
military. The following chart indicates some of the potential markets that may
be available based on technologies developed 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





Stationary
power represents a developing market opportunity for EnerDel. 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
has been awarded three contracts from the Department of Defense (“DOD”) through
the federal appropriations process over the last two years. In 2008, we
completed work under the first of these contracts with a defense agency, the
Office of Naval Research, to develop a lithium-ion battery system for use in
asset tracking applications.  We are currently working on three
development contracts for batteries for asset tracking and Unmanned Aerial
Vehicle (UAV) applications totaling approximately $5.5 million with the DOD.
These contracts were signed in September 2008 and the work is expected to be
completed and billed during 2009.





Our low
voltage battery pack design is intended to power transmitters and receivers used
in asset tracking applications.  Engineering samples of this product
have been developed and successfully passed extensive testing
programs.  Based on the testing data, we believe this product can
offer a significant improvement in cold temperature performance as well as
extended useful life compared to the lead-acid and NiMH batteries used in asset
tracking applications today.  We believe that our batteries will
reduce the total cost of ownership through improved cycle life and that our
technology could be commercialized for revenue opportunities in non-military
sectors.





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 use in security systems and GPS
systems.  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





In the
United States, we market our products through a combination of direct selling
using our own sales force, executive level meetings with potential customers,
and attendance at trade shows.  Due to the emerging nature of this
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
2008.  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.





Enertech’s
small cell sales and marketing team includes a direct sales force and support
staff of fourteen 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 OEM
automotive manufacturers (light and heavy duty) and 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 home owners.  Our customers in
the government include the DOD and other departments of the United States
government, from which we seek research grants and development
contracts.  Our customers in the small cell market include large
consumer product companies in the telephone and personal device application
markets and also the scanner market.  We consider Symbol Technologies
(Motorola) to be a significant customer in our small cell business.





In the
large format cell market, we currently conduct development activities on eight
automotive or related products, three government projects and four research
products for the DOE and USABC.  The automotive development projects
include final testing and production qualification of the battery pack for the
Think City EV, an EV battery pack program for demonstration for a tier one
supplier in Europe, a large format cell development program for a tier one
supplier in Europe, a PHEV battery pack testing program with a European
automotive company and electric utility, an EV conversion program with specialty
vehicles, an EV conversion program for a national postal service conversion
program, the development of a fast charging system partners with KEPCO, and
early design concept development of a program with a European automotive
company.





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 include the delivery of samples,
prototypes and final product.  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, Delphi and Johnson Controls.  Our sales and
marketing efforts are directed to the automotive companies and the tier one
suppliers.  We may consider additional strategic relationships or
joint ventures with tier one suppliers to enhance our marketing
efforts.





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.


- 8
-


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, it is reasonable to believe that the bulk of our expected sales
will be concentrated in a very 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.  We may not be able to compete successfully against
current or future competitors, and competitive pressures that we face may
materially adversely affect our business.




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
Panasonic recently announced its intention to acquire the remaining ownership of
Sanyo, which is the largest producer of commercial battery cells and a supplier
to Continental.  Other collaborations include: Bosch-Samsung,
Daimler-Evonik-Litec, Continental-ENAX, GS Yuasa-Mitsubishi and Nissan-NEC under
the name AESC.  In addition, in 2008 BYD 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.




Although
other companies may attempt to enter the lithium battery market, the lithium
battery industry has certain technological and economic barriers to entry. The
development of technology, equipment and manufacturing techniques and the
operation of a facility for the automated production of lithium batteries
require large capital expenditures, which may deter new entrants from commencing
production. Automotive manufacturers have a significant and extensive testing
process, and we believe that it would be difficult for a company that is not
already part of that process to achieve immediate acceptance of its
products.  It is also expected that the automotive industry will
require high levels of quality and reliability of the batteries they purchase,
especially due to the longer life requirements in the automotive industry versus
for portable electronics products, which we believe requires highly automated
manufacturing which EnerDel and Enertech have developed.


- 9
-




Battery
Capacity
 
 We lease
approximately 92,000 square feet in Indianapolis, Indiana, where cell
development, engineering and prototype manufacturing are
conducted.  The facility includes 68,000 square feet of manufacturing
space and 24,000 square feet of office space.  We consider coating
machine capacity to be the critical indicator of cell
capacity.  Coating capacity is determined by both machine efficiency
(speed) and yield, or the percentage of good production.  While cell
assembly and formation capacity can be scaled to meet coating capacity, we
expect that there will be a shortage of worldwide coating capacity as the HEV,
PHEV and EV markets grow over the next five years.  We currently have
coating capacity in Indiana to produce approximately 300 million watt hours of
electrodes for batteries on three shifts. With approximately $50 million of
additional cell production and pack assembly equipment additions, we can
increase our coating capacity in Indiana to 600 million watt hours and our cell
and battery pack production capacity to produce an estimated $450 million value
of battery pack sales.
 
 We have
purchased and installed equipment in Indiana to complete one production line at
minimum capacity levels, and will increase the scalable equipment to increase
that capacity as customer orders require.  We spent $21.3 million on
capital equipment and building modifications in 2008, and had capital equipment
purchase commitments of $6.4 million at December 31, 2008.  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 activities.
 
 We own a
200,000 square foot lithium-ion manufacturing facility in Chungcheongbuk-do,
Korea. With the recent purchase of a large format coating machine, we have
sufficient plant capacity in Korea to produce 300 million watt hours of
electrodes for batteries on three shifts and have assembly capacity to produce
40 million watt hours of battery cells.  With approximately $20 to $30
million of cell production equipment additions, we can increase our cell
production capacity in Korea to produce an estimated $250 million value of
battery pack sales.
 
 We lease
11,000 square feet of small cell pack assembly and sales and administrative
space in Hackensack, New Jersey.
 
 Intellectual
Property of EnerDel
 
 EnerDel
has more than 35 issued United States patents, 9 foreign patents and has filed
over 60 pending United States, Patent Cooperation Treaty and other international
patent applications, all relating to lithium-ion battery or related
technologies. The majority of these were obtained from Delphi when EnerDel was
formed, and were issued during a period of several years preceding the formation
of EnerDel. The majority of the issued patents will expire 20 years from the
date of filing or the earliest priority date, applicable. EnerDel 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
and work-for-hire agreements. We also have a policy of entering into
confidentiality agreements with third parties before discussing sensitive
information with them.
 
 Research
and Development
 
 During
2008 and 2007, Ener1 spent $22, 902,000 and $11,948,000, respectively, on
research and development net of proceeds from grants of $3,835,000 and $910,000,
respectively.
 
 Raw
Materials and Suppliers
 
 The
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 2009, the primary source of lithium
is from brine and the largest producing countries of lithium are Chile,
Australia, China and Argentina.  Estimated identified reserves are
760,000 tons located in the United States and 13 million tons located in other
countries.  Annual worldwide consumption in 2008 was an estimated
27,400 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 25% of global lithium consumption is for
batteries.


- 10
-




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.
 
 EnerFuel
 
 Our
EnerFuel subsidiary, located in West Palm Beach, Florida, is working on
developing a hydrogen fuel cell range extender for PHEVs and has successfully
created a high temperature fuel cell stack which was incorporated into an EV by
the end of 2008 for testing during 2009.  Other planned products are
in early stages of development and completion of prototypes will require
additional time, effort and funding.  EnerFuel’s operating loss before
corporate allocations was $4 million for the year ending December 31,
2008.
 
 NanoEner
 
 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 operating loss before corporate allocations was
$1.1 million for the year ending December 31, 2008.
 
 Employees
 
 At March
6, 2009, we had 486 full time employees of which 271 were employed by
Enertech in Korea.  Included in our employees are 133 fulltime
contract workers, of which 102 were employed in Korea.  We have no
employees under collective bargaining agreements.
 
 Government
Regulation and Approvals
 
 Certain
aspects of production and transportation of batteries and fuel cells and their
components or raw materials are regulated on the international, federal, state,
and local levels, as well as by private commercial organizations. Transportation
of battery products is regulated by the U.S. Department of Transportation and
other governmental departments and 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 flammable or hazardous fuels before we are able to deliver
some of our planned fuel cell systems. Future legislation and/or other
regulation concerning the transportation and storage of hydrogen fuel and other
fuels associated with fuel cells is expected in the future
 
 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
  - 11
-
  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
 
 In
addition to the other information in this Annual Report, readers should consider
carefully the following factors that may affect our future
performance.
 
 We
will need additional capital to fund 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, our operating performance and the terms of our existing
indebtedness. We cannot provide assurances 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, the ownership
percentage of existing holders 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 could 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 provide assurances 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 permanent financing, we would have to curtail our
development and production activities and adopt an alternative operating
model.
 
 We
have a history of operating losses.
  We have
experienced net operating losses since 1997, and have incurred negative cash
flows from operations since 1999. Cash used in operations for the years ended
December 31, 2008 and 2007 was $24.1 million and $26.7 million, respectively. We
expect that we will continue to incur negative cash flows and require additional
cash to fund our operations and implement our business plan. The continued
development of our energy-related technology and products will require
significant additional capital investment.
 
 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 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
these 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 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.
  - 12
-
  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. We will face significant
challenges, expenses and difficulties 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
 
 We
have no experience manufacturing battery, fuel cell or nanotechnology-based
products on a large-scale commercial basis and may be unable to do
so.
  Since
2002, we have focused primarily on research and development and, 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 high volume
battery manufacturing processes and equipment. We have no experience using such
equipment for the products we are developing. We do not know whether or when we
will be able to develop efficient, low-cost manufacturing capabilities and
processes that will enable us to manufacture our products in commercial
quantities while meeting the quality, price, engineering, design and production
standards required to successfully market our products. Our failure to develop
such manufacturing processes and capabilities could have a material adverse
effect on our business, financial condition, results of operations and
prospects.
 
 We
may not meet our development and commercialization milestones.
  We have
established product development and commercialization milestones that we use to
assess our progress toward developing commercially viable products. These
milestones relate to 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
provide assurance 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.
  - 13
-
  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 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. The 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.
 
 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 celltechnologies 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.
  - 14
-
  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 for EVs, PHEVs and HEVs 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.
  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.
  On
October 15, 2007, we entered into a Supply Agreement with Think Global of Oslo,
Norway that, subject to the achievement of certain milestones and conditions,
granted to us the opportunity to supply approximately $70 million of lithium-ion
battery packs for the Think electric vehicle in 2009 and 2010. Think announced
in December 2008 that it needs additional working capital funding in order to
continue production of its vehicles and that it was filing for protection from
creditors under Norwegian law. Think is a significant potential customer, and a
delay in deliveries under or cancellation of the Supply Agreement would
adversely affect our expected 2009 and 2010 revenues and profitability and could
have a material adverse effect on our business.
  The
U.S. and global automobile industry is experiencing 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 U.S.
and global automobile industry. The effect of the continued economic
difficulties of the major auto manufacturers on our business is unclear. It is
possible that one or more of these companies may enter into a restructuring,
which could be government mandated, privately negotiated, or conducted within
the context of bankruptcy proceedings. 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 and
the possibility of continuing volatility is expected 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 remain at deflated levels, the demand for
hybrid and electric vehicles may decrease, which would have a material adverse
effect on our business.
  - 15
-
  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 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.
  We
could be liable for environmental damages resulting from our research,
development or manufacturing operations.
  Our
business exposes us to the risk that harmful substances may escape into the
environment, resulting in personal injury or loss of life, damage to or
destruction of property and natural 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 it is
reasonable to expect there will be additional changes in the future. If our
operations do not comply with current or future environmental laws and
regulations, we may be required to make significant unanticipated capital and
operating expenditures to bring our operations into compliance. If we fail to
comply with applicable environmental laws and regulations, governmental
authorities may seek to impose fines and penalties on us or to revoke or deny
the issuance or renewal of operating permits and private parties may seek
damages from us. Under those circumstances, we might be required to curtail or
cease operations, conduct site remediation or other corrective action, or pay
substantial damage claims.
 
 Our
products may use materials that are inherently dangerous 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.
  - 16
-
  We
may not be able to successfully integrate Enertech.
  Our
future success depends in part on our ability to effectively integrate the
operations of Enertech International, Inc., which we acquired in October 2008.
The acquisition of Enertech has placed, and will continue to place, significant
demands on our management, operational and financial resources. Realization of
the expected benefits of the Enertech acquisition will require integration of
Enertech’s sales and marketing, distribution, manufacturing, engineering,
finance and administrative operations. If we are unable to successfully complete
this integration, we may not realize the expected benefits of the acquisition,
including the anticipated increases in Ener1’s manufacturing capabilities and
capacity.
  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 trade secrets, know-how, 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 and are
sufficiently broad, 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.
  In
addition, we do not know whether the U.S. Patent & Trademark Office will
grant federal registrations based on our pending trademark applications. Even if
federal registrations are granted to us, our trademark rights may be challenged.
It is 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 the expenditure of 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 the
expenditure of 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.
  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.
  - 17
-
  Our
business depends on retaining and attracting highly capable management and
operating personnel.
  Our
success depends in large part on our ability to retain and attract qualified
management and operating personnel. We require a highly skilled specialized
workforce, including scientists, engineers, researchers and manufacturing and
marketing professionals, individuals who are in high demand and are often
subject to competing offers. To retain and attract key personnel, we use various
measures, including employment agreements, a stock incentive plan and incentive
bonuses for key employees. These measures may not be enough to retain and
attract the personnel we need or to offset the impact on our business of the
loss of the services of key officers or employees. We could face difficulty
hiring and retaining qualified senior executives.
 
 We
face risks associated with our plans to market, distribute and service our
products internationally.
  We have
limited experience developing and no experience manufacturing or distributing
products that will be sold in the U.S. 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 convenience of the contracting agency and potential disclosure of our
confidential information to third parties. Under the Freedom of Information Act,
any documents that we have submitted to the government or to a contractor under
a government funding arrangement may be subject to public disclosure 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.
  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.
  - 18
-
  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 the 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 sales of our stock may be
limited.
 
 Future
sales of our common stock may adversely affect our common stock
price.
  If a
large number of shares of our common stock is 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, the 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.
  - 19
-
  Our
principal shareholder has substantial control over our affairs.
  Ener1
Group, Inc. beneficially owns a majority of our outstanding common stock. Two
executives and members of Ener1 Group’s board are also executives, including the
Chief Executive Officer and President, and members of our Board of
Directors.  Ener1 Group has the ability to control virtually all
matters submitted to a vote of the shareholders of Ener1, including the election
and removal of directors and any merger, consolidation or sale of all or
substantially all of our assets. In addition, Ener1 Group, 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 a change in control or
impeding a merger or consolidation, takeover or other business combination which
other shareholders may view favorably.
 
 Item
1B.         Unresolved Staff
Comments.
 
 We have
received no written comments regarding our periodic or current reports from the
staff of the SEC that were issued 180 days or more preceding the end of our
fiscal year 2008 that remain unresolved.
 
 Item
2.            Properties.
 
 Description
of 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 continue to
lease 8,183 square feet of office space in Fort Lauderdale pursuant to a lease
expiring in February 2010.  This location is sub-let to an unrelated
third party pursuant to a sub-lease agreement also expiring in February
2010.
 
 EnerDel
leases 92,000 square feet of industrial and office space in Indianapolis,
Indiana pursuant to a lease expiring in February 2017.  This space is
used for the manufacturing and production of battery cells and research and
development of battery products.  EnerDel also leases 31,000 square
feet of industrial and office space in Noblesville, Indiana pursuant to a lease
expiring in July 2013.  This facility is used primarily for battery
pack assembly.  There is an option to purchase the Noblesville
facility as well as the adjacent land through September 2009.
 
 EnerFuel
leases 7,611 square feet of industrial and office space in West Palm Beach,
Florida pursuant to a lease expiring in December 2010. We have the option to
extend the lease for an additional term of five years.  This space is
used primarily for research and development of fuel cell products.
 
 Enertech,
through its United States based subsidiary, Emerging Power, leases 11,000 square
feet of office, warehouse and battery pack assembly space in Hackensack, New
Jersey.
 
 From time
to time, we may enter into short term leases, on a month-to-month basis, for
industrial and/or office space.
 
 Through
Ener1 Battery, we own land and a building in Fort Lauderdale, Florida containing
approximately 19,000 square fee of industrial and office space.  Ener1
utilizes a portion of this facility for administrative personnel, EnerFuel
utilizes a portion of this facility for certain hardware development projects,
and NanoEner utilizes a portion of this facility for prototype equipment and
research and development.
 
 Through
Enertech, we own land and a building in South Korea containing a 200,000 square
foot manufacturing plant and adjacent office space.  This facility is
used for manufacturing and production of battery cells.
  - 20
-
  Item
3.            Legal
Proceedings.
 
 We
receive communications from time to time alleging various claims. These claims
include, but are not limited to, employment matters, collection of accounts
payable, and allegations that certain of our products infringe the patent rights
of other third parties. We cannot predict the outcome of any such claims or the
effect of any such claims on our operating results, financial condition, or cash
flows. As of December 31, 2008, there are no material pending legal
proceedings.
 
 Item
4.            Submission
of Matters to a Vote of Security Holders.
 
 Our
majority shareholder approved an amendment to our Articles of Incorporation
through action taken by consent and without a meeting to increase the number of
authorized shares of our common stock from 150,714,286 shares to 175,714,286
shares.  The increase in the authorized shares became effective on
December 31, 2008.
  - 21
-
  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 stock began trading on the NASDAQ 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
Over-the-Counter Bulletin Board.
 
 The
following table sets forth the daily high and low sales prices for our common
stock as reported by the American Stock Exchange for the period from May 8,
2008 through December 31, 2008 and the OTC Electronic Bulletin Board for the
period from January 1, 2007 through May 7, 2008.  The OTC Electronic
Bulletin Board is a regulated quotation service that displays real-time quotes,
last-sale prices and volume information in OTC equity securities.  The
quotations reflect inter-dealer prices, without retail mark-up, mark-down or
commission and may not represent actual transactions.
 
 On March
6, 2009, the closing price of our common stock on the NASDAQ was $2.51 per
share.
 
 Year
                                    
                                    Fiscal Quarter Ended
                                    
                                    High
                                    
                                    
                                    Low2007
                                    
                                    March
      31, 2007
                                    
                                    $
                                    1.96
                                    
                                    
                                    $
                                    1.82June
      30, 2007
                                    
                                    $
                                    1.61
                                    
                                    
                                    $
                                    1.40September
      30, 2007
                                    
                                    $
                                    3.29
                                    
                                    
                                    $
                                    2.80December
      31, 2007
                                    
                                    $
                                    5.88
                                    
                                    
                                    $
                                    5.672008
                                    
                                    March
      31, 2008
                                    
                                    $
                                    6.16
                                    
                                    
                                    $
                                    5.88June
      30, 2008
                                    
                                    $
                                    8.19
                                    
                                    
                                    $
                                    7.27September
      30, 2008
                                    
                                    $
                                    8.14
                                    
                                    
                                    $
                                    7.00December
      31, 2008
                                    
                                    $
                                    7.42
                                    
                                    
                                    $
                                    7.15
 
 As of
March 6, 2009, there were 113,474,085 shares of common stock issued and
outstanding.  We had approximately 280 shareholders of record. Such
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.
  - 22
-
  Equity
Compensation Plan Information
 
 The
following table provides information regarding common stock authorized for
issuance under Ener1’s equity compensation plans as of December 31,
2008:
  Plan Category
                              
                              (a) Number of
                                securities to be
                                issued uponexercise
                                ofoutstanding
                                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 approved by security holders
                              
                              
                              2,547,274
                              
                              
                              $
                              3.14
                              
                              
                              
                              2,903,637Equity
      compensation plans not approved by security holders
                              
                              
                              1,410,347
                              
                              
                              $
                              3.70
                              
                              
                              
                              -Total
                              
                              
                              3,957,621
                              
                              
                              
                              
                              
                              
                              
                              2,903,637
 
 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 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 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.  No new options are expected to be issued
from these plans.
 
 Sales
of Unregistered Securities and Repurchases
 
 All of
the following issuance 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.
 
 Shares issued in connection
with acquisitions
 
 In
October 2008, we issued 5,000,000 shares of common stock and warrants to
purchase up to 2,560,000 shares of common stock in connection with the
acquisition of approximately 83% of the capital stock, on a fully diluted basis,
of Enertech International, Inc.
 
 In
January 2009, we issued 385,936 shares of common stock in connection with the
acquisition of additional ownership in Enertech bringing our current ownership
percentage, on a fully diluted basis, to 89%.
 
 On
January 7, 2009, we filed a registration statement on Form S-3 to register the
resale of the shares issued as well as the shares issuable upon exercise of 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.
  - 23
-
  Shares issued in connection
with master lease agreement
 
 During
the fourth quarter of 2008, we issued 38,141 shares of Ener1 common stock
totaling approximately $281,000 in connection with a master lease agreement and
recorded the value as a discount to capital lease liability.
 
 Shares issued as
compensation
 
 In
February 2009, we issued 24,243 shares of Ener1 common stock as compensation to
an independent third party for investment banking services totaling
approximately $200,000 and recorded the value as general and administrative
expense.
 
 Item
6.            Selected
Financial Data.
 
 This Item
6 is not applicable to us as, pursuant to Item 301(c) of Regulation S-K, a
smaller reporting company is not required to provide the information required by
Item 301 of Regulation S-K.
 
 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 contain ”forward-looking statements” within the meaning of
Section 27A of the Securities Act, and Section 23E of the Securities Exchange
Act of 1934, as amended, including statements about our beliefs and
expectations. There are many risks and uncertainties that could cause actual
results to differ materially from those discussed in the forward-looking
statements. Potential factors that could cause actual results to differ
materially from those discussed in any forward-looking statements include, but
are not limited to, those stated below under the headings “Cautionary Statement
Concerning Forward-Looking Statements” and “Risk Factors” as well as those
described from time to time in our filings with the Securities and Exchange
Commission.
 
 All forward-looking statements are
based on information available to us on the date of this filing, and we assume
no obligation to update such statements. The following discussion should be read
in conjunction with our filings with the Securities and Exchange Commission and
the consolidated financial statements and the related notes included in this
Annual Report.
 
 Cautionary
Statement Concerning Forward Looking Statements
 
 We have
made forward-looking statements in this Annual Report including, without
limitation, statements concerning our financial outlook for 2009 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 and Section 21E of the Securities Act of
1934.
 
 Any
statements contained in this report that are not statements of historical fact
may be deemed forward-looking statements. Our forward-looking statements may be
identified by words such as “believes,” “expects,” “thinks,” “anticipates,”
“intends,” “estimates” 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.
 
 We
undertake no obligation to update or revise publicly any forward-looking
statements, whether as a result of new information, future events, or
otherwise.
 
 The
factors discussed in “Risk Factors” and in our filings with the Securities and
Exchange Commission from time to time, and other unforeseen events or
circumstances, could affect our future results and could cause those results or
other outcomes to differ materially from those expressed or implied in our
forward-looking statements. Accordingly, you should not place undue reliance on
forward-looking statements, which speak only as of the date of this Annual
Report.
  - 24
-
  Business
Overview and 2008 Developments
 
 We are
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.  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 transportation markets, stationary power
and military markets.  Our intention is to serve 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.
 
 In August
2008, we acquired the remaining 19.5% equity interest in our EnerDel subsidiary
held by Delphi Corporation (“Delphi”).  As part of the restructuring
of the equity participation, Delphi transferred to us its equity interest in
EnerDel and relinquished its right to appoint a member to the Board of Directors
of EnerDel.  In exchange, we transferred to Delphi 2,857,143 shares of
Ener1 common stock and 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
October 2008, we acquired approximately 83% of the fully diluted capital stock
of Enertech, a Korean based manufacturer of lithium-ion batteries for $600,000
cash, 5,000,000 shares of Ener1 common stock and warrants to purchase up to
2,560,000 shares of Ener1 common stock at an exercise price of $7.50 per
share.  The warrants are immediately exercisable and expire in October
2010.  The acquisition expands our production capabilities with
Enertech’s 200,000 square foot lithium-ion battery manufacturing plant and
production equipment located in South Korea.  Enertech, through its
United States based subsidiary, Emerging Power, leases 11,000 square feet of
office, battery pack assembly and warehousing space in Hackensack, New
Jersey.  On January 6, 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, on a fully diluted basis
from 83% to 89%.
  In 2007,
pursuant to a $70 million Supply Agreement (the “Supply Agreement”) with Think
Global AS of Oslo, Norway (“Think”), we began developing a lithium-ion battery
pack designed specifically for the Think City electric vehicle.  The
first generation battery for this EV uses a hard carbon anode and a mixed oxide
cathode.  During 2008, we delivered to Think prototype battery packs
and additional battery packs for in-vehicle testing in Norway.
  In
October 2008, we received a $34,000,000 purchase order from Think under the
Supply Agreement.  The purchase order is subject to meeting certain
milestones including technical and mileage accumulation tests.  Think
announced in December 2008 that it needs additional working capital funding in
order to continue production of its vehicles and that it was filing for
protection from creditors under Norwegian law. Ener1 Group, our majority
shareholder, is one of several lenders who have provided interim financing to
Think to allow them to focus their efforts towards the next stages of the
restructuring process, which include raising permanent equity capital and
returning to volume production.  Ener1 Group has provided
approximately $3,573,000 in bridge financing to Think.
  - 25
-
  In August
2008, the Indiana Economic Development Corporation granted performance based tax
credits of up to $7,125,000 and training grants of up to $58,000 for
EnerDel.  The grants are based on, and subject to the results of,
EnerDel’s program for potential job creation in Indiana through the year
2012.  The offer includes $6,800,000 in Economic Development for a
Growing Economy (“EDGE”) tax credits based on the creation of new jobs and up to
$325,000 in possible tax credits under the Hoosier Business Investment Tax
Credit Program.
 
 In
September 2008, we were awarded $5,495,000 in research and development contracts
with the Department of Defense to create advanced battery solutions for military
applications and $984,000 in research and development contracts with the DOE to
develop high energy batteries for hybrid buses.  We expect to perform
and invoice pursuant to these contracts during 2009.
 
 Our
activities are beginning to shift from research and development to manufacturing
and production of our lithium-ion batteries.  We have invested
approximately $30 million in equipment and building improvements to establish
cell manufacturing and battery pack assembly capacity in our Indiana facilities,
and acquired majority ownership of Enertech an existing manufacturing and
assembly facility in Korea.  Enertech has specific expertise in
manufacturing flat or prismatic batteries of the type used in our battery
packs.  Enertech has been supplying the Think cells for prototype and
sample packs for testing during the last year.
 
 We have
extended the lease for our Indianapolis, Indiana facility for an additional five
years through February 2017 and entered into a new lease with an option to
purchase for 31,000 square feet of pack assembly space in Noblesville, Indiana
through July 2013.  We have purchased and installed equipment in
Indiana to complete one production line at minimum capacity levels, and will
increase the scalable equipment to increase that capacity as customer orders
require.  We spent $21.3 million on capital equipment and building
modifications in 2008, leased equipment of $7.2 million and had capital
equipment purchase commitments of $6.4 million at December 31,
2008.
 
 Other
2008 and Early 2009 Developments
 
 As of
March 31, 2008, we converted the outstanding principal and interest on our 2004
and 2005 Debentures of $11.8 million into 2,257,741 shares of Ener1 common
stock.  We also converted $13.8 million of outstanding principal and
interest on our Group Notes into 3,955,634 shares of Ener1 common
stock.  The security interests in our assets that were granted in
favor of the debt holders were released.
 
