UNITED
      STATES


SECURITIES
      AND EXCHANGE COMMISSION


Washington,
      D.C. 20549





FORM
      10-QSB





QUARTERLY
      REPORT UNDER SECTION 13 OR 15(d)


OF
      THE
      SECURITIES EXCHANGE ACT OF 1934





For
      the
      quarterly period ended **March 31, 2006**





Commission
      File Number **0-21138**





**ENER1,
      INC.**


(Exact
      name of registrant as specified in its charter)





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





**500
        West Cypress Creek Road-Suite 100**
 **Ft.
        Lauderdale, Florida 33309**
 (Address
        of principal executive offices) (Zip Code)
 
 **(954)
        556-4020**
 (Registrant’s
        telephone number, including area code)
 
 (Former
        name, former address, and former fiscal year if changed since last
        report)
 
 Indicate
        by check mark whether the registrant (1) has filed all reports required to
        be
        filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
        the
        preceding 12 months (or for such shorter period that the registrant was required
        to file such reports), and (2) has been subject to such filing requirements
        for
        the past 90 days.
 Yes
x
        Noo
 
 Indicate
        by check mark whether registrant is a shell company (as defined in Rule 12b-2
        of
        the Exchange Act)
 Yes
o
        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**
              **Outstanding
                  as of May 18, 2006**Common
                  Stock, par value $.01 per share
              402,279,969
 
 
 
 
 Transitional
        Small Business Format (check one): Yes o No x
 
  1


ENER1,
      INC. AND SUBSIDIARIES





Form
      10-QSB for the Quarter Ended March 31, 2006





INDEX


PagePart
                I
            FINANCIAL
                INFORMATIONItem
                1
            Financial
                StatementsCondensed
                Consolidated Balance Sheet(unaudited)
                as of March 31, 2006
            4Condensed
                Consolidated Statements ofOperations
                (unaudited) for the threemonths
                ended March 31, 2006 and 2005
            5Condensed
                Consolidated Statements ofCash
                Flows (unaudited) for the threemonths
                ended March 31, 2006 and 2005
            6Notes
                to Condensed ConsolidatedFinancial
                Statements (unaudited)
            7Item
                2
            Management's
                Discussion and Analysis ofFinancial
                Condition and Results ofOperations
            24Item
                3
            Controls
                and Procedures
            29Part
                II
            OTHER
                INFORMATIONItem
                1
            Legal
                Proceedings
            30Item
                2
            Unregistered
                Sales of Equity Securities and Use of Proceeds
            30Item
                6
            Exhibits
            32Signatures
            .
            34








2


Explanatory
        Note
 
 
 The
        consolidated financial statements for the three months ended March 31, 2005
        and
        related disclosures in this Quarterly Report on Form 10-QSB have been restated
        in accordance with the changes described below.
 
 The
        balance sheet as of December 31, 2005 has been restated to classify the Series
        A
        Preferred Stock totaling $4,967,000 and the Series B Preferred Stock totaling
        $13,188,000 as temporary equity in accordance with EITF D-98, because both
        the
        Series A Preferred Stock and the Series B Preferred Stock contain conditional
        redemption features.  We previously reported the Series A Preferred Stock
        and Series B Preferred Stock as long-term liabilities.
 
 The
        Company previously reported diluted earnings per share for the quarter ended
        March 31, 2005 of $0.06 per share. Weighted average shares outstanding -
        diluted
        were previously reported as 417,907,000 shares at March 31, 2005. Diluted
        earnings per share are calculated by dividing the Company’s net income for the
        applicable period by the number of shares of the Company's common stock
        outstanding on a fully diluted basis. The previously reported diluted earnings
        per share did not reflect adjustments required to be made to the numerator
        of
        the fraction used in this calculation, specifically, excluding from net income
        the gain on derivative liability reported for the applicable period. Making
        these adjustments to the calculation resulted in the determination that the
        Company's Senior Secured Convertible Debentures due 2009 were dilutive
        securities and that the shares of Company common stock underlying the debentures
        should be considered outstanding for purposes of calculating diluted earnings
        per share. The restated diluted earnings per share for the quarter ended
        March
        31, 2005 are $0.02 per share. The restated weighted average shares outstanding
        -
        diluted are 436,379,000 shares at March 31, 2005.











3





ENER1,
      INC. AND SUBSIDIARIES


CONDENSED
      CONSOLIDATED BALANCE SHEET


(Unaudited)


(In
      thousands except share data)





**March
                  31,**
              
              **December
                  31,****2006**
              
              **2005****Restated****ASSETS**Current
                  assetsCash
                  and equivalents
              
              $
              890
              
              $
              2,306Prepaid
                  expenses and other current assets
              
              
              639
              
              
              189Due
                  from related parties
              
              
              -
              
              
              157Total
                  current assets
              
              
              1,529
              
              
              2,652Property
                  and equipment, net
              
              
              2,996
              
              
              3,042Investment
                  in EnerStruct, Inc.
              
              
              658
              
              
              805Deferred
                  debenture costs, net of amortizationof
                  $2,390 and $2,082
              
              
              3,441
              
              
              3,748Other
              
              
              74
              
              
              202Total
                  assets
              
              $
              8,698
              
              $
              10,449**LIABILITIES
                  AND STOCKHOLDERS' DEFICIT**Current
                  liabilitiesCurrent
                  portion of installment loan
              
              $
              25
              
              $
              24Accounts
                  payable and accrued expenses
              
              
              4,349
              
              
              3,276Derivative
                  liability
              
              
              26,952
              
              
              54,410Total
                  current liabilities
              
              
              31,326
              
              
              57,710Long-term
                  portion of installment loan
              
              
              60
              
              
              67$19,700
                  convertible debentures, net of discount of $10,832 and
                  $11,817
              
              
              8,868
              
              
              7,883$14,225
                  convertible debentures, net of discount of $9,355 and
                  $9,956
              
              
              4,870
              
              
              4,269Total
                  liabilities
              
              
              45,124
              
              
              69,929Minority
                  interest
              
              
              -
              
              
              -Commitments
                  and contingenciesRedeemable
                  convertible preferred stock:EnerDel,
                  Inc. Series A Preferred, $.01 par value, 500,000 shares
                  authorized,8,000
                  shares issued and outstanding; liquidation preference
                  $8,000
              
              
              5,563
              
              
              4,967Series
                  B Preferred, $.01 par value, 180,000 shares authorized,152,500
                  shares issued and outstanding; liquidation preference
                  $15,250
              
              
              13,882
              
              
              13,188**STOCKHOLDERS'
                  DEFICIT**Common
                  Stock, $.01 par value, 750,000,000 shares authorized392,104,469
                  and 347,455,751 issued and outstanding, respectively
              
              
              3,921
              
              
              3,475Paid
                  in capital
              
              
              74,395
              
              
              72,185Accumulated
                  deficit
              
              
              (134,187
              )
              
              (153,295
              )Total
                  stockholders' deficit
              
              
              (55,871
              )
              
              (77,635
              )Total
                  liabilities and stockholders' deficit
              
              $
              8,698
              
              $
              10,449


See
      notes
      to condensed consolidated financial statements.


4


ENER1,
      INC. AND SUBSIDIARIES


CONDENSED
      CONSOLIDATED STATEMENTS OF OPERATIONS


(Unaudited)


(In
      thousands except share data)





**Three
                  Months Ended****March
                  31,****2006**
              
              **2005****Restated**Net
                  sales
              
              $
              18
              
              $
              21Cost
                  of sales
              
              
              -
              
              
              -Gross
                  profit
              
              
              18
              
              
              21Operating
                  expensesManufacturing
                  pre-production costs
              
              
              -
              
              
              793General
                  and administrative
              
              
              3,385
              
              
              2,768Depreciation
              
              
              101
              
              
              302Research
                  and development
              
              
              919
              
              
              1,952Total
                  operating expenses
              
              
              4,405
              
              
              5,815Net
                  Loss from operations
              
              
              (4,387
              )
              
              (5,794
              )Other
                  income and (expense)Interest
                  expense
              
              
              (2,956
              )
              
              (2,257
              )Registration
                  delay payment
              
              
              (871
              )
              
              -Equity
                  in loss of EnerStruct, Inc.
              
              
              (147
              )
              
              (169
              )Other
              
              
              10
              
              
              52Gain
                  on derivative liability
              
              
              27,458
              
              
              34,588Total
                  other income (expense)
              
              
              23,494
              
              
              32,214Income
                  before income taxes
              
              
              19,107
              
              
              26,420Income
                  taxes
              
              
              -
              
              
              -Net
                  income before minority interest
              
              
              19,107
              
              
              26,420Minority
                  interest
              
              
              -
              
              
              643Net
                  income
              
              
              19,107
              
              
              27,063Preferred
                  stock dividends
              
              
              (1,289
              )
              
              (1,210
              )Net
                  income attributableto
                  common shareholders
              
              $
              17,818
              
              $
              25,853Net
                  income per share, basic
              
              $
              0.05
              
              $
              0.07Net
                  income per share, diluted
              
              $
              (0.01
              )
              $
              0.02Weighted
                  average shares outstanding:Weighted
                  average shares outstanding - Basic
              
              
              368,458
              
              
              347,456Weighted
                  average shares outstanding - Diluted
              
              
              420,165
              
              
              436,379





See
      notes
      to condensed consolidated financial statements.


