UNITED
      STATES


SECURITIES
      AND EXCHANGE COMMISSION


Washington,
      D.C. 20549




FORM
      10-QSB




QUARTERLY
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF


THE
      SECURITIES EXCHANGE ACT OF 1934


For
      the
      quarterly period ending September 30, 2005




Commission
      File Number 0-21138




**ENER1,
      INC.**


(Exact
      name of registrant as specified in its charter)




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





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


**Ft.
      Lauderdale, Florida 33309**


(Address
      of principal executive offices) (Zip Code)




**(954)
      556-4020** ****


(Registrant’s
      telephone number, including area code)




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




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




Indicate
      by check mark whether the registrant is an accelerated filer (as defined in
      Rule
      12b-2 of the Exchange Act.) Yes [ ] No [X]




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




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




Class
              Common
                stock, par value
              $.01
                per share
            Outstanding
                as of
              December31,
                2005
              347,
                455,751




Transitional
      Small Business Format (check one): Yes [  ] No [X]




-1-


**ENER1,
      INC. AND SUBSIDIARIES**


**Form
      10-QSB for the Quarter Ended September 30, 2005**




INDEX


PagePart
                I. FINANCIAL INFORMATIONItem
                1.  Financial StatementsConsolidated
                Balance Sheet (unaudited) as
                ofSeptember
                30, 2005
            4Consolidated
                Statements of Operations
                (unaudited)for
                the three and nine months ended September 30, 2005 and
                2004
            5Consolidated
                Statements of Cash Flows
                (unaudited)for
                the nine months ended September 30, 2005 and
                2004
            6Notes
                to Consolidated Financial Statements
                (unaudited)
            7Item
                2.  Management's Discussion and Analysis of
                FinancialCondition
                and Results of Operations
            22Item
                3.  Controls and Procedures
            26Part
                II. OTHER INFORMATIONItem
                6.  Exhibits
            27Signatures
            28




-2-


**Explanatory
      Note**





The
      consolidated financial statements for the three and nine months ended September
      30, 2004 and related disclosures included in this Quarterly Report on Form
      10-QSB have been restated. During the fourth quarter of 2005, Ener1 determined
      that it was necessary to restate its previously issued financial statements
      for
      these periods to reflect additional gains and losses related to the
      classification of and accounting for: (1) the conversion features of Ener1's senior
      secured convertible debentures due 2009 and the
      associated warrants, (2) the amortization expense associated with the discount
      recorded with respect to Ener1's senior secured convertible debentures due
      2009
      and financing costs incurred in connection with the issuance of this debt,
      (3)
      the  conversion features associated with the preferred stock issued by
      Ener1's subsidiary and the associated warrants and (4) warrants issued
      by Ener1 including the warrants issued to Ener1 Group, Inc. in September 2002
      and warrants associated with Ener1's preferred stock.





On
      December 21, 2005, Ener1 filed a Current Report on Form 8-K with the Securities
      and Exchange Commission announcing its determination that its previously issued
      financial statements contained in its Annual Report on Form 10-KSB for
      the
      fiscal year ended December 31, 2004 and its Quarterly Reports on Form 10-QSB
      for
      the interim periods ended March 31 and June 30, 2005 will
      be
      restated. Once Ener1's review of the financial statements for these periods
      is
      complete, Ener1 will file amendments to these reports with the Securities and
      Exchange Commission as soon as practicable. Ener1 believes the
      financial statements, and other financial information included in this Quarterly
      Report , fairly present in all material respects the financial condition, results of
      operations and cash flows of the Company as of, and for, the periods presented
      in this Quarterly Report. Ener1 does not expect any changes to the financial
      statements and other financial information included in this Quarterly Report
      resulting from the review
      of
      Ener1's historical financial statements described above to be
      material.


-3-


**Part
      I. FINANCIALINFORMATION**




Item
      1. - Financial Statements


ENER1,
      INC. AND SUBSIDIARIES


CONSOLIDATED
      BALANCE SHEET


(Unaudited)


(In
      thousands except share data)


**September
                30,****2005**Assets:Current
                AssetsCash
                and equivalents
            
            $
            7,012Prepaid
                expenses and other current assets
            
            
            544Due
                from related parties
            
            
            204Total
                current assets
            
            
            7,760Property
                and equipment, net
            
            
            2,944Investment
                in Enerstruct, Inc. (see note 10)
            
            
            899Deferred
                debenture costs; $2,778, net of amortization of $679 (see notes 5
&
                6)
            
            
            2,099Other
            
            
            255Total
                Assets
            
            $
            13,957Liabilities
                and Stockholders’ Deficit:Current
                LiabilitiesCurrent
                portion of installment loan
            
            $
            24Accounts
                payable and accrued expenses
            
            
            1,598Liabilities
                of discontinued operations
            
            
            307Derivative
                liability on conversion features of securities (see note
                8)
            
            
            66,385Total
                current liabilities
            
            
            68,314Long-term
                portion of installment loan
            
            
            73$19,700
                convertible debentures, net of discount of $12,802 (see note
                5)
            
            
            6,898$14,225
                convertible debentures, net of discount of $10,531 (see note
                6)
            
            
            3,694Redeemable
                convertible preferred stock (see note 7)Series
                A Preferred, $.01 par value, 500,000 shares authorized,8,000
                shares issued and outstanding
            
            
            3,790Series
                B Preferred, $.01 par value, 180,000 shares authorized,152,500
                shares issued and outstanding
            
            
            12,065Total
                Liabilities
            
            
            94,834Commitments
                and contingenciesStockholders’
                deficit:Common
                stock, $.01 par value, 750,000,000 shares authorized,347,455,751
                issued and outstanding
            
            
            3,475Paid
                in capital
            
            
            72,349Accumulated
                deficit
            
            
            (156,701
            )Total
                Stockholders’ Deficit
            
            
            (80,877
            )Total
                Liabilities and Stockholders’ Deficit
            
            $
            13,957


-4-


ENER1,
      INC. AND SUBSIDIARIES


CONSOLIDATED
      STATEMENTS OF OPERATIONS


(In
      thousands except per share data)


(unaudited)


**3
                Months Ended**
            
            **9
                Months Ended****September
                30,**
            
            **September
                30,****2005**
            
            **2004**
            
            **2005**
            
            **2004****(Restated)**
            
            
            
            **(Restated)**Net
                sales
            
            $
            25
            
            $
            -
            
            $
            60
            
            $
            41Operating
                expensesCost
                of sales
            
            
            -
            
            
            -
            
            
            -
            
            
            10Manufacturing
                pre-production costs
            
            
            -
            
            
            532
            
            
            2,132
            
            
            1,048Research
                and development
            
            
            1,194
            
            
            576
            
            
            17,936
            
            
            1,753General
                and administrative
            
            
            2,807
            
            
            1,504
            
            
            8,434
            
            
            5,817Total
                operating expenses
            
            
            4,001
            
            
            2,612
            
            
            28,502
            
            
            8,628Net
                loss from operations
            
            
            (3,976
            )
            
            (2,612
            )
            
            (28,442
            )
            
            (8,587
            )Other
                income and (expense):Interest
            
            
            (2,566
            )
            
            (1,625
            )
            
            (6,968
            )
            
            (4,102
            )Equity
                in loss of EnerStruct, Inc.
            
            
            (59
            )
            
            (139
            )
            
            (286
            )
            
            (426
            )Other
            
            
            83
            
            
            77
            
            
            223
            
            
            150Gain
                (loss) on embedded derivative liability (see note 8)
            
            
            (26,101
            )
            
            5,454
            
            
            39,158
            
            
            62,264Total
                other income (expense)
            
            
            (28,643
            )
            
            3,767
            
            
            32,127
            
            
            57,886Net
                income (loss) before minority interestand
                discontinued operations
            
            
            (32,619
            )
            
            1,155
            
            
            (3,685
            )
            
            49,299Minority
                interest
            
            
            -
            
            
            -
            
            
            3,760
            
            
            -Net
                income (loss) from continuing operations
            
            
            (32,619
            )
            
            1,155
            
            
            7,445
            
            
            49,299Loss
                from discontinued operations
            
            
            -
            
            
            (5
            )
            
            -
            
            
            (7
            )Net
                Income (Loss)
            
            
            (32,619
            )
            
            1,150
            
            
            7,445
            
            
            49,292Preferred
                stock dividends
            
            
            (1,024
            )
            
            -
            
            
            (2,855
            )
            
            -Net
                income (loss) attributableto
                common shareholders
            
