**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


Washington,
      D.C. 20549







**FORM
      10-QSB/A**


Amendment
        No. 1




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 jurisdictionof
                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
              December
                31, 2005
              347,455,751







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












**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
                3A.  Controls and Procedures
            24Part
                II. OTHER INFORMATIONItem
                1. Legal Proceedings
            25Item
                5. Other
            25Item
                6.  Exhibits
            26Signatures
            27














**Explanatory
      Note**




The
      consolidated financial statements for the three and nine months ended September
      30, 2004 and 2005 and related disclosures included in this Amendment No. 1
      to
      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 the three and nine months ended
      September 30, 2004 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. On
      January 5, 2006, Ener1 filed a Quarterly Report on Form 10-QSB for the three
      and
      nine months ended September 30, 2005 (the "September 2005 10-QSB") including
      restatements of Ener1's previously issued financial statements for the three
      and
      nine months ended September 30, 2004.





On
      March 2, 2006, Ener1 determined that it was necessary to restate the financial
      statements included in the September 2005 10-QSB for the three and nine months
      ended September 30, 2004 and 2005 in order to reflect additional gains and
      losses related to the classification of and accounting for (1) options to
      purchase Ener1's common stock issued to a business partner in July 2003 and
      (2)
      warrants to purchase Ener1's common stock issued to Ener1's majority stockholder
      in November 2003. In accordance with Statement of Financial Accounting Standard
      No. 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," Ener1 determined that these
      options and warrants were derivatives because there was no explicit cap on
      the
      amount of shares that could be issued pursuant to the warrant and option
      agreements. The financial statements and other financial information included
      in
      this is Amendment No. 1 to the September 2005 10-QSB have been restated
      accordingly. Ener1's
      shareholders should no longer rely on Ener1's previously filed financial
      statements for the three and nine months ended September 30, 2004 and 2005.
      These matters have been discussed by Ener1's authorized executive officers
      with
      the Company’s independent registered public accounting firm .





Once
      Ener1's review of its financial statements for the fiscal year ended December
      31, 2004 and the interim periods ended March 31 and June 30, 2005 is complete,
      Ener1 will file reports with the Securities and Exchange Commission including
      restated financial statements for these periods 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.










**Part
      I****.
      FINANCIAL INFORMATION**


Item
      1. - Financial Statements


ENER1,
      INC. AND SUBSIDIARIES


CONSOLIDATED
      BALANCE SHEET


(Unaudited)


(In
      thousands except share data)


**September
                  30,****2005****(Restated)****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.
              
              
              899Deferred
                  debenture costs, net of amortizationof
                  $679 (Notes 5 and 6)
              
              
              2,099Other
              
              
              255Total
                  assets
              
              $
              13,957**LIABILITIES
                  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 (Note
                  8)
              
              
              76,185Total
                  current liabilities
              
              
              78,114Long-term
                  portion of installment loan
              
              
              73$19,700
                  convertible debentures, net of discount of $12,802 (Note
                  5)
              
              
              6,898$14,225
                  convertible debentures, net of discount of $10,531 (Note
                  6)
              
              
              3,694Redeemable
                  convertible preferred stock (Note 7):EnerDel,
                  Inc. 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
              
              
              104,634Minority
                  interest
              
              
              -Commitments
                  and contingencies**STOCKHOLDERS'
                  DEFICIT**Common
                  Stock, $.01 par value, 750,000,000 shares authorized347,455,751
                  issued and outstanding
              
              
              3,475Paid
                  in capital
              
              
              72,349Accumulated
                  deficit
              
              
              (166,501
              )Total
                  stockholders' deficit
              
              
              (90,677
              )Total
                  liabilities and stockholders' deficit
              
              $
              13,957
  See
      accompanying notes to financial statements.