5





ENER1,
      INC. AND SUBSIDIARIES


CONDENSED
      CONSOLIDATED STATEMENTS OF CASH FLOWS


(Unaudited)


(In
      thousands except share data)





**Three
                  Months Ended****March
                  31,****2006**
              
              **2005****Restated**Net
                  income
              
              $
              19,107
              
              $
              27,063Adjustments
                  to reconcile net loss to cash used by operating
                  activities:Gain
                  on derivative liability
              
              
              (27,458
              )
              
              (34,588
              )Minority
                  interest
              
              
              -
              
              
              (643
              )Accretion
                  of discount on debentures
              
              
              1,586
              
              
              1,156Non
                  cash interest expense related to financing costs
              
              
              308
              
              
              245Depreciation
              
              
              101
              
              
              302Compensation
                  expense for stock options
              
              
              385
              
              
              282Equity
                  in loss from investment in Enerstruct
              
              
              147
              
              
              169Assets
                  transferred under Warrant Exercise Agreement
              
              
              219
              
              
              -Changes
                  in current assets and liabilities
              
              
              690
              
              
              (324
              )Net
                  cash used in operating activities
              
              
              (4,915
              )
              
              (6,338
              )Investing
                  Activities:Capital
                  expenditures
              
              
              (55
              )
              
              (153
              )Net
                  cash used in investing activities
              
              
              (55
              )
              
              (153
              )Financing
                  Activities:Proceeds
                  from issuance of senior secured debenture, net of costs
              
              
              -
              
              
              13,134Repayment
                  of bank installment loan
              
              
              (7
              )
              
              (6
              )Proceeds
                  from exercise of warrants
              
              
              3,560
              
              
              -Net
                  cash provided by financing activities
              
              
              3,553
              
              
              13,128Net
                  increase in cash and equivalents
              
              
              (1,417
              )
              
              6,637Cash
                  and cash equivalents beginning balance
              
              
              2,306
              
              
              14,091Cash
                  and cash equivalents ending balance
              
              $
              889
              
              $
              20,728


See
      notes
      to condensed consolidated financial statements.


6


ENER1,
        INC. AND SUBSIDIARIES
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS
 
 1.    
        BASIS OF PRESENTATION
 
 The
        accompanying unaudited condensed consolidated financial statements for Ener1,
        Inc. (“Ener1” or the “Company”) have been prepared in accordance with accounting
        principles generally accepted in the United States of America 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
        (the
        "Exchange Act"). Accordingly, they do not include all of the information
        and
        footnotes required by accounting principles generally accepted in the United
        States of America 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 months ended March 31, 2006 are not necessarily indicative
        of the results that may be expected for the year ending December 31, 2006.
        The
        audited financial statements at December 31, 2005, which are included in
        the
        Company’s Annual Report on Form 10-KSB for the year ended December 31, 2005,
        should be read in conjunction with these condensed consolidated financial
        statements.
 
 2.    
        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 $134,000,000 as of March 31, 2006. It is
        likely that Ener1's operations will continue to incur negative cash flows
        through December 31, 2006 and 2007 and additional financing will be required
        to
        fund Ener1's planned operations through that time. If additional financing
        is
        not obtained, such a condition will give rise to substantial doubt about
        Ener1's
        ability to continue as a going concern. 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.
 
 During
        the three months ended March 31, 2006, the Company obtained interim operating
        funding from its controlling shareholder through the exercise of certain
        warrants. The Company requires additional interim working capital financing
        until it raises permanent capital. The Company plans to raise substantial
        additional capital during 2006 from government sources including grants or
        public financing, or from strategic or financial investors. If the Company
        is
        unable to raise adequate permanent capital for its current plan of operations,
        it would have to curtail its research and development activities and adopt
        an
        alternative operating model to continue as a going concern.
 
 3.    
        NATURE OF BUSINESS AND DISCONTINUED OPERATIONS
 
 Nature
        of
        Business
 
 Ener1,
        Inc. is a Florida corporation, founded in 1985 and headquartered in Fort
        Lauderdale, Florida. Ener1’s primary lines of business consist of the
        development and marketing of advanced Lithium-ion (“Li-ion”) batteries, fuel
        cells and nanotechnology-related manufacturing processes and materials.
 
 In
        January 2002, Ener1 Group, Inc. (“Ener1 Group”) acquired a majority interest in
        the Company and owned approximately 90% of the outstanding common stock of
        the
        Company as of March 31, 2006. Prior to 2002, the Company manufactured set
        top
        boxes and other digital entertainment products. These operations were conducted
        through the Company’s Digital Media Technologies Division after 2002, and those
        activities were discontinued as an operation in 2003. The Company sold
        substantially all of the remaining assets of the Digital Media Technologies
        Division to TVR Communications LLC (“TVRC”) in return for a 5% membership
        interest in TVRC, which was valued at $115,000. On March 30, 2006, the Company
        transferred its 5% membership interest in TVRC to Ener1 Group at cost, which
        approximates fair market value, as partial consideration for the exercise
        of
        certain warrants prior to their expiration. See Note 18.
 
 In
        August
        2003, the Company formed a joint venture company, named EnerStruct, Inc.,
        with
        ITOCHU Corporation of Japan to pursue technology development and marketing
        opportunities for lithium batteries in Japan. The Company and ITOCHU have
        each
        licensed to EnerStruct some of their respective battery technologies for
        use in
        Japanese markets.
 
 7
 The
        Company’s operations are conducted by Ener1 and three of its subsidiaries:
        EnerDel, Inc. (“EnerDel”), EnerFuel Inc. (EnerFuel”) and NanoEner, Inc.
        (“NanoEner”). Certain real estate and equipment assets used by the Company are
        held by Ener1 Battery Company (“Ener1 Battery” or the “Battery
        Company”)
 
 On
        October 20, 2004, the Company and a unit of Delphi Corporation each contributed
        Li-ion battery related assets to EnerDel. The Company owns 80.5% of EnerDel’s
        outstanding common stock, and Delphi owns 19.5% of EnerDel’s outstanding common
        stock and 8,000 shares of EnerDel’s Series A Preferred Stock. All of the
        Company’s Li-ion battery business has been conducted through EnerDel since its
        formation. The Company formed NanoEner on April 2, 2004 to develop new markets
        and applications for Ener1’s proprietary technologies to manufacture
        nanomaterials. The Company formed EnerFuel on October 29, 2004 to conduct
        the
        Company’s fuel cell related operations.
 
 4. RESTATEMENT
 
 The
        consolidated financial statements for the three months ended March 31, 2005
        and
        related disclosures in this Quarterly Report on Form 10-QSB have been restated
        in accordance with the changes described below.
 
 The
        balance sheet as of December 31, 2005 has been restated to classify the Series
        A
        Preferred Stock totaling $4,967,000 and the Series B Preferred Stock totaling
        $13,188,000 as temporary equity in accordance with EITF D-98, because both
        the
        Series A Preferred Stock and the Series B Preferred Stock contain conditional
        redemption features.  We previously reported the Series A Preferred Stock
        and Series B Preferred Stock as long-term liabilities.
 
 The
        Company previously reported diluted earnings per share for the quarter ended
        March 31, 2005 of $0.06 per share. Weighted average shares outstanding -
        diluted
        were previously reported as 417,907,000 shares at March 31, 2005. Diluted
        earnings per share are calculated by dividing the Company’s net income for the
        applicable period by the number of shares of the Company's common stock
        outstanding on a fully diluted basis. The previously reported diluted earnings
        per share did not reflect adjustments required to be made to the numerator
        of
        the fraction used in this calculation, specifically, excluding from net income
        the gain on derivative liability reported for the applicable period. Making
        these adjustments to the calculation resulted in the determination that the
        Company's Senior Secured Convertible Debentures due 2009 were dilutive
        securities and that the shares of Company common stock underlying the debentures
        should be considered outstanding for purposes of calculating diluted earnings
        per share. The restated diluted earnings per share for the quarter ended
        March
        31, 2005 are $0.02 per share. The restated weighted average shares outstanding
        -
        diluted are 436,379,000 shares at March 31, 2005.
  8
  The
        impact of the revisions to the earnings or loss per share for the quarter
        ended
        March 31, 2005 is as follows:
 
 **As
                      Previously Reported**
                  
                  **Adjustment**
                  
                  
                  
                  **As
                      Restated**Net
                      income from continuing operations, basic and dilutedBasic
                      net income per share
                  
                  $
                  0.07
                  
                  
                  
                  
                  
                  
                  
                  $
                  0.07Diluted
                      net income per share
                  
                  $
                  0.06
                  
                  $
                  (0.04
                  )
                  
                  (a)
                  
                  $
                  0.02Net
                      income from discontinued operations, basic and dilutedBasic
                      net income per share
                  
                  $
                  -
                  
                  
                  
                  
                  
                  
                  
                  $
                  -Diluted
                      net income per share
                  
                  $
                  -
                  
                  
                  
                  
                  
                  
                  
                  $
                  -Weighted
                      average shares outstanding (in 000's):Weighted
                      average shares outstanding - Basic
                  
                  
                  347,456
                  
                  
                  -
                  
                  
                  
                  
                  
                  347,456Weighted
                      average shares outstanding - Diluted
                  
                  
                  417,907
                  
                  
                  18,472
                  
                  
                  (b)
                  
                  
                  436,379
 (a)
                *To
                    reflect diluted earnings per share based as adjusted for derivative
                    gains
                    in the numerator of the**computation
                    and increased diluted shares outstanding .*(b)
                *To
                    reflect additional diluted shares outstanding from convertible
                    securities*
 5.
        SEGMENT REPORTING
 
 As
        of
        March 31, 2006, the Company is organized based upon the following segments:
        battery, fuel cell and nanotechnology. The battery business develops and
        markets
        advanced lithium batteries. The fuel cell business develops and markets fuel
        cells and fuel cell systems. The nanotechnology business is developing
        nanotechnology related manufacturing processes and materials.
 
 The
        accounting policies of the segments are the same as those described in the
        “Summary of Significant Accounting Policies.” Transactions between segments,
        consisting principally of product sales and purchases, are recorded at the
        consummated sales price. The Company determines reportable segments based
        on the
        way management organizes segments for decision making and performance assessment
        purposes. The Company regularly reviews the performance of its segments and
        allocates resources to them based on anticipated future
        contribution.
 
