**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**





WASHINGTON,
      D.C. 20549


_________________


Form
      10-KSB





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


**For
      The Fiscal Year Ended December 31, 2007**





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


For
      The
      Transition Period From ____________ to ____________





Commission
      File Number 0-21138





**Ener1,
      Inc.**


(Exact
      name of registrant as specified in its charter)


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





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


**Fort
      Lauderdale, Florida 33309**


**(954)
      556-4020**


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





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





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





COMMON
      STOCK, par value $0.01 per share


(title
      of
      class)





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





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





Yes
x
      No o





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





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


Yes
o  No
x





The
      issuer’s revenue for its fiscal year ended December 31, 2007 was
      $280,000.





The
      aggregate market value of voting stock held by non-affiliates (223,433,331
      shares) as of February 29, 2008: $192,152,665 **** based
      on
      the $0.86 closing price for the common stock quoted on the OTC Bulletin Board
      on
      such date.





Shares
      of
      Common Stock outstanding as of February 29, 2008: 652,328,047 **s** hares.





Transitional
      Small Business Disclosure Format: Yes o No x











**ENER1,
      INC.**


**ANNUAL
      REPORT ON FORM 10-KSB**


**FOR
      THE YEAR ENDED DECEMBER 31, 2007**





**INDEX**


**Page****PART
                I**ITEM
                1
            Business
            1ITEM
                2
            Properties
            18ITEM
                3
            Legal
                Proceedings
            18ITEM
                4
            Submission
                of Matters to a Vote of Security Holders
            18**PART
                II**ITEM
                5
            Market
                for the Registrant's Common Equity, Related Stockholder
                Mattersand
                Small Business Issuer Purchases of Equity Securities
            19ITEM
                6
            Management’s
                Discussion and Analysis of Financial Condition and Results of Operations
                and Risk Factors
            21ITEM
                7
            Financial
                Statements
            34ITEM
                8
            Changes
                in and Disagreements with Accountants on Accounting and Financial
                Disclosure
            67ITEM
                8A
            Controls
                and Procedures
            67ITEM
                8B
            Other
                Information
            67**PART
                III**ITEM
                9
            Directors,
                Officers and Control Persons
            68ITEM
                10
            Executive
                Compensation
            73ITEM
                11
            Security
                Ownership of Certain Beneficial Owners and Managementand
                Related Stockholder Matters
            78ITEM
                12
            Certain
                Relationships and Related Transactions
            82ITEM
                13
            Exhibits
            86ITEM
                14
            Principal
                Accountant Fees and Services
            93









**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
      have
      three business lines which we conduct through our three operating subsidiaries.
      EnerDel, Inc. (“EnerDel”) develops lithium ion ("Li-ion") batteries for
      automotive, military and other industrial uses. EnerFuel, Inc. (“EnerFuel”)
      develops fuel cell products and services. NanoEner, Inc. (“NanoEner”) develops
      technologies, materials and equipment for nanomanufacturing.





Currently,
      we generate minimal revenue from sales of Ener1’s products. We have developed a
      working prototype of our hybrid electric vehicle (“HEV”) battery pack and are
      producing sample cells for testing for an electric vehicle (“EV”) battery pack.
      Our products are considered under development.





Since
      September 30, 2007, we have raised additional capital and our financial
      condition has improved due to conversions of convertible debt and preferred
      equity into common stock. We will require additional capital investment to
      increase our production capacity to meet currently anticipated demands for
      our
      products in development. We have contracted with Think Global AS of Oslo,
      Norway, ("Think"), an automotive manufacturer, to develop prototype samples
      for
      a lithium battery for an EV. If our prototypes are accepted by Think Global,
      we
      expect to begin shipping batteries to them under a Supply Agreement by the
      end
      of 2008. We plan to spend approximately $12 million in 2008 to purchase coating
      machines and other automated equipment required for production of battery packs
      under this supply agreement and for possible HEV battery pack production in
      future years. If our product development efforts are successful, we will need
      to
      increase our production capacity and our capital needs will increase
      substantially.





We
      have
      developed a Li-ion battery for HEVs that we believe has significant competitive
      advantages because of its safety, power and other performance characteristics.
      In particular, our battery chemistry, which uses lithium titanate for the anode
      material, does not experience thermal problems that sometimes occur in lithium
      batteries used in consumer electronics. Our HEV battery cell was developed
      under
      an ongoing program with the United States Advanced Battery Consortium (“USABC”).
      The USABC is a consortium of three major U.S. auto manufacturers, Ford, General
      Motors and Chrysler, with funding provided by the U.S. Department of Energy
      (“DOE”).





We
      are
      also developing a lithium titanate battery for Plug-in Hybrid Electric Vehicles
      (“PHEV”) under an award from the DOE which is also managed by the USABC.





The
      major
      automotive companies have discussed plans to introduce Li-ion batteries in
      HEVs
      and PHEVs with varying dates by 2010 and 2011. Through 2007, no major HEV
      battery production contracts had been formally announced. While none of the
      announced HEV or PHEV models have yet been converted to use Li-ion batteries,
      Toyota, General Motors and Mercedes-Benz have announced plans to use Li-ion
      batteries in HEVs and PHEVs. In March 2008 in Geneva both General Motors and
      Mercedes-Benz were the first to formally announce that they would use Li-ion
      batteries in certain 2009 and 2010 models in limited quantities.





We
      believe that the market for HEVs will grow dramatically during the next few
      years due to the large number of planned introductions of HEVs by the major
      automotive manufacturers. The total number of cars and light trucks sold in
      North America in 2007 was 19,316,295 compared with sales of 18,908,099 for
      2006,
      an increase of approximately 2%.  Total US sales for the five most popular
      hybrids in 2007 totaled 311,726, compared with sales of 220,425 in 2006, an
      increase of approximately 41%. We believe that this growth will continue if
      an
      affordable Li-ion battery is developed. Furthermore, we believe that Li-ion
      batteries will eventually replace existing battery technology for HEVs once
      Li-ion technology is adopted for automotive use because Li-ion batteries weigh
      less, take up less space/volume, have more power and are expected to cost less
      than the nickel metal hydride batteries currently used in HEVs.




1





EnerFuel
      is developing what we believe will be the next generation of high-temperature
      fuel cells. These cells are intended to address the fuel cell industry's need
      for fuel cells that are smaller, less costly and less complex. EnerFuel is
      pursuing fuel cell related opportunities in the portable power, auxiliary power,
      distributed power and backup power markets. EnerFuel has developed a new
      fuel-cell-powered remote surveillance camera, a prototype of which was exhibited
      October 15, 2007.





NanoEner,
      our nanotechnology subsidiary, has built prototype equipment that utilizes
      our
      proprietary High Pressure Vapor Deposition Solidification (HDS) process for
      depositing materials onto battery electrodes as part of the battery cell
      manufacturing process. NanoEner is developing electrodes produced using this
      process for internal testing.





***2007
      Developments***





In
      January 2007, EnerDel received test results of its battery cells developed
      under
      Phase I of the development program with USABC, conducted by Idaho National
      Laboratory. The test results met or exceeded all of the initial test
      requirements and Phase I of the development program is complete.





On
      May
      22, 2007, we were awarded a research contract from the Office of Naval Research
      (“ONR”) in the amount of $853,000 to develop a Li-ion battery system for use in
      asset tracking applications. In addition, Congress has approved additional
      Department of Defense (“DOD”) appropriations for research contracts to be
      awarded to EnerDel totaling approximately $4.4 million net. The terms of these
      contracts are under negotiation and review by the DOD; ** EnerDel
      has not entered into any of these contracts or been awarded any of these
      funds.





In
      September 2007, we signed a technology license agreement with ITOCHU Corporation
      for intellectual property developed by EnerStruct and intellectual property
      under a patent and patent applications of EnerStruct and ITOCHU regarding
      lithium ion battery technology. Ener1 formed a new subsidiary, EnerDel (Japan),
      Inc., to continue its Japanese operations and hired key employees of the
      EnerStruct joint venture, which was terminated in September 2007.





On
      September 18, 2007, we were awarded a Phase II Li-ion battery technology
      development contract from the USABC to develop further our Li-ion battery
      technology for hybrid-electric vehicle applications. The 18-month contract
      in
      the amount of $6.5 million (net value of $3,250,000) requires that EnerDel
      share
      50 percent of the project costs.





On
      September 26, 2007, the DOE awarded us a $2.5 million contract (net value of
      $1,250,000) over two years for PHEV battery research.





On
      October 9, 2007, we unveiled a working prototype of an HEV battery pack.





On
      October 15, 2007, we entered into a Supply Agreement with Think to supply
      lithium ion battery packs for the Think electric vehicle, Think City. If our
      prototypes are accepted by Think, they will purchase approximately $70 million
      of batteries based upon Think's minimum forecasted vehicle delivery schedule
      over an approximate two-year period. Think is not obligated to buy any units
      if
      design and test requirements are not met.





In
      December 2007, we exhibited a working HEV using our battery pack at the Electric
      Vehicle Symposium (EVS23) in Anaheim California.





At
      February 29, 2008, we had 104 full time employees.





**Company
      History**





Ener1
      is
      a Florida corporation, founded in 1985 and headquartered in Fort Lauderdale,
      Florida. Ener1 Group, Inc., a privately held technology incubator company
      headquartered in Fort Lauderdale ("Ener1 Group"), acquired an 80% stake in
      our
      company in early 2002. At December 31, 2007, Ener1 Group owned approximately
      66%
      of our outstanding common stock and three of our nine directors are affiliated
      with Ener1 Group. At December 31, 2007, Bzinfin, S.A., the owner of 66% of
      the
      common stock of Ener1 Group, directly owned approximately 3% of our outstanding
      common stock.




2





In
      October 2002, we changed our name from Boca Research, Inc. to Ener1, Inc. Boca
      Research was in the business of developing and marketing modems and network
      communications systems, devices and software, including set top boxes for use
      in
      hotels and hospitals. During 2002 and 2003, we exited this business to focus
      on
      alternative energy technologies including the development of lithium ion
      batteries. In December 2004, we transferred all of the assets of the set top
      box
      business to TVR Communications, LLC in return for a 5% equity interest in TVR
      Communications. In 2006, we transferred this ownership interest to Ener1 Group.





In
      September 2002, we acquired Ener1 Battery Company ("Ener1 Battery"), which
      was
      engaged in research, development and marketing of Li-ion battery technologies,
      from Ener1 Group in return for a combination of equity and debt consideration.
      Ener1 Battery’s assets included several pending patent applications for various
      lithium battery technologies; a staff of research and development engineers;
      the
      land and building where Ener1 Battery conducted its operations; and lithium
      battery research, development and production equipment.





In
      October 2004, we and Delphi Corporation (“Delphi”) contributed our respective
      lithium battery operations to newly formed EnerDel. EnerDel is located in
      Indianapolis, Indiana. Delphi, which had ten years of experience in Li-ion
      battery research and development, contributed the following assets to EnerDel:
      testing and production equipment, Delphi's Li-ion patent portfolio,
      manufacturing facilities in Indianapolis and technical resources including
      the
      services of engineers and technical information. We contributed the following
      assets to EnerDel: $15,000,000 in cash for working capital, substantially all
      of
      our battery-related patents and patent applications, technical resources
      including scientists and engineers and exclusive use of all of our battery
      testing and production equipment.





We
      own
      80.5% of EnerDel’s outstanding common stock and Delphi owns the remaining 19.5%.
      Delphi also owns 8,000 shares of EnerDel 8% Non-Voting Cumulative and Redeemable
      Series A Preferred Stock, which has a liquidation value of $8,000,000 plus
      accrued dividends. Delphi is currently in Chapter 11 bankruptcy proceedings.
      It
      has not contributed any capital to EnerDel since its formation, and Ener1 has
      the ability to reduce Delphi’s ownership percentage substantially from its
      current level.





EnerDel
      obtained certain key elements of its technology from EnerStruct, which we formed
      with ITOCHU Corporation in 2003 to pursue technology development and marketing
      opportunities for Li-ion batteries in Japan. We terminated our joint venture
      with ITOCHU in September 2007 and ITOCHU agreed to license to us certain
      know-how and other intellectual property regarding lithium ion battery
      technology developed by EnerStruct in exchange for 3,333,333 shares of our
      common stock and $519,885 payable in installments over ten months.





We
      formed
      a new subsidiary, EnerDel (Japan), Inc., to continue our Japanese operations
      and
      hire key employees of EnerStruct.





To
      complement our battery operations and expand our alternative energy business,
      in
      September 2003 we began a research and development program focusing on fuel
      cells and related products and technologies. In October 2004, we formed EnerFuel
      to conduct all of our fuel cell activities. EnerFuel conducts its operations
      in
      West Palm Beach, Florida.





In
      April
      2004, we formed NanoEner to pursue technologies for nanomaterials and
      nanomanufacturing. Initially, these activities focused on applying
      nanotechnology to improving the performance of Li-ion battery electrodes.
      NanoEner conducts its operations in Fort Lauderdale, Florida.




3




**Our
      Battery Business**





*Overview*





We
      have
      been developing batteries since 2002, and have focused on lithium ion batteries
      for automotive and military applications since 2003.





In
      August
      2005, we changed our technology focus to develop a lithium ion battery that
      was
      both safe and powerful. We concluded that battery safety would become a critical
      issue in automotive batteries. Due to the larger format size of automotive
      batteries, we believe the chemistry should not contain graphite and certain
      other chemicals, which in rare situations could overheat and lead to thermal
      runaway. Since that time, the safety of Li-ion batteries for consumer
      electronics devices has become a critical issue, and several serious fires
      have
      occurred and received media attention. Several consumer product recalls,
      including recalls by Dell Inc. and Sony Corp., were announced in 2007 due to
      battery safety issues.





In
      August
      2005, we hired two key executives to join EnerDel to lead the development of
      a
      battery using safe chemistry. We also formed a strategic relationship with
      Argonne National Laboratory “ANL” to work on developing a safe and powerful
      battery chemistry for automotive use.





In
      May
      2006, the USABC awarded EnerDel a $1 million, fifty percent cost-sharing Phase
      I
      development contract (net value of $500,000) to provide funding to develop
      Li-ion battery cells for automotive use using our lithium titanate chemistry.
      EnerDel's responsibilities under the first phase of this program were to provide
      samples of Li-ion batteries that offer potentially significant advantages in
      terms of weight, volume, performance and safety over existing technologies
      for
      HEVs. ANL was a subcontractor to EnerDel in this project. EnerDel made its
      first
      scheduled delivery of samples at the end of November 2006. In January 2007,
      EnerDel received test results of its battery cells from USABC, conducted by
      Idaho National Laboratory. The test results met or exceeded the initial test
      goals established by USABC. We have completed Phase I of the HEV battery
      development with the USABC. We continue to produce cells which are evaluated
      by
      the USABC and our prospective customers.





On
      September 18, 2007, we were awarded a Phase II lithium-ion battery technology
      development contract from the USABC to develop further our Li-ion battery
      technology for HEV applications. The 18-month contract in the amount of $6.5
      million (net value of $3,250,000) requires that EnerDel share 50 percent of
      the
      project costs.





On
      September 26, 2007, the DOE announced that EnerDel was awarded a $2.5 million
      contract to develop a PHEV battery under a USABC program using lithium titanate
      with the same safety and performance as our HEV battery. The award is for the
      development of cells for 10- and 40-mile range PHEVs using nano-phase lithium
      titanate coupled with a high voltage nickel-manganese cathode material. The
      total USABC/industry cost share will be $2.5 million, and it is expected that
      EnerDel and the USABC (funded by DOE) will each fund $1.25 million of the costs.
      We have commenced work on this program and continue to work with ANL on the
      material chemistry.





On
      October 9, 2007, we produced a working prototype of an HEV battery pack which
      was shown to the public.





On
      October 15, 2007 we entered into a two year Supply Agreement with Think Global
      of Oslo, Norway, ("Think") to supply Li-ion battery packs for the Think electric
      vehicle, Think City. Under the Agreement, EnerDel must deliver production
      prototypes in March 2008 and pre-production parts in July 2008 in exchange
      for
      approximately $1.4 million. After completion of the production prototypes and
      delivery of pre-production parts, if Think’s design and test requirements have
      been met, Think will order battery packs on a rolling six-month purchase order.
      If these requirements are met, the first order is expected to be placed in
      July
      2008 with the first delivery expected by the end of 2008. We estimate orders
      of
      approximately $70 million based upon Think's minimum forecasted vehicle delivery
      schedule for 2009 and 2010, although quantities may increase from the estimate.
      Think may increase the number of units on six months notice. Think is not
      obligated to buy any units if design and test requirements are not met.





In
      December 2007, we converted a Toyota Prius to use our lithium ion battery and
      exhibited it at the Electric Vehicle Symposium (EVS23) in Anaheim California.





In
      December 2007, the United States Senate approved funding of $1 million to
      EnerDel for research to develop, produce and evaluate battery technology for
      mass transit hybrid electric buses. The funding was approved as part of the
      FY
      2008 Omnibus Appropriations bill passed in the Senate.




4





In
      February 2008, we placed a purchase order for a high volume coating machine
      which is expected to be delivered in August 2008. This equipment will be used
      to
      manufacture electrodes for the anticipated Think vehicle production order and
      for other HEV production orders we may receive in the future. This will
      supplement coating capacity from two mid-sized coating machines that we
      purchased in 2006. We also purchased additional formation and test equipment
      and
      stacking machines, and are expanding the size and capacity of our dry room
      facility. We also intend to add additional space for assembly at a location
      close to our plant in Indianapolis.





*EnerDel’s
      Business Strategy*





Our
      goal
      is to become a leading United States-based developer and manufacturer of
      advanced, safe, high-performance Li-ion battery systems for HEVs, PHEVs and
      EVs
      and for related markets such as non-automotive transportation and military
      markets. We intend to serve the North American and European HEV, PHEV and EV
      markets. We initially intend to manufacture and assemble our batteries in our
      U.S. based Indianapolis plant, and may use additional suppliers worldwide to
      increase our production capacity as needed.





*Principal
      Products*





Our
      primary products will consist of batteries and battery packs for HEVs, PHEVs,
      EVs and additional markets such as non-automotive transportation and military
      markets. 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. Automotive manufacturers may have particular
      specifications for different vehicles.





HEVs
      are
      cars that are powered by a combination of an electric motor and a combustion
      engine. HEVs use a gasoline engine as the primary source of propulsion, and
      an
      electric motor powered by battery provides additional power when needed. In
      addition, HEVs can use the electric motor as the sole source of propulsion
      for
      low-speed, low-acceleration driving, such as in stop-and-go traffic or for
      backing up. This electric-only driving mode further increases fuel
      efficiency.





The
      PHEV
      generally refers to a car that is based on a hybrid concept and has a battery
      that powers an electric motor, as well as a combustion engine. The user
      recharges the battery by connecting the PHEV car to an electric outlet, either
      at home or at work or other places where access to the electric grid is
      provided, when the car is parked. In contrast to the HEV, the PHEV uses a
      battery as its primary energy source, and the combustion engine is available
      for
      situations where the battery is depleted.  The combustion engine then
      propels the car and recharges the battery, with the car operating as a regular
      HEV. PHEVs are currently being designed to travel between 5 to 40 miles on
      battery power before switching to the HEV mode where the combustion engine
      is
      required or requiring recharging. 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. In order to recharge the battery the user would connect
      the
      EV car to an electric outlet, either at home or at work or other places where
      access to the electric grid is provided, when the car is parked. EV’s are
      currently being designed to travel 70 to 200 miles on battery power before
      requiring recharging.





HEV
      Battery Packs





We
      have
      developed a battery pack system for HEVs which we believe is safer than other
      Li-ion battery systems being developed in the industry. We believe that safety
      of battery pack systems will become a critical factor. Our HEV battery using
      lithium titanate chemistry has been designed to safely provide high power with
      a
      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 high charge and discharge rates, unlike consumer electronic Li-ion
      batteries that use graphite anodes and cobalt based cathodes. In addition,
      our
      lithium titanate based batteries do not have a risk of thermal runaway due
      to
      the unique characteristics of the chemistry, which occurs occasionally in
      consumer electronic batteries.




5





We
      believe that the key advantages of our lithium ion battery for HEVs are that
      our
      batteries have:


·
            Superior
                chemistry - lithium titanate provides a very safe
                chemistry.


·
            Less
                expensive chemistry - our chemistry does not use cobalt or nickel,
                both of
                which have experienced increased
                prices.


·
            High
                power chemistry which is well suited for
                HEVs.


·
            Excellent
                cold cranking - our batteries start in cold temperatures (-32 degrees
                Celsius).


·
            Excellent
                charge and discharge characteristics.


·
            Very
                good performance over a wide temperature range.


·
            Design
                advantages - Our batteries have a prismatic design and are flat rather
                than coiled; coiled batteries result in additional heat generation.
                The
                flat prismatic design offers a more compact packing
                design.


·
            Low
                heat generation which results in less expensive design costs of the
                thermal management system required from the vehicle
                side.


·
            Efficient
                packaging due to a flat stacked design which results in reduced size
                and
                maintenance


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


·
            Are
                manufactured domestically (Indiana) near U.S. automotive
                industry





PHEV
      and EV Battery Packs





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
      are
      currently developing an EV battery using a different chemistry than our HEV
      battery to achieve the higher energy density required. We intend to develop
      a
      second generation battery for EVs and PHEVs using lithium titanate that will
      have many of the advantages of our lithium titanate 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
      the
      Supply Agreement with Think Global, EnerDel must deliver three EV battery
      production prototypes in March 2008 and pre-production parts in July 2008 for
      approximately $1.4 million. After completion of the production prototypes and
      delivery of pre-production parts, if Think’s design and test requirements have
      been met, Think will order battery packs on a rolling six-month purchase order.
      If these requirements are met, the first order is expected to be placed in
      July
      2008 with the first delivery expected in December 2008. Orders of approximately
      $70 million based upon Think's minimum forecasted vehicle delivery schedule
      for
      2009 and 2010 are expected to be delivered according to the supply agreement,
      although quantities may increase from the estimate. Think may increase the
      number of units on six months notice. Think is not obligated to buy any units
      if
      design and test requirements are not met.





Military
      Applications





EnerDel
      has been awarded three contracts from the Department of Defense through the
      federal appropriations process over the last two years. We commenced work during
      2007 under the first of these contracts with a defense agency, the Office of
      Naval Research, to develop a Li-ion battery system for use in asset tracking
      applications. 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 prevalent in asset tracking applications today.
      We
      believe that with proven performance in ambient temperatures down to -40°C and
      longer life, our batteries will reduce the total cost of ownership through
      improved cycle life and give our planned asset tracking battery pack a
      competitive advantage. We believe that the technologies we develop for these
      contracts could be commercialized for revenue opportunities in government and
      non-government sectors.




6





In
      addition, Congress has approved additional defense department appropriations
      for
      Li-ion battery research contracts with EnerDel totaling approximately $4.4
      million net. Projects under these contracts will commence after formal detailed
      project review and approval by the appropriate Department of Defense agencies.
      To date Ener1 has not entered into any of these research contracts.





Battery
      Management Systems (“BMS”)





We
      have
      designed two families of lithium battery management systems to provide control,
      optimization and advanced user features for batteries and battery packs. The
      two
      families are:





·
            Low
                Voltage (8 - 16V) Controls - for batteries used in asset tracking
                and
                other lower voltage applications.


·
            High
                Voltage Distributed Controls (HEV) - for batteries used in HEV, PHEV,
                EV
                and other automotive applications.





Through
      the use of algorithms implemented through electronic circuitry, these
      controllers are designed to regulate the operation of our batteries and battery
      packs to make them operate more efficiently and safely. Our BMS are designed
      to
      regulate cell voltage limits and cell temperature limits and provide protection
      from overcharge. They are also designed to indicate the state of charge and
      overall condition of the cells and/or pack, as well as provide a data bus for
      digital communications. The BMS monitors each cell’s condition, and maintains
      the voltage balance among the cells making up the battery in order to optimize
      cell life. Based on customer requirements, the BMS may also be programmed to
      optimize charging, discharging and other operating characteristics or
      application features.





BMS
      are
      an integral component of battery packs, and are not currently sold as a separate
      product from battery packs.





Other
      Applications





We
      believe the Li-ion battery technologies that we are developing will also have
      future applications in other industry sectors. In addition, we believe that
      battery cells will have adequate power capability at the end of their useful
      life in automotive applications that will allow them to be used in other
      industrial applications. The following chart indicates some of the automotive
      and additional markets that may be available in the future based on technologies
      developed for the automotive battery sector:











*Battery
                Categories*
            
            Automotive
                Applications
            
            Other
              Applications*High
                Power Battery*
            
            Hybrid
                Electric Vehicles (light vehicles, tanks, buses and others) and Fuel
                Cell
                Vehicles
            
            Power
                tools, marine motors, load leveling, back up power (UPS- uninterrupted
                power supply), auxiliary power and mobility devices*High
                Capacity Battery*
            
            Plug-in
                Hybrid Electric Vehicle, Electric Vehicles or Solar Cell
                Vehicles
            
            Military
                applications (power vests, “UAVs” or unmanned aerial vehicles), aerospace,
                medical applications, load leveling and
                storage





*Our
      Markets*





Forecasts
      for the size and growth of the hybrid vehicle market vary widely, but all
      estimate significant growth in sales of hybrid vehicles. Automobile manufactures
      plan to introduce a significant number of HEVs during the next two years. At
      the
      end of 2007, according to www.Hybridvehicles.com ,
      auto
      manufacturers had plans to offer a hybrid version of approximately 50 models
      by
      2010 and 2011. We expect that the number of HEV and PHEV models will exceed
      60
      by 2011. Several manufacturers, including General Motors, are also developing
      PHEV models.




7





We
      believe that the market potential for a high-performance Li-ion battery in
      hybrid vehicle and other applications is significant because Li-ion batteries
      are superior in several respects to the nickel metal hydride ("NiMH") batteries
      currently used by car manufacturers: they are more powerful, have longer life,
      occupy less space and weigh less, each of which are critical considerations
      for
      automotive manufacturers. In addition, we expect the Li-ion batteries to be
      significantly less expensive than NiMH batteries once Li-ion batteries economies
      of scale are achieved as Li-ion battery material costs are significantly less
      and the power and energy density is significantly higher than NiMH
      batteries.





We
      cannot
      predict when the automotive industry will adopt the Li-ion battery for use
      in
      hybrid vehicles or how rapidly they will convert to the technology. While none
      of the announced HEV or PHEV models has yet been converted to use Li-ion
      batteries, Toyota, General Motors, Chrysler and Mercedes-Benz have announced
      plans to use Li-ion batteries in HEVs and or PHEVs. In March 2008 in Geneva
      both
      General Motors and Mercedes-Benz were the first to formally announce that they
      would use Li-ion batteries in certain 2009 and 2010 models in limited
      quantities.





From
      the
      industry standpoint, Toyota has led the development of the HEV with the Prius
      vehicle, and is also attempting to lead the introduction of the lithium ion
      battery. The competing auto companies are working on the development of this
      technology. Several automotive companies including General Motors are expending
      considerable resources to develop the PHEV. No major HEV industry production
      contract awards have been formally announced other than a contract for 5,000
      batteries awarded to Johnson Controls for the S class Mercedes. In March 2008
      at
      the Geneva Auto Show, Mercedes-Benz announced that it will be the first to
      use
      lithium-ion batteries, which will be installed in the S400 BlueHybrid expected
      to be available in 2009. In March 2009, at the Geneva Auto Show, General Motors
      announced the award of a contract to Hitachi to purchase 100,000 lithium ion
      battery packs per year for mild hybrids, but did not identify the car models.
      Toyota has announced plans to convert to Li-ion batteries for a PHEV in 2010,
      but the public announcement of the availability has changed several times during
      2007. General Motors management in the Volt division has stated their intention
      to install a PHEV Li-ion battery pack in the Chevy Volt in 2010. Corporate
      executives at General Motors have stated that it is not clear that Volt can
      attain that goal in that time period. Although the Volt has received much media
      attention, General Motors has unveiled several new HEVs including the Chevy
      Tahoe, which is rated at an estimated 50% increase in fuel efficiency over
      the
      non-hybrid Tahoe. We have been awarded a lithium ion battery production supply
      agreement for the Think City electric vehicle with production commencing by
      the
      end of 2008. This is believed to be the largest lithium ion automotive battery
      contract awarded to date.





While
      the
      number of planned vehicles is significant, we do not expect HEV, PHEV and EV
      vehicles to become the predominant form of transportation until the hybrid
      option is affordable to mass markets, which we believe will be dependent upon
      the adoption of Li-ion battery systems. Furthermore, at least one of the large
      NiMH manufacturers has encountered financial difficulties, and the material
      costs in NiMH batteries have increased. There may not be sufficient supply
      of
      affordable NiMH batteries to handle the planned introductions of HEVs in 2010.
      We believe that the large planned increase in HEVs during the next two to three
      years will have to be sold at a significant premium due to the higher cost
      of
      the NiMH batteries, which could restrict potential sales. Alternatively,
      automotive companies would have to accelerate the switch to less expensive
      Li-ion batteries at an earlier date.





As
      popular as hybrids are in the media, the number of hybrids produced to date
      is
      still modest. Toyota in June 2007 announced the production of its one-millionth
      hybrid vehicle. However, annual United States sales of all hybrids in 2006
      were
      approximately 350,000 in 2007 compared to 254,000 in 2006. There were thirteen
      hybrid models available in 2007, and there are 18 models available in early
      2008. Forecasts for the size and growth of this market vary widely. A Booz
      Allen
      Hamilton report estimates that by 2015 80% of all cars sold in the U.S. will
      be
      a hybrid variety. While there are other forecasts with varying levels of sales,
      all of them estimate significant growth in sale of hybrid vehicles. Total light
      vehicle sales in the U.S. market are approximately 16,000,000 to 18,000,000
      units per year.