            $
            (33,643
            )
            $
            1,150
            
            $
            4,590
            
            $
            49,292Loss
                per share, basic and dilutedContinuing
                operations
            
            $
            (.10
            )
            $
            (.00
            )
            $
            (.02
            )
            $
            0.15Discontinued
                operations
            
            $
            (.00
            )
            $
            (.00
            )
            $
            (.00
            )
            $
            (.00
            )Weighted
                average shares outstanding
            
            
            347,456
            
            
            347,276
            
            
            347,456
            
            
            346,966


-5-


ENER1,
INC.
      AND SUBSIDIARIES


CONSOLIDATED
      STATEMENTS OF CASH FLOWS


(Unaudited)


(In
      thousands)


**September
                30,**
            
            **September
                30,****2005**
            
            **2004****(restated)**Cash
                provided by Operating Activities:Net
                income (loss)
            
            
            7,445
            
            
            49,292Adjustments
                to reconcile net loss to cash used by operating
                activities:Asset
                impairment
            
            
            --
            
            
            --Depreciation
                and amortization
            
            
            857
            
            
            694Minority
                interest
            
            
            (3,760
            )
            
            --Accretion
                of discount on debentures (see note 5&6)
            
            
            4,202
            
            
            2,959Research
                and development costs
            
            
            10,527
            
            
            --Gain
                on embedded derivative liability (see note 8)
            
            
            (39,158
            )
            
            (62,264
            )Loss
                on disposal of assets
            
            
            1
            
            
            --Equity
                in loss from investment in Enerstruct (see note 10)
            
            
            286
            
            
            426Changes
                in assets and liabilities
            
            
            (1,105
            )
            
            (1,175
            )Changes
                in assets and liabilities held for disposal
            
            
            --
            
            
            (5
            )Compensation
                expense for stock options (see note 2)
            
            
            815
            
            
            925Net
                cash used in operating activities
            
            
            (19,890
            )
            
            (9,148
            )Investing
                activities:Capital
                expenditures
            
            
            (556
            )
            
            (1,322
            )Investment
                in Splinex (see note 11)
            
            
            --
            
            
            (150
            )Net
                cash used in investing activities
            
            
            (556
            )
            
            (1,472
            )Financing
                activities:Repayment
                of related party notes
            
            
            --
            
            
            (1,041
            )Repayment
                of guaranteed related party debt
            
            
            --
            
            
            (2,200
            )Repayment
                of mortgage note payable
            
            
            --
            
            
            (704
            )Repayment
                of bank loan
            
            
            --
            
            
            (1,600
            )Repayment
                of bank installment loan
            
            
            (17
            )
            
            (8
            )Proceeds
                from employee stock options exercised
            
            
            --
            
            
            22Proceeds
                from exercise of warrants
            
            
            --
            
            
            1,050Proceeds
                from issuance of senior secured debenture, net of costs(see note
                5&6)
            
            
            13,134
            
            
            18,527Proceeds
                from sale of preferred stock
            
            
            250
            
            
            --Net
                cash provided by financing activities
            
            
            13,367
            
            
            14,046Net
                increase (decrease) in cash and equivalents
            
            
            (7,079
            )
            
            3,426Cash
                and equivalents beginning balance
            
            
            14,091
            
            
            200Cash
                and equivalents ending balance
            
            
            7,012
            
            
            3,626


-6-





**ENER1,
      INC.ANDSUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**





1.
            BASIS
                OF PRESENTATION





The
      accompanying unaudited consolidated financial statements for Ener1, Inc. have
      been prepared in accordance with accounting principles generally accepted in
      the
      United States for interim financial information and with the instructions to
      Form 10-QSB for quarterly reports under Section 13 or 15 (d) of the Securities
      Exchange Act of 1934. Accordingly, they do not include all of the information
      and footnotes required by accounting principles generally accepted in the United
      States for complete financial statements. In the opinion of management, all
      adjustments considered necessary for a fair presentation have been included
      and
      such adjustments are of a normal recurring nature. Operating results for the
      three and nine months ended September 30, 2005 are not necessarily indicative
      of
      the results that may be expected for the year ending December 31, 2005. Notes
      to
      the financial statements which would substantially duplicate the disclosure
      contained in the audited financial statements for the year ended December 31,
      2004 as reported in Ener1's Annual Report on Form 10-KSB have been omitted.





2.  STOCK-BASED
      COMPENSATION





Ener1
      accounts for stock-based compensation under the intrinsic value method. Under
      this method, Ener1 recognizes no compensation expense in connection with the
      grant of employee stock options when the number of underlying shares is known
      and the exercise price of the option is greater than or equal to the fair market
      value of the underlying stock on the date of grant. The following table
      illustrates the pro forma effect on net loss and net loss per share as if Ener1
      had applied the fair value provisions of FASB Statement No. 123, Accounting
      for
      Stock-Based Compensation, to stock-based employee compensation (dollars in
      thousands):







**3
                Months Ended**
            
            **9
                Months Ended****September
                30,**
            
            **September
                30,****2005**
            
            **2004**
            
            **2005**
            
            **2004****(Restated)**
            ****
            ****
            ****
            **(Restated)**Net
                loss as reported
            
            $
            (32,619
            )
            $
            1,150
            
            $
            7,445
            
            $
            49,292Add:stock-based
                compensationdetermined
                under intrinsicvalue-based
                method
            
            
            265
            
            
            197
            
            
            794
            
            
            517Less:stock-based
                compensationdetermined
                under fair value-based
                method
            
            
            (856
            )
            
            (798
            )
            
            (2,707
            )
            
            (1,685
            )Net
                Loss, pro forma
            
            $
            (33,210
            )
            $
            549
            
            $
            5,532
            
            $
            48,124Basic
                and diluted net loss per common shareAs
                reported
            
            $
            (.10
            )
            $
            .00
            
            $
            .02
            
            $
            .14Pro
                forma
            
            $
            (.10
            )
            $
            .00
            
            $
            .02
            
            $
            .14


-7-


The
      weighted average fair value of the stock options granted during fiscal 2005 and
      2004 was $.42 and $.62,
      respectively. Variables used in the Black-Scholes option-pricing model include
      (1) 3.5%risk-free interest rate, (2) expected option life is the actual remaining life
      of the options as of each year end, (3) expected volatility was100%,
      and (4)
      no dividends are expected to be paid.




3.  GOING
      CONCERN




The
      accompanying consolidated financial statements have been prepared on a going
      concern basis, which contemplates the realization of assets and the satisfaction
      of liabilities in the normal course of business. Ener1 has experienced net
      operating losses since 1997 and negative cash flows from operations since 1999,
      and had an accumulated deficit of $15 7 million
      as of September 30, 2005. It is likely that Ener1's operations will continue
      to
      incur negative cash flows through September 30, 2006 and additional financing
      will be required to fund Ener1's planned operations through that time. If
      additional financing is not obtained, such a condition, among others, will
      give
      rise to substantial doubt about Ener1's ability to continue as a going concern
      for a reasonable period of time. The consolidated financial statements do not
      include any adjustments relating to the recoverability and classification of
      recorded asset amounts or the amounts and classifications of liabilities that
      might be necessary should Ener1 not be able to continue as a going concern.





4. 
      SEGMENT REPORTING





Ener1
      is
      organized based upon the following segments: EnerDel, EnerFuel, NanoEner, Ener1
      Battery, Ener1 Technologies and Digital Media Technologies Division/EnerLook
      (which is classified as discontinued operations). EnerDel develops and markets
      lithium batteries and certain battery components. EnerFuel develops and markets
      fuel cell systems, components and related services. NanoEner develops
      nanotechnology related manufacturing processes and materials. Ener1 Battery
      provides facilities to EnerDel and owns Ener1 Ukraine. Ener1 Technologies,
      Inc.
      had no activities during either of the three and nine month periods ended
      September 30, 2005.




**Three
                months**
              **Ended
                September 30**
            
            **Nine
                months**
              **Ended
                September 30****2005**
            
            **2004******
            
            **2005******
            
            **2004********(Restated)**
            ****
            ****
            ****
            **(Restated)****(In
                thousands)****Sales**EnerFuel,
                Inc.
            
            
            --
            
            
            --
            
            
            15
            
            
            
            
            --EnerDel
                Inc.
            