 9
 **Three
                    Months Ended****March
                    31,****2006**
                
                **2005****Net
                    sales**Battery
                    business
                
                $
                -
                
                $
                -Fuel
                    Cell business
                
                
                18
                
                
                15Nanotechnology
                
                
                -
                
                
                6Total
                    Net Sales
                
                $
                18
                
                $
                21**Net
                    income (loss)**Corporate
                
                
                21,266
                
                
                30,244Battery
                    business
                
                
                (1,330
                )
                
                (2,623
                )Fuel
                    Cell business
                
                
                (608
                )
                
                (270
                )Nanotechnology
                
                
                (221
                )
                
                (288
                )Net
                    income (loss)
                
                $
                19,107
                
                $
                27,063**Assets**Corporate
                
                
                5,902
                
                
                17,612Battery
                    business
                
                
                2,664
                
                
                22,857Fuel
                    Cell business
                
                
                120
                
                
                8Nanotechnology
                
                
                12
                
                
                6Total
                    assets
                
                $
                8,698
                
                $
                40,483
 
 6. 
        $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 March 31, 2006,
        the
        conversion price was $1.23. Ener1 may require that a specified amount of
        the
        principal of the 2004 Debentures be converted if certain conditions are
        satisfied for a period of 22 consecutive trading days.
 
 During
        2004, a holder of the 2004 Debentures converted $300,000 of principal into
        common shares. The conversion was accounted for by debiting the principal
        amount
        of the 2004 Debentures and crediting common stock and additional paid in
        capital
        by this amount. Ener1 also adjusted the conversion option derivative
        to its fair value immediately prior to conversion through adjustments to
        gain
        (loss) on derivative liability and then reduced the derivative liability
        by the
        proportionate amount of principal converted by crediting paid in
        capital.
 
 Interest
        is due quarterly. All or a portion of the accrued and unpaid interest may
        be
        converted at the option of the debenture holder at any time under the same
        conversion terms as the principal. Interest expense was $738,000 and $661,000
        for the three months ended March 31, 2006 and 2005, respectively. All interest
        was paid. Through March 31, 2006, $262,000 of interest has been converted.
  The
        initial interest rate was 5%, subject to increases to 7.5% if Ener1 did not
        achieve all of the specific milestones set forth in the 2004 Debentures by
        180
        days following the date of issuance of the 2004 Debentures and to 15% if
        Ener1
        did not achieve all of the milestones within 365 days after issuance of the
        2004
        Debentures. The milestones were as follows: (1) the registration statement
        is
        available to cover resales of such shares or such shares may be immediately
        sold
        to the public under Rule 144(k); (2) the Company’s common stock is listed on the
        NASDAQ ® National
        Market, NASDAQ ® SmallCap
        Market or the New York Stock Exchange and trading on the stock has not been
        suspended; (3) an Event of Default (as defined in the 2004 Debentures) or
        an
        event that, with the passage of time or giving of notice, would constitute
        an
        Event of Default, shall not have occurred and be continuing; and (4) the
        closing
        bid price for the common stock shall be greater than $1.75 (subject to
        adjustment for stock splits, stock dividends and similar events). As a result
        of
        Ener1’s failure to achieve all of the milestones except the milestone related to
        Events of Default and the registration of the resale of the underlying shares,
        the interest rate was increased to 7.5% as of July 19, 2004 and 15% as of
        January 30, 2005.
 
 10
 From
        January 20, 2007 to January 20, 2008, Ener1 may prepay some or all of the
        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 all of the
        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 10). 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 plus accrued interest.
 
 Ener1
        is required
        under the terms of the 2004 Debentures agreements to register the resale
        of the
        common stock underlying the debentures and associated warrants. If the
        registration statements are not available for use, Ener1 is required to make
        certain payments to the purchasers of the 2004 Debentures (the "registration
        delay payments"). The registration delay p ayments
        accrue at the rate of 1.5% of principal or approximately $295,000 per month
        until January 20, 2006, at which time the obligation to maintain the
        effectiveness of the resale registration statement for the common stock
        underlying the 2004 Debentures and associated warrants ends. The registration
        statements became unavailable for use in November 2005, and registration
        delay
        payments of $591,000 had accrued through the period ending January 20, 2006
        and
        were outstanding at March 31, 2006. A holder of the 2004 Debentures has demanded
        payment of the registration delay payments, but has not declared an event
        of
        default for non-payment of such amounts under the applicable agreement, and
        the
        Company is negotiating terms for extended payment.
 
 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 March 31, 2006, 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.
 
 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").
 
 7. 
        $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 $13,134,000 after direct placement costs of $1,091,000.
        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.
 
 Ener1
        is
        required under the terms of the 2005 Debentures agreements to register the
        resale of the common stock underlying the debentures and associated warrants
        and
        maintain the listing or
        quotation of its common stock on the
        OTC
        Bulletin Board, the NASDAQ ® National
        Market, NASDAQ ® SmallCap
        Market or the New York Stock Exchange. If the registration statements are
        not
        available for use or Ener1’s common stock is not listed or quoted on the OTC
        Bulletin Board, the NASDAQ ® National
        Market, NASDAQ ® SmallCap
        Market or the New York Stock Exchange, Ener1 is required to make certain
        payments to the purchasers of the 2005 Debentures (the "registration delay
        payments"). Registration
        delay payments accrue at a fixed rate of $213,375 per month until the 2005
        Debenture holders are able to use the resale registration statement and until
        Ener1’s common stock is quoted on the OTC Bulletin Board or other exchange. The registration
        statements became unavailable for use in November 2005, and the Company’s stock
        was neither traded or quoted or listed, as applicable, on the OTC Bulletin
        Board
        or other exchange from December 22, 2005 to April 6, 2006, and registration
        delay payments of $925,000 had accrued at March 31, 2006. A holder of the
        2005
        Debentures has demanded payment of the registration delay payments, but has
        not
        declared an event of default for non-payment under the applicable agreement;
        the
        Company is negotiating terms for extended payment.
 
 11
 At
        the
        issuance date, the 2005 Debentures were 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 March 31, 2006,
        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. At any time on or
        after
        March 14, 2008, Ener1 may prepay some or all of the principal of the 2005
        Debentures at 103% of the principal, plus accrued interest. The 2005 Debentures
        are senior to Ener1's existing and future indebtedness and pari passu with
        the
        2004 Debentures.
  Interest
        is due quarterly. The current annual interest rate is 15%. All or a portion
        of
        the accrued and unpaid interest may be converted at the option of the debenture
        holder at any time under the same conversion terms as the principal. Interest
        expense was $320,000 and $53,000 for the three months ended March 31, 2006
        and
        2005, respectively. All interest was paid, and no interest has been
        converted.
 
 The
        initial interest rate on the 2005 Debentures was initially 7.5% per year.
        The
        2005 Debentures provided that the interest rate will increase to 15% per
        year
        effective 365 days after issuance of the 2005 Debentures if Ener1 fails to
        meet
        and maintain any of milestones set forth in the 2005 Debentures. The milestones
        were as follows: (1) the registration statement registering the resale of
        the
        shares underlying the 2005 Debentures and warrants is made and kept effective
        until the date on which the holders of the 2005 Debentures and warrants may
        sell
        all of their underlying shares; (2) Ener1’s common stock is listed on the
        NASDAQ ® National
        Market, NASDAQ ® SmallCap
        Market or the New York Stock Exchange and trading on the stock has not been
        suspended; (3) an Event of Default (as defined in the 2005 Debentures) or
        an
        event that, with the passage of time or giving of notice, would constitute
        an
        Event of Default, shall not have occurred and be continuing; (4) the closing
        bid
        price for Ener1’s common stock shall be greater than $1.50; and (5) trading
        volume of Ener1’s common stock shall have exceeded $500,000 per day for each of
        the preceding 30 days. As a result of Ener1’s failure to meet and maintain any
        of the milestones except the milestone related to Events of Default and the
        registration of the resale of the underlying shares, the interest rate increased
        to 15% per year, effective March 14, 2006.
 
 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 $213,000 and was allocated to
        deferred debenture costs. Ener1 also incurred $1,091,000 in placement
        fees.
 
 12
 Ener1
        is
        accounting for the conversion option in the 2005 Debentures and the associated
        warrants as derivative liabilities in accordance with SFAS 133 and EITF
        00-19.
 
 8.    
        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.
 
 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.
 
 The
        proceeds were first allocated to the fair value of the freestanding warrants,
        and the remaining proceeds were allocated to the Series B Preferred
        Stock.
  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. If this occurs, 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
        for
        the offering. The conversion ratio shall be established by dividing the
        liquidation value per share of the Series B Preferred Stock by the price
        for the
        common stock sold in the registered offering. Because of this contingency,
        the
        conversion option is not within the scope of SFAS 133 and EITF 00-19. If
        the
        contingency is triggered in the future and the holder receives the ability
        to
        convert, Ener1 will need to reassess whether the conversion feature meets
        the
        definition of a derivative under SFAS 133.
  The
        Series B Preferred Stock is redeemable at the option of Ener1 at any time,
        in
        part or whole, at 100% of the liquidation value, plus accrued and unpaid
        dividends. The Series B Preferred Stock is redeemable at the option of the
        holder when none of the 2004 Debentures are outstanding. The 2004 Debentures
        mature on January 20, 2009. The Series B Preferred Stock is classified as
        temporary equity in accordance with EITF D-98.
  In
        connection with the issuances of its 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 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 1.8%; and a term of ten
        years.
 