 Effective
April 24, 2008, we completed a 1 for 7 reverse stock split of Ener1’s common
stock.   After the split, we had 135,714,286 authorized common
shares and in August 2008 and December 2008, the authorized number of common
shares was increased to 150,714,286 and 175,714,286, respectively.
 
 We moved
our corporate headquarters to New York in May 2008.  Our common stock
began trading on the American Stock Exchange effective May 8, 2008, under the
ticker symbol “HEV.”  Effective January 2, 2009, our common stock
began trading on the NASDAQ under the symbol “HEV”.
 
 In May
2008, we entered into a $7.0 million master equipment lease agreement with an
unrelated third party.  At December 31, 2008, we leased production
equipment totaling $7.2 million, which includes the purchase option that
management intends to exercise at the end of lease term.  Each lease
bears interest at 10% with a three year term.
 
 Through
May 31, 2008, we received $29.7 million in cash from the exercise of 5,657,149
warrants related to our equity private placement in November 2007.
 
 In August
2008, we redeemed the EnerDel Series A Preferred Stock from Delphi for $8.0
million in cash and all accrued and unpaid dividends were deemed to be paid in
full.
 
 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 or until
we complete a public equity offering, whichever occurs first.  Through
March 31, 2009, we can borrow up to $10.0 million, in $500,000
increments.  Subsequent to March 31, 2009, we may borrow up to the
face amount of $30.0 million.  All funds borrowed will bear interest
at a rate of 8.0% per annum.  In February 2009, we borrowed $5.0
million from this line of credit.
  - 26
-
  On
January 7, 2009, we filed a registration statement on Form S-3 to register the
resale of the shares issued to the sellers in the Enertech transaction, as well
as the shares issuable upon the exercise of 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.
 
 Results
of Operations for the Year ended December 31, 2008
 
 On
October 24, 2008, we acquired approximately 83% of the fully diluted capital
stock of Enertech, which was incorporated in March 2001 under the laws of the
Republic of Korea.  The acquisition was accounted for as a purchase
according to Statement of Financial Accounting Standards 141, (“SFAS 141”) Business
Combinations.
 
 The
account balances of Enertech have been included since November 1, 2008, the
accounting effective date of the acquisition.  As a result, the
audited financial statements included herein present operating results for the
period from November 1, 2008 through December 31, 2008 for
Enertech.  Management believes this two month period does not give a
full view of the operations of Ener1and therefore, has presented the results of
operations separately for Ener1for the year ended December 31, 2008 and Enertech
for the two months ended December 31, 2008 for proper comparison to Ener1’s
results of operations for the year ended December 31, 2007.
 
 The
following information has been derived from the accompanying audited
consolidated financial statements for the years ended December 31, 2008 and 2007
included in Item 8. Financial Statements and is presented in
thousands:
 
 Net
Sales, Cost of Sales and Gross Profit
 
 2008
                  
                  
                  2007
                  
                  
                  Ener1Ener1
                  
                  
                  Enertech
                  
                  
                  Totals
                  
                  
                  Ener1
                  
                  
                  $
      Change
                  
                  
                  %
      ChangeNet
      sales
                  
                  $
                  1,177
                  
                  
                  $
                  5,671
                  
                  
                  $
                  6,848
                  
                  
                  $
                  280
                  
                  
                  $
                  897
                  
                  
                  
                  320
                  %Cost
      of sales
                  
                  
                  -
                  
                  
                  
                  4,661
                  
                  
                  
                  4,661
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Gross
      profit
                  
                  $
                  1,177
                  
                  
                  $
                  1,010
                  
                  
                  $
                  2,187
                  
                  
                  $
                  280
                  
                  
                  $
                  897
                  
                  
                  
                  320
                  %
 
 Our
revenue increase is primarily due to the $941,000 from the Think Supply
Agreement.  These increases have been partially offset by a decrease
in engineering services of $153,000 due to the completion of the contract at the
end of 2007.
 
 Enertech’s
sale from finished goods and merchandise of $5,671,000 and $4,661,000 in cost of
sales contributed a gross profit of $1,010,000 or 18%.  Included in
cost of sales is depreciation expense of $408,000.
 
 Operating
Expenses
 
 2008
                      
                      
                      2007
                      
                      
                      Ener1Ener1
                      
                      
                      Enertech
                      
                      
                      Totals
                      
                      
                      Ener1
                      
                      
                      $
      Change
                      
                      
                      %ChangeGeneral
      and administrative
                      
                      $
                      10,609
                      
                      
                      $
                      969
                      
                      
                      $
                      11,578
                      
                      
                      $
                      8,265
                      
                      
                      $
                      2,344
                      
                      
                      
                      28
                      %Research
      and development, net
                      
                      
                      22,888
                      
                      
                      
                      14
                      
                      
                      
                      22,902
                      
                      
                      
                      11,948
                      
                      
                      
                      10,940
                      
                      
                      
                      92
                      %Warrant
      modification expense
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      583
                      
                      
                      
                      (583
                      )
                      
                      
                      -100
                      %Depreciation
      and amortization
                      
                      
                      1,454
                      
                      
                      
                      158
                      
                      
                      
                      1,612
                      
                      
                      
                      530
                      
                      
                      
                      924
                      
                      
                      
                      174
                      %Total
      operating expenses
                      
                      $
                      34,951
                      
                      
                      $
                      1,141
                      
                      
                      $
                      36,092
                      
                      
                      $
                      21,326
                      
                      
                      $
                      13,625
                      
                      
                      
                      64
                      %
  - 27
-
  General and
administrative:Our general and administrative expenses increased due to an increase in
legal and professional fees of $1,075,000 of which $680,000 is for investor,
government, media and public relations, an increase in bad debt expense of
$542,000 in connection with the Think Supply Agreement, an increase in stock
based compensation of $516,000, an increase in trade shows and travel of
$363,000, an increase in facilities related expenses of $345,000, and an
increase of $250,000 in licenses and fees of which $175,000 is directly related
to the listing of our common stock on both the American Stock Exchange and the
NASDAQ.  These increases have been partially offset by a decrease in
salary related expenses of $926,000 due to decreases in executive benefits,
executive and employee bonuses and salaries and the allocation of certain
employees’ salaries from general and administrative to research and development
programs.
 
 Of
Enertech’s total general and administrative expenses of $969,000, which
represents approximately 8% of the consolidated expenses, $569,000, or 59%,
represents salary and related expenses, $105,000 is for legal and professional
fees and approximately $100,000 is for facilities and travel related
expenses.
 
 Research anddevelopment:Our research and
development expenses increased primarily due to an increase in salaries and
related benefits of $5,687,000 which includes the increase of $1,102,000 in
stock based compensation, an increase in outside services related to the
production of prototypes of $1,277,000, an increase in travel related expenses
of $656,000, an increase in facilities expenses of $456,000, and an increase in
production materials of $2,339,000, net of reimbursements.
 
 We
present proceeds from our cost sharing arrangements with federal government
agencies as a reduction of research and development
expenses.  Billings under these contracts were $3,835,000 and $910,000
for the years ended December 31, 2008 and 2007, respectively, an increase of
$2,925,000, which partially offsets the increase in research and development
expenses.
 
 Research
and development expenses for the year ended December 31, 2008 included
$17,861,000 of expenses incurred in connection with our battery business, net of
$3,706,000 in proceeds, $3,965,000 of expenses incurred in connection with our
fuel cell business which is net of $129,000 in proceeds and $1,062,000 of
expenses incurred in connection with our nano-technology business.
 
 Depreciation and
amortization:Our depreciation and amortization increased $460,000 in amortization as a
direct result of the intangible assets capitalized in the transaction with
Delphi and $464,000 in depreciation as a direct result of the increase in
property and equipment during the year ended December 31, 2008.
 
 Other
income and expenses
 
 2008
                  
                  
                  2007
                  
                  
                  Ener1Ener1
                  
                  
                  Enertech
                  
                  
                  Totals
                  
                  
                  Ener1
                  
                  
                  $ Change
                  
                  
                  %ChangeInterest
      expense
                  
                  $
                  (11,951
                  )
                  
                  $
                  (75
                  )
                  
                  $
                  (12,026
                  )
                  
                  $
                  (17,233
                  )
                  
                  $
                  5,282
                  
                  
                  
                  -31
                  %Interest
      income
                  
                  
                  401
                  
                  
                  
                  79
                  
                  
                  
                  480
                  
                  
                  
                  121
                  
                  
                  
                  280
                  
                  
                  
                  231
                  %Other
                  
                  
                  95
                  
                  
                  
                  94
                  
                  
                  
                  189
                  
                  
                  
                  (14
                  )
                  
                  
                  109
                  
                  
                  
                  -779
                  %Gain
      (loss) on derivative liabilities
                  
                  
                  3,936
                  
                  
                  
                  -
                  
                  
                  
                  3,936
                  
                  
                  
                  (11,537
                  )
                  
                  
                  15,473
                  
                  
                  
                  -134
                  %Loss
      on foreign currency transactions
                  
                  
                  (6
                  )
                  
                  
                  (253
                  )
                  
                  
                  (259
                  )
                  
                  
                  -
                  
                  
                  
                  (6
                  )
                  
                  
                  100
                  %Total
      other expenses
                  
                  $
                  (7,525
                  )
                  
                  $
                  (155
                  )
                  
                  $
                  (7,680
                  )
                  
                  $
                  (28,663
                  )
                  
                  $
                  21,138
                  
                  
                  
                  -74
                  %
 
 Interest
expense:  Our interest expense represents a combination of both
cash and non-cash interest related to our capital lease obligations, convertible
notes and debentures.  Cash paid for interest expenses was $421,000
and $7,062,000 for the years ended December 31, 2008 and 2007,
respectively.  The decrease in interest expense is primarily due to
the conversion of the outstanding principal and interest on the convertible
notes, 2004 Debentures and 2005 Debentures, into shares of Ener1 common stock,
during the three months ended March 31, 2008. As a result of the conversions of
all outstanding obligations under the convertible notes, 2004 and 2005
Debentures, all security interests in the property of Ener1 were
terminated.
  - 28
-
  Gain (loss) on derivative
Liabilities:  Following the provisions of SFAS 133 and EITF
00-19, we concluded that the conversion feature of our 2004 Debentures and 2005
Debentures and the warrants associated with the 2005 Debentures should be
treated as separate derivative liabilities on the balance sheet.  When
the 2004 Debentures and 2005 Debentures were converted into shares of Ener1
common stock they no longer were treated as derivative liabilities and the fair
value of each derivative was marked to market and the gain of $3,936,000 on
derivative liabilities was recorded.
 
 Loss on foreign currency
transactions:  Foreign currency transactions are transactions
denominated in a currency other that 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 between the functional
currency in which a transaction is denominated increases or decreases the
expected cash flow creating a foreign currency transaction gain or
loss.
 
 Minority
interest in consolidated subsidiaries
 
 Amounts
pertaining to the minority ownership interest held by third parties in the
operating results of our majority owned subsidiaries are reported as minority
interest in consolidated subsidiaries.
 
 2008
                  
                  
                  2007
                  
                  
                  Ener1Ener1
                  
                  
                  Enertech
                  
                  
                  Totals
                  
                  
                  Ener1
                  
                  
                  $
      Change
                  
                  
                  %
      ChangeMinority
      interest
                  
                  $
                  (1,495
                  )
                  
                  $
                  (59
                  )
                  
                  $
                  (1,554
                  )
                  
                  $
                  (2,001
                  )
                  
                  $
                  506
                  
                  
                  
                  -25
                  %
 
 The
minority interest for Ener1 of $1,495,000 and $2,001,000 for the years ended
December 31, 2008 and 2007 respectively, represents the dividends and accretion
on the Series A Preferred Stock of EnerDel.  The decrease of $506,000
is directly attributable to the early redemption of the EnerDel Series A
Preferred stock in August 2008. The minority interest for Enertech represents
the 17% of Enertech’s operating losses which is owned by the minority interest
holders.
 
 Net
loss
 
 Ener1’s
net loss for the years ended December 31, 2008 and 2007 is as
follows:
 
 2008
                  
                  
                  2007
                  
                  
                  Ener1Ener1
                  
                  
                  Enertech
                  
                  
                  Totals
                  
                  
                  Ener1
                  
                  
                  $
      Change
                  
                  
                  %
      ChangeNet
      loss
                  
                  $
                  (42,794
                  )
                  
                  $
                  (161
                  )
                  
                  $
                  (42,955
                  )
                  
                  $
                  (51,710
                  )
                  
                  $
                  8,916
                  
                  
                  
                  -17
                  %
 
 The
decrease in net loss of $8,916,000 or 18% is primarily attributable to the
decrease in other expenses of $21,138,000, the increase in gross profit of
$897,000 and the decrease in minority interest of $506,000.  This net
decrease of $22,541,000 has been partially offset by the increase in operating
expenses of $13,625,000 for a net decrease in the net loss of
$8,916,000.
  - 29
-
  Liquidity
and Capital Resources
 
 Cash Flow
Summary
 
 At
December 31, 2008, we had working capital of $4,555,000 with available cash on
hand of $11,229,000 and restricted cash of $2,976,000.  During the
year ended December 31, 2008, we experienced a decrease in cash and cash
equivalents of $10,621,000 which was funded through our cash on hand and our
financing activities which was primarily from $29,700,000 in proceeds from the
exercise of warrants.
 
 The
following information is a summary of consolidated cash flows for Ener1
presented in thousands:
 
 2008
                      
                      
                      2007
                      
                      
                      $Change
                      
                      
                      %ChangeOperating
      activities
                      
                      $
                      (24,121
                      )
                      
                      $
                      (26,692
                      )
                      
                      $
                      2,571
                      
                      
                      
                      -10
                      %Investing
      activities
                      
                      
                      (10,799
                      )
                      
                      
                      (495
                      )
                      
                      
                      (10,304
                      )
                      
                      2082
                      %Financing
      activities
                      
                      
                      24,112
                      
                      
                      
                      51,722
                      
                      
                      
                      (27,610
                      )
                      
                      
                      -53
                      %Effects
      of exchange rates on cash and cash equivalents
                      
                      
                      187
                      
                      
                      
                      -
                      
                      
                      
                      187
                      
                      
                      
                      100
                      %Net
      (decrease) increase in cash and cash equivalents
                      
                      $
                      (10,621
                      )
                      
                      $
                      24,535
                      
                      
                      $
                      (35,156
                      )
                      
                      
                      -143
                      %Cash
      and cash equivalents - beginning balance
                      
                      
                      24,826
                      
                      
                      
                      291
                      
                      
                      
                      24,535
                      
                      
                      
                      99
                      %Cash
      and cash equivalents - ending balance
                      
                      $
                      14,205
                      
                      
                      $
                      24,826
                      
                      
                      $
                      (10,621
                      )
 
 Operating
activities
 
 We used
$24,121,000 in cash for operating activities, comprised of a net loss of
$42,955,000 offset by non-cash items of $15,294,000 and a net increase in
certain operating assets and liabilities of $3,540,000.  The non-cash
items consist primarily of $9,420,000 in accretion of discounts on debentures
and notes, $2,983,000 in stock based compensation expense and $2,020,000 in
depreciation and amortization, which is partially offset by the gain on
derivative liabilities of $3,936,000.
 
 The
increase in certain operating assets and liabilities is primarily due to the
increase in accounts payable and accrued expenses of $5,405,000, partially
offset by the increase in accounts receivable of $1,222,000 and the increase in
inventory of $1,050,000.  Our accounts receivable have been increasing
due to the slow paying nature of certain federal government agencies with whom
we have cost sharing arrangements.  Subsequent to December 31, 2008,
we have collected approximately $1,626,000 or 96% of our government based
accounts receivable.
 
 Investing
activities
 
 Cash used
in investing activities increased $10,799,000 primarily due to $14,115,000 in
capital expenditures and equipment deposits and $1,121,000 in direct costs for
acquisitions, partially offset by $5,028,000 in cash received in the acquisition
of Enertech.  As of December 31, 2008, we have incurred $21,324,000 in
purchases for plant and equipment comprised of $10,713,000 in capital
expenditures, $3,402,000 in equipment deposits and $7,209,000 (non-cash) in
leased equipment pursuant to capital leases.
 
 Our
equipment is leased under a $7.0 million master equipment lease agreement with
an unrelated third party.  Under the terms of the agreement we may
lease newly acquired equipment to be used in connection with the manufacturing
of lithium-ion batteries.  At December 31, 2008, we lease certain
machinery and production equipment totaling $7.2 million, which includes the
purchase option that management intends to exercise at the end of lease
term.  Each lease bears interest at 10% with a three year
term.
 
 In
connection with the master equipment lease agreement we are obligated to issue
shares of Ener1 common stock in the amount of $42,857 for each $1 million drawn
under the $7.0 million agreement up to an aggregate value of
$300,000.  As of December 31, 2008, we have issued 38,141 shares of
common stock valued at $281,000.  In addition, as a commitment fee, we
issued 17,559 shares of Ener1 common stock upon the receipt of the commitment
letter from the lessor and the value of $105,000 was recorded to interest
expense.
  - 30
-
  Financing
activities
 
 Financing
activities provided $24,112,000 in cash primarily from the exercise of options
and warrants which provided $30,980,000 partially offset by $8,000,000 expended
for the redemption of EnerDel’s Series A Preferred Stock.
 
 In
connection with our equity private placement in November 2007, we issued
8,228,578 warrants with an exercise price of $5.25 and an expiration date of May
19, 2008.  Through the expiration date, 5,657,149 warrants were
exercised resulting in cash proceeds of $29,700,000.  The remaining
2,571,429 warrants expired unexercised on May 19, 2008.
 
 In August
2008, we redeemed the EnerDel Series A Preferred Stock from Delphi for
$8,000,000 in cash and all accrued and unpaid dividends on the Series A
Preferred Stock were deemed to be paid in full.
 
 Other
Activities
 
 During
the first quarter of 2008, holders of the 2004 and 2005 Debentures converted the
remaining outstanding principal and accrued interest of $9,753,000 and
$2,136,000, respectively, into 2,257,741 shares of common stock at conversion
prices ranging from $4.83 to $5.46 per share, on a post-split
basis.  The original principal amount at inception of the 2004
Debentures and the 2005 Debentures was $20,000,000 and $14,225,000,
respectively, with stated maturity dates of January 2009 and March 2009,
respectively.
 
 Also
during the first quarter of 2008, Ener1 Group converted the outstanding
principal and accrued interest of $13,845,000 into 3,955,634 shares of Ener1’s
common stock at a conversion price of $3.50 per share, on a post-split
basis.  The original principal amount at inception was $11,960,000
with maturity in the second quarter of 2009.  As an inducement to
convert debt, we issued 142,858 warrants to Ener1 Group with an exercise price
of $5.95 per share, on a post-split basis.  The warrants are
exercisable at any time through March 2013.  The fair value of the
warrants, using a Black-Scholes pricing model, of $680,000 was recorded to
interest expense during the year ended December 31, 2008.
 
 In
December 2008, we entered into a line of credit agreement with Ener1 Group, our
majority shareholder, for $30,000,000 over a period of 18 months or until we
complete a public equity offering, whichever occurs first.  Through
March 31, 2009, we can borrow up to $10,000,000, in $500,000
increments.  Subsequent to March 31, 2009, we may borrow up to the
face amount of $30,000,000 All funds borrowed will bear interest at a rate of
8.0% per annum.  In February 2009, we borrowed $5,000,0000 million
from this line of credit.
 
 As a
commitment fee, we issued to Ener1 Group warrants to purchase up to 1,250,000
shares of Ener1 common stock at an exercise price of $8.25 per
share.  The warrants are immediately exercisable and expire in
December 2010.  Using a Black-Scholes pricing model to value the
warrants the fair value of $5,100,000 was recorded to deferred financing costs
at December 31, 2008 which will be amortized to interest expense over 18
months.  In addition to the commitment fee, we are also obligated to
issue to Ener1 Group warrants to purchase additional shares of Ener1 common
stock each time we borrow funds from this line of credit.  In
connection with the February 2009 borrowing, we issued to Ener1 Group warrants
to purchase up to 250,000 shares of Ener1 common stock at an exercise price of
$8.25 per share.  These warrants expire in February 2011 and using a
Black-Scholes pricing model the fair value of $874,000 has been recorded as a
reduction in proceeds and is amortized to interest expense over the term of the
line of credit of 18 months.
  - 31
-
  Liquidity
 
 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,
additional 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 expect
that United States government programs will fund a significant increase in
investment in the domestic battery business and related supplier markets, and we
expect to benefit from these programs due to our presence as a United States
based manufacturer.  If granted, these funds will be designated to
increase our battery manufacturing capacity above and beyond our existing
plans.
 
 In
February 2009, the United States government approved a stimulus plan which
included $2 billion of grants for development of battery manufacturing
capability.  Under this plan in February 2009, the DOE's National
Energy Technology Laboratory announced that it intends to issue, on behalf of
the DOE Office of Energy Efficiency and Renewable Energy, a Funding Opportunity
Announcement entitled "Automotive Battery Manufacturing
Initiative.  The program, if adopted, will provide 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
addition, in December 2008, we applied for a $480 million loan under the
Advanced Technology Vehicle Manufacturing Incentive Program (“ATVM”) to increase
our battery manufacturing capacity in Indiana.  We are currently
providing additional information to the DOE pursuant to the application
process.  The ATVM was created under Section 136 of the Energy
Independence and Security Act of 2007.   In addition, there are
additional loan guarantee programs available under Title XVII of the of the
Energy Policy Act of 2005 for projects that reduce air pollutants or man-made
greenhouse gas emissions, and that employ new or significantly improved
technologies compared to commercial technologies currently in service in the
U.S.  The guarantee program specifically includes guarantees for
production facilities for fuel-efficient vehicles, including hybrid
vehicles.  We have not to date applied for loan guarantees under the
Title XVII program.
 
 We expect
to receive $8.6 million from our active cost-sharing arrangements from DOD and
DOE and USABC through March 2010, which will reduce our future research and
development expenses.  We have purchase orders at December 31, 2008 to
purchase up to $6.4 million for capital expenditures during 2009.
 
 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. In
recent months, 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 we expect that the recent
upheaval experienced by the debt and equity markets are likely to adversely
affect our ability to procure such financing.
 
 We are
continually monitoring the financial institutions that hold our cash and cash
equivalents.   Our emphasis is primarily on safety of principal
and secondarily on maximizing yield on those funds.
  - 32
-
  We
believe we have sufficient capital to continue our planned operations for 12
months from our balance sheet date of December 31, 2008.  We plan to
utilize our line of credit with Ener1 Group to fund operations and the purchase
of certain production equipment and manufacturing plant assets.  We
continue to integrate Enertech’s operations into our existing business and it
may take time before we realize the synergies and potential cost savings from
this acquisition.  Enertech has adequate operational funding and also has
access to facilities with several banks for short term working capital and
equipment purchases.
 
 Application
of Critical Accounting Policies
 
 The
preceding discussion and analysis of financial condition and results of
operations are based upon our consolidated financial statements, which have been
prepared in conformity with accounting principles generally accepted in the
United States. The preparation of these financial statements requires management
to make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues, expenses and related disclosures. On an on-going basis,
we evaluate our estimates and assumptions, including but not limited to those
related to the impairment of long-lived assets, reserves for doubtful accounts
and inventory obsolescence, provision for income taxes, revenue recognition and
certain accrued liabilities. We base our estimates on historical experience and
various other assumptions that are believed to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent from
other sources. Actual results may differ from these estimates under different
assumptions or conditions.
 
 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 financial statements and the major
estimates 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.
 
 Intangible Assets and
Goodwill
 
 Intangible
assets and goodwill are comprised of certain definite and indefinite lived
assets.  Definite lived intangible assets, including patents,
technology and customer relationships are amortized over the estimated useful
life of the asset and reviewed for impairment upon any triggering event that may
give rise to the assets ultimate recoverability as prescribed under SFAS
No. 144, Accounting for
the Impairment or Disposal of Long-Lived Assets.  Goodwill
which represents the excess of cost over fair value of assets of businesses
acquired, which is our only indefinite lived intangible asset is not amortized
but evaluated annually (or more frequently) for impairment under SFAS No. 142,
Goodwill and Other Intangible
Assets.
 
 Under the
guidance of SFAS No. 142, we are required to test for impairment intangible
assets with indefinite lives at least annually.  Our only intangible
asset with an indefinite life is goodwill, which was acquired in August and
October 2008 as part of the acquisition of the remaining 19.5% interest in
EnerDel and the 83% majority interest in Enertech.  We decided to test
this goodwill annually on October 1st, the first day of our fourth quarter of
each year, commencing October 1, 2009, unless an event occurs that would cause
us to believe the value is impaired at an interim date.  As of
December 31, 2008, no such event occurred.
 
 We will
continue to evaluate whether events and circumstances have occurred that
indicate the balance of goodwill may not be recoverable. In evaluating
impairment we may estimate the sum of the expected future cash flows derived
from such goodwill. Such evaluations for impairment are significantly impacted
by estimates of future revenues, costs and expenses and other factors. A
significant change in cash flows in the future could result in an impairment of
goodwill.
 
 In
addition to goodwill, third party valuations were obtained for both the
acquisition of Enertech and the acquisition of the remaining 19.5% interest in
EnerDel which resulted in intangible assets being recorded.  These
separately identifiable intangible assets include patents, patented and
unpatented technology, and customer relationships. Methods used to value these
intangible assets included the relief from royalty method, the residual earnings
method, and the multi-period excess earnings method. Estimated useful lives were
determined using various assumptions including expected product life cycles,
projected rates of sales replacement and the rate of deterioration for
forecasted revenues.
  - 33
-
  Impairment of Long-lived
Assets
 
 In
accordance with SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets, we evaluate the recoverability of the
carrying value of our long-lived assets, consisting primarily of buildings,
machinery and equipment, based on estimated undiscounted cash flows to be
generated from such assets. If the undiscounted cash flows indicate an
impairment then the carrying value of the assets evaluated is written-down to
the estimated fair value of those assets.
 
 In
assessing the recoverability of these assets, we must project estimated cash
flows, which are based on various operating assumptions.  Management
develops these cash flow projections on a periodic basis and reviews the
projections based on actual operating trends. The projections assume that
general economic conditions will continue unchanged throughout the projection
period and that their potential impact on capital spending and revenues will not
fluctuate.
 
 Our
review of the carrying value of our tangible long-lived assets at December 31,
2008 and 2007 indicates that the carrying value of these assets will be
recoverable through estimated future cash flows.
 
 Revenue
Recognition
 
 We
recognize revenue when an arrangement exists, prices are determinable, services
and products are rendered or delivered and collectibility is reasonably
assured.  We generally recognize revenue from research and development
cost-sharing arrangements with federal government agencies as a reduction of
research and development expenses.  We generally recognize revenue
from research and development cost-sharing arrangements with commercial entities
that are longer term in nature using the percentage of completion
method.  To date, these contracts have been for the development and
sale of a customer specified prototype and the costs incurred are classified as
research and development expenses as opposed to cost of sales.
  Share-Based
Payments
  In
accordance with SFAS No. 123R, we estimate the fair value of each stock option,
on the date of grant, using a Black-Scholes Model and amortize the estimated
fair value to expense over the vesting period of the option on a straight line
basis.  Key assumptions used in the Black-Scholes model include
estimates of (1) expected volatility, (2) an expected term, (3) discount rate
and (4) expected dividend yield.
 