*Potential
      Customers*





Our
      potential customers are primarily major auto, truck and bus manufacturers and
      their tier one suppliers, and departments of the U.S. government, from which
      we
      seek research grants and development contracts. In the battery business, the
      selling cycle is generally quite long. There is ordinarily an iterative,
      interactive process in which the customer tests and evaluates prototypes or
      samples, and the supplier then modifies the product characteristics to achieve
      the customer’s requirements. Due to the long battery life required by the auto
      manufacturers, this testing and evaluation could take several years and include
      the delivery of samples, prototypes and final product. In addition, the
      procurement cycle for auto makers is quite long due to the requirements for
      design and retooling associated with new auto models, as a result of the need
      to
      assure conformity with automotive engineering and safety requirements and the
      complexity of the auto manufacturing process in general. In addition, automotive
      companies purchase system solutions from tier one suppliers, such as Continental
      Systems 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 join ventures with tier one suppliers.




8





At
      this
      time, we cannot predict the extent to which our sales, if any, will be dependent
      on a single customer or small group of customers. However, given the limited
      number of expected HEV automotive manufacturers and our focus on them as our
      primary market, it is reasonable to believe that the bulk of our expected sales
      will be concentrated in a very small number of customers. If we achieve the
      March and July 2008 milestones under our agreement with Think Global, we expect
      our sales of Li-ion batteries to be dependant for at least one year on Think
      Global. We intend to offer our products to military markets. The sales cycle
      in
      this segment may also be lengthy depending on the longevity requirement for
      the
      specific application. We expect customers in these segments will also perform
      thorough testing and evaluation of samples and prototypes before approving
      a
      final product.





*Sales
      and Marketing*





We
      plan
      to market our Li-ion battery products through internal marketing and technical
      sales personnel. Our marketing activities are currently conducted by our
      management team, but we have added sales personnel with automotive experience
      in
      2008 and expect to add to the business development team in 2008 and 2009. 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. Automotive companies often source the
      same product from more than one supplier. Media relations and trade show
      activity are also used to increase awareness for our company.





*Competition*  ******





Competition
      in the battery industry currently is, and is expected to remain, intense. The
      competition ranges from development stage companies to major domestic and
      international companies, many of which have financial, technical, marketing,
      sales, manufacturing, distribution and other resources significantly greater
      than ours. We compete against companies producing lithium batteries as well
      as
      other non-rechargeable and rechargeable battery technologies. We compete on
      the
      basis of 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 Li-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 Li-ion development
      programs to supply batteries for their own HEV production.





In
      addition, 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. Valence recently announced that it will be supplying
      batteries for hybrid trucks in Europe. Additional potential competitors in
      Li-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 process. There are numerous other companies
      who are developing batteries, some of which recently stated they intend to
      supply batteries for hybrid vehicles.




9





Johnson
      Controls, Inc., one of the world’s largest suppliers of automotive subsystems to
      major auto makers, has partnered with Saft of France, which is a manufacturer
      of
      Li-ion batteries. Johnson Controls/Saft has opened a small Li ion manufacturing
      facility adjacent to the Saft facility in France. A123 Systems, a privately-held
      company based in Watertown, Massachusetts, is developing a lithium iron
      phosphate chemistry that provides reasonable energy density for PHEVs. A123
      and
      Compact Power are both providing samples under development contracts to the
      Chevrolet Volt concept PHEV. Toyota is developing a Li-ion battery internally
      and now also in a joint venture with Panasonic EV. Currently Toyota owns a
      majority (60%) interest in the JV. Hitachi Electric was awarded a Li-ion product
      contract by General Motors in March 2008 for 100,000 battery packs. Mitsubishi
      Corporation, Mitsubishi Motors Corporation and GS Yuasa Corporation have
      established a joint venture company to manufacture large-capacity,
      high-performance lithium-ion batteries that can be used in electric
      vehicles.





Although
      other market competitors may attempt to take advantage of the growth of the
      lithium battery market, the lithium battery industry has certain technological
      and economic barriers to entry. The development of technology, equipment and
      manufacturing techniques and the operation of a facility for the automated
      production of lithium batteries require large capital expenditures, which may
      deter new entrants from commencing production. Automotive manufacturers have a significant and extensive testing process,
      and
      we believe that it would be difficult for a company to that is not already
      part
      of that process to achieve immediate acceptance of their products.





*Intellectual
      Property*





EnerDel
      has 33 United States patents, 10 foreign patents and 92 pending patent
      applications, all relating to Li-ion battery or related technologies. The
      majority of these were obtained from Delphi when EnerDel was formed, and were
      issued during a period of several years preceding the formation of EnerDel.
      The
      majority of the issued patents will expire 20 years from the date of issuance.
      Of EnerDel's issued patents, one will expire in 2015, one will expire in 2018,
      one will expire in 2019 and the remaining patents will expire during the period
      from 2020 to 2024. EnerDel continues to file patent applications, as
      appropriate, to protect its interests in new inventions. We require our
      employees to sign confidentiality and work-for-hire agreements. We also enter
      into confidentiality agreements with third parties before discussing sensitive
      information with them.




EnerDel
      also has rights to license high-rate battery technologies and associated
      manufacturing processes developed by its technology partner, EnerStruct, as
      described below.





*EnerStruct
      and EnerDel Japan, Inc.*





We
      and
      ITOCHU Corporation formed EnerStruct, Inc., a Japanese corporation, in August
      2003 to pursue technology development and marketing opportunities for Li-ion
      batters in Japan. EnerStruct performed research and development for
      rechargeable, high-rate Li-ion battery technologies and associated high volume,
      highly automated mass production technologies. EnerStruct delivered battery
      cell
      prototypes and coated electrodes to EnerDel and also provided technical
      consulting services to EnerDel, including the services of several highly
      experienced process engineers who were active in developing, designing and
      installing advanced, automated Li-ion battery production facilities for some
      of
      the world’s largest manufactures, including Sony and Sanyo.





On
      September 11, 2007, we terminated the EnerStruct joint venture. We signed a
      technology license agreement with ITOCHU Corporation that grants Ener1 an
      exclusive world-wide license to certain “know-how” developed by EnerStruct and
      the intellectual property under certain patent and patent applications of
      EnerStruct and ITOCHU regarding lithium ion battery technology. EnerStruct
      is in
      the process of closing its business. Ener1 formed a new subsidiary, EnerDel
      (Japan), Inc., to continue its Japanese operations and hire key employees of
      EnerStruct.





*Research
      and Development*





During
      2007 and 2006, EnerDel spent $8,116,000 and $3,780,000, respectively, on
      research and development.





*Raw
      Materials and Suppliers*





The
      primary materials used in our battery are lithium and manganese, both of which
      are in abundant worldwide supply. According to the U.
      S.
      Geological Survey, Mineral Commodity Summaries, January 2008 ,
      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 13 million tons of which 760,000 tons are located in the United States,
      and
      annual worldwide consumption in 2007 was an estimated 25,000 tons. According
      to
      the U.
      S.
      Geological Survey, Mineral Commodity Summaries, January 2008 ,
      the
      largest producing countries of manganese are South Africa and the Ukraine.
      Estimated identified reserves are 5.2 million tons, and annual worldwide
      consumption in 2007 was an estimated 11,600 tons.




10




We
      continually evaluate prospective suppliers’ material. While lithium is readily
      available, we will require very high quality material with very 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 are also working with Argonne National
      Laboratory and commercial material developers to develop and evaluate the best
      quality lithium compounds for use with our battery technologies.





*Facilities*





Our
      primary production facility is in Indianapolis, Indiana, where cell development,
      engineering and prototype manufacturing are conducted. We lease approximately
      92,000 square feet, which includes 68,000 square feet of manufacturing space
      and
      24,000 square feet of office space. We intend to lease additional space near
      our
      plant, and move battery pack assembly operations to this new space during 2008.
      We will have sufficient plant capacity to produce approximately 300,000 HEV
      battery packs a year at full capacity on three shifts with approximately $40
      million of additional equipment additions. We plan to spend approximately $12
      million on equipment in 2008 with additional financing, but that amount could
      increase based on changing demands from prospective customers. There is a six
      to
      twelve month lead time for coating and stacking machines, which are our critical
      equipment.





We
      own a
      building located in Fort Lauderdale, Florida, which was used mostly for research
      and development of prototype battery products through 2006, but is not currently
      used by the battery operations. The Fort Lauderdale facility has three glove
      box
      lines and a testing laboratory, plus office space within a building of about
      19,000 square feet.




**Our
      Fuel Cell Business**




*Company
      Overview*




EnerFuel
      produces fuel cell products and provides fuel cell related technical services.
      Like a battery, a fuel cell is an electrochemical power generator that converts
      chemical potential energy into electricity. There are many types of fuel cells;
      each using a different chemistry. We focus primarily on the type of fuel cell
      known as the “PEM” or proton exchange membrane fuel cell.





We
      are
      presently producing a limited volume of fuel cell related products into niche
      markets with the goal of expanding into larger markets.





Currently,
      we have introduced into the market a line of fuel cell system humidifiers,
      and a
      fuel cell based remote surveillance system with the brand name “EnerOptix”.
      EnerOptix uses a chemical hydride system to produce energy. The chemical hydride
      energy system has generated interest from some customers as a stand-alone
      system. EnerFuel’s future products could have applications in the backup power
      market and the marine power market. EnerFuel is also conducting research and
      development of high temperature fuel cell stacks.





EnerFuel
      operates primarily from an office and industrial space in West Palm Beach,
      Florida and also produces fuel cell products in the Ener1 owned battery facility
      located in Fort Lauderdale, Florida. EnerFuel substantially restructured its
      fuel cell activities and operations as of January 2006, including hiring a
      new
      president and building a new management team.





*Summary
      of Current Products*




EnerFuel
      is developing a range of fuel cell products and services. Products in
      development include fuel cell stacks and fuel cell stack components, fuel cell
      systems, components for fuel cell systems and integrated products containing
      fuel cell systems. Fuel cell stacks include both high and low temperature PEM
      fuel cells. A fuel cell system consists of a fuel cell and the other components
      required to convert the chemical energy of a fuel into electricity. Integrated
      products are formed by adding hardware to a fuel cell system such that it is
      capable of providing some end-user function, such as an uninterruptible power
      supply (UPS). Many of our planned products are in an early stage of development
      and completion of prototypes will require additional time, effort and funding.




11




EnerFuel
      is developing what it believes will be the next generation of high-temperature
      fuel cells. These products are intended to address the fuel cell industry's
      need
      for fuel cells that are smaller and less costly and complex than those currently
      available. High temperature PEM fuel cells are still a novelty in the fuel
      cell
      industry and their adoption has not been widespread. EnerFuel plans to
      differentiate itself from competing fuel cell companies by establishing
      technical advantages afforded by higher temperature operation.





EFH
      Humidifiers:





EnerFuel's
      first product, released in June 2006, was a fuel cell humidifier. A fuel cell
      humidifier regulates the amount of water in a fuel cell system, which is
      necessary to keep the system functioning properly. Typical fuel cells will
      stop
      working if there is too little or too much water within them. EnerFuel’s EFH
      solid-state humidifiers are based on permeable hollow fiber technology, which
      enables highly effective heat and humidity transfer between fluids. The
      humidifier transfers humidity via a bundle of hollow micro-porous fibers. This
      type of humidity transfer has many advantages over conventional humidification
      methods in that it does not require external power for operation, the humidifier
      is intrinsically durable, capable of operating under harsh conditions, and
      can
      be produced in customer specified physical configuration. EFH humidifiers are
      offered in two basic configurations, air-to-air and liquid water-to-air.





EnerOptix
      Remote Surveillance System :





EnerFuel's
      remote portable wireless camera called the EnerOptix remote surveillance system
      is powered by its own fuel cell/chemical hydride fuel technology which, together
      with other power sources (like battery and solar power), provides low voltage
      energy at a lower weight than competing products. This energy is used to power
      a
      system of day/night *infrared* cameras
      that take and transmit pictures through the global CDMA network wirelessly
      to
      the internet and to the system user. The user can access and control the
      surveillance system via the internet.





We
      plan
      to sell the EnerOptix remote surveillance system in the consumer mass-market
      channels. The EnerOptix system has possible applications in the construction,
      forestry, surveillance, security, and military industries.





The
      chemical hydride system used to provide energy to the camera also has other
      potential applications that have remote, low-power high-energy
      needs.





Fuel
      Cell Related Engineering Services:





Our
      fuel
      cell-related services may include demonstration projects, technology
      development, design, fabrication, assembly and testing of fuel cell components,
      membrane electrode assembly ("MEA") performance and failure analysis and
      software development related to fuel cell operations.





In
      2007
      EnerFuel completed a high temperature fuel cell development contract with
      American Science and Technology and the DOD. For this program, EnerFuel
      developed and demonstrated an air-cooled high temperature fuel cell stack
      designed for use in unmanned aerial vehicles.





During
      2007, EnerFuel started working on an alternative energy demonstration program
      with the Florida Hydrogen Initiative and the US Department of Energy (DOE).
      This
      program will continue during 2008. As part of this project, EnerFuel is
      designing and implementing a 10kW (kilowatt) fuel cell system using the chemical
      energy in waste orange peels to power the Turkey Lake Rest Stop of the Florida
      Turnpike located north of Orlando. EnerFuel is working on this project under
      a
      50% cost-share contract under which the Florida state government and the DOE
      will provide $550,000 over 18 months to fund EnerFuel's research and product
      development and EnerFuel will use the same amount of its own funds in performing
      the contract.





*Fuel
      Cell Technology Overview*




Fuel
      cells are power generators that directly, and without combustion, produce
      electricity from a fuel and oxidant; typically hydrogen and oxygen. This direct
      conversion allows fuel cells to create electricity at higher efficiencies than
      combustion engines. The energy density of a fuel cell ( *i.e.,* the mass
      per unit of energy) is dependent primarily on the quantity and packaging of
      hydrogen used in the fuel cell.




12




There
      is
      an increased interest in fuel cell vehicles due to the increased interest in
      alternative energy and heightened concern with the cost and availability of
      oil.
      Several major car makers have instituted fuel cell vehicle development programs
      including Honda and General Motors. When and if developed cost effectively,
      fuel
      cell vehicles are expected to have a long driving range with low (or zero)
      emissions.





Major
      barriers to fuel cell commercialization remain. While currently there is a
      lack
      of hydrogen fueling infrastructure ( *i.e* .,
      availability of hydrogen supplies and transmission networks), this
      infrastructure could be developed if an affordable fuel cell car is made
      available to the mass markets. From a technology standpoint, the cost of fuel
      cell power systems must be drastically reduced and their reliability improved
      before there is widespread customer acceptance.





EnerFuel
      is developing technology that could potentially lower many of the barriers
      to
      automotive fuel cell commercialization. For example, EnerFuel is developing
      low-cost high-temperature (>100 degrees C) PEM fuel cell technology. We
      believe that the development of a high-temperature stacking system would reduce
      many of the technological barriers for automotive fuel cell
      commercialization.





*Our
      Markets*




Forecasts
      for size and growth of the markets for fuel cell products vary. We believe
      the
      overall markets for fuel cell products will experience substantial growth in
      the
      coming years. Global Information, Inc., in a study entitled “World Fuel Cell to
      2009,” published in May 2005, has estimated that overall demand for all types of
      fuel cell products combined will rise from $375 million in 2005 to $2.5 billion
      in 2009 and $13.5 billion in 2014.





EnerFuel’s
      current market opportunities include small product sales of fuel cell components
      such as humidifiers, and a low cost chemical hydride-based hydrogen generator.
      We are also developing a high temperature fuel cell stack. EnerFuel’s
      proprietary chemical hydride-based hydrogen generator has a long shelf-life,
      and
      can be used in low-power backup power, auxiliary power, and portable power
      products with very high energy density.





EnerFuel
      may in the future pursue directly or through partnerships with OEMs several
      emerging market sectors within the overall fuel cell market. These include
      the
      markets for portable power, auxiliary power, backup power, and marine power.
      The
      market for portable power encompasses a variety of market segments from powering
      military equipment to powering OEM devices ranging from lawnmowers to robotics.
      The auxiliary power market supplies auxiliary power units that provide
      electricity used in a vehicle, such as a long-haul truck or boat, for
      applications other than propulsion. Uses of backup power range from providing
      assurance that applications will continue to function in the unlikely event
      of a
      blackout to augmenting unreliable power grids in many countries on a daily
      basis. The marine power market supplies low noise, high efficiency power
      generators for boats, yachts and sailboats.




The
      potential market opportunities for EnerFuel’s chemical hydride generator also
      include the market for remote sensors for video cameras (visible, infrared,
      ultraviolet), which could have applications for weather instrumentation and
      tsunami and earthquake detection.





There
      are
      potential additional markets for fuel cells within the backup power supply
      market. We believe that fuel cells have several advantages over batteries
      including better energy storage, as well as advantages over internal combustion
      generators, including less noise and fumes and increased reliability.
      Additionally, fuel cell power generators can be operated indoors without
      generating carbon monoxide.





*Competition*




There
      are
      many companies in the fuel cell business that are generally larger and/or have
      greater resources than EnerFuel, such as Ballard, Plug Power, UTC and ReliOn.
      Many of these companies have been in the fuel cell industry for longer than
      we
      have and have more available capital and greater technical, marketing, sales,
      manufacturing, distribution and other resources than we do. We believe that
      EnerFuel's competitive advantages include, its experienced technical team and
      a
      building block product development approach, which we believe will make it
      possible for EnerFuel to get its proposed products into the market more quickly
      than the competition.




13




Within
      the fuel cell market, there are companies that operate in many areas of fuel
      cell technology and others that operate in narrowly defined areas, such as
      development and marketing of fuel cell stacks or PEMs or MEAs (membrane
      electrode assemblies). EnerFuel’s competition consists of mainly pure stack or
      pure membrane companies. Unlike these companies, EnerFuel works in both stacks
      and membranes, and we believe it will be able to optimize both aspects in ways
      its competitors, which do not operate in both sectors, cannot, because of the
      technical performance connections between these two components. Stack
      competitors include: Ballard, Plug Power, UTC and ReliOn. Membrane competitors
      include: Gore, DuPont, DeNora, Asahi Glass and PEMEAS. We believe that BASF
      is
      the only company with commercially available high temperature MEAs at this
      time.
      EnerFuel plans to use low cost materials and is researching the possibility
      of
      eliminating platinum as a catalyst which would give it a competitive
      advantage.





We
      believe products based on EnerFuel’s technology will have several competitive
      advantages. These include:





·
            Smaller,
                lighter weight, high temperature fuel
                cell


·
            Flexible
                design and easier reparability


·
            Lower
                cost materials used in production


·
            Lower
                cost MEA’s for EnerFuel Stacks





*Customers
      and Potential Customers*




In
      June
      2006, EnerFuel launched its first product, a fuel cell humidifier. Since then,
      EnerFuel has sold humidifiers to Hydrogenics, Protonex, General Motors, NASA,
      United Technologies, and the Government of Singapore. Revenues from these sales
      have been minimal to date. Many of these customers are using EnerFuel
      humidifiers in product prototypes. If these products are launched, EnerFuel
      humidifier sales could increase.





In
      late
      2007, EnerFuel developed and unveiled a beta prototype of its remote
      surveillance system (EnerOptix) at the 2007 Fuel Cell Seminar in San Antonio,
      Texas. EnerFuel plans to sell the EnerOptix system through online web sales
      sites beginning in 2008.





*Technical
      Resources*




Our
      management and engineering staff has technology expertise in the following
      areas:





·
            Proton exchange membrane fuel cell
              (PEMFC)
              membrane electrode assembly (MEA)


·
            Fuel
                cell stack design


·
            Fuel
                cell system integration


·
            Fuel
                cell system controls development


·
            Reformate
                gas processing


·
            Fuel
                processing


·
            Fuel
                cell failure analysis and
                mechanisms


·
            Electrolyzers
                (membrane, hardware, controls)


·
            Microelectronics





Our
      West
      Palm Beach facility is equipped and permitted for fuel cell development
      operations.





*Intellectual
      Property*




Currently,
      EnerFuel’s IP portfolio consists of two non-provisional patent applications and
      eight provisional patent applications covering various aspects of fuel cell
      technology. Of particular importance, EnerFuel has patent filings associated
      with the use of its singular chemical hydride chemistry to generate hydrogen,
      the packaging of an open cathode fuel cell stack, and the manufacturing methods
      used in making its humidifiers. The following is a description of our patent
      applications.




14





·
            fuel
                cell humidifier and method of forming the
                same


·
            hydrogen
                refueling station


·
            method
                and apparatus for cold starting a PEM fuel
                cell


·
            fuel
                cell humidifier incorporating rectangular moisture exchange
                cartridges


·
            humidifier
                device and method of forming the
                same


·
            hydrogen
                production from chemical hydrides


·
            symmetrical
                PEM fuel cell module


·
            remote
                surveillance system with wireless data
                transmission




EnerFuel
      is developing intellectual property in the following areas:





·
            Design
                of a high temperature fuel cell
                stack


·
            Method
                of preparation of a high temperature MEA that does not require water
                for
                proton conduction


·
            System
                integration of a high temperature fuel cell
                system





We
      require our employees to sign confidentiality and work-for-hire agreements.
      We
      also enter into confidentiality agreement with third parties before discussing
      sensitive information with them.





*Sources
      of Supply*




There
      are
      a limited number of suppliers of fuel cell membrane electrode assemblies (MEAs).
      EnerFuel sources low and high temperature MEAs from BASF. To our knowledge
      BASF
      is the only supplier of high temperature fuel cell MEAs in the market.





*Research
      and Development*




During
      2007 and 2006 EnerFuel spent $2,937,000 and $2,008,000, respectively, on
      research and development.





*Facilities*




EnerFuel
      leases its headquarters in West Palm Beach, Florida (7,160 square feet).
      Additionally, EnerFuel operates in a facility located in Fort Lauderdale,
      Florida owned by Ener1. Both facilities have offices and fuel cell specific
      laboratory space and equipment. The West Palm Beach facility also has a complete
      machine shop and is equipped with routed de-ionized water, cooling water, clean
      compressed air, hydrogen and other gases.





**Our
      Nanotechnology Operations**





*Overview*





Our
      nanotechnology operations currently consist of research and development efforts
      to develop our patent pending vapor deposition and solidification (VDS) and
      high
      pressure vapor deposition solidification (HDS) processes. These processes are
      used to deposit materials in microscopically thin (from 500nm) and thick (up
      to
      1mm) layers on substrates used to form manufactured components. The VDS process
      is designed to facilitate precise deposition of the manufacturing materials
      so
      as to increase efficiency and speed of production while also increasing
      performance of the battery electrode by enhancing conductivity and producing
      increased electrical current. These processes have potential applications in
      thin batteries and for corrosive-proof, metal-ceramic
      composite, heat
      resisting, heat-resistant, wear-proof and other coatings for battery and
      non-battery applications.





Nano
      processes for deposition are typically PVD (physical vapor deposition) and
      CVD
      (chemical vapor deposition) vacuum technology. These processes have not been
      able to produce products at sufficiently low cost to be economic and are
      primarily used in laboratories. The VDS technology uses high-pressure and vapor.
      NanoEner’s HDS technology is a solid state process that is proprietary NanoEner
      technology. The VDS method is used for low-melting-point ceramics. HDS method
      is
      used for deposition of materials requiring low heat. One of the primary expected
      advantages of HDS is that the deposition speed increases with HDS. The HDS
      process coats an estimated 1000 micrometers per second while common PVD
      technology reaches only 0.25 micrometers per second.




15




If
      proven, the HDS process is expected to have several advantages,
      including:





·
            Lower
                production costs due to higher
                speed,


·
            Lower
                material costs due to lower structural
                requirements,


·
            Lower
                capital costs (no coating machines are required to coat
                electrodes),


·
            Excellent
                adhesion without binding agents,


·
            High
                efficiency of material deposition,
                and


·
            Controls
                porosity of applied materials





During
      2008, we intend to produce lithium battery electrodes on prototype machines
      which will be tested and evaluated by EnerDel. We have subcontracted the project
      to produce these electrodes to a Ukraine company. These
      nanostructural-electrodes do not require binding and conductive additives which
      are commonly used in the industry. The HDS process would eliminate the need
      for
      coating machines in battery manufacturing.





*Intellectual
      Property*





Through
      product development and research, NanoEner plans to develop an intellectual
      property (IP) portfolio that will protect the competitive advantage of its
      products. NanoEner has six nanotechnology-based non-provisional patent
      applications and one provisional patent application pending before the United
      States Patent and Trademark Office. NanoEner has one issued US Patent with
      several foreign counterparts currently pending in European and Asian countries,
      which cover our VDS “thin films” deposition process.





We
      require our employees to sign confidentiality and work-for-hire agreements.
      We
      also enter into confidentiality agreement with third parties before discussing
      sensitive information with them.





*Competition*





There
      are
      numerous companies involved in the nanotechnology field and the term
“nanotechnology” has a broad range of descriptions. We have defined our
      participation in this field initially in terms of the above-described efforts
      in
      lithium battery development and coatings. We believe that among the other
      companies participating in the nanotechnology field, there are many with greater
      financial, technical, marketing, sales, manufacturing, distribution and other
      resources than our company.





*Research
      and Development*





During
      2007 and 2006 NanoEner spent $895,000 and $654,000, respectively, on research
      and development to pursue technologies for nanomaterials and nanomanufacturing,
      focusing on applying nanotechnology to improving the performance of Li-ion
      battery electrodes.





*Facilities*





NanoEner
      facilities are located in our battery building in Fort Lauderdale, Florida.





**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. Certain certifications may
      not
      be required for products imbedded into systems (e.g., for certain OEM
      applications).




16





Future
      legislation and/or other regulation concerning the transportation and storage
      of
      hydrogen fuel and other fuels associated with fuel cells are expected in the
      future. As a result of any such legislation or regulation, we may need to obtain
      governmental approval for the storage or transportation of flammable or
      hazardous fuels before transporting fuel cell systems to our
      customers.





In
      addition to the foregoing, we must comply with all applicable environmental
      and
      safety regulations. These regulations may become more stringent, increasing
      the
      cost of compliance and the risk of failure to comply. In particular, there
      are
      environmental laws that provide for strict, unlimited liability in connection
      with releases of “hazardous substances.” In the manufacturing of batteries and
      components and materials for batteries (and to a lesser extent in our fuel
      cell
      and nanotechnology operations), we may use hazardous substances that are
      regulated under these environmental laws. Our battery operations are currently
      classified as a “small quantity generator of hazardous waste” and must operate
      in accordance with the applicable regulations. Air emissions from our battery
      operation are regulated under an operating permit issued at the local level.
      Compliance requirements are identified in the permit. At this time, our costs
      for maintaining environmental, health and safety compliance are not
      significant.




**Additional
      Information**





We
      electronically file reports with the Securities and Exchange Commission (the
      "SEC"), including annual reports, quarterly reports and current reports. The
      reports we file with or furnish to the SEC are available free of charge on
      our
      Internet web site as soon as reasonably practicable after we electronically
      file
      such material with, or furnish it to, the SEC. The
      public may also read and copy any materials that we file with or furnish to
      the
      SEC at the SEC's Public Reference Room at 450 Fifth Street, N.W., Washington,
      D.C. 20549. The public may obtain information on the operation of the Public
      Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also maintains
      an
      internet site that contains reports, proxy and information statements, and
      other
      information regarding issuers that file electronically with the SEC at *http://www.sec.gov* .


17


**ITEM
      2: PROPERTIES**





*Description
      of Properties*





Our
      corporate headquarters are located in Fort Lauderdale, Florida where we lease
      8,183 square feet of office space pursuant to a lease expiring February 28,
      2010. The facility was finished to our office layout specifications. The monthly
      rent plus common area charges total approximately $19,000 and are subject to
      annual increases.





EnerDel
      leases 92,000 square feet of industrial and office space in Indianapolis,
      Indiana pursuant to a lease expiring in February 2012. The monthly rent, plus
      common area charges, totals approximately $38,000 and is subject to annual
      increases. This space is used for research and development of battery products
      and for production of battery cells.





EnerFuel
      leases 7,611 square feet of industrial and office space in West Palm Beach,
      Florida pursuant to a lease expiring in December 31, 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.





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 a building in Fort Lauderdale, Florida containing
      approximately 19,000 square feet of industrial and office space. EnerFuel
      utilizes a portion of this facility for certain hardware development projects
      and NanoEner is utilizing a portion of this facility for prototype equipment
      and
      research and development.





The
      land,
      building and equipment are pledged as collateral to secure the obligations
      under
      our senior secured convertible debentures due January 2009 (the “2004
      Debentures”). As of December 31, 2007, $9,634,000 in aggregate principal amount
      of the 2004 Debentures was outstanding.




*Investment
      Policies*





We
      do not
      have specific limitations on the percentage of our assets that may be invested
      in any one investment or any specific limitation on the types of investments
      we
      may make. There is no specific shareholder vote requirement regarding changes
      in
      this policy. Generally, we acquire assets primarily for operating purposes
      and
      not for capital gains or income *per
      se* .





**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, 2007, there are no material pending legal
      proceedings.




**ITEM
      4: SUBMISSION OF MATTERS TO A VOTE FOR SECURITY HOLDERS**





None.





18





**PART
      II**




**ITEM
      5: MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
      SMALL BUSINESS ISSUER PURCHASE OF EQUITY SECURITIES**




Since
      April 6, 2006 our stock has been listed on the Over-the-Counter Bulletin Board.
      Previously, from December 22, 2005 to April 6, 2006, the principal market for
      our stock was the Pink Sheets. On February 29, 2008, the closing price of our
      common stock on the Over-the-Counter Bulletin Board was $0.86 per
      share.





The
      OTC
      Electronic Bulletin Board is a regulated quotation service that displays
      real-time quotes, last-sale prices and volume information in OTC equity
      securities.





The
      following table sets forth the high and low prices for our common stock for
      the
      period from April 6, 2006 through December 31, 2007 on the OTC Electronic
      Bulletin Board and as reported by the OTC Pink Sheets for the
      period from January 1, 2006 through April 6, 2006. The quotations reflect
      inter-dealer prices, without retail mark-up, mark-down or commission and may
      not
      represent actual transactions.