 EnerDel
        Series A Convertible Preferred Stock
  In
        October 2004, a subsidiary of Delphi Corporation purchased 8,000 shares of Non-Voting,
        Cumulative and Redeemable Series
        A
        Convertible Preferred Stock issued by EnerDel (“Series A Preferred Stock”) plus
        warrants to purchase Ener1 common stock for an aggregate purchase price of
        $8,000,000. The Series A Preferred Stock was convertible into 6,956,522 shares
        of Ener1 common stock until January 2005. No shares were converted.
 
 Ener1
        is
        accounting for the freestanding warrants and embedded conversion feature
        of the
        Series A Preferred Stock in accordance with SFAS 133. The proceeds were first
        allocated to the freestanding warrants at their fair value. The remaining
        proceeds were next allocated based on the with-and-without method first to
        the
        embedded conversion feature of the Series A Preferred Stock and then to of
        the
        host instrument (Series A Preferred Stock).
 
 13
 When
        the
        term of the conversion feature expired in January 2005, the remaining liability
        of $1,183,000 was recorded as a gain on derivative liability 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 .
        The Series
        A
        Preferred Stock is reported as temporary equity in accordance with EITF
        D-98.
 
 In
        connection with the issuance of the Series A Preferred Stock, Ener1 issued
        warrants to purchase up to 1,750,000 shares of common stock at an exercise price
        of $0.70 per share and warrants to purchase up to 5,250,000 shares of common
        stock at an exercise price of $1.00 per share. These warrants have a seven
        year
        term. Ener1 is not required to register the resale of the warrants or of
        the
        common stock issuable upon exercise of the warrants. The fair value 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 seven years.
 
 The
        following are the components of redeemable preferred stock as of March 31,
        2006
        (in thousands):
 
 **EnerDel**
                
                **Ener1****Series
                    A**
                
                **Series
                    B**
                
                **Total**Face
                    value
                
                $
                8,000
                
                $
                15,250
                
                $
                23,250Less
                    fair value of freestanding warrant derivativesat
                    issue date
                
                
                (4,620
                )
                
                (5,514
                )
                
                (10,134
                )Less
                    fair value of embedded derivativesat
                    issue date
                
                
                (1,183
                )
                
                -
                
                
                (1,183
                )Accumulated
                    accretionof
                    discounts
                
                
                2,413
                
                
                2,613
                
                
                5,026Cumulative
                    dividends
                
                
                953
                
                
                1,533
                
                
                2,486Carrying
                    value as of March 31, 2006
                
                $
                5,563
                
                $
                13,882
                
                $
                19,445
 
 14
 
 9. 
        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 liability.”
 
 The
        derivative liability as of December 31, 2005 and 2004 and March 31, 2006
        and
        2005 and the derivative gain or loss for the three months ended March 31,
        2006
        and 2005 were as follows (dollars in thousands):
 
 **December
                  31,**
              
              **March
                  31,**
              
              **Gain**
              
              **December
                  31,**
              
              **March
                  31,**
              
              **Gain****2005**
              
              **2006**
              
              **(Loss)**
              
              **2004**
              
              **2005**
              
              **(Loss)**2004
                  Debenture
              
              $
              4,164
              
              $
              3,524
              
              
              640
              
              $
              11,627
              
              $
              6,246
              
              $
              5,3812004
                  Debenture Warrants
              
              
              3,520
              
              
              3,360
              
              
              160
              
              
              11,040
              
              
              4,960
              
              
              6,0802005
                  Debenture
              
              
              4,424
              
              
              2,987
              
              
              1,437
              
              
              -
              
              
              6,544
              
              
              1,422
              
              
              (a)2005
                  Debenture Warrants
              
              
              3,087
              
              
              1,465
              
              
              1,622
              
              
              -
              
              
              4,452
              
              
              (640
              )
              
              (a)EnerDel
                  Series A Preferred Stock
              
              
              -
              
              
              -
              
              
              -
              
              
              1,183
              
              
              -
              
              
              1,183Series
                  A Warrants
              
              
              2,660
              
              
              1,698
              
              
              962
              
              
              5,944
              
              
              4,008
              
              
              1,936Series
                  B Warrants
              
              
              3,135
              
              
              2,203
              
              
              932
              
              
              7,096
              
              
              5,700
              
              
              1,396Battery
                  Warrants
              
              
              26,220
              
              
              6,615
              
              
              19,605
              
              
              57,960
              
              
              46,230
              
              
              11,730Exchange
                  Warrants
              
              
              7,200
              
              
              5,100
              
              
              2,100
              
              
              16,600
              
              
              10,500
              
              
              6,100$
              54,410
              
              $
              26,952
              
              $
              27,458
              
              $
              111,450
              
              $
              88,640
              
              $
              34,588
 (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.
 
 15
 Because
        the conversion feature 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 feature meets
        the
        definition of a derivative under SFAS 133.
 
 The
        Battery Warrants are immediately exercisable at an exercise price of $.08
        per
        share and have a term of ten years. The warrants have provisions requiring
        that
        the number of shares available for exercise and/or the exercise price for
        the
        shares be adjusted to reflect stock splits, stock dividends and similar
        transactions, as well as the issuance of other shares of our common stock,
        except for employee stock options, at prices below the exercise price stated
        in
        the warrants. The warrants also provide for cashless exercise in accordance
        with
        a formula stated in the warrants.
 
 The
        Company uses the Black Scholes valuation model for calculation of the value
        of
        derivative liabilities. Ener1 uses volatility rates based upon the closing
        stock
        price of its common stock since January 2002, when the company underwent
        a
        change in control. Ener1 determined that share prices prior to this period
        do
        not reflect the ongoing business valuation of its current operations. Ener1
        uses
        a risk free interest rate that is equal to the U. S. Treasury bill rate with
        a
        maturity that approximates the estimated expected life of a derivative or
        security. Ener1 uses the closing market price of the common stock on the
        date of
        issuance of a derivative or at the end of a quarter when a derivative is
        valued
        at fair value. The volatility factor used in the Black Scholes valuation
        model
        has a significant effect on the resulting valuation of the derivative
        liabilities on the balance sheet. The volatility of Ener1’s stock prices has
        ranged from 296% to 145% during the period from 2002 through 2006. At volatility
        rates above 140%, the call value of the options calculated under the Black
        Scholes valuation model approaches the market price of the stock, and additional
        volatility does not further materially increase the value of the derivatives.
        The initial volatility for the calculation of the embedded and freestanding
        derivatives ranged from 135% to 296%.
 
 The
        following table shows the volatility, risk free interest rate and market
        price
        used in the calculation of the call value under the Black Scholes valuation
        model for each derivative at issuance date and at the end of each
        year.
 
 **Issue
                      Date**
                  
                  **Volatility**
                  
                  **Risk
                      Free Interest Rate**
                  
                  **Market
                      Price**
                  
                  **Term
                      in Years**At
                      Issuance date for:2004
                      Debentures
                  
                  
                  1/21/2004
                  
                  
                  296
                  %
                  
                  3.5
                  %
                  $
                  1.65
                  
                  
                  52004
                      Debenture Warrants
                  
                  
                  1/21/2004
                  
                  
                  296
                  %
                  
                  3.5
                  %
                  $
                  1.65
                  
                  
                  102005
                      Debentures
                  
                  
                  3/11/2005
                  
                  
                  104
                  %
                  
                  3.5
                  %
                  $
                  0.75
                  
                  
                  52005
                      Debenture Warrants
                  
                  
                  3/11/2005
                  
                  
                  104
                  %
                  
                  3.5
                  %
                  $
                  0.75
                  
                  
                  5EnerDel
                      Series A Preferred Stock
                  
                  
                  10/20/2004
                  
                  
                  207
                  %
                  
                  1.8
                  %
                  $
                  0.66
                  
                  
                  5Delphi
                      Warrants
                  
                  
                  10/20/2004
                  
                  
                  207
                  %
                  
                  1.8
                  %
                  $
                  0.66
                  
                  
                  7Series
                      B Preferred Stock Warrants
                  
                  
                  10/15/2004
                  
                  
                  207
                  %
                  
                  1.8
                  %
                  $
                  0.65
                  
                  
                  10Debt
                      Exchange Warrants
                  
                  
                  11/14/2003
                  
                  
                  296
                  %
                  
                  1.0
                  %
                  $
                  0.98
                  
                  
                  10ITOCHU
                      options
                  
                  
                  7/1/2003
                  
                  
                  296
                  %
                  
                  1.0
                  %
                  $
                  1.40
                  
                  
                  6
                      mos.Battery
                      Warrants
                  
                  
                  9/6/2002
                  
                  
                  201
                  %
                  
                  1.7
                  %
                  $
                  0.05
                  
                  
                  10Prices
                      and average rates at Year End:December
                      31, 2003
                  
                  
                  
                  
                  
                  296
                  %
                  
                  4.3
                  %
                  $
                  1.40December
                      31, 2004
                  
                  
                  
                  
                  
                  155
                  %
                  
                  4.1
                  %
                  $
                  0.85December
                      31, 2005
                  
                  
                  
                  
                  
                  145
                  %
                  
                  4.1
                  %
                  $
                  0.39
 10.    
        ITOCHU CORPORATION INVESTMENT AND INVESTMENT IN ENERSTRUCT
 
 On
        July
        25, 2003, the Company entered into a Subscription and Investment Agreement
        with
        ITOCHU Corporation (“ITOCHU”), under which the Company issued 14,000,000 shares
        of its common stock in a private sale to ITOCHU at a price of $0.25 per share,
        for $3.5 million. In addition, the Company granted the following options
        to
        ITOCHU to purchase Ener1 common stock at the following prices: During the
        six
        month period from July 25, 2003 through January 24, 2004, ITOCHU had the
        option
        to purchase up to 12,461,861 shares of common stock, for $0.70 per share.
        During
        January 2004, ITOCHU exercised a portion of these options and purchased
        1,500,000 shares for $1,050,000. During the period from January 25, 2004
        through
        January 31, 2005, ITOCHU had the option to purchase up to 9,346,396 shares
        of
        common stock for $4.00 per share. These options expired unexercised on January
        31, 2005.
 