 Derivative
Instruments
 
 SFAS No.
133, Accounting for Derivative
Instruments and Hedging Activities, as amended, requires all derivatives
to be recorded on the balance sheet at fair value.  These derivatives,
including embedded derivatives, are separately valued and accounted for on our
balance sheet.
 
 EITF
00-19, Accounting for
Derivative Financial Instruments Indexed to and Potentially Settled in, a
Company's Own Stock, requires freestanding contracts that are settled in
a company's own stock, including warrants to purchase common stock, to be
designated as an equity instrument, asset or a liability. Under the provisions
of EITF 00-19, a contract designated as an asset or a liability must be carried
at fair value on a company’s balance sheet, with any changes in fair value
recorded in the company’s results of operations. A contract designated as an
equity instrument must be included within equity, and no fair value adjustments
are required.
 
 Following
the guidance of SFAS No. 133 and EITF 00-19, we determined the conversion
feature of our 2004 Debentures and 2005 Debentures and the warrants associated
with the 2005 Debentures should be treated as separate derivative liabilities on
our balance sheet under current liabilities.  Unrealized changes in
the value of these derivatives are recorded in the consolidated statement of
operations as a gain or loss on derivative liabilities.  Fair values
of the derivative liability associated with the conversion features are
determined using market based lattice pricing models incorporating readily
observable market data and management assumptions.   Fair values
of the derivative liabilities associated with the warrants are determined using
a Black-Scholes Model.
  - 34
-





Recent
Accounting Pronouncements





Adopted Accounting
Standards





In
September 2006, the FASB issued SFAS No. 157, Fair Value Measurements
(“SFAS No. 157”).  This standard defines fair value, establishes a
framework for measuring fair value in generally accepted accounting principles
in the United States, and expands disclosures about fair value
measurements.  This standard does not require any new fair value
measurements, but provides guidance on how to measure fair value by providing a
fair value hierarchy used to classify the source of the
information.  SFAS No. 157 is effective for fiscal years beginning
after November 15, 2007, and all interim periods within those fiscal
years.  In February 2008, the FASB issued FASB Staff
Position (FSP) FSP 157-2, Effective Date of FASB Statement
No. 157 (“FSP 157-2”). FSP 157-2 delays the effective date of SFAS
No. 157 for all non-financial assets and non-financial liabilities, except
for items that are recognized or disclosed at fair value in the financial
statements on a recurring basis (at least annually), to fiscal years beginning
after November 15, 2008 and interim periods for those fiscal
years.  The Company is currently evaluating the impact that SFAS
No. 157 will have on the consolidated financial statements when it is
applied to non-financial assets and non-financial liabilities that are not
measured at fair value on a recurring basis beginning in the first quarter of
2009.





In
December 2007, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin 110, Share-Based Payment (“SAB 110”).  SAB 110
amends SAB 107 and allows for the continued use, under certain circumstances, of
the “simplified method” in developing an estimate of the expected term on stock
options accounted for under SFAS No. 123R.   SAB 110 is effective
for stock options granted on or after January 1, 2008.  Ener1 will
continue to use the simplified method until there is sufficient historical data
necessary to provide reasonable estimates of expected lives in accordance with
SAB 107, as amended by SAB 110.




Future Adoption of
Accounting Standards





In
December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in
Consolidated Financial Statements - an amendment of Accounting Research Bulletin
No. 51 ("SFAS 160"), which establishes accounting and reporting standards
for ownership interests in subsidiaries held by parties other than the parent,
the amount of consolidated net income attributable to the parent and to the
noncontrolling interest, changes in a parent's ownership interest and the
valuation of retained noncontrolling equity investments when a subsidiary is
deconsolidated. The Statement also establishes reporting requirements that
require disclosure that clearly identifies and distinguishes between the
interests of the parent and the interests of the noncontrolling owners. SFAS 160
is effective on January 1, 2009 and Ener1 is currently evaluating the potential
impact, if any, of the adoption of SFAS 160 on its consolidated financial
statements.





In
December 2007, the FASB issued SFAS No. 141 (revised 2007), Business Combinations ("SFAS
141R"), which replaces FASB Statement No. 141. SFAS 141R establishes principles
and requirements for how an acquirer recognizes and measures in its financial
statements the identifiable assets acquired, the liabilities assumed, any
noncontrolling interest in the acquiree and the goodwill acquired. The Statement
also establishes disclosure requirements which will enable users to evaluate the
nature and financial effects of the business combination. SFAS 141R is to be
applied prospectively to business combinations, if any, for which the
acquisition date is on or after January 1, 2009.





In March
2008, the FASB issued SFAS No. 161, Disclosures about Derivative
Instruments and Hedging Activities (“SFAS 161”), which amends and expands
the disclosure requirements of FASB Statement No. 133, Accounting for Derivative
Instruments and Hedging Activities(“SFAS 133”), with the intent to
provide users of financial statements with an enhanced understanding of: (a) how
and why an entity uses derivative instruments; (b) how derivative instruments
and related hedged items are accounted for under SFAS No. 133 and its related
interpretations; and (c) how derivative instruments and related hedged items
affect an entity’s financial position, financial performance and cash flows.
SFAS 161 requires qualitative disclosures about objectives and strategies for
using derivatives, quantitative disclosures about fair value amounts of and
gains and losses on derivative instruments and disclosures about
credit-risk-related contingent features in derivative instruments. This
statement applies to all entities and all derivative instruments. SFAS 161 is
effective January 1, 2009 and Ener1 is currently evaluating the potential
impact, if any, of the adoption of SFAS 161 on its consolidated financial
statements.





- 35
-





In
May 2008, FASB issued FSP APB 14-1, Accounting for Convertible Debt
Instruments that may be Settled in Cash upon Conversion (Including Partial Cash
Settlement)("FSP APB 14-1").  FSP APB 14-1 applies to
convertible debt securities that, upon conversion, may be settled by the issuer
fully or partially in cash.  FSP APB 14-1 specifies that
issuers of such instruments should separately account for the liability and
equity components in a manner that will reflect the entity's nonconvertible debt
borrowing rate when interest cost is recognized in subsequent
periods.  FSP APB 14-1 is effective January 1, 2009 and
Ener1 is currently evaluating the potential impact, if any, of the adoption of
FSP APB 14-1 on its consolidated financial statements.





In
June 2008, FASB ratified EITF No. 07-05, Determining Whether an Instrument
(or an Embedded Feature) Is Indexed to an Entity's Own Stock ("EITF
07-05").  EITF 07-05 provides that an entity should use a two-step
approach to evaluate whether an equity-linked financial instrument (or embedded
feature) is indexed to its own stock, including evaluating the instrument's
contingent exercise and settlement provisions.  EITF 07-05 is
effective January 1, 2009 and Ener1 is currently evaluating the impact of the
adoption of EITF 07-05 for certain financing warrants that contain exercise
price adjustment features.





Item
7A.     Quantitative and Qualitative Disclosure About
Market Risk





This Item
7 is not applicable to us as, pursuant to Item 305(e) of Regulation S-K, a
smaller reporting company is not required to provide the information required by
Item 305 of Regulation S-K.





Item
8.         Financial
Statements





Financial
Statements




PageReports
      of Independent Registered Public Accounting Firm
                            37Consolidated
      Balance Sheets as of December 31, 2008 and 2007
                            39Consolidated
      Statements of Operations for the years ended December 31, 2008 and
      2007
                            40Consolidated
      Statement of Stockholders' Equity (Deficit) and Comprehensive Income
      (Loss)
                              for
      the years ended December 31, 2008 and 2007
                            41Consolidated
      Statements of Cash Flows for the years ended December 31, 2008 and
      2007
                            42Notes
      to Consolidated Financial Statements
                            44




- 36
-





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 2007 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 2007, 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.





We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the Company’s internal control over financial
reporting as of December 31, 2008, based on criteria established in Internal Control-Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO), and our report dated March 12, 2009, expressed an
unqualified opinion.





/s/  MALONE
& BAILEY, PC


www.malone-bailey.com


Houston,
Texas





March 12,
2009





- 37
-





REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM





To the
Board of Directors


Ener1,
Inc.


New York,
New York





We have
audited Ener1, Inc.’s (the Company) internal control over financial reporting as
of December 31, 2008, based on criteria established in Internal Control – Integrated
Frameworkissued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO).  The Company’s management is responsible
for maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting
included in the accompanying  “Management’s Evaluation of Internal
Control over Financial Reporting.”  Our responsibility is to express
an opinion on the company’s internal control over financial reporting based on
our audit.





Management
excluded from its assessment of the effectiveness of the Company’s disclosure
controls and procedures and internal control over financial reporting, the
disclosure controls and procedures and internal controls for the Enertech
International, Inc.  Management was unable to assess the effective of
the disclosure controls and procedures and internal control over financial
reporting of the Enertech businesses because of the integration of the business
since its acquisition effective November 1, 2008.  Management expects
to update its assessment of the effectiveness of the disclosure controls and
procedures and internal control over financial reporting to include the Enertech
businesses as soon as practicable.





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
effective internal control over financial reporting was maintained in all
material respects.  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 opinion.





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 (1)
pertain to the maintenance of records that, in reasonable detail accurately and
fairly reflect the transactions and dispositions of the assets of the company;
(2) provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with the generally
accepted accounting principles, and that receipts and expenditures of the
company are being made only in accordance with authorization of management and
directors of the company; and (3) 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 limitation, 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.





In our
opinion, the Company maintained, in all material respects, effective internal
control over financial reporting as of December 31, 2008, based on criteria
established in Internal
Control-Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO).





We have
also audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the balance sheets and the related statements
of income, stockholders’ equity and comprehensive income, and cash flows of the
company, and our report dated March 12, 2009, expressed an unqualified
opinion.





/s/  MALONE
& BAILEY, PC


www.malone-bailey.com


Houston,
Texas





March 12,
2009





- 38
-





ENER1,
INC.


CONSOLIDATED
BALANCE SHEETS


(in
thousands, except per share data)





December 31,
                                      
                                      
                                      December 31,2008
                                      
                                      
                                      2007ASSETSCurrent
      assetsCash
      and cash equivalents (including restricted cash of $2,976 and
      $0)
                                      
                                      $
                                      14,205
                                      
                                      
                                      $
                                      24,826Accounts
      receivable, net of allowance for doubtful accounts of $915 and
      $0
                                      
                                      
                                      7,006
                                      
                                      
                                      
                                      102Inventory,
      net of allowance for obsolescence of $483 and $0
                                      
                                      
                                      10,202
                                      
                                      
                                      
                                      -Prepaid
      expenses and other current assets
                                      
                                      
                                      1,199
                                      
                                      
                                      
                                      702Total
      current assets
                                      
                                      
                                      32,612
                                      
                                      
                                      
                                      25,630Property
      and equipment, net of accumulated depreciation of $2,728 and
      $1,255
                                      
                                      
                                      39,513
                                      
                                      
                                      
                                      4,287Deferred
      financing costs, net of amortization of $0 and $5,596
                                      
                                      
                                      5,088
                                      
                                      
                                      
                                      835Intangible
      assets, net of accumulated amortization of $568,000 and $0
                                      
                                      
                                      15,246
                                      
                                      
                                      
                                      -Goodwill
                                      
                                      
                                      48,674
                                      
                                      
                                      
                                      -Other
                                      
                                      
                                      598
                                      
                                      
                                      
                                      549Total
      assets
                                      
                                      $
                                      141,731
                                      
                                      
                                      $
                                      31,301LIABILITIES
      AND STOCKHOLDERS' EQUITY (DEFICIT)Current
      liabilitiesAccounts
      payable and accrued expenses
                                      
                                      $
                                      16,322
                                      
                                      
                                      $
                                      3,799Accrued
      income taxes payable
                                      
                                      
                                      318
                                      
                                      
                                      
                                      -Short
      term borrowings
                                      
                                      
                                      9,414
                                      
                                      
                                      
                                      315Capital
      lease obligations, current portion
                                      
                                      
                                      2,003
                                      
                                      
                                      
                                      -Derivative
      liabilities
                                      
                                      
                                      -
                                      
                                      
                                      
                                      10,144Total
      current liabilities
                                      
                                      
                                      28,057
                                      
                                      
                                      
                                      14,258Other
      long-term payables
                                      
                                      
                                      1,093
                                      
                                      
                                      
                                      -Deferred
      income tax liabilities
                                      
                                      
                                      397
                                      
                                      
                                      
                                      -Long
      term borrowings
                                      
                                      
                                      795
                                      
                                      
                                      
                                      -Capital
      lease obligations, less current portion
                                      
                                      
                                      4,580
                                      
                                      
                                      
                                      -Convertible
      bonds
                                      
                                      
                                      396
                                      
                                      
                                      
                                      -Convertible
      notes, net of discount of $0 and $5,250, related party
                                      
                                      
                                      -
                                      
                                      
                                      
                                      8,3152004
      convertible debentures, net of discount of $0 and $3,597
                                      
                                      
                                      -
                                      
                                      
                                      
                                      6,0372005
      convertible debentures, net of discount of $0 and $940
                                      
                                      
                                      -
                                      
                                      
                                      
                                      1,141Total
      liabilities
                                      
                                      
                                      35,318
                                      
                                      
                                      
                                      29,751Redeemable
      preferred stockEnerDel,
      Inc. Series A Preferred, $0.01 par value, 500,000 sharesauthorized,
      liquidation preference $8,000.  Shares issued
andoutstanding;
      -0- and 8,000
                                      
                                      
                                      -
                                      
                                      
                                      
                                      8,577Minority
      interest
                                      
                                      
                                      3,517
                                      
                                      
                                      
                                      -Commitments
      and contingenciesSTOCKHOLDERS'
      EQUITY (DEFICIT)Common
      stock, $0.01 par value, 175,714,286 shares authorized,113,074,478
      and 92,597,178 issued and outstanding (1)
                                      
                                      
                                      1,132
                                      
                                      
                                      
                                      926Paid
      in capital
                                      
                                      
                                      383,367
                                      
                                      
                                      
                                      233,700Accumulated
      deficit
                                      
                                      
                                      (283,113
                                      )
                                      
                                      
                                      (241,653
                                      )Accumulated
      other comprehensive income
                                      
                                      
                                      1,510
                                      
                                      
                                      
                                      -Total
      stockholders' equity (deficit)
                                      
                                      
                                      102,896
                                      
                                      
                                      
                                      (7,027
                                      )Total
      liabilities and stockholders' equity (deficit)
                                      
                                      $
                                      141,731
                                      
                                      
                                      $
                                      31,301





(1)
            The
      shares of common stock authorized, issued and outstanding have been
      adjusted to reflect a 1 for 7 reverse stock split effective April 24,
      2008.




See notes
to consolidated financial statements.




- 39
-




ENER1,
INC.


CONSOLIDATED
STATEMENTS OF OPERATIONS


(In
thousands except per share data)





Year Ended December 31,2008
                              
                              
                              2007Net
      sales
                              
                              $
                              6,848
                              
                              
                              $
                              280Cost
      of sales
                              
                              
                              4,661
                              
                              
                              
                              -Gross
      profit
                              
                              
                              2,187
                              
                              
                              
                              280Operating
      expenses:General
      and administrative
                              
                              
                              11,578
                              
                              
                              
                              8,265Research
      and development, net of proceeds from grants of $3,835 and
      $910
                              
                              
                              22,902
                              
                              
                              
                              11,948Warrant
      modification expense
                              
                              
                              -
                              
                              
                              
                              583Depreciation
      and amortization
                              
                              
                              1,612
                              
                              
                              
                              530Total
      operating expenses
                              
                              
                              36,092
                              
                              
                              
                              21,326Loss
      from operations
                              
                              
                              (33,905
                              )
                              
                              
                              (21,046
                              )Other
      income (expense):Interest
      expense
                              
                              
                              (12,026
                              )
                              
                              
                              (17,233
                              )Interest
      income
                              
                              
                              480
                              
                              
                              
                              121Equity
      in loss of EnerStruct, Inc.
                              
                              
                              -
                              
                              
                              
                              (40
                              )Other
                              
                              
                              189
                              
                              
                              
                              26Gain
      (loss) on derivative liabilities
                              
                              
                              3,936
                              
                              
                              
                              (11,537
                              )Loss
      on foreign currency transactions
                              
                              
                              (259
                              )
                              
                              
                              -Total
      other expenses
                              
                              
                              (7,680
                              )
                              
                              
                              (28,663
                              )Loss
      before income taxes
                              
                              
                              (41,585
                              )
                              
                              
                              (49,709
                              )Income
      tax benefit
                              
                              
                              (184
                              )
                              
                              
                              -Net
      loss before minority interest
                              
                              
                              (41,401
                              )
                              
                              
                              (49,709
                              )Minority
      interest in consolidated subsidiaries
                              
                              
                              (1,554
                              )
                              
                              
                              (2,001
                              )Net
      loss
                              
                              
                              (42,955
                              )
                              
                              
                              (51,710
                              )Preferred
      stock dividends
                              
                              
                              -
                              
                              
                              
                              (10,227
                              )Net
      loss attributableto
      common shareholders
                              
                              $
                              (42,955
                              )
                              
                              $
                              (61,937
                              )Net
      loss per share:basic
      and diluted
                              
                              $
                              (0.42
                              )
                              
                              $
                              (0.85
                              )Weighted
      average shares outstanding:basic
      and diluted (1)
                              
                              
                              103,382
                              
                              
                              
                              72,922





(1)
            Share
      and per share data for the year ended December 31, 2007 has been adjusted
      to reflect a 1 for 7 reverse stock split effective April 24,
      2008.





See notes
to consolidated financial statements.





- 40
-





ENER1,
INC.


CONSOLIDATED
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)


FOR THE
YEARS ENDED DECEMBER 31, 2007 and 2008


(In
thousand except share data)





Accumulated
                                            
                                            
                                            TotalOther
                                            
                                            
                                            Stockholders'Common Stock
                                            
                                            
                                            Paid In
                                            
                                            
                                            Accumulated
                                            
                                            
                                            Comprehensive
                                            
                                            
                                            EquityShares (1)
                                            
                                            
                                            Amount
                                            
                                            
                                            Capital
                                            
                                            
                                            Deficit
                                            
                                            
                                            Income (Loss)
                                            
                                            
                                            (Deficit)Balance
      December 31, 2006
                                            
                                            
                                            59,623,153
                                            
                                            
                                            $
                                            596
                                            
                                            
                                            $
                                            141,085
                                            
                                            
                                            $
                                            (191,944
                                            )
                                            
                                            $
                                            -
                                            
                                            
                                            $
                                            (50,263
                                            )Employee
      stock options exercised
                                            
                                            
                                            14,286
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -Shares
      issued in payment of services
                                            
                                            
                                            331,207
                                            
                                            
                                            
                                            3
                                            
                                            
                                            
                                            587
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            590Stock-based
      compensation expense
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            1,365
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            1,365Accretion
      of discount on preferred stock
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            (783
                                            )
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            (783
                                            )Accrued
      dividends on preferred stock
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            (1,066
                                            )
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            (1,066
                                            )Warrants
      exercised by Ener1 Group
                                            
                                            
                                            5,929,007
                                            
                                            
                                            
                                            59
                                            
                                            
                                            
                                            9,847
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            9,906Shares
      purchased by Ener1 Group
                                            
                                            
                                            6,057,688
                                            
                                            
                                            
                                            61
                                            
                                            
                                            
                                            12,660
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            12,721Shares
      purchased by investors in private placement
                                            
                                            
                                            9,142,857
                                            
                                            
                                            
                                            91
                                            
                                            
                                            
                                            29,314
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            29,405Warrant
      modification expense
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            583
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            583Warrants
      issued to UTE
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            18
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            18Warrants
      issued to related party in connectionwith
      debt placement services
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            3,236
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            3,236Shares
      issued in connection with EnerStruct
                                            
                                            
                                            533,333
                                            
                                            
                                            
                                            5
                                            
                                            
                                            
                                            928
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            933Shares
      issued for senior debenture conversions
                                            
                                            
                                            4,304,006
                                            
                                            
                                            
                                            43
                                            
                                            
                                            
                                            22,167
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            22,210Acceleration
      of discount related to conversion of senior debentures
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            (9,740
                                            )
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            (9,740
                                            )Reduction
      in derivative liability related to conversions ofsenior
      debentures
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            8,556
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            8,556Shares
      issued for Series B preferred stock conversions
                                            
                                            
                                            6,661,641
                                            
                                            
                                            
                                            68
                                            
                                            
                                            
                                            8,566
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            8,634Deemed
      preferred stock dividends
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            8,378
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            8,378Net
      loss (including preferred dividends payable to minorityinterest
      owner charged to paid in capital)
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            (2,001
                                            )
                                            
                                            
                                            (49,709
                                            )
                                            
                                            
                                            -
                                            
                                            
                                            
                                            (51,710
                                            )Balance
      December 31, 2007
                                            
                                            
                                            92,597,178
                                            
                                            
                                            $
                                            926
                                            
                                            
                                            $
                                            233,700
                                            
                                            
                                            $
                                            (241,653
                                            )
                                            
                                            $
                                            -
                                            
                                            
                                            $
                                            (7,027
                                            )Comprehensive
      loss:Net
      loss (including preferred dividends payable tominority
      interest owner charged to paid in capital)
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            (1,495
                                            )
                                            
                                            
                                            (41,460
                                            )
                                            
                                            
                                            -
                                            
                                            
                                            
                                            (42,955
                                            )Effects
      of exchange rates on consolidation
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            1,510
                                            
                                            
                                            
                                            1,510Total
      comprehensive loss
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            (41,445
                                            )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 Groupconvertible
      notes
                                            
                                            
                                            3,955,634
                                            
                                            
                                            
                                            40
                                            
                                            
                                            
                                            13,805
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            13,845Shares
      issued for acquisition of Enertech
                                            
                                            
                                            5,000,000
                                            
                                            
                                            
                                            50
                                            
                                            
                                            
                                            36,775
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            36,825Warrants
      issued for acquisition of Enertech
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            8,781
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            8,781Shares
      issued for acquisition of remaining 19.5% interest in
    EnerDel
                                            
                                            
                                            2,857,143
                                            
                                            
                                            
                                            29
                                            
                                            
                                            
                                            31,564
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            31,593Reduction
      in derivative liability related toconversion
      of senior debentures
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            6,208
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            6,208Acceleration
      of discount related toconversion
      of senior debentures
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            (3,974
                                            )
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            (3,974
                                            )Intrinsic
      value of beneficial conversion feature forEner1
      Group convertible notes
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            3,608
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            3,608Warrants
      issued to related party in connectionwith
      inducement to convert debt
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            680
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            680Warrants
      issued to related party for commitment feefor
      revolving line of credit facility
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            5,088
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            5,088Redemption
      of EnerDel Series A Preferred Stock
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            2,073
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            2,073Stock-based
      compensation expense
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            2,984
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            2,984Balance
      December 31, 2008
                                            
                                            
                                            113,074,478
                                            
                                            
                                            $
                                            1,132
                                            
                                            
                                            $
                                            383,367
                                            
                                            
                                            $
                                            (283,113
                                            )
                                            
                                            $
                                            1,510
                                            
                                            
                                            $
                                            102,896





(1)
            The
      shares of common stock issued and outstanding as of December 31, 2006 and
      2007 has been adjusted to reflect a 1 for 7 reverse stock split effective
      April 24, 2008.





See notes
to consolidated financial statements.





- 41
-





ENER1,
INC.


CONSOLIDATED
STATEMENTS OF CASH FLOWS


(In
thousands)




Year Ended December 31,2008
                        
                        
                        2007Operating
      activities:Net
      loss
                        
                        $
                        (42,955
                        )
                        
                        $
                        (51,710
                        )Adjustments
      to reconcile net loss to cash used in operating
activities:(Gain)
      loss on derivative liabilities
                        
                        
                        (3,936
                        )
                        
                        
                        11,537Minority
      interest in and preferred dividends of consolidated
    subsidiary
                        
                        
                        1,554
                        
                        
                        
                        2,001Non-cash
      accretion of discounts on debentures and notes
                        
                        
                        9,420
                        
                        
                        
                        8,008Non-cash
      interest expense related to financing costs
                        
                        
                        954
                        
                        
                        
                        2,227Non-cash
      interest expense related to convertible notes and advancesfrom
      related party
                        
                        
                        279
                        
                        
                        
                        1,237Non-cash
      inducement for debt conversions and equity investments
                        
                        
                        883
                        
                        
                        
                        583Depreciation
      and amortization
                        
                        
                        2,020
                        
                        
                        
                        530Stock-based
      compensation expense
                        
                        
                        2,983
                        
                        
                        
                        1,684Shares
      issued in connection with EnerStruct
                        
                        
                        -
                        
                        
                        
                        933Loss
      on foreign currency transactions, net
                        
                        
                        259
                        
                        
                        
                        -Other
      non-cash expenses
                        
                        
                        878
                        
                        
                        
                        50Changes
      in certain operating assets and liabilities:Accounts
      receivable
                        
                        
                        (1,222
                        )
                        
                        
                        50Inventory
                        
                        
                        (1,050
                        )
                        
                        
                        -Accounts
      payable and accrued expenses
                        
                        
                        5,405
                        
                        
                        
                        (1,710
                        )Interest
      payable
                        
                        
                        -
                        
                        
                        
                        (1,300
                        )Changes
      in current assets, liabilities and other, net
                        
                        
                        407
                        
                        
                        
                        (812
                        )Net
      cash used in operating activities
                        
                        
                        (24,121
                        )
                        
                        
                        (26,692
                        )Investing
      activities:Capital
      expenditures and equipment deposits
                        
                        
                        (14,115
                        )
                        
                        
                        (569
                        )Cash
      paid for acquisition of remaining 19.5% interest in
EnerDel
                        
                        
                        (600
                        )
                        
                        
                        -Cash
      received in acquisition of Enertech
                        
                        
                        5,028
                        
                        
                        
                        -Direct
      costs for acquisitions
                        
                        
                        (1,121
                        )
                        
                        
                        -Cash
      proceeds from sale of assets
                        
                        
                        9
                        
                        
                        
                        74Net
      cash used in investing activities
                        
                        
                        (10,799
                        )
                        
                        
                        (495
                        )Financing
      activities:Proceeds
      from borrowings, net of costs
                        
                        
                        1,802
                        
                        
                        
                        5,177Proceeds
      from exercise of options and warrants
                        
                        
                        30,980
                        
                        
                        
                        5,206Proceeds
      ($12,721 from related party) from sale of stock , net of
    costs
                        
                        
                        -
                        
                        
                        
                        42,126Redemption
      of EnerDel Series A Preferred Stock
                        
                        
                        (8,000
                        )
                        
                        
                        -Repayments
      of capital leases
                        
                        
                        (355
                        )
                        
                        
                        -Repayment
      of notes payable and bank installment loan
                        
                        
                        (315
                        )
                        
                        
                        (787
                        )Net
      cash provided by financing activities
                        
                        
                        24,112
                        
                        
                        
                        51,722Effect
      of exchange rate changes on cash and cash equivalents
                        
                        
                        187
                        
                        
                        
                        -Net
      (decrease) increase in cash and equivalents
                        
                        
                        (10,621
                        )
                        
                        
                        24,535Cash
      and cash equivalents - beginning balance
                        
                        
                        24,826
                        
                        
                        
                        291Cash
      and cash equivalents - ending balance
                        
                        $
                        14,205
                        
                        
                        $
                        24,826Cash
      paid during the year for:Interest
                        
                        $
                        421
                        
                        
                        $
                        7,062Income
      taxes
                        
                        
                        2
                        
                        
                        
                        -





See notes
to consolidated financial statements.