-4-





ENER1,
      INC. AND SUBSIDIARIES


CONSOLIDATED
      STATEMENTS OF OPERATIONS


(In
      thousands except per share data)


(unaudited)


**Three
                  Months Ended**
              
              **Nine
                  Months Ended****September
                  30,**
              
              **September
                  30,****2005**
              
              **2004**
              
              **2005**
              
              **2004****(Restated)**
              
              **(Restated)**
              
              **(Restated)**
              
              **(Restated)**Net
                  sales
              
              $
              25
              
              $
              -
              
              $
              60
              
              $
              41Operating
                  expensesCost
                  of sales
              
              
              -
              
              
              -
              
              
              -
              
              
              10Manufacturing
                  pre-production costs
              
              
              -
              
              
              532
              
              
              2,132
              
              
              1,048General
                  and administrative
              
              
              1,194
              
              
              576
              
              
              17,936
              
              
              1,753Research
                  and development
              
              
              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
              
              
              (29,513
              )
              
              6,467
              
              
              45,958
              
              
              84,167Total
                  other income (expense)
              
              
              (32,055
              )
              
              4,780
              
              
              38,927
              
              
              79,789Income
                  (loss) before income taxes
              
              
              (36,031
              )
              
              2,168
              
              
              10,485
              
              
              71,202Income
                  taxes
              
              
              -
              
              
              -
              
              
              -
              
              
              -Net
                  income (loss) before minority interestand
                  discontinued operations
              
              
              (36,031
              )
              
              2,168
              
              
              10,485
              
              
              71,202Minority
                  interest
              
              
              -
              
              
              -
              
              
              3,760
              
              
              -Net
                  income (loss) from continuing operations
              
              
              (36,031
              )
              
              2,168
              
              
              14,245
              
              
              71,202Loss
                  from discontinued operations
              
              
              -
              
              
              (5
              )
              
              -
              
              
              (7
              )Net
                  income (loss)
              
              
              (36,031
              )
              
              2,163
              
              
              14,245
              
              
              71,195Preferred
                  stock dividends
              
              
              (1,024
              )
              
              -
              
              
              (2,855
              )
              
              -Net
                  income (loss) attributableto
                  common shareholders
              
              $
              (37,055
              )
              $
              2,163
              
              $
              11,390
              
              $
              71,195Net
                  income (loss) per share, basicContinuing
                  operations
              
              $
              (0.11
              )
              $
              0.01
              
              $
              0.03
              
              $
              0.21Discontinued
                  operations
              
              $
              -
              
              $
              -
              
              $
              -
              
              $
              -Net
                  income (loss) per share, dilutedContinuing
                  operations
              
              $
              (0.11
              )
              $
              0.01
              
              $
              0.03
              
              $
              0.17Discontinued
                  operations
              
              $
              -
              
              $
              -
              
              $
              -
              
              $
              -Weighted
                  average shares outstanding:Weighted
                  average shares outstanding - Basic
              
              
              347,456
              
              
              347,276
              
              
              347,456
              
              
              346,966Weighted
                  average shares outstanding - Diluted
              
              
              347,456
              
              
              412,256
              
              
              412,126
              
              
              417,624


See
      accompanying notes to financial statements.




-5-


ENER1, INC. AND SUBSIDIARIES


CONSOLIDATED
      STATEMENTS OF CASH FLOWS


(Unaudited)


(In
      thousands)


**Nine
                  Months Ended****September
                  30,****2005**
              
              **2004****(Restated)**
              
              **(Restated)**Net
                  income
              
              $
              14,245
              
              $
              71,195Adjustments
                  to reconcile net loss to cash used by operating
                  activities:Gain
                  on embedded derivative liability
              
              
              (45,958
              )
              
              (84,167
              )Asset
                  impairmentResearch
                  and development costs
              
              
              10,527
              
              
              -Minority
                  interest
              
              
              (3,760
              )
              
              -Accretion
                  of discount on debentures
              
              
              4,202
              
              
              2,959Depreciation
                  and amortization
              
              
              857
              
              
              694Compensation
                  expense for stock options
              
              
              815
              
              
              925Equity
                  in loss from investment in Enerstruct
              
              
              286
              
              
              426Changes
                  in current assets and liabilities
              
              
              (1,104
              )
              
              (1,175
              )Changes
                  in assets and liabilities held for disposal
              
              
              -
              
              
              (5
              )Net
                  cash used in operating activities
              
              
              (19,890
              )
              
              (9,148
              )Investing
                  Activities:Capital
                  expenditures
              
              
              (556
              )
              
              (1,322
              )Investment
                  in Splinex
              
              
              -
              
              
              (150
              )Net
                  cash used in investing activities
              
              
              (556
              )
              
              (1,472
              )Financing
                  Activities:Proceeds
                  from issuance of senior secured debenture, net of costs
              
              
              13,134
              
              
              18,527Proceeds
                  from sale of preferred stock
              
              
              250
              
              
              -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
              
              
              -
              
              
              1,050Net
                  cash provided by financing activities
              
              
              13,367
              
              
              14,046Net
                  increase (decrease) in cash and equivalents
              
              
              (7,079
              )
              
              3,426Cash
                  and cash equivalents beginning balance
              
              
              14,091
              
              
              200Cash
                  and cash equivalents ending balance
              
              $
              7,012
              
              $
              3,626
  See
      accompanying notes to financial statements.