 16
 Using
        the
        proceeds of the ITOCHU investment, the Company invested $2,003,000 in a new
        Japanese company called EnerStruct, Inc. (“EnerStruct”), in exchange for an
        initial 49% ownership interest in EnerStruct. As a result of subsequent third
        party investments in EnerStruct Ener1’s interest in EnerStruct has been reduced
        to 48% at March 31, 2006. ITOCHU initially owned 51% of EnerStruct, for which
        it
        invested $1,100,000 plus equipment totaling approximately $500,000. At March
        31,
        2006, the Company’s original investment in EnerStruct was reduced by $1,345,000
        which represents the Company’s share of EnerStruct losses through that
        date.
 
 In
        connection with the foregoing activities, the Company and Ener1 Battery entered
        into a license agreement with ITOCHU and EnerStruct to provide EnerStruct
        with
        an exclusive license (for Japan only) to use the technologies covered by
        two of
        Ener1 Battery’s pending patent applications. In July 2004, this license became
        non-exclusive. In October 2004, this license was transferred to EnerDel.
        ITOCHU
        has also licensed to EnerStruct, on an exclusive basis, several of its patents
        relating to its lithium battery technologies. In April 2005, EnerDel entered
        into an agreement with EnerStruct, under which EnerDel paid EnerStruct
        $1,000,000 in prepayment for engineering services related to optimization
        of
        EnerDel’s planned lithium battery production and further development of
        EnerStruct’s high-rate battery technology. If development of this technology is
        successfully completed, use of such technology would be licensed to EnerDel
        on
        terms set forth in the agreement and certain other terms to be negotiated
        at
        that time.
 
 Summarized
        financial information of EnerStruct is as follows as of March 31, 2006 and
        for
        the three month period then ended:
 
 Cash
                
                $
                144,000Total
                    assets
                
                
                900,000Total
                    liabilities
                
                
                105,000Net
                    (loss)
                
                
                (306,000
                )
 
 11.  RELATED
        PARTY TRANSACTIONS
 
 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
        Sub
        with and 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.  A
        director of Ener1, Dr. Peter Novak, is a director of Splinex. Dr. Novak was
        also
        the president of Splinex from its inception on February 7, 2004 to August
        31,
        2004 and became the Chairman of Splinex on September 1, 2005. A former director
        and officer of Ener1, Mr. Fitzgerald, was the chairman and a director of
        Splinex; he resigned as chairman and director of Splinex in December
        2005.
 
 17
 Two
        of
        the Company’s directors, Dr. Peter Novak and Mike Zoi, collectively beneficially
        own 31% of the outstanding common stock of Ener1 Group, which owns approximately
        90% of the outstanding common stock of the Company.
 
 Messrs.
        Novak and Zoi also beneficially own an aggregate of 25% of the voting membership
        interests (and an aggregate of 25.5% of the economic membership interests)
        of
        Splinex, LLC, which currently holds 63% of the outstanding common stock of
        Splinex.
 
 Effective
        March 1, 2006, Ener1 Group assumed the Company’s lease on office space in New
        York City, New York. As a result, the Company expensed the book value of
        leasehold improvements totaling $60,000 during the quarter ending March 31,
        2006.
 
 12.    
        ENER1 GROUP FINANCING
 
 Effective
        as of October 15, 2004, the Company entered into an agreement with Ener1
        Group
        under which Ener1 Group agreed to purchase, from time to time, at the Company’s
        request, up to 30,000 shares of the Series B Preferred Stock at a purchase
        price
        of $100.00 per share (or an aggregate purchase price of $3,000,000), and
        warrants to purchase up to 833,334 shares of its common stock at an exercise
        price of $1.25 per share, and warrants to purchase up to 833,334 shares of
        its
        common stock at an exercise price of $1.50 per share. Under the agreement,
        if
        the Company requires Ener1 Group to purchase any of the Series B Preferred
        Stock
        and warrants pursuant to this agreement, the Company is required to pay Ener1
        Group a fee equal to one third of the aggregate purchase price for the
        securities purchased by Ener1 Group in return for Ener1 Group’s assistance in
        arranging a prior sale of Series B Preferred Stock. In March 2005, at the
        Company’s request, Ener1 Group purchased 2,500 of the Company’s Series B
        Preferred stock and warrants to purchase 13,889 shares of the Company’s common
        stock, for an aggregate purchase price of $250,000, and Ener1 paid Ener1
        Group a
        fee of $83,333. In consideration of Ener1 Group’s exercise of certain warrants
        prior to their expiration, the Company agreed on March 30, 2006 to terminate
        Ener1 Group's obligation to purchase additional Series B Preferred Stock.
        See
        Note 15.
 
 13.    
        COMMITMENTS AND CONTINGENCIES
 
 Litigation
 
 The
        Company receives communications from time to time alleging various claims.
        These
        claims include, but are not limited to, allegations that certain of the
        Company’s products infringe the patent rights of other third parties. The
        Company cannot predict the outcome of any such claims or the effect of any
        such
        claims on the Company’s operating results, financial condition, or cash
        flows.
 
 On
        February 10, 2005, Kevin P. Fitzgerald, Ener1’s former Chairman and Chief
        Executive Officer, filed a complaint against the Company in the Circuit
        Court for Broward County, Florida for breach of contract and specific
        performance based on an alleged breach of his employment agreement
        dated September 8, 2003.  Mr. Fitzgerald was dismissed as Ener1’s Chairman
        and Chief Executive Officer on January 9, 2006.  Mr. Fitzgerald’s
        complaint claims he is entitled to additional salary, stock options,
        severance pay equal to his annual salary for two years and unreimbursed expenses
        and benefits in an unspecified amount and seeks a court order extending the
        period during which he may require us to repurchase certain vested
        options through and including April 10, 2006.  The complaint
        also seeks attorney’s fees. The Company intends to vigorously defend
        against the charges made in this litigation.  Mr. Fitzgerald has not filed
        a notice of intent to exercise his right to have the Company repurchase vested
        stock options and the time period for which he sought an extension has
        expired.
 
 On
        January 13, 2006, Pankaj Dhingra, former President of the Company’s Energy
        Division, filed a complaint against the Company in the Circuit Court for
        Broward
        County Florida. The complaint claims that Ener1 breached Mr. Dhingra's
        employment agreement dated December 5, 2004 and that he is entitled to an
        additional $25,000 in compensation, a discretionary bonus of $250,000 and
        business expenses of $3,500. The complaint also seeks attorney's fees in
        an
        unspecified sum. The Company intends to vigorously defend against the charges
        made in this litigation.
 
 On
        February 24, 2006, A. Ernest Toth, Jr., the Company’s former Chief Financial
        Officer filed a one count complaint against us in the Circuit Court for Broward
        County, Florida for breach of contract. The complaint alleges breach of his
        employment agreement dated June 1, 2005 and that he is entitled to six months
        of
        severance pay in the amount of $112,500, as well as $2,743.89 in additional
        reimbursable expenses.   The complaint alleges Mr. Toth was dismissed
        without cause and that he is therefore entitled to the severance.  The
        Company dismissed Mr. Toth on January 7, 2006 for cause. The complaint also
        seeks attorney's fees.  The Company intends to vigorously defend against
        the charges made in this litigation.
 
 
 18
 14.     STOCK
        AND OPTION ISSUANCES DURING QUARTER ENDED MARCH 31, 2006
 
 Effective
        January 2, 2006, a consultant to the Company exercised warrants to purchase
        200,000 shares of common stock in a cashless exercise, and the Company delivered
        148,718 shares to the consultant.
 
 15.
        WARRANT EXERCISE AGREEMENT AND INTERCOMPANY TRANSACTIONS WITH ENER1
        GROUP
 
 In
        January 2006, Ener1 Group agreed to assume Ener1’s lease on an office in New
        York City, New York, for which the monthly rent is $35,520. The lease expires
        in
        September 2010. Ener1 expensed the leasehold improvements made to this office
        space in the amount of $60,419 during the quarter ending March 31, 2006.
        The
        lease payments on the office space are secured by a letter of credit in the
        name
        of Ener1; the letter of credit is secured by a cash collateral account in
        the
        amount of $224,000. The Company intends to cancel the letter of credit so
        that
        the collateral will be released. The letter of credit has not been cancelled
        as
        of March 31, 2006.
 
 On
        January 27, 2006, February 7, 2006 and, in accordance with the agreement
        described below, March 30, 2006, Ener1 Group exercised warrants to purchase
        an
        aggregate of 44,500,000 shares of the Company's common stock at an exercise
        price of $.08 per share. Total proceeds to the Company from the exercise
        transactions were $2,860,000. The expiration date of the exercised warrants
        was
        2012. On
        March
        30, 2006, the Company and Ener1 Group entered into an agreement (the “Warrant
        Exercise Agreement”), under which Ener1 Group agreed to exercise certain
        warrants, and Ener1
        agreed to transfer Ener1’s entire equity interest in Ener EL Holdings, Inc.
        ("Ener EL"), to Ener1 Group, Ener1 and Ener1 Group
        terminated the letter agreement between Ener1 Group
        and
        Ener1 dated October 15, 2004 regarding Ener1 Group’s
        commitment to purchase shares of Ener1 Series B Preferred Stock and warrants
        to
        purchase Ener1 stock, each of Ener1 and Ener1 Group
        agreed to release the other company from outstanding obligations with respect
        to
        intercompany services provided by each company to the other as of March 30,
        2005, and the companies agreed that after Ener1 Group exercises the balance
        of
        the Battery Warrants to purchase 24,500,000 share of Ener1 common stock,
        Ener1
        shall issue to Ener1 Group a new immediately exercisable, ten-year warrant
        to
        purchase 20,000,000 shares of Ener1 common stock at an exercise price of
        $0.50
        per share.
 