- 42
-


Supplemental
      Disclosure of Noncash Investing and Financing ActivitiesNon-cash
      investing and financing activities:Shares
      issued for conversion of senior debentures
            
            $
            11,715
            
            
            $
            22,210Shares
      issued for conversion of senior debentures interest
            
            
            174
            
            
            
            -Acceleration
      of discount related to conversion of senior debentures
            
            
            (3,974
            )
            
            
            (9,740
            )Reduction
      in derivative liability related to conversion of senior
      debentures
            
            
            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 related to conversion of convertible
notes
            
            
            3,608
            
            
            
            -Warrants
      issued in connection with the commitment of related party
    debt
            
            
            5,088
            
            
            
            3,236Shares
      issued for acquisition of Enertech
            
            
            36,825
            
            
            
            -Warrants
      issued for acquisition of Enertech
            
            
            8,781
            
            
            
            -Transaction
      costs related to the acquisition of Enertech
            
            
            655Shares
      issued for acquisition of 19.5% interest in EnerDel
            
            
            22,429
            
            
            
            -Warrant
      modification for acquisition of 19.5% interest in EnerDel
            
            
            195
            
            
            
            -Reduction
      in accounts payable in connection with acquisition of minority
      interest
            
            
            163
            
            
            
            -Borrowings
      pursuant to capital lease obligations
            
            
            7,209
            
            
            
            -Shares
      issued for capital lease obligations
            
            
            385
            
            
            
            -Redemption
      of EnerDel Series A Preferred Stock
            
            
            2,073
            
            
            
            -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




See notes
to consolidated financial statements.





- 43
-





ENER1,
INC.


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS





Note
1 – Nature of the Business





Ener1,
Inc. (“Ener1”), a Florida corporation, was founded in 1985 and is headquartered
in New York.  In January 2002, Ener1 Group, Inc. (“Ener1 Group”)
acquired a majority interest in Ener1 and owns approximately 57% of the
outstanding common stock of Ener1 as of December 31, 2008.





All share
related information presented in the Consolidated Financial Statements and the
notes have been adjusted to reflect a 1 for 7 reverse stock split, which became
effective on April 24, 2008.  In August 2008 and
December 2008, the authorized number of common shares was increased to
150,714,286 and 175,714,286, respectively.





Ener1 is
the parent company to its wholly-owned subsidiaries; (i) EnerDel, Inc.
(“EnerDel”) a Delaware corporation, (ii) EnerFuel, Inc. (“EnerFuel”) a Florida
corporation, (iii) NanoEner, Inc. (“NanoEner”) a Florida corporation, (iv)
EnerDel Japan, Inc. (“EnerDel Japan”), a Japanese corporation, and (v) Ener1
Battery Company (“Battery Company”) a Florida corporation.  Ener1
currently holds an 89% interest in Enertech International, Inc. (“Enertech”), a
Korean 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.  See further discussion in Note 3 –
      Acquisitions.





·
            EnerFuel, located in
      West Palm Beach, Florida produces 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
      Ener1’s 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.




- 44
-





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


The
accompanying consolidated financial statements include the accounts of Ener1,
Inc. and its wholly-owned subsidiaries, as well as its majority-owned
subsidiary, Enertech.  The operating results of Enertech have been
included since November 1, 2008, the accounting effective date of the
acquisition.  Amounts pertaining to the minority ownership interests
held by third parties in the operating results and financial position of Ener1’s
majority-owned subsidiaries, are reported as minority interest in other
liabilities.  All significant intercompany balances and transactions
have been eliminated in consolidation.  EnerDel, NanoEner, EnerFuel,
EnerDel Japan and Enertech have ongoing operations.





Use
of Estimates and Assumptions


Preparing
financial statements in conformity with accounting principles generally accepted
in the United States of America requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period.  Actual results and outcomes may differ from management’s
estimates and assumptions.





Reclassifications


Certain
reclassifications have been made to prior year’s financial statements in order
to conform to the current year presentation.





Foreign
Currencies


Subsidiaries
located outside the U.S. use the local currency as the functional currency.
Accordingly, assets and liabilities are translated at exchange rates in effect
at the balance sheet date and equity accounts at the historical exchange
rates.  Income and expense accounts are translated at average exchange
rates during the year. Resulting translation gains or losses are included in
comprehensive income as a separate component of stockholders’
equity.At December 31, 2008, accumulated foreign currency
translation adjustments were $1,510,000.  Foreign currency transaction
gains and losses are recognized in other income and expenses at the time they
occur.  Ener1 recorded foreign currency transaction losses of $259,000
for the year ended December 31, 2008. There were no material
foreign currency related transactions prior to January 1,
2008.





Cash
and Cash Equivalents and Restricted Cash


Ener1
considers liquid instruments purchased with a maturity of three months or less
to be cash and cash equivalents.  Cash and equivalents consist of cash
on deposit with domestic and foreign banks and, at times, may exceed federally
insured limits.





Restricted
cash represents amounts maintained with foreign banks that are pledged to
guarantee short term and long term borrowings.  Restricted cash
totaled $2,976,000 and $0 at December 31, 2008 and 2007,
respectively.





Accounts
Receivable


Ener1
establishes an allowance for doubtful accounts through a review of several
factors including historical collection experience, current aging status of the
customer accounts and financial condition of the customers.





Accounts
receivable are presented net of an allowance for doubtful accounts of $915,000
and $0 at December 31, 2008 and 2007, respectively. Of the total allowance
of $915,000 at December 31, 2008, one customer accounts for
$542,000.  Based on the information available to Ener1, management
believes the allowance for doubtful accounts at December 31, 2008 is adequate.
However, actual write-offs may exceed the recorded allowance.





- 45
-





Inventory


Inventory
is stated at the lower of cost or market, with cost determined under the
first-in, first-out method, except for inventory at foreign subsidiaries which
are determined using the weighted average method.  Cost includes
materials, labor, and manufacturing overhead related to the purchase and
production of inventory.  Ener1 regularly reviews inventory on hand
and, when necessary, records a provision for excess or obsolete inventories
based on an assessment of future demand.  Inventories are presented
net of a reserve for obsolescence of $483,000 and $0 at December 31, 2008 and
2007, respectively.  Actual results could differ from this
estimate.





The
following table reflects the components of inventory at December 31, 2008
and 2007 (in thousands):





2008
                  
                  
                  2007Finished
      goods
                  
                  $
                  5,152
                  
                  
                  $
                  -Work
      in process
                  
                  
                  783
                  
                  
                  
                  -Raw
      materials and supplies
                  
                  
                  4,750
                  
                  
                  
                  -Total
      inventory
                  
                  
                  10,685
                  
                  
                  
                  -Less:
      valuation allowance
                  
                  
                  (483
                  )
                  
                  
                  -Inventory,
      net
                  
                  $
                  10,202
                  
                  
                  $
                  -





Property
and Equipment


Property
and equipment is stated at cost. Depreciation is computed using the
straight-line method and commences when the asset is placed in service.
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.





Upon the
sale of an asset, the cost and related accumulated depreciation are removed from
the balance sheet, and any gains or losses on those assets are reflected in the
accompanying consolidated statement of operations of the respective
period.





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 and failure
to exercise such option would result in an economic penalty.





The
straight-line method estimated useful lives are as follows:





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




Intangible
Assets and Goodwill


Intangible
assets and goodwill are comprised of certain definite and indefinite lived
assets.  Definite lived intangible assets, including patents,
technology and customer relationships are amortized over the estimated useful
life of the asset and reviewed for impairment upon any triggering event that may
give rise to the assets ultimate recoverability as prescribed under SFAS
No. 144, Accounting for
the Impairment or Disposal of Long-Lived Assets.  Goodwill,
which represents the excess of cost over fair value of assets of businesses
acquired, which is our only indefinite lived asset is not amortized but
evaluated annually (or more frequently) for impairment under SFAS No. 142,
Goodwill and Other Intangible
Assets.





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-





Definite Lived Intangible
Assets


Definite
lived intangible assets consist of patents, technology and customer
relationships which were recorded at the date of acquisition of EnerDel and
Enertech, during 2008.  Intangible assets are carried at cost less
accumulated amortization. Amortization is computed using the straight-line
method over the intangibles assets estimated useful life. The estimated useful
lives for the intangible assets are as follows:




Patents
                    
                    10
      yearsPatented
      and unpatented technology
                    
                    10
      yearsElectric
      vehicle battery technology
                    
                    4.2
      yearsCustomer
      relationships
                    
                    2.2
      years





Ener1
periodically reviews the estimated useful lives of its identifiable intangible
assets, taking into consideration any events or circumstances that might result
in a lack of recoverability or revised useful life.





Indefinite lived
asset


Under the
guidance of SFAS No. 142, Ener1 is required to test for impairment intangible
assets with indefinite lives at least annually.  Our only intangible
asset with an indefinite life is goodwill, which was acquired in August and
October 2008 as part of the acquisition of the 19.5% minority Interest in
EnerDel and the 83% majority interest in Enertech.  Ener1 has
determined to test this goodwill annually, on October 1st, the
first day of Ener1’s fourth quarter of each year, commencing October 1, 2009,
unless an event occurs that would cause us to believe the value is impaired at
an interim date.  At December 31, 2008, no such event has
occurred.





Ener1
will continue to evaluate whether events and circumstances have occurred that
indicate the balance of goodwill may not be recoverable.  In
evaluating impairment estimates of the sum of expected future cash flows derived
from such goodwill may be used.  Such evaluations for impairment are
significantly impacted by estimate of future revenues, costs and expenses and
other factors.  A significant change in cash flows in the future could
result in an impairment of goodwill.





Impairment of Long-lived
Assets


In
accordance with SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets, Ener1 evaluates the recoverability of the
carrying value of its long-lived assets based on estimated undiscounted cash
flows to be generated from such assets. If the undiscounted cash flows indicate
impairment occurred then the carrying value of the assets evaluated is
written-down to the estimated fair value of those assets.





In
assessing the recoverability of these assets, projections of estimated cash
flows must be made, which are based on various operating
assumptions.  Management develops these cash flow projections on a
periodic basis and reviews the projections based on actual operating
trends.  The projections assume that general economic conditions will
continue unchanged throughout the projection period and that the potential
impact on capital spending and revenues will not fluctuate.





Ener1’s
review of the carrying value of its tangible long-lived assets at
December 31, 2008 and 2007 indicates that the carrying value of these
assets will be recoverable through estimated future cash flows.





Other
Long-Term Payables


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.  The refundable government grants at
December 31, 2008 was $161,000 and is reflected in the accompanying consolidated
balance sheet in other-long term payables.








- 47
-





Severance
Benefit


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 expense charged to expense is calculated based on the net
change in the accrued severance benefit payable at the balance sheet date based
on the guidance of EITF 88-1, Determination of Vested Benefit
Obligation for a Defined Benefit Pension Plan.





The
accrued severance benefit payable at December 31, 2008 was $932,000 and is
reflected in the accompanying consolidated balance sheet in other-long term
payables.  The annual accrued benefit expense for the two month period
ended December 31, 2008 was $120,000.





Derivative
Instruments


Ener1
follows the provision in SFAS 133, Accounting for Derivative
Instruments and Hedging Activities and EITF 00-19, Accounting for Derivative Financial
Instruments Indexed to and Potentially Settled in, a Company's Own Stockand determined that the conversion feature of senior secured convertible
debentures and certain warrants associated with the debentures should be treated
as separate derivative liabilities.  During the three months ended
March 31, 2008, the debentures converted and were no longer treated as
derivative liabilities including the certain warrants associated with the
debentures.  The fair value of each derivative was marked to market
and gain on derivative liabilities was recorded.





The fair
values of the derivative liability associated with the senior secured
convertible debentures was determined using market based lattice pricing models
incorporating readily observable market data and management
assumptions.   The fair values of the derivative liabilities
associated with the warrants were determined using a Black-Scholes
Model.





Ener1’s
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 as they are not designated as hedges based on the
criteria established by SFAS No. 133, and gains or losses from changes in the
fair value are recognized in earnings.





Comprehensive
Income


Ener1 is
required to report its comprehensive income in accordance with Statement of
Financial Accounting Standards (“SFAS”) No. 130, Reporting Comprehensive
Income, (“SFAS No. 130”).  Other comprehensive income refers to
revenues, expenses, gains and losses that under generally accepted accounting
principles are included in comprehensive income but are excluded from net
income, as these amounts are recorded directly as an adjustment to stockholders’
equity.  A consolidated statement of changes in stockholders’ equity
and comprehensive income has been presented as Ener1 has components of other
comprehensive income, such as foreign currency translation
adjustments.





Fair
Value of Financial Instruments


The
carrying value of short-term financial instruments, including cash and cash
equivalents, accounts receivables, inventory, 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 carrying value
since the related rates of interest approximate current market
rates.





- 48
-





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.





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.  At December 31, 2008, approximately
$543,000 was uninsured at domestic institutions.





Accounts
at foreign institutions are insured by the Korean Federal Deposit Insurance
Corporation (KFDIC) up to approximately $50,000.  At December 31,
2008, approximately $3,228,000 was uninsured at foreign
institutions.





Ener1 has
been dependent on several large clients for a significant portion of net sales
and as such believes it has a concentration of risk.  Sales and
accounts receivable from customers accounting for 10% or more of net sales and
accounts receivable are as follows (in thousands):





Sales for the year ended
                      December 31,
                    
                    
                    
                    
                    
                    Accounts receivable at
                      December 31,2008
                    
                    
                    
                    
                    
                    2007
                    
                    
                    
                    
                    
                    2008
                    
                    
                    
                    
                    
                    2007Symbol
      Technologies, Inc. (Motorola)
                    
                    $
                    1,682
                    
                    
                    
                    25
                    %
                    
                    
                    N/A
                    
                    
                    
                    N/A
                    
                    
                    $
                    1,664
                    
                    
                    
                    24
                    %
                    
                    
                    N/A
                    
                    
                    
                    N/AThink
      Global AS
                    
                    
                    941
                    
                    
                    
                    14
                    %
                    
                    
                    76
                    
                    
                    
                    27
                    %
                    
                    
                    542
                    
                    
                    
                    8
                    %
                    
                    
                    -
                    
                    
                    
                    0
                    %$
                    2,623
                    
                    
                    
                    
                    
                    
                    $
                    76
                    
                    
                    
                    
                    
                    
                    $
                    2,206
                    
                    
                    
                    
                    
                    
                    $
                    0





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.





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 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, as opposed to cost of sales.





In
accordance with EITF 99-19, Reporting Revenue Gross as a
Principal versus Net as an Agent, Ener1 recognizes revenue from the
sublease of the former corporate offices on a gross basis since Ener1 is the
primary obligor in the arrangement and bears the credit
risk.  Sublease income for the year ended December 31, 2008 totaled
approximately $85,000 and has been recorded to net sales in the accompanying
statements of operations.





Cost
of Sales


Cost of
sales includes manufacturing and distribution costs for products sold,
depreciation, inventory write-downs and costs associated with the delivery of
products.  Depreciation expense included in cost of goods sold for the
years ended December 31, 2008 and 2007 was $408,000 and $0,
respectively.





- 49
-





Research
and Development


Research
and development expenses include payroll, employee benefits, stock-based
compensation and other direct and indirect costs associated with product
developments.  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 $3,835,000 and
$910,000 for the years ended December 31, 2008 and December 31, 2007,
respectively.





Stock
Based Compensation


Ener1
accounts for stock-based compensation issued to employees and non-employees as
required by SFAS No. 123R Share Based Payments (“SFAS
123R”) and related interpretations. Under the provisions of this statement,
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


Ener1 has
adopted the provisions of SFAS 109, Accounting for Income Taxes,
which requires recognition of deferred tax liabilities and assets for the
expected future tax consequences of events that have been included in the
consolidated financial statements or tax returns. Under this method, deferred
tax liabilities and assets are determined based on the difference between the
financial statement carrying amounts and tax basis of assets and liabilities
using enacted tax rates in effect for the year in which the differences are
expected to reverse.  Valuation allowances are established when
necessary to reduce deferred tax assets to the amount more likely than not to be
realized.





Historically,
Ener1 and its subsidiaries have filed consolidated federal income tax returns
and certain state tax returns with Ener1 Group.  In October 2007,
Ener1 Group’s ownership of Ener1 declined below 80% and as a result they will
not file consolidated returns after such date.





Ener1
adopted the provisions of FASB issued Interpretation 48, Accounting for Uncertainty in Income
Taxes — an interpretation of FASB Statement No. 109 (“FIN 48”). This
Interpretation prescribes a recognition threshold and measurement attribute for
the financial statement recognition and measurement of a tax position taken or
expected to be taken in a tax return. In addition, FIN 48 includes the
provisions that interest penalties recognized in accordance with FIN 48 may be
classified in the financial statements as either income taxes or interest
expense. Our policy is to recognize such items as interest expense.





Earnings
per Share


In
accordance with SFAS No. 128, Earnings per Share (“SFAS
128”), basic earnings per share (“EPS”) is computed by dividing the net loss
attributable to common shareholders for the period by the weighted average
number of shares outstanding. Diluted EPS is computed by dividing net income
loss attributable to common shareholders by the weighted average number of
shares outstanding including the effect of share equivalents.





Common
share equivalents consist of shares issuable upon the exercise of certain common
stock purchase warrants, stock options, convertible notes and senior convertible
debentures.  These common share equivalents have been excluded from
the computation of earnings per share due to their antidilutive effect as Ener1
has reflected a net loss for the years ended December 31, 2008 and 2007,
respectively.  Accordingly, the basic and diluted EPS are the
same.





- 50
-





Recently
Issued Accounting Standards





Adopted Accounting
Standards


In
September 2006, the FASB issued SFAS No. 157, Fair Value Measurements
(“SFAS No. 157”).  This standard defines fair value, establishes a
framework for measuring fair value in generally accepted accounting principles
in the United States, and expands disclosures about fair value
measurements.  This standard does not require any new fair value
measurements, but provides guidance on how to measure fair value by providing a
fair value hierarchy used to classify the source of the
information.  SFAS No. 157 is effective for fiscal years beginning
after November 15, 2007, and all interim periods within those fiscal
years.  In February 2008, the FASB issued FASB Staff
Position (FSP) FSP 157-2, Effective Date of FASB Statement
No. 157 (“FSP 157-2”). FSP 157-2 delays the effective date of SFAS
No. 157 for all non-financial assets and non-financial liabilities, except
for items that are recognized or disclosed at fair value in the financial
statements on a recurring basis (at least annually), to fiscal years beginning
after November 15, 2008 and interim periods for those fiscal
years.  We are currently evaluating the impact that SFAS No. 157
will have on the consolidated financial statements when it is applied to
non-financial assets and non-financial liabilities that are not measured at fair
value on a recurring basis beginning in the first quarter of 2009.





In
December 2007, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin 110, Share-Based Payment (“SAB 110”).  SAB 110
amends SAB 107 and allows for the continued use, under certain circumstances, of
the “simplified method” in developing an estimate of the expected term on stock
options accounted for under SFAS No. 123R.   SAB 110 is effective
for stock options granted on or after January 1, 2008.  Ener1 will
continue to use the simplified method until there is sufficient historical data
necessary to provide reasonable estimates of expected lives in accordance with
SAB 107, as amended by SAB 110.




Future Adoption of
Accounting Standards


In
December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in
Consolidated Financial Statements - an amendment of Accounting Research Bulletin
No. 51 ("SFAS 160"), which establishes accounting and reporting standards
for ownership interests in subsidiaries held by parties other than the parent,
the amount of consolidated net income attributable to the parent and to the
noncontrolling interest, changes in a parent's ownership interest and the
valuation of retained noncontrolling equity investments when a subsidiary is
deconsolidated. The Statement also establishes reporting requirements that
require disclosure that clearly identifies and distinguishes between the
interests of the parent and the interests of the noncontrolling owners. SFAS 160
is effective on January 1, 2009 and Ener1 is currently evaluating the potential
impact, if any, of the adoption of SFAS 160 on its consolidated financial
statements.





In
December 2007, the FASB issued SFAS No. 141 (revised 2007), Business Combinations ("SFAS
141R"), which replaces FASB Statement No. 141. SFAS 141R establishes principles
and requirements for how an acquirer recognizes and measures in its financial
statements the identifiable assets acquired, the liabilities assumed, any
noncontrolling interest in the acquiree and the goodwill acquired. The Statement
also establishes disclosure requirements which will enable users to evaluate the
nature and financial effects of the business combination. SFAS 141R is to be
applied prospectively to business combinations, if any, for which the
acquisition date is on or after January 1, 2009.





In March
2008, the FASB issued SFAS No. 161, Disclosures about Derivative
Instruments and Hedging Activities (“SFAS 161”), which amends and expands
the disclosure requirements of FASB Statement No. 133, Accounting for Derivative
Instruments and Hedging Activities(“SFAS 133”), with the intent to
provide users of financial statements with an enhanced understanding of: (a) how
and why an entity uses derivative instruments; (b) how derivative instruments
and related hedged items are accounted for under SFAS No. 133 and its related
interpretations; and (c) how derivative instruments and related hedged items
affect an entity’s financial position, financial performance and cash flows.
SFAS 161 requires qualitative disclosures about objectives and strategies for
using derivatives, quantitative disclosures about fair value amounts of and
gains and losses on derivative instruments and disclosures about
credit-risk-related contingent features in derivative instruments. This
statement applies to all entities and all derivative instruments. SFAS 161 is
effective January 1, 2009 and Ener1 is currently evaluating the potential
impact, if any, of the adoption of SFAS 161 on its consolidated financial
statements.





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-





In
May 2008, FASB issued FSP APB 14-1, Accounting for Convertible Debt
Instruments that may be Settled in Cash upon Conversion (Including Partial Cash
Settlement)("FSP APB 14-1").  FSP APB 14-1 applies to
convertible debt securities that, upon conversion, may be settled by the issuer
fully or partially in cash.  FSP APB 14-1 specifies that
issuers of such instruments should separately account for the liability and
equity components in a manner that will reflect the entity's nonconvertible debt
borrowing rate when interest cost is recognized in subsequent
periods.  FSP APB 14-1 is effective January 1, 2009 and
Ener1 is currently evaluating the potential impact, if any, of the adoption of
FSP APB 14-1 on its consolidated financial statements.





In
June 2008, FASB ratified EITF No. 07-05, Determining Whether an Instrument
(or an Embedded Feature) Is Indexed to an Entity's Own Stock ("EITF
07-05").  EITF 07-05 provides that an entity should use a two-step
approach to evaluate whether an equity-linked financial instrument (or embedded
feature) is indexed to its own stock, including evaluating the instrument's
contingent exercise and settlement provisions.  EITF 07-05 is
effective January 1, 2009 and Ener1 is currently evaluating the impact of the
adoption of EITF 07-05 for certain financing warrants that contain exercise
price adjustment features.





Note
3 – Acquisitions





Majority
interest in Enertech International, Inc.


On
October 24, 2008, Ener1 acquired approximately 83% of the fully diluted capital
stock of Enertech, a Korean based manufacturer of lithium-ion battery cells with
manufacturing facilities and equipment located in Chungcheongbuk-do, South Korea
and Hackensack, New Jersey.  As a result, the results of operations
for Enertech have been included in the consolidated financial statements since
November 1, 2008.





To effect
the acquisition, Ener1 acquired  all of the outstanding capital stock
of TVG Asian Communications Fund II, L.P., a limited partnership organized under
the laws of the Cayman Islands (“TVGAC”), and Rosebud Securities Limited, an
international business company incorporated under the laws of the British Virgin
Islands (“Rosebud,” together with TVGAC, the “Sellers”).  TVGAC and
Rosebud own the entire equity interest in each of TVG Saehan Holdings, a limited
company incorporated under the laws of the Federal Territories of Labuan,
Malaysia (“TVG Saehan”), and TVG SEI Holdings, a limited company incorporated
under the laws of the British Virgin Islands (“TVG SEI”).  TVG Saehan
and TVG SEI owned 83% of the fully diluted capital stock of Enertech pursuant to
their ownership of Enertech’s common stock, warrants and convertible
bonds.





Ener1
paid the Sellers $600,000 in cash and issued to the Sellers 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. In addition, Ener1 incurred
approximately $1,203,000 of third party transaction costs for total purchase
consideration of $47,408,000.  The warrants are immediately
exercisable, contain a cashless exercise provision and expire in October
2010.





The
acquisition of Enertech has been accounted for under the purchase method of
accounting which requires that assets acquired and liabilities assumed be
recorded at the date of acquisition at their respective fair values with the
excess being recorded in goodwill, which is assigned to the battery segment. The
following table summarizes the estimated fair values of the assets acquired and
liabilities assumed at December 31, 2008:





Current
      assets
                  
                  $
                  20,843Property
      and equipment
                  
                  
                  14,984Other
      assets
                  
                  
                  456Identifiable
      intangible assets
                  
                  
                  1,947Goodwill
                  
                  
                  29,693Total
      assets acquired
                  
                  
                  67,923Current
      liabilities
                  
                  
                  13,969Long
      term liabilities
                  
                  
                  3,179Total
      liabilities assumed
                  
                  
                  17,148Minority
      interest
                  
                  
                  3,367Net
      assets acquired
                  
                  $
                  47,408





Goodwill
has been adjusted as a result of foreign currency translations totaling
approximately $783,000 at December 31, 2008 as a result of fluctuations in the
Korean Won, which is the local currency of Enertech.




- 52
-




The
allocation of the purchase price was based on preliminary estimates and
third-party valuations.  Ener1 obtained third-party valuations to
provide a preliminary estimate for the fair market value of certain assets
purchased.  As a result, part of the purchase price was allocated to
specifically identifiable intangible assets.  The following table
summarizes the intangible assets purchased in the
transaction:





Estimated Fair
                    Value
                  
                  Remaining
                    Useful LifePatents
                  
                  $
                  83
                  
                  10
      yearsTechnology
                  
                  
                  1,028
                  
                  4.2
      yearsCustomer
      relationships
                  
                  
                  836
                  
                  2.2
      yearsTotal
      identifiable intangible assets
                  
                  $
                  1,947





The
allocation of the purchase price was based on estimates, as well as third-party
valuations.  Estimates and assumptions are subject to change based
upon the preparation of final tax returns. The final evaluation, if any, of net
assets acquired will be completed no later than one year from the acquisition
date and any future changes in the value of the net assets acquired will be
offset by a corresponding change in goodwill.





On
January 7, 2009, Ener1 filed a registration statement to register the resale of
the shares issued to the Sellers, as well as the shares issuable upon the
exercise of the warrants and the registration statement became effective on
February 5, 2009.  In addition, through January 24, 2009, Ener1 could
have been obligated to make a cash payment to the Sellers if it issued common
shares at a price less than $7.20 per share.  Such clause has expired
and no such cash payment was made.





In
January 2009, Ener1 purchased an additional ownership interest in Enertech by
issuing 385,936 shares of Ener1 common stock valued at approximately $2,597,000
based on the closing stock price of $6.73 on the effective date of the
closing.   As a result, Ener1’s interest in Enertech increased
from 83% to 89%, on a fully diluted basis.  The additional ownership
interest will be accounted for in accordance with SFAS 141R, Business
Combinations.





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.