            
            25
            
            
            --
            
            
            45
            
            
            
            
            --Ener1
                BatteryCompany
            
            
            --
            
            
            --
            
            
            --
            
            
            
            
            41Net
                sales
            
            $
            25
            
            $
            --
            
            $
            60
            
            
            
            
            41**Net
                Loss**Discontinuedoperations
            
            $
            --
            
            $
            (5
            )
            $
            --
            
            
            
            $
            (7
            )Corporate
            
            
            (30,287
            )
            
            2,265
            
            
            26,314
            
            
            
            
            52,303EnerDel
            
            
            (1,621
            )
            
            --
            
            
            (20,732
            )
            
            
            
            --Ener1
                Battery Co.
            
            
            (23
            )
            
            (828
            )
            
            (119
            )
            
            
            
            (2,092
            )Ener1
                Technologies
            
            
            
            
            
            (3
            )
            
            
            
            
            
            
            (13
            )EnerFuel
            
            
            (424
            )
            
            (197
            )
            
            (1,003
            )
            
            
            
            (739
            )NanoEner
            
            
            (264
            )
            
            (82
            )
            
            (775
            )
            
            
            
            (160
            )Minority
                interest
            
            
            
            
            
            --
            
            
            3,760
            
            
            
            
            --Net
                income (loss)
            
            $
            (32,619
            )
            $
            1,150
            
            $
            7,445
            
            
            
            $
            49,292**Assets**Discontinued
              operations
            
            
            
            
            
            
            
            $
            --
            
            
            
            $
            2Corporate
            
            
            
            
            
            
            
            
            7,924
            
            
            
            
            7,240EnerDel
            
            
            
            
            
            
            
            
            4,527
            
            
            
            
            --Ener1
                Battery Co.
            
            
            
            
            
            
            
            
            1,351
            
            
            
            
            22,530Ener1
                Technologies
            
            
            
            
            
            
            
            
            1
            
            
            
            
            10EnerFuel
            
            
            
            
            
            
            
            
            49
            
            
            
            
            305NanoEner
            
            
            
            
            
            
            
            
            105
            
            
            
            
            68Total
                Assets
            
            
            
            
            
            
            
            $
            13,957
            
            
            
            $
            30,155


-8-





5.
            $19,700,000
                CONVERTIBLE DEBENTURES




On
      January 20, 2004, Ener1 issued $20,000,000 in aggregate principal amount of
      senior secured convertible debentures due January 2009 (the "2004 Debentures")
      and warrants to purchase 16,000,000 shares of Ener1’s common stock. The net
      proceeds of the issuance totaled $18,527,000 after direct placement costs of
      $1,473,000.




The
      2004
      Debentures mature on January 20, 2009. Ener1’s obligations under the 2004
      Debentures are secured by collateral including land, building and battery
      production equipment owned by Ener1 Battery and used by EnerDel.




At
      the
      issuance date, the 2004 Debentures were convertible by the holder at any time
      into common shares at a price of $1.25 per share subject to adjustment upon
      certain events such as the sale of equity securities by Ener1 at a price below
      the then current conversion price of the debenture. As of September 30, 2005,
      the conversion price was $1.23.





Ener1
      may
      require that a specified amount of the principal of the 2004 Debentures be
      converted if certain conditions are satisfied for a period of 22 consecutive
      trading days.





During
      2004, a holder of the 2004 Debentures converted $300,000 of principal into
      common shares. The
      conversion was accounted for by debiting the principal amount of the 2004
      Debentures and crediting common stock and additional paid in capital by this
      amount. Ener1 also adjusted the conversion option derivative to its
      fair value immediately prior to conversion through adjustments to gain (loss)
      on
      embedded derivative liability and then reduced the derivative liability by
      the
      proportionate amount of principal converted by crediting paid in
      capital.





Interest
      is due quarterly. The initial rate was 5%, but was subject to increases if
      Ener1
      did not achieve specific milestones by certain dates. Ener1 did not achieve
      all
      of these milestones, and the rate was increased to 7.5% as of July 19, 2004
      and
      the rate increased again to 15% as of January 30, 2005. 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. To date,
      interest of $1,614,340 has
      been
      paid, $0.00
      interest wa s
      accrued
      at September 30, 2005 and $261,506 interest
      has been converted.




From
      January 20, 2007 to January 20,
      2008, Ener1 may prepay some or the entire principal at a price of 103% of unpaid
      principal plus accrued interest. From January 21, 2008 to January 20, 2009,
      Ener1 may prepay some or the entire principal at 101% of unpaid principal plus
      accrued interest.





The
      2004
      Debentures are senior to Ener1’s existing and future indebtedness and pari passu
      with the 2005 Convertible Debentures (see Note 6).





In
      the
      event of any default or fundamental change as defined under the 2004 Debentures,
      the holder will be entitled to require Ener1 to redeem the 2004 Debentures
      at a
      price equal to 101% of the unpaid principal and accrued
      interest.




The
      warrants issued in connection with the issuance of the 2004 Debentures had
      an
      exercise price of $2.51 at the issuance date, subject to adjustment upon certain
      events such as the sale of equity securities by Ener1 at a price below the
      then
      current exercise price. As of September 30, 2005, the exercise price was $2.37
      per share. The warrants are exercisable at any time through January 20, 2010.




Ener1
      issued warrants to purchase 1,920,000 shares
      of common stock with an exercise price of $ 2.51 to the
      placement agent for the 2004 Debentures issuance.  Ener1
      also incurred $1,200,000 in placement fees.





As
      discussed in Note 8, Ener1 is accounting for the conversion option in the 2004
      Debentures and the associated warrants as derivative liabilities in accordance
      with SFAS 133 “Accounting for Derivative Instruments and Hedging Activities”
"SFAS 113" and EITF 00-19 "Accounting for Derivative Financial Instruments
      Indexed to and Potentially Settled in a Company’s Own Stock "EIFT
      00-19".”


-9-




6.
            $14,225,000
                CONVERTIBLE DEBENTURES





On
      March
      14, 2005, Ener1 issued $14,225,000 in aggregate principal amount of senior
      secured convertible debentures due March 2009 (the "2005 Debentures") and
      warrants to purchase 7,112,500 shares of Ener1’s common stock. The net proceeds
      of the issuance totaled $13,133,781 after direct placement costs of $1,304,593.
      Proceeds from the sale were used to pay expenses of the sale and for working
      capital.




The
      2005
      Debentures mature on March 14, 2009. If certain events occur, including a
      default on the 2005 Debentures, Ener1 will pledge certain collateral to secure
      its obligations under the 2005 Debentures.




At
      the
      issuance date, the 2005 Debentures are convertible by the holder at any time
      into common shares at a price of $1.00 per share subject to adjustment upon
      certain events such as the sale of equity securities by Ener1 at a price below
      the then current conversion price of the debenture. As of September 30, 2005,
      the conversion price was $1.00.




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.




Interest
      is due quarterly. The current interest rate is 7.5% and will increase to 15%
      per
      year if Ener1 fails to meet certain milestones as of the first anniversary
      of
      the date of issuance of the 2005 Debentures. 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. To date, interest of $298,234 has
      been
      paid, no interest
      wa s
      accrued
      at September 30, 2005 and no interest
      has been converted.





At
      any time on or after
      March 14, 2008, Ener1 may prepay some or the entire 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 Convertible Debentures (see Note 5).





In
      the
      event of any default as defined under the 2005 Debentures, the holder will
      be
      entitled to require Ener1 to redeem the 2005 Debentures at a price equal to
      (1)
      the greater of 105% of the unpaid principal and accrued interest or (2)
      the product of the number of shares the principal and accrued interest
      could be converted into at the time of default multiplied by the then current
      market price. In the event of any fundamental change as defined under the 2005
      Debentures, the holder will be entitled to require Ener1 to redeem the 2005
      Debentures at a price equal to 120% of the unpaid principal and accrued interest
      if the fundamental change occurs before the first anniversary of the issuance
      date, 115% of the unpaid principal and accrued interest if the fundamental
      change occurs between the first anniversary of the issuance date and the second
      anniversary of the issuance date, and 110% of the unpaid principal and accrued
      interest if the fundamental change occurs after the second anniversary of the
      issuance date.





The
      warrants issued in connection with the issuance of the 2005 Debentures were
      divided into Series A and Series B. Each Series A warrant entitles the holder
      to
      purchase a number of shares of common stock equal to 30% of the number of shares
      of common stock that would be issuable upon conversion of the original principal
      amount of the 2005 Debenture divided by the conversion price for an exercise
      price of $1.15 per share. Each Series B warrant entitles the holder to purchase
      a number of shares of common stock equal to 20% of the number of shares of
      common stock that would be issuable upon conversion of the original principal
      amount of the 2005 Debenture divided by the conversion price for an exercise
      price of $1.25 per share. Both Series A and Series B warrants are subject to
      adjustment upon certain events such as the sale of equity securities by Ener1
      at
      a price below the exercise price. The warrants are exercisable, in whole or
      in
      part, at any time on or before March 14, 2010.