 Ener1
        Group and its subsidiaries have from time to time used various services and
        employees of the Company. The Company billed Ener1 Group and its subsidiaries
        for the actual cost of these services and employees. Similarly, the Company
        has
        from time to time used various services and employees of Ener1Group and its
        subsidiaries, and Ener1 Group has billed the Company for the actual cost
        of
        these services and employees. As of March 31, 2006, the net balance due to
        the
        Company from Ener1 Group and its subsidiaries was $0. In accordance with
        the
        agreement described above, during the three months ending March 31, 2006,
        the
        Company expensed $228,000 of intercompany receivables from Ener1 Group in
        order to
        release Ener1 Group from outstanding obligations to Ener1 for intercompany
        services and payments provided to Ener1 Group as of March 30, 2006, and expensed
        $115,000 in connection with the transfer of Ener1’s entire equity interest in
        Ener EL to Ener1 Group.
  16.
        STOCK
        BASED COMPENSATION
 
 *Adoption
        of New Accounting Guidance and Transition*
 
 At
        January 1, 2006, the Company has five stock-based employee, executive and
        director compensation plans. Prior to December 31, 2005, the Company accounted
        for these plans under the recognition and measurement provisions of APB Opinion
        No. 25, *Accounting
        for Stock Issued to Employees* ,
        and
        related Interpretations, (“APB 25”) as permitted by FASB Statement No. 123, *Accounting
        for Stock-Based Compensation* (“SFAS
        No. 123”). The Company recorded compensation expense related to the CEO
        option Plan of approximately $194,000 during the year ending December 31,
        2005.
 
 19
 Effective
        January 1, 2006, the Company adopted the fair value recognition provisions
        of
        FASB Statement No. 123R, *Share-Based
        Payment* ,
        and
        related interpretations (“SFAS No. 123R”) using the modified-prospective
        transition method. Under that method, compensation cost recognized in the
        first
        quarter of 2006 includes (a) compensation cost for all share-based payments
        granted prior to, but not yet vested as of, December 31, 2005 based on the
        grant
        date fair value estimated in accordance with the original provisions of SFAS
        No. 123 and (b) compensation cost for all share-based payments granted
        on or subsequent to January 1, 2006, based on the grant-date fair value
        estimated in accordance with the provisions of SFAS No. 123R. Compensation
        cost is being recognized on a straight-line basis over the requisite service
        period for the entire award in accordance with the provisions of SFAS
        No. 123R. Results for the prior periods have not been restated.
 
 *Valuation
        and Expense Information under SFAS No. 123R*
 
 As
        a
        result of adopting Statement 123(R) on January 1, 2006, the Company’s income
        before income taxes and net income for the quarter ended March 31, 2006 are
        $385,000 lower than if it had continued to account for share-based compensation
        under APB 25. Basic and diluted earnings or (loss) per share for the quarter
        ended March 31, 2006 would have been $0.05 and ($0.001), respectively, if
        the
        Company had not adopted Statement 123(R), compare to reported basic and diluted
        earnings per share of $0.05 and ($0.002), respectively. The Company recorded
        share based compensation costs of $385,000 for the first quarter of
        2006.
  As
        required by SFAS No. 123R, the Company estimates forfeitures of employee
        stock options and recognizes compensation cost only for the portion of those
        awards expected to vest. Forfeiture rates are estimated to be 10% of total
        outstanding options. Estimated forfeitures are adjusted to actual forfeiture
        experience as needed.
 
 In
        connection with the adoption of SFAS No. 123R, the Company estimates the
        fair value of each stock option on the date of grant using a Black Scholes
        Model
        valuation model, applying the following assumptions, and amortizes the estimated
        fair value to expense over the option’s vesting period using the straight-line
        attribution approach.
 
 *Expected
        Term:* The
        expected term represents the period over which the share-based awards are
        expected to be outstanding. It has been determined using the “shortcut method”
described in Staff Accounting Bulletin Topic 14.D.2, which is based on a
        calculation that determines the midpoint between the vesting date and the
        end of
        the contractual term.
 
 *Risk-Free
        Interest Rate:* The
        Company based the risk-free interest rate used in its assumptions on the
        implied
        yield currently available on U.S. Treasury issues with a remaining term
        equivalent to the stock option award’s expected term. The average risk free
        interest rate used through March 31, 2006 was 3.5%.
 
 *Expected
        Volatility:* The
        Company uses volatility rates based upon the weekly closing stock price of
        the
        Company’s common stock since January 2002, when the Company underwent a change
        in control. The Company determined that share prices prior January 2002 do
        not
        reflect the ongoing business valuation of the Company’s operations. The average
        expected volatility used during the period options were granted was
        100%.
 
 *Expected
        Dividend Yield* :
        The
        Company does not intend to pay dividends on its common stock for the foreseeable
        future. Accordingly, the Company uses a dividend yield of zero in its
        assumptions.
 
 20
 A
        summary
        of option activity under the Company’s stock plans as of March, 31, 2006 and the
        changes during the first quarter of 2006 is presented below:
 
 **Options**
                
                **Number
                    of Options**
                
                **Weighted
                    Average Price**
                
                **Average
                    Remaining Contractual Term**
                
                **Intrinsic
                    Value**Outstanding
                    at December 31, 2005
                
                
                24,605,617
                
                $
                0.53Granted
                
                
                -Exercised
                
                
                -Forfeited
                    or expired
                
                
                (2,518,167
                )
                $
                0.60Outstanding
                    at March 31, 2006
                
                
                22,087,450
                
                $
                0.50
                
                
                7.7
                
                $
                284Vested
                    or expected to vest at March 31, 2006
                
                
                21,003,129
                
                $
                0.52
                
                
                8.0
                
                $
                276Exercisable
                    at March 31, 2006
                
                
                11,248,745
                
                $
                0.49
                
                
                7.7
                
                $
                207
  No
        options were granted or exercised in the first quarter of 2006. As of March
        31,
        2006, there was $1,456,000 of total unrecognized compensation cost related
        to
        the stock options granted under the Company stock plans. That cost is expected
        to be recognized over a weighted-average period of 8.0 years.
 
 *Performance
        Share Option Plan*
 
 Effective
        October 1, 2005, an officer of EnerDel was granted an option to purchase
        1,000,000 shares of Ener1, Inc. common stock at the exercise price of $.49
        per
        share, vesting 25% on each of the first four anniversaries of the date of
        the
        grant. The officer’s right to exercise this option is subject to EnerDel
        achieving certain revenue thresholds. The performance goals are not expected
        to
        be met at this time, and no compensation cost has been recognized in the
        three
        months ended March 31, 2006 in connection with this plan.
 
 *Pro
        Forma Information Under SFAS No.123 for Periods Prior to 2006*
 
 The
        Company accounted for stock options under the intrinsic value method specified
        in APB 25 and adopted the disclosure-only provisions of SFAS No. 123 for
        periods
        prior to the quarter ending March 31, 2006. Accordingly, compensation cost
        for
        prior reported periods has been recognized for grants under the stock option
        plans only when the exercise prices of employee stock options were less than
        the
        market prices or fair values of the underlying stock on the date of grant.
 
 The
        table
        below illustrates the effect on net earnings and earnings per share if the
        Company had applied the fair value recognition provisions of SFAS No. 123
        to options granted in the first quarter of 2005.
 
 Net
                    income as reported
                
                $
                27,063Plus
                    stock-based compensationdetermined
                    under intrinsic value-based method
                
                
                265Less
                    stock-based compensationdetermined
                    under fair value-based method
                
                
                (931
                )Net
                    income pro forma
                
                
                26,397Preferred
                    stock dividends
                
                
                (1,210
                )Net
                    income attributable to common shareholders
                
                $
                25,187Net
                    income per share, pro forma basic
                
                $
                0.07Net
                    income per share, pro forma diluted
                
                $
                0.02
 
 21
 17.  EARNINGS
        PER SHARE
 
 Basic
        net
        income per share is computed by dividing the net income attributable to common
        shareholders by the weighted-average number of common shares outstanding
        during
        the period. Diluted net income per share is computed using the weighted-average
        number of common shares outstanding during the period, adjusted for the dilutive
        effect of common stock equivalents, consisting of shares that would be issued
        upon exercise of common stock warrants and from the conversion of the Company’s
        convertible debentures. Weighted-average common shares for the quarter ending
        March 31, 2006 do not include the common stock equivalents represented by
        common
        stock options and the 2004 Debentures because their inclusion would be
        anti-dilutive. The Company’s Series B Convertible Preferred Stock was not
        convertible at March 31, 2006 or March 31, 2005 and these common stock
        equivalents were excluded from the earnings per share calculations. Diluted
        earnings per share is computed using the net income attributable to common
        shareholders and adjusted by the income statement effect of warrants, options
        and convertible instruments as if the dilutive securities had been converted
        at
        the beginning of the period. If a debt security is deemed to be dilutive,
        the
        related interest expense, including accretion of debenture discounts, and
        the
        gain or loss on the related embedded derivative liability are added back
        to the
        income or loss for the purposes of computing diluted earnings or loss per
        share. The
        dilutive effect of outstanding stock options and warrants is reflected in
        diluted net income or loss per share by application of the treasury stock
        method. The dilutive effect of outstanding convertible securities is reflected
        in diluted net income or loss per share by application of the if-converted
        method.
 