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-





The
unaudited condensed combined pro forma 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
                  
                  
                  (7,680
                  )
                  
                  
                  (3,969
                  )
                  
                  
                  (667
                  )
                  (c
      )
                  
                  
                  (12,316
                  )Income
      tax expense (benefit)
                  
                  
                  (184
                  )
                  
                  
                  271
                  
                  
                  
                  
                  
                  
                  
                  
                  87Net
      income (loss) before minority interest
                  
                  
                  (41,401
                  )
                  
                  
                  (4,185
                  )
                  
                  
                  (1,197
                  )
                  
                  
                  
                  (46,783
                  )Minority
      interest
                  
                  
                  (1,554
                  )
                  
                  
                  -
                  
                  
                  
                  915
                  
                  (d)
                  
                  
                  (639
                  )Net
      income (loss)
                  
                  $
                  (42,955
                  )
                  
                  $
                  (4,185
                  )
                  
                  $
                  (282
                  )
                  
                  
                  $
                  (47,422
                  )Preferred
      stock dividends
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  
                  
                  
                  
                  
                  -Net
      loss attributable to common shareholders
                  
                  $
                  (42,955
                  )
                  
                  $
                  (4,185
                  )
                  
                  $
                  (282
                  )
                  
                  
                  $
                  (47,422
                  )Weighted
      average shares outstanding
                  
                  
                  103,382
                  
                  
                  
                  
                  
                  
                  
                  5,000
                  
                  (e)
                  
                  
                  108,382Net
      income (loss) per share-basic and diluted
                  
                  $
                  (0.42
                  )
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  $
                  (0.76
                  )


(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)
            Minority
      interest reflects an adjustment to the allocable portion of pro forma
      income (loss) before majority interest in
  Enertech.


(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.





- 54
-





The
unaudited condensed combined pro forma 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
                  
                  
                  (28,663
                  )
                  
                  
                  (1,027
                  )
                  
                  
                  1,537
                  
                  (c
      )
                  
                  
                  (28,153
                  )Income
      taxes
                  
                  
                  -
                  
                  
                  
                  (167
                  )
                  
                  
                  -
                  
                  
                  
                  
                  (167
                  )Net
      income (loss) before minority interest
                  
                  
                  (49,709
                  )
                  
                  
                  2,071
                  
                  
                  
                  788
                  
                  
                  
                  
                  (46,850
                  )Minority
      interest
                  
                  
                  (2,001
                  )
                  
                  
                  (43
                  )
                  
                  
                  (486
                  )
                  (d)
                  
                  
                  (2,530
                  )Net
      income (loss)
                  
                  $
                  (51,710
                  )
                  
                  $
                  2,028
                  
                  
                  $
                  302
                  
                  
                  
                  $
                  (49,380
                  )Preferred
      stock dividends
                  
                  
                  (10,227
                  )
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  
                  (10,227
                  )Net
      income (loss) attributable to common shareholders
                  
                  $
                  (61,937
                  )
                  
                  $
                  2,028
                  
                  
                  $
                  302
                  
                  
                  
                  $
                  (59,607
                  )Weighted
      average shares outstanding
                  
                  
                  72,922
                  
                  
                  
                  
                  
                  
                  
                  5,000
                  
                  (e)
                  
                  
                  77,922Net
      income (loss) per share-basic and diluted
                  
                  $
                  (0.85
                  )
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  $
                  (0.76
                  )




(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)
            Minority
      interest reflects an adjustment to the allocable portion of pro forma
      income before majority interest in
Enertech.


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




- 55
-





Minority
interest in EnerDel, Inc.


On August
12, 2008, Ener1 acquired the 19.5% remaining interest in its 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 $32,012,000, including $22,429,000 for
the shares of Ener1 common stock based on the closing price reported by the
American Stock Exchange on the date of acquisition, $8,968,000 for the
forgiveness of intercompany payables, net of intercompany receivables, $195,000
for the revised exercise price of certain warrants held by Delphi and $420,000
in direct costs of the acquisition.





The
allocation of the purchase price was based on preliminary estimates and
third-party valuations.  Ener1 obtained third-party valuations to
provide a preliminary 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,
$13,814,000 was allocated to specifically identifiable intangible assets,
specifically patented and unpatented technology, and the remaining $18,198,000
was recorded to goodwill, which has been assigned to the battery segment, in
accordance with the provisions of SFAS No. 142, Goodwill and Other Intangible
Assets.  The identifiable intangible assets have an estimated
useful life of 10 years and the goodwill will subsequently be accounted for in
accordance with the provisions of SFAS No. 142, Goodwill and Other Intangible
Assets.





Ener1 has
recorded a deferred tax liability of approximately $5,198,000 on the temporary
difference related to the patented and unpatented
technology.  However, Ener1 also has existing deferred tax assets from
its 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 and allocated as part of the
purchase price resulting in an adjustment to goodwill.  The
recognition of the deferred tax liability and the partial release of the
deferred tax asset valuation have no impact on goodwill.





Note
4 – Earnings per Share





Basic net
loss per share is computed on the basis of the weighted average number of shares
of common stock outstanding during the period.  Diluted net loss per
share is computed on the basis of the weighted average number of shares of
common stock plus the effect of dilutive potential common shares outstanding
during the period.  The dilutive effect of outstanding stock options
and warrants is reflected in diluted earnings per share by application of the
treasury stock method. The dilutive effect of outstanding
convertible securities is reflected in diluted earnings per share by
application of the if-converted method.





Basic net
loss per share is computed by dividing the net loss attributable to common
shareholders by the weighted-average number of common shares outstanding during
the period. Diluted net loss per share is computed using the weighted-average
number of common shares outstanding during the period, adjusted for the dilutive
effect of common stock equivalents, consisting of shares that would be issued
upon exercise of common stock options and warrants and from the conversion of
Ener1’s convertible notes and debentures.





In
calculating diluted net loss per share, the numerator is also adjusted to: (1)
add back interest expense from the 2004 and 2005 Debentures; and (2) subtract
the derivative gains on convertible securities to the extent the effect is
dilutive.





- 56
-





In
periods when losses are reported, the weighted-average number of common shares
outstanding excludes common stock equivalents, because their inclusion would be
anti-dilutive.  The following potential common shares have been
excluded from the computation of diluted net loss per share for all periods
presented because the effect of including them would have been
anti-dilutive:





Year Ended December 31,2008
                    
                    
                    2007Stock
      options
                    
                    
                    3,957,621
                    
                    
                    
                    459,281Warrants
                    
                    
                    27,758,424
                    
                    
                    
                    3,651,101Plus
      shares from assumed conversion of:Convertible
      Group Notes
                    
                    
                    -
                    
                    
                    
                    3,875,7142004
      Debentures
                    
                    
                    -
                    
                    
                    
                    1,764,4782005
      Debentures
                    
                    
                    -
                    
                    
                    
                    430,835Total
      options, warrants and convertible securitiesexcluded
      from weighted average shares
                    
                    
                    31,716,045
                    
                    
                    
                    10,181,409





Note
5 – Property and Equipment





Property
and equipment consisted of the following at December 31, 2008 and 2007 (in
thousands):





2008
                  
                  
                  2007Land
                  
                  $
                  1,966
                  
                  
                  $
                  368Building
      and building improvements
                  
                  
                  5,381
                  
                  
                  
                  1,177Machinery
      and equipment
                  
                  
                  19,315
                  
                  
                  
                  1,801Office
      equipment, furniture and other
                  
                  
                  2,137
                  
                  
                  
                  638Leasehold
      improvements
                  
                  
                  7,966
                  
                  
                  
                  1,558Construction
      in progress
                  
                  
                  5,477
                  
                  
                  
                  -Total
      cost
                  
                  
                  42,241
                  
                  
                  
                  5,542Less
      accumulated depreciation
                  
                  
                  (2,728
                  )
                  
                  
                  (1,255
                  )Property
      and equipment, net
                  
                  $
                  39,513
                  
                  
                  $
                  4,287





At
December 31, 2008, construction in progress includes $3,402,000 in deposits for
equipment being constructed, by third parties, specifically for Ener1’s
use,.  Depreciation on these assets will commence when the assets are
place in service by Ener1.





Depreciation
expense for the years ended December 31, 2008 and 2007 was approximately
$1,452,000 and $530,000, respectively.  Assets recorded under capital
leases were approximately $7,209,000 at December 31, 2008.  There were
no capital leases during the year ended December 31, 2007.





- 57
-





Note
6 – Intangible Assets





Intangible
assets consisted of the following at December 31, 2008 and 2007 (in
thousands):





2008
                  
                  
                  2007Patents
                  
                  $
                  86
                  
                  
                  $
                  -Patented
      and unpatented technology
                  
                  
                  13,814
                  
                  
                  
                  -Electric
      vehicle battery technology
                  
                  
                  1,056
                  
                  
                  
                  -Customer
      relationships
                  
                  
                  858
                  
                  
                  
                  -Total
      cost
                  
                  
                  15,814
                  
                  
                  
                  -Less
      accumulated amortization
                  
                  
                  (568
                  )
                  
                  
                  -Intangbile
      assets, net
                  
                  $
                  15,246
                  
                  
                  $
                  -





Amortization
expense for the years ended December 31, 2008 and 2007 was approximately
$568,000 and $0, respectively.





Note
7 – Accounts Payable and Accrued Expenses





Accounts
payable and accrued expenses consist of the following at December 31, 2008 and
2007 (in thousands):





2008
                    
                    
                    2007Accounts
      payable
                    
                    $
                    12,825
                    
                    
                    $
                    2,002Accrued
      compensation and benefits
                    
                    
                    1,194
                    
                    
                    
                    775Accrued
      registration delay expense
                    
                    
                    679
                    
                    
                    
                    679Accrued
      professional fees
                    
                    
                    573
                    
                    
                    
                    163Customer
      advances
                    
                    
                    561
                    
                    
                    
                    99Accrued
      other
                    
                    
                    490
                    
                    
                    
                    81Total
      accounts payable and accrued expenses
                    
                    $
                    16,322
                    
                    
                    $
                    3,799





Note
8 – Short Term and Long Term Borrowings





Short
term borrowings


Short
term borrowings as of December 31, 2008 and 2007 consist of the
following:





Annual
                              interest rate
                            
                            2008
                            
                            
                            2007Letters
      of credit
                            
                            3.25% ~ 3.70%
                            
                            $
                            1,716
                            
                            
                            $
                            -Trade
      financing
                            
                            5.91%
      ~ 7.49%
                            
                            
                            7,298
                            
                            
                            
                            -General
      term loan
                            
                            3.25%
      ~ 4.00%
                            
                            
                            400
                            
                            
                            
                            315$
                            9,414
                            
                            
                            $
                            315





The
letters of credit and trade financing agreements are denominated in Korean Won
and the total amount available at December 31, 2008 was approximately
$17,600,000 of which $9,014,000 was outstanding.  The amounts are
scheduled for repayment at various times through out 2009.





The
general term loan is denominated in United States dollars and the total amount
available at December 31, 2008 was $750,000 of which $400,000 was
outstanding.  The loan is scheduled to mature on April 27, 2009 and
can be renegotiated and renewed for a period of one year.





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





- 58
-





Long
term borrowings


Long-term
borrowings consist of an equipment loan denominated in the Korean Won and the
total amount available at December 31, 2008 was approximately $3,976,000 of
which $795,000 was outstanding.  The loan bears interest at 8.19% and
matures in October 2011.  Certain bank deposits, land and buildings
are pledged as collateral to guarantee the payments of this debt.





Note
9 – Capital Leases





In May
2008, Ener1entered into a $7 million master equipment lease agreement with an
unrelated third party for an initial term of one year, renewable upon mutual
consent.  Under the terms of the agreement, Ener1 may lease newly
acquired equipment to be used in connection with the manufacturing of
lithium-ion batteries.  Installation, construction and other
non-equipment costs are excluded from this financing agreement.





As a
commitment fee, Ener1 issued 17,559 shares of common stock upon the receipt of
the unconditional commitment letter from the lessor and the value of $105,000
was recorded to interest expense.  In addition to the commitment fee,
Ener1 is obligated to issue additional shares of Ener1 common stock in the
amount of $42,857 for each $1 million drawn under the $7 million equipment lease
agreement up to a maximum aggregate of $300,000 of Ener1 common
stock.  As of December 31, 2008, Ener1 has issued 38,141 shares of
common stock valued at $281,000 pursuant to this additional share issuance
clause of the master equipment lease agreement.





At
December 31, 2008, Ener1 is obligated under nine separate leases pursuant to the
master equipment lease agreement for certain machinery and production equipment
totaling $7,209,000, which includes the bargain purchase option that management
intends to exercise at the end of the lease terms.  Ener1 has the
option to purchase the equipment at the end of the lease at fair market value or
10% of the original cost, whichever is lower, which management deems to be a
bargain.  Each lease bears interest at a rate of 10% with a three year
term.  Assets under these capital leases are recorded as part of
property and equipment in the accompanying balance sheet.  Future
minimum lease payments over the life of these leases are $7,783,000, of which
$930,000 represents interest.  See Note 19 - Commitments and
Contingencies or future minimum lease payments required under capital
leases.





Note
10 – Income Taxes





Ener1’s
income tax expenses are composed of domestic and foreign income taxes depending
on the relevant tax jurisdiction.  The components of income tax
expense (benefit) for the years ended December 31, 2008 and 2007 are as
follows:





2008
                  
                  
                  2007Current
      income taxes:Domestic
                  
                  $
                  (86
                  )
                  
                  $
                  -Foreign
                  
                  
                  -
                  
                  
                  
                  -Total
      current income taxes
                  
                  $
                  (86
                  )
                  
                  $
                  -Deferred
      income taxes:Domestic
                  
                  $
                  4
                  
                  
                  $
                  -Foreign
                  
                  
                  (102
                  )
                  
                  
                  -Total
      deferred income taxes
                  
                  $
                  (98
                  )
                  
                  $
                  -Total
      income tax benefit
                  
                  $
                  (184
                  )
                  
                  $
                  -




- 59
-


A summary
of Ener1’s deferred tax assets and liabilities as of December 31, 2008 and 2007
are attributable to the following items (in thousands):





2008
                      
                      
                      2007Deferred
      tax assets:Net
      operating loss carryforwards
                      
                      $
                      75,090
                      
                      
                      $
                      47,209R&D
      expense taken on equipment and intellectual property
                      
                      
                      3,369
                      
                      
                      
                      8,022Impairment
      losses
                      
                      
                      5,262
                      
                      
                      
                      1,892Compensation
      and benefit accruals
                      
                      
                      1,029
                      
                      
                      
                      694Depreciation
      and amortization
                      
                      
                      523
                      
                      
                      
                      1,726Other
                      
                      
                      1,065
                      
                      
                      
                      (148
                      )Gross
      deferred tax asset
                      
                      
                      86,338
                      
                      
                      
                      59,395Valuation
      allowance
                      
                      
                      (81,111
                      )
                      
                      
                      (59,395
                      )Deferred
      tax asset, net
                      
                      
                      5,227
                      
                      
                      
                      -Deferred
      tax liability:Intangible
      assets
                      
                      
                      (5,437
                      )
                      
                      
                      -Other
                      
                      
                      (187
                      )
                      
                      
                      -Gross
      deferred tax liability
                      
                      
                      (5,624
                      )
                      
                      
                      -Net
      deferred tax liability
                      
                      $
                      (397
                      )
                      
                      $
                      -





The
deferred tax assets reflect a reduction of approximately $17,000,000 to reflect
the limits on our ability to use net operating loss carryforwards in existence
in January 2002 due to the change in ownership that occurred in January
2002.





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 Ener1’s 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
Ener1 has recorded a valuation allowance of $81,111,000 and $59,395,000 for the
year ended December 31, 2008 and 2007, respectively. The valuation allowance
recorded in the financial statements reduces deferred tax assets to an amount
that represents management’s best estimate of the amount of such deferred tax
assets that more likely than not will be realized.





Ener1 has
net operating loss (“NOL”) carryforwards available to offset future taxable
income of approximately $187,388,000 and $147,000,000 at December 31, 2008 and
2007, 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 excludes $50,677,000 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 $40,000 of annual
taxable income, as well as any unrealized appreciation on assets existing at the
time of the ownership change.




- 60
-


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





2008
                  
                  
                  2007Statutory
      rate applied to income before taxes
                  
                  
                  35.0
                  %
                  
                  
                  35.0
                  %Non-taxable
      items:Derivative
      income
                  
                  
                  9.5
                  %
                  
                  
                  24.0
                  %Accretion
      of discounts
                  
                  
                  -22.7
                  %
                  
                  
                  35.9
                  %Other
                  
                  
                  -0.3
                  %
                  
                  
                  1.1
                  %State
      income tax net of federal tax benefit
                  
                  
                  3.3
                  %
                  
                  
                  3.3
                  %Foreign
      income tax benefit at different rate
                  
                  
                  -17.2
                  %
                  
                  
                  0.0
                  %Increase
      in valuation allowance
                  
                  
                  -24.9
                  %
                  
                  
                  -99.4
                  %Total
      income tax provision
                  
                  
                  -17.2
                  %
                  
                  
                  0.0
                  %





Uncertain
Tax Positions


As of
January 1, 2007 Ener1 adopted FIN 48 which prescribes a comprehensive model for
how a company should recognize, measure, present, and disclose in its financial
statements uncertain tax positions that a company has taken or expects to take
on a tax return.  Ener1 has not taken a tax position that, if challenged,
would have a material effect on the financial statements or the effective tax
rate for the twelve months ended December 31, 2008, or during the prior three
years applicable under FIN 48.





As part
of the acquisition of Enertech on October 24, 2008, Ener1 performed an analysis
for uncertain tax positions of Enertech in accordance with FIN 48.  As
a result of this analysis Enertech recorded $264,000 as a provision for
uncertain tax positions as of December 31, 2008 which is reflected in the
accompanying consolidated balance sheet in accrued income
taxes.  There is no accrued interest expense or penalties relating to
the unrecognized tax benefit at December 31, 2008.  When applicable,
Enertech will record interest and penalties on unrecognized tax benefits as
interest expense.





Ener1 is
subject to income taxes in U.S. and non-U.S. jurisdictions, as well as various
states.  Judgment is required in determining the worldwide provision
for income taxes and recording the related assets and liabilities. In the
ordinary course of Ener1’s business, there are several transactions and
calculations where the ultimate tax determination is uncertain.





Ener1 is
open to examination by the Internal Revenue Service and various states for
fiscal years 1998 to the present. These tax years are still open to audit as net
operating losses incurred in those years may be subject to examination. Ener1is
currently not under any income tax examinations.





Note
11 – Derivatives





Ener1
follows the provision in SFAS 133, Accounting for Derivative
Instruments and Hedging Activities and EITF 00-19, Accounting for Derivative Financial
Instruments Indexed to and Potentially Settled in, a Company's Own Stockand concluded that the conversion feature of (i) the 5% Senior Secured
Convertible Debentures (the “2004 Debentures”), (ii)  the 7.5% Senior
Secured Convertible Debentures (the “2005 Debentures”) and (iii) the warrants
associated with the 2005 Debentures (the “2005 Debenture Warrants”) should be
treated as separate liabilities on the balance sheet.





The fair
values of the derivative liability associated with the 2004 Debentures and 2005
Debentures was determined using market based lattice pricing models
incorporating readily observable market data and management
assumptions.   The fair values of the derivative liabilities
associated with the 2005 Debenture Warrants was determined using a Black-Scholes
Model.  Unrealized changes in the value of these derivatives are
recorded in the consolidated statement of operations as a gain or loss on
derivative liabilities.





During
the three months ended March 31, 2008, the 2004 Debentures and 2005 Debentures
were converted into shares of Ener1 common stock and were no longer treated as
derivative liabilities, including the 2005 Debenture Warrants.  The
fair value of each derivative was marked to market and a gain on derivative
liabilities was recorded.





- 61
-





A summary
of the changes in the balance of the derivative liability, as of March 31, 2008
is as follows (in thousands):




AdjustmentsMarch 31,
                  
                  
                  December 31,
                  
                  
                  for
                  
                  
                  (Gain)2008
                  
                  
                  2007
                  
                  
                  Conversion
                  
                  
                  Loss2004
      Debentures compound derivative
                  
                  
                  -
                  
                  
                  
                  4,973
                  
                  
                  
                  (1,836
                  )
                  
                  
                  (3,137
                  )
                  (a)2005
      Debentures compound derivative
                  
                  
                  -
                  
                  
                  
                  1,188
                  
                  
                  
                  (725
                  )
                  
                  
                  (463
                  )
                  (a)2005
      Debenture Warrants
                  
                  
                  -
                  
                  
                  
                  3,983
                  
                  
                  
                  (3,647
                  )
                  
                  
                  (336
                  )
                  (b)$
                  -
                  
                  
                  $
                  10,144
                  
                  
                  $
                  (6,208
                  )
                  
                  $
                  (3,936
                  )





(a)
            Ener1’s
      obligations relating to the 2004 Debentures and 2005 Debentures were
      settled when the debentures were converted into shares of Ener1’s common
      stock.  As a result, the 2004 Debentures and 2005 Debentures are
      no longer deemed to be derivatives under SFAS 133 and EITF
      00-19.  The debenture conversions were recorded at various dates
      during the three months ended March 31, 2008.  Each debenture
      conversion was valued at fair value on the date of conversion and a
      corresponding derivative gain or loss was recorded.  The
      remaining derivative liability was recorded as a contribution to paid in
      capital on such date.


(b)
            As
      a result of the conversion of all the outstanding 2005 Debentures, these
      warrants were deemed to no longer be derivatives under SFAS 133 and EITF
      00-19.  The 2005 Debenture Warrants were valued at fair value on
      March 26, 2008 with a corresponding gain on derivatives.  The
      remaining derivative liability was then recorded as a contribution to paid
      in capital on such date.





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





Lattice
Valuation Model





Ener1
valued the compound embedded derivative features in the 2004 Debentures and 2005
Debentures using a Lattice Model with the assistance of a valuation consultant.
The lattice model valued the compound embedded derivatives based on a
probability weighted discounted cash flow model. This model was based on future
projections of the five primary alternatives possible for settlement of the
features included within the compound embedded derivative at the time,
including: (1) payments are made in cash, (2) payments are made in stock, (3)
the holder exercises its right to convert the debentures, (4) Ener1 exercises
its right to convert the debentures and (5) Ener1 defaults on the
debentures.





Ener1
used the model to analyze various economic factors, develop a set of
potential scenarios and determine the probability of each scenario occurring
over the remaining term of the debentures based on management’s projections. The
probabilities were used to create a discounted weighted average cash flow for
each scenario with and without the compound embedded derivative in order to
determine a value for the compound embedded derivative.





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





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Black-Scholes
Valuation Model


Ener1
used the Black-Scholes pricing model to determine the fair values of the 2005
Debenture Warrants. The model uses market sourced inputs such as interest rates,
stock prices, and option volatilities, the selection of which requires
management’s judgment, and which may impact net income or loss.





Ener1
uses volatility rates based upon the closing stock price of its common
stock since January 2002, when Ener1 underwent a change in control. Ener1
determined that share prices prior to this period do not reflect the ongoing
business valuation of its current operations. Ener1 uses a risk free
interest rate which is the U.S. Treasury bill rate for securities with a
maturity that approximates the estimated expected life of a derivative or
security. Ener1 uses the closing market price of the common stock on the date of
issuance of a derivative or at the end of a quarter when a derivative is valued
at fair value. The volatility factor used in the Black-Scholes pricing model has
a significant effect on the resulting valuation of the derivative
liabilities on the balance sheet. The volatility has ranged from 296% to 128%
during the last four years.





The
following table shows the volatility, risk free interest rate and market price
used in the calculation of the Black-Scholes call value for each derivative at
issuance date and at March 31, 2008:





Issue Date
                      
                      Volatility
                      
                      
                      Risk-Free
                        Interest
                        Rate
                      
                      
                      Market
                        Price
                      
                      
                      Term
                        inYearsValuation
      inputs at issuance date for:2005
      Debenture Warrants
                      
                      3/11/2005
                      
                      
                      135
                      %
                      
                      
                      3.5
                      %
                      
                      $
                      5.25
                      
                      
                      
                      5Valuation
      inputs at:March
      26, 2008
                      
                      
                      
                      
                      128
                      %
                      
                      
                      1.8
                      %
                      
                      $
                      5.60
                      
                      
                      
                      2





Note
12 – Convertible Bonds, Convertible Debentures and Convertible
Bonds





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 $9,173,000 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 SFAS No. 133, Accounting for Derivative
Instrumentsand Hedging Activities, and
EITF No.98-5, Accounting for
ConvertibleSecurities with Beneficial
Conversion Features or Contingently Adjustable Conversion Ratios, and the
beneficial conversion feature had no intrinsic value at the inception
date.  It was determined that the conversion feature did not meet the
definition of an embedded derivative under the provisions of SFAS 133 and EITF
00-19 and therefore was not bifurcated from the host instrument and recorded as
a separate liability.





Ener1
owns approximately 96% of the outstanding balance of the convertible bonds at
December 31, 2008 and as a result has eliminated the principal and related
interest, in consolidation.  The remaining outstanding convertible
bonds, as of December 31, 2008, are as follows (in thousands):





Convertible
      bond
                    
                    $
                    367Add:
      long-term accrued interest
                    
                    
                    29Total
                    
                    
                    396Less:
      portion due within one year
                    
                    
                    -Long-term
      portion
                    
                    $
                    396




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2004
Senior Secured Convertible Debentures


In
January 2004, Ener1 issued $20,000,000 in aggregate principal amount of the 2004
Debentures and warrants to purchase 2,285,715 shares of Ener1’s common stock.
The net proceeds of the issuances were $18,527,000.





On March
11, 2008, $4,000,000 of principal was converted into 761,905 shares of common
stock of Ener1 at a per share conversion price of $5.25 rather than the $5.46
current conversion price and an expense related to the inducement to convert
debt of $203,000 was recorded for the 29,304 additional shares
received.  On March 20, 2008, all $5,634,048 of remaining outstanding
principle plus $119,036 of accrued interest was converted into 1,053,678 shares
of common stock of Ener1 at a per share conversion price of $5.46.  At
the issuance date, the 2004 Debentures were convertible at a price of $8.75 per
share, which has been adjusted for dilutive issuances of common
stock.





The
warrants to purchase 2,285,715 shares of common stock had an exercise price of
$17.57 per share at the issuance date, subject to adjustment. As of December 31,
2008, the adjusted exercise price was $8.88 per share. The warrants are
exercisable at any time through January 21, 2014.





Ener1 has
accounted for the conversion option in the 2004 Debentures as a derivative
liability in accordance with SFAS 133 and EITF 00-19.  The terms of
the 2004 Debentures 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 under SFAS 133 and Derivatives
Implementation Group Issue No. B15.  Upon completion of conversion,
the compound embedded derivative liabilities were treated as a contribution to
additional paid in capital.





2005
Senior Secured Convertible Debentures


In March
2005, Ener1 issued $14,225,000 in aggregate principal amount of the 2005
Debentures and warrants to purchase 1,016,072 shares of Ener1’s common stock.
The net proceeds of the issuances were $13,134,000.





As of
March 26, 2008, the outstanding principal amount of $2,080,933 plus $54,689 of
accrued interest was converted into 442,158 shares of common stock of Ener1 at a
per share conversion price of $4.83.  At the issuance date, the 2005
Debentures were convertible at a price of $7.00 per share, which has been
adjusted for dilutive issuances of common stock.