**Year**
            
            **Fiscal
                Quarter Ended**
            
            **High**
            
            
            **Low**2006
            
            March
                31, 2006
            
            0.45
            
            
            0.13June
                30, 2006
            
            0.50
            
            
            0.28September
                30, 2006
            
            0.50
            
            
            0.23December
                31, 2006
            
            0.35
            
            
            0.192007
            
            March
                31, 2007
            
            0.40
            
            
            0.21June
                30, 2007
            
            0.29
            
            
            0.20September
                30, 2007
            
            0.46
            
            
            0.21December
                31, 2007
            
            0.81
            
            
            0.40




As
      of
      February 29, 2008, there were 652,328,047 shares of common stock outstanding
      held by approximately 350 shareholders of record. The number of shareholders
      of
      record does not include beneficial owners of common stock whose shares are
      held
      in the names of various dealers, clearing agencies, banks, brokers and other
      fiduciaries.





We
      have
      not paid any cash dividends during the last two fiscal years and do not
      anticipate paying any cash dividends on our common stock.





The
      terms
      of our senior secured convertible debentures restrict our ability to pay
      dividends on our common stock until we have met certain milestones set forth
      in
      the debentures or until less than $100,000 in aggregate principal amount of
      the
      debentures remains outstanding.





**Recent
      sales of unregistered securities and use of proceeds**





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 Regulation
      D
      under the Securities Act.





*Shares
      issued as compensation*





In
      October 2007, we issued 25,888 shares of common stock as compensation to an
      independent third party for investor relation services and in accordance with
      SFAS No. 123R, recorded the value of the equity issued as general and
      administrative expense of $18,980.




19





In
      October 2007, we issued 9,769 shares of common stock as compensation to an
      independent third party for legal fees and in accordance with SFAS No. 123R,
      recorded the value of the equity issued as general and administrative expense
      of
      $6,250.





In
      December 2007, we issued 300,000 shares of common stock to three individuals
      as
      compensation for placement agency services and in accordance with SFAS No.
      123R,
      recorded the value of the equity issued as general and administrative expense
      of
      $210,000.





*Shares
      issued in connection with Capital Commitment Agreement*


In
      November 2007, we issued 9,530,483 shares of common stock and warrants to
      purchase up to 5,718,290 shares of common stock in exchange for $2,859,145
      in
      cash to Ener1 Group as part of its Capital Commitment
      Agreement.


20


**ITEM
      6: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
      OPERATIONS**





*The
      following Management’s Discussion and Analysis of Financial Condition and
      Results of Operations contain ”forward-looking statements” within the meaning of
      Section 27A of the Securities Act, and Section 23E of the Securities Exchange
      Act of 1934, as amended,* including statements *about our beliefs and expectations. There are many risks and uncertainties
      that
      could cause actual results to differ materially from those discussed in the
      forward-looking statements. Potential factors that could cause actual results
      to
      differ materially from those discussed in any forward-looking statements
      include, but are not limited to, those stated below under the headings
“Cautionary Statement Concerning Forward-Looking Statements” and “Risk Factors”
as well as those described from time to time in our filings with the Securities
      and Exchange Commission* .





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





***Overview***





We
      have
      three business lines which we conduct through our three operating subsidiaries.
      EnerDel, an 80.5% owned subsidiary which is 19.5% owned by Delphi Corporation,
      develops lithium ion (“Li-ion”) batteries for automotive, military and other
      industrial uses. EnerFuel, a wholly-owned subsidiary, develops fuel cell
      products and services. NanoEner, also a wholly-owned subsidiary, develops
      technologies, materials and equipment for nanomanufacturing.





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





We
      have
      developed a lithium ion battery for Hybrid Electric Vehicles (HEVs) that we
      believe has significant competitive advantages because of its safety, power
      and
      other performance characteristics. In particular, our battery chemistry, which
      uses lithium titanate for the anode material, does not experience thermal
      problems that sometimes occur in lithium batteries used in consumer electronics.
      Our HEV battery cell was developed under an ongoing program with the United
      States Advanced Battery Consortium (“USABC”). The USABC is a consortium of the
      three largest U.S. auto manufacturers -- Ford, General Motors and Chrysler,
      with
      funding provided by the U.S. Department of Energy (DOE).





We
      are
      also developing a lithium titanate battery for plug-in hybrid electric vehicles
      (PHEV) under an award from the DOE which is expected to be managed by the USABC.
      In addition, we are currently developing prototype samples for a lithium battery
      for an electric vehicle for Think Global SA (“Think”), which if successful, we
      expect to begin shipping in December 2008. The first generation battery for
      this
      electric vehicle will use a hard carbon anode which we intend to replace with
      lithium titanate when the next generation battery is developed.





The
      major
      automotive companies have discussed plans to introduce Li-ion batteries in
      HEV
      and PHEV with varying dates. No industry production contract awards have been
      formally announced. Extensive additional testing and evaluation by the
      automotive industry is required before the lithium ion battery technology is
      adopted. Our HEV Li-ion batteries are undergoing extensive testing, the results
      of which are evaluated by our prospective customers and the USABC.





EnerFuel
      is developing what it believes will be the next generation of high-temperature
      fuel cells, intended to address the fuel cell industry's need for fuel cells
      that are smaller, less costly and less complex. EnerFuel is pursuing fuel cell
      related opportunities in the portable power, auxiliary power, distributed power
      and backup power markets. EnerFuel developed a new fuel-cell-powered remote
      surveillance camera, a prototype of which was exhibited to the public in the
      fourth quarter of 2007.





NanoEner,
      our nanotechnology subsidiary, has built prototype equipment that utilizes
      our
      proprietary vapor deposition and solidification (“VDS”) process for depositing
      materials onto battery electrodes as part of the battery cell manufacturing
      process. NanoEner is developing electrodes produced using this process for
      testing during 2008.





21





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





Management’s
      discussion and analysis of our financial condition and results of operations
      are
      based on our consolidated financial statements, which have been prepared in
      accordance with accounting principles generally accepted in the United States.
      The preparation of these consolidated financial statements requires management
      to make estimates and judgments that affect the reported amounts of assets,
      liabilities, revenues and expenses, and related disclosures of contingent assets
      and liabilities. 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.





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. Certain estimates are subject
      to market place conditions, and are discussed below. Actual results may differ
      from these estimates under different assumptions or conditions. 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.





*Derivative
      Instruments*





Statement
      of Financial Accounting Standard (“SFAS”) No. 133, “Accounting for Derivative
      Instruments and Hedging Activities,” as amended, requires all derivatives to be
      recorded on the balance sheet at fair value. These derivatives, including
      embedded derivatives, are separately valued and accounted for on our balance
      sheet.





Emerging
      Issues Task Force Issue No. 00-19, "Accounting for Derivative Financial
      Instruments Indexed to and Potentially Settled in, a Company's Own Stock" ("EITF
      00-19"), 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
      guidance by SFAS No. 133 and EITF 00-19, we determined the conversion feature
      of
      our senior secured convertible debentures due January 2009 (the “2004
      Debentures”) and our senior secured convertible debentures due March 2009 (the
“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.




*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.





*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.




22





We
      generally recognize revenue from research and development cost-sharing
      arrangements with commercial entities 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.





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





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 non- controlling 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
      for which the acquisition date is on or after an entity's fiscal year that
      begins after December 15, 2008. We will assess the impact of SFAS 141R on our
      consolidated financial statements if and when a future acquisition
      occurs.




In
      December 2007, the FASB issued SFAS No. 160, Non-controlling 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
      non-controlling interest, changes in a parent's ownership interest and the
      valuation of retained non-controlling equity investments when a subsidiary
      is
      deconsolidated. The Statement also establishes reporting requirements that
      provide sufficient disclosures that clearly identify and distinguish between
      the
      interests of the parent and the interests of the non-controlling owners. SFAS
      160 is effective as of the beginning of an entity's fiscal year that begins
      after December 15, 2008. We are currently evaluating the potential impact,
      if
      any, of the adoption of SFAS 160 on our consolidated financial
      statements.





In
      December 2007, the SEC issued SAB No. 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 123R. SAB 110 is
      effective for stock options granted after December 31, 2007. We are
      currently evaluating the impact of the new provisions of SAB 110 for stock
      option awards granted after December 31, 2007.





In
      February 2007, the FASB issued SFAS No. 159, The Fair Value Option for
      Financial Assets and Financial Liabilities—Including an amendment of FASB
      Statement No. 115 (“SFAS 159”). SFAS 159 permits entities to choose to
      measure many financial instruments and certain other assets and liabilities
      at
      fair value on an instrument-by-instrument basis. SFAS 159 is effective for
      fiscal years beginning after November 15, 2007. We are currently evaluating
      the potential impact, if any, of the adoption of SFAS 159 on our consolidated
      financial statements.





In
      September 2006, the FASB issued SFAS No. 157, Fair Value Measurements
      (“SFAS 157”), which defines fair value, establishes a framework for measuring
      fair value in accordance with generally accepted accounting principles, and
      expands disclosures about fair value measurements. SFAS 157 is effective for
      fiscal years beginning after November 15, 2007, however the FASB has
      delayed the effective date of SFAS 157 to fiscal years beginning after
      November 15, 2008 for non-financial assets and non-financial liabilities,
      except those items recognized or disclosed at fair value on an annual or more
      frequently occurring basis. We are currently evaluating the potential impact,
      if
      any, of the adoption of SFAS 157 on our consolidated financial
      statements.





**Results
      of Operations for Years Ended December 31, 2007 and 2006**





While
      we
      had no significant sales or gross profit from continuing operations during
      the
      year ended December 31, 2007, sales increased by $180,000 from $100,000 for
      the
      year ended December 31, 2006 to $280,000 for the year ended December 31, 2007.
      The causes for the increase are EnerDel’s revenue for products under the Think
      supply agreement ($76,000), EnerDel’s sales of battery cells ($25,000) and
      EnerFuel’s increased revenue from engineering services ($76,000).





*Net
      income (loss)* .
      We
      reported a net loss of $51,710,000 for the year ended December 31, 2007, an
      increase of $10,405,000, or 25%, when compared to a net loss of $41,305,000
      for
      the year ended December 31, 2006.




23





The
      increase in net loss was due to an increase of $11,391,000 in loss on derivative
      liabilities, an increase in interest expense of $6,857,000, and an increase
      of
      $5,506,000 in research and development expenses. These increases have been
      partially offset by a decrease of $8,617,000 in warrant modification expense,
      a
      decrease in general and administrative expenses of $2,212,000 and a decrease
      in
      registration delay expenses of $2,016,000. Non-cash elements of our net loss
      were $22,291,000 and $16,042,000 for the years ended December 31, 2007 and
      2006,
      respectively.





*Losses
      from operations* .
      We
      reported losses from operations of $21,046,000 for the year ended December
      31,
      2007, a decrease of $5,364,000, or 20%, when compared to losses from operations
      of $26,410,000 for the year ended December 31, 2006. The decrease in operating
      losses was attributable to a $2,212,000 decrease in general and administrative
      expenses and an $8,617,000 reduction in warrant modification expense, partially
      offset by a $5,506,000 increase in research and development expenses. We had
      no
      significant sales from continuing operations in 2007 or 2006.





*General
      and administrative (“G&A”) expenses.* G&A
      decreased $2,212,000, or 21%, to $8,265,000 in 2007 compared to $10,477,000
      in
      2006. This decrease was due to decreases of $1,264,000 in legal and professional
      fees which were higher in 2006 due to work required to analyze and account
      for
      financial derivatives, $565,000 in stock based compensation expense due to
      a
      decrease in equity compensation awards, $136,000 in salary related expenses,
      $236,000 in insurance expense and $153,000 in outside services, partially offset
      by an increase of $304,000 in investment banker fees and an increase in public
      and investor relation fees of $333,000. G&A expenses for the year ended
      December 31, 2006 include $584,000 which represents the fair value of the Series
      B Preferred Stock Put that we agreed to terminate in 2006 in exchange for
      Ener1Group’s agreement to exercise warrants to purchase our common stock for
      which there was no corresponding expense during the year ended December 31,
      2007.





*Research
      and development (“R&D”) expenses.* Our
      R&D expenses were $11,948,000 and $6,442,000 for the years ended December
      31, 2007 and 2006, respectively, an increase of $5,506,000 or 85%. The increase
      is primarily attributable to R&D activity associated with our battery
      business which consolidated its operations, equipment and personnel into our
      Indiana manufacturing and R&D facility during the first half of 2006.
      R&D expenses were lower during this transition period but began accelerating
      as Li-ion battery development activities increased during the second half of
      2006. In addition, the increase for the year ended December 31, 2007 is due
      the
      acquisition of in-process R&D from Itochu totaling $1,353,000 in September
      2007. We report proceeds from cost-share R&D contracts that we enter into
      with the USABC, ONR and FHI as a reduction of research and development expenses.
      Proceeds from contracts were $910,000 and $451,000 during the years ended
      December 31, 2007 and 2006, respectively





R&D
      expenses for fiscal 2007 included $8,116,000 of expenses incurred in connection
      with our battery business, $2,937,000 of expenses incurred in connection with
      our fuel cell business, and $895,000 of expenses incurred in connection with
      our
      nanotechnology business. R&D expenses for fiscal 2006 included $3,780,000 of
      expenses incurred in connection with our battery business, $2,008,000 of
      expenses incurred in connection with our fuel cell business, and $654,000 of
      expenses incurred in connection with our nanotechnology business. Overall,
      R&D materials and equipment expense increased $2,091,000 from $875,000 in
      2006 to $2,966,000 in 2007.





*Warrant
      modification expense.* Warrant
      modification expense decreased by $8,617,000, or 94%, to $583,000 for the year
      ended December 31, 2007 compared to $9,200,000 for the year ended December
      31,
      2006. Warrant modification expense during each of the years ended December
      31,
      2007 and 2006 resulted from modification of the terms of certain warrants to
      purchase our common stock issued to Ener1 Group.





*Interest
      expense.* Interest
      expense was $17,233,000 and $10,376,000 in 2007 and 2006, respectively, an
      increase of $6,857,000, or 66%. The increase was primarily due to an increase
      of
      $4,266,000 in debenture discount accretion from conversion of the 2004 and
      2005
      Debentures in 2007 and an increase of $1,236,000 in accrued interest on
      convertible notes due to Ener1 Group issued starting in June 2006, as well
      as
      increased amortization of discount and deferred financing costs on most of
      these
      notes for a full year in 2007, compared with six months or less in 2006.





*Registration
      delay expenses* .
      Registration delay expenses decreased $2,016,000 to $0 for the year ended
      December 31, 2007 compared to $2,016,000 the year ended December 31, 2006,
      because we ceased incurring registration delay expenses relating to the 2004
      Debentures when our obligation to register the resale of the common stock
      underlying the 2004 Debenture expired on January 20, 2006 and we ceased
      incurring registration delay expenses relating to the 2005 Debentures when
      the
      registration statement for the common stock underlying the 2005 Debentures
      was
      declared effective on September 8, 2006. We
      incurred a total of $2,671,000 in registration delay expenses under the
      registration rights agreements between us and the holders of the 2004 and 2005
      Debentures. As of February 29, 2008, $1,992,000 of the registration delay
      expenses have been paid and $679,000 remains unpaid. We have not entered into
      a
      forbearance agreement with, nor received a default notice from, any of the
      holders with respect to noncompliance with these payment obligations. If a
      default notice is delivered, an event of default would occur if payment is
      not
      made in ten business days (or 15 business days if Ener1 is making good faith
      efforts to cure the default).




24





*Gain
      (loss) on derivative liabilities.* Loss on
      derivative liabilities increased $11,391,000 from a loss of $146,000 for the
      year ended December 31, 2006 to a loss of $11,537,000 for the year ended
      December 31, 2007. The increase was
      comprised of an increase in loss of $17,114,000 on derivative liabilities for
      the 2004 and 2005 Debentures and the warrants issued to purchasers of the 2005
      Debentures attributable to non-cash changes in the accounting value of their
      freestanding and embedded derivative liabilities, which was primarily due to
      changes in the market price of our common stock. This increase was partially
      offset by a decrease in loss on derivative liabilities of $5,723,000 associated
      with various financial instruments that were terminated, exercised or changed
      in
      status, which caused them to no longer be treated as derivative liabilities
      at
      December 31, 2006.





*Provision
      for income taxes.* The
      effective tax rate in 2007 and 2006 was zero percent. We reported a net
      operating loss (“NOL”) for tax purposes, and the NOL was entirely offset by an
      increase in the deferred tax asset valuation allowance.





**Liquidity
      and Capital Resources**





At
      December 31, 2007, we had working capital of $11,730,000, ($21,874,000 excluding
      derivative liabilities). Our available cash at December 31, 2007 was
      $24,826,000. We
      used
      $26,692,000 of cash for operating activities in 2007, which was funded through
      financing activities of $51,722,000. These financing activities consisted of
      (1)
      funding from Ener1 Group, our controlling shareholder, through purchases of
      convertible notes and exercise of warrants to purchase common stock, which
      generated proceeds of $10,383,000, (2) purchase of common stock by Ener1 Group
      pursuant to the Capital Commitment, described below, which generated proceeds
      of
      $12,721,000 and (3) our sale of common stock and warrants pursuant to the
      Securities Purchase Agreement, described below, with certain investors which
      generated net proceeds of $29,405,000.





The
      proceeds of our financing activities during the year ended December 31, 2007
      were used for working capital purposes, including interest payments of
      $7,058,000 made to the holders of the 2004 and 2005 Debentures and payments
      of
      $1,542,000 of registration delay expenses to holders of our 2004 and 2005
      Debentures. We incur monthly cash operating expenses, primarily for salaries,
      insurance, employee benefits and rent, typically ranging from $1,400,000 to
      $1,700,000. In addition, interest payments of approximately $356,000 under
      the
      2004 Debentures and 2005 Debentures remaining outstanding are due at the end
      of
      each quarter.





We
      have issued
      subordinated, convertible notes to Ener1 Group in the aggregate principal amount
      of $11,960,000 which bear interest at the rate of 10% per annum. All interest
      accrues until the maturity of the notes. The notes mature in the second quarter
      of 2009 or earlier if all of our obligations under the 2004 and 2005 Debentures
      have been satisfied. After our obligations under the 2004 and 2005 Debentures
      have been satisfied, the notes will be convertible at Ener1 Group's option
      into
      up to 23,920,000 shares of common stock at the conversion price of $0.50 per
      share. In
      consideration for the exercise by Ener1 Group of certain warrants prior to
      their
      expiration, we lowered the exercise prices of these warrants held by Ener1
      Group. During the first three quarters of 2007, we relied on our controlling
      shareholder, Ener1 Group for funding to sustain our operations on a
      month-to-month basis. During the first five months of 2007, Ener1 Group
      exercised warrants to purchase our common stock for an aggregate purchase price
      of $6,800,000.





In
      June
      2007, Ener1 Group agreed to invest up to $15,000,000 in our company through
      purchases of common stock and warrants (the "Capital Commitment"), to fund
      up to
      95% of our planned operations through December 31, 2007. Funding under the
      Capital Commitment was subject to our achieving certain operational and
      financial milestones including monthly limitations on available amounts based
      on
      budgeted expenditures. From
      June
      29, 2007 through November 14, 2007, Ener1 Group purchased 42,403,816 shares
      of
      common stock from us for $12,721,145 pursuant to the Capital Commitment. Subsequent
      to November 19, 2007, Ener1 Group was no longer required to invest the remaining
      funds under the Capital Commitment in our company because we raised capital
      from
      third parties.





25




On
      November 19, 2007, we sold 64,000,000 shares of common stock and warrants to
      purchase up to 57,600,000 shares of common stock for an aggregate purchase
      price
      of $32,000,000 to investors in a private placement. The warrants have an
      exercise price of $0.75 per share and can be exercised for a period of 180
      days
      following the closing of the private placement.




During
      the third and fourth quarters of 2007, investors converted a total of
      $22,210,000 in principal of the 2004 and 2005 Debentures into shares of common
      stock, In exchange for the agreement of investors holding a majority of our
      2004
      Debentures and 2005 Debentures to convert their Debentures prior to December
      31,
      2007 we agreed to make a "coupon make-whole" payment to these investors in
      the
      aggregate amount of $750,000.




From
      January 1, 2008 through February 29, 2008, $2,500,000 of principal of the 2004
      Debentures and $605,933 of principal of the 2005 Debentures have been converted
      into shares of common stock. The remaining principal balance of the Debentures
      as of February 29, 2008 is $8,609,000, consisting of $7,134,000 due under the
      2004 Debentures and $1,475,000 due under the 2005 Debentures. The original
      principal amount at inception of the 2004 Debentures and the 2005 Debentures
      were $20,000,000 and $14,225,000, respectively.




During
      the year ended December 31, 2007, we were awarded $10,000,000 in government
      research and development contracts. These contracts are typically in the form
      of
      cost sharing development contracts which are implemented over periods of six
      to
      eighteen months. Amounts we receive under these contracts will offset our
      research and development expenses.





We
      believe that we have sufficient capital to fully fund our business plan for
      2008. We
      intend
      to continue efforts to raise additional capital during 2008 from strategic
      and
      financial investors. In addition, we expect to bid for additional research
      and
      development contracts from government and industry sources.




**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 2008 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” below and in our filings with the Securities
      and Exchange Commission from time to time, and other unforeseen events or
      circumstances could affect our future results and could cause those results
      or
      other outcomes to differ materially from those expressed or implied in our
      forward-looking statements.  Accordingly, you should not place undue
      reliance on forward-looking statements, which speak only as of the date of
      this
      Annual Report.


26


**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 through the sale of our
      securities and by borrowing money. During the next two years, we will continue
      our research and development spending, and in addition will begin increasing
      our
      capital expenditures for plant and production equipment. Our ability to obtain
      additional financing will be subject to a number of factors, including market
      conditions, our operating performance and the terms of our existing
      indebtedness. The terms of our senior secured convertible debentures limit
      our
      ability to incur additional debt because any additional debt we incur must
      be
      contractually subordinated, as to payment and liquidation, to the payment in
      full of the debentures. We cannot assure you that we will be able to raise
      additional funds on terms favorable to us or at all. If we raise additional
      funds through the sale of equity or convertible debt securities, your ownership
      percentage of our common stock will be reduced. In addition, any such
      transactions may dilute the value of our common stock. We may issue securities
      that have rights, preferences and privileges senior to our common stock. The
      terms of any additional indebtedness may include restrictive financial and
      operating covenants that would limit our ability to compete and expand. Our
      failure to obtain any required future financing could materially and adversely
      affect our financial condition. Our ability to obtain financing from government
      contracts is subject to the availability of funds under applicable government
      programs and approval of our applications to participate in such programs.
      We
      cannot assure you that our efforts to obtain such funds from these government
      sources will be successful





**We
      have a history of operating losses.**





We
      have
      experienced net operating losses since 1997, incurred negative cash flows from
      operations since 1999 and, as of December 31, 2007, had a deficiency in
      assets, or a negative shareholders’ equity, of $7,027,000. Cash used in
      operations for the years ended December 31, 2007 and 2006 was $26,692,000 and
      $17,126,000, respectively. We expect that we will continue to incur negative
      cash flows and require additional cash to fund our operations and implement
      our
      business plan. The continued development of our energy-related technology and
      products will require significant additional capital investment.





**The
      terms of our senior secured convertible debentures issued in January 2004 and
      March 2005 restrict our operations.**





Our
      senior secured convertible debentures issued in January 2004 and March 2005,
      both due 2009, contain restrictive covenants that limit our ability to, among
      other things: dispose of assets; incur debt; pay dividends; repurchase our
      capital stock and debt securities; create liens on our assets; and, engage
      in
      transactions with our affiliates. These covenants may significantly limit our
      ability to respond to changing business and economic conditions and to secure
      additional financing, and we may be prevented from engaging in transactions
      that
      might be considered important to our business strategy or otherwise beneficial
      to us.





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





We
      are
      developing a number of products that are based on new technology. These products
      are in various stages of development. We do not know when or whether we will
      successfully complete research and development of these various 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





**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
      Li-ion batteries, fuel cells and nanotechnology. Before investing in our
      securities, you should consider the challenges, expenses and difficulties that
      we will face as a company seeking to develop and manufacture new
      products.




27





**Viable
      markets for our products may never develop, may take longer to develop than
      we
      anticipate or may not be sustainable.**





Our
      energy products and technologies target emerging markets and we do not know
      the
      extent to which our technologies and products will be accepted. If a viable
      market fails to develop or develops more slowly than we anticipate, we may
      not
      recover the losses we will have incurred to develop our products or achieve
      profitability. The development of a viable market for our products may be
      impacted by many factors which are not in our control, including:





·The
                cost competitiveness of our products·Consumer
                reluctance to try a new product·Consumer
                perceptions of our products’ safety·Regulatory
                requirements·Barriers
                to entry created by existing energy providers·Emergence
                of newer, more competitive technologies and
                products





Our
      planned products include battery technologies for HEVs. The ability of domestic
      automobile manufacturers to adopt new battery technologies for HEVs will depend
      on many factors outside our control, including their ability to develop HEV
      vehicle platforms. If the HEV industry does not accept Li-ion battery
      technology, or if our Li-ion batteries do not meet industry requirements for
      battery cost, weight and size, our batteries will not gain market acceptance.





**We
      have no experience manufacturing battery, fuel cell or nanotechnology-based
      products on a large-scale commercial basis and may be unable to do
      so.**





Since
      2002, we have focused primarily on research and development and have no
      experience manufacturing any of our planned products on a commercial basis.
      We
      are developing new battery products that will use high volume battery
      manufacturing processes and equipment. We have no experience using such
      equipment for the products we are developing. We do not know whether or when
      we
      will be able to develop efficient, low-cost manufacturing capabilities and
      processes that will enable us to manufacture our products in commercial
      quantities while meeting the quality, price, engineering, design and production
      standards required to successfully market our products. Our failure to develop
      such manufacturing processes and capabilities could have a material adverse
      effect on our business, financial condition, results of operations and
      prospects.





**We
      may not meet our development and commercialization milestones.**





We
      have
      established product development and commercialization milestones that we use
      to
      assess our progress toward developing commercially viable products. These
      milestones relate to technology and design improvements as well as to dates
      for
      achieving development goals. To gauge our progress, we plan to operate, test
      and
      evaluate our products. If our systems or products exhibit technical defects
      or
      are unable to meet cost or performance goals, including power output, useful
      life and reliability goals, our commercialization schedule could be delayed
      and
      potential purchasers of our initial commercial battery and energy products
      may
      decline to purchase them. We cannot assure you that we will successfully achieve
      our development and commercialization 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 may have a material adverse effect on our business,
      financial condition, results of operations and prospects.





**If
      we fail to meet the date for achieving development and commercialization
      milestones under our contract with Think Global, this contract may be
      cancelled.**





We
      must
      deliver three battery pack production prototypes on March 31, 2008 pursuant
      to
      our Supply Agreement with Think Global of Oslo, Norway, (“Think”). Failure to
      deliver these prototypes or failure of the prototypes to meet Think’s design and
      test requirements may result in the cancellation or amendment of this supply
      agreement. Think is not obligated to buy any units if design and test
      requirements are not met. This Supply Agreement is currently our only agreement
      to supply batteries for commercial production.





28




**We
      may be unable to establish relationships with third parties for aspects of
      product development, manufacturing, distribution and servicing and the supply
      of
      key components for our products.**





We
      will
      need to enter into additional strategic relationships in order to complete
      our
      current product development and commercialization plans. We will also require
      partners to assist in the distribution, servicing and supply of components
      for
      our anticipated fuel cell products which are in development. If we are unable
      to
      identify or enter into satisfactory agreements with potential partners, we
      may
      not be able to complete our product development and commercialization plans
      on
      schedule or at all. We may also need to scale back these plans in the absence
      of
      needed partners, which would adversely affect our future prospects. In addition,
      any arrangement with a strategic partner may require us to make large cash
      payments to the partner, issue a significant amount of equity securities to
      the
      partner, provide the partner with the opportunity to have representation on
      our
      board of directors, agree to exclusive purchase or other arrangements with
      the
      partner and/or commit significant financial resources to fund our product
      development efforts in exchange for their assistance or the contribution to
      us
      of intellectual property. Any such issuance of equity securities would reduce
      the percentage ownership of our then current stockholders. Our business,
      prospects, results of operations and financial condition are likely to be harmed
      if we fail to secure relationships, or maintain our current strategic
      relationships with entities that provide the product development,
      commercialization, distribution and servicing support we require.





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





We
      will
      rely on third-party suppliers to develop and supply key components that we
      will
      use in our products. If those suppliers fail to develop and supply these
      components in a timely manner or at all, or fail to develop or supply components
      that meet our quality, quantity or cost requirements, and we are unable to
      obtain substitute sources of these components on a timely basis or on terms
      acceptable to us, we may not be able to manufacture our products. In addition,
      to the extent that our supply partners use technology or manufacturing processes
      that are proprietary, we may be unable to obtain comparable components from
      alternative sources.





We
      do not
      know when or whether we will secure long-term supply relationships with any
      suppliers or whether such relationships will be on terms that will allow us
      to
      achieve our objectives. Our business, prospects, results of operations and
      financial condition could be harmed if we fail to secure long-term relationships
      with entities that will supply the required components for our battery and
      energy related products.





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





The
      markets in which we intend to compete are highly competitive. There are a number
      of companies located in the United States, Canada and abroad that are developing
      battery and fuel cell technologies and other energy products that will compete
      with our technologies and planned products. Some of our competitors are much
      larger than we are and have the manufacturing, marketing and sales capabilities
      to complete research, development and commercialization of commercially viable
      products more quickly and effectively than we can.