-6-


**ENER1,
      INC.** **AND SUBSIDIARIES**


**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):




**Three
                  Months Ended**
              
              **Nine
                  Months Ended****September
                  30,**
              
              **September
                  30,****2005**
              
              **2004**
              
              **2005**
              
              **2004****(Restated)**
              
              **(Restated)**
              
              **(Restated)**
              
              **(Restated)**Net
                  income (loss)
              
              $
              (36,031
              )
              $
              2,163
              
              $
              14,245
              
              $
              71,195Add
                  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
                  income (loss) pro forma
              
              $
              (36,622
              )
              $
              1,562
              
              $
              12,332
              
              $
              70,027Net
                  income (loss) per share, basicContinuing
                  operations
              
              $
              (0.11
              )
              $
              -
              
              $
              0.04
              
              $
              0.20Net
                  income (loss) per share, dilutedContinuing
                  operations
              
              $
              (0.11
              )
              $
              -
              
              $
              0.03
              
              $
              0.17
 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 was 100%,
      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 $167 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.




-7-





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**
              
              **Nine
                  Months Ended****September
                  30,**
              
              **September
                  30,****2005**
              
              **2004**
              
              **2005**
              
              **2004****(Restated)**
              
              **(Restated)**
              
              **(Restated)**
              
              **(Restated)****Net
                  sales**EnerFuel,
                  Inc.
              
              $
              -
              
              $
              -
              
              $
              15
              
              $
              -EnerDel,
                  Inc.
              
              
              25
              
              
              -
              
              
              45
              
              
              -Ener1
                  Battery
              
              
              -
              
              
              -
              
              
              -
              
              
              41Total
                  Net Sales
              
              $
              25
              
              $
              -
              
              $
              60
              
              $
              41**Net
                  income (loss)**Discontinued
                  segments
              
              $
              -
              
              $
              (5
              )
              $
              -
              
              $
              (7
              )Corporate
              
              
              (33,699
              )
              
              3,278
              
              
              33,114EnerDel,
                  Inc.
              
              
              (1,621
              )
              
              -
              
              
              (20,732
              )
              
              74,206Ener1
                  Battery
              
              
              (23
              )
              
              (828
              )
              
              (119
              )
              
              (2,092
              )Ener1
                  Technologies Inc.
              
              
              -
              
              
              (3
              )
              
              -
              
              
              (13
              )EnerFuel
              
              
              (424
              )
              
              (197
              )
              
              (1,003
              )
              
              (739
              )NanoEner
              
              
              (264
              )
              
              (82
              )
              
              (775
              )
              
              (160
              )Minority
                  interest
              
              
              -
              
              
              -
              
              
              3,760
              
              
              -Net
                  income (loss)
              
              $
              (36,031
              )
              $
              2,163
              
              $
              14,245
              
              $
              71,195**Assets**Discontinued
                  segments
              
              
              
              
              
              
              
              $
              -
              
              $
              2Corporate
              
              
              
              
              
              
              
              
              7,924
              
              
              7,240EnerDel,
                  Inc.
              
              
              
              
              
              
              
              
              4,527
              
              
              -Ener1
                  Battery
              
              
              
              
              
              
              
              
              1,351
              
              
              22,530Ener1
                  Technologies Inc.
              
              
              
              
              
              
              
              
              1
              
              
              10EnerFuel
              
              
              
              
              
              
              
              
              49
              
              
              305NanoEner
              
              
              
              
              
              
              
              
              105
              
              
              68Total
                  assets
              
              
              
              
              
              
              
              $
              13,957
              
              $
              30,155
  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.




-8-





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 was 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 133") and EITF 00-19 "Accounting for Derivative Financial Instruments
      Indexed to and Potentially Settled in a Company's Own Stock ("EITF
      00-19").





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 was accrued at September 30, 2005 and no
      interest has been converted.