The 2005
Debenture Warrants were divided into Series A and Series B.  The
Series A warrants to purchase 609,643 shares of common stock had an exercise
price of $8.05 per share at the issuance date, subject to adjustment; as of
December 31, 2008, the adjusted exercise price was $5.25 per
share.  The Series B warrants to purchase 406,429 shares of common
stock had an exercise price of $8.75 per share at the issuance date, subject to
adjustment; as of December 31, 2008, the adjusted exercise price was $5.60 per
share.  The warrants are exercisable at any time through March 11,
2010.





Ener1 has
accounted for the conversion option in the 2005 Debentures as a derivative
liability in accordance with SFAS 133 and EITF 00-19.  The terms of
the 2005 Debentures 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 under SFAS 133 and Derivatives
Implementation Group Issue No. B15.  Upon completion of conversion,
the compound embedded derivative liabilities were treated as a contribution to
additional paid in capital.





Convertible
Notes and Warrants


During
2006 and 2007, Ener1 Group, a related party to Ener1, loaned Ener1 an aggregate
principal amount of $11,960,000.  Ener1’s obligation to repay Ener1
Group was recorded as subordinated convertible debt pursuant to notes issued,
the (“Group Notes”), which bear interest at 10% per annum.





In
connection with the Group Notes, Ener1 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 Ener1 recorded $583,000 in warrant
modification expense.  All warrants have a five-year
term.





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The Group
Notes were subordinated to the rights of the holders of the 2004 and 2005
Debentures. Once Ener1's obligations under the 2004 and 2005 Debentures have
been satisfied, the Group Notes can be converted, at Ener1 Group's option, into
shares of Ener1’s common stock at a conversion price of $3.50 per
share.





In
connection with the satisfaction of Ener1’s obligations under the 2004 and 2005
Debentures, Ener1 Group converted the $11,960,000 of outstanding principal and
$1,884,717 in accrued interest into 3,955,634 shares of Ener1’s common stock on
March 26, 2008.





As an
inducement for Ener1Group’s conversion of the Group Notes, Ener1 issued 142,858
warrants with an exercise price of $5.95 per share to Ener1
Group.  The warrants are exercisable at any time through March 26,
2013.  Ener1 used the Black-Scholes pricing model to value the
warrants with a risk-free interest rate of 1.78%, the current stock price, at
the date of issuance, of $5.60 per share, the exercise price of the warrants of
$5.95 per share, the term of five years and volatility of
127.64%.   The fair value of the warrants of $680,000 has been
recorded to interest expense as an inducement to convert debt on March 26,
2008.





Ener1 had
been accounting for the warrants and conversion features of the Group Notes as a
beneficial conversion feature in accordance with EITF 00-27. The proceeds of the
Group Notes were first allocated to the warrants at their relative fair value
and credited to additional paid in capital.  Ener1 used a
Black-Scholes pricing model to value the warrants issued with the Group
Notes.  Ener1 recorded a discount to the Group Notes equal to the
relative fair value of the warrants which is being 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 $3,608,000 has been recorded as a credit to additional 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
$5,249,997 and $3,608,000, respectively, was recorded to interest expense in
accordance with EITF 00-27.





Note
13 – 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 Ener1 common stock for an aggregate purchase
price of $8,000,000.





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.





The
Series A Preferred Stock is classified as temporary equity in accordance with
EITF Topic D-98, “Classification and Measurement of Redeemable Securities”
(“EITF D-98”), as the redemption feature is not solely within the control of
Ener1 and is deemed to be conditional in nature.  If EnerDel has not
redeemed all of the shares of Series A Preferred Stock on or before October 20,
2008, the holders may require EnerDel to redeem all of the Series A Preferred
shares on 10 days notice.  Ener1 can extend payment of the redemption
price over four quarterly installments.





In
connection with the issuance of the Series A Preferred Stock, Ener1 issued
warrants to purchase up to 250,000 shares of common stock at an exercise price
of $4.90 per share and warrants to purchase up to 750,000 shares of common stock
at an exercise price of $7.00 per share. The warrants are exercisable at any
time through October 20, 2011.  Ener1 is not required to register the
resale of the warrants or of the common stock issuable upon exercise of the
warrants.





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The fair
value of the warrants was determined utilizing the Black-Scholes pricing
model. The significant assumptions used in the valuation are: the exercise
prices as noted above; the market value of Ener1’s common stock on the date of
issuance: $4.62 per share (post split); expected volatility of 207%; a risk free
interest rate of approximately 1.74%; and a term of seven years.





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 $8,000,000 in
cash and a gain on early extinguishment of $2,073,000 was recorded to paid in
capital in accordance with EITF 86-32, Early Extinguishment of a
Subsidiary’s Mandatorily Redeemable Preferred Stock, as the redemption
feature was not solely within the control of Ener1 or Delphi.  The
gain was calculated as the difference between the carrying amount of the Series
A Preferred Stock of $10,073,000 and the cash paid for redemption of
$8,000,000.  Upon payment of the $8,000,000, all accrued and unpaid
dividends on the Series A Preferred Stock were deemed to be paid in
full.





The
following are the components of Series A Preferred Stock as of August 12, 2008
(redemption date) and December 31, 2007 (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
                  
                  
                  5,360Cumulative
      dividends
                  
                  
                  2,516Carrying
      value
                  
                  $
                  10,073Carrying
      value as of August 12, 2008
                  
                  $
                  10,073Cash
      paid for redemption
                  
                  
                  8,000Gain
      on early redemption
                  
                  $
                  2,073





Note
14 – Minority Interest and Investment in Subsidiaries





Amounts
pertaining to the minority ownership interest held by third parties in the
operating results and financial position of Ener1’s majority owned subsidiaries
are reported as minority interest in the accompanying consolidated financial
statements.





Investment
in Enertech


In
October 2008, Ener1 purchased an 83% interest in Enertech, a Korean based
manufacturer of lithium-ion battery cells with manufacturing facilities and
equipment located in South Korea and distribution and sales offices in
Hackensack, New Jersey.  The consolidated financial statements include
100% of the assets and liabilities of Enertech and the ownership interest of the
minority investors is recorded as a minority interest. The consolidated
statement of operations includes 100% of the operations of Enertech and the
minority interest income equal to 17% of Enertech’s operating income is
reflected in minority interest in consolidated subsidiaries.





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, 2008, there are 475,000 stock options
outstanding which represent 1.6%, on a fully diluted basis, of the outstanding
ownership of Enertech.





In
January 2009, Ener1 purchased an additional ownership interest in Enertech by
issuing 385,936 shares of Ener1 common stock valued at approximately $2,597,000
based on the closing stock price of $6.73 on the effective date of the
closing.   As a result, Ener1’s interest in Enertech increased
from 83% to 89%, on a fully diluted basis.





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Investment
in EnerDel


In 2004,
at the initial date of capitalization, Ener1 received an 80.5% equity ownership
interest in EnerDel.  The consolidated financial statements include
100% of the assets and liabilities of EnerDel, and the ownership interest of
Delphi, the minority investor, was originally recorded as a minority interest.
The consolidated statement of operations includes 100% of the operations of
EnerDel, and the minority 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 in minority interest in consolidated
subsidiaries.





The
minority interest balance sheet amount was reduced to zero during 2005 as a
result of EnerDel’s cumulative losses, and no additional minority interest in
income or losses has been recorded.  Minority interest in consolidated
subsidiaries was reduced by the dividends and accretion on the Series A
Preferred Stock in the amount of $1,495,000 and $2,001,000 for the years ended
December 31, 2008 and 2007, respectively.





On August
12, 2008, Ener1 acquired the 19.5% remaining interest in its 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 $32,012,000, including $22,429,000 for
the shares of Ener1 common stock based on the closing price reported by the
American Stock Exchange on the date of acquisition, $8,968,000 for the
forgiveness of receivables, due from Delphi, net of payables due to Delphi,
$195,000 for the revised exercise price of certain warrants held by Delphi and
$420,000 in direct costs of the acquisition.





Investment
in EnerStruct


In 2003,
at the initial formation of the joint venture, Ener1 received a 49% equity
ownership interest in EnerStruct, a Japanese company.  As of March 31,
2007, Ener1’s investment was reduced to zero, which represented Ener1’s share in
the losses of EnerStruct through such date.  In September 2007, Ener1
and the majority owner, ITOCHU, agreed to terminate the joint venture and
EnerStruct’s operations ceased.





Under the
agreement terminating the joint venture, Ener1 (i) issued 57,143 shares of Ener1
common stock valued at $100,000 to an unrelated third party, (ii) paid $200,000
in liquidation expenses and (iii) received $300,000 of property and equipment
from EnerStruct.





On
September 12, 2007, Ener1 also purchased from ITOCHU certain intangible assets
totaling approximately $1,353,000.  The purchase consideration was
comprised of 476,190 shares of Ener1 common stock valued at $833,000, cash of
$150,000 and issued short-term notes totaling $370,000.  The payment
was accounted for as purchased research and development costs.  This
acquisition of research and development did not meet the definition of a
business under Regulation S-X, Rule 11-01(d).





Note
15 – Related Party Transactions





Intercompany
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 Chief Financial Officer of Ener1 and the Chief Financial Officer of Ener1
Group.  This agreement ceased in January 2008.





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In
February 2007, Ener1 entered into an agreement with Ener1 Group under which
Ener1 agreed to pay 40% of the total salary and related costs, including travel
expenses, for Charles Gassenheimer for services Mr. Gassenheimer would perform
for Ener1.  In January 2008, the percentage was increased to
67%.  In August 2008, Mr. Gassenheimer was appointed Chief Executive
Officer of Ener1 in addition to his role as Chairman of the
Board.  The terms of the agreement have not been further amended as
Mr. Gassenheimer is not receiving additional compensation for this added
responsibility.





Financing
Transactions


Financing
transactions with Ener1Group are approved by the independent members of Ener1’s
board of directors.





Effective
December 29, 2008, Ener1 and Ener1 Group entered into a Line of Credit
Agreement, (the “Agreement”) to establish a line of credit in the aggregate
principal amount of $30,000,000 for a period of 18 months or until Ener1
completes a public equity offering, whichever occurs earlier.  Through
March 31, 2009, the maximum amount that Ener1 can borrow is $10,000,000 which
may be drawn in $500,000 increments.  Subsequent to March 31, 2009,
Ener1 may borrow up to the face amount of the Agreement in increments of
$500,000 or, if less, the remaining balance of the Agreement.  All
funds advanced pursuant to the Agreement will bear interest at 8.0% per
annum.  As of December 31, 2008 there are no amounts outstanding under
this line of credit and in February 2009, Ener1 advanced $5,000,000 from the
line of credit.





As a
commitment fee, Ener1 issued to Ener1 Group warrants to purchase up to 1,250,000
shares of Ener1 common stock at an exercise price of $8.25 per
share.  The warrants are immediately exercisable and expire two years
after the date of grant.  Ener1 used a Black-Scholes pricing model to
value the warrants and the fair value of $5,087,500 has been recorded as
deferred financing costs and amortized to interest expense over the term of the
line of credit agreement.





In
addition to the commitment fee, Ener1 is obligated to issue to Ener1 Group
warrants to purchase additional shares of Ener1 common stock, each time an
advance is made under the Agreement, equal to the amount of the advance divided
by $20 with an exercise price equal to $8.25 per share.  In connection
with the $5,000,000 advance in February 2009, Ener1 issued to Ener1 Group
warrants to purchase up to 250,000 shares of Ener1 common
stock.  Using a Black-Scholes pricing model to value of the warrants,
the fair value of $874,000 will be recorded as a reduction in proceeds and
amortized to interest expense over the term of the Agreement.





Note
16 – Stock Based Compensation





At
December 31, 2008, Ener1 had eight active stock-based employee, executive,
director, advisory board and consultant compensation plans which provide for the
granting of incentive and non-incentive stock options to officers, directors,
employees and consultants.  The Compensation Committee or the Board of
the Directors administers the plans and has the authority to determine the
optionees 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 Board of Directors shall not be less
than the fair market value of Ener1 common stock at date of grant.





In August
2008, the Board of Directors of Ener1 approved the amendment of the stock-based
plans to provide for the acceleration of unvested stock options in the event of
a corporate restructuring wherein the current shareholders of Ener1 would cease
to have a greater than 50% interest in the surviving entity.





Valuation and Expense Information
under SFAS 123R


Ener1
recorded share-based compensation costs related to stock-based employee plans of
$2,984,000 and $1,366,000 for the years ended December 31, 2008 and 2007,
respectively.  As required by SFAS 123R, Ener1 estimates forfeitures
of employee stock options and recognizes compensation cost only for the portion
of those awards expected to vest. Forfeiture rate estimates for each plan are
based on actual experience through December 31, 2008 and are adjusted annually
to reflect actual forfeiture experience as needed.  Included in the
stock-based compensation cost of $2,984,000 is $800,000 in adjustments to
reflect Ener1’s actual forfeiture rate and experience for vested
awards.








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Ener1
estimates the fair value of each stock option on the date of grant using a
Black-Scholes option valuation model, applying the assumptions below, and
amortizes the estimated fair value to expense over the option’s vesting period
using the straight-line attribution approach.





Expected
Term


The
expected term represents the period over which the share-based awards are
expected to be outstanding. It has been determined using the “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


Ener1
bases the risk-free interest rate used in its assumptions on the implied yield
currently available on U.S. Treasury issues with a remaining term equivalent to
the stock option award’s expected term.





Expected
Volatility


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





Expected
Dividend Yield


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





The fair
value of each stock option grant is estimated on the date of grant using a
Black-Scholes pricing model and is based on the following key assumptions for
the year ended December 31, 2008:





Expected
      term
                          
                          3 -
      4 yearsRisk
      free interest rate
                          
                          
                          1.55% - 3.72%Expected
      volatility
                          
                          
                          113%
      - 129%Expected
      dividend yield
                          
                          
                          0





Summary
of Stock Options


A summary
of the changes in the stock options outstanding under all of Ener1’s stock
option plans described above as of December 31, 2008 and 2007 is as
follows:





Options
                              
                              Number of
                                Options
                              
                              
                              Weighted
                                Average
                                ExercisePrice
                              
                              
                              Average
                                Remaining
                                Contractual
                                Term in
                                Years
                              
                              
                              Intrinsic ValueOutstanding
      at 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
                              )
                              
                              $
                              2.12Cancelled
                              
                              
                              -
                              
                              
                              $
                              0.00Outstanding
      at 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
                              )
                              
                              $
                              1.88Outstanding
      at December 31, 2008
                              
                              
                              3,957,621
                              
                              
                              $
                              3.34
                              
                              
                              
                              4.5
                              
                              
                              $
                              14,713,862Exercisable
      at December 31, 2008
                              
                              
                              2,765,297
                              
                              
                              $
                              3.14
                              
                              
                              
                              4.4
                              
                              
                              $
                              11,111,705




- 69
-




The
following summarizes Ener1’s outstanding and exercisable options and the
respective exercise prices at December 31, 2008:
 
 Weighted
                            
                            
                            
                            
                            
                            WeightedRange of
                            
                            No. of options
                            
                            
                            Average
                            
                            
                            No. of options
                            
                            
                            Averageexercise price
                            
                            outstanding
                            
                            
                            Exercise Price
                            
                            
                            exercisable
                            
                            
                            Exercise Price$0.49
      - $1.61
                            
                            
                            932,578
                            
                            
                            $
                            1.60
                            
                            
                            
                            662,106
                            
                            
                            $
                            1.59$2.10
      - $4.20
                            
                            
                            1,647,575
                            
                            
                            $
                            2.33
                            
                            
                            
                            1,343,761
                            
                            
                            $
                            2.21$4.83
      - $4.90
                            
                            
                            570,465
                            
                            
                            $
                            4.46
                            
                            
                            
                            266,100
                            
                            
                            $
                            4.90$5.18
      - $6.79
                            
                            
                            592,001
                            
                            
                            $
                            6.43
                            
                            
                            
                            431,186
                            
                            
                            $
                            6.70$7.15
      - $7.63
                            
                            
                            215,002
                            
                            
                            $
                            7.20
                            
                            
                            
                            62,144
                            
                            
                            $
                            7.56Totals
                            
                            
                            3,957,621
                            
                            
                            $
                            3.34
                            
                            
                            
                            2,765,297
                            
                            
                            $
                            3.14
 
 The
following table summarizes the status of Ener1’s non-vested stock options since
January 1, 2007:
 
 Non-vested optionsWeightedAverageNo. of options
                          
                          
                          Fair ValueNon-vested
      at January 1, 2008
                          
                          
                          1,918,582
                          
                          
                          $
                          2.57Granted
                          
                          
                          458,940
                          
                          
                          $
                          4.70Vested
                          
                          
                          (673,083
                          )
                          
                          $
                          2.37Forfeited
                          
                          
                          (362,114
                          )
                          
                          $
                          2.92Cancelled
                          
                          
                          (150,001
                          )
                          
                          $
                          1.74Non-vested
      at December 31, 2008
                          
                          
                          1,192,324
                          
                          
                          $
                          3.30
 
 As of
December 31, 2008 and 2007, there was $3,180,000 and $3,015,000, respectively,
of total unrecognized compensation cost related to the stock options granted
under Ener1 stock plans. That cost is expected to be recognized over a
weighted-average period of three years.
 
 2008
Option Activity
 
 Ener1
granted performance based options to employees to purchase up to 169,650 shares
of common stock at exercise prices ranging from $4.83 to $7.25 per
share.  These options are subject to 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 vest one-third per year over a three year
period.  The fair value of these options on the date of grant was
computed as $829,000, and in accordance with SFAS 123R will be expensed over the
vesting period.
 
 Ener1
granted incentive based options to employees to purchase up to 201,432 shares of
common stock at exercise prices ranging from $2.17 to $7.49 per
share.  Except for 71,430 options which vest in October 2009, all
options are scheduled to vest one-third per year over a three year
period.  The fair value of these options on the date of grant was
computed as $1,013,031 and in accordance with SFAS 123R, will be expensed over
the vesting period.
 
 Ener1
also granted incentive based options to members of the Board of Directors of
Ener1 to purchase up to 87,858 shares of common stock at exercise prices ranging
from $5.18 to $7.15 per share.  These options vest one-third per year
over a three year period.  The fair value of these options on the date
of grant was computed as $333,302, and in accordance with SFAS 123R will be
expense over the vesting period.
 
 Current
and former employees have exercised 647,848 options with exercise prices ranging
from $0.70 to $7.64 per share and Ener1 issued 643,858 shares of common
stock.  The total intrinsic value of these options on the date of
exercise was $3,356,000.
  - 70
-
  Options
to purchase up to 362,114 shares of common stock that were issued to various
employees and former employees were forfeited because vesting requirements were
not met or the options expired in accordance with their
terms.  Options to purchase up to 150,001 shares of common stock were
cancelled and were not accompanied by a concurrent grant (or offer to grant) a
replacement award.  In accordance with SFAS 123R, the previously
unrecognized compensation cost was recognized into expense on the cancellation
date.
 
 2007
Option Activity
 
 In May
2007, in connection with an employment agreement with Mr. Subhash Dhar to serve
as its President, Ener1 issued options to purchase 428,572 shares of common
stock. Effective October 31, 2007, Mr. Dhar resigned as President, his options
were forfeited effective on that date and any previously expensed amounts were
reversed in accordance with SFAS 123R.
 
 In
December 2007, Ener1 granted fully-vested options to purchase up to 142,858
shares of common stock to Mr. Charles Gassenheimer at an exercise price of
$4.90.  The fair value of these options on the date of grant was
computed as $610,000 and was immediately expensed.
 
 Ener1
granted performance based options to employees to purchase up to 515,451 shares
of common stock at exercise prices ranging from $1.96 to $4.90 per
share.  These options are subject to 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 vest one-third per year over a three year
period.  The fair value of these options on the date was computed as
$2,201,000, and in accordance with SFAS 123R will be expensed over the vesting
period.
 
 Ener1
granted incentive based options to employees to purchase up to 21,430 shares of
common stock at exercise prices ranging from $2.80 to $4.90 per
share.  The options are scheduled to vest one-third per year over a
three year period.  The fair value of these options on the date of
grant was computed as $70,500 and in accordance with SFAS 123R, will be expensed
over the vesting period.
 
 Ener1
also granted incentive based options to members of the Board of Directors of
Ener1 to purchase up to 114,288 shares of common stock at exercise prices
ranging from $2.10 to $4.20 per share.  These options vest one-third
per year over a three year period.  The fair value of these options on
the date of grant was computed as $272,000, and in accordance with SFAS 123R
will be expense over the vesting period.
 
 One
employee exercised options to purchase a total of 14,286 shares in March 2007 at
an exercise price of $0.00.  The total intrinsic value of these shares
on the date of exercise was $25,000.  Options to purchase 731,900
shares of common stock that were issued to various employees and former
employees were forfeited because vesting requirements were not met or the
options expired in accordance with their terms.
  - 71
-
 
 Note
17 - Warrants
 
 A summary
of the changes in warrants outstanding as of December 31, 2008 and 2007 is as
follows:
 
 Warrants
                    
                    Number of
                      Warrants
                    
                    
                    Weighted
                      Average
                      Exercise
                      Price
                    
                    
                    Average
                      Remaining
                      TerminYears
                    
                    
                    IntrinsicValueOutstanding
      and Exercisable at December 31, 2006
                    
                    
                    15,418,788
                    
                    
                    $
                    4.83
                    
                    
                    
                    5.6
                    
                    
                    $
                    -Granted
                    
                    
                    23,553,969
                    
                    
                    $
                    3.36Exercised
                    
                    
                    (5,660,437
                    )
                    
                    $
                    2.42Surrendered
                    
                    
                    (1,210,318
                    )
                    
                    $
                    9.50Forfeited
      or expired
                    
                    
                    -
                    
                    
                    
                    -Outstanding
      and Exercisable at December 31, 2007
                    
                    
                    32,102,002
                    
                    
                    $
                    4.00
                    
                    
                    
                    3.3
                    
                    
                    $
                    67,633,630Granted
                    
                    
                    3,952,858
                    
                    
                    $
                    7.68Exercised
                    
                    
                    (5,725,007
                    )
                    
                    $
                    5.25Surrendered
                    
                    
                    -
                    
                    
                    
                    -Forfeited
      or expired
                    
                    
                    (2,571,429
                    )
                    
                    $
                    5.25Outstanding
      and Exercisable at December 31, 2008
                    
                    
                    27,758,424
                    
                    
                    $
                    4.10
                    
                    
                    
                    3.2
                    
                    
                    $
                    95,607,859
 
 The
following summarizes Ener1’s outstanding and exercisable warrants and the
respective exercise prices at December 31, 2008:
 
 WeightedRange of
                    
                    No. of warrants
                    
                    
                    Averageexercise price
                    
                    outstanding
                    
                    
                    Exercise Price$2.10
      - $2.80
                    
                    
                    18,880,998
                    
                    
                    $
                    2.30$4.83
      - $5.95
                    
                    
                    2,166,321
                    
                    
                    $
                    5.31$7.50
      - $8.88
                    
                    
                    6,095,717
                    
                    
                    $
                    8.17$10.50
      - $17.57
                    
                    
                    615,388
                    
                    
                    $
                    14.6227,758,424
                    
                    
                    $
                    4.10
 
 The fair
value of each warrant grant is estimated on the date of grant using a
Black-Scholes pricing model and is based on the following key assumptions for
the year ended December 31, 2008:
 
 Expected
      term
                    
                    2 -
      5 yearsRisk
      free interest rate
                    
                    0.78%
      - 1.78%Expected
      volatility
                    
                    93.09%
      - 127.64%Expected
      dividend yield
                    
                    0%
 
 2008
Warrant Activity
 
 In April
2008, Ener1 issued warrants to purchase up to 142,858 shares of Ener1 common
stock with an exercise price of $5.95 per share to Ener1 Group as an inducement
to convert all the outstanding Group Notes.  The warrants are
exercisable at any time through March 2013.  The fair value of the
warrants was $680,000 and was recorded to interest expense as an inducement to
convert debt.
  - 72
-
  In
connection with Ener1’s equity private placement in November 2007, 8,228,578
warrants with an exercise price of $5.25 and an expiration date of May 19, 2008
were issued.  Through the expiration date, 5,657,149 warrants were
exercised resulting in cash proceeds to Ener1 of $29,700,000.  The
remaining 2,571,429 warrants expired unexercised on May 19, 2008.
 
 Warrant
holders exercised 67,858 “cashless” warrants with exercise prices ranging from
$3.50 to $5.60 per share.  Ener1 issued 25,832 shares of common stock
pursuant to such cashless exercise.
 
 In
connection with the acquisition of Enertech, Ener1 issued 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.  The fair value of the
warrants was $8,781,000 was recorded as a direct cost of the
acquisition.   In connection with the acquisition of 19.5%
remaining interest in the EnerDel subsidiary, the exercise price of 750,000
warrants held by Delphi was revised from $7.00 per share to $5.25 per
share.  The fair value of the warrant modification was $195,000 and
was recorded as a direct cost of the acquisition.
 
 In
connection with the $30,000,000 line of credit, Ener1 issued to Ener1 Group
warrants to purchase up to 1,250,000 shares of Ener1 common stock at an exercise
price of $8.25 per share.  The warrants are immediately exercisable
and expire two years after the date of grant.  Ener1 used a
Black-Scholes pricing model to value the warrants and the fair value of
$5,087,500 as deferred financing costs which will be amortized over the 18 month
term of the line of credit agreement.
 
 2007
Warrant Activity
 
 In
January, Ener1 amended the terms of certain previously issued warrants to Ener1
Group to purchase up to 2,285,714 shares of Ener1 common stock to reduce
the exercise prices ranging from $10.50 to $14.00 per share to $1.75 per
share.  Following the amendment, Ener1 Group exercised all the
warrants and purchased 2,285,714 shares of Ener1 common stock for $4,000,000. In
connection with this transaction, Ener1 issued to Credit Suisse Securities
(USA), LLC, five year warrants to purchase up to 714,286 shares of Ener1’s
common stock at an exercise price of $2.10 per share and also issued to Charles
Gassenheimer five year warrants to purchase up to 71,429 share of Ener1’s common
stock at an exercise price of $2.10 per share. There was no warrant modification
expense to record as the fair value of the modified warrant was less than the
fair value of the original warrant.
 
 In
February, in connection with the issuance of certain Group Notes, Ener1 issued
to Ener1 Group immediately exercisable warrants to purchase up to 1,285,715
shares of Ener1’s common stock at an exercise price of $3.50 per share and
immediately exercisable warrants to purchase up to 2,571,429 shares of Ener1’s
common stock at an exercise price of $4.20 per share. The exercise price for
both these warrants was subsequently reduced to $2.10 per share in connection
with the Ener1 Group Capital Commitment Agreement on June 29, 2007.
 
 Also in
February, Ener1 amended the terms of certain previously issued warrants to Ener1
Group to purchase up to 689,008 shares of Ener1 common stock to reduce the
exercise prices ranging from $3.50 to $10.50 per share to $1.75 per
share.  Following the amendment, Ener1 Group exercised all the
warrants and purchased 689,008 shares of Ener1 common stock $1,205,000. There
was no warrant modification expense to record as the fair value of the modified
warrant was less than the fair value of the original warrant.
 
 In May
2007, Ener1 amended the terms of certain previously issued warrants to Ener1
Group to purchase up to 2,685,715 shares of Ener1 common stock to reduce the
exercise price from $4.20 per share to $1.75 per share.  Following the
amendment, Ener1 Group exercised all the warrants and purchased 2,685,715 shares
of Ener1 common stock for $4,700,000. In connection with this transaction, Ener1
issued to Ener1 Group five year warrants to purchase up to 1,697,143 shares of
Ener1’s common stock with an exercise price of $2.10 per share. There was no
warrant modification expense to record as the fair value of the modified warrant
was less than the fair value of the original warrant.
 