Not
      only
      do we face competition from other companies that are developing battery and
      fuel
      cell technologies, but we also face competition from companies that provide
      energy products based on traditional energy sources, such as oil and natural
      gas. We also face competition from companies that are developing energy products
      based on alternative energy sources as a significant amount of public and
      private funding is currently directed toward development of a number of types
      of
      distributed generation technology, including microturbines, solar power, wind
      power and other types of fuel cell technologies. Technological advances in
      alternative energy products, improvements in the electric power grid or other
      fuel cell technologies may make some of our planned products less attractive
      or
      render them obsolete. There are many companies engaged in all areas of
      traditional and alternative energy generation in the United States, Canada
      and
      abroad, including, among others, major electric, oil, chemical, natural gas,
      batteries, generators and specialized electronics firms, as well as
      universities, research institutions and foreign government-sponsored companies.
      Many of these entities have substantially greater financial, research and
      development, manufacturing and marketing resources than we do.




29





**We
      intend to offer Li-ion batteries to the automotive industry, which is a very
      competitive and cost-focused industry.**





Supplying
      Li-ion batteries to the automotive industry has significant risks for a new
      company like Ener1. The automotive industry is extremely competitive and
      competition to supply vehicle components to manufacturers focuses on cost,
      weight and size of such components. 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.





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





We
      may
      encounter problems and delays during testing of our planned products for a
      number of reasons, including the failure of our technology or the technology
      of
      third parties, as well as our failure to maintain and service our planned
      products properly. Many of the factors that may cause 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.**





The
      market for our technologies and products may be heavily influenced by federal,
      state, local and foreign government laws, regulations and policies concerning
      the energy industry. A change in the current regulatory policies could make
      it
      more difficult or costly for us to develop, manufacture or market our products.
      Any such changes could also deter further investment in the research and
      development of alternative energy sources, including fuel cells, which could
      significantly reduce demand for our technologies and products. We cannot predict
      how changes in regulation or other industry changes will affect the market
      for
      our products or impact our ability to distribute, install and service our
      products.





**We
      could be liable for environmental damages resulting from our research,
      development or manufacturing**  **operations.**





Our
      business exposes us to the risk that harmful substances may escape into the
      environment, resulting in personal injury or loss of life, damage to or
      destruction of property, and natural resource damage. Our insurance policies
      may
      not adequately reimburse us for costs incurred in defending and settling
      environmental damage claims, and in some instances, we may not be reimbursed
      at
      all. Our business is subject to numerous federal, state and local laws and
      regulations that govern environmental protection and human health and safety.
      These laws and regulations have changed frequently in the past and it is
      reasonable to expect there will be additional changes in the future. If our
      operations do not comply with current or future environmental laws and
      regulations, we may be required to make significant unanticipated capital and
      operating expenditures to bring our operations into compliance. If we fail
      to
      comply with applicable environmental laws and regulations, governmental
      authorities may seek to impose fines and penalties on us or to revoke or deny
      the issuance or renewal of operating permits and private parties may seek
      damages from us. Under those circumstances, we might be required to curtail
      or
      cease operations, conduct site remediation or other corrective action, or pay
      substantial damage claims.





**Our
      products may use materials that are inherently dangerous substances which could
      subject our business to product liability claims.**





Our
      energy technologies and products may use lithium, hydrogen or other materials
      that could leak and combust if ignited by another source. These technologies
      and
      products expose us to potential product liability claims relating to dangers
      that are inherent in lithium, hydrogen and products that use these materials.
      In
      addition, our products may operate at high temperatures, which could increase
      the risk of accidents involving combustion or explosion. Accidents involving
      our
      products or other hydrogen-based products could materially impede widespread
      market acceptance and demand for, or heighten regulatory scrutiny of, our
      products. In addition, we 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 warrant claims. Any liabilities we may incur relating
      to our products may exceed the scope of our insurance coverage.




30





**Product
      liability or defects could negatively impact our results of
      operations.**





Any
      liability we incur for damages resulting from malfunctions or design defects
      of
      our products could be substantial and could materially adversely affect our
      business, financial condition, results of operations and prospects. In addition,
      a publicized actual or perceived problem could adversely affect the market’s
      perception of our products, resulting in a decline in demand for our
      products.





**We
      may not be able to successfully identify, acquire or integrate acquisition
      candidates.**





As
      part
      of our business strategy, we may seek to acquire complementary technologies,
      products, expertise and/or other valuable assets. However, we may not be able
      to
      identify suitable acquisition candidates. If we do identify suitable candidates,
      we may not be able to complete the acquisitions on commercially acceptable
      terms
      or at all. We may not be able to successfully integrate the acquired business
      into our existing business in a timely and non-disruptive manner. We may have
      to
      devote a significant amount of time and management and financial resources
      to do
      so. An acquisition may not result in the expected revenues, earnings or business
      synergies. If we fail to integrate the acquired business effectively or if
      key
      employees of that business leave, the anticipated benefits of the acquisition
      would be jeopardized. The time, capital and management and other resources
      spent
      on an acquisition that fails to meet our expectations could cause our business
      and financial condition to be materially and adversely affected. In addition,
      as
      a result of any acquisition, we may incur non-recurring charges and be required
      to amortize significant amounts of intangible assets, which could adversely
      affect our results of operations.





**We
      may not be able to protect the intellectual property upon which we depend and
      we
      could incur substantial costs defending against claims that our products
      infringe on the proprietary rights of others.**





Our
      ability to compete effectively will depend, in part, on our ability to protect
      our proprietary technologies, systems designs and manufacturing processes.
      We
      rely on patents, trademarks, and policies and procedures related to
      confidentiality to protect our intellectual property. However, some of our
      intellectual property is not covered by any patent or patent application.
      Moreover, we do not know whether patents will be issued under any of our pending
      patent applications 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. Our patents may be challenged or invalidated. We could incur
      substantial costs in prosecuting or defending patent infringement suits or
      otherwise protecting our intellectual property rights. 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. If
      any
      of our intellectual property is found to infringe third party proprietary
      rights, we could be required to pay substantial royalties and/or damages, and
      we
      do not know whether we will be able to obtain licenses to use the intellectual
      property at issue on acceptable terms, if at all. Failure to obtain needed
      licenses could delay or prevent the development, manufacture or sale of our
      products, and could necessitate the expenditure of significant resources to
      develop or acquire non-infringing intellectual property.





**Some
      of our intellectual property is in the form of trade secrets and may not be
      protected by intellectual property laws.**





We
      will
      not be able to protect all of our intellectual property under patents,
      trademarks or copyrights. 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. Confidentiality agreements to which
      we
      are party may be breached, and we may not have adequate remedies for any breach.
      Our trade secrets for certain processes and technology may also become known
      without breach of such agreements or may be independently developed by
      competitors.





**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, including our officers and other key
      employees. Our business requires a highly skilled specialized workforce,
      including scientists, engineers, researchers and manufacturing and marketing
      professionals, who are in high demand and are often subject to competing offers.
      We may not be able 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.





31





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





We
      may
      market, distribute and service our products internationally. We have limited
      experience developing and no experience manufacturing our products to comply
      with the commercial and legal requirements of international markets. Our success
      in international markets will depend, in part, on our ability and our partners
’
ability to secure relationships with foreign sub-distributors, and our
      ability to manufacture products that meet foreign regulatory and commercial
      requirements. Additionally, our planned international operations are subject
      to
      other inherent risks, including potential difficulties in enforcing contractual
      obligations and intellectual property rights in foreign countries and
      fluctuations in currency exchange rates.





**Our
      government contracts could be terminated or modified in ways adverse to us
      if we
      don’t comply with Federal Accounting Regulations (FAR).**





As
      a
      government contractor, we must comply with and are affected by federal
      government regulations relating to the formation, administration and performance
      of government contracts. These regulations will affect how we do business with
      our customers and may impose added costs on our business. Any failure to comply
      with applicable laws and regulations could result in contract termination,
      price
      or fee reductions or suspension or debarment from contracting with the federal
      government.





In
      addition, federal government agencies routinely audit government contracts.
      These agencies review a contractor’s performance on its contract, pricing
      practices, cost structure and compliance with applicable laws, regulations
      and
      standards. These audits may occur several years after completion of the audited
      work. An audit could result in a substantial adjustment to our revenues because
      any costs found to be improperly allocated to a specific contract will not
      be
      reimbursed, while improper costs already reimbursed must be refunded.





**We
      may be unable to manage rapid growth effectively.**





We
      expect
      to expand our manufacturing capabilities rapidly, accelerate the
      commercialization of our products and enter a period of rapid growth, which
      will
      place a significant strain on our senior management team and our financial
      and
      other resources. The proposed expansion will expose us to increased competition,
      greater overhead, marketing and support costs and other risks associated with
      the commercialization of a new product. Our ability to manage our rapid growth
      effectively will require us to continue to improve our operations, to improve
      our financial and management information systems and to train, motivate and
      manage our employees. Difficulties in effectively managing the budgeting,
      forecasting and other process control issues presented by such a rapid expansion
      could harm our business, prospects, results of operations and financial
      condition.





**Our
      stock price has been and could remain volatile.**





The
      market price of our common stock has historically experienced and may continue
      to experience significant volatility. Our progress in developing and
      commercializing our products, our quarterly operating results, announcements
      of
      new products by us or our competitors, our perceived prospects, changes in
      securities analysts’ recommendations or earnings estimates, changes in general
      conditions in the economy or the financial markets, adverse events related
      to
      our strategic relationships and other developments affecting us or our
      competitors could cause the market price of our common stock to fluctuate
      substantially. In addition, in recent years, the stock market, and in particular
      the market for technology-related stocks, has experienced significant price
      and
      volume fluctuations. This volatility has affected the market prices of
      securities issued by many companies for reasons unrelated to their operating
      performance and may adversely affect the price of our common stock.





**Our
      principal shareholder has substantial control over our
      affairs.**





Ener1
      is
      controlled by Ener1 Group, which owns approximately 65% of our outstanding
      common stock. Three of Ener1 Group’s board members are also members of our Board
      of Directors, and four of our senior executives, including the Chief Executive
      Officer and Chief Administrative Officer, and two of our directors are also
      executives of Ener1 Group. Ener1 Group has the ability to control all matters
      submitted to a vote of the stockholders of Ener1, including the election and
      removal of directors and any merger, consolidation or sale of all or
      substantially all of our assets. In addition, Ener1 Group may dictate the
      management of our business and affairs. This concentration of ownership could
      have the effect of delaying, deferring or preventing a change in control or
      impeding a merger or consolidation, takeover or other business combination
      which
      you, as a shareholder, may view favorably.




32




**Future
      sales of our common stock may adversely affect our common stock
      price.**





If
      our
      shareholders sell a large number of shares of common stock or if we issue a
      large number of shares in connection with future acquisitions or financings,
      the
      market price of our common stock could decline significantly. In addition,
      the
      perception in the public market that our shareholders might sell a large number
      of shares of common stock could cause a decline in the market price of our
      common stock.





**Our
      certificate of incorporation and Florida law could adversely affect our common
      stock price.**





Provisions
      of our articles 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 of
      us.
      The issuance of additional series of preferred stock could also adversely affect
      the voting power of the holders of common stock, including the loss of voting
      control to others.




33





**Item
      7.****Financial
      Statements.**





**Financial
      Statements**


**Page**Report
                of Independent Registered Public Accounting Firm
            **35**Consolidated
                Balance Sheets
            **36**Consolidated
                Statements of Operations
            **37**Consolidated
                Statement of Stockholders' Deficit
            **38**Consolidated
                Statements of Cash Flows
            **39**Notes
                to Consolidated Financial Statements
            **41**




34





**REPORT
      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**





To
      the
      Board of Directors


Ener1,
      Inc.


Fort
      Lauderdale, Florida





We
      have
      audited the accompanying consolidated balance sheets of Ener1, Inc. (the
      "Company") as of December 31, 2007 and 2006 and the related consolidated
      statements of operations, stockholders' deficit and cash flows for each of
      the
      two years in the period ended December 31, 2007. 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. The
      Company is not required to have, nor were we engaged to perform, an audit of
      its
      internal control over financial reporting. Our audit included consideration
      of
      internal control over financial reporting as a basis for designing audit
      procedures that are appropriate in the circumstances, but not for the purpose
      of
      expressing an opinion on the effectiveness of the Company’s internal control
      over financial reporting. Accordingly, we express no such opinion. 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,
      2007 and 2006, and the results of its operations and its cash flows for each
      of
      the two years in the period ended December 31, 2007 in conformity with
      accounting principles generally accepted in the United States of
      America.




/s/
      MALONE & BAILEY, PC


www.malone-bailey.com


Houston,
      Texas





March
      5,
      2008




35


ENER1,
      INC.


CONSOLIDATED
      BALANCE SHEETS


(Dollars
      in thousands)


**December
                  31,**
              
              **December
                  31,****2007**
              
              **2006****ASSETS**Current
                  assetsCash
                  and equivalents, including restricted cash of $0 and $224,
                  respectively
              
              $
              24,826
              
              $
              291Accounts
                  receivable
              
              
              102
              
              
              152Prepaid
                  expenses and other current assets
              
              
              608
              
              
              248Due
                  from related parties
              
              
              94
              
              
              -Total
                  current assets
              
              
              25,630
              
              
              691Property
                  and equipment, net
              
              
              4,287
              
              
              3,554Investment
                  in EnerStruct, Inc.
              
              
              -
              
              
              40Deferred
                  debenture and note costs, net of amortization of $5,596and
                  $3,369, respectively
              
              
              835
              
              
              2,812Other
              
              
              549
              
              
              71Total
                  assets
              
              $
              31,301
              
              $
              7,168**LIABILITIES
                  AND STOCKHOLDERS' DEFICIT**Current
                  liabilitiesCurrent
                  portion of installment loan
              
              
              -
              
              
              27Notes
                  payable - short-term
              
              
              315
              
              
              -Accounts
                  payable and accrued expenses
              
              
              3,798
              
              
              5,937Interest
                  payable
              
              
              -
              
              
              1,300Derivative
                  liabilities
              
              
              10,144
              
              
              7,162Total
                  current liabilities
              
              
              14,257
              
              
              14,426Long-term
                  portion of installment loan
              
              
              -
              
              
              39Convertible
                  notes, advances and accrued interest due to related party,net
                  of discounts of $5,250 and $3,663, respectively
              
              
              8,315
              
              
              7,9392004
                  senior convertible debentures, net of discount of $3,597and
                  $11,780, respectively
              
              
              6,037
              
              
              7,9202005
                  senior convertible debentures, net of discount of $940and
                  $8,856, respectively
              
              
              1,141
              
              
              5,369Total
                  liabilities
              
              
              29,750
              
              
              35,693Redeemable
                  convertible preferred stockEnerDel,
                  Inc. Series A Preferred, $.01 par value, 500,000 shares
                  authorized,8,000
                  shares issued and outstanding; liquidation preference
                  $8,000
              
              
              8,577
              
              
              6,576Series
                  B Preferred, $.01 par value, 180,000 shares authorized, 0
                  and152,500
                  shares issued and outstanding, respectively; liquidationpreference
                  $0 and $15,250, respectively
              
              
              -
              
              
              15,162Minority
                  interest
              
              
              -
              
              
              -Commitments
                  and contingencies**STOCKHOLDERS'
                  DEFICIT**Common
                  stock, $.01 par value, 950,000,000 shares authorized,648,167,740
                  and 417,349,560 issued and outstanding, respectively
              
              
              6,482
              
              
              4,174Paid
                  in capital
              
              
              228,145
              
              
              137,507Accumulated
                  deficit
              
              
              (241,653
              )
              
              (191,944
              )Total
                  stockholders' deficit
              
              
              (7,026
              )
              
              (50,263
              )Total
                  liabilities and stockholders' deficit
              
              $
              31,301
              
              $
              7,168


See
      notes
      to consolidated financial statements.


36


ENER1,
      INC.


CONSOLIDATED
      STATEMENTS OF OPERATIONS


(In
      thousands except per share data)




**Year
                  Ended December 31,****2007**
              
              **2006**Net
                  sales
              
              $
              280
              
              $
              100Cost
                  of sales
              
              
              -
              
              
              -Gross
                  profit
              
              
              280
              
              
              100Operating
                  expensesGeneral
                  and administrative
              
              
              8,265
              
              
              10,477Research
                  and development, net
              
              
              11,948
              
              
              6,442Warrant
                  modification expense
              
              
              583
              
              
              9,200Depreciation
                  and amortization
              
              
              530
              
              
              391Total
                  operating expenses
              
              
              21,326
              
              
              26,510Loss
                  from operations
              
              
              (21,046
              )
              
              (26,410
              )Other
                  income (expense):Interest
                  expense
              
              
              (17,233
              )
              
              (10,376
              )Interest
                  income
              
              
              121
              
              
              -Registration
                  delay expenses
              
              
              -
              
              
              (2,016
              )Equity
                  in loss of EnerStruct, Inc.
              
              
              (40
              )
              
              (765
              )Other
              
              
              26
              
              
              17Gain
                  (loss) on derivative liabilities
              
              
              (11,537
              )
              
              (146
              )Total
                  other expense
              
              
              (28,663
              )
              
              (13,286
              )Loss
                  before income taxes
              
              
              (49,709
              )
              
              (39,696
              )Income
                  taxes
              
              
              -
              
              
              -Net
                  loss before minority interest
              
              
              (49,709
              )
              
              (39,696
              )Minority
                  interest
              
              
              (2,001
              )
              
              (1,609
              )Net
                  loss
              
              
              (51,710
              )
              
              (41,305
              )Deemed
                  preferred stock dividends
              
              
              (8,378
              )
              
              -Preferred
                  stock dividends
              
              
              (1,849
              )
              
              (1,974
              )Net
                  loss attributableto
                  common shareholders
              
              $
              (61,937
              )
              $
              (43,279
              )Net
                  loss per share:basic
                  and diluted
              
              $
              (0.12
              )
              $
              (0.11
              )Weighted
                  average shares outstanding:basic
                  and diluted
              
              
              510,456
              
              
              401,534
 See
        notes
        to consolidated financial statements.


37


ENER1,
      INC.


CONSOLIDATED
      STATEMENTS OF STOCKHOLDERS' DEFICIT


FOR
      THE
      YEARS ENDED DECEMBER 31, 2006 and 2007


(In
      thousand except share data)




AdditionalCommon
                  Stock
              
              Paid
                  In
              
              AccumulatedShares
              
              Amount
              
              Capital
              
              Deficit
              
              TotalBalance
                  December 31, 2005
              
              
              347,455,751
              
              
              3,475
              
              
              72,830
              
              
              (152,248
              )
              
              (75,943
              )Employee
                  stock options exercised
              
              
              619,314
              
              
              6
              
              
              (6
              )
              
              -
              
              
              -Warrants
                  exercised in connection with services
              
              
              148,718
              
              
              2
              
              
              (2
              )
              
              -
              
              
              -Shares
                  issued in payment of services
              
              
              125,777
              
              
              1
              
              
              46
              
              
              -
              
              
              47Stock-based
                  compensation expense
              
              
              -
              
              
              -
              
              
              1,641
              
              
              -
              
              
              1,641Accretion
                  of discount on preferred stock
              
              
              -
              
              
              -
              
              
              (907
              )
              
              -
              
              
              (907
              )Accrued
                  dividends on preferred stock
              
              
              -
              
              
              -
              
              
              (1,067
              )
              
              -
              
              
              (1,067
              )Warrants
                  exercised by Ener1 Group
              
              
              69,000,000
              
              
              690
              
              
              4,830
              
              
              -
              
              
              5,520Warrant
                  modification expense
              
              
              -
              
              
              -
              
              
              9,200
              
              
              -
              
              
              9,200Fair
                  value adjustment for elimination ofderivatives
                  - warrants
              
              
              -
              
              
              -
              
              
              22,096
              
              
              -
              
              
              22,096Fair
                  value adjustment for conversion ofderivatives
                  - warrants
              
              
              -
              
              
              -
              
              
              26,449
              
              
              -
              
              
              26,449Warrants
                  issued to related party in connectionwith
                  debt placement services
              
              
              -
              
              
              -
              
              
              4,006
              
              
              -
              
              
              4,006Net
                  loss (including preferred dividendspayable
                  to minority interest owner chargedto
                  paid in capital)
              
              
              -
              
              
              -
              
              
              (1,609
              )
              
              (39,696
              )
              
              (41,305
              )Balance
                  December 31, 2006
              
              
              417,349,560
              
              $
              4,174
              
              $
              137,507
              
              $
              (191,944
              )
              $
              (50,263
              )Employee
                  stock options exercised
              
              
              100,000
              
              
              1
              
              
              (1
              )
              
              -
              
              
              -Shares
                  issued in payment of services
              
              
              2,318,452
              
              
              23
              
              
              567
              
              
              -
              
              
              590Stock-based
                  compensation expense
              
              
              -
              
              
              -
              
              
              1,366
              
              
              -
              
              
              1,366Accretion
                  of discount on preferred stock
              
              
              -
              
              
              -
              
              
              (783
              )
              
              -
              
              
              (783
              )Accrued
                  dividends on preferred stock
              
              
              -
              
              
              -
              
              
              (1,066
              )
              
              -
              
              
              (1,066
              )Warrants
                  exercised by Ener1 Group
              
              
              41,503,047
              
              
              415
              
              
              9,491
              
              
              -
              
              
              9,906Shares
                  purchased by Ener1 Group
              
              
              42,403,816
              
              
              424
              
              
              12,297
              
              
              -
              
              
              12,721Shares
                  purchased by investors in private placement
              
              
              64,000,000
              
              
              640
              
              
              28,765
              
              
              -
              
              
              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
              
              
              3,733,333
              
              
              37
              
              
              896
              
              
              -
              
              
              933Shares
                    issued for conversions of senior debentures
              
              
              30,128,044
              
              
              301
              
              
              21,909
              
              
              -
              
              
              22,210Acceleration
                    of discount related to conversion of senior
                    debentures
              
              
              -
              
              
              -
              
              
              (9,740
              )
              
              -
              
              
              (9,740
              )Reduction
                  in derivative liability related to conversion of seniordebentures
              
              
              -
              
              
              -
              
              
              8,556
              
              
              -
              
              
              8,556Shares
                  issued for Series B preferred stock conversions
              
              
              46,631,488
              
              
              467
              
              
              8,167
              
              
              -
              
              
              8,634Deemed
                  preferred stock dividends
              
              
              -
              
              
              -
              
              
              8,378
              
              
              -
              
              
              8,378Net
                  loss (including preferred dividendspayable
                  to minority interest owner chargedto
                  paid in capital)
              
              
              -
              
              
              -
              
              
              (2,001
              )
              
              (49,709
              )
              
              (51,710
              )Balance
                  December 31, 2007
              
              
              648,167,740
              
              $
              6,482
              
              $
              228,145
              
              $
              (241,653
              )
              $
              (7,026
              )


See
      notes
      to consolidated financial statements.


38


ENER1,
      INC.


CONSOLIDATED
      STATEMENTS OF CASH FLOWS


(In
      thousands)


**Year
                  Ended December 31,****2007**
              
              **2006**Net
                  loss
              
              $
              (51,710
              )
              $
              (41,305
              )Adjustments
                  to reconcile net loss to cash used in operating
                  activities:(Gain)
                  loss on derivative liabilities
              
              
              11,537
              
              
              146Minority
                  interest in losses and preferred dividends of consolidated
                  subsidiary
              
              
              2,001
              
              
              1,609Research
                  and development assets expensed
              
              
              -
              
              
              364Accretion
                  of discounts on debentures and notes
              
              
              8,008
              
              
              3,741Non-cash
                  interest expense related to financing costs
              
              
              2,227
              
              
              1,286Non-cash
                  interest expense related to convertible notes and advancesfrom
                  related party
              
              
              1,237
              
              
              369Non-cash
                  warrant modification expense
              
              
              583
              
              
              9,200Depreciation
              
              
              530
              
              
              391Stock
                  for services
              
              
              1,684
              
              
              1,641Stock
                  for EnerStruct
              
              
              933
              
              
              -Equity
                  in loss from investment in EnerStruct
              
              
              40
              
              
              765Loss
                  on disposal of equipment
              
              
              10
              
              
              5Assets
                  transferred under Warrant Exercise Agreement
              
              
              -
              
              
              927Decrease
                  (increase) in accounts receivable
              
              
              50
              
              
              (152
              )Increase
                  in prepaid expenses and other current assets
              
              
              (360
              )
              
              (59
              )(Increase)
                  decrease in other assets
              
              
              (478
              )
              
              63(Increase)
                  decrease in accounts payable and accrued expenses
              
              
              (1,710
              )
              
              2,661(Increase)
                  decrease in interest payable
              
              
              (1,300
              )
              
              1,300Changes
                  in current assets, liabilities and other, net
              
              
              26
              
              
              (78
              )Net
                  cash used in operating activities
              
              
              (26,692
              )
              
              (17,126
              )Investing
                  Activities:Capital
                  expenditures
              
              
              (569
              )
              
              (1,287
              )Proceeds
                  from sale of assets
              
              
              74
              
              
              20Net
                  cash used in investing activities
              
              
              (495
              )
              
              (1,267
              )Financing
                  Activities:Proceeds
                  from convertible notes and advances from related party, net of
                  costs
              
              
              5,177
              
              
              10,883Proceeds
                  from exercise of warrants
              
              
              5,206
              
              
              5,520Proceeds
                  from sale of stock to related party
              
              
              12,721
              
              
              -Proceeds
                  from sale of stock net of costs
              
              
              29,405Repayment
                  of notes payable
              
              
              (721
              )
              
              -Repayment
                  of bank installment loan
              
              
              (66
              )
              
              (25
              )Net
                  cash provided by financing activities
              
              
              51,722
              
              
              16,378Net
                  increase (decrease) in cash and equivalents
              
              
              24,535
              
              
              (2,015
              )Cash
                  and cash equivalents - beginning balance
              
              
              291
              
              
              2,306Cash
                  and cash equivalents - ending balance
              
              $
              24,826
              
              $
              291


See
      notes
      to consolidated financial statements.





39




**Supplemental
                  Disclosure of Cash Flow Information**Cash
                  paid during the year for:Interest
              
              $
              7,062
              
              $
              3,680Income
                  taxes
              
              
              -
              
              
              -Non-cash
                  investing and financing activities:Reduction
                  of advances for exercise of warrants
              
              $
              4,700
              
              $
              -Shares
                  issued for Series B preferred stock conversions
              
              
              8,634
              
              
              -Deemed
                  preferred stock dividends
              
              
              8,378
              
              
              -Stock
                  issued for conversion of senior debentures
              
              
              22,210
              
              
              -Acceleration
                    of discount related to conversion of senior
                    debentures
              
              
              (9,740
              )
              
              -Reduction
                  in derivative liability related to conversion of senior
                  debentures
              
              
              8,556
              
              
              -Notes
                  payable issued in connection with settlement of leasehold
              
              
              509
              
              
              -Reduction
                  of accounts payable for stock and notes payable
              
              
              429
              
              
              -Notes
                  payable issued in connection with purchased research and
                  development
              
              
              370Warrants
                  issued in connection with settlement of leasehold
              
              
              18
              
              
              -Warrants
                  issued in connection with the issuance of debt
              
              
              3,236
              
              
              4,006Accrued
                  dividends on preferred stock
              
              
              (1,066
              )
              
              (1,067
              )Accretion
                  of discounts on preferred stock
              
              
              (783
              )
              
              (907
              )Cashless
                  exercise of options and warrants
              
              
              1
              
              
              1Adjustment
                  for elimination of derivatives as fair value - warrants
              
              
              -
              
              
              22,096Adjustment
                  for conversion of derivatives as fair value - warrants
              
              
              -
              
              
              26,449





See
      notes
      to consolidated financial statements.




40





ENER1,
      INC.


NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS




1.  NATURE
      OF
      BUSINESS





Ener1,
      Inc. ("Ener1"
      or the "Company") is a
      Florida corporation, founded in 1985 and headquartered in Fort Lauderdale,
      Florida.





In
      January 2002, Ener1 Group, Inc. (“Ener1 Group”) acquired a majority interest in
      the Company and owns approximately 66% of the outstanding common stock of the
      Company as of December 31, 2007.





The
      Company operates in three primary lines of business conducted through three
      operating subsidiaries; (i) EnerDel, an 80.5% owned subsidiary which is 19.5%
      owned by Delphi Corporation, develops lithium ion (“Li-ion”) batteries for
      automotive, military and other industrial uses, (ii) EnerFuel, a wholly-owned
      subsidiary, develops fuel cell products and services and (iii) NanoEner, also
      a
      wholly-owned subsidiary, develops technologies, materials and equipment for
      non-manufacturing.





***EnerDel,
      Inc.***


EnerDel,
      Inc., a Delaware corporation, was formed in October 2004 when the Company and
      each of Delphi Automotive Systems, LLC and Delphi Technologies, Inc.
      (collectively, “Delphi”) contributed certain assets to a newly organized
      corporation, EnerDel, Inc. (“EnerDel”). The Company received 80.5% of EnerDel’s
      common stock. Delphi received 19.5% of EnerDel's common stock, 8,000
      shares of EnerDel’s
      Series A Preferred Stock, warrants with a seven year term to purchase up to
      1.75
      million shares of the Company’s common stock for $0.70 per share, and warrants
      with a seven year term to purchase up to 5.25 million shares of the Company’s
      common stock for $1.00 per share. All
      of
      the Company’s Li-ion battery business has been conducted through EnerDel since
      its formation.





***EnerFuel,
      Inc.***


EnerFuel,
      Inc. (“EnerFuel”), a Florida corporation, was formed in October 2004 and is a
      wholly-owned subsidiary of the Company. All of the Company’s fuel cell business
      has been conducted through EnerFuel since its formation.





***NanoEner,
      Inc.***


NanoEner,
      Inc. (“NanoEner”), a Florida corporation, was formed in April 2004 and is a
      wholly-owned subsidiary of the Company. All of the Company’s nanomanufacturing
      business has been conducted through NanoEner since its formation.