-9-





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. The number of common shares
      issuable under the Series A and Series B warrants issued in connection with
      the
      2005 Debentures are 4,267,500 and 2,845,000, respectively.





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.




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.




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 associated with the
      Series B Preferred Stock 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.




-10-




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”).




In
      connection with the issuances of is Series B Preferred Stock, Ener1 issued
      warrants to purchase up to 4,236,111 shares of common stock at an exercise
      price
      of $1.25 per share and warrants to purchase up to 4,236,111 shares of common
      stock at an exercise price of $1.50 per share. These warrants have a ten year
      term. Ener1 is not required to register the resale of the warrants or of the
      common stock issuable upon exercise of the warrants. The fair value 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.





EnerDel
      Series A Convertible Preferred Stock




In
      October 2004, Delphi Corporation purchased 8,000 shares of Non-Voting,
      Cumulative and Redeemable Series
      A Convertible Preferred Stock issued by EnerDel (“Series A Preferred Stock”)
      plus warrants to purchase Ener1 common stock for an aggregate purchase price
      of
      $8,000,000. The Series A Preferred Stock was convertible into 6,956,522 shares
      of Ener1 common stock until January 2005. No shares were converted.




As
      discussed in Note 8, Ener1 is accounting for the warrants and conversion option
      in accordance with SFAS 133.




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. In accordance with EITF 00-19,
      Ener1 accounted for the conversion option as a derivative under SFAS 133. When
      the term of the conversion 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 of the shares of Series A Preferred Stock on or
      before the 4th anniversary of the filing date of the certificate of designation
      for the Series A Preferred Stock, the holders will have the option to require
      EnerDel to redeem all of the Series A Preferred shares on 10 days notice. 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.




-11-




The
      following are the components of redeemable preferred stock as of September
      30,
      2005 (in thousands):


**Ener1**
              
              **EnerDel****Series
                  B**
              
              **Series
                  A**
              
              **Total**Face
                  value
              
              $
              15,250
              
              $
              8,000
              
              $
              23,250Less
                  fair value ofwarrant
                  derivative
              
              
              (5,514
              )
              
              (4,620
              )
              
              (10,134
              )Less
                  fair value ofconversion
                  option
              
              
              -
              
              
              (1,183
              )
              
              (1,183
              )Accumulated
                  accretionof
                  discounts
              
              
              1,328
              
              
              969
              
              
              2,297Cumulative
                  dividends
              
              
              1,001
              
              
              624
              
              
              1,625Carrying
                  value
              
              $
              12,065
              
              $
              3,790
              
              $
              15,855


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");·
            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”);·
            warrants
                to purchase common stock issued to Ener1 Group, Inc. in connection
                with
                the exchange of stock, notes and warrants in exchange for debt (the
                “Exchange Warrants”); and·
            options
                to purchase common stock issued to ITOCHU Corporation (“ITOCHU Options”)





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 and option agreements, Ener1
      determined the conversion features and the warrants and options 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 and options
      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.




-12-




The
      impact on the balance sheet as of September 30, 2005 and the statements of
      income for the nine months ended September 30, 2005 and 2004 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
            
            
            58,650Exchange
                Warrants
            
            
            16,600
            
            
            9,800
            
            
            6,800
            
            
            19,600
            
            
            11,000
            
            
            8,600Itochu
                stock options
            
            
            —
            
            
            —
            
            
            —
            
            
            13,957
            
            
            654
            
            
            13,303Total
            
            $
            111,547
            
            $
            76,185
            
            $
            45,958
            
            $
            130,157
            
            $
            65,862
            
            $
            84,167





(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 B 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.




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





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.




-13-




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.





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, 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.




-14-





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




**Amount
                Incurred****For
                Three Month Period**
            
            **Cumulative
                  Amount****Description
                  of**Disposal Activity
            
            **Expected
                  Liability**Of Exit Activity
            
            **Ended**
              **September
                30, 2005**
            
            **Incurred
                  As Of**September 30, 2005Personnel
                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.





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***





The
      consolidated financial statements for the three and nine months ended September
      30, 2004 and 2005 and related disclosures included in this Amendment No. 1
      to
      Quarterly Report on Form 10-QSB have been restated. 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 associated 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 Preferred Stock.  On
      January 5, 2006, Ener1 filed a Quarterly Report on Form 10-QSB for the three
      and
      nine months ended September 30, 2005 (the "September 2005 10-QSB") including
      restatements of Ener1's previously issued financial statements for the three
      and
      nine months ended September 30, 2004.