-10-




Ener1
      issued warrants to purchase up to 426,750 shares of common stock with an
      exercise price of $1.00 to the placement agent for the 2005 Debentures issuance.
      The fair market value of these warrants was $149,362 and was allocated to
      deferred debenture costs. Ener1 also incurred $1,240,581 in placement
      fees.





As
      discussed in Note 8, Ener1 is accounting for the conversion option in the 2005
      Debentures and the associated warrants as derivative liabilities in accordance
      with SFAS 133 “Accounting for Derivative Instruments and Hedging Activities” and
      EITF 00-19 "Accounting for Derivative Financial Instruments Indexed to and
      Potentially Settled in a Company’s Own Stock.”




7.    
      REDEEMABLE PREFERRED STOCK




Ener1,
      Inc. Series B Convertible Preferred Stock




In
      October 2004, Ener1 sold 150,000 shares of Series B Convertible Preferred Stock
      ("Series B Preferred Stock"), plus warrants to purchase 4,166,666 shares of
      common stock at an exercise price of $1.25 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.




As
        discussed in Note 8, Ener1 is accounting for the warrants in accordance with
        SFAS 133 “Accounting for Derivative Instruments and Hedging Activities” and EITF
        00-19 "Accounting for Derivative Financial Instruments Indexed to and
        Potentially Settled in a Company’s Own Stock.”
  The
        proceeds were allocated between the Series B Preferred Stock and the warrants
        using the with-and-without method in accordance with SFAS 133. The proceeds
        were
        allocated $5,416,667 to the fair value of the warrants and the remaining
        $9,583,333 was allocated to the Series B Preferred Stock.


In
      February 2005, Ener1 sold 2,500 shares of Series B Preferred Stock, plus
      warrants to purchase 69,445 shares of common stock at an exercise price of
      $1.25
      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.


As
        discussed in Note 8, Ener1 is accounting for the warrants in accordance with
        SFAS 133 “Accounting for Derivative Instruments and Hedging Activities” and EITF
        00-19 "Accounting for Derivative Financial Instruments Indexed to and
        Potentially Settled in a Company’s Own Stock.”
  The
        proceeds were allocated between the Series B
        Preferred Stock and the warrants using the with-and-without method in accordance
        with SFAS 133. The proceeds were allocated $97,223 to the fair value
        of the warrants, and the remaining $152,777 was allocated to the Series B
        Preferred Stock.
  The
        conversion feature for the Series B Preferred Stock is contingent upon Ener1
        filing a registration statement with the Securities and Exchange Commission
        to
        register an underwritten offering of common stock. The holders of Series
        B
        Preferred Stock will have the right to convert up to one-half of their shares
        of
        Series B Preferred Stock into common stock for sale pursuant to the registration
        statement, subject to the discretion of the underwriters of the offering.
        The
        conversion ratio shall be established by dividing the liquidation value per
        share of the Series B Preferred Stock by the price for the common stock sold
        in
        the registered offering. Because of this contingency, the conversion option
        is
        not within the scope of SFAS 133 and EITF 00-19. If the contingency is triggered
        in the future and the holder receives the ability to convert, Ener1 will
        need to
        reassess whether the conversion feature meets the definition of a derivative
        under SFAS 133.


The
        Series B Preferred Stock is redeemable at the option of Ener1 at any time,
        in
        part or whole, at 100% of the liquidation value, plus accrued and unpaid
        dividends. The Series B Preferred Stock is redeemable at the option of the
        holder when none of the 2004 Debentures are outstanding. The 2004 Debentures
        mature on January 20, 2009. Due to the mandatory redemption feature, the
        Series
        B Preferred Stock is reported as a liability consistent with SFAS 150,
“Accounting for Certain Financial Instruments with Characteristics of Both
        Liabilities and Equity” (“SFAS 150”).
  Ener1
        issued warrants to purchase up to 4,236,111 shares of common stock at an
        exercise price of $1.25 per share and warrants to purchase up to 4,236,111
        shares of common stock at an exercise price of $1.50 per share. These warrants
        have a ten year term. Ener1 is not required to register the resale of the
        warrants or of the common stock issuable upon exercise of the warrants. The
        fair
        value 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,
        $0.65 and $0.80 for October 2004 and February 2005, respectively; expected
        volatility of 207%; risk free interest rate of approximately 1.79% and 2.50%
        for
        October 2004 and February 2005, respectively; and a term of ten
        years.


-11-
 EnerDel
        Series A Convertible Preferred Stock




In
      October 2004, EnerDel sold 8,000 shares of Series A Convertible Preferred Stock
      (“Series A Preferred Stock”), plus warrants for an aggregate purchase price of
      $8,000,000.




As
        discussed in Note 8, Ener1 is accounting for the warrants and conversion
        option
        in accordance with SFAS 133 “Accounting for Derivative Instruments and Hedging
        Activities” and EITF 00-19 "Accounting for Derivative Financial Instruments
        Indexed to and Potentially Settled in a Company’s Own Stock.”
  The
        issuance proceeds were allocated between the Series A Preferred Stock, the
        warrants and the conversion option using the with-and-without method in
        accordance with SFAS 133.  The proceeds were allocated $4,620,000 to the
        fair value of the warrants, $1,182,609 to the fair value of the conversion
        option, and the remaining $2,197,391 was allocated to the series A Preferred
        Stock.


As
      discussed in Note 8, Ener1 assessed whether the conversion feature should be
      accounted for as a derivative under SFAS 133 “Accounting for Derivative
      Instruments and Hedging Activities” (“SFAS 133”).  In accordance with EITF
      00-19, Ener1 accounted for the conversion option as a derivative under SFAS
      133.
      When the term of the option expired in January 2005, the remaining liability
      of
      $1,182,609 was recorded as unrealized gain on embedded derivative in
      the first quarter of 2005.




If
      EnerDel has not redeemed all series shares on or before the 4th anniversary
      of
      the date of the certificate of designation of the Series A Preferred Stock,
      the
      holders shall have the option to require EnerDel to redeem all of the series
      shares within 10 days after notifying EnerDel of their exercise of such option.
      As a result, Ener1 has determined the preferred stock is mandatorily redeemable.
      Due to the mandatory redemption feature, the Series A Preferred Stock is
      reported as a liability consistent with SFAS 150, “Accounting for Certain
      Financial Instruments with Characteristics of Both Liabilities and Equity.”




In
      connection with the issuance of the Series A Preferred Stock, EnerDel 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 ten year
      term. Ener1 is not required to register the resale of the warrants or of the
      common stock issuable upon exercise of the warrants.The fair
      value 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;
      expected volatility of 207%; risk free interest rate of approximately 1.74%;
      and
      a term of ten years.




The
        following are the components of redeemable preferred stock as of September
        30,
        2005:
  **Ener1**
                **Series
                  B******
              **EnerDel**
                **Series
                  A******
              **Total**Face
                  value
              
              
              $
              15,250,000
              
              $
              8,000,000
              
              $
              23,250,000Less
                  fair value of warrant derivative
              
              
              
              (5,513,890)
              
              
              (4,620,000)
              
              
              (10,133,890)Less
                  fair value of conversion option derivative
              
              
              
              -
              
              
              (1,182,609)
              
              
              (1,182,609)Accumulated
                  accretion of discounts
              
              
              
              1,328,441
              
              
              968,567
              
              
              2,297,008Cumulative
                  dividends
              
              
              
              1,000,661
              
              
              623,836
              
              
              1,624,497$
              12,065,212
              
              $
              3,789,794
              
              $
              15,855,006


-12-




8.  Derivatives




Ener1
      evaluated the application of SFAS 133 and EITF 00-19 for the following
      financial instruments:




·
            the
                2004 Debenture conversion feature;


·
            warrants
                to purchase common stock associated with the 2004
                Debentures;


·
            the
                2005 Debenture conversion feature;


·
            warrants
                to purchase common stock associated with the 2005
                Debentures;


·
            EnerDel
                Series A Preferred Stock conversion
                feature;


·
            Warrants
                to purchase common stock issued to Delphi Corporation (the "Delphi
                Warrants");


·
            Series
                B Preferred Stock conversion
                feature;


·
            warrants
                to purchase common stock issued to the purchasers of the Series B
                Preferred Stock (the "Series B Warrants");
                and


·
            warrants
                to purchase common stock issued to Ener1 Group, Inc. in connection
                with
                the acquisition by Ener1 of Ener1 Battery Company from Ener1 Group,
                Inc.
                (“Battery Warrants”)