***EnerStruct,
      Inc.***


EnerStruct,
      Inc. (“EnerStruct”), a Japanese joint venture, was formed in August 2003 between
      the Company and Itochu Corporation (“Itochu”). As of September 12, 2007, the
      Company maintained a 42% ownership and Itochu maintained a 51% ownership in
      EnerStruct. This joint venture was created for the pursuit of technology
      developments and marketing opportunities for Li-ion batteries in Japan.





On
      September 12, 2007, the owners of EnerStruct completed a series of simultaneous
      transactions terminating their joint venture. The owners purchased the ownership
      interest of a third EnerStruct stockholder in exchange for 800,000 shares of
      Ener1 common stock. EnerStruct ceased operations and the two remaining owners
      agreed to fund the estimated $400,000 in liquidation expenses equally. The
      Company signed a technology license agreement with Itochu which grants the
      Company an exclusive world-wide license to certain “know-how” developed by
      EnerStruct and the intellectual property under certain patent and patent
      applications of EnerStruct and Itochu regarding lithium ion battery technology
      in exchange for 3,333,333 shares of the Company’s common stock and $519,885
      payable in installments over ten months. The Company formed a new subsidiary,
      EnerDel Japan, Inc., to continue its Japanese operations and employ key
      employees of EnerStruct.





***Ener1
      Battery Company***


Ener1
      Battery Company, (the “Battery Company”), a Florida Corporation, was formed in
      March 2001. The Battery Company does not have any operations. Certain real
      estate and equipment assets used by the Company are held by the Battery
      Company.




41




2.  SIGNIFICANT
      ACCOUNTING POLICIES





*Principles
      of Consolidation.* The
      accompanying consolidated financial statements include Ener1, Inc. and its
      wholly-owned subsidiaries and its majority (80.5%) owned subsidiary, EnerDel.
      All significant intercompany balances and transactions have been eliminated
      in
      consolidation. EnerDel, NanoEner, EnerFuel and EnerDel Japan have ongoing
      operations.




*Use
      of Estimates* .
      The
      preparation of consolidated financial statements in conformity with accounting
      principles generally accepted in the United States of America requires
      management to make estimates and assumptions that affect the reported amounts
      of
      assets and liabilities and disclosure of contingent assets and liabilities
      at
      the date of the financial statements and the reported amounts of revenues and
      expenses during the reporting period. Actual results could differ materially
      from those estimates.





*Cash
      and Cash Equivalents* .
      The
      Company considers liquid instruments purchased with a maturity of three months
      or less to be cash and cash equivalents. The Company may, in the normal course
      of operations, maintain cash balances in excess of federally insured limits.
      Restricted cash in the amount of $224,000 represents cash in a bank account
      securing a letter of credit on the New York City office lease that was
      terminated in February 2007. The cash became unrestricted on March 22,
      2007.





*Property
      and Equipment* .
      Property and equipment are recorded at cost. Expenditures for major betterments
      and additions are charged to the asset accounts, while replacement, maintenance
      and repairs, which do not extend the lives of the respective assets, are charged
      to expense in the period incurred.





Depreciation
      and amortization are computed using the straight-line method over the estimated
      useful lives of the assets, which are as follows (in years):




**Asset
                  Category**
              
              **Years**Building
                  and improvements
              
              
              39Leasehold
                  improvements
              
              
              5
              
              
              (*
              )Battery
                  plant equipment
              
              
              10Machinery
                  and equipment
              
              
              5Office
                  equipment, furniture and other
              
              
              5Computers
                  and software
              
              
              3*
                  Lesser of the life of the lease or five years





*Long-
      Lived Assets* .
      The
      Company accounts for the impairment and disposition of long-lived assets in
      accordance with Statement of Financial Accounting Standard No. 144, “Accounting
      for the Impairment or Disposal of Long-Lived Assets.” ("SFAS No. 144"). In
      accordance with SFAS No. 144, long-lived assets to be held are reviewed for
      impairment whenever events or changes in circumstances indicate that the
      carrying amount of the asset may not be recoverable. An asset is considered
      impaired when the sum of the undiscounted cash flows estimated to be generated
      by the asset is less than its carrying value.





*Revenue
      Recognition*





The
      Company recognizes revenue when an arrangement exists, prices are determinable,
      services and products are rendered or delivered and collectibility is reasonably
      assured.





The
      Company generally recognizes revenue from research and development cost-sharing
      arrangements with federal government agencies as a reduction of research and
      development expenses.




42




The
      Company generally recognizes revenue from research and development cost-sharing
      arrangements with commercial entities 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.





*Earnings
      Per Share* .
      Basic
      net earnings (loss) per common share are computed by dividing net earnings
      (loss) applicable to common shareholders by the weighted-average number of
      common shares outstanding during the period. Diluted net earnings (loss) per
      common share is determined using the weighted-average number of common shares
      outstanding during the period, adjusted for the dilutive effect of common stock
      equivalents. In periods when losses are reported, the weighted-average number
      of
      common shares outstanding excludes common stock equivalents, because their
      inclusion would be anti-dilutive.





The
      dilutive effect of outstanding stock options and warrants is reflected in
      diluted earnings per share by application of the treasury stock method. The
      dilutive effect of outstanding convertible securities is reflected in
      diluted earnings per share by application of the if-converted
      method.





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





*Research
      and Development Costs* .
      Research and development costs consist of direct and indirect expenditures,
      the
      cost of equipment and other assets used in research and development activities,
      including a reasonable allocation of overhead expenses associated with the
      Company’s various research and development programs and the cost of equipment
      and other assets used in research and development activities that do not have
      alternative future uses. Research and development costs are expensed as
      incurred, unless they meet generally accepted accounting criteria for deferral
      and amortization. The Company 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 $910,000 and $451,000
      for
      December 31, 2007 and 2006 respectively.





*Income
      Taxes* .
      The
      Company provides for income taxes in accordance with the liability method.
      Deferred income tax assets and liabilities are computed for differences between
      the financial statement carrying values and the tax bases of assets and
      liabilities and carryforwards that will result in taxable or deductible amounts
      in the future based on enacted tax laws and rates applicable to the periods
      in
      which the differences are expected to affect taxable income. Valuation
      allowances are established when necessary to reduce deferred tax assets to
      the
      amount more likely than not to be realized. Income tax expense or benefit is
      the
      tax payable or refundable for the period plus or minus the change during the
      period in deferred tax assets and liabilities.





Ener1
      calculates its income taxes as if it filed a separate return. Ener1 Group files
      a consolidated federal income tax return and certain state income tax returns
      which include Ener1 and its subsidiaries. Ener1 and Ener1 Group have adopted
      a
      tax sharing agreement which provides for the allocation of income taxes between
      the two groups. I nter-group
      tax payments are made only when a payment is required or a refund is received
      on
      the consolidated tax return of Ener1 Group. When determining any Federal income
      tax payments due by Ener1 in any year, for purposes of the tax allocation
      agreement, Ener1 shall be credited the tax benefit of all of Ener1’s net
      operating losses generated after January 3, 2003 plus the tax benefit of any
      of
      Ener1’s net operating losses generated before January 3, 2003 that are allowable
      under the Internal Revenue Code, plus any payments Ener1 has made under the
      tax
      allocation agreement, less any payments Ener1 has received under the tax
      allocation agreement. During 2007, Ener1 Group’s ownership of Ener1 declined
      below 80% and as a result they may not file consolidated returns in tax years
      starting in 2008.




43





In
      June
      2006, the FASB issued FASB Interpretation No. 48, Accounting for
      Uncertainty in Income Taxes which is an interpretation of FASB Statement 109,
      Accounting for Income Taxes, (“FIN 48”), which requires management to perform a
      two-step evaluation for all tax positions, ensuring that these tax return
      positions meet the “more likely than not” recognition threshold criteria and can
      be measured sufficiently to determine the benefit recognized in the financial
      statements.





The
      Company adopted the provisions of FASB Interpretation 48, *Accounting
      for Uncertainty in Income Taxes* (“FIN
      48”), on January 1, 2007. Previously, the Company had accounted for tax
      contingencies in accordance with Statement of Financial Accounting Standards
      5, *Accounting
      for Contingencies* .
      As
      required by FIN48, which clarifies Statement 109, *Accounting
      for Income Taxes* ,
      the
      Company recognizes the financial statement benefit of a tax position only after
      determining that the relevant tax authority would more likely than not sustain
      the position following an audit. For tax positions meeting the
      more-likely-than-not ** threshold,
      the amount recognized in the financial statements is the largest benefit that
      has a greater than 50 percent likelihood of being realized upon ultimate
      settlement with the relevant tax authority. At the adoption date, the Company
      applied FIN 48 to all tax positions for which the statute of limitations
      remained open and did not incur any change in the liability for unrecognized
      benefits.





*Fair
      Value of Financial Instruments* .
      The
      carrying value of cash and cash equivalents, trade receivables, accounts payable
      and accrued expenses and other liabilities approximates fair value due to the
      short term maturity of these instruments or the fact that they are carried
      at
      fair value, as applicable. The carrying value of the installment loan
      approximates fair value as the interest rates are not significantly different
      from the current market rates available to the Company for similar type loans.
      The face value of the senior secured convertible debentures and the stated
      value
      of the redeemable preferred stock approximate fair value.





*Accounting
      for Derivative Instruments* .
      Statement of Financial Accounting Standard (“SFAS”) No. 133, “Accounting for
      Derivative Instruments and Hedging Activities,” as amended, requires all
      derivatives to be recorded on the balance sheet at fair value. These
      derivatives, including embedded derivatives in the Company’s structured
      borrowings, are separately valued and accounted for on the Company’s balance
      sheet. Fair values for exchange-traded securities and derivatives are based
      on
      quoted market prices. Where market prices are not readily available, fair values
      are determined using market based pricing models incorporating readily
      observable market data and requiring judgment and estimates.





In
      September 2000, the Emerging Issues Task Force issued EITF 00-19, "Accounting
      for Derivative Financial Instruments Indexed to and Potentially Settled in,
      a
      Company's Own Stock" ("EITF 00-19"), which requires freestanding contracts
      that
      are settled in a company's own stock, including common stock warrants, to be
      designated as an equity instrument, asset or a liability. Under the provisions
      of EITF 00-19, a contract designated as an asset or a liability must be carried
      at fair value on a company’s balance sheet, with any changes in fair value
      recorded in the company’s results of operations. A contract designated as an
      equity instrument must be included within equity, and no fair value adjustments
      are required from period to period. In accordance with SFAS No. 133 and EITF
      00-19, certain of the Company’s warrants to purchase common stock and the
      embedded conversion feature of several of the Company’s financial instruments
      are separately accounted for as liabilities. The fair value of these warrants
      and conversion features are shown on the Company’s balance sheet and the
      unrealized changes in the values of these derivatives are shown in the Company’s
      consolidated statement of operations as “Gain (loss) on derivative
      liabilities.”





Following
      guidance by SFAS No. 133 and EITF 00-19, the Company determined the conversion
      feature of the Company’s 5% Senior Secured Convertible Debentures due January
      20, 2009 (the “2004 Debentures”) and 7.5% Senior Secured Convertible Debentures
      due March 14, 2009 (the “2005 Debentures”) and the warrants associated with the
      2005 Debentures should be treated as separate derivative liabilities on the
      balance sheet. 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 are determined using market based pricing models
      incorporating readily observable market data and management assumptions.





*Reclassifications* .
      Certain
      prior year amounts have been reclassified to conform to the fiscal 2007
      presentation.





44




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





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
      for which the acquisition date is on or after an entity's fiscal year that
      begins after December 15, 2008. The Company will assess the impact of SFAS
      141R
      on its consolidated financial statements if and when a future acquisition
      occurs.




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 as of the beginning of an entity's fiscal year that begins after
      December 15, 2008. The Company is currently evaluating the potential impact,
      if
      any, of the adoption of SFAS 160 on its consolidated financial
      statements.





In
      December 2007, the SEC issued SAB No. 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 123R. SAB 110 is
      effective for stock options granted after December 31, 2007. The Company is
      currently evaluating the impact of the new provisions of SAB 110 for stock
      option awards granted after December 31, 2007.





In
      February 2007, the FASB issued SFAS No. 159, The Fair Value Option for
      Financial Assets and Financial Liabilities—Including an amendment of FASB
      Statement No. 115 (“SFAS 159”). SFAS 159 permits entities to choose to
      measure many financial instruments and certain other assets and liabilities
      at
      fair value on an instrument-by-instrument basis. SFAS 159 is effective for
      fiscal years beginning after November 15, 2007. The Company is currently
      evaluating the potential impact, if any, of the adoption of SFAS 159 on its
      consolidated financial statements.





In
      September 2006, the FASB issued SFAS No. 157, Fair Value Measurements
      (“SFAS 157”), which defines fair value, establishes a framework for measuring
      fair value in accordance with generally accepted accounting principles, and
      expands disclosures about fair value measurements. SFAS 157 is effective for
      fiscal years beginning after November 15, 2007, however the FASB has
      delayed the effective date of SFAS 157 to fiscal years beginning after
      November 15, 2008 for non-financial assets and non-financial liabilities,
      except those items recognized or disclosed at fair value on an annual or more
      frequently occurring basis. The Company is currently evaluating the potential
      impact, if any, of the adoption of SFAS 157 on its consolidated financial
      statements.





45





3.PROPERTY
      AND EQUIPMENT





Property
      and equipment consisted of the following at December 31, 2007 and 2006 (in
      thousands):




**2007**
              
              **2006**Building
                  and building improvements
              
              $
              1,551
              
              $
              1,551Leasehold
                  improvements
              
              
              1,552
              
              
              971Machinery
                  and equipment
              
              
              1,801
              
              
              1,049Office
                  equipment, furniture and other
              
              
              638
              
              
              838Total
                  cost
              
              
              5,542
              
              
              4,409Less
                  accumulated depreciation
              
              
              (1,255
              )
              
              (855
              )Net
                  property, plant, and equipment
              
              $
              4,287
              
              $
              3,554





In
      2007
      and 2006, Ener1 expensed $0 and $364,000, respectively, of equipment that is
      currently used in research and development. This equipment was expensed to
      research and development expense in accordance with SFAS No. 2, “Accounting for
      Research and Development Costs,” which requires that assets to be used in
      R&D activities are to be immediately charged to income unless an alternative
      future use for the asset exists.





The
      building and certain machinery and equipment owned by the Battery Company are
      pledged as security under the terms of the 2004 Debentures.





Depreciation
      and amortization expense for property and equipment for the years ended December
      31, 2007 and 2006 was $530,000 and $391,000, respectively.





4.    
      INVESTMENT IN ENERSTRUCT




In
      2003,
      Ener1 invested $2,003,000 in EnerStruct, a Japanese company, in exchange for
      an
      initial 49% equity ownership interest. ITOCHU Corporation invested $1,100,000
      plus equipment totaling approximately $500,000 for an initial 51% ownership
      interest. As a result of subsequent investments in 2006 in EnerStruct by ITOCHU
      and SBIC, a Japanese venture capital company, Ener1’s equity ownership interest
      in EnerStruct was reduced over time to 42%. At December 31, 2006, the Company’s
      investment in EnerStruct had a carrying value of $40,000 as compared to an
      underlying equity interest in net assets of $473,000, primarily due to a
      difference between the ownership interests in equity agreed upon between Ener1
      and ITOCHU as compared to their relative capital contributions. As of March
      31,
      2007, the value of Ener1’s investment in EnerStruct was reduced by $2,003,000,
      which represented Ener1’s share of EnerStruct losses through that date and
      resulted in a carrying value of $0.





On
      September 12, 2007, Ener1 and ITOCHU agreed to terminate their joint venture
      and
      cease EnerStruct’s operations. Ener1 and Itochu purchased the ownership interest
      of SBIC for shares of Ener1’s stock. Ener1 issued 400,000 shares of common stock
      with a value of $100,000 and recorded an additional investment in EnerStruct
      and
      the respective ownership became 46% for Ener1 and 54% for Itochu. EnerStruct
      ceased operations and the two remaining owners agreed to fund the estimated
      $400,000 in liquidation expenses equally. Ener1 had prepaid $162,000 for these
      expenses and accrued an additional $38,000 at September 12, 2007 recording
      an
      additional investment in EnerStruct of $200,000. In connection with the
      termination of the joint venture, Ener1 received property and equipment assets
      from EnerStruct. Ener1 capitalized the assets at the value of its additional
      investment in EnerStruct totaling $300,000. Under the agreement terminating
      the
      joint venture, Ener1 agreed to give Itochu a total of $1,353,218 in stock and
      cash in exchange for certain intangibles. These payments were accounted for
      as
      purchased research and development costs. Ener1 paid $150,000 in cash, issued
      short term notes for $369,885, with an imputed interest rate of 10%, and issued
      3,333,333 shares of common stock valued at $833,333 to Itochu for the know-how
      included in this purchased research and development. This acquisition of
      research and development did not meet the definition of a business under
      Regulation S-X, Rule 11-01(d).




46





Summarized
      financial information of EnerStruct is as follows as of December 31, 2007 and
      2006 and for the years then ended is as follows (in thousands):




**2007**
              
              **2006**Cash
              
              $
              -
              
              $
              105Total
                  assets
              
              
              -
              
              
              1,853Total
                  liabilities
              
              
              -
              
              
              726Net
                  loss
              
              
              -
              
              
              (1,439
              )





5.  ACCOUNTS
      PAYABLE AND ACCRUED EXPENSES





Accounts
      payable and accrued expenses principally consist of the following at December
      31, 2007 and 2006 (in thousands):




**2007**
              
              **2006**Accounts
                  payable
              
              $
              2,002
              
              $
              2,514Accrued
                  registration delay expenses
              
              
              679
              
              
              2,221Accrued
                  compensation and benefits
              
              
              775
              
              
              490Accrued
                  severance
              
              
              -
              
              
              350Accrued
                  other
              
              
              340
              
              
              362Total
                  accounts payable and accrued expenses
              
              $
              3,798
              
              $
              5,937




6 .  INCOME
      TAXES





Ener1
      has
      deferred tax assets of $63,447,000 and $49,125,000 at December 31, 2007 and
      2006, respectively, which are completely offset by valuation allowances. The
      deferred tax assets reflect a reduction of approximately $17,000,000 to reflect
      the limits on the Company’s ability to use net operating loss carryforwards in
      existence in January 2002 due to the change in ownership that occurred in
      January 2002.




Deferred
      income tax assets in the accompanying balance sheet as of December 31, 2007
      and
      2006 are attributable to the following items (in thousands):




**2007**
              
              **2006**Federal
                  and state net operating loss carryforwards
              
              $
              51,775
              
              $
              36,302R&D
                  expense taken on equipment and intellectual property
              
              
              8,022
              
              
              8,584Impairment
                  losses
              
              
              1,892
              
              
              2,300Goodwill
              
              
              1,726
              
              
              2,001Other
              
              
              32
              
              
              (62
              )Gross
                  deferred tax asset
              
              
              63,447
              
              
              49,125Valuation
                  allowance
              
              
              (63,447
              )
              
              (49,125
              )Net
                  deferred tax asset
              
              $
              -
              
              $
              -


Ener1
      has
      federal and Florida net operating loss (“NOL”) carryforwards available to offset
      future taxable income of approximately $124,000,000 and $174,000,000 at December
      31, 2007, respectively, and approximately $85,000,000 and $135,000,000 at
      December 31, 2006, respectively. The federal NOL carryforwards will begin to
      expire in 2018, while the Florida NOL carryforwards will begin to expire in
      2011. The federal NOL carryforwards exclude $50,677,000 of carryforwards in
      existence at the time of change in ownership in January 2002 which are subject
      to substantial restrictions and may only be utilized to offset approximately
      $40,000 of annual taxable income, as well as any unrealized appreciation on
      assets existing at the time of the ownership change.





A
      valuation allowance is established when it is more likely than not that some
      portion of Ener1’s deferred tax assets will not be realized. Management has
      evaluated the available evidence about Ener1’s future taxable income and other
      possible sources of realization of deferred tax assets, and as a result, the
      valuation allowance was increased by the full amount of the tax benefit from
      the
      net operating loss in the years ended December 31, 2007 and 2006. The valuation
      allowance recorded in the financial statements reduces deferred tax assets
      to an
      amount that represents management’s best estimate of the amount of such deferred
      tax assets that more likely than not will be realized.




47





The
      Company's effective income tax rate differs from the statutory federal rate
      of
      35% as follows:


**2007**
              
              **2006**Statutory
                  rate applied to income before taxes
              
              
              35.0
              %
              
              35.0
              %Non-taxable
                  items:Derivative
                  income
              
              
              -15.0
              %
              
              -0.4
              %Accretion
                  of discounts
              
              
              44.9
              %
              
              9.4
              %Warrant
                  modification expense
              
              
              1.5
              %
              
              23.2
              %State
                  income tax net of federal tax benefit
              
              
              3.3
              %
              
              3.3
              %Increase
                  in valuation allowance
              
              
              -69.8
              %
              
              -70.5
              %Total
                  income tax provision
              
              
              0.0
              %
              
              0.0
              %


The
      Company adopted FASB Interpretation No. 48, Accounting for Uncertainty in
      Income Taxes, on January 1, 2007. This did not result in any change to the
      Company’s liability for unrecognized tax benefits.





7.  DERIVATIVES





Ener1
      has
      evaluated the application of SFAS No. 133 “Accounting for Derivative Instruments
      and Hedging Activities” and EITF Issue 00-19, “Accounting for Derivative
      Financial Instruments Indexed to and Potentially Settled in a Company’s Own
      Stock” to the following:


·
              the
                  conversion feature, interest rate adjustment, registration delay
                  expenses,
                  redemption premium, forced conversion default premium and change
                  in
                  control premium features of Ener1's secured convertible debentures
                  due
                  January 20, 2009 (the "2004
                  Debentures");
 ·
              the
                  conversion feature, interest rate adjustment, registration delay
                  expenses,
                  default premium and change in control premium features of Ener1's
                  secured
                  convertible debentures due March 14, 2009 (the "2005
                  Debentures");
 ·
              the
                  conversion features of the EnerDel Series A Preferred Stock which
                  expired
                  in 2005, the Series B Preferred Stock which was converted into
                  common
                  stock in 2007 and the convertible notes issued to Ener1 Group (the
“Ener1
                  Group Convertible Notes”);
 ·
              the
                  warrants to purchase common stock associated with: the 2004 Debentures
                  (the "2004 Debenture Warrants"), the 2005 Debentures (the "2005
                  Debenture
                  Warrants"), the preferred stock, the acquisition by Ener1 of Ener1
                  Battery Company from Ener1 Group, Inc. (“Battery Warrants”), the exchange
                  of stock, notes and warrants for debt (the "Exchange Warrants"),
                  the Ener1
                  Group capital commitment and other warrant issuances;
                  and
 ·
              the
                  right to require Ener1 Group to purchase shares of Series B Preferred
                  Stock (the “Series B Preferred Stock Put”) which was terminated on March
                  31, 2006.


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





The
      Ener1
      Group Convertible Notes were deemed to be conventional convertible debt under
      EITF 00-19 and therefore were accounted for as convertible instruments under
      EITF Issue 00-27, “Application of Issue No. 98-5 to Certain Convertible
      Instruments”.





48





Once
      the
      Battery Warrants had been fully exercised as of June 30, 2006, Ener1 determined
      that it could conclude that it had sufficient authorized and unissued shares
      to
      issue the number of shares required under the other warrants described above
      and, therefore, all of these warrants, other than the 2005 Debenture Warrants,
      should not be treated as derivative liabilities as of June 30, 2006. The fair
      value of these warrants was marked to market on the date they no longer were
      accounted for as derivatives and derivative gain or loss was recorded. The
      balance of the derivative liability was then recorded as a contribution to
      paid
      in capital on June 30, 2006. Ener1 determined that the conversion and other
      derivative features of the 2004 Debentures and 2005 Debentures and the 2005
      Debenture Warrants should continue to be treated as derivative
      liabilities.





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





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


**December
                  31,**
              
              **December
                  31,**
              
              **Adjustments
                  for**
              
              **Gain****2007**
              
              **2006**
              
              **Conversions**
              
              **(Loss)**2004
                  Debentures compound derivative
              
              $
              4,973
              
              $
              3,753
              
              $
              (3,589
              )
              $
              (4,809
              )2005
                  Debentures compound derivative
              
              
              1,188
              
              
              2,442
              
              
              (4,966
              )
              
              (3,712
              )2005
                  Debenture Warrants
              
              
              3,983
              
              
              967
              
              
              -
              
              
              (3,016
              )$
              10,144
              
              $
              7,162
              
              $
              (8,555
              )
              $
              (11,537
              )




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





*Lattice
      Valuation Model*





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




49





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





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


**2004
                  Debentures*****Assumptions:***
              
              **December
                  31, 2007**
              
              **December
                  31, 2006**The
                  price of Ener1's common stock would increase at a rate commensurate
                  with
                  the cost of equity, with a volatility of:
              
              
              100
              %
              
              100
              %Percent
                  likelihood that Ener1 would not be in default of its obligations
                  under the
                  registration rights agreement relating to the 2004
                  Debentures:
              
              
              100
              %
              
              100
              %Percent
                  likelihood that an event of default or a fundamental change would
                  occur,
                  increasing over time:
              
              
              5
              %
              
              5
              %Reset
                  events projected to occur with a weighted average adjustment factor
                  of:
              
              
              0.983
              
              
              0.896Percent
                  likelihood that Ener1 would force the conversion of the 2004 Debentures
                  if
                  the stock price reached $1.75:
              
              
              95
              %
              
              95
              %The
                  holders of the 2004 Debentures would convert the 2004 Debentures
                  if the
                  registration rights agreement was effective, Ener1 was not in default
                  under the 2004 Debentures, and Ener1's common stock price
                  was:
              
              $
              1.50
              
              $
              3.50Ener1
                  would redeem the 2004 Debentures following the third anniversary
                  of the
                  issue date if Ener1's common stock price reached:
              
              $
              1.25
              
              $
              1.50Percent
                  likelihood that Ener1 would be able to obtain alternative financing
                  that
                  would enable it to redeem the 2004 Debentures, increasing 2.5%
                  per quarter
                  to a maximum of 25%:
              
              
              10
              %
              
              0
              %Percent
                  likelihood that Ener1's common stock would be listed on an exchange
                  increasing 10% quarterly to a maximum of 90%:
              
              
              20
              %
              
              0
              %


Based
      on
      these management assumptions, the fair value of these embedded derivatives
      as of
      December 31, 2007 and 2006 were calculated by management to be $4,973,000
      and $3,753,000, respectively.




50





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


**2005
                  Debentures*****Assumptions:***
              
              **December
                  31, 2007**
              
              **December
                  31, 2006**The
                  price of Ener1's common stock would increase at a rate commensurate
                  with
                  the cost of equity, with a volatility of:
              
              
              100
              %
              
              100
              %Percent
                  likelihood that Ener1 would not be in default of its obligations
                  under the
                  registration rights agreement relating to the 2005
                  Debentures:
              
              
              95
              %
              
              95
              %Percent
                  likelihood that an event of default or a fundamental change would
                  occur:
              
              
              5
              %
              
              5
              %Reset
                  events projected to occur with a weighted average adjustment factor
                  of:
              
              
              0.990
              
              
              0.977Percent
                  likelihood that Ener1 would force the conversion of the 2005 Debentures
                  if
                  the Ener1 common stock price reached $1.50:
              
              
              95
              %
              
              95
              %The
                  holders of the 2005 Debentures would convert the 2005 Debentures
                  if the
                  registration rights agreement was effective, Ener1 was not in default
                  under the 2005 Debentures and Ener1's common stock price
                  was:
              
              $
              1.25
              
              $
              1.75Ener1
                  would redeem the 2005 Debentures following the third anniversary
                  of the
                  issue date if Ener1's common stock price reached:
              
              $
              1.00
              
              $
              1.25Percent
                  likelihood that Ener1 would be able to obtain alternative financing
                  that
                  would enable it to redeem the 2005 Debentures, increasing 2.5%
                  per quarter
                  to a maximum likelihood of 25%:
              
              
              10
              %
              
              0
              %Percent
                  likelihood that Ener1's common stock would be listed on an exchange
                  and
                  meet the volume requirements set forth in the 2005 Debentures,
                  increasing
                  10% quarterly to a maximum likelihood of 90%:
              
              
              20
              %
              
              0
              %




Based
      on
      these management assumptions, the fair value of the compound embedded derivative
      in the 2005 Debentures as of December 31, 2007 and 2006 were calculated by
      management to be $1,188,000 and $2,442,000, respectively.





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





*Black-Scholes
      Valuation Model*





Ener1
      used the Black-Scholes pricing model to determine the fair values of the 2005
      Debenture Warrants. The model uses market sourced inputs such as interest rates,
      stock prices, and option volatilities, the selection of which requires
      management’s judgment, and which may impact net income or loss.  Ener1 uses
      volatility rates based upon the closing stock price of its common stock
      since January 2002, when Ener1 underwent a change in control. Ener1 determined
      that share prices prior to this period do not reflect the ongoing business
      valuation of its current operations. Ener1 uses a risk free interest
      rate which is the U. S. Treasury bill rate for securities with a maturity that
      approximates the estimated expected life of a derivative or security. Ener1
      uses
      the closing market price of the common stock on the date of issuance of a
      derivative or at the end of a quarter when a derivative is valued at fair value.
      The volatility factor used in the Black-Scholes pricing model has
      a significant effect on the resulting valuation of the derivative
      liabilities on the balance sheet. The volatility has ranged from 296% to 129%
      during the last four years.