On
      March 2, 2006, Ener1 determined that it was necessary to restate the financial
      statements included in the September 2005 10-QSB for the three and nine months
      ended September 30, 2004 and 2005 in order to reflect additional gains and
      losses related to the classification of and accounting for (1) options to
      purchase Ener1's common stock issued to a business partner in July 2003 and
      (2)
      warrants to purchase Ener1's common stock issued to Ener1's majority stockholder
      in November 2003. The financial statements and other financial information
      included in this is Amendment No. 1 to the September 2005 10-QSB have been
      restated accordingly





Ener1
      had previously classified the value of these conversion features and warrants
      and options 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,
      or
      options as the case may be), the corresponding derivative liability will be
      reclassified as equity.




-15-





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




**Three
                  Months Ended****September
                  30, 2004****As
                  Previously****Reported**
              
              **Adjustment**
              
              
              
              **As
                  restated**Gross
                  profit
              
              $
              -
              
              $
              -
              
              
              
              
              $
              -Total
                  operating expenses
              
              
              2,538
              
              
              74
              
              
              (1
              )
              
              2,612Loss
                  from operations
              
              
              (2,538
              )
              
              
              
              
              
              
              
              (2,612
              )Other
                  income and (expense)Interest
              
              
              (666
              )
              
              (959
              )
              
              (2
              )
              
              (1,625
              )Equity
                  in loss of EnerStruct, Inc.
              
              
              (139
              )
              
              -
              
              
              
              
              
              (139
              )Other
              
              
              77
              
              
              -
              
              
              
              
              
              77Gain
                  on embedded derivative liability
              
              
              -
              
              
              6,467
              
              
              (3
              )
              
              6,467Total
                  other income (expense)
              
              
              (728
              )
              
              5,508
              
              
              
              
              
              4,780Net
                  income (loss) before minority interestand
                  discontinued operations
              
              
              (3,266
              )
              
              5,434
              
              
              
              
              
              2,168Minority
                  interest
              
              
              -
              
              
              -
              
              
              
              
              
              -Net
                  income (loss) from continuing operations
              
              
              (3,266
              )
              
              5,434
              
              
              
              
              
              2,168Loss
                  from discontinued operations
              
              
              (5
              )
              
              -
              
              
              
              
              
              (5
              )Net
                  income (loss)
              
              
              (3,271
              )
              
              5,434
              
              
              
              
              
              2,163Preferred
                  stock dividends
              
              
              -
              
              
              -
              
              
              
              
              
              -Net
                  income (loss) attributableto
                  common shareholders
              
              $
              (3,271
              )
              $
              5,434
              
              
              
              
              $
              2,163Net
                  income (loss) per share, basicContinuing
                  operations
              
              $
              (0.01
              )
              
              0.02
              
              
              
              
              $
              0.01Discontinued
                  operations
              
              $
              -
              
              
              -
              
              
              
              
              $
              -Net
                  income (loss) per share, dilutedContinuing
                  operations
              
              $
              (0.01
              )
              
              0.02
              
              
              
              
              $
              0.01Discontinued
                  operations
              
              $
              -
              
              
              -
              
              
              
              
              $
              -Weighted
                  average shares outstanding:


***(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)***




-16-


**Nine
                  Months Ended****September
                  30, 2004****As
                  Previously****Reported**
              
              **Adjustment**
              
              
              
              **As
                  restated**Gross
                  profit
              
              $
              31
              
              $
              -
              
              
              
              
              $
              31Total
                  operating expenses
              
              
              8,397
              
              
              221
              
              
              (1
              )
              
              8,618Loss
                  from operations
              
              
              (8,366
              )
              
              (221
              )
              
              
              
              
              (8,587
              )Other
                  income and (expense)Interest
              
              
              (1,143
              )
              
              (2,959
              )
              
              (2
              )
              
              (4,102
              )Equity
                  in loss of EnerStruct, Inc.
              