 As part
of a purchase money financing agreement, Ener1 issued five year warrants to UTE
to purchase up to 14,286 shares of Ener1 common stock at an exercise price of
$3.50 per share.
  - 73
-
  As part
of a capital commitment agreement, Ener1 issued five year warrants to Ener1
Group to purchase up to 3,634,615 shares of Ener1 common stock at an exercise
price of $2.10 per share.
 
 In
October 2007, in connection with the election by Cofis to convert its Ener1
Series B Preferred Stock, Ener1 issued five year warrants to Cofis and its
designees to purchase 5,249,004 shares of Ener1 common stock at a purchase price
of $2.80 per share. As part of this transaction, Cofis surrendered warrants to
purchase 1,190,476 shares issued when Cofis purchased the Series B Preferred
Stock.
 
 In
November 2007, in connection with the election by Ener1 Group to convert its
Ener1 Series B Preferred Stock, Ener1 issued five year warrants to Ener1 Group
to purchase 87,484 shares of Ener1 common stock at a purchase price of $2.80 per
share. As part of this transaction, Ener1 Group surrendered warrants to purchase
19,842 shares issued when Cofis purchased the Series B Preferred
Stock.
 
 In
November 2007 in connection with an equity private placement, Ener1 issued 180
day warrants to the investors to purchase up to 8,228,578 shares of Ener1 common
stock at an exercise price of $5.25 per share.
 
 Note
18 - Segments
 
 Under
SFAS No. 131, Disclosures
about Segments of an Enterprise and Related Information, Ener1 uses the
“management” approach to reporting segments.  The management approach
designates the internal organization that is used by management for making
operating decisions and assessing performance as the source of reportable
segments.  SFAS No. 131 also requires disclosures about products and
services, geographic areas, and major customers.
 
 Under
SFAS No. 131, Ener1 has identified three business and reporting segments:
battery, fuel cell and nanotechnology.  The battery business develops
and markets advanced lithium batteries. The fuel cell business develops and
markets fuel cells and fuel cell systems. The nanotechnology business is
developing nanotechnology related manufacturing processes and
materials.
 
 The
accounting policies of the segments are the same as those described in the Summary of Significant Accounting
Policies. Transactions between segments, consisting principally of
product sales and purchases, are recorded at the consummated sales
price.
  - 74
-
  The
following table provides segment financial information (in
thousands):
 
 2008
                                                
                                                
                                                2007Net
      sales:Corporate
                                                
                                                $
                                                85
                                                
                                                
                                                $
                                                -Battery
                                                
                                                
                                                6,730
                                                
                                                
                                                
                                                101Fuel
      Cell
                                                
                                                
                                                33
                                                
                                                
                                                
                                                179Total
      net sales
                                                
                                                $
                                                6,848
                                                
                                                
                                                $
                                                280Interest
      expense:Corporate
                                                
                                                $
                                                12,026
                                                
                                                
                                                $
                                                17,233Depreciation
      and amortization expense:Corporate
                                                
                                                $
                                                219
                                                
                                                
                                                $
                                                116Battery
                                                
                                                
                                                1,730
                                                
                                                
                                                
                                                375Fuel
      Cell
                                                
                                                
                                                53
                                                
                                                
                                                
                                                27Nanotechnology
                                                
                                                
                                                18
                                                
                                                
                                                
                                                11Total
      depreciation and amortization expense
                                                
                                                $
                                                2,020
                                                
                                                
                                                $
                                                530Net
      loss before minority interest:Corporate
                                                
                                                $
                                                (5,100
                                                )
                                                
                                                $
                                                (20,026
                                                )Battery
                                                
                                                
                                                (27,943
                                                )
                                                
                                                
                                                (20,014
                                                )Fuel
      Cell
                                                
                                                
                                                (6,587
                                                )
                                                
                                                
                                                (7,132
                                                )Nanotechnology
                                                
                                                
                                                (1,771
                                                )
                                                
                                                
                                                (2,537
                                                )Total
      net loss before minority interest
                                                
                                                $
                                                (41,401
                                                )
                                                
                                                $
                                                (49,709
                                                )Corporate
      allocations:Corporate
                                                
                                                $
                                                (11,987
                                                )
                                                
                                                $
                                                (17,814
                                                )Battery
                                                
                                                
                                                8,800
                                                
                                                
                                                
                                                11,958Fuel
      Cell
                                                
                                                
                                                2,570
                                                
                                                
                                                
                                                4,315Nanotechnology
                                                
                                                
                                                617
                                                
                                                
                                                
                                                1,541Net
      income (loss)
                                                
                                                $
                                                -
                                                
                                                
                                                $
                                                -Assets:Corporate
                                                
                                                $
                                                10,910
                                                
                                                
                                                $
                                                26,091Battery
                                                
                                                
                                                130,169
                                                
                                                
                                                
                                                4,665Fuel
      Cell
                                                
                                                
                                                488
                                                
                                                
                                                
                                                497Nanotechnology
                                                
                                                
                                                164
                                                
                                                
                                                
                                                49Total
      assets
                                                
                                                $
                                                141,731
                                                
                                                
                                                $
                                                31,301Capital
      expenditures:Corporate
                                                
                                                $
                                                221
                                                
                                                
                                                $
                                                10Battery
                                                
                                                
                                                17,516
                                                
                                                
                                                
                                                398Fuel
      Cell
                                                
                                                
                                                113
                                                
                                                
                                                
                                                158Nanotechnology
                                                
                                                
                                                103
                                                
                                                
                                                
                                                3Total
      capital expenditures
                                                
                                                $
                                                17,953
                                                
                                                
                                                $
                                                569
 
 Ener1
records proceeds from cost-sharing grants as a reduction of research and
development expenses.  Proceeds from grants were $3,835,000 and
$910,000 for the years ended December 31, 2008 and 2007.
 
 Effective
October 31, 2008, Ener1 acquired Enertech, a Korean based manufacturer of
lithium-ion battery cells.  The acquisition is intended to expand our
production capabilities and accelerate the expansion of our EnerDel
operations.  As a result, Enertech has been included in the above
disclosure as a component of the battery segment.
  - 75
-
  Based on
Enertech’s foreign and domestic operations additional reportable segments have
been created based on geographic location.  The following table
provides Ener1’s geographic segment financial information (in
thousands):
 
 2008Net
      sales:U.S.
                                  
                                  $
                                  4,877South
      Korea
                                  
                                  
                                  5,544Intersegment
      transfers
                                  
                                  
                                  (3,573
                                  )Total
      net sales
                                  
                                  $
                                  6,848Interest
      expense:U.S.
                                  
                                  $
                                  11,956South
      Korea
                                  
                                  
                                  70Total
      interest expense
                                  
                                  $
                                  12,026Depreciation
      and amortization expense:U.S.
                                  
                                  $
                                  1,489South
      Korea
                                  
                                  
                                  531Total
      depreciation and amortization expense
                                  
                                  $
                                  2,020Net
      loss before minority interest:U.S.
                                  
                                  $
                                  (41,651
                                  )South
      Korea
                                  
                                  
                                  638Intersegment
      transfers
                                  
                                  
                                  (388
                                  )Net
      loss before minority interest
                                  
                                  $
                                  (41,401
                                  )Assets:U.S.
                                  
                                  $
                                  77,114,000South
      Korea
                                  
                                  
                                  64,617Total
      assets
                                  
                                  $
                                  141,731
 
 Note
19 – Commitments and Contingencies
 
 Litigation
 Ener1
receives communications from time to time alleging various claims. These claims
include, but are not limited to, employment matters, collections of accounts
payable, and allegations that certain of Ener1’s products infringe the patent
rights of other third parties.  Ener1 cannot predict the outcome of
any such claims or the effect of any such claims on its operating results,
financial condition, or cash flows.  As of December 31, 2008, there
were no material pending legal proceedings.
  - 76
-
  Lease
Commitments
 Approximate
future minimum lease payments under capital and operating leases subsequent to
December 31, 2008 are as follows, (in thousands):
 
 Capital
                      Leases
                    
                    
                    Operating
                      LeasesYear
      Ending December 31,2009
                    
                    $
                    2,517
                    
                    
                    $
                    1,1262010
                    
                    
                    2,517
                    
                    
                    
                    1,1492011
                    
                    
                    2,566
                    
                    
                    
                    1,0152012
                    
                    
                    183
                    
                    
                    
                    1,0392013
                    
                    
                    -
                    
                    
                    
                    731Thereafter
                    
                    
                    -
                    
                    
                    
                    1,845Total
      minimum payments
                    
                    
                    7,783
                    
                    
                    $
                    6,905Less:
      amounts representing interest
                    
                    
                    (1,200
                    )Present
      value of minimum lease payments
                    
                    
                    6,583Less:
      current portion
                    
                    
                    (2,003
                    )Long
      term capital lease obligation
                    
                    $
                    4,580
 
 Rent
expense totaled approximately $577,000 and $302,000 for the years ended December
31, 2008 and 2007, respectively.
 
 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 $6,432,000 as of
December 31, 2008.
 
 Note
20 – Subsequent Events
 
 On
January 6, 2009, Ener1 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, on a fully diluted basis from 83% to
89%.  The increase in ownership percentage will be accounted for in
accordance with SFAS 141R, Business
Combinations.
 
 On
January 7, 2009, Ener1 filed a registration statement on From S-3 to register
the resale of the shares issued to the sellers in the Enertech transaction, as
well as the shares issuable upon the exercise of 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.
 
 On
January 12, 2009, Ener1 Group, Ener1’s majority shareholder became one of a
number of lenders who have provided interim financing to Think Global AS of
Oslo, Norway (“Think”), a major customer for Ener1’s electric vehicle
lithium-ion battery, to allow them to focus their efforts towards the next
stages of the restructuring process, which include raising permanent equity
capital and returning to volume production. Ener1 Group has provided
approximately $3,573,000 in bridge financing to Think.
 
 On
February 3, 2009, Ener1 borrowed $5,000,000 from Ener1 Group pursuant to the
line of credit and committed to issue warrants to purchase up to 250,000 shares
of Ener1 common stock at an exercise price of $8.25.  The warrants are
immediately exercisable and expire two years after the date of
issue.  Using a Black-Scholes pricing model to value the warrants, the
fair value of $874,000 will be recorded as a discount to the liability recorded
and amortized to interest expense over the term of 18
months.
  - 77
-
  On
February 17, 2009, Ener1granted performance and incentive based options to
certain executives and employees to purchase up to 757,500 shares of common
stock at an exercise price of $4.05 per share.  These options are
subject to 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 vest
one-third per year over a three year period.  Ener1 estimated the fair
value of such options totaled approximately $2,318,000 based on the
Black-Scholes option pricing model with the following assumption: expected term
of four years, a 1.22% risk free rate, expected volatility of 114.86% and zero
dividends.
 
 Additionally,
on February 17, 2009, Ener1 issued fully vested options to purchase up to
200,000 shares of common stock to Charles Gassenheimer, the Chief Executive
Officer at an exercise price of $4.05 per share.  Ener1 estimated the
fair value of such options totaled approximately $652,000 based on the
Black-Scholes option pricing model with the following assumption: expected term
of five years, a 1.65% risk free rate, expected volatility of 114.03% and zero
dividends.
 
 Ener1
issued a total of 10,000 shares of restricted stock to certain executives and
employees on February 17, 2009.  These shares become exercisable one
year from the date of grant, February 17, 2010. The shares were valued at the
closing stock price on that day of $4.05, and approximately $41,000 will be
amortized over the one year vesting period.
  - 78
-
  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
  As of
December 31, 2008, we carried out an evaluation of the effectiveness of the
design and operation of our disclosure controls and procedures pursuant to
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 their evaluation of
our disclosure controls and procedures (as defined in the Exchange Act Rules
13a-15(e) and 15d-15(e)), our Chief Executive Officer and
Chief Financial Officer have concluded that as of December 31, 2008, such
disclosure controls and procedures were effective.
  Management's Annual Report on
Internal Control Over Financial Reporting
  Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting for the company. Internal control over
financial reporting is a process to provide reasonable assurance regarding the
reliability of our financial reporting for external purposes in accordance with
accounting principles generally accepted in the United States of America.
Internal control over financial reporting includes maintaining records that in
reasonable detail accurately and fairly reflect the transactions and
dispositions of our assets; provide reasonable assurance that transactions are
recorded as necessary for preparation of our financial statements; provide
reasonable assurance that receipts and expenditures of company assets are made
in accordance with management authorization; and provide reasonable assurance
that unauthorized acquisition, use or disposition of company assets that could
have a material effect on our financial statements would be prevented or
detected on a timely basis. Because of its inherent limitations, internal
control over financial reporting is not intended to provide absolute assurance
that a misstatement of our financial statements would be prevented or
detected.
 
 Pursuant
to Exchange Act Rules 13a-15(c) and 15d-15(c), management conducted an
evaluation of the effectiveness of our internal control over financial reporting
based on the framework inInternal Control – Integrated Framework (1992), issued by the Committee
of Sponsoring Organizations of the Treadway Commission. Based on this
evaluation, management concluded that the company’s internal control over
financial reporting was effective as of December 31, 2008.
 
 We
acquired Enertech effective October 31, 2008 and have excluded them from our
assessment of and conclusion on the effectiveness of internal control over
financial reporting as of December 31, 2008 because management has been focused
on integrating the business.  Enertech will be included in our
assessment as soon as reasonably practicable.
 
 The
effectiveness of our internal control over financial reporting as of
December 31, 2008 has been audited by Malone & Bailey PC, an
independent registered public accounting firm, as stated in their attestation
report which is included herein.
 
 Item
      9B.
              Other
      Information
 
 None.
  - 79
-
 
 PART
III
 
 Item
      10.
              Directors,
      Executive Officers and Corporate
Governance
 
 The term
of office of each of our directors will expire at our next shareholders meeting.
Our directors and executive officers are as follows:
  Name
                      
                      Age
                      
                      PositionCharles
      Gassenheimer
                      
                      35
                      
                      Director,
      Chief Executive Office and Chairman of the BoardPeter
      Novak
                      
                      56
                      
                      Director,
      Chief Technology Officer and PresidentKenneth
      Baker
                      
                      61
                      
                      DirectorMarshall
      Cogan
                      
                      71
                      
                      DirectorMark
      D’Anastasio
                      
                      54
                      
                      DirectorElliot
      Fuhr
                      
                      49
                      
                      DirectorKarl
      Gruns
                      
                      61
                      
                      DirectorLudovico
      Manfredi
                      
                      47
                      
                      DirectorThomas
      Snyder
                      
                      64
                      
                      DirectorNaoki
      Ota
                      
                      42
                      
                      Chief
      Operating OfficerUlrik
      Grape
                      
                      48
                      
                      Executive
      Vice PresidentGerard
      Herlihy
                      
                      56
                      
                      Chief
      Financial
Officer
 
 Charles Gassenheimer has been
our Chief Executive Office 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.
 
 Dr. Peter Novak has been our
President since November 2007 and our Chief Technology Officer since August
2008.  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 in process 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.
  - 80
-
  Kenneth Baker has been a
director of our company since July 2007.  He also serves on the
Governance and Nomination Committee as well as 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 non profit 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 Aero Vironment, 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 B.A. and M.B.A. from Harvard University.
 
 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 B.A. from Dartmouth College, an
M.A. from Yale University and an M.S. from 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 LLC in the Business Recovery Services division
and had 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.
  - 81
-
  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 an M.B.A from the Wharton School of Business, University of
Pennsylvania, with a concentration in Finance and he received his initial degree
from Institut d’Etudes Politiques de Paris, with a major in Economics and
Finance.
 
 Thomas Snyder has been a
director of our company since July 2007.  He serves on the Governance
and Nomination Committee of the board of directors.  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 master’s degree in business
administration from Indiana University.
 
 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
 
 Ulrik Grape has been our
Executive Vice President and Chief Executive Officer of EnerDel since January
2006. 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.
 
 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 CFO, of
Splinex Technology Inc., an affiliate of Ener1 and from September 2005 to
December 31, 2007 he additionally served as President of Splinex
Technology.  For the year before he joined Splinex, Mr. Herlihy
provided accounting, financing and acquisition advisory consulting services to
public and private companies.  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).
  - 82
-
  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 the 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),we
have received during the year ended December 31, 2008 and written
representations of the persons required to file said reports, we believe that
all reporting persons complied with these reporting requirements during fiscal
2008 except for the following late reports, each of which was due to
administrative error: Ener1 Group filed a Form 5 in January 2009 to report
delinquent transactions since 2002; two Forms 4 reporting the receipt of options
to purchase our common stock by each of Ulrik Grape and Gerard Herlihy which
were subsequently reported on a delinquent Form 5 in March 2009; a Form 3 and
three Form 4’s for Ludovico Manfredi for stock option awards for the years
2005-2007; three Form 4’s for Karl Gruns  for stock option awards for
the years 2004, 2006 and 2007; two Form 4’s for Marshall Cogan for a stock
option award in 2006 and the exercise of stock options in 2008, which were
subsequently reported on a delinquent Form 5 in March 2009; and a Form 3 for
Mark D’Anastasio when he joined the Board of Directors in August
2008.
 
 Code
of Ethics
 
 In March
2008 we adopted an amendment to our Business Code of Conduct, 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 promote: (1) honest and ethical
conduct, including the ethical handling of actual or apparent conflicts of
interests between personal and professional relationships; (2) full, fair,
accurate, timely and understandable disclosure in reports and documents that we
file with or submit to the SEC or in other public communications we make; (3)
compliance with applicable laws, rules and regulations; (4) prompt internal
reporting of violations of the Code to an appropriate person identified in the
Code; and (5) accountability for the adherence to the Code.Our Business
Code of Conduct 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 Business Code of Conduct can be found on our Internet website at www.ener1.com.
 
 Nomination
and Governance Committee
 
 The
Nomination and Governance Committee assists the Board of Directors in fulfilling
its responsibilities to shareholders, potential shareholders and the investment
community 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.
 
 Our
Nomination and Governance Committee has three members: Mr. Snyder, who serves as
Chairperson, Mr. Baker and Mr. Fuhr.  The Nomination and Governance
Committee did not meet during 2008 or 2007.
 
 Compensation
Committee
 
 The
Compensation Committee, formed in August 2008, assists the Board of Directors in
fulfilling its responsibilities to the shareholders, potential shareholders and
the investment community with respect to compensation programs and compensation
of executive.  The Compensation Committee has three member; Mr. Baker,
who serves as the Chairperson, Mr. Manfredi and Mr. Fuhr.  The
Compensation Committee convened and communicated via email on multiple occasions
during 2008.
  - 83
-
  Audit
Committee
 
 The Audit
Committee assists the Board of Directors 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 internal audit
process and our external auditors and our compliance with laws and regulations
and our code of conduct.
 
 Our Audit
Committee has three members: Mr. Karl Gruns, Mr. Ludovico Manfredi and Mr.
Elliot Fuhr. All three members are “independent” as defined under Rule 4200(a)
(15) of the National Association of Securities Dealers’ (“NASD”) Listing
Standards for NASDAQ-listed companies. The Board has determined Mr. Gruns meets
the SEC criteria of an “audit committee financial expert,” as defined in
Regulation S-B, Item 407(d)(5)(ii). The Audit Committee held twelve meetings
during 2008 and seven meetings during 2007.
 
 Item
      11.
              Executive
      Compensation
 
 Summary
Compensation Table
 
 The
following table sets forth information regarding the compensation paid during
2008 and 2007 to all individuals serving during 2008 as our Chief Executive
Officer and each of our two additional most highly compensated executive
officers who were serving as executive officers on December 31, 2008, (whom
we refer to collectively as the “named executive officers”).
 
 Name and Principal Position
                                              
                                              Year
                                              
                                              Salary
                                                ($)
                                              
                                              
                                              Bonus
                                                ($)
                                              
                                              
                                              Option Awards($)
                                              
                                              All Other
                                                Compensation($)
                                              
                                              Total
                                                ($)Charles
      Gassenheimer
                                              
                                              2008
                                              
                                              $
                                              500,000
                                              
                                              
                                              $
                                              -
                                              
                                              
                                              $
                                              -
                                              
                                              
                                              $
                                              -
                                              
                                              
                                              $
                                              500,000Chief
      Executive Officer (1)
                                              
                                              2007
                                              
                                              
                                              300,000
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              610,004
                                              (5)
                                              
                                              
                                              -
                                              
                                              
                                              
                                              910,004Dr.
      Peter Novak
                                              
                                              2008
                                              
                                              
                                              430,000
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              5,950
                                              (6)
                                              
                                              
                                              435,950Chief
      Executive Officer andPresident
      (2)
                                              
                                              2007
                                              
                                              
                                              415,540
                                              
                                              
                                              
                                              215,000
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              35,599
                                              (6)
                                              
                                              
                                              666,139Ulrik
      Grape
                                              
                                              2008
                                              
                                              
                                              300,000
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              170,003
                                              (7)
                                              
                                              
                                              -
                                              
                                              
                                              
                                              470,003Executive
      Vice President (3)
                                              
                                              2007
                                              
                                              
                                              250,000
                                              
                                              
                                              
                                              25,000
                                              
                                              
                                              
                                              366,003
                                              (7)
                                              
                                              
                                              -
                                              
                                              
                                              
                                              641,003Gerard
      Herlihy
                                              
                                              2008
                                              
                                              
                                              250,000
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              170,003
                                              (8)
                                              
                                              
                                              -
                                              
                                              
                                              
                                              420,003Chief
      Financial Officer (4)
                                              
                                              2007
                                              
                                              
                                              200,000
                                              
                                              
                                              
                                              12,500
                                              
                                              
                                              
                                              305,002
                                              (8)
                                              
                                              
                                              -
                                              
                                              
                                              
                                              517,502
 
 (1)
              Mr.
      Gassenheimer was appointed Chief Executive Officer on August 19, 2008 in
      addition to his role as Chairman as of the
  Board.
 
 (2)
              Dr.
      Novak resigned as Chief Executive Officer on August 19, 2008 and was
      appointed Chief Technology Officer.  Dr. Novak has retained his
      title as President and will continue to serve as a member of the Board of
      Directors.  Dr. Novak had been serving as Chief Executive
      Officer since December 28, 2006.  He does not receive any
      compensation for his services as a
director.
 
 (3)
              Mr.
      Grape has been our Executive Vice President since January
      2006.
 
 (4)
              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.
 
 (5)
              In
      December 2007, Mr. Gassenheimer was awarded options to purchase up to
      142,857 shares of our common stock.  In accordance with SFAS No.
      123R, the value of these options was determined using a Black-Scholes
      model.  Cross-reference is made to Part II, Item 8, Footnote No.
      16, Stock Based Compensation for assumptions made in the valuation of
      these options.
  - 84
-
 
 (6)
              Includes
      $5,950 for employee life insurance premiums paid in
      2008.  Includes $14,553 for employee life insurance premiums and
      $21,046 for automobile related payments paid in
  2007.
 
 (7)
              In
      January 2008 and December 2007, Mr. Grape was awarded options to purchase
      up to 35,715 shares and 85,715 shares, respectively, of our common
      stock.  In accordance with SFAS No. 123R, the value of these
      options was determined using a Black-Scholes
      model.  Cross-reference is made to Part II, Item 8, Footnote 16,
      Stock Based Compensation for assumptions made in the valuation of these
      options.  In December 2008 and 2007, Mr. Grape forfeited
      performance options to purchase up to 25,714 and 8,572 shares of our
      common stock, respectively.
 
 (8)
              In
      January 2008 and December 2007, Mr. Herlihy was awarded options to
      purchase up to 35,715 shares and 71,429 shares, respectively, of our
      common stock.  In accordance with SFAS No. 123R, the value of
      these options was determined using a Black-Scholes
      model.  Cross-reference is made to Part II, Item 8, Footnote 16,
      Stock Based Compensation for assumptions made in the valuation of these
      options.
 
 Employment
Agreements
 
 Effective
July 27, 2005, EnerDel, Inc. entered into an employment agreement with Mr.
Grape, under which Mr. Grape serves as its Chief Executive
Officer.  Mr. Grape’s salary under the agreement is initially $250,000
per year. The employment agreement may be terminated with or without cause (as
defined in the agreement) by EnerDel, Inc.  In the event of a
termination without cause or termination by Mr. Grape with good reason (as
defined in the agreement), EnerDel shall pay Mr. Grape severance in the form of
his base salary for a period of six months.  The agreement calls for
Mr. Grape to be awarded an immediately vested option to purchase 14,286 shares
of Ener1 common stock at an exercise price of $0.00 per share.  In
addition to this equity sign-on bonus, Mr. Grape received a cash sign-on bonus
of $70,000.
 
 Pursuant
to a separate option plan, Mr. Grape was awarded an option to purchase 142,857
shares of Ener1’s common stock with an exercise price equal to the fair market
value on the date of grant, vesting 25% on each anniversary of the employment
agreement.  These options do not become exercisable until EnerDel’s
annual revenue exceeds $5.6 million.  The target revenue has not yet
been met.  In the event of change of control (as defined in the
agreement) any unvested options shall vest and become fully exercisable
immediately.  This option has a ten year life.
 
 Compensation
of Executives
 
 Charles
Gassenheimer
 On
December 19, 2007, Mr. Gassenheimer was granted immediately vested options to
purchase up to 142,857 shares of our common stock at an exercise price of $4.90
per share.
 
 Ulrik
Grape
 On
December 21, 2006 Mr. Grape was granted options to purchase 57,143 shares of our
common stock subject to specifically identified performance criteria and subject
to forfeiture if such performance criteria are not met.  In December
2007, the Board of Directors determined that 70% of the performance criteria
were met, 15% of the performance criteria were extended into 2008 and 15% of the
performance criteria were not met.  As a result, options to purchase
40,000 shares were deemed earned, options to purchase 8,571 shares are unearned
and options to purchase 8,572 shares were forfeited.  The 40,000
earned options will vest one-third per year on the anniversary of the date of
grant starting December 21, 2007.  Effective December 31, 2008, the
Board of Directors determined the 8,571 options to be earned and these options
will vest one-third per year on the anniversary of the date of grant starting
December 21, 2008.
  - 85
-
  On
December 19, 2007, Mr. Grape was granted options to purchase up to 85,714 shares
of our common stock subject to specifically identified performance criteria and
subject to forfeiture if such performance criteria are not
met.  Effective December 2008, the Board of Directors determined that
50% of the performance criteria were met, 20% of the performance criteria were
extended into 2009 and 30% of the performance criteria were not
met.  As a result, options to purchase 42,857 shares were deemed
earned, options to purchase 17,143 shares are unearned and options to purchase
25,715 shares were forfeited.  The 42,857 earned options will vest
one-third per year on the anniversary of the date of grant starting December 19,
2008.  The 17,143 unearned options continue to be subject to
specifically identified performance criteria.
 
 On
January 15, 2008, the Board of Directors approved the transfer to Mr. Grape
options to purchase up to 35,715 shares of our common stock at an exercise price
of $2.17 per share.  These options become fully vested on October 16,
2009.
 
 Gerard
Herlihy
 On
December 19, 2007, Mr. Herlihy was granted options to purchase up to 71,429
shares of our common stock at an exercise price of $4.90 per
shares.  These options vests one-third per year over the three year
vesting period.
 