The
      following table shows the volatility, risk free rate and market price used
      in
      the calculation of the Black-Scholes call value for each derivative at issuance
      date and at the end of each year and at December 31, 2007:




51




**Issue
                  Date**
              **Volatility**
              **Risk-Free
                  Interest Rate**
              **Market
                  Price**
              **Term
                  in Years****Valuation
                  inputs at issuance date for:**2005
                  Debenture Warrants
              3/11/2005
              135%
              3.5%
              $0.75
              5**Valuation
                  inputs at:**December
                  31, 2007
              
              129%
              3.1%
              $0.81
              2.2





8.  DEBT





*2004
      SENIOR SECURED CONVERTIBLE DEBENTURES*





On
      January 20, 2004, Ener1 issued $20,000,000 in aggregate principal amount of
      the
      2004 Debentures and warrants to purchase 16,000,000 shares of Ener1’s common
      stock. The net proceeds were $18,527,000. Debentures in the amount of $300,000
      in principal were converted in 2004. For the year ended December 31, 2007,
      2004
      Debentures of $10,065,952 plus $7,151 of accrued interest have been converted
      at
      conversion prices ranging from $0.78 to $0.91.





At
      the
      issuance date, the 2004 Debentures were convertible at any time into common
      shares at a price of $1.25 per share, subject to adjustment for dilutive
      issuances of common stock by the Company. As of December 31, 2007, the adjusted
      conversion price was $0.78 per share. The warrants to purchase 16,000,000 shares
      of common stock had an exercise price of $2.51 per share at the issuance date,
      subject to adjustment. As of December 31, 2007, the adjusted exercise price
      was
      $1.27 per share. The warrants are exercisable at any time through January 21,
      2014. In addition, Ener1 issued warrants to purchase 1,920,000 shares of common
      stock with an exercise price of $2.51 per share to the placement agent for
      the
      2004 Debentures.





Accrued
      interest expense for the 2004 Debentures was $0 and $755,000 as of December
      31,
      2007 and 2006, respectively. All or a portion of the accrued and unpaid interest
      may be converted at the option of the debenture holder at any time under the
      same conversion terms as the principal. Interest is due quarterly. All interest
      payments due through December 31, 2007 have been paid. The initial annual
      interest rate was 5%, which was increased to 7.5% as of July 19, 2004 and 15%
      as
      of January 20, 2005 because Ener1 failed to achieve certain milestone
      requirements in the debentures. Upon issuance, the 2004 Debentures included
      embedded derivative liabilities and beneficial conversion features which, when
      bifurcated into and valued as separate liabilities, exceeded the notional debt
      amount and resulted in a fully discounted debenture. After giving effect to
      the
      discount, the effective rate of interest for the 2004 Debentures was 60.5%
      as of
      December 31, 2007.




Ener1
      may
      prepay principal at 101% of unpaid principal from January 21, 2008 to January
      20, 2009. The 2004 Debentures are senior to Ener1’s existing and future
      indebtedness and pari passu with the 2005 Debentures. In the event of any “Event
      of Default" or "Fundamental Change” as defined under the 2004 Debentures, the
      holder may require Ener1 to redeem the 2004 Debentures at a price equal
      to 101% of the unpaid principal plus accrued interest. Ener1’s obligations
      under the 2004 Debentures are partially secured by collateral, including land,
      building and battery production equipment owned by Ener1 Battery and used by
      EnerDel. As of December 31, 2007, no Fundamental Change has occurred. On
      February 22, 2008, the Company sent a notice to holders of the 2004 Debentures
      that it intended to prepay the entire remaining principal amount of the 2004
      Debentures in cash at an amount equal to 101% of the principal balance. The
      prepayment will occur on March 24, 2008 unless the holders convert their
      debentures into common stock before that date. At February 22, 2008, $9,284,000
      in principal of 2004 Debentures were outstanding of which $2,150,000 of
      principal of the 2004 Debentures plus $51,711 of accrued interest have been
      subsequently converted into 2,822,707 shares of common stock of Ener1 through
      February 29, 2008.





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




52





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




*2005
      SENIOR SECURED CONVERTIBLE DEBENTURES*





On
      March
      14, 2005, Ener1 issued $14,225,000 in aggregate principal amount of the 2005
      Debentures and warrants to purchase 7,112,500 shares of Ener1’s common stock.
      The net proceeds of the issuance totaled $13,134,000. For the year ended
      December 31, 2007, 2005 Debentures of $12,144,065 plus $4,333 of accrued
      interest have been converted at conversion prices ranging from $0.69 to
      $0.79.





As
      a
      result of Ener1’s failure to meet certain milestone requirements in the 2005
      Debentures, the holders of the 2005 Debentures have a security interest in
      all
      of the EnerDel common stock owned by Ener1.





At
      the
      issuance date, the 2005 Debentures were convertible at any time into common
      shares at a price of $1.00 per share subject to adjustment for dilutive
      issuances of common stock by the Company. As of December 31, 2007, the
      conversion price was $0.69 per share. The 2005 Debenture Warrants were divided
      into Series A and Series B. Ener1 issued Series A warrants to purchase 4,267,500
      shares of common stock with an exercise price of $1.15 per share at the issuance
      date, subject to adjustment; as of December 31, 2007, the adjusted exercise
      price was $0.75 per share. Ener1 issued Series B warrants to purchase 2,845,000
      shares of common stock with an exercise price of $1.25 per share at the issuance
      date, subject to adjustment; as of December 31, 2007, the adjusted exercise
      price was $0.80 per share. The warrants are exercisable, in whole or in part,
      at
      any time on or before March 14, 2010. In addition, Ener1 issued warrants to
      purchase up to 426,750 shares of common stock with an initial exercise price
      of
      $0.75 per share to the placement agent for the 2005 Debentures.




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





Accrued
      interest expense for the 2005 Debentures was $0 and $545,000 as of December
      31,
      2007 and 2006, respectively. All or a portion of the accrued and unpaid interest
      may be converted at the option of the debenture holder at any time under the
      same conversion terms as the principal. Interest is due quarterly. All interest
      payments due through December 31, 2007 have been paid. The initial annual
      interest rate was 7.5%, which was increased to 15% as of March 14, 2006 because
      Ener1 failed to achieve certain milestone requirements of the debentures. Upon
      issuance, the 2005 Debentures included embedded derivative liabilities and
      beneficial conversion features which, when bifurcated into and valued as
      separate liabilities, resulted in a discount to the notional debt amount of
      the
      debenture. After giving effect to the discount, the effective rate of interest
      for the 2005 Debentures was 72.0% as of December 31, 2007.





53





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





In
      an
“Event of Default” as defined under the 2005 Debentures, the holder may require
      Ener1 to redeem the 2005 Debentures at a price equal to the greater of (1)
      105%
      of the unpaid principal and accrued interest or (2) the value of the shares
      that the principal and accrued interest could be converted into at the time
      of
      default. In the event of any “Fundamental Change,” as defined in the 2005
      Debentures, including the sale or disposition of substantially all of the assets
      of the Company or certain transactions which result in the transfer of more
      than
      50% of the Company's voting equity, the holder can redeem the 2005 Debentures
      at
      a price equal to 115% of the unpaid principal and accrued interest if the
      fundamental change occurs between March 14, 2006 and March 14, 2007, and 110%
      of
      the unpaid principal and accrued interest if the fundamental change occurs
      after
      March 14, 2007. As of December 31, 2007, no Fundamental Change has
      occurred.




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





*REGISTRATION
      DELAY EXPENSES*





At
      December 31, 2006, accrued registration delay expenses relating to the 2004
      and
      2005 Debentures of $2,221,000 were unpaid. During the year ended December 31,
      2007, $1,542,000 of the accrued registration delay expenses were paid.





As
      of
      February 29, 2007, the Company has not paid registration delay expenses of
      $679,000. The Company has not entered into a forbearance agreement with, nor
      received a default notice from, any of the holders with respect to its
      noncompliance with these payment obligations. If a default notice is delivered,
      an event of default would occur if payment is not made in ten business days
      (or
      15 business days if the Company is making good faith efforts to cure the
      default).





9.  REDEEMABLE
      PREFERRED STOCK





*EnerDel
      Series A Convertible Preferred Stock*





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





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




54





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





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





The
      following are the components of Series A Preferred Stock as of December 31,
      2007
      (in thousands):




**EnerDel****Series
                  A**Face
                  value
              
              $
              8,000Less
                  initial fair value of warrant derivative
              
              
              (4,620
              )Less
                  initial fair value of conversion option
              
              
              (1,183
              )Fair
                  value at date of issue
              
              
              2,197Accumulated
                  accretion of discounts
              
              
              4,270Cumulative
                  dividends
              
              
              2,110Carrying
                  value as of December 31, 2007
              
              $
              8,577





*Ener1,
      Inc. Series B Convertible Preferred Stock*





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





Also,
      in
      October 2004, Ener1 entered into an agreement with Ener1 Group under which
      Ener1
      Group agreed to purchase, at Ener1's request, up to 30,000 shares of the Series
      B Preferred Stock (“Series B Preferred Stock Put”) and warrants to purchase up
      to 833,334 shares of its common stock at an exercise price of $1.25 per share,
      and warrants to purchase up to 833,334 shares of its common stock at an exercise
      price of $1.50 per share. Under the terms of the Series B Preferred Stock Put,
      Ener1 Group purchased 2,500 shares of Series B Preferred Stock, at a purchase
      price of $100 per share, plus warrants to purchase 69,445 shares of common
      stock
      at an exercise price of $1.25 per share and warrants to purchase 69,445 shares
      of common stock at an exercise price of $1.50 per share, for an aggregate
      purchase price of $250,000. The Series B Preferred Stock Put was terminated
      on
      March 30, 2006 and no additional shares were issued.





The
      conversion option for the Series B Preferred Stock was initially contingent
      upon
      Ener1 filing a registration statement with the Securities and Exchange
      Commission to register an offering of common stock. In October 2007, the
      Certificate of Designation was amended to permit the conversion of the Series
      B
      Preferred Stock into common stock at a conversion price of $0.40 per share.
      Ener1 determined that the conversion option did not meet the definition of
      a
      derivative under SFAS 133.




55





In
      October 2007, Ener1 and the holders of the Series B Preferred Stock (Cofis
      and
      Ener1Group) agreed to amend the terms of the Series B Preferred Stock and
      associated warrants as follows:





·
            each
                holder of Series B Preferred Stock will have the right until December
                31,
                2007 to convert shares of Series B Stock, plus any accrued and unpaid
                dividends on such Series B Preferred Stock, into shares of common
                stock at
                a conversion ratio using a price of $0.40 per share (the "Conversion
                Price"),


·
            Ener1
                may elect at any time prior to December 31, 2007 to automatically
                convert
                the Series B Preferred Stock, together with accrued and unpaid dividends,
                into common stock at the Conversion Price as of 11:59 p.m. on December
                31,
                2007,


·
            the
                warrants issued by the Company to purchase 4,236,111 shares of common
                stock with an exercise price of $1.25 per share (the "Original $1.25
                Warrants") were amended to enable the holder thereof to purchase
                18,677,699 shares of Common Stock at an exercise price of $0.40 per
                share,


·
            the
                warrants issued by the Company to purchase 4,236,111 shares of common
                stock with an exercise price of $1.50 per share (the "Original $1.50
                Warrants" ) were amended to enable the holders thereof to purchase
                18,677,699 shares at an exercise price of $0.40 per share,


·
            Ener1
                agreed to additional warrants to Cofis and Ener1 Group (pro rata
                in
                proportion to the amount of Series B Preferred Stock held by each
                of them)
                in the event that a Triggering Event occurs. The additional warrants
                will
                entitle the holders to purchase an aggregate of 15,362,100 shares
                of
                common stock at an exercise price of $0.001 per share and will expire
                at
                5:00 p.m. (New York time) on January 1, 2008. "Triggering Event"
                means the
                occurrence of either or both of the following events prior to December
                1,
                2007:


o
            Ener1failsto
                sell, in one or more transactions with gross proceeds of at least
                $10
                million dollars at a price per share equal to at least $0.40 and
                warrant
                coverage not greater than 60% of the aggregate investment amount
                exercisable and with an exercise price of not less than $0.40 per
                share;
                or


o
            the
                volume weighted average price of the common stock ("VWAP") is less
                than
                $0.30 and, during the period of either (a) ten (10) consecutive Trading
                Days immediately following such trading day, or (b) fifteen trading
                days
                (whether or not consecutive) following such trading day but prior
                to
                December 1, 2007, the daily VWAP on each such day is less than $0.33.





In
      accordance with SFAS 84 and EITF Topic No. D-42, Ener1 accounted for this
      transaction as an inducement to convert the preferred instruments into common
      stock. Ener1 recognized a preferred stock dividend of $8,377,750 when the
      Amendment Agreement was executed. This represents the excess of consideration
      over the fair value of securities issuable pursuant to the original conversion
      terms.





On
      October 11, 2007, Cofis converted its 150,000 shares of Series B Preferred
      Stock
      and all accrued dividends into 45,880,965 shares of common stock, surrendered
      8,333,332 original warrants and received 36,743,014 five year warrants expiring
      October 17, 2012 with an exercise price of $0.40 per share.





On
      November 14, 2007, Ener1 Group converted its 2,500 shares of Series B Preferred
      Stock and all accrued dividends into 750,523 shares of common stock, surrendered
      138,890 original warrants and received 612,384 five year warrants expiring
      November 14, 2012 with an exercise price of $0.40 per share.





Ener1
      did
      not issue any additional warrants to Cofis or Ener1 Group as no Triggering
      Event
      occurred.




The
      Series B Preferred Stock was classified as temporary equity in accordance with
      EITF Topic D-98 as the redemption features were not solely within the control
      of
      Ener1.





10.  MINORITY
      INTEREST





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




56




Ener1
      recorded a minority interest in consolidated subsidiaries representing the
      19.5%
      equity ownership in EnerDel held by Delphi at the date of the initial
      capitalization of EnerDel in October 2004. The minority interest balance sheet
      amount was reduced by minority interest income in 2004 and 2005 equal to
      19.5% of EnerDel’s annual operating losses. Minority interest income was reduced
      by the dividends and accretion on the Series A Preferred Stock in the
      amount of $2,001,000 and $1,609,000 for the years ended December 31, 2007 and
      2006, respectively. The minority interest balance sheet amount was reduced
      to zero as of September 2005 as a result of the minority interest in EnerDel’s
      cumulative losses, and no additional minority interest income or loss will
      be
      recorded until the minority interest account returns to a positive balance.
      Ener1 is accreting the discount on the Series A Preferred Stock to the face
      amount of $8,000,000 through the earliest redemption date in October
      2008.





11.    
      RELATED PARTY TRANSACTIONS





*Intercompany
      Transactions with Ener1 Group*





Ener1
      Group and its subsidiaries have from time to time used various services and
      employees of Ener1. Ener1 billed Ener1 Group and its subsidiaries for the actual
      cost of these services and employees. Similarly, Ener1 has from time to time
      used various services and employees of Ener1 Group and its subsidiaries, and
      Ener1 Group has billed Ener1 for the actual cost of these services and
      employees. Two
      of
      the Company’s directors, Dr. Peter Novak and Mike Zoi, collectively beneficially
      own 31% of the outstanding common stock of Ener1 Group, which owns approximately
      65% of the outstanding common stock of the Company. Financing
      transactions with Ener1Group are approved by the independent members of Ener1’s
      board of directors.





Effective October
      3, 2006, Ener1 entered into an agreement with Ener1 Group under which Ener1
      Group agreed to pay 53% of the total salary and related costs for Victor Mendes,
      who was the Chief Executive Officer of Ener1 and Chairman of the Board of Ener1
      Group from October 3, 2006 until October 26, 2006. Effective October 12, 2006,
      Ener1 entered into an agreement with Ener1 Group under which Ener1 Group agreed
      to pay 31% of the total salary and related costs for Ajit Habbu, who became
      the
      Chief Financial Officer of Ener1 and the Chief Financial Officer of Ener1 Group.
      On February 13, 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
      February 2006, Ener1 Group agreed to assume Ener1’s lease on an office in New
      York City, New York, for which the monthly rent was $35,520. The lease, which
      was due to expire in September 2010, was terminated with the landlord in
      February 2007 without obligation. Ener1 expensed $60,000 of leasehold
      improvements made to this office space during the quarter ended March 31, 2006.
      The lease payments on the office space were secured by a letter of that was
      itself secured by a cash collateral account of $224,000. The letter of credit
      was cancelled in February 2007 and the cash collateral was released on March
      22,
      2007. On February 5, 2007, Ener1 entered into a short-term lease for new office
      space in New York City for monthly rent of $6,750 on a month-to-month lease
      with
      a minimum lease term of three months. The rent expense is shared equally
      between Ener1 and Ener1 Group such that each party pays $3,375 of the monthly
      rent.





*Warrant
      Exercise Agreement*





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





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




57





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





*Ener1
      Group Convertible Notes, Warrants and Capital Commitment*





From
      June
      29, 2006 through February 13, 2007, Ener1 Group loaned Ener1 an aggregate
      principal amount of $11,960,000. Ener1’s obligation to repay Ener1 Group has
      been recorded as subordinated convertible debt under notes issued in the amount
      of $3,250,000 (“Group Note I”), $3,100,000 (“Group Note II”), $455,000 (“Group
      Note III”), $655,000 (“Group Note IV) and $4,500,000 (“Group Note V”). The net
      loan proceeds of $11,360,000 were used for working capital.





Under
      the
      terms of Group Note I, Group Note II and Group Note V, Ener1 agreed to pay
      $250,000, $100,000 and $250,000, respectively, as financing fees to Ener1 Group;
      the amounts have been added to the principal balance of the notes and recorded
      as deferred financing costs which are being amortized over the life of the
      notes. All of the notes bear interest at the rate of 10% per annum. Upon
      issuance, Group Note I, Group Note II and Group Note V included embedded
      derivative liabilities and beneficial conversion features which, when bifurcated
      into and valued as separate liabilities, resulted in discount to the notional
      debt amount of the notes. After giving effect to the discount, the effective
      rates of interest were 45.2%, 71.5% and 79.4%, respectively. All interest
      accrues until the maturity of the notes on April 15, 2009 for Group Notes I,
      II,
      III and IV and May 15, 2009 for Group Note V, at which time all principal and
      accrued interest are payable in full. All of the notes are subordinated to
      the
      rights of the holders of the 2004 Debentures and 2005 Debentures. Once all
      of
      Ener1's obligations under the 2004 Debentures and 2005 Debentures have been
      satisfied, all of the notes will be convertible at Ener1 Group's option into
      shares of Ener1’s common stock at the conversion price of $0.50 per share. Ener1
      Group may accelerate the amounts due under any of the notes if none of the
      2004
      or 2005 Debentures are outstanding and certain default or bankruptcy events
      occur with respect to Ener1. No warrants were issued in connection with Group
      Note III or Group Note IV.





In
      connection with Group Note I, Ener1 issued to Ener1 Group immediately
      exercisable warrants to purchase up to 9,000,000 shares of Ener1’s common stock
      at an exercise price of $0.50 per share. In connection with Group Note II,
      Ener1
      issued to Ener1 Group immediately exercisable warrants to purchase up to
      9,000,000 shares of Ener1’s common stock at an exercise price of $0.40 per share
      and immediately exercisable warrants to purchase up to 9,000,000 shares of
      Ener1’s common stock at an exercise price of $0.60 per share.  In
      connection with Group Note V, Ener1 issued to Ener1 Group immediately
      exercisable warrants to purchase up to 9,000,000 shares of Ener1’s common stock
      at an exercise price of $0.50 per share and immediately exercisable warrants
      to
      purchase up to 18,000,000 shares of Ener1’s common stock at an exercise price of
      $0.60 per share. All of these warrants have a five-year term.





Ener1
      is
      accounting for the warrant and conversion features of Group Note I, Group Note
      II and Group Note V in accordance with EITF 00-27. The proceeds of the notes
      were first allocated to the warrants at their relative fair value and credited
      to paid in capital. Ener1 used the Black-Scholes pricing model to value the
      warrants issued with the notes. For Group Note I, the model assumes a risk-free
      interest rate of 5.1%, the current stock price at date of issuance of $0.47
      per
      share, the exercise price of the warrants of $0.50 per share, the term of five
      years and volatility of 141%. For Group Note II, the model assumes a risk-free
      interest rate of 4.6%, the current stock price at date of issuance of $0.31
      per
      share, the exercise price of the warrants of $0.40 per share and $0.60 per
      share, the term of five years and volatility of 138%. For Group Note V, the
      model assumes a risk-free interest rate of 5.1%, the current stock price at
      date
      of issuance of $0.30 per share, the exercise price of the warrants of $0.50
      per
      share and $0.60 per share, the term of five years and volatility of 141%. Ener1
      recorded a discount to each convertible note equal to the relative fair value
      of
      the warrants, which is being amortized over the life of each note as interest
      expense. The intrinsic values of the conversion features were $1,602,000,
      $1,032,000 and $1,796,000, respectively, at the dates of issuance. No entry
      was
      made to record the values of the conversion features because the ability of
      the
      holder to convert is contingent upon Ener1’s repayment of the 2004 and 2005
      Debentures which is considered outside the holder’s control. Once the 2004
      Debentures and 2005 Debentures are repaid, Ener1 will revalue the benefit of
      the
      conversion features and record the intrinsic values, if any, as a credit to
      paid
      in capital.




58





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





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





On
      May
      21, 2007, Ener1 amended
      the terms of certain warrants with a Black-Scholes value before amendment of
      $3,272,518 to purchase up to 18,800,000 shares of Ener1 common stock previously
      issued to Ener1 Group to  reduce
      the exercise price of the warrants from $0.60 per share to $0.25 per share. On
      May
      21, 2007, f ollowing
      the amendment of the terms of these warrants, Ener1 Group exercised all of
      these
      warrants to purchase 18,800,000 common shares with a fair market value of
      $4,136,000 by canceling Ener1’s obligation to repay $4,700,000 in advances
      outstanding as of March 31, 2007. In addition, Ener1 issued 1,880,000 shares
      of
      Ener1 common stock with a fair market value of $414,000 in exchange for Ener1
      Group’s agreement to exercise these warrants prior to their expiration. Ener1
      also issued to Ener1 Group immediately exercisable warrants to purchase up
      to
      11,880,000 shares of Ener1’s common stock at an exercise price of $0.30 per
      share and a term of five years. Ener1
      recorded $0 in warrant modification expense because the fair value of the
      instruments given up was less than the fair value of the instruments and cash
      received.





On
      June
      29, 2007, Ener1 Group committed (the “Capital Commitment”) to purchase
      $15,000,000 of Ener1 common stock for $0.30 per share subject to certain
      operational and financial milestones and the issuance of five-year warrants
      at
      an exercise price of $0.30 per share equal to 60% of the number of shares
      purchased by Ener1 Group. At the same time, Ener1 also agreed to amend the
      exercise price of all outstanding warrants held by Ener1 Group to purchase
      up to
      52,128,136 shares of common stock from a weighted average price of $0.50 per
      share to $0.30 per share, which resulted in a warrant modification expense
      of
      $583,000. Subsequent
      to November 19, 2007, Ener1 Group was no longer required to purchase any Ener1
      common stock under the Capital Commitment because Ener1 raised capital from
      third parties.





Under
      the
      Capital Commitment, Ener1 Group purchased 12,873,333
      shares of common stock and warrants to purchase 7,724,000 shares for $3,862,000
      on June 29, 2007, 6,000,000 shares of common stock and warrants to purchase
      3,600,000 shares for $1,800,000 on August 7, 2007, 14,000,000 shares of common
      stock and warrants to purchase 8,400,000 shares for $4,200,000 on September
      28,
      2007, 7,397,150 shares of common stock and warrants to purchase 4,438,290 shares
      for $2,219,145 on November 5, 2007, 2,133,333 shares of common stock and
      warrants to purchase 1,280,000 shares for $640,000 on November 14, 2007. All
      of
      these warrants have a five-year term with an exercise price of $0.30 per share.
      All proceeds were allocated to the common stock and the warrants based on the
      relative fair market value of each instrument as shown in the following table
      (in thousands):




59




Relative
                  Fair Market Values
              
              TotalStock
              
              Warrants
              
              ProceedsJune
                  29, 2007
              
              $
              2,538
              
              $
              1,324
              
              $
              3,862August
                  7, 2007
              
              $
              1,189
              
              $
              611
              
              $
              1,800September
                  28, 2007
              
              $
              2,751
              
              $
              1,449
              
              $
              4,200November
                  5, 2007
              
              $
              1,515
              
              $
              704
              
              $
              2,219November
                  14, 2007
              
              $
              436
              
              $
              204
              
              $
              640Totals
              
              $
              8,429
              
              $
              4,292
              
              $
              12,721


The
      components of the notes issued to Ener1Group and advances at December 31, 2007
      are as follows (in thousands):




**Group
                  Note I**
              
              **Group
                  Note II**
              
              **Group
                  Note III**
              
              **Group
                  Note IV**
              
              **Group
                  Note V**
              
              **Group
                  Advances**
              
              **Total
                  Group Notes and Advances**Note
                  proceeds and advances
              
              $
              3,000
              
              $
              3,000
              
              $
              455
              
              $
              655
              
              $
              4,250
              
              $
              -
              
              $
              11,360Financing
                  fees
              
              
              250
              
              
              100
              
              
              -
              
              
              -
              
              
              250
              
              
              -
              
              
              600Total
                  notes and advances
              
              
              3,250
              
              
              3,100
              
              
              455
              
              
              655
              
              
              4,500
              
              
              -
              
              
              11,960Unamortized
                  discount relatedto
                  fair value of warrants
              
              
              (1,104
              )
              
              (1,579
              )
              
              -
              
              
              -
              
              
              (2,567
              )
              
              -
              
              
              (5,250
              )Accrued
                  interest payable at maturity
              
              
              522
              
              
              446
              
              
              53
              
              
              62
              
              
              522
              
              
              -
              
              
              1,605Balance
                  at December 31, 2007
              
              $
              2,668
              
              $
              1,967
              
              $
              508
              
              $
              717
              
              $
              2,455
              
              $
              -
              
              $
              8,315


12. STOCK-BASED
      COMPENSATION





At
      December 31, 2007, Ener1 had eight active stock-based employee, executive,
      director, advisory board and consultant compensation plans .





*Valuation
      and Expense Information under SFAS 123R*





Ener1
      recorded share-based compensation costs related to stock-based employee plans
      of
      $1,366,000 and $1,641,000 for the years ended December 31, 2007 and 2006,
      respectively.





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





In
      connection with the adoption of SFAS 123R, Ener1 estimates the fair value of
      each stock option on the date of grant using a Black-Scholes Model option
      valuation model, applying the 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 “shortcut method”
described in Staff Accounting Bulletin Topic 14.D.2, which is based on a
      calculation that determines the midpoint between the vesting date and the end
      of
      the contractual term.





*Risk-Free
      Interest Rate:* Ener1
      based the risk-free interest rate used in its assumptions on the implied yield
      currently available on U.S. Treasury issues with a remaining term equivalent
      to
      the stock option award’s expected term. The weighted-average risk-free interest
      rate used through December 31, 2007 was 4.1%.





*Expected
      Volatility:* Ener1
      uses volatility rates based upon the weekly closing stock price of Ener1’s
      common stock since January 2002, when Ener1 underwent a change in control.
      Ener1
      determined that share prices prior to January 2002 do not reflect the ongoing
      business valuation of Ener1’s operations. The weighted-average expected
      volatility used during the period options were granted was 122%.




60





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




*Stock
      Options*





A
      summary
      of the changes in the stock options outstanding under all of Ener1’s stock
      option plans described above as of December 31, 2006
      and
      2007is as follows:


**Options**
                
                **Number
                    of Options**
                
                **Weighted
                    Average Price**
                
                **Average
                    Remaining Contractual Term in Years**
                
                **Intrinsic
                    Value**Outstanding
                    at December 31, 2005
                
                
                24,605,617
                
                $
                0.53Granted
                
                
                15,860,000
                
                $
                0.25Exercised
                
                
                (933,333
                )
                $
                0.10Forfeited
                    or expired
                
                
                (10,257,079
                )
                $
                0.61Outstanding
                    at December 31, 2006
                
                
                29,275,205
                
                $
                0.36
                
                
                8.7
                
                $
                88,000Granted
                
                
                8,558,000
                
                $
                0.53Exercised
                
                
                (100,000
                )
                $
                0.00Forfeited
                    or expired
                
                
                (5,123,167
                )
                $
                0.30Outstanding
                    at December 31, 2007
                
                
                32,610,038
                
                $
                0.42
                
                
                5.8
                
                $
                13,278,594Exercisable
                    at December 31, 2007
                
                
                19,180,260
                
                $
                0.43
                
                
                5.9
                
                $
                7,862,550


Ener1
      granted options to purchase up to 15,860,000 shares in 2006. Employees exercised
      options to purchase a total of 933,333 shares during 2006. The total intrinsic
      value of these shares on the date of exercise was $215,000.





On
      May
      21, 2007, in connection with an employment agreement with Mr. Subhash Dhar
      to
      serve as its President, Ener1 issued options to purchase 3,000,000 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.





On
      July
      31, 2007, October 30, 2007, November 13, 2007 and December 19, 2007, Ener1
      granted options to directors and employees to purchase up to 5,558,000 shares
      of
      common stock at exercise prices ranging from $0.30 to $0.70 per share.
      T he
      fair
      value of these options on the date of grant using Black-Scholes was computed
      as
      $2,076,000 and, i n
      accordance with SFAS 123R, will be expensed over the vesting period of zero
      to
      three years.





During
      the years ended December 31, 2007 and 2006, Ener1 recognized $1,366,000 and
      $0,
      respectively, in amortization of stock options granted in previous
      periods.





One
      employee exercised options to purchase a total of 100,000 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.





As
      of
      December 31, 2007 and 2006, there was $3,015,000 and $2,345,000, 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.




61




During
      the year ended December 31, 2007, options to purchase 5,123,167 shares issued
      to
      various employees and
      former
      employeeswere forfeited because vesting requirements were not met or the
      options expired in accordance with their terms.





The
      weighted average fair value of the options granted during 2007 and 2006 was
      estimated at $0.44 per share and $0.23 per share, respectively, using the
      Black-Scholes option-pricing model with the following weighted- average
      assumptions: no dividend yield, expected volatility of 131% and 136%,
      respectively, weighted-average risk-free interest rate of approximately 4.0%
      and
      4.7%, respectively, and expected lives of three to ten years.