              
              (426
              )
              
              -
              
              
              
              
              
              (426
              )Other
              
              
              150
              
              
              -
              
              
              
              
              
              150Gain
                  on embedded derivative liability
              
              
              -
              
              
              84,167
              
              
              (3
              )
              
              84,167Total
                  other income (expense)
              
              
              (1,419
              )
              
              81,208
              
              
              
              
              
              79,789Net
                  income (loss) before minority interestand
                  discontinued operations
              
              
              (9,785
              )
              
              80,987
              
              
              
              
              
              71,202Minority
                  interest
              
              
              -
              
              
              -
              
              
              
              
              
              -Net
                  income (loss) from continuing operations
              
              
              (9,785
              )
              
              80,987
              
              
              
              
              
              71,202-Loss
                  from discontinued operations
              
              
              (7
              )
              
              -
              
              
              
              
              
              (7
              )Net
                  income (loss)
              
              
              (9,792
              )
              
              80,987
              
              
              
              
              
              71,195Preferred
                  stock dividends
              
              
              -
              
              
              -
              
              
              
              
              
              -Net
                  income (loss) attributableto
                  common shareholders
              
              $
              (9,792
              )
              $
              80,987
              
              
              
              
              $
              71,195Net
                  income (loss) per share, basicContinuing
                  operations
              
              $
              (0.03
              )
              
              0.24
              
              
              
              
              $
              0.21Discontinued
                  operations
              
              $
              -
              
              
              -
              
              
              
              
              $
              -Net
                  income (loss) per share, dilutedContinuing
                  operations
              
              $
              (0.03
              )
              
              0.20
              
              
              
              
              $
              0.17Discontinued
                  operations
              
              $
              -
              
              
              -
              
              
              
              
              $
              -


***(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)***




-17-




**Three
                  Months Ended****September
                  30, 2005****As
                  Previously****Reported**
              
              **Adjustment**
              
              
              
              **As
                  restated**Gross
                  profit
              
              $
              25
              
              $
              -
              
              
              
              
              $
              25Total
                  operating expenses
              
              
              4,001
              
              
              -
              
              
              
              
              
              4,001Loss
                  from operations
              
              
              (3,976
              )
              
              -
              
              
              
              
              
              (3,976
              )Other
                  income and (expense)Interest
              
              
              (2,566
              )
              
              -
              
              
              
              
              
              (2,566
              )Equity
                  in loss of EnerStruct, Inc.
              
              
              (59
              )
              
              -
              
              
              
              
              
              (59
              )Other
              
              
              83
              
              
              -
              
              
              
              
              
              83Gain
                  on embedded derivative liability
              
              
              (26,101
              )
              
              (3,412
              )
              
              (1
              )
              
              (29,513
              )Total
                  other income (expense)
              
              
              (28,643
              )
              
              (3,412
              )
              
              
              
              
              (32,055
              )Net
                  income (loss) before minority interestand
                  discontinued operations
              
              
              (32,619
              )
              
              (3,412
              )
              
              
              
              
              (36,031
              )Minority
                  interest
              
              
              -
              
              
              -
              
              
              
              
              
              -Net
                  income (loss) from continuing operations
              
              
              (32,619
              )
              
              (3,412
              )
              
              
              
              
              (36,031
              )-Loss
                  from discontinued operations
              
              
              -
              
              
              -
              
              
              
              
              
              -Net
                  income (loss)
              
              
              (32,619
              )
              
              (3,412
              )
              
              
              
              
              (36,031
              )Preferred
                  stock dividends
              
              
              (1,024
              )
              
              -
              
              
              
              
              
              (1,024
              )Net
                  income (loss) attributableto
                  common shareholders
              
              $
              (33,643
              )
              $
              (3,412
              )
              
              
              
              $
              (37,055
              )Net
                  income (loss) per share, basicContinuing
                  operations
              
              $
              (0.09
              )
              $
              (0.02
              )
              
              
              
              $
              (0.11
              )Discontinued
                  operations
              
              $
              -
              
              $
              -
              
              
              
              
              $
              -Net
                  income (loss) per share, dilutedContinuing
                  operations
              
              $
              (0.09
              )
              $
              (0.02
              )
              
              
              
              $
              (0.11
              )Discontinued
                  operations
              
              $
              -
              
              $
              -
              
              
              
              
              $
              -Weighted
                  average shares outstanding:Weighted
                  average shares outstanding - Basic
              
              
              347,456
              
              
              
              
              
              
              
              
              347,456Weighted
                  average shares outstanding - Diluted
              
              
              347,456
              
              
              
              
              
              
              