-13-


Based
      on
      the guidance in SFAS 133 and EITF 00-19, Ener1 concluded all of these
      instruments other than the Series B Preferred Stock qualified for derivative
      accounting. SFAS 133 and EITF 00-19 require Ener1 to bifurcate and separately
      account for the conversion features of the debentures and Series A preferred
      stock as embedded derivatives. Pursuant to SFAS 133, Ener1 bifurcated the
      conversion feature from the debentures and the Series A preferred stock, because
      the economic characteristics and risks of the conversion features were
      determined to not be clearly and closely related to the economic characteristics
      and risks of the Debentures. In addition, among other reasons, because
      there was no explicit cap on the amount of shares that could be issued pursuant
      to the conversion features or the warrant agreements, Ener1 determined the
      conversion features and the warrants met the attributes of a liability and
      therefore recorded the fair value of the conversion features and the warrants
      as
      current liabilities. Ener1 is required to record the fair value of the
      conversion features and the warrants on its balance sheet at fair value with
      unrealized changes in the values of these derivatives reflected in the
      consolidated statement of operations as “Gain (loss) on derivative liabilities.”
These derivative liabilities were not classified as such in Ener1's historical
      financial statements. In order to reflect the correction of these errors, Ener1
      will restate its financial statements for the year ended December 31, 2004
      and
      for the periods ended March 31, 2005 and June 30, 2005, and file amendments
      to
      its reports with the Commission reflecting these restatements as soon as
      practicable.




The
      impact on the balance sheet as of September 30, 2005 and the statements of
      income for the 3 and 9 months ended September 30, 2005 is as
      follows:





(dollars
                in thousands)**December
                31, 2004**
            
            **September
                30, 2005**
            
            **Gain
                (Loss)**
            
            **December
                31, 2003**
            
            **September
                30, 2004**
            
            **Gain
                (Loss)**2004
                Debenture
            
            $
            11,627
            
            $
            6,918
            
            $
            4,709
            
            $
            -
            
            $
            7,938
            
            
            $11,934
            (a)2004
                Debenture Warrants
            
            
            11,040
            
            
            6,720
            
            
            4,320
            
            
            -
            
            
            8,320
            
            
            (8,320
            )2005
                Debenture
            
            
            -
            
            
            6,686
            
            
            1,280
                (a)
            
            
            -
            
            
            -
            
            
            -2005
                Debenture Warrants
            
            
            -
            
            
            4,680
            
            
            (868)(a)
            
            
            -
            
            
            -
            
            
            -EnerDel
                Series A Preferred Stock
            
            
            1,183
            
            
            -
            
            
            1,183
            
            
            -
            
            
            -
            
            
            -Series
              A Warrants
            
            
            5,944
            
            
            3,426
            
            
            2,518Series
              B Warrants
            
            
            7,193
            
            
            4145
            
            
            1,866(a)Battery
                Warrants
            
            
            57,960
            
            
            33,810
            
            
            24,150
            
            
            96,600
            
            
            37,950
            
            
            58,650Total
            
            $
            94,947
            
            $
            66,385
            
            $
            39,158
            
            $
            96,600
            
            $
            54,208
            
            $
            62,264


-14-





(a)
      The
      original liability was recorded out of the proceeds of the debentures therefore
      the gain (loss) in the first period after issuance of the instrument is not
      equal to the balance sheet amount.




Because
      the conversion option for the Series Preferred
      Stock is contingent, the Series B Preferred Stock is not within the scope of
      SFAS 133 and EITF 00-19. If the contingency is resolved in the future and
      the holder receives the ability to convert, Ener1 will assess whether the
      conversion option meets the definition of a derivative under SFAS
      133.




9.    
      ENER1 GROUP FINANCING




On
      October 15, 2004, Ener1’s majority shareholder Ener1 Group, Inc. agreed to
      purchase at Ener1’s request, up to 30,000 shares of Ener1’s Series B Preferred
      Stock at $66.67 per share, together with 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.




In
      March
      2005, Ener1 Group purchased 2,500 Series B Preferred shares and warrants to
      purchase 138,890 shares of common stock for an aggregate purchase price of
      $166,667.





-15-


10.  ITOCHU
      CORPORATION INVESTMENT AND INVESTMENT IN ENERSTRUCT





On
      July
      25, 2003, Ener1 sold 14,000,000 common shares and granted options to purchase
      common stock to ITOCHU Corporation for $3.5 million. All options expired
      unexercised on January 31, 2005. Using these proceeds, Ener1 purchased a 49%
      interest in a new Japanese company called Enerstruct, Inc. for $2,003,339.
      ITOCHU acquired the remaining 51% of Enerstruct, for $1,100,000 plus equipment.
      Ener1’s net book value on September 30, 2005, accounted for under the equity
      method, was $2,395,847, after deducting Ener1's share of Enerstruct's losses
      to
      date.




On
      April
      12, 2005, EnerDel purchased engineering and consulting services from Enerstruct
      and an option to license from Enerstruct certain battery cell and manufacturing
      technologies for $1 million. On June 23, 2005, EnerDel exercised this option.
      At
      that time, EnerDel also determined that it would no longer conduct battery
      manufacturing operations using its existing technology and reduced the work
      force at its manufacturing facility in Indianapolis, Indiana by eliminating
      functions related to this technology. See Note 12.




Summarized
      information of Enerstruct is as follows as of September 30, 2005 and for the
      nine-month period then ended.





Cash
            
            
            $
            1,369,070Total
                assets
            
            
            $
            1,898,489Total
                liabilities
            
            
            $
            554,144Net
                loss
            
            
            $
            (584,282
            )




11.  RELATED
      PARTY TRANSACTIONS





During
      2005, Ener1 and Ener1 Group have from time to time used each other’s services
      and employees. Ener1 Group billed Ener1 $750 and $40,987, respectively, for
      the
      cost of services and employees provided to Ener1 for the three and nine months
      ended September 30, 2005. Ener1 billed Ener1 Group $27,990 and $113,815,
      respectively, for the cost of these services and employees provided to Ener1
      Group for the three and nine months ended September 30, 2005. As of September
      30, 2005, the net balance due to Ener1 from Ener1 Group was $132,921.





Ener1,
      Ener1's wholly owned subsidiary, Ener1 Acquisition Corp. (“Acquisition”), and
      Splinex Technology, Inc. (“Splinex”) a related party, entered into a Merger
      Agreement dated as of June 9, 2004, providing for the merger of Acquisition
      into
      Splinex. Upon closing in January 2005, Ener1 received 5,000,000 shares of
      Splinex common stock. Ener1 declared a dividend to distribute these 5,000,000
      shares of Splinex common stock to its shareholders of record on January 17,
      2005. In exchange for the 5,000,000 shares, Ener1 paid $150,000 of the expenses
      incurred in connection with the registration under the Securities Act of the
      distribution of these shares to Ener1's shareholders. The terms of the merger
      were negotiated on an arm’s-length basis by an independent committee of Ener1's
      Board of Directors. The independent committee engaged a financial adviser,
      Capitalink, L.C., to assist the committee in connection with its evaluation
      of
      the transaction. Capitalink delivered a fairness opinion to the independent
      committee indicating that the merger consideration was fair, from a financial
      point of view, to Ener1's non-affiliated stockholders. Based on the foregoing,
      Ener1 concluded that $150,000 represented the fair value of the 5,000,000 shares
      of Splinex common stock that Ener1 received in the merger. Ener1 recorded a
      dividend of $150,000, which amount represented the value of the Splinex common
      stock on the date the dividend was declared.


-16-





Ener1’s
      primary business purpose in approving the Splinex merger was to provide its
      shareholders with the opportunity to participate in the future value of Splinex,
      which Ener1's Board of Directors believed had the potential to become a leading
      three-dimensional graphics software company.  Two
      of
      Ener1’s directors, Kevin P. Fitzgerald and Dr. Peter Novak, are also directors
      of Splinex. Dr. Novak was also the president of Splinex from its inception
      February 7, 2004 to August 31, 2004. Mr. Fitzgerald resigned as a director
      of
      Splinex in December 2005.