 The
        following potential common shares have been included in the computation of
        diluted net loss per share for all periods presented:
 
 **Quarter
                    Ended March 31,****2006**
                
                **2005****(Restated)**Weighted
                    Average Shares Outstanding - Basic
                
                
                368,457,582
                
                
                347,455,751Plus
                    net shares from assumed conversion of warrantsunder
                    treasury stock method
                
                
                37,482,548
                
                
                61,831,169Plus
                    net shares from assumed conversion of optionsunder
                    treasury stock method
                
                
                -
                
                
                8,230,987Plus
                    shares from assumed conversion ofconvertible
                    instruments:2004
                    Debentures
                
                
                -
                
                
                16,016,2602005
                    Debentures
                
                
                14,225,000
                
                
                2,845,000Weighted
                    Average Shares Outstanding - Diluted
                
                
                420,165,130
                
                
                436,379,167
 
 The
        following is a reconciliation of net income as reported and net income used
        in
        the numerator for the calculation of diluted earnings per share:
 
  **Quarter
                    Ended March 31,****2006**
                
                **2005**in
                    thousands
                
                
                
                **(Restated)**Net
                    income as reported
                
                $
                19,107
                
                $
                27,063Less
                    preferred stock dividends and accretion
                
                
                (1,289
                )
                
                (1,210
                )Add
                    interest expense and accretion of discount onconvertible
                    debentures
                
                
                1,002
                
                
                2,123Less
                    derivative gain on convertible debentures
                
                
                (1,437
                )
                
                (6,803
                )Less
                    derivative gain on warrants
                
                
                (19,605
                )
                
                (11,730
                )Net
                    loss computed for diluted net loss per share
                
                $
                (2,222
                )
                $
                9,443
 22
 
 18.  SUBSEQUENT
        EVENTS
 
 On
        May 4,
        2006, the Company received a notice from a holder of 2004 Debentures and
        2005
        Debentures demanding the payment of accrued registration delay payments,
        which
        through April 30, 2006 aggregated $1.7 million in aggregate for all debenture
        holders of the 2004 Debentures and 2005 Debentures combined. The debenture
        holder has informed Ener1 in writing that the demand was not to be considered
        a
        notice of default under the 2004 Debentures or 2005 Debentures. The Company
        is
        in discussions with the debenture holder about restructuring the payment
        terms
        of the registration delay payments and the debenture terms.
  23
  
 **Item
        2. Management's Discussion and Analysis of Financial Condition and Results
        of
        Operations**
 
 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 our 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: our ability to raise capital, 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; managerial
        execution; 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. 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.
 
 Overview
 
 We
        have
        three business lines which we conduct through our three operating subsidiaries.
        EnerDel which is an 80.5% owned subsidiary that we operate as a joint venture
        with Delphi, develops Li-ion batteries, battery packs and components such
        as
        Li-ion battery electrodes and lithium electronic controllers for lithium
        battery
        packs. EnerFuel develops fuel cell products and services. NanoEner develops
        technologies, materials and equipment for nanomanufacturing.
 
 Currently,
        we generate minimal revenue from sales of samples of our products. All of
        our
        planned products are still under development. We will require significant
        capital investment to continue our product development activities.
 
 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 $134,000,000 as of March 31, 2006. It is
        likely that Ener1's operations will continue to incur negative cash flows
        through December 31, 2006 and 2007 and additional financing will be required
        to
        fund Ener1's planned operations through those periods. 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.
 
 We
        are
        required under the terms of our senior secured convertible debentures due
        2009,
        issued in January 2004 (the "2004 Debentures”), and our senior secured
        convertible debentures due 2009, issued in March 2005 (the "2005 Debentures"),
        to register the resale of the common stock underlying the debentures and
        associated warrants. If the registration statements we filed to register
        these
        resales are not available for use, we are required to make certain payments
        to
        the purchasers of the 2004 and 2005 Debentures (the "registration delay
        payments"). These registration statements have not been available for use
        since
        November 21, 2005. At April 30, 2006, the accumulated registration delay
        payments for the 2004 and 2005 Debentures aggregated $1.7 million. Payments
        accrued at the rate of 1.5% of principal approximately $295,000 per month
        for
        the 2004 Debentures until January 20, 2006, at which time our obligation
        to
        maintain the effectiveness of the resale registration statement for the common
        stock underlying the 2004 Debentures ended. Registration delay payments will
        continue to accrue at a fixed rate of $213,375 per month for the 2005 Debentures
        until the 2005 Debenture holders are able to use the resale registration
        statement. The obligations to make registration delay payments have adversely
        affected our ability to raise additional funds for our operations and may
        continue to do so until any post-effective amendments or new registration
        statements we file are declared effective by the SEC.
 
 24
 Results
        of Operations
 
 We
        had no
        significant sales or gross margin from continuing operations in either of
        the
        three month periods ended March 31, 2006 and 2005. Sales in the quarter ending
        March 31, 2006 were for services provided by our fuel cell
        business.
 
 *Net
        income* .
        We
        reported net income of $19,107,000 for the quarter ended March 31, 2006,
        a
        decrease of $7,956,000 when compared to net income of $27,063,000 for the
        quarter ended March 31, 2005.
 Our
        net
        income includes $27,457,000 and $34,588,000 in gain on derivative liability
        resulting from changes in the accounting value of derivative liabilities
        for the
        quarters ended March 31, 2006 and 2005, respectively. The decrease in net
        income
        for the quarter ended March 31, 2006 as compared to the quarter ended March
        31,
        2005 was primarily the result of the decrease in gain on derivative
        liability.
 
 *Losses
        from operations* .
        We
        reported losses from operations of $4,387,000 for the quarter ended March
        31,
        2006, a decrease of $1,407,000 when compared to losses from operations of
        $5,794,000 for the quarter ended March 31, 2005. The decrease in operating
        losses was attributable primarily to decreases in research and development
        expenses of $1,033,000 and manufacturing pre-production costs of $793,000,
        partially offset by an increase in general and administrative expenses of
        $617,000.
 
 *Research
        and development (“R&D”) Expenses.* Our
        R&D expenses were $919,000 and $1,952,000 for the quarters ending March 31,
        2006 and 2005, respectively. The 53% reduction in R&D expenses of $1,033,000
        is primarily due to decreases in salaries, rent, contract labor and materials.
        During the quarter ending March 31, 2006, our battery business consolidated
        its
        operations, equipment and personnel into the Indiana manufacturing and R&D
        facility, and began accelerating its Li-ion battery development activities.
        Although R&D expenses were lower during this transition period, we expect
        our battery business to increase its R&D expenditures substantially during
        2006. Our fuel cell business increased its R&D activity during the quarter
        as it moved most of its personnel into our West Palm Beach facility and began
        new product development activities. Overall, R&D salaries and benefits
        decreased $351,000, rent decreased $334,000, materials decreased $447,000
        and
        contract labor decreased $216,000 during the quarter. The rent decrease was
        due
        to a rent credit of $313,000 resulting form the termination of leasehold
        improvement obligations on our Indiana facility.
 
 *General
        and administrative expenses ("G&A").* G&A
        increased $617,000, or 22%, to $3,385,000 in the first quarter ending March
        31,
        2006 compared to $2,768,000 for the quarter ending March 31, 2005. The major
        components of general and administrative expenses are wages and benefits,
        professional fees, rent, stock compensation expense and costs associated
        with
        the Warrant Exercise Agreement described below. G&A wages and benefits
        decreased $35,000 to $990,000 primarily due to lower executive salaries.
        Rent
        increased $105,000 due to the cost associated with rental of our New York
        City
        administrative offices through February 2006. Stock compensation expense
        increased $120,000 to $385,000 due to the January 1, 2006 adoption of SFAS
        123(R) which requires us to record the fair value of shares issuable under
        employee stock options as compensation cost. Professional fees increased
        $201,000 to $808,000 in the quarter ending March 31, 2006 due to higher legal
        and accounting services necessary to complete the restatement of the prior
        year
        financial statements to comply with derivative accounting requirements.
 
 On
        March
        30, 2006, we entered into an agreement (the “Warrant Exercise Agreement”) with
        Ener1 Group, under which Ener1 Group agreed to exercise certain warrants,
        and
        we agreed
        to transfer our entire equity interest in Ener EL Holdings, Inc. ("Ener EL"),
        to
        Ener1 Group, we and Ener1 Group
        terminated the letter agreement between Ener1 Group
        and
        Ener1 dated October 15, 2004 regarding Ener1 Group’s
        commitment to purchase shares of Ener1 Series B Preferred Stock and warrants
        to
        purchase our stock, we and Ener1 Group
        each agreed to release the other company from outstanding obligations with
        respect to intercompany services provided by each company to the other as
        of
        March 30, 2005, and we agreed that after Ener1 Group exercises additional
        warrants to purchase 24,500,000 share of Ener1 common stock, we shall issue
        to
        Ener1 Group a new immediately exercisable, ten-year warrant to purchase
        20,000,000 shares of our common stock at an exercise price of $0.50 per share. In
        accordance with the Warrant Exercise Agreement, during the three months ending
        March 31, 2006, we expensed $228,000 of intercompany receivables from Ener1
        Group in order to
        release Ener1 Group from outstanding obligations to Ener1 for intercompany
        services and payments provided to Ener1 Group as of March 30, 2006, and we
        expensed $115,000 in connection with the transfer of Ener1’s entire equity
        interest in Ener EL to Ener1 Group. In addition, Ener1 Group agreed to assume
        our lease on office space in New York City e ffective
        March 1, 2006. As a result, we expensed the book value of leasehold improvements
        to this office totaling $60,000 during the quarter ended March 31,
        2006.
 
 25
 *Provision
        for income taxes* The
        effective tax rate in 2005 and 2006 was zero percent. The gain on derivative
        liability is not considered income for federal income tax purposes. As a
        result,
        we reported a net operating loss (“NOL”) for tax purposes, and the NOL was
        entirely offset by an increase in our deferred tax asset valuation allowance.
 