              
              347,456


***(1)
      Change due to the gain on the derivative liabilities not previously
      recorded***




-18-


**Nine
                  Months Ended****September
                  30, 2004****As
                  Previously****Reported**
              
              **Adjustment**
              
              
              
              **As
                  restated**Gross
                  profit
              
              $
              31
              
              $
              -
              
              
              
              
              $
              31Total
                  operating expenses
              
              
              8,397
              
              
              221
              
              
              (1
              )
              
              8,618Loss
                  from operations
              
              
              (8,366
              )
              
              (221
              )
              
              
              
              
              (8,587
              )Other
                  income and (expense)Interest
              
              
              (1,143
              )
              
              (2,959
              )
              
              (2
              )
              
              (4,102
              )Equity
                  in loss of EnerStruct, Inc.
              
              
              (426
              )
              
              -
              
              
              
              
              
              (426
              )Other
              
              
              150
              
              
              -
              
              
              
              
              
              150Gain
                  on embedded derivative liability
              
              
              -
              
              
              84,167
              
              
              (3
              )
              
              84,167Total
                  other income (expense)
              
              
              (1,419
              )
              
              81,208
              
              
              
              
              
              79,789Net
                  income (loss) before minority interestand
                  discontinued operations
              
              
              (9,785
              )
              
              80,987
              
              
              
              
              
              71,202Minority
                  interest
              
              
              -
              
              
              -
              
              
              
              
              
              -Net
                  income (loss) from continuing operations
              
              
              (9,785
              )
              
              80,987
              
              
              
              
              
              71,202-Loss
                  from discontinued operations
              
              
              (7
              )
              
              -
              
              
              
              
              
              (7
              )Net
                  income (loss)
              
              
              (9,792
              )
              
              80,987
              
              
              
              
              
              71,195Preferred
                  stock dividends
              
              
              -
              
              
              -
              
              
              
              
              
              -Net
                  income (loss) attributableto
                  common shareholders
              
              $
              (9,792
              )
              $
              80,987
              
              
              
              
              $
              71,195Net
                  income (loss) per share, basicContinuing
                  operations
              
              $
              (0.03
              )
              
              0.24
              
              
              
              
              $
              0.21Discontinued
                  operations
              
              $
              -
              
              
              -
              
              
              
              
              $
              -Net
                  income (loss) per share, dilutedContinuing
                  operations
              
              $
              (0.03
              )
              
              0.20
              
              
              
              
              $
              0.17Discontinued
                  operations
              
              $
              -
              
              
              -
              
              
              
              
              $
              -


***(1)
      Change due to the gain on the derivative liabilities not previously
      recorded***




-19-


***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 sheets as of September 30, 2005 and 2004. The following tables set
      forth
      the effects of the restatement adjustments on Ener1's 2005 and 2004 consolidated
      balance sheet (dollars in thousands):




**As
                  of September 30, 2005****As
                  Previously**
              
              
              
              
              
              **September
                  30,****Reported**
              
              **Adjustment**
              
              
              
              **As
                  restated****ASSETS**Total
                  current assets
              
              $
              7,760
              
              
              
              
              
              
              
              $
              7,760Property
                  and equipment, net
              
              
              2,944
              
              
              
              
              
              
              
              
              2,944Investment
                  in EnerStruct, Inc.
              
              
              899
              
              
              
              
              
              
              
              
              899Deferred
                  debenture costs
              
              
              2,099
              
              
              
              
              
              
              
              
              2,099Other
              
              
              255
              
              
              
              
              
              
              
              
              255Total
                  assets
              
              $
              13,957
              
              $
              -
              
              
              
              
              $
              13,957**LIABILITIES
                  AND STOCKHOLDERS' DEFICIT**Current
                  liabilitiesDerivative
                  liability on conversion features of securities
              
              
              66,385
              
              
              9,800
              
              
              (1
              )
              
              76,185Other
                  current liabilities
              
              
              1,929
              
              
              -
              
              
              
              
              
              1,929Total
                  current liabilities
              
              
              68,314
              
              
              9,800
              
              
              
              
              
              78,114Long-term
                  debt
              
              
              73
              
              
              -
              
              
              
              
              
              73$19,700
                  convertible debentures
              
              
              6,898
              
              
              -
              
              
              
              
              
              6,898$14,225
                  convertible debentures
              
              
              3,694
              
              
              -
              
              
              
              
              