12.  COSTS
      ASSOCIATED WITH EXIT OR DISPOSAL ACTIVITIES




On
      June
      23, 2005, EnerDel, Inc. decided to acquire automated manufacturing technology
      for high-rate battery production from Enerstruct, Ener1 Inc.’s joint venture
      with ITOCHU. In connection with this decision, Ener1’s 80.5% subsidiary EnerDel
      began restructuring its manufacturing facilities in Indianapolis and Fort
      Lauderdale to use the automated manufacturing technology. A total of 37
      employees were terminated in Indianapolis and Fort Lauderdale and Ener1
      determined that the equipment in the Fort Lauderdale facility will be used
      for
      research and development activities. Ener1 charged the remaining net book value
      of the Fort Lauderdale’s facility equipment of approximately $10.5 million to
      research and development expenses EnerDel plans to retain selected equipment
      and
      battery pack/systems integration engineers at the Indianapolis facility. EnerDel
      has incurred and will continue to incur exit and disposal costs associated
      with
      these changes. These costs are predominantly severance, equipment disposal,
      and
      contract termination costs. In accordance with FASB No. 146, these costs are
      included in results of operations as research and development, selling, general,
      and administrative expenses.





The
      table
      below summarizes the exit and disposal costs of this change in strategy by
      each
      major cost type.





**Amount
                Incurred**
            
            
            
            **Cumulative
                Amount****Description
                of**
            
            
            **Expected
                Liability**
            
            
            
            **For
                Three Month Period**
            
            
            
            **Incurred
                As Of****Disposal
                Activity**
            
            
            **Of
                Exit Activity**
            
            
            
            **Ended
                September 30, 2005**
            
            
            
            **September
                30, 2005**Personnel
                termination costs
            
            $
            951,028
            
            
            $
            80,996
            
            
            $
            826,258Contract
                termination costs****(1)
            
            
            1,830,908
            
            
            
            214,000
            
            
            
            214,000Equipment
                relocation costs
            
            
            150,000
            
            
            
            --
            
            
            
            ----
            
            
            
            --
            
            
            
            --Total
                activity exit costs
            
            $
            2,931,936
            
            
            $
            294,996
            
            
            $
            1,040,258





Table
      Notes :




(1) Contract
      termination costs include: facilities lease obligations to Delphi of
      approximately $1,198,000; purchase order commitments of $625,000 which Ener1
      is
      attempting to recover; and cancellation of one sales contract for
      $8,000.





-17-


13.  COMMITMENTS
      AND CONTINGENCIES





Lease
      Commitments





In
      April
      2005, Ener1 signed a 62-month operating lease for office facilities located
      in
      New York City. The lease provides for fixed rent of $426,240 per
      year.





In
      June
      2005, Ener1 signed a 37-month operating lease for office facilities in Fort
      Lauderdale to be used by EnerFuel, Inc. The lease provides for monthly rent
      of
      $8,819 a month plus charges for taxes and common area costs).





In
      June
      2005, Ener1 signed a 12 month operating lease for office facilities in Fort
      Lauderdale to be used by NanoEner, Inc. The lease provides for monthly rent
      payments of $1,863 plus charges for taxes and common area costs.





14.  RESTATEMENT
      AND RECLASSIFICATIONS OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS





***Summary
      of Restatement Items***





On
      December 15, 2005, Ener1 concluded that it would be necessary to restate its
      financial results for the fiscal year ended December 31, 2004 and for the
      interim periods ended March 31 and June 30, 2005 to reflect additional
      non-operating gains and losses related to the classification of and accounting
      for: (1) the conversion feature of the 2004 and 2005 Debentures, the warrants
      to
      purchase common stock associated with the 2004 and 2005 Debentures and the
      amortization expense associated with the discount recorded with respect to
      the
      2004 and 2005 Debentures and financing costs incurred in connection with the
      2004 Debentures, (2) the EnerDel Inc. Series A Convertible Preferred Stock
      issued in November, 2004 ("Preferred Stock") and assaciated warrants and (3)
      the
      warrants to purchase common stock issued to Ener1 Group, Inc. in September
      2002
      and warrants to purchase common stock issued to purchasers of Ener1's Series
      B Perferred Stock.  Ener1 had previously classified the value of these
      conversion features and warrants to purchase common stock, when applicable,
      as
      equity . After
      further review, Ener1 has determined that these instruments should have been
      classified as derivative liabilities and therefore, the fair value of each
      instrument must be recorded as a derivative liability on Ener1's balance sheet.
      Changes in the fair values of these instruments will result in adjustments
      to
      the amount of the recorded derivative liabilities and the corresponding gain
      or
      loss will be recorded in Ener1's statement of operations. At the date of the respective conversion
      of the each
      respective instrument ( or
      exercise of the warrants ,
      as the case may be) ,
      the
      corresponding derivative liability will be reclassified as equity.


-18-





The
      impact of the adjustments related to the classification of and
      accounting for the conversion features and warrants are summarized
      below:  (dollars
      in thousands).





**Consolidated
                Statement of Operations****Three
                Months Ended**
            ********
            ****
            **September
                30, 2004**AS
                PREVIOUSLY REPORTED
            
            ADJUSTMENT
            
            AS
                RESTATEDGross
                profit
            
            
            0
            
            
            
            
            
            0Operating
                expenses
            
            
            2,538
            
            
            74
            
            
            2,612Loss
                from operations
            
            
            (2,538
            )
            
            
            
            
            (2,612
            )Non
                operating income (expense)Interest
                expense
            
            
            (666
            )
            
            (959
            )
            
            (1,625
            )Other
                income (expense)
            
            
            (62
            )
            
            
            
            
            (62
            )Gain
                on embedded derivative liability
            
            
            -
            
            
            5,454
            
            
            5,454Total
                non-operating income (expense)
            
            
            (728
            )
            
            4,495
            
            
            3,767Loss
                before minority interest, income taxes,and
                discontinued operations
            
            
            (3,266
            )
            
            4,421
            
            
            1,155Loss
                from discontinued operations
            
            
            (5
            )
            
            
            
            
            (5
            )Net
                income (loss)
            
            
            (3,271
            )
            
            4,421
            
            
            1,150Basic
                and diluted income (loss) per share:Basic
            
            
            (0.01
            )
            
            0.01
            
            
            0.00Diluted
            
            
            (0.01
            )
            
            0.01
            
            
            0.00Shares
                outstanding
            
            
            347,276
            
            
            347,276
            
            
            347,276




***(1)***
            ***Change
                due to correction of deferred financing cost on the 2004 Debenture
                (see
                Note 5)***


***(2)***
            ***Change
                due to the recording of the debt discount related to the 2004 Debenture
                (see Note 5)***


***(3)***
            ***Change
                due to the gain on the derivative liabilities not previously recorded
                (see
                Notes 5 & 8)***


-19-





**Consolidated
                Statement of Operations**Nine
                Months EndedSeptember
                30, 2004AS
                PREVIOUSLY REPORTED
            
            ADJUSTMENT
            
            AS
                RESTATEDGross
                profit
            
            
            31
            
            
            
            
            
            31Operating
                expenses
            
            
            8,397
            
            
            221
            
            
            8,618Loss
                from operations
            
            
            (8,366
            )
            
            
            
            
            (8,587
            )Non
                operating income (expense)Interest
                expense
            
            
            (1,143
            )
            
            (2,959
            )
            
            (4,102
            )Other
                income (expense)
            
            
            (276
            )
            
            
            
            
            (276
            )Gain
                on embedded derivative liability
            
            
            -
            
            
            62,264
            
            
            62,264Total
                non-operating income (expense)
            
            
            (1,419
            )
            
            59,305
            
            
            57,886Loss
                before minority interest, income taxes,and
                discontinued operations
            
            
            (9,785
            )
            
            59,084
            
            
            49,299Loss
                from discontinued operations
            
            
            (7
            )
            
            
            
            
            (7
            )Net
                income (loss)
            
            
            (9,792
            )
            
            59,084
            
            
            49,292Basic
                and diluted income (loss) per share:Basic
            
            
            (0.03
            )
            
            0.17
            
            
            0.14Diluted
            
            
            (0.03
            )
            
            0.17
            
            
            0.14Shares
                outstanding
            
            
            346,966
            
            
            346,966
            
            
            346,966





***(1)***
            ***Change
                due to correction of deferred financing cost on the 2004 Debenture
                (see
                Note 5)***


***(2)***
            ***Change
                due to the recording of the debt discount related to the 2004 Debenture
                (see Note 5)***


***(3)***
            ***Change
                due to the gain on the derivative liabilities not previously recorded
                (
                see Notes 5 & 8)***


-20-
 ***Balance
        Sheet Impact***





In
      addition to the effects on Ener1's 2005 and
      2004
      consolidated statements of operations discussed above, the restatement impacted
      Ener1's consolidated balance sheet s as of
      September 30, 2004. The following table(s) sets forth the effects of the
      restatement adjustments on Ener1's 2004 consolidated balance sheet (dollars
      in
      thousands):