13.  WARRANTS





A
      summary
      of the changes in warrants outstanding as of December 31, 2006
      and 2007 is as follows:




**Warrants**
              
              **Number
                  of Warrants**
              
              **Weighted
                  Average Price**
              
              **Average
                  Remaining Term in Years**
              
              **Intrinsic
                  Value**Outstanding
                  and Exercisable at December 31, 2005
              
              
              130,131,471
              
              $
              0.86
              
              
              6.5
              
              $
              111,947,441Granted
              
              
              47,000,000
              
              $
              0.50Exercised
              
              
              (69,200,000
              )
              $
              0.08Surrendered
              
              
              -
              
              
              -Forfeited
                  or expired
              
              
              -
              
              
              -Outstanding
                  and Exercisable at December 31, 2006
              
              
              107,931,471
              
              $
              1.20
              
              
              5.6
              
              $
              129,907,441Granted
              
              
              164,877,688
              
              $
              0.52Exercised
              
              
              (39,623,047
              )
              $
              0.25Surrendered
              
              
              (8,472,222
              )
              $
              1.36Forfeited
                  or expired
              
              
              -
              
              
              -Outstanding
                  and Exercisable at December 31, 2007
              
              
              224,713,890
              
              $
              0.57
              
              
              3.4
              
              $
              128,224,993


In
      January 2006, Ener1 issued 200,000 shares of its common stock upon the exercise
      of warrants with an exercise price of $0.10 per share for an aggregate exercise
      price of $20,000.





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





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





In
      August
      2006, in connection with the issuance of Group Note I, Ener1 issued to Ener1
      Group warrants to purchase up to 9,000,000 shares of common stock at an exercise
      price of $0.50 per share, expiring five years from the grant date. Ener1
      recorded the fair value of these warrants of approximately $1,797,000 to
      additional paid in capital as debt issuance costs on the date of grant. Such
      cost is being amortized, using the effective interest method, over the remaining
      term of the underlying debt.





In
      September 2006, in connection with the issuance of Group Note II, Ener1 issued
      to Ener1 Group warrants to purchase up to 9,000,000 shares of common stock
      at an
      exercise price of $0.40 per share and warrants to purchase up to 9,000,000
      shares of common stock at an exercise price of $0.60 per share, expiring five
      years from the grant date. Ener1 recorded the fair value of these warrants
      of
      approximately $2,210,000 to additional paid in capital as debt issuance costs
      on
      the date of grant. Such cost is being amortized, using the effective interest
      method, over the remaining term of the underlying debt.




62





On
      January 5, 2007, in conjunction with a Purchase Agreement among Ener1 Group,
      Ener1 and Credit Suisse, Ener1 amended
      the terms of certain warrants to purchase up to 16,000,000 common shares
      previously issued to Ener1 Group to  reduce
      the exercise price of the warrants from $2.00 and $1.50 per share to $0.25
      per
      share. On
      January 5, 2007, f ollowing
      this amendment, Ener1 Group exercised all of these warrants to purchase
      16,000,000 common shares for $4,000,000. In connection with this transaction,
      Ener1 issued to Credit Suisse Securities (USA), LLC, five year warrants to
      purchase up to 5,000,000 shares of Ener1’s common stock at an exercise price of
      $0.30 per share and also issued to Charles Gassenheimer five year warrants
      to
      purchase up to 500,000 shares of Ener1’s common stock at an exercise price of
      $0.30 per share. Ener1
      recorded $0 in warrant modification expense because the fair value of the
      warrants after modification was less than the fair value before modification.





On
      February 13, 2007, in connection with the issuance of Group Note V, Ener1
      issued to Ener1 Group immediately exercisable warrants to purchase up to
      9,000,000 shares of Ener1’s common stock at an exercise price of $0.50 per share
      and immediately exercisable warrants to purchase up to 18,000,000 shares of
      Ener1’s common stock at an exercise price of $0.60 per share. The exercise price
      for both these warrants was subsequently reduced to $0.30 per share in
      connection with the Ener1 Group Capital Commitment Agreement on June 29,
      2007.





On February
      21, 2007 ,
      Ener1 amended
      the terms of the remaining 1,612,293 Exchange Warrants and 3,210,754 warrants
      dated June 30, 2006 to purchase up to 4,823,047 common shares previously issued
      to Ener1 Group to  reduce
      the exercise price of the warrants from $1.50 and $0.50 per share to $0.25
      per
      share. On
      February 21, 2007, f ollowing
      the amendment of the terms of these warrants, Ener1 Group exercised all of
      these
      warrants to purchase 4,823,047 common shares for $1,205,000. Ener1
      recorded $0 in warrant modification expense as the fair value of the warrants
      after modification was less than the fair value before modification.





On May
      21,
      2007 ,
      Ener1 amended
      the terms of 9,000,000 Group Note II Warrants and 9,800,000 Group Note V
      Warrants to purchase up to 18,800,000 common shares previously issued to Ener1
      Group to  reduce
      the exercise price of the warrants from $0.60 per share to $0.25 per share. On
      May
      21, 2007, f ollowing
      the amendment of the terms of these warrants, Ener1 Group exercised all of
      these
      warrants to purchase 18,800,000 common shares for $4,700,000. In connection
      with
      this transaction, Ener1 issued to Ener1 Group five year warrants to purchase
      up
      to 11,880,000 shares of Ener1’s common stock with an exercise price of $0.30 per
      share. Ener1
      recorded $0 in warrant modification expense as the fair value of the warrants
      after modification was less than the fair value before modification.





On
      May
      21, 2007, Ener1 issued five year warrants to UTE to purchase 100,000 shares
      of
      Ener1 common stock at an exercise price of $0.50 per share as part of a Purchase
      Money Financing Agreement.





On
      June
      29, 2007, August 7, 2007, September 28, 2007, November 5, 2007 and November
      14,
      2007 Ener1 issued five year warrants to Ener1 Group to purchase 7,724,000
      shares, 3,600,000 shares, 8,400,000shares, 4,438,290 shares and 1,280,000 shares
      of Ener1 common stock, respectively, at an exercise price of $0.30 per share
      as
      part of its Capital Commitment Agreement.





On
      October 17, 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 36,743,014 shares of Ener1 common stock at a purchase
      price of $0.40 per share. As part of this transaction, Cofis surrendered
      warrants to purchase 8,333,332 shares issued when Cofis purchased the Series
      B
      Preferred Stock.





On
      November 14, 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 612,384 shares of Ener1 common stock at a purchase price of $0.40
      per share. As part of this transaction, Ener1 Group surrendered warrants to
      purchase 138,890 shares issued when Cofis purchased the Series B Preferred
      Stock.





On
      November 19, 2007 in connection with an equity private placement, Ener1 issued
      180 day warrants to the investors to purchase 57,600,000 shares of Ener1 common
      stock at an exercise price of $0.75 per share.





63





14.  EARNINGS
      PER SHARE





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 warrants and from the conversion of Ener1’s
      convertible debentures. In calculating diluted net loss per share, the numerator
      is also adjusted to: (1) add back interest expense in the 2004 and 2005
      Debentures; and (2) subtract the derivative gains on convertible securities
      to
      the extent the effect is dilutive. Weighted-average common shares do not include
      the common stock equivalents resulting from common stock options because their
      inclusion would be anti-dilutive. Because the shares of Series B Preferred
      Stock
      had been fully converted at December 31, 2007 and were not convertible at
      December 31, 2006 these common stock equivalents were excluded from the earnings
      per share calculations. The dilutive effect of outstanding stock options and
      warrants is reflected in diluted net income or loss per share by application
      of
      the treasury stock method. The dilutive effect of outstanding convertible
      securities is reflected in diluted net income or loss per share by application
      of the if-converted method.





The
      following potential common shares have been excluded from the computation of
      diluted net loss per share for all periods presented because the effect of
      including them would have been antidilutive:




**Year
                  Ended December 31,****2007**
              
              **2006**Stock
                  options that were not in the money
              
              
              3,214,969
              
              
              28,705,205Warrants
                  that were not in the money
              
              
              25,557,706
              
              
              107,931,471Plus
                  shares from assumed conversion ofconvertible
                  instruments2004
                  Debentures
              
              
              12,351,344
              
              
              17,433,6282005
                  Debentures
              
              
              3,015,845
              
              
              15,295,699Group
                  Convertible Notes
              
              
              27,130,000
              
              
              14,192,000Total
                  options, warrants and convertiblesecurities
                  excluded from weighted average shares
              
              
              71,269,864
              
              
              183,558,003


15.  SEGMENT
      REPORTING





As
      of
      December 31, 2007, Ener1 is organized based upon the following segments:
      battery, fuel cell and nanotechnology. The battery business develops and markets
      advanced lithium batteries. The fuel cell business develops and markets fuel
      cells and fuel cell systems. The nanotechnology business is developing
      nanotechnology related manufacturing processes and materials.





The
      accounting policies of the segments are the same as those described in the
      “Summary of Significant Accounting Policies.” Transactions between segments,
      consisting principally of product sales and purchases, are recorded at the
      consummated sales price. Ener1 determines reportable segments based on the
      way
      management organizes segments for decision making and performance assessment
      purposes. Ener1 regularly reviews the performance of its segments and allocates
      resources to them based on anticipated future contribution.





Retroactive
      to 2006, certain corporate incurred costs are allocated to subsidiaries based
      on
      the ratio of the subsidiary’s incurred expenses to total subsidiary incurred
      expenses. As a result, the segment net income (loss) and corporate allocations
      for 2006 have been recast to conform to current periods' presentations since
      allocations were not included in prior segment reporting.




64




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




**2007**
              
              **2006****Net
                  sales:**Battery
              
              $
              101
              
              $
              -Fuel
                  Cell
              
              
              179
              
              
              100Total
                  net sales
              
              $
              280
              
              $
              100**Interest
                  expense:**Corporate
              
              $
              17,233
              
              $
              10,376**Depreciation
                  and amortization expense:**Corporate
              
              
              116
              
              
              169Battery
              
              
              375
              
              
              198Fuel
                  Cell
              
              
              27
              
              
              15Nanotechnology
              
              
              11
              
              
              9Total
                  depreciation and amortization expense
              
              $
              530
              
              $
              391**Net
                  income (loss):**Corporate
              
              
              (22,027
              )
              
              (15,323
              )Battery
              
              
              (20,015
              )
              
              (17,924
              )Fuel
                  Cell
              
              
              (7,132
              )
              
              (6,115
              )Nanotechnology
              
              
              (2,537
              )
              
              (1,943
              )Net
                  income (loss)
              
              $
              (51,711
              )
              $
              (41,305
              )**Corporate
                  allocations:**Corporate
              
              
              (17,814
              )
              
              (16,041
              )Battery
              
              
              11,958
              
              
              11,061Fuel
                  Cell
              
              
              4,315
              
              
              3,779Nanotechnology
              
              
              1,541
              
              
              1,201Net
                  income (loss)
              
              $
              -
              
              $
              -**Assets:**Corporate
              
              
              26,091
              
              
              3,487Battery
              
              
              4,665
              
              
              3,510Fuel
                  Cell
              
              
              497
              
              
              104Nanotechnology
              
              
              49
              
              
              67Total
                  assets
              
              $
              31,301
              
              $
              7,168**Capital
                  expenditures:**Corporate
              
              
              10
              
              
              10Battery
              
              
              398
              
              
              1,239Fuel
                  Cell
              
              
              158
              
              
              4Nanotechnology
              
              
              3
              
              
              14Total
                  capital expenditures
              
              $
              569
              
              $
              1,267


16.  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, 2007, there were no material
      pending legal proceedings.





*Lease
      Commitments*





Approximate
      future payments for all operating leases for years subsequent to December 31,
      2007 are as follows (in thousands):




65




12/31/20072008
              
              $
              7502009
              
              
              7782010
              
              
              6072011
              
              
              5252012
              
              
              88Total
              
              $
              2,748




17.    
      SUBSEQUENT EVENTS





*Conversions
      of Senior Debentures*





From
      January 1, 2008 through February 29, 2008, $2,500,000 in principal amount of
      2004 Debentures plus $56,170 of accrued interest have been converted into
      3,277,140 shares of common stock at a per share conversion price of $0.78.





From
      January 1, 2008 through February 29, 2008, $605,933 in principal amount of
      2005
      Debentures plus $3,451 of accrued interest have been converted into 883,167
      shares of common stock at a per share conversion price of $0.69.





On
      February 22, 2008, Ener1 sent a notice to holders of the 2004 Debentures that
      it
      intended to prepay the entire remaining principal amount of the 2004 Debentures
      in cash at an amount equal to 101% of the principal balance. The prepayment
      will
      occur on March 24, 2008 unless the holders convert their debentures into common
      stock before that date. At February 22, 2008, $9,284,000 in principal of 2004
      Debentures were outstanding of which $2,150,000 of principal of the 2004
      Debentures plus $51,711 of accrued interest have been subsequently converted
      into 2,822,707 shares of common stock of Ener1 through February 29,
      2008.


66





**Item
      8.**  **Changes
      In and Disagreements With Accountants and Financial
      Disclosure.**





None .





**Item
      8A.**  **Controls
      and Procedures.**





As
      of
      December 31, 2007, we carried out an evaluation of the effectiveness of the
      design and operation of our disclosure controls and procedures pursuant to
      Exchange Act Rule 13a-15. This evaluation was done under the supervision and
      with the participation of our management, including our Chief Executive Officer
      and Chief Financial Officer. Based on their evaluation of our disclosure
      controls and procedures (as defined in the Exchange Act Rule 13a-15e), our
      Chief
      Executive Officer and Chief Financial Officer have concluded that as of December
      31, 2007 such disclosure controls and procedures were
      effective.





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 Rule 13a-15d of the  Exchange
      Act, management conducted an evaluation of the effectiveness of our internal
      control over financial reporting based on the framework in *Internal Control - Integrated Framework* (1992)
      and *Internal
      Control Over Financial Reporting - Guidance for Smaller Public
      Companies* (2006),
      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, 2007.





This
      annual report does not include an attestation report of our registered public
      accounting firm regarding internal control over financial reporting.
      Management's report was not subject to attestation by our registered public
      accounting firm pursuant to temporary rules of the SEC that permit the company
      to provide only management's report in this annual report.





**Item
      8B.**  **Other
      Information.**





None.


67





**PART
      III**




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





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




**Name**
            
            **Age**
            
            **Position**Charles
                Gassenheimer
            
            34
            
            Director,
                Chairman of the BoardPeter
                Novak
            
            55
            
            Director,
                Chief Executive Officer and PresidentKenneth
                Baker
            
            60
            
            DirectorMarshall
                Cogan
            
            70
            
            DirectorElliot
                Fuhr
            
            48
            
            DirectorKarl
                Gruns
            
            60
            
            DirectorLudovico
                Manfredi
            
            46
            
            DirectorThomas
                Snyder
            
            63
            
            DirectorMike
                Zoi
            
            41
            
            DirectorNaoki
                Ota
            
            41
            
            Chief
                Operating OfficerUlrik
                Grape
            
            47
            
            Executive
                Vice PresidentRex
                Hodge
            
            42
            
            Executive
                Vice PresidentGerard
                Herlihy
            
            55
            
            Chief
                Financial OfficerAjit
                Habbu
            
            53
            
            Chief
                Administrative OfficerMichael
                Shariff
            
            38
            
            General
                Counsel and Chief Intellectual Property CounselAnton
                Zingarevich
            
            25
            
            Vice
                President





**Charles
      Gassenheimer** has been
      one of our directors since January 2006 and our Vice Chairman since January
      2006. In November 2007 he was named Chairman of the Board of Directors. He
      has
      also been the Chief Executive Officer and a director of Ener1 Group since
      January 2006. From 2002 through 2005, Mr. Gassenheimer was Portfolio Manager
      of
      Satellite Asset Management's Convertible Arbitrage Division and Managing
      Director and Portfolio Manager of its Private Investment Group. From 2001
      through 2002, he was a Portfolio Manager and head of the distressed securities
      investment group at Tribeca Investments (Citigroup Global Investments). Mr.
      Gassenheimer has also been a Vice President with Credit Suisse First Boston,
      where he served as Investment Manager of a proprietary hedge fund focused on
      private investments in public equity securities, and a Turnaround Management
      Consultant at Coopers & Lybrand. Mr. Gassenheimer has a B.A. in Economics
      from the University of Pennsylvania.





**Dr.
      Peter Novak** has been
      a director of our company since February 2002 and Chief Executive Officer since
      December 2006. In November 2007 Dr. Novak became our President. Since 2001,
      he
      has been the Chief Technology Officer and a director of Ener1 Group. Since
      1991,
      Dr. Novak has worked with Mike Zoi, focusing on bringing advanced electronic
      technologies to market. In 1998, Dr. Novak worked with Mr. Zoi to form Ener1
      s.r.l. Dr. Novak has been the “sole administrator”, a position equivalent to
      president, and sole director, for Ener1 s.r.l. Ener1 s.r.l. commenced
      development of a research, development and production facility for advanced
      lithium metal batteries in Italy in 1998. For the next three years, Dr. Novak
      worked with Mr. Zoi to manage the start-up business operations of Ener1 s.r.l.
      Dr. Novak was, during that period, and is now, primarily responsible for
      technology development. In that capacity, he performed and supervised research
      and development, developed numerous technologies for which patent applications
      are now in process at the United States Patent and Trademark office and
      elsewhere. In 2001, Dr. Novak and Mr. Zoi formed Ener1 Group. As Chief
      Technology Officer of Ener1 Group, he is responsible for all technology
      development, licensing and patent matters. He also assists in the management
      of
      the business affairs of Ener1 Group. Dr. Novak graduated from the Ural
      Polytechnic Institute, Physics and Technical Department specializing in
      experimental nuclear physics, and has a doctoral degree in solid-state physical
      chemistry.





**Kenneth
      Baker** has been
      a director of our company since July 2007. He also serves on the Governance
      and
      Nominating 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 is partially funding our Li-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.




68





**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.





**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 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 & gas companies. Mr. Fuhr has led
      or is leading several FTI firm-wide initiatives, including Business Quality,
      Learning & 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.





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





**Thomas
      Snyder** has been
      a director of our company since July 2007. He serves on the Governance and
      Nominating 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.





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




69




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





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





**Gerard
      Herlihy** has been
      our Chief Financial Officer since November 2007. Since October 2006, Mr. Herlihy
      has been directing Ener1’s media and investor relations and external reporting.
      He was the CFO of Ener1 from January 2006 through October 2006. Since June
      2004,
      he also served as CFO, and since September 2005 he has additionally served
      as
      President, of Splinex Technology Inc., an affiliate of Ener1. For the year
      before he joined Splinex, Mr. Herlihy provided accounting, financing and
      acquisition advisory consulting services to public and private companies. From
      2001 through 2003, he was the chief executive officer of Putt Trak Inc., a
      vision systems software development company. 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).





**Ajit
      Habbu** has been
      our Chief Administrative Officer since November 2007. He was Chief Financial
      Officer from October 2006 to October 2007. Mr. Habbu has been the
      Chief Financial Officer of Ener1 Group since October 2006. Prior to
      joining Ener1, from September 2005 to October 2006, Mr. Habbu was Executive
      Vice
      President and Chief Financial Officer of Vixia, LLC, a provider of process
      solutions and support services for healthcare organizations, using radio
      frequency identification and ultrasound technologies. From 1999 to 2005, Mr.
      Habbu was with Recall Corporation, a global document management business with
      operations in 22 countries, where he served as Senior Vice President and Chief
      Financial Officer. From 1983 to 1999, Mr. Habbu was with IBM Corporation, where
      he served in a number of executive positions, including Chief Financial Officer
      of its Education Business Unit. Mr. Habbu holds a B.S. degree in Chemical
      Engineering from the Indian Institute of Technology, an M.S. degree in Systems
      and Industrial Engineering from the University of Iowa, and an M.B.A. with
      a
      concentration in Financial and International Business from the University of
      Chicago.




70




**Michael
      Shariff** has
      been
      our General Counsel and Chief Intellectual Property Officer since November
      2007.
      Prior to joining Ener1, Mr. Shariff was with Howard & Howard Attorneys, P.C.
      from August 2001 to October 2007 and served as an outside patent counsel for
      Ener1. Mr. Shariff is registered to practice before the United States Patent
      and
      Trademark Office and is an active member of the Washington State Bar. Mr.
      Shariff holds the degree of Masters of Science in Petroleum Industry Engineering
      and Economy in the Fields of Fuel and Energy received from the State Academy
      of
      Oil and Gas (former USSR). Mr. Shariff has drafted patent applications for
      various technologies including and not limited to nanotechnology, mechanical
      devices, electrochemical devices, assembly lines for automotive applications,
      electrical systems and business methods.





**Anton
      Zingarevich** has been
      our Vice President of Operations and Chief Executive Officer of NanoEner since
      October 2007. From 2003 to 2006, Mr. Zingarevich was a student pursuing his
      bachelor’s degree at Regents Business School in London.





**Compliance
      with Section 16(a) of the Exchange Act**





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 we have received during the
      year ended December 31, 2007 and written representations of the persons required
      to file said reports, we believe that all reporting persons complied with these
      reporting requirements during fiscal 2007 except for the following late reports,
      each of which was due to administrative error: (i) five Forms 4 each reporting
      an award of options to purchase our common stock by each of Charles
      Gassenheimer, Naoki Ota, Ulrik Grape, Rex Hodge and Gerard Herlihy, and (ii)
      a
      Form 3 by Mr. Ota reporting an award of options to purchase our common stock.




**Code
      of Ethics**





Effective
      with the filing of this Annual Report, we adopted an amendment to our Business
      Code of Conduct, which was originally adopted in 2004 and amended in 2008.
      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 reporting of internal violations of the code; and (5)
      accountability for the adherence to the code **.**  Our
      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. Gruns, Mr. Baker
      and
      Mr. Snyder. The Nomination and Governance Committee did not meet during 2007
      or
      2006.





**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.




71




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 seven meetings
      during 2007 and ten meetings during 2006.




72


**ITEM
      10: EXECUTIVE COMPENSATION**





**Summary
      Compensation Table**





The
      following table sets forth information regarding the compensation paid during
      2007 and 2006 to all individuals serving during 2007 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, 2007, (whom
      we refer to collectively as the “named executive officers”).


**Name
                  and Principal Position**
              
              **Year**
              
              **Salary
                  ($)**
              
              **Bonus
                  ($)**
              
              **Option
                  Awards ($)**
              
              
              
              **All
                  Other Compen- sation ($)**
              
              
              
              **Total
                  ($)**Dr.
                  Peter Novak
              
              
              2007
              
              $
              415,540
              
              $
              215,000
              
              $
              -
              
              
              
              
              $
              35,599
              
              
              (4
              )
              $
              666,139Chief
                  Executive Officer and President (1)
              
              
              2006
              
              
              250,010
              
              
              -
              
              
              -
              
              
              
              
              
              53,944
              
              
              (4
              )
              
              303,954Naoki
                  Ota
              
              
              2007
              
              
              220,002
              
              
              25,000
              
              
              366,000
              
              
              (6
              )
              
              -
              
              
              (9
              )
              
              611,002Chief
                  Operating Officer (2)
              
              
              2006
              
              
              160,596
              
              
              -
              
              
              645,000
              
              
              (5
              )
              
              -
              
              
              
              
              
              805,596Ulrik
                  Grape
              
              
              2007
              
              
              250,000
              
              
              25,000
              
              
              366,000
              
              
              (8
              )
              
              -
              
              
              (10
              )
              
              641,000Executive
                  Vice President (3)
              
              
              2006
              
              
              247,198
              
              
              -
              
              
              126,000
              
              
              (7
              )
              
              -
              
              
              
              
              
              373,198


(1)
            Dr.
                Novak was appointed Chief Executive Officer on December 28, 2006.
                Prior to
                that Dr. Novak provided services to us as an employee for which he
                received annual compensation of $250,000. Effective December 28,
                2006, Dr.
                Novak’s salary was increased to $430,000 annually. Dr. Novak is also a
                director. He does not receive any compensation for his services as
                a
                director.(2)
            Mr.
                Ota was appointed Chief Operating Officer in November 2007. He is
                also
                President and Chief Operating Officer of our EnerDel
                subsidiary.(3)
            Mr.
                Grape has been our Executive Vice President since January
                2006.(4)
            Includes
                $20,697 for employee life insurance premiums and $33,247 for automobile
                related payments paid in 2006. Includes $14,553 for employee life
                insurance premiums and $21,046 for automobile related payments paid
                in
                2007.(5)
            In
                October 2006, Mr. Ota was awarded an option to purchase 1,500,000
                shares
                of our common stock and in December 2006 he was awarded an option
                to
                purchase 1,000,000 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 7, Footnote No. 13,
                Stock
                Based Compensation for assumptions made in the valuation of these
                options.(6)
            In
                December 2007, Mr. Ota was awarded an option to purchase 600,000
                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 7, Footnote No. 13, Stock Based Compensation
                for
                assumptions made in the valuation of these options.(7)
            In
                December 2006, Mr. Grape was awarded an option to purchase 600,000
                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 7, Footnote No. 13, Stock Based Compensation
                for
                assumptions made in the valuation of these options.(8)
            In
                December 2007, Mr. Grape was awarded an option to purchase 600,000
                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 7, Footnote No. 13, Stock Based Compensation
                for
                assumptions made in the valuation of these options.




73




(9)
            In
                December 2007, Mr. Ota forfeited performance options to purchase
                150,000
                shares.(10)
            In
                December 2007, Mr. Grape forfeited performance options to purchase
                60,000
                shares.




**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 100,000 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 1,000,000
      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 shall be fully exercisable immediately. This option has a ten
      year life.




**Compensation
      of Executives**





On
      December 21, 2006 Mr. Ota was granted options to purchase 1,000,000 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 700,000
      shares were deemed earned, options to purchase 150,000 shares are unearned
      and
      options to purchase 150,000 shares were forfeited. The 700,000 earned options
      will vest one-third per year period on the anniversary of the date of grant
      starting December 21, 2007. The 150,000 unearned options continue to be subject
      to specifically identified performance criteria. On December 19, 2007, Mr.
      Ota
      was granted options to purchase 600,000 shares of our common stock subject
      to
      specifically identified performance criteria and subject to forfeiture if such
      performance criteria are not met.





On
      December 21, 2006 Mr. Grape was granted options to purchase 400,000 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 280,000
      shares were deemed earned, options to purchase 60,000 shares are unearned and
      options to purchase 60,000 shares were forfeited. The 280,000 earned options
      will vest one-third per year on the anniversary of the date of grant starting
      December 21, 2007. The 60,000 unearned options continue to be subject to
      specifically identified performance criteria. On December 19, 2007, Mr. Grape
      was granted options to purchase 600,000 shares of our common stock subject
      to
      specifically identified performance criteria and subject to forfeiture if such
      performance criteria are not met.





74


**OUTSTANDING
      EQUITY AWARDS AT FISCAL YEAR-END 2007**


**Option
                  Awards**
 
 **Name**
              **Number
                  of Securities Underlying Unexercised Options (#) Exercisable**
              **Number
                  of Securities Underlying Unexercised Options (#) Unexercisable**
              
              **Equity
                  Incentive Plan Awards: Number of Securities Underlying Unexercised
                  Unearned Options (#)**
              
              **Option
                  Exercise Price ($)**
              
              **Option
                  Expiration Date**Dr.
                  Peter Novak
              -
              -
              
              -
              
              -
              
              -Naoki
                  Ota
              500,000
              1,000,000
              (1)
              -
              
              0.31
              
              10/13/16233,333
              466,667
              (3)
              150,000
              (2)
              0.23
              
              12/21/11-
              -
              
              600,000
              (2)
              0.70
              
              12/19/12Ulrik
                  Grape
              -
              500,000
              (4)
              500,000
              (4)
              0.49
              
              09/29/15133,000
              67,000
              (5)
              -
              
              0.23
              
              12/21/1193,333
              186,667
              (6)
              60,000
              (2)
              0.23
              
              12/21/11-
              -
              
              600,000
              (2)
              0.70
              
              12/19/12


(1)
            Option
                vests with respect to 500,000 shares on each of 10/16/08 and
                10/16/09.(2)
            Unearned
                options are subject to specifically identified performance criteria.
                Upon
                achievement of the performance criteria, the options will become
                earned
                and will vest one-third per year over a three year
                period.(3)
            Option
                vests with respect to 233,333 shares on 12/21/08 and with respect
                to
                233,334 shares on 12/21/09.(4)
            These
                options do not become exercisable until EnerDel’s annual revenue exceeds
                $5.6 million. This target revenue has not yet been met. Of the total
                options, options to purchase 500,000 shares are vested and the remaining
                options to purchase 500,000 shares will vest with respect to 250,000
                shares on each of 10/1/08 and 10/1/09.(5)
            Vests
                with respect to 67,000 shares on 12/21/08.(6)
            Vests
                with respect to 93,333 shares on 12/21/08 and with respect to 93,334
                shares on 12/21/09.


75


**2007
      DIRECTOR COMPENSATION**





**Name**
              
              **(1)**
                **Fees
                  Earned or Paid in Cash ($)**
              
              **Option
                  Awards ($)**
              
              **Total
                  ($)**Charles,
                  Gassenheimer
              
              
              -
              
              
              610,000
              
              
              (4
              )
              
              610,000Kenneth
                  Baker
              
              
              20,000
              
              
              72,000
              
              
              (2
              )
              
              92,000Marshall
                  Cogan
              
              
              -
              
              
              -
              
              
              
              
              
              -Karl
                  Gruns
              
              
              40,000
              
              
              61,000
              
              
              (3
              )
              
              101,000Ludovico
                  Manfredi
              
              
              40,000
              
              
              61,000
              
              
              (3
              )
              
              101,000Thomas
                  Snyder
              
              
              20,000
              
              
              72,000
              
              
              (2
              )
              
              92,000Mike
                  Zoi
              
              
              -
              
              
              -
              
              
              
              
              
              -


(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 10,000 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.(2)
            In
                July 2007, Mr. Baker and Mr. Snyder were each awarded an option to
                purchase 300,000 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 7, Footnote No. 13,
                Stock
                Based Compensation for the assumptions made in the valuation of these
                options.(3)
            In
                December 2007, Mr. Gruns and Mr. Manfredi were each awarded an option
                to
                purchase 100,000 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 7, Footnote No. 13,
                Stock
                Based Compensation for the assumptions made in the valuation of these
                options.(4)
            In
                December 2007, Mr. Gassenheimer was awarded an option to purchase
                1,000,000 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 7, Footnote No. 13, Stock
                Based
                Compensation for the assumptions made in the valuation of these
                options.