              3,694Redeemable
                  convertible preferred stock:EnerDel,
                  Inc. Series A Preferred
              
              
              3,790
              
              
              -
              
              
              
              
              
              3,790Series
                  B Preferred
              
              
              12,065
              
              
              -
              
              
              
              
              
              12,065Total
                  liabilities
              
              
              94,834
              
              
              9,800
              
              
              
              
              
              104,634Total
                  stockholders' deficit
              
              
              (80,877
              )
              
              (9,800
              )
              
              
              
              
              (90,677
              )Total
                  liabilities and stockholders' deficit
              
              $
              13,957
              
              $
              -
              
              
              
              
              $
              13,957


***(1)
      Change due to the recording of a liability for warrants determined to be a
      derivative***




-20-




**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)***





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.




-21-


**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.





**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.





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 and increased by
      $1.1
      million or 104% from $1 million to $2.1 million, when compared to the same
      periods in 2004.




-22-





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 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.




Other
      Income and Expense




Other
      expense increased by $37 million and other income decreased by $41 million
      for
      the three and nine month periods ended September 30, 2005. This is primarily
      due
      to (1) a loss of $30 million on freestanding derivatives and
      embedded derivatives in conversion features of securities due to decreases
      in our stock price in the three month period ended September 30, 2005 as
      compared a gain of $6 million during the same prior year period; and (2)
      a $46 million gain from freestanding derivatives and embedded derivatives
      in conversion features of securities in the nine month period ended September
      30, 2005 compared to a gain of $84 million for the same prior year
      period, also due to decreases in our stock price.




**Liquidity
      and Capital Resources**




As
      of December 31, 2004, we had a working capital deficit of $100million. During
      the nine months ended September 30, 2005, our working capital increased by
      $30
      million, resulting in negative working capital of $70 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 and other current assets, offset by $1.6
      million in accounts payable, accrued expenses and accrued exit costs and $76
      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.




-23-





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.




-24-




**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.





**Item
      5. Other Information**





The
      consolidated financial statements for the three and nine months ended September
      30, 2004 and 2005 and related disclosures included in this Amendment No. 1
      to
      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 the three and nine months ended
      September 30, 2004 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. On
      January 5, 2006, Ener1 filed a Quarterly Report on Form 10-QSB for the three
      and
      nine months ended September 30, 2005 (the "September 2005 10-QSB") including
      restatements of Ener1's previously issued financial statements for the three
      and
      nine months ended September 30, 2004.





On
      March 2, 2006, Ener1 determined that it was necessary to restate the financial
      statements included in the September 2005 10-QSB for the three and nine months
      ended September 30, 2004 and 2005 in order to reflect additional gains and
      losses related to the classification of and accounting for (1) options to
      purchase Ener1's common stock issued to a business partner in July 2003 and
      (2)
      warrants to purchase Ener1's common stock issued to Ener1's majority stockholder
      in November 2003. In accordance with Statement of Financial Accounting Standard
      No. 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," Ener1 determined that these
      options and warrants were derivatives because there was no explicit cap on
      the
      amount of shares that could be issued pursuant to the warrant and option
      agreements. The financial statements and other financial information included
      in
      this is Amendment No. 1 to the September 2005 10-QSB have been restated
      accordingly. Ener1's
      shareholders should no longer rely on Ener1's previously filed financial
      statements for the three and nine months ended September 30, 2004 and 2005.
      These matters have been discussed by Ener1's Audit Committee with Malone &
Bailey, the independent registered public accounting firm that reviewed Ener1's
      financial statements included in the September 2005 10-QSB.




-25-





**Item
      6. - E****xhibits**




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
  -26-


**ENER1,
      INC.** **AND SUBSIDIARIES**




**SIGNATURES**




Pursuant
      to the requirements of the Securities Exchange Act of 1934, the registrant
      has
      duly caused this Amendment No. 1 to Quarterly Report on Form 10-QSB to be signed
      on its behalf of the undersigned thereunto duly authorized.





**ENERI,
              INC.**Dated: March
              3, 2006
            By:
            /s/ RONALD
              STEWARTRonald
                Stewart
              Chief
                Executive Officer
              (Principal Executive
                Officer)




Dated: March
                3, 2006
              By:
              /s/ GERARD
                HERLIHYGerard
                  Herlihy
                Chief
                  Financial Officer
                (Principal Financial and Accounting
                  Officer)
  -27-