**Consolidated
                Balance Sheet****As
                of September 30, 2004**As
                Previously Reported
            
            Restatement
                Adjustments
            
            As
                RestatedAssets:Current
                assets
            
            $
            3,961
            
            
            
            
            $
            3,961Property,
                plant, and equipment
            
            
            23,311
            
            
            
            
            
            23,311Deferred
                debenture costs
            
            
            -
            
            
            1,253
            
            
            1,253Other
                Assets
            
            
            1,630
            
            
            
            
            
            1,630Total
            
            
            28,902
            
            
            1,253
            
            
            30,155Liabilities
                and shareholders deficit:
            
            
            
            
            
            
            
            
            -Derivative
                liability on Battery warrants
            
            
            -
            
            
            37,950
            
            
            37,950Other
                current liabilities
            
            
            1,916
            
            
            
            
            
            1,916Total
                current liabilities
            
            
            1,916
            
            
            37,950
            
            
            39,866Long
                term debt
            
            
            97
            
            
            
            
            
            97Debenture
            
            
            19,700
            
            
            
            
            
            19,700Discount
                on debentures
            
            
            (19,700
            )
            
            2,959
            
            
            (16,741
            )Embedded
                derivatives on convertible debentures
            
            
            -
            
            
            16,258
            
            
            16,258Total
                liabilities
            
            
            2,013
            
            
            57,167
            
            
            59,180Shareholders'
                equity
            
            
            26,889
            
            
            (55,914
            )
            
            (29,025
            )Total
            
            $
            28,902
            
            $
            1,253
            
            $
            30,155




***(1)***
            ***Change
                due to recording of deferred financing cost on the 2004 Debenture
                (see
                Note 5)***


***(2)***
            ***Change
                due to the recording of a liability for warrants determined to be
                a
                derivative (see Note
                8)***


***(3)***
            ***Change
                due to recording of discount on the 2004 Debenture (see Note
                5)***


***(4)***
            ***Change
                due to the recording of the derivatives on the 2004 Debenture (see
                Note
                5)***





-21-


15.  STOCK
      OPTION ISSUANCES




On
      April
      11, 2005, pursuant to his appointment as Director of Ener1, Inc., Ludovico
      Manfredi received 110,000 options to purchase common shares at $.70 per share,
      vesting 33 1/3% on each of the first three anniversaries of the option grant
      date.




On
      June
      1, 2005, pursuant to his appointment as Chief Executive Officer of NanoEner,
      Inc., J. Gary McDaniels received 500,000 options to purchase shares at $.48
      per
      share, vesting in four equal installments, beginning on the first anniversary
      of
      the option grant.


On
        June
        25, 2005, as compensation for serving as Board Director and Chairman of the
        Audit Committee, Karl Gruns received 50,000 options to purchase shares at
        $.57,
        vesting immediately.




On
      July
      8, 2005, pursuant to his employment agreement as Chief Financial Officer for
      Ener1, Inc., Ernie Toth received 250,000 options to purchase shares at $.28,
      25%
      of which would vest on each of the first four anniversaries of the option
      grant.




During
      the nine months ended September 30, 2005, 910,000 options were granted under
      Ener1’s 2002 Stock Option Plan, 855,000 options were terminated, and no options
      were exercised.




The
      fair
      value of the above issuances was $806,450.





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





The
      following discussion should be read in conjunction with our Annual Reports
      on
      Form 10-KSB, Quarterly Reports on Form 10-QSB and other filings with the
      Securities and Exchange Commission and the condensed consolidated financial
      statements and related notes included in this Quarterly Report.





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





All
      forward-looking statements are based on information available to us on the
      date
      of this filing, and we assume no obligation to update such statements.





-22-


**Overview**





Ener1’s
      primary lines of business consist of developing and marketing lithium batteries
      and certain battery components such as electrodes; fuel cells, fuel cell
      systems, components and related services; and nanotechnology-related
      manufacturing processes and materials.





In
      October 2004, Ener1 formed EnerDel with Delphi Automotive Systems, LLC (a
      subsidiary of Delphi Corporation) (“Delphi”) as Ener1's new vehicle for pursuing
      its battery business. Ener1 owns 80.5% of EnerDel’s outstanding common stock,
      and Delphi owns 19.5% of EnerDel’s outstanding common stock. Ener1's lithium
      battery business has been conducted through EnerDel since 2004.





On
      April
      12, 2005, EnerDel and an affiliated party, Enerstruct, entered an agreement
      under which Enerstruct agreed to provide engineering and consulting services
      to
      EnerDel. Enerstruct also gave EnerDel the option to license from Enerstruct
      certain battery cell and manufacturing technologies. On June 23, 2005, EnerDel
      decided to acquire these technologies. At that time, EnerDel reduced the work
      force at its manufacturing facility in Indianapolis, Indiana by eliminating
      functions related to EnerDel's existing technology.





On
      September 6, 2005, we announced a plan to spin-off the common stock of our
      three
      primary alternative energy subsidiaries to our shareholders. The proposed
      spin-offs are subject to the receipt of applicable regulatory and third-party
      approvals and adequate financing, which we may seek in the public or private
      equity or debt markets. Following the proposed spin-offs, we intend to seek
      new
      investments in technology. At this time, we are exploring financing
      opportunities to fund the activities of our operating subsidiaries as a
      prerequisite to proceeding with the proposed spin-offs.





We
      have
      experienced net operating losses since 1997, negative cash flows from operations
      since 1999, and have an accumulated deficit of $157 million
      as of September 30, 2005. It is likely that our operations will continue to
      incur negative cash flows through September 30, 2006 and additional financing
      will be required to fund our planned operations through that time. If additional
      financing is not obtained, such a condition, among others, will give rise to
      substantial doubt about our ability to continue as a going concern for a
      reasonable period of time.





**Results
      of Operations**





Net
      Sales




Our
      net
      sales for the three-month and nine-month periods ended September 30, 2005 were
      $25,000 and $60,000, respectively. Net sales for the three and nine month
      periods ended September 30, 2004 were $0.0 and $41,000, respectively. All sales
      consisted of sample sales of lithium batteries and fuel cell
      components.





-23-


Manufacturing
      Pre-production Costs




For
      the
      three and nine month periods ended September 30, 2005, manufacturing
      pre-production costs decreased by 100% from $532,000 to $0.00 and increased
      by
      $1.1 million or 104% from $1 million to $2.1 million, when compared to the
      same
      periods in 2004.





During
      the three months ended September 30, 2005, we ceased incurring Manufacturing
      Pre-production Costs for our Fort Lauderdale facilities since management
      determined in June of 2005 that going forward, the Fort Lauderdale facility
      will
      be used solely for research and development activities.





The
      increase of $1.1 million for the nine month period September 30, 2005 was
      primarily due to additional hiring of manufacturing personnel, increases in
      International Standards Organization (“ISO”) compliance costs and increases in
      the costs of implementing manufacturing processes and procedures until June
      of
      2005 .





Research
      and Development (“R&D”) Expenses





R&D
      expenses for the three and nine month periods ended September 30, 2005 increased
      by approximately $618,000 to $1,194,000 and $16,183,000 to $17,936,000,
      respectively, when compared to the same periods in 2004. The increase of
      $618,000 for the three months ended September 30, 2005 was primarily due to
      the
      inclusion of EnerDel expenses in the three month period ended September 30,
      2005
      resulting in added research and development expenses of $640,000 in the three
      month period ended September 30, 2005. The increase of approximately $16 million
      for the nine months ended September 30 was due primarily to a $10.5 million
      charge to R&D expense for the book value of battery equipment and supplies
      that were determined to have no alternative future use, in accordance with
      SFAS
      No. 2 “Accounting for Research and Development Costs,” as a result of
      management’s change in battery cell development and production strategies,
      approximately $4 million of additional expenses incurred due to the inclusion
      of
      EnerDel in the nine month period ended September 30, 2005 and $1 million in
      prepaid R&D work pursuant to a contract with Enerstruct.