76




**Compensation
      of Directors**





Mr.
      Gassenheimer serves as the Chairman of our company. We reimbursed Ener1
      Group $300,000 for salary paid to Mr. Gassenheimer during the year. During
      2007,
      Mr. Gassenheimer was awarded an option to purchase up to 1,000,000 shares of
      our
      common stock at an exercise price of $0.70 per share. These options were fully
      vested on the date of grant and have a five year term.





Mr.
      Baker
      became an independent, non-executive director of our company in July 2007.
      Upon
      his appointment to the Board of Directors he was awarded an option to purchase
      up to 300,000 shares of our common stock at an exercise price of $0.40. Such
      options will vest ratably over three years.





Mr.
      Gruns
      serves as an independent, non-executive director and is the Chairman of our
      Audit Committee. During 2007, Mr. Gruns was awarded an option to purchase up
      to
      100,000 shares of our common stock with an exercise price of $0.70. Such options
      will vest ratably over three years.





Mr.
      Manfredi serves as an independent, non-executive director and is a member of
      our
      Audit Committee. During 2007, Mr. Manfredi was awarded an option to purchase
      up
      to 100,000 shares of our common stock with an exercise price of $0.70. Such
      options will vest ratably over three years.





Mr.
      Snyder became an independent, non-executive director of our company in July
      2007
      and was a member of our Audit Committee from July 2007 to February 2008. Upon
      his appointment to the Board of Directors he was awarded an option to purchase
      up to 300,000 shares of our common stock at an exercise price of $0.40. Such
      options will 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.




77


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





**Equity
      Compensation Plan Information**





The
      following table provides information regarding common stock authorized for
      issuance under Ener1‘s equity compensation plans as of December 31, 2007:


**Plan
                  Category**
              
              **(a)
                  Number of Securities to be Issued Upon Exercise of Outstanding
                  Options,
                  Warrants, and Rights**
              
              **(b)
                  Weighted-Average Exercise Price of Outstanding Options, Warrants,
                  and
                  Rights**
              
              **(c)
                  Number of Securities Remaining Available for Future Issuance Under
                  Equity
                  Compensation Plans (excluding securities reflected in column (a))**Equity
                  Compensation Plans Approvedby
                  Security Holders
              
              
              20,524,833
              
              $
              0.38
              
              
              19,725,184Equity
                  Compensation Plans Not Approvedby
                  Security Holders
              
              
              12,085,205
              
              $
              0.49
              
              
              7,118,412Total
              
              
              32,610,038
              
              
              
              
              
              26,843,596


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





Under
      the
      2007 Plan, incentive stock options, nonqualified stock options, stock
      appreciation rights, restricted stock, restricted stock units and deferred
      stock
      units may be issued to persons selected by the administrators of the Plan from
      a
      class of employees, officers and non-employee directors and other service
      providers who render valuable contributions to Ener1. The 2007 Plan provides
      that no more than 5,000,000 shares of common stock may be issued to any employee
      in any one calendar year. Option awards are generally granted with an exercise
      price equal to the market price of our common stock at the date of grant; those
      option awards generally vest based on three years of continuous service and
      have
      ten-year contractual terms. Options to purchase 14,284,833 shares at a
      weighted-average exercise price of $0.38 per share were outstanding under the
      2007 Stock Option Plan as of December 31, 2007. Options
      granted under the 2007 Plan expire no later than ten years from the date of
      grant.





Under
      the
      CEO Option Plan and in accordance with his employment agreement we issued to
      Kevin Fitzgerald, our former Chief Executive Officer options to purchase shares
      of our common stock. In connection with Mr. Fitzgerald’s separation from the
      Company on January 9, 2006, a portion of the options were forfeited. The
      following table summarizes the options granted to and forfeited by Mr.
      Fitzgerald:





Options
                Granted
            Strike
                Price
            Options
                Forfeited
            Options
                Outstanding (Fully Vested)September
                8, 2003
            9,716,716
            $0.30
            2,159,270
            7,557,446December
                31, 2004
            5,159,943
            $0.97
            2,364,974
            2,794,969December
                31, 2005
            2,706,958
            $0.54
            2,594,168
            112,79017,583,617
            
            7,118,412
            10,465,205




78




Options
      to purchase a total of 420,000 shares have been granted in connection with
      our
      Advisory Committee Option Plan and our 2004 Advisory Committee Option Plan;
      no
      additional shares are reserved for issuance in connection with these plans.
      These plans provide for the grant of options to members of our Advisory
      Committee or to the entities with whom our Advisory Committee members are
      affiliated. The terms of these option grants were determined by our Board of
      Directors, in their sole discretion, including, without limitation, the number
      of shares subject to an option and the applicable exercise price, vesting
      schedule and term. Each of the options granted under these plans has a ten-year
      term, vests over a two-year period and an exercise price equal to fair market
      value of our common stock on the date of grant.





We
      granted an option to Mr. Ulrik Grape, President of EnerDel, in accordance with
      his employment agreement, under the EnerDel Officer Plan, to purchase 1,000,000
      shares of our common stock, vesting 25% per year, with an exercise price equal
      to fair market value on the date of grant. These options do not become
      exercisable until EnerDel’s annual revenue exceeds $5.6 million. This target
      revenue has not yet been met. This option has a ten-year term. No additional
      shares are reserved for issuance in connection with this plan.





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


79





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





The
      table
      below contains information as of February 29, 2008 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 29, 2008,
      652,328,047 shares of common stock were outstanding. Except as otherwise noted
      below, each person or entity named in the following table has the sole voting
      and investment power with respect to all shares of our common stock that he,
      she
      or it beneficially owns. Except as otherwise noted below, the address of each
      person or entity named in the following table is c/o Ener1, Inc., 500 West
      Cypress Creek Road, Suite 100, Fort Lauderdale, Florida 33309.




**Amount
                  Of**
              
              
              **Percent****Beneficial**
              
              
              **of****Name**
              
              **Ownership**
              
              
              **Class**Ener1
                  Group, Inc.
              
              514,170,345
              
              (1)
              69.2%Morgan
                  Stanley & Co., Incorporated
              
              54,150,000
              
              (2)
              8.0%1585
                  Broadway, 10th Floor, New York, NY 10036The
                  Quercus Trust
              
              38,000,000
              
              (3)
              5.7%230
                  Santiago Drive, Newport Beach, CA 92660Anchorage
                  Capital Master Offshore, Ltd.
              
              35,209,997
              
              (4)
              5.3%610
                  Broadway, 6th Floor, New York, NY 10012Charles
                  Gassenheimer
              
              3,500,000
              
              (5)
              *Kenneth
                  Baker
              
              -
              
              
              *Marshall
                  Cogan
              
              166,666
              
              (6)
              *Elliot
                  Fuhr
              
              -
              
              
              *Karl
                  Gruns
              
              320,000
              
              (7)
              *Ludovico
                  Manfredi
              
              110,000
              
              (8)
              *Peter
                  Novak
              
              3,751,791
              
              (9)
                  (16)
              *Thomas
                  Snyder
              
              -
              
              
              *Mike
                  Zoi
              
              834,206
              
              (10)
                  (16)
              *Gerard
                  Herlihy
              
              300,000
              
              
              *Naoki
                  Ota
              
              523,333
              
              (11)
              *Ajit
                  Habbu
              
              750,000
              
              (12)
              *Ulrik
                  Grape
              
              326,333
              
              (13)
              *Rex
                  Hodge
              
              300,000
              
              (14)
              *Anton
                  Zingarevich
              
              -
              
              
              *Michael
                  Shariff
              
              -
              
              
              *Directors
                  and officers as a group (sixteen persons)
              
              10,882,329
              
              (15)
              1.7%*
                  Less than 1%




Notes
      are
      on the following page.




80




***Notes:***(1)
              Includes
                  89,923,920 shares issuable under outstanding warrants exercisable
                  duringthe
                  60 day period following February 29, 2008.(2)
              Includes
                  25,650,000 shares issuable under outstanding warrants exercisable
                  duringthe
                  60 day period following February 29, 2008. The information reported
                  is
                  pursuant toSchedule
                  13G filed by Morgan Stanley on February 14, 2008.(3)
              David
                  Gelbaum and Monica Chavez Gelbaum are Trustees of The Quercus
                  Trust.Includes
                  18,000,000 shares issuable under outstanding warrants exercisable
                  duringthe
                  60 day period following February 29, 2008.(4)
              Includes
                  5,300,000 shares issuable under outstanding warrants exercisable
                  during
                  the 60 day periodfollowing
                  February 29, 2008 and 526,087 shares issuable upon conversion of
                  debt
                  during the 60 dayperiod
                  following February 29, 2008. The information reported is pursuant
                  to
                  Schedule 13G filed byAnchorage
                  Capital Master Offshore, Ltd. on February 29, 2008.(5)
              Includes
                  1,500,000 shares issuable under outstanding options and warrants
                  exercisable duringthe
                  60 day period following February 29, 2008.(6)
              Includes
                  166,666 shares issuable under outstanding options exercisable
                  duringthe
                  60 day period following February 29, 2008.(7)
              Includes
                  270,000 shares issuable under outstanding options exercisable
                  duringthe
                  60 day period following February 29, 2008.(8)
              Includes
                  110,000 shares issuable under outstanding options exercisable
                  duringthe
                  60 day period following February 29, 2008.(9)
              Includes
                  1,953,376 shares issuable under outstanding warrants exercisable
                  duringthe
                  60 day period following February 29, 2008.(10)
              Includes
                  434,330 shares issuable under outstanding warrants exercisable
                  duringthe
                  60 day period following February 29, 2008.(11)
              Includes
                  523,333 shares issuable under outstanding options exercisable
                  duringthe
                  60 day period following February 29, 2008.(12)
              Includes
                  750,000 shares issuable under outstanding options exercisable
                  duringthe
                  60 day period following February 29, 2008.(13)
              Includes
                  226,333 shares issuable under outstanding options exercisable
                  duringthe
                  60 day period following February 29, 2008.(14)
              Includes
                  300,000 shares issuable under outstanding options exercisable
                  duringthe
                  60 day period following February 29, 2008.(15)
              Includes
                  6,234,038 shares issuable under outstanding warrants and options
                  exercisable duringthe
                  60 day period following February 29, 2008.(16)
              The
                  amount shown does not include common stock beneficially owned byEner1
                  Group, Inc., a company of which Dr. Novak and Mr. Zoi are directors
                  and
                  stockholders.Dr.
                  Novak and Mr. Zoi disclaim beneficial ownership of any Ener1 common
                  stockbeneficially
                  owned by Ener1 Group, Inc.


81





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





*Ener1
      Group Ownership*





Bzinfin,
      S.A. is the parent company of Ener1, Group, Inc. which owns 66% 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 Dr. Peter Novak, Mike Zoi, Boris Zingarevich, Mikhail
      Zingarevich, Charles Gassenheimer and Alexei Paramonov.





On
      October 12, 2006, Ener1 entered into an agreement with Ener1 Group under which
      Ener1 Group agreed to pay 31% of Ener1’s salary and related costs for Mr. Ajit
      Habbu for services Mr. Habbu would perform as an officer of Ener1 Group. Mr.
      Habbu became an officer of Ener1 on October 16, 2006.





On
      February 13, 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 its chief executive officer, Mr. Charles Gassenheimer, for
      services Mr. Gassenheimer would perform for Ener1.





*Tax
      Allocation Agreement with Ener1 Group*





Ener1
      and
      Ener1 Group are parties to a tax allocation agreement dated March 1, 2006 which
      provides for the allocation of income taxes between the two groups. Intergroup
      tax payments are made only when a payment is required or a refund is received
      on
      the consolidated tax return of Ener1 Group. When determining any federal income
      tax payments due by Ener1 in any year, for purposes of the tax allocation
      agreement, Ener1 is credited for the tax benefit of all of Ener1’s net operating
      losses generated after January 3, 2003 plus the tax benefit of any Ener1 net
      operating losses generated before January 3, 2003 that are allowable under
      the
      Internal Revenue Code, plus any payments Ener1 has made under the tax allocation
      agreement, less any payments Ener1 has received under the tax allocation
      agreement. Both Ener1 Group and Ener1 have had net operating losses for all
      periods since Ener1 Group acquired a majority of Ener1's common stock, and
      no
      intergroup tax payments have been made to date. Ener1 Group’s percentage
      ownership of Ener1 declined below 80% during 2007. Accordingly, Ener1 Group
      expects to allocate the net operating loss carryforwards to Ener1 based upon
      the
      losses that Ener1 incurred since 2002.





*Intercompany
      Services between Ener1 and Ener1 Group*





Ener1
      Group and its subsidiaries have from time to time used various services and
      employees of ours and we have billed Ener1 Group and its subsidiaries for the
      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 2007,
      Ener1 Group and its subsidiaries billed us $383,127 and we billed Ener1 Group
      and its subsidiaries $289,576, in each case for services and employees of the
      other party. As of December 31, 2007, the net balance due to us from Ener1
      Group
      and its subsidiaries was $93,551.





*Ener1
      Group Convertible Notes*





On
      January 19, 2007, we issued a subordinated, convertible note to Ener1 Group
      in
      the principal amount of $655,000 in
      connection with a Forbearance Agreement with one of our debenture holders.
      The
      note bears interest at the rate of 10% per annum. All interest accrues until
      the
      maturity of the note on April 15, 2009. No warrants were issued in connection
      with this note. Ener1 Group paid the holder $5,000 for the holder’s legal fees
      and deposited $650,000 into an escrow account on behalf of Ener1 for the benefit
      of the holder, which exercised its right to apply the payment to registration
      delay expenses owed to the holder upon the expiration of the Forbearance
      Agreement on March 2, 2007.





On
      February 13, 2007, we issued a subordinated, convertible note to Ener1 Group
      in
      the principal amount of $4,500,000, which represented our obligation to repay
      loans and advances made to us from September 20, 2006 through December 31,
      2006.
      The principal amount of the note includes a financing fee of $250,000. The
      net
      loan proceeds of $4,250,000 were used for working capital. The note bears
      interest at the rate of 10% per annum. All interest accrues until the maturity
      of the note on May 15, 2009, at which time all principal and accrued interest
      are payable in full, or earlier but not before January 1, 2008, if all of our
      obligations under the 2004 Debentures and 2005 Debentures have been satisfied.
      The note is subordinated to the rights of the holders of the 2004 Debentures
      and
      2005 Debentures. Once all of our obligations under the 2004 Debentures and
      2005
      Debentures have been satisfied, the note will be convertible at Ener1 Group's
      option into 9,000,000 shares of our common stock at the conversion price of
      $0.50 per share. Ener1 Group may accelerate the amounts due under the note
      if
      none of the 2004 or 2005 Debentures are outstanding and certain bankruptcy
      events occur with respect to our company.




82





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





*Ener1
      Group Capital Commitment*





On
      June
      29, 2007, Ener1 Group committed (the “Capital Commitment”) to purchase up to
      $15,000,000 of Ener1 common stock for $0.30 per share subject to certain
      operational and financial milestones. We agreed to issue to Ener1 Group warrants
      to purchase a number of shares of our common stock equal to 60% of the number
      of
      shares purchased by Ener1 Group under the Capital Commitment. At the same time,
      Ener1 also agreed to amend the exercise price of all outstanding warrants held
      by Ener1 Group to purchase up to 52,128,136 shares of common stock from a
      weighted average price of $0.50 per share to $0.30 per share as a result of
      which we recorded warrant modification expense of $583,000.





Under
      the
      Capital Commitment, Ener1 Group purchased 12,873,333 shares of common stock
      and
      received warrants for 7,724,000 shares for $3,862,000 on June 29, 2007,
      6,000,000 shares of common stock and received warrants for 3,600,000 shares
      for
      $1,800,000 on August 7, 2007, 14,000,000 shares of common stock and received
      warrants for 8,400,000 shares for $4,200,000 on September 28, 2007, 7,397,150
      shares of common stock and received warrants for 4,438,290 shares for $2,219,145
      on November 5, 2007, 2,133,333 shares of common stock and received warrants
      for
      1,280,000 shares for $640,000 on November 14, 2007. All proceeds were allocated
      to the common stock and the warrants based on the relative fair market value
      of
      each instrument. All of these warrants have a five-year term with an exercise
      price of $0.30 per share.





*Warrant
      Exercises by Ener1 Group*





On
      January 5, 2007, Ener1 amended the terms of certain warrants to purchase up
      to
      16,000,000 shares of Ener1 common stock previously issued to Ener1 Group
      to:


·
            reduce
                the exercise price of the warrants from $2.00 and $1.50 per share
                to $0.25
                per share; and ·
            change
                the expiration date of the warrants from November 14, 2013 to January
                5,
                2007.





Following
      the amendment of the terms of these warrants, Ener1 Group exercised the warrants
      to purchase 16,000,000 shares of Ener1 common stock for an aggregate purchase
      price of $4,000,000.





On
      February 21, 2007, Ener1 amended the terms of certain warrants to purchase
      up to
      4,823,047 shares of Ener1 common stock previously issued to Ener1 Group
      to:


·
            reduce
                the exercise price of warrants to purchase 1,612,293 shares from
                $1.50 to
                $0.25, and warrants to purchase 3,210,754 shares from $0.50 per share
                to
                $0.25 per share; and ·
            change
                the expiration dates for the above warrants from November 14, 2013
                and
                June 29, 2011 respectively, to February 21,
                2007.





Following
      the amendment of the terms of these warrants, Ener1 Group exercised the warrants
      to purchase 4,823,047 shares of Ener1 common stock for an aggregate purchase
      price of $1,205,000.


83


On
      May
      21, 2007, Ener1 amended the terms of certain warrants to purchase up to
      18,800,000 shares of Ener1 common stock previously issued to Ener1 Group
      to:


·
            reduce
                the exercise price of warrants to purchase 9,000,000 shares from
                $0.60 to
                $0.25 and warrants to purchase 9,800,000 shares from $0.60 per share
                to
                $0.25 per share; and ·
            change
                the expiration dates for the above warrants from September 30, 2011
                and
                February 13, 2012 respectively, to May 21,
                2007.





Following
      the amendment of the terms of these warrants, Ener1 Group exercised the warrants
      to purchase 18,800,000 shares of Ener1 common stock for an aggregate purchase
      price of $4,700,000.





*Payments
      to Mr. Zoi*





In
      2007
      we paid annual compensation to Mr. Zoi of $246,886 in exchange for his services
      as Vice President.





*Series
      B Preferred Stock*





In
      October 2007, as an inducement to convert the outstanding Series B Preferred
      Stock ("Series B Stock") into common stock, Ener1 and the holders of the Series
      B Preferred Stock (Cofis and Ener1Group) agreed to the following:





·
            each
                holder of Series B Stock will have the right until December 31, 2007
                to
                convert shares of Series B Stock, plus any accrued and unpaid dividends
                on
                such Series B Stock, into shares of common stock of Ener1 at a conversion
                ratio using a price of $0.40 per share (the "Conversion
                Price"),


·
            Ener1
                may elect at any time prior to December 31, 2007 to automatically
                convert
                the Series B Stock, together with accrued and unpaid dividends, into
                common stock at the Conversion Price as of 11:59 p.m. on December
                31,
                2007,


·
            the
                warrants issued by Ener1 to purchase 4,236,111 shares of common stock
                with
                an exercise price of $1.25 per share (the "Original $1.25 Warrants")
                were
                amended to enable the holder[s?] thereof to purchase 18,677,699 shares
                of
                Common Stock at an exercise price of $0.40 per share,


·
            the
                warrants issued by Ener1 to purchase 4,236,111 shares of common stock
                with
                an exercise price of $1.50 per share (the "Original $1.50 Warrants"
                ) were
                amended to enable the holders thereof to purchase 18,677,699 shares
                at an
                exercise price of $0.40 per share,


·
            Ener1
                will issue additional warrants to Cofis and Ener1 Group (pro rata
                in
                proportion to the amount of Series B Stock held by each of them)
                in the
                event that a Triggering Event occurs. The additional warrants will
                entitle
                the holders to purchase an aggregate of 15,362,100 shares of common
                stock
                at an exercise price of $0.001 per share and will expire at 5:00
                p.m. (New
                York time) on January 1, 2008. "Triggering Event" means the occurrence
                of
                either or both of the following events prior to December 1,
                2007:


o
            Ener1
                fails to sell, in one or more transactions with gross proceeds of
                at least
                $10 million dollars at a price per share equal to at least $0.40
                and
                warrant coverage not greater than 60% of the aggregate investment
                amount
                exercisable and with an exercise price of not less than $0.40 per
                share;
                or


o
            the
                volume weighted average price of the Common Stock ("VWAP") is less
                than
                $0.30 and, during the period of either (a) ten (10) consecutive trading
                days immediately following such trading day, or (b) fifteen trading
                days
                (whether or not consecutive) following such trading day but prior
                to
                December 1, 2007, the daily VWAP on each such day is less than
                $0.33.





On
      November 14, 2007, Ener1 Group converted its 2,500 shares of Series B Stock
      and
      all accrued dividends into 750,523 shares of Ener1 common stock, surrendered
      warrants to purchase up to 138,890 shares and received warrants to purchase
      up
      to 612,384 shares expiring November 14, 2012 with an exercise price of $0.40
      per
      share.





Ener1
      did
      not issue any additional warrants to Cofis or Ener1 as no Triggering Event
      occurred.





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





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




84





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





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





*Transactions
      among Ener1, Ener1 Group and Charles Gassenheimer*





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


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





*Director
      Independence*





As
      our
      common stock is currently traded on the OTC Bulletin Board, we are not subject
      to the rules of any national securities exchange which require that a majority
      of a listed company's directors and specified committees of the board of
      directors meet independence standards prescribed by such rules. For the purpose
      of preparing the disclosures in this Report on Form 10-KSB regarding director
      independence, we have used the definition of “independent director” 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.





Consistent
      with these standards, we believe that the following directors are independent:
      (1) Kenneth Baker, (2) Elliot Fuhr, (3) Karl Gruns, (4) Ludovico Manfredi,
      and
      (5) Thomas Snyder.


85


**ITEM
          13: EXHIBITS**
  3.1
                Amended
                    and Restated Articles of Incorporation of the Registrant, dated
                    February
                    12, 1993, incorporated by reference to Exhibit 3(i) to the Registrant's
                    Quarterly Report on Form 10-Q for the quarter ended September
                    30,
                    2000.3.2
                Articles
                    of Amendment to Amended and Restated Articles of Incorporation,
                    dated
                    March 11, 2002, incorporated by reference to Exhibit 3.2 of the
                    Registrant's Annual Report on Form 10-K for the year ended December
                    31,
                    2001.3.3
                Articles
                    of Amendment to Amended and Restated Articles of Incorporation,
                    dated
                    October 21, 2002, incorporated by reference to Exhibit 3.1 of
                    the
                    Registrant's Current Report on Form 8-K dated October 28,
                    2002.3.4
                Articles
                    of Amendment to Amended and Restated Articles of Incorporation,
                    incorporated by reference to Exhibit A of the Registrant's Schedule
                    14C
                    filed on December 6, 2004.3.5
                By-laws
                    of the Registrant, incorporated by reference to Exhibit 3.4 of
                    the
                    Registrant's Registration Statement on Form SB-2 (Registration
                    No.
                    333-112837), filed February 13, 2004.3.6
                Certificate
                    of Designations of Series B Convertible Preferred Stock, dated
                    October 15,
                    2004, incorporated by reference to Exhibit 3.6 of the Registrant’s Annual
                    Report on Form 10-KSB for the year ended December 31,
                    2004.3.7
                Amendment
                    to Bylaws of the Registrant, dated January 5, 2005, incorporated
                    by
                    reference to Exhibit 3.2 of the Registrant’s Current Report on Form 8-K
                    dated January 12, 2005.3.8
                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, 2007.4.1
                Form
                    of 5% Senior Secured Convertible Debenture incorporated by reference
                    to
                    Exhibit 4.1 to the Registrant's Current Report on Form 8-K dated
                    January
                    21, 2004.4.2
                Form
                    of Warrant to Purchase Common Stock issued pursuant to Securities
                    Purchase
                    Agreement, dated January 16, 2004, incorporated by reference
                    to Exhibit
                    4.2 to the Registrant's Current Report on Form 8-K dated January
                    21,
                    2004.4.3
                Registration
                    Rights Agreement dated as of January 16, 2004, by and among the
                    Registrant
                    the entities whose names appear on the signature pages thereof
                    incorporated by reference to Exhibit 4.3 to the Registrant's
                    Current
                    Report on Form 8-K dated January 21, 2004.4.4
                Warrant
                    issued to Cofis Compagnie Fiduciaire S.A. dated October 15, 2004
                    to
                    purchase from Ener1, Inc., 4,166,666 shares of Common Stock of
                    the Company
                    at a price per share of $1.25, incorporated by reference to Exhibit
                    4.4 of
                    the Registrant’s Annual Report on Form 10-KSB for the year ended December
                    31, 2004.4.5
                Warrant
                    issued to Cofis Compagnie Fiduciaire S.A. dated October 15, 2004
                    to
                    purchase from Ener1, Inc., 4,166,666 shares of Common Stock of
                    the Company
                    at a price per share of $1.50, incorporated by reference to Exhibit
                    4.5 of
                    the Registrant’s Annual Report on Form 10-KSB for the year ended December
                    31, 2004.4.6
                Warrant
                    to Purchase Common Stock issued October 20, 2004 to Delphi Automotive
                    Systems, LLC, to purchase up to 7,000,000 shares of Common Stock,
                    incorporated by reference to Exhibit 4.6 of the Registrant’s Annual Report
                    on Form 10-KSB for the year ended December 31, 2004.4.7
                Registration
                    Rights Agreement dated as of October 20, 2004, by and between
                    Ener1, Inc.
                    and Delphi Automotive Systems LLC, incorporated by reference
                    to Exhibit
                    4.7 of the Registrant’s Annual Report on Form 10-KSB for the year ended
                    December 31, 2004.
  86
  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, 2006.4.18
                $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.
  87
  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, 2007.4.33
                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.
  88
  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. included herein at Exhibit
                    4.32.
                    *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,
                    2004.10.
                    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.
  89
  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, 2004.10.23
                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.
  90
 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,
                    2007.10.
                    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, 2007.14.1
                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.
  91
  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 included herein
                  at
                  Exhibit 14.1.*21
                Subsidiaries
                    of the Registrant, incorporated by reference to Exhibit 21 of
                    Registrant's
                    Annual Report on Form 10-KSB for the period ended December 31,
                    2005.23
                Consent
                    of Malone & Bailey, P.C.*31.1
                Rule
                    13a-14(a)/15(d)-14(a) Certification of Chief Executive
                    Officer.*31.2
                Rule
                    13a-14(a)/15(d)-14(a) Certification of Chief Financial
                    Officer.*32.1
                Section
                    1350 Certification of Chief Executive Officer.*32.2
                Section
                    1350 Certification of Chief Financial
                    Officer.*
  *
            Filed
            herewith


92


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





**Year
      ended December 31, 2007**





*Audit
      Fees* : The
      aggregate fees, including expenses, billed by our principal accountant in
      connection with the audit of our consolidated financial statements for the
      most
      recent fiscal year and for the review of our financial information included
      in
      our Annual Report on Form 10-KSB, and our quarterly reports on Form 10-QSB
      during the fiscal year ending December 31, 2007, were $174,175.





*Audit-Related
      Fees* :
      The
      aggregate fees, including expenses, billed by our principal accountant for
      services reasonably related to the audit for the year ended December 31, 2007
      were $0.





*Tax
      Fees* :
      The
      aggregate fees, including expenses, billed by our principal accountant for
      services reasonably related to tax services during the year 2007 were
      $0.





*All
      Other Fees* :  The
      aggregate fees, including expenses, billed for services related to SEC filings
      rendered to us by our principal accountant during year 2007 were
      $26,515.





**Year
      ended December 31, 2006**





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





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





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





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





**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


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.





Date:
                March 11, 2008
            
            **Ener1,
                Inc.**
              
              
              BY:
                /s/ Dr. Peter Novak
              ——————————————
              Dr.
                Peter Novak
              Chief
                Executive Officer




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





**Signature******
            
            **Title**
            
            **Date******/s/
                Dr. Peter Novak
            
            Chief
                Executive Officer, Director
            
            March
                11, 2008Dr.
                Peter Novak
            
            (Principal
                Executive Officer)/s/
                Charles Gassenheimer
            
            Chairman
                of the Board, Director
            
            March
                6, 2008Charles
                Gassenheimer/s/
                Gerard Herlihy
            
            Chief
                Financial Officer
            
            March
                11, 2008Gerard
                Herlihy
            
            (Principal
                Financial Officer andPrincipal
                Accounting Officer)/s/
                Kenneth Baker
            
            Director
            
            March
                6, 2008Kenneth
                Baker/s/
                Marshall Cogan
            
            Director
            
            March
                6, 2008Marshall
                Cogan/s/
                Elliot Fuhr
            
            Director
            
            March
                6, 2008Elliot
                Fuhr/s/
                Karl Gruns
            
            Director
            
            March
                6, 2008Karl
                Gruns/s/
                Ludovico Manfredi
            
            Director
            
            March
                6, 2008Ludovico
                ManfrediDirectorThomas
                SnyderDirectorMike
                Zoi




94