 On
January 15, 2008, the Board of Directors approved the transfer to Mr. Herlihy
options to purchase up to 35,715 shares of our common stock at an exercise price
of $2.17 per share.  These options become fully vested on October 16,
2009.
 
 Outstanding
Equity Awards at December 31, 2008
 
 Option AwardsName
                                
                                Number of
                                  Securities
                                  Underlying
                                  Unexercised
                                  Options (#)
                                  Exercisable
                                
                                
                                Number of
                                  Securities
                                  Underlying
                                  Unexercised
                                  Options (#)
                                  Unexercisable
                                
                                
                                Equity
                                  Incentive Plan
                                  Awards:
                                  Number of
                                  Securities
                                  Underlying
                                  Unexercised
                                  Unearned
                                  Options (#)
                                
                                
                                Option
                                  Exercise
                                  Price
                                  ($)
                                
                                
                                Option
                                  Expiration
                                  DateCharles
      Gassenheimer
                                
                                
                                142,858
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                $
                                4.90
                                
                                
                                12/19/12Dr.
      Peter Novak
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -Ulrik
      Grape
                                
                                
                                -
                                
                                
                                
                                35,715
                                (1)
                                
                                
                                -
                                
                                
                                $
                                2.17
                                
                                
                                10/16/16Ulrik
      Grape
                                
                                
                                14,286
                                
                                
                                
                                28,572
                                (2)
                                
                                
                                17,143
                                (3)
                                
                                $
                                4.90
                                
                                
                                12/19/12Ulrik
      Grape
                                
                                
                                29,523
                                
                                
                                
                                19,048
                                (4)
                                
                                
                                -
                                
                                
                                $
                                1.61
                                
                                
                                12/21/11Ulrik
      Grape
                                
                                
                                28,572
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                $
                                1.61
                                
                                
                                12/21/11Ulrik
      Grape
                                
                                
                                
                                
                                
                                
                                35,714
                                (5)
                                
                                
                                107,144
                                (5)
                                
                                $
                                3.43
                                
                                
                                10/01/15Gerard
      Herlihy
                                
                                
                                -
                                
                                
                                
                                35,715
                                (1)
                                
                                
                                -
                                
                                
                                $
                                2.17
                                
                                
                                10/16/16Gerard
      Herlihy
                                
                                
                                23,810
                                
                                
                                
                                47,619
                                (6)
                                
                                
                                -
                                
                                
                                $
                                4.90
                                
                                
                                12/19/12
 
 (1)
                Options
      vest with respect to 35,715 shares on October 16,
  2009.
 
 (2)
              Options
      vest with respect to 14,286 shares on December 19, 2009 and 14,286 shares
      on December 19, 2010.
 
 (3)
              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.
 
 (4)
              Options
      vest with respect to 16,191 shares on December 21, 2009 and 2,857 shares
      on December 21, 2010.
  - 86
-
 
 (5)
              Options
      are not exercisable until annual revenue of our EnerDel subsidiary exceeds
      $5.6 million.  This revenue target has not yet been
      met.  Of the total options, options to purchase 107,144 shares
      are vested and the remaining 35,714 shares will vest on October 1,
      2009.
 
 (6)
              Options
      vest with respect to 23,810 shares on December 19, 2009 and 23,809 shares
      on December 19, 2010.
 
 2008
Director Compensation
 
 Name
                          
                          Fees Earned
                            or Paid in
                            Cash($) (1)
                          
                          
                          Option
                            Awards ($)
                          
                          Total ($)Kenneth
      Baker
                          
                          
                          40,000
                          
                          
                          
                          40,200
                          
                          (3)
      (4)
                          
                          
                          80,200Marshall
      Cogan
                          
                          
                          40,000
                          
                          
                          
                          40,200
                          
                          (3)
      (5)
                          
                          
                          80,200Mark
      D'Anastasio
                          
                          
                          -
                          
                          
                          
                          -
                          
                          (1a)
                          
                          
                          -Elliot
      Fuhr
                          
                          
                          40,000
                          
                          
                          
                          115,202
                          
                          (2)
      (3) (4)
                          
                          
                          155,202Karl
      Gruns
                          
                          
                          40,000
                          
                          
                          
                          40,200
                          
                          (3)
      (6)
                          
                          
                          80,200Ludovico
      Manfredi
                          
                          
                          40,000
                          
                          
                          
                          40,200
                          
                          (3)
      (7)
                          
                          
                          80,200Thomas
      Snyder
                          
                          
                          40,000
                          
                          
                          
                          40,200
                          
                          (3)
      (4)
                          
                          
                          80,200
 
 Mr.
Gassenheimer and Dr. Novak’s compensation appears is Item 11. Executive
Compensation.
 
 (1)
              Independent
      non-executive directors are entitled to receive annual board fees of
      $40,000 payable in cash, $10,000 per quarter, and to be reimbursed for
      travel expenses to attend Board and Committee meetings.  Each
      independent director is entitled to participate in the 2002 Non-Employee
      Director Stock Participation Plan which provides for the grant of stock
      options for each year the director serves as a member of the board of
      directors at an exercise price equal to the fair market value of our
      common stock on the date of grant.
 
 (1a)
              Mr.
      D’Anastasio is not an independent director as we pay him, through his
      company EMC, for government and media relations consulting
      services.  He does not receive any other compensation for his
      services other than reimbursement for travel related expenses to attend
      meetings.
 
 (2)
              In
      January 2008, Mr. Fuhr was awarded an option to purchase up to 42,858
      shares of our common stock.  In accordance with SFAS No. 123R,
      the value of these options was determined using a Black-Scholes
      model.  Cross-reference is made to Part II, Item 8, Footnote 16,
      Stock Based Compensation for the assumptions made in the valuation of
      these options.
 
 (3)
              In
      December 2008, all independent non-executive directors were awarded an
      option to purchase up to 7,500 shares of our common stock.  In
      accordance with SFAS No. 123R, the value of these options was determined
      using a Black-Scholes model.  Cross-reference is made to Part
      II, Item 8, Footnote 16, Stock Based Compensation for the assumptions made
      in the valuation of these options.
 
 (4)
              Options
      to purchase up to 50,358 shares of our common stock are outstanding at
      December 31, 2008.
 
 (5)
              Options
      to purchase up to 19,405 shares of our common stock are outstanding at
      December 31, 2008.  In September 2008, Mr. Cogan exercised
      23,810 with an exercise price of $2.80 per share.  The total
      intrinsic value of these options on the date of exercise was approximately
      $117,000.
 
 (6)
              Options
      to purchase up to 60,358 shares of our common stock are outstanding at
      December 31, 2008.
 
 (7)
              Options
      to purchase up to 44,644 shares of our common stock are outstanding at
      December 31, 2008.
  - 87
-
  Compensation
of Directors
 
 Mr.
Gassenheimer serves as the Chairman of our company.  We
reimbursed Ener1 Group $500,000 for salary paid to Mr. Gassenheimer during the
year.
 
 Mr. Baker
serves as an independent, non-executive director and serves on the Governance
and Nomination Committee as well as the Compensation Committee.  In
December 2008 he was awarded options to purchase up to 7,500 shares of our
common stock at an exercise price of $7.15 per share.  These options
vest ratably over three years.
 
 Mr. Cogan
serves as a non-executive director.  During 2006 Mr. Cogan received
consulting fees from Ener1 Group.  In December 2008 he was awarded
options to purchase up to 7,500 shares of our common stock at an exercise price
of $7.15 per share.  These options vest ratably over three
years.
 
 Mr.
D’Anastasio became a director or our company in August 2008.  Mr.
D’Anastasio provides government and media relation services through his company
EMC and was compensated $519,000 during the year ended December 31, 2008 for
such services.  He is not currently serving on any committees and does
not receive any other compensation for his services other than reimbursement for
travel related expenses to attend meetings.
 
 Mr. Fuhr
became an independent, non-executive director of our company in January 2008 and
serves on the Audit Committee and the Compensation Committee.  Upon
his appointment to the Board of Directors, he was awarded an option to purchase
up to 42,858 shares of our common stock with an exercise price of $5.18 per
share.  These options vest ratably over three years.
 
 Mr. Gruns
serves as an independent, non-executive director and is the Chairman of our
Audit Committee.  In December 2008 he was awarded options to purchase
up to 7,500 shares of our common stock at an exercise price of $7.15 per
share.  These options vest ratably over three years.
 
 Mr.
Manfredi serves as an independent, non-executive director and is a member of our
Audit Committee and our Compensation Committee.  In December 2008 he
was awarded options to purchase up to 7,500 shares of our common stock at an
exercise price of $7.15 per share.  These options vest ratably over
three years.
 
 Mr.
Snyder serves as an independent, non-executive director and was a member of our
Audit Committee from July 2007 to February 2008.  Mr. Snyder serves as
a member of our Governance and Nomination Committee.  In December
2008, he was awarded options to purchase up to 7,500 shares of our common stock
at an exercise price of $7.15 per share.  These options vest ratably
over three years.
 
 Other
than described in this Annual Report, our directors do not receive compensation
for their services as directors or members of committees.
  - 88
-
  Item
      12.
              Security
      Ownership of Certain Beneficial Owners and
  Management
 
 Security
Ownership of Certain Beneficial Owners and Management
 
 The table
below contains information as of February 24, 2009 about stockholders whom we
believe are the beneficial owners of more than five percent (5%) of our
outstanding common stock, as well as information regarding stock ownership by
our directors, named executive officers and our directors and executive officers
as a group. Except as described below, we know of no person that beneficially
owns more than 5% of our outstanding common stock.
 
 As of
February 24, 2009, 113,474,085 shares of common stock were outstanding. Except
as otherwise noted below, each person or entity named in the following table has
the sole voting and investment power with respect to all shares of our common
stock that he, she or it beneficially owns. Except as otherwise noted below, the
address of each person or entity named in the following table is c/o Ener1,
Inc., 1540 Broadway, Suite 25C, New York, New York 10036.
 
 Amount Of
                                        
                                        
                                        
                                        PercentBeneficial
                                        
                                        
                                        
                                        ofName
                                        
                                        Ownership
                                        
                                        
                                        
                                        ClassEner1
      Group, Inc.
                                        
                                        
                                        78,908,551
                                        
                                        (1)
                                        
                                        
                                        61.7
                                        %Morgan
      Stanley & Co., Incorporated
                                        
                                        
                                        9,142,521
                                        
                                        (2)
                                        
                                        
                                        7.9
                                        %1585
      Broadway, New York, NY 10036Alpha
      Class Investments Limited, c/o
                                        
                                        
                                        7,560,000
                                        
                                        (3)
                                        
                                        
                                        6.5
                                        %c/o
      TVG Capital Partners Limited, 16th Fl., No. 8Queen’s
      Road Central, Hong KongAnchorage
      Capital Master Offshore, Ltd.
                                        
                                        
                                        6,354,426
                                        
                                        (4)
                                        
                                        
                                        5.6
                                        %610
      Broadway, 6th Floor, New York, NY 10012Charles
      Gassenheimer
                                        
                                        
                                        700,000
                                        
                                        (5)
      (16)
                                        
                                        
                                        *Peter
      Novak
                                        
                                        
                                        535,970
                                        
                                        (6)
      (16)
                                        
                                        
                                        *Kenneth
      Baker
                                        
                                        
                                        14,286
                                        
                                        (7)
                                        
                                        
                                        *Marshall
      Cogan
                                        
                                        
                                        11,905
                                        
                                        (8)
                                        
                                        
                                        *Mark
      D'Anastasio
                                        
                                        
                                        -
                                        
                                        
                                        
                                        
                                        *Elliot
      Fuhr
                                        
                                        
                                        14,286
                                        
                                        (9)
                                        
                                        
                                        *Karl
      Gruns
                                        
                                        
                                        50,477
                                        
                                        (10)
                                        
                                        
                                        *Ludovico
      Manfredi
                                        
                                        
                                        25,239
                                        
                                        (11)
                                        
                                        
                                        *Thomas
      Snyder
                                        
                                        
                                        14,286
                                        
                                        (12)
                                        
                                        
                                        *Ulrik
      Grape
                                        
                                        
                                        86,667
                                        
                                        (13)
                                        
                                        
                                        *Gerard
      Herlihy
                                        
                                        
                                        66,667
                                        
                                        (14)
                                        
                                        
                                        *Directors
      and officers as a group (twelve persons)
                                        
                                        
                                        1,822,165
                                        
                                        (15)
                                        
                                        
                                        1.6
                                        %*
      Less than 1%
 
 Notes are
on the following page.
  - 89
-
 
 Notes:
 (1)
              Includes
      14,489,137 shares issuable under outstanding warrants exercisable duringthe
      60 day period following February 20,
2009.
 (2)
              Includes
      1,600,000 shares issuable under outstanding warrants exercisable duringthe
      60 day period following February 20, 2009.  The information
      reported is pursuant to Schedule13G
      filed by Morgan Stanley on February 16,
  2009.
 (3)
              Includes
      2,560,000 shares issuable under outstanding warrants exercisable duringthe
      60 day period following February 20,
2009.
 (4)
              Includes
      228,571 shares issuable under outstanding warrants exercisable duringthe
      60 day period following February 20, 2009.  The information
      reported is pursuant toSchedule
      13G filed by Anchorage Capital Masters Offshore, Ltd. on February 17,
      2009.
 (5)
              Includes
      414,286 shares issuable under outstanding options and warrants exercisableduring
      the 60 day period following February 20,
2009.
 (6)
              Includes
      279,054 shares issuable under outstanding warrants exercisable duringthe
      60 day period following February 20,
2009.
 (7)
              Includes
      14,286 shares issuable under outstanding options exercisable duringthe
      60 day period following February 20,
2009.
 (8)
              Includes
      11,905 shares issuable under outstanding options exercisable duringthe
      60 day period following February 20,
2009.
 (9)
              Includes
      14,286 shares issuable under outstanding options exercisable duringthe
      60 day period following February 20,
2009.
 (10)
              Includes
      43,334 shares issuable under outstanding options exercisable duringthe
      60 day period following February 20,
2009.
 (11)
              Includes
      25,239 shares issuable under outstanding options exercisable duringthe
      60 day period following February 20,
2009.
 (12)
              Includes
      14,286 shares issuable under outstanding options exercisable duringthe
      60 day period following February 20,
2009.
 (13)
              Includes
      72,381 shares issuable under outstanding options exercisable duringthe
      60 day period following February 20,
2009.
 (14)
              Includes
      23,810 shares issuable under outstanding options exercisable duringthe
      60 day period following February 20,
2009.
 (15)
              Includes
      1,822,165 shares issuable under outstanding options and warrantsexercisabe
      during the 60 day period following February 20,
  2009.
 (16)
              The
      amount shown does not include common stock beneficially owned byEner1
      Group, Inc., a company of which Charles Gassenheimer and Dr. Novak aredirectors,
      and Dr. Novak is a shareholder.  Mr. Gassenheimer owns warrants
      topurchase
      shares of Ener1 Group.  Mr. Gassenheimer and Dr. Novak disclaim
      beneficialownership
      of any Ener1 common stock beneficially owned by Ener1 Group,
      Inc.
  - 90
-
  Item
      13.
              Certain
      Relationships and Related Transactions, and Director
      Independence
 
 Ener1
Group Ownership
 
 Bzinfin,
S.A. a 66% shareholder of Ener1, Group, Inc. which owns 57% 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, Mikhail Zingarevich, and Alexei
Paramonov.
 
 Services
between Ener1 and Ener1 Group
 
 We
operate under an agreement where we reimburse Ener1 Group for 67% of the total
salary and related costs, including travel expenses, for Charles Gassenheimer
for services he performs for Ener1.
 
 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 2008, Ener1 Group and its subsidiaries billed us
approximately $498,000 and we billed Ener1 Group and its subsidiaries
approximately $58,000, in each case for services and employees of the other
party.
 
 Ener1
Group Convertible Notes and Warrants
 
 During
2006 and 2007, Ener1 Group loaned us an aggregate principal amount of
$11,960,000.  Our obligation to repay Ener1 Group was recorded as
subordinated convertible debt pursuant to notes issued, the (“Group Notes”),
which bear interest at 10% annum and are convertible into shares of our common
stock at a conversion price of $3.50 per share.  In connection with
the Group Notes, we issued Ener1 Group warrants to purchase up to 7,446,877
shares of our common stock at $2.10 per share.
 
 On March
26, 2008, Ener1 Group converted the $11,960,000 of outstanding principal and
$1,884,717 in accrued interest into 3,955,634 shares of our common
stock.  As an inducement for Ener1Group’s conversion of the Group
Notes, we issued warrant to purchase up to 141,858 share of our common stock at
an exercise price of $5.95 per share.  The warrants are exercisable at
any time through March 26, 2013.  Using a Black-Scholes pricing model
the fair value of the warrants of $680,000 was charged to interest expense as an
inducement to convert debt.
 
 We had
been accounting for the warrants and conversion feature of the Group Notes as a
beneficial conversion feature in accordance with EITF 00-27.  The
value of the conversion feature had not been recorded since the ability of the
holder to convert was contingent upon our repayment of the 2204 Debentures 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 $3,608,000
was recorded as a credit to additional paid in capital and the unamortized
discount related to the fair value of the warrants and the beneficial conversion
feature of $5,249,997 and $3,608,000, respectively, was recorded to interest
expense.
 
 Ener1
Group Financing Transactions
 
 Effective
December 29, 2008, we entered into a Line of Credit Agreement, (the “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.  Through March 31, 2009, the
maximum amount we can borrow is $10.0 million which may be drawn in $500,000
increments.  Subsequent to March 31, 2009, we may borrow up to the
face amount of the Agreement in increments of $500,000 or, if less, the
remaining balance of the Agreement.  All funds borrowed pursuant to
the Agreement bear interest at 8.0% per annum.  As of December 31,
2008 there are no amounts outstanding under this line of credit and in February
2009, we borrowed $5.0 million from the line of credit.
  - 91
-
  As a
commitment fee, we issued Ener1 Group warrants to purchase up to 1,250,000
shares of our common stock at an exercise price of $8.25 per
share.  The warrants are immediately exercisable and expire two years
from the date of grant.  Using a Black-Scholes pricing model to value
the warrants, the fair value of $5.1 million has been recorded as deferred
financing costs and amortized to interest expense over the 18 month term of
Agreement.
 
 In
addition to the commitment fee, we are obligated to issue to Ener1 Group
warrants to purchase additional shares of our common stock, each time a
borrowing is made under the Agreement, equal to the amount of funds borrowed
divided by $20 with an exercise price equal to $8.25 per share.  In
connection with the $5.0 million borrowing in February 2009, we issued Ener1
Group warrants to purchase up to 250,000 shares of our common
stock.  Using a Black-Scholes pricing model to value of the warrants,
the fair value of $874,000 has been recorded as a reduction in proceeds and will
be amortized to interest expense over the term of 18 months.
 
 Director
Independence
 
 Transactions
with Ener1 Group are approved by the independent member of our Board of
Directors.
 
 As of
December 31, 2008, our Board of Directors consisted of the following
directors: Charles Gassenheimer, Peter Novak, Kenneth Baker, Marshall Cogan,
Mark D’Anastasio, Elliot Fuhr, Karl Gruns, Ludovico Manfredi and Thomas
Snyder.  With the exception of Mr. Gassenheimer who serves as our
Chief Executive Officer in addition to serving as Chairman of the Board of
Directors, Dr. Novak, who serves as our President and Chief Technology Officer,
Mr. D’Anastasio who provides consulting services and Mr. Cogan, who provided
consulting services during 2006, each of these directors is independent as set
forth in the Marketplace Rules of The NASDAQ Stock Market, which defines an
“independent director” generally as a person other than an executive officer or
employee of the company or any other individual having a relationship which, in
the opinion of the company's board of directors, would interfere with the
exercise of independent judgment in carrying out the responsibilities of a
director.
 
 Item
      14.
              Principal
      Accounting Fees and Services
 
 The
accounting firm of Malone & Bailey, PC was our independent accounting firm
during the years ended December 31, 2008 and 2007.
 
 For the years endedDecember 31,2008
                    
                    
                    2007Audit
      fees
                    
                    $
                    376,988
                    
                    
                    $
                    192,326Audit-related
      fees
                    
                    
                    46,263
                    
                    
                    
                    13,574Tax
      fees
                    
                    
                    -
                    
                    
                    
                    -All
      other fees
                    
                    
                    -
                    
                    
                    
                    -Total
      fees paid to independent auditors
                    
                    $
                    423,251
                    
                    
                    $
                    205,900
 
 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.
 
 Audit-related
fees
 Audit-related
fees are fees for assurance and related services that are reasonably related to
the audit. This category includes fees related attendance of audit
committee meetings, consulting on financial accounting and reporting standards
and due diligence related to acquisitions.
  - 92
-
  Tax
fees
 Tax fees
primarily include professional services performed with respect to preparation of
our federal and state tax returns for our consolidated subsidiaries and for
state and local tax consultation.
 
 All
other fees
 All other
fees are fees for other permissible work performed that do not meet the above
category descriptions.
 
 Policy
on Pre-Approval by Audit Committee of Services Performed by Independent
Auditors
 
 Our Audit
Committee pre-approves all audit services to be provided to us by our
independent auditors. Our Audit Committee’s policy regarding the pre-approval of
non-audit services to be provided to us by our independent auditors is that all
such services shall be pre-approved by the Audit Committee. Non-audit services
that are prohibited to be provided by our independent auditors may not be
pre-approved. In addition, prior to the granting of any pre-approval, our Audit
Committee must be satisfied that the performance of the services in question
will not compromise the independence of the independent
auditors.
  - 93
-


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.





3.2
            Articles
      of Amendment to Amended and Restated Articles of Incorporation, dated
      March 11, 2002, incorporated by reference to Exhibit 3.2 of the
      Registrant's Annual Report on Form 10-K for the year ended December 31,
      2001.





3.3
            Articles
      of Amendment to Amended and Restated Articles of Incorporation, dated
      October 21, 2002, incorporated by reference to Exhibit 3.1 of the
      Registrant's Current Report on Form 8-K dated October 28,
      2002.





3.4
            Articles
      of Amendment to Amended and Restated Articles of Incorporation,
      incorporated by reference to Exhibit A of the Registrant's Schedule 14C
      filed on December 6, 2004.





3.5
            By-laws
      of the Registrant, incorporated by reference to Exhibit 3.4 of the
      Registrant's Registration Statement on Form SB-2 (Registration No.
      333-112837), filed February 13,
2004.





3.6
            Certificate
      of Designations of Series B Convertible Preferred Stock, dated October 15,
      2004, incorporated by reference to Exhibit 3.6 of the Registrant’s Annual
      Report on Form 10-KSB for the year ended December 31,
  2004.





3.7
            Amendment
      to 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.





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.





4.2
            Form
      of Warrant to Purchase Common Stock issued pursuant to Securities Purchase
      Agreement, dated January 16, 2004, incorporated by reference to Exhibit
      4.2 to the Registrant's Current Report on Form 8-K dated January 21,
      2004.





4.3
            Registration
      Rights Agreement dated as of January 16, 2004, by and among the Registrant
      the entities whose names appear on the signature pages thereof
      incorporated by reference to Exhibit 4.3 to the Registrant's Current
      Report on Form 8-K dated January 21,
2004.


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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.





4.5
            Warrant
      issued to Cofis Compagnie Fiduciaire S.A. dated October 15, 2004 to
      purchase from Ener1, Inc., 4,166,666 shares of Common Stock of the Company
      at a price per share of $1.50, incorporated by reference to Exhibit 4.5 of
      the Registrant’s Annual Report on Form 10-KSB for the year ended December
      31, 2004.





4.6
            Warrant
      to Purchase Common Stock issued October 20, 2004 to Delphi Automotive
      Systems, LLC, to purchase up to 7,000,000 shares of Common Stock,
      incorporated by reference to Exhibit 4.6 of the Registrant’s Annual Report
      on Form 10-KSB for the year ended December 31,
  2004.





4.7
            Registration
      Rights Agreement dated as of October 20, 2004, by and between Ener1, Inc.
      and Delphi Automotive Systems LLC, incorporated by reference to Exhibit
      4.7 of the Registrant’s Annual Report on Form 10-KSB for the year ended
      December 31, 2004.





4.8
            Registration
      Rights Agreement dated as of October 20, 2004, by and between EnerDel,
      Inc., Delphi Automotive Systems, LLC and Ener1, Inc., incorporated by
      reference to Exhibit 4.8 of the Registrant’s Annual Report on Form 10-KSB
      for the year ended December 31,
2004.





4.9
            Form
      of 7.5% Senior Secured Convertible Debenture issued pursuant to Securities
      Purchase Agreement dated March 5, 2005, incorporated by reference to
      Exhibit 4.1 of the Registrant’s Current Report on Form 8-K dated March 15,
      2005.





4.10
            Form
      of Warrant to Purchase Common Stock 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.





4.11
            Registration
      Rights Agreement, dated as of March 14, 2005, by and among Ener1, Inc. and
      the purchasers of Ener1's 7.5% Senior Secured Convertible Debentures,
      incorporated by reference to Exhibit 4.3 of the Registrant’s Current
      Report on Form 8-K dated March 15,
2005.





4.12
            Form
      of Warrant to Purchase Common Stock of Ener1, dated December 9, 2004
      issued to Merriman Curhan Ford & Co., incorporated by reference to
      Exhibit 4.10 to the Registrant’s Registration Statement on Form SB-2
      (Registration No. 333-124745), filed May 9,
  2005.





4.13
            Certificate
      of Designation of Non-Voting, Cumulative and Redeemable Series A Preferred
      Stock of EnerDel, Inc., dated October 20, 2004, incorporated by reference
      to Exhibit 4.6 to Amendment No. 1 to Ener1’s Quarterly Report on Form
      10-QSB/A for the period ending September 30,
  2004.





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





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





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





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


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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.





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.





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.





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.





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.





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.




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.





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.


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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.





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 filed
      on March 31, 2004.





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.





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.





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.





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.





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.





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.





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.





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.





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.





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.





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.





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.


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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.





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.





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.





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.





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.





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 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 referenced 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.





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.





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 filed on March 12,
      2008.





21
            Subsidiaries
      of the Registrant.*





23
            Consent
      of Malone & Bailey, P.C.*





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:
      March 12, 2009
              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
      12, 2009Charles
      Gassenheimer
                                        
                                        (Principal
      Executive Officer)/s/
      Peter Novak
                                        
                                        President,
      Director
                                        
                                        March
      12, 2009Peter
      Novak/s/
      Gerard A. Herlihy
                                        
                                        Chief
      Financial Officer
                                        
                                        March
      12, 2009Gerard
      A. Herlihy
                                        
                                        (Principal
      Financial Officer and Principal Accounting Officer)/s/
      Kenneth Baker
                                        
                                        Director
                                        
                                        March
      12, 2009Kenneth
      Baker/s/
      Marshall Cogan
                                        
                                        Director
                                        
                                        March
      12, 2009Marshall
      Cogan/s/
      Mark D’Anastasio
                                        
                                        Director
                                        
                                        March
      12, 2009Mark
      D’Anastasio/s/
      Elliot Fuhr
                                        
                                        Director
                                        
                                        March
      12, 2009Elliot
      Fuhr/s/
      Karl Gruns
                                        
                                        Director
                                        
                                        March
      12, 2009Karl
      Gruns/s/
      Ludovico Manfredi
                                        
                                        Director
                                        
                                        March
      12, 2009Ludovico
      ManfrediDirectorThomas
      Snyder


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