Selling,
      General and Administrative (“SG&A”) Expenses





SG&A
      expenses for the three and nine month periods ended September 30, 2005 increased
      by 87% or $1,303,000 to $2,807,000 and 45% or $2,616,000 to 8,434,000,
      respectively, when compared to the same periods in 2004. The increase of
      $1,303,000 for the three months ended September 30, 2005 was due primarily
      to an
      increase of $1.1 million as a result of the inclusion of EnerDel expenses for
      the three month period ended September 30, 2005, an increase of $24,000 due
      to
      hiring by NanoEner of executive personnel, an increase in rent of $64,000 due
      to
      three new operating leases for Corporate Administration, Fuel Cell and NanoEner,
      and an increase of $57,000 in professional fees. The increase of $2.6 million
      for the nine months ended September 30 was due primarily to an increase of
      approximately $3.8. million as a result of the inclusion of EnerDel expenses in the nine month period ended September 30, 2005, offset
      by
      a decrease of approximately $800,000 due to the termination of supercapacitor
      R&D activities by Ener1, Inc. and Ener1 Ukraine.






-24-




Other
      Income and Expense




Other expense increased by $32 million and $25 million for the three and nine
      month periods ended September 30, 2005. This is primarily due to
      (1) a loss of $26 million on embedded derivatives in conversion
      features of securities due to decreases in our stock price in the three month
      period ended Septmeber 30, 2005 (as compared to the same prior year period);
      and
      (2) a $23 million reduction in gain from embedded derivatives in conversion
      features of securities in the nine month period ended September 30, 2005 (as
      compared to a gain of $5.5 million for the same prior year period), also
      due to decreases in our stock price.




**L** **iquidity
      and Capital Resources**




As of December 31, 2004, we had a working capital deficit of $70 million.
        During
        the nine months ended September 30, 2005, our working capital increased by
        $8.3
        million, resulting in negative working capital of $61.7 million as of September
        30, 2005. Working capital as of September 30, 2005 included $7.0 million
        in cash
        and $0.7 million in prepaid expenses, offset by $1.6 million in accounts
        payable, accrued expenses and accrued exit costs and $67.5 million in derivative
        liabilities on conversion features of securities. For the nine months ended
        September 30, 2005, net cash used in operating activities totaled $19.9 million.
        However, during the same period, we received $13.1 million from the sale
        of our
        $14,225,000 Senior Secured Convertible Debentures due in March 2009 and $250,000
        from the sale of our Series B Preferred Stock to Ener1 Group, Inc.




We
      have a
      commitment from Ener1 Group to purchase, at our request, an additional 27,500
      shares of our Series B Preferred Stock for an aggregate net purchase price
      of
      $1.833 million.





We
      will
      require additional capital within the next twelve months to support the
      activities of EnerDel, EnerFuel, and NanoEner. We intend to seek additional
      financing, which may take the form of equity or debt funding. We cannot assure
      you that any such required capital will be available on terms acceptable to
      us,
      if at all, or at such time or times as we require it. If additional financing
      is
      not obtained, such condition, among others, will give rise to substantial doubt
      about our ability to continue as a going concern for a reasonable period of
      time.




**Critical
      Accounting** **Policies**




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





-25-


Accounting
      for employee stock options





As
      permitted under Statement of Financial Accounting Standard No. 123, “Accounting
      for Stock-Based Compensation,” (“SFAS No. 123”) we account for employee stock
      options in accordance with Accounting Principles Board Opinion No. 25 (“APB No.
      25”), “Accounting for Stock Issued to Employees.” Under APB No. 25, we recognize
      compensation cost based on the intrinsic value of the equity instrument awarded
      as determined at the measurement date. We disclose the required pro forma
      information in our notes to consolidated financial statements as if the fair
      value method prescribed by SFAS No. 123 had been applied.





Derivative
      Instruments and Hedging Activities





Statement
      of Financial Accounting Standard No. 133, “Accounting for Derivative Instruments
      and Hedging Activities,” as amended (“SFAS 133”) requires all derivatives to be
      recorded on the balance sheet at fair value. SFAS 133 also established rules
      for
      derivatives used as hedging instruments which, depending on the nature of the
      hedge, require that changes in the fair value of the derivatives either be
      offset against the change in fair value of assets or liabilities through
      earnings, or be recognized in other comprehensive income until the hedged item
      is recognized in earnings.




**ITEM
      3A. CONTROLS AND PROCEDURES**




Based
      on
      their evaluation of our disclosure controls and procedures (as defined in Rule
      13a-15e under the Securities Exchange Act of 1934 (the “Exchange Act”)), our
      principal executive officer and principal financial officer have concluded
      that
      as of the end of the period covered by this quarterly report on Form 10-QSB
      such
      disclosure controls and procedures were not effective to ensure that information
      required to be disclosed by us in reports that we file or submit under the
      Exchange Act is recorded, processed, summarized and reported within the time
      periods specified in Securities and Exchange Commission rules and forms, because
      of several adjustments required by our auditors, predominantly in the areas
      of
      debt and equity.  In connection with the completion of its review of our
      financial statements for the nine months ended September 30, 2005, Malone &
Bailey, PC identified deficiencies that existed in the design or operation
      of
      our internal control over financial reporting that it considers to be “material
      weaknesses.” The Public Company Accounting Oversight Board has defined a
      material weakness as a “significant deficiency or combination of significant
      deficiencies that results in more than a remote likelihood that a material
      misstatement of the annual or interim financial statements will not be prevented
      or detected.”




Specifically,
      our independent auditors identified deficiencies in our internal controls and
      disclosure controls related to the accounting for convertible debt with
      detachable warrants and convertible preferred stock with detachable warrants,
      as
      well as deficiencies in the valuation of such financial instruments. Our
      independent auditors also noted deficiencies related to late filings with the
      Securities Exchange Commission and failure to properly classify mandatorily
      redeemable preferred stock as a liability. Appropriate adjustments and footnote
      disclosures have been recorded and disclosed in this Quarterly Report on Form
      10-QSB. We are in the process of improving our internal controls in an effort
      to
      remediate these deficiencies through the following efforts: 1) implementing
      better controls and procedures over the accounting and valuation of debt and
      preferred stock, and 2) improving supervision and training of our accounting
      staff. We are continuing our efforts to improve and strengthen our control
      processes and procedures to fully remedy these deficiencies. Our management
      and
      directors will continue to work with our auditors and other outside advisors
      to
      ensure that our controls and procedures are adequate and effective.




**PART
      II. OTHER INFORMATION**




**Item
      1. - Legal Proceedings**





We
      receive communications from time to time alleging various claims. These claims
      include, but are not limited to, 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. We are not currently a party to any lawsuit
      or proceeding that, in the opinion of our management, is likely to have a
      material adverse effect on our financial position or results of
      operations.





-26-


**Item
      6. - Exhibits**





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  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  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  Amendment
      to Amended and Restated Articles of Incorporation, dated December 29, 2004,
      incorporated by reference to Exhibit A of the Registrant's Schedule 14C dated
      December 7, 2004.





3.5  Bylaws
      of
      the Registrant, incorporated by reference to Exhibit 3.4 of the Registrant's
      Registration Statement (Commission File No. 333-112837) filed with the
      Commission on February 13, 2004.





3.6  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 11,
      2005.





4.1  Form
      of
      5% Senior Secured Convertible Debenture incorporated by reference to Exhibit
      4.1
      to our Current Report on Form 8-K dated January 21, 2004.





4.2  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.





4.3  Form
      of
      7.5% Senior Secured Convertible Debenture incorporated by reference to Exhibit
      4.1 to the Registrant’s Current Report on Form 8-K dated March 15, 2005.





4.4  Registration
      Rights Agreement, dated as of March 14, 2005, 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
      March 15, 2005.




31.1 Certification
        of Principal Executive Officer pursuant to
        Section 302 of the Sarbanes-Oxley Act of 2002
 31.2 Certification
          of Principal Financial Officer pursuant to
          Section 302 of the Sarbanes-Oxley Act of
          2002
 32.1 Certification
            of Principal Executive Officer pursuant to 18
            U.S.C. Sec. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
            Act
            of 2002
 32.2 Certification
              of Principal Financial Officer pursuant to 18
              U.S.C. Sec. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
              Act
              of 2002


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**ENER1,
      INC. AND SUBSIDIARIES**




**SIGNATURES**




Pursuant
      to the requirements of the Securities Exchange Act of 1934, the registrant
      has
      duly caused this report to be signed on its behalf of the undersigned thereunto
      duly authorized.





Dated:January
                5, 2006
              
              
              
              
              
              
              
              
              Dated:January
                5, 2006
            ENER1,
                INC.
              
              By:/s/
                Kevin P. Fitzgerald
              Kevin
                Fitzgerald
              Chief
                Executive Officer
              (Principal
                Executive Officer)
              
              
              
              
              
              By:/s/
                A. Ernest Toth
              A.
                Ernest Toth
              Chief
                Financial Officer
              (Principal
                Financial and Accounting Officer)










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