 *Interest
        expense and Registration Delay Payments* Interest
        expense increased $699,000 to $2,956,000 for the three months ended March
        31,
        2006 compared to $2,257,000 in the quarter ended March 31, 2005. Interest
        expense increased due the inclusion of a full quarter of interest on the
        2005
        Debentures, and increase in the interest rate to 15% on the 2005 Debentures
        and
        an increase in the interest rate to 15% on the 2004 debentures. First quarter
        interest payments were $1,067,000 and $714,000 for the three months ending
        March
        31, 2006 and 2005, respectively. Interest expense also increased due to higher
        accretion of bond discount, which increased from $1,543,000 to $1,889,000
        in the
        quarter ended March 31, 2006 compared to $1,543,000 in quarter ended March
        31,
        2005. We accrued $871,000 of registration delay payment obligations in the
        quarter ending March 31, 2006; the payments are accruing under our registration
        rights agreements with the purchasers of the 2005 and 2004 Debentures due
        to the
        unavailability of a registration statement for resale of the common stock
        underlying the 2004 and 2005 Debentures.
 
 Manufacturing
        Pre-production Costs. Beginning in June 2004, we began preparing our battery manufacturing plant
        in
        Fort Lauderdale to begin production, in addition to continuing our
        battery-related research and development activities. Manufacturing
        pre-production cost for the three months ended March 31, 2006 and 2005 were
        0
        and $793,000, respectively. These expenses were incurred for implementing
        new
        manufacturing infrastructure, including new personnel, policies, and procedures.
        We ceased these activities and did not incur any similar expense in the quarter
        ended March 31, 2006.
 
 Gain
        on derivative liability. The gain
        on derivative liability for the three months ended March 31, 2006 decreased
        by
        $7,130,000 to $27,458,000 compared to $34,588,000 in the period ended March
        31,
        2005. The decrease was due to corresponding decrease in the reported value
        of
        freestanding derivatives and embedded derivatives resulting from decreases
        in the market value of our common stock at the end of the quarter and from
        a
        decrease in the number of shares underlying warrants recorded as a derivative
        liability outstanding at the end of the period.
 
 Liquidity
        and Capital Resources
 
 We
        do not
        presently have sufficient funds to execute our business plans, and need to
        raise
        $30,000,000 to $40,000,000 in additional capital to conduct our planned
        operations during 2006 and 2007, including planned
        capital expenditures for pilot production equipment and facilities upgrades
        at
        EnerDel and funding of continuing R&D expenses. We intend to raise this
        capital through a combination of funds from government sources, including
        research and development grants and public financing such as revenue bonds,
        and
        equity or debt financing from strategic or financial investors. We also need
        additional short term working capital to fund our operations through June
        2006,
        at which time we intend to seek to raise the additional financing described
        above. 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.
 
 We
        are
        required under the terms of the 2004 and 2005 Debentures to register the
        resale
        of the common stock underlying the debentures and associated warrants. These
        registration statements have not been available for use since November 21,
        2004. As
        a
        result of the restatement of our financial statements for 2004 and 2005 and
        the
        amendment of certain of our prior filings with the SEC containing such financial
        information, we have not yet filed post-effective amendments to these
        registration statements with updated financial statements. Under the terms
        of
        the registration agreements for the 2004 Debentures and 2005 Debentures,
        we have
        incurred $1.7 million as of April 30, 2006 of registration delay payment
        requirements due to the debenture holders. We have received a demand from
        a
        holder of the 2005 and 2004 Debentures for us to pay the registration delay
        payments, and if we do not make such payments, the debenture holders could
        declare an event of default on all of the Debentures which could result in
        the
        acceleration of the requirement to pay all principal and accrued interest.
        The
        debenture holder has informed us in writing that the demand was not to be
        considered a notice of default under the 2004 Debentures or 2005 Debentures.
        We
        are in discussions with the debenture holder about restructuring the payment
        terms of the registration delay payments and the terms of the 2005 and 2004
        Debentures.
 
 26
 At
        March
        31, 2006, we had a working capital deficit of $29,797,000 primarily due to
        an
        aggregate derivative liability of $26,952,000. Our working capital deficit
        excluding the derivative liability was $2,845,000. Our cash at March 31,
        2006
        was $890,000. During the three months ending March 31, 2006, w e
        used
        $4,914,000 of cash in operations which was funded through financing activities
        of $3,553,000 and beginning cash on hand of $2,306,000.
 
 During
        the three months ended March 31, 2006, our working capital provided by financing
        sources was $3,553,000 consisting primarily of the proceeds from the exercise
        of
        warrants to purchase our common stock by Ener1 Group. On
        January 27, 2006, February 7, 2006 and March 30, 2006, Ener1 Group exercised
        warrants to purchase an aggregate 44,500,000 shares of our common stock at
        an
        exercise price of $.08 per share. Total proceeds from the exercise transactions
        were $3,560,000. The expiration date of the exercised warrants was
        2012.
 
 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.
 
 Critical
        Accounting Policies
 
 The
        preparation of financial statements and related disclosures in conformity
        with
        accounting principles generally accepted in the United States (“GAAP”) requires
        management to make estimates and assumptions that affect the reported amounts
        of
        assets and liabilities, the fair value of financial instruments such as
        derivatives, the disclosure of contingent assets and liabilities at the date
        of
        the financial statements 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.
 
 *Accounting
        for Derivative Instruments*
 
 Statement
        of Financial Accounting Standard (“SFAS”) No. 133, “Accounting for Derivative
        Instruments and Hedging Activities,” as amended, requires all derivatives to be
        recorded on the balance sheet at fair value. These derivatives, including
        embedded derivatives in our structured borrowings, are separately valued
        and
        accounted for on our balance sheet. Fair values for exchange-traded securities
        and derivatives are based on quoted market prices. Where market prices are
        not
        readily available, fair values are determined using market based pricing
        models
        incorporating readily observable market data and requiring judgment and
        estimates.
 
 The
        pricing model we use for determining fair values of our derivatives is the
        Black
        Scholes pricing model. Valuations derived from this model are subject to
        ongoing
        internal and external verification and review. The model uses market-sourced
        inputs such as interest rates, exchange rates and option volatilities. Selection
        of these inputs involves management’s judgment and may impact net income.
 
 In
        particular, we use volatility rates based upon the closing stock price of
        our
        common stock since January 2002, when our company underwent a change in control.
        We determined that share prices prior to this period do not reflect the ongoing
        business value of our current operations. We use a risk free interest rate
        which
        is the U. S. Treasury bill rate for securities with a maturity that approximates
        the estimated expected life of our derivative or security. We use the closing
        market price of our common stock at the close of business on the date of
        issuance of a derivative or at the end of a quarter when determining the
        fair
        value of a derivative. The volatility factor used in the Black Scholes pricing
        model has a significant effect on the resulting valuation of the derivative
        liabilities on our balance sheet. The volatility has ranged from 296% to
        104%
        during the years ending December 31, 2003, 2004 and 2005. The initial volatility
        for the calculation of the embedded and freestanding derivatives ranged from
        296% to 104%. Our volatility rate will likely change in the future. Our stock
        price will also likely change in the future. To the extent that our stock
        price
        increases, our derivative liability will also increase, absent any change
        in
        volatility rates.
 
 27
 In
        September 2000, the Emerging Issues Task Force issued EITF 00-19, "Accounting
        for Derivative Financial Instruments Indexed to and Potentially Settled in,
        a
        Company's Own Stock," ("EITF 00-19") which requires freestanding contracts
        that
        are settled in a company's own stock, including common stock warrants, to
        be
        designated as an equity instrument, asset or a liability. Under the provisions
        of EITF 00-19, a contract designated as an asset or a liability must be carried
        at fair value on a company’s balance sheet, with any changes in fair value
        recorded in the company’s results of operations. A contract designated as an
        equity instrument must be included within equity, and no fair value adjustments
        are required. In accordance with EITF 00-19, in December 2005, we determined
        that several of the outstanding warrants to purchase our common stock and
        the
        embedded conversion feature of several of our financial instruments, should
        be
        separately accounted for as liabilities. We had not classified these derivative
        liabilities as such in our historical financial statements. In order to reflect
        these changes, we restated our financial statements for the year ended December
        31, 2004 and for the first three quarters of 2005, to record the fair value
        of these warrants and conversion features on our balance sheet and record
        unrealized changes in the values of these derivatives in our consolidated
        statement of operations as “Gain (loss) on derivative liabilities.”
 
 *Accounting
        for Long-Lived Assets*
 
 We
        account for the impairment and disposition of long-lived assets in accordance
        with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived
        Assets.” In accordance with SFAS No. 144, long-lived assets are reviewed for
        impairment whenever events or changes in circumstances indicate that the
        carrying amount of the asset may not be recoverable. An asset is considered
        impaired if the sum of the undiscounted cash flows we estimate will be generated
        by that asset is less than its carrying value.
 
 *Accounting
        for Share-based Payments*
 
 The
        preparation of financial statements and related disclosures in conformity
        with
        accounting principles generally
 Stock-Based
        Compensation. Statement of Financial Accounting Standards (“SFAS”)
        No. 123R, “Accounting for Stock-Based Compensation,” requires companies to
        record employee stock option compensation at fair value. We adopted SFAS
        123R
        during the quarter ending March 31, 2006.
 
 
 .
 
 
  28
  Item
        3.  Controls and Procedures
 
 As
        of
        March 31, 2006, we carried out an evaluation, under the supervision and with
        the
        participation of our management, including the individuals serving as our
        Chief
        Executive Officer and our Chief Financial Officer, of the effectiveness of
        the
        design and operation of our disclosure controls and procedures.  During the
        course of this evaluation, we identified deficiencies in our internal controls
        and disclosure controls relating to our calculation of diluted earnings or
        loss
        per share and our accounting for redeemable preferred stock.  As a result
        of the identification of these deficiencies, the financial statements for
        the
        quarter ended March 31, 2005 included in this Quarterly Report on Form 10-QSB
        have been restated in order to reflect the financial effect of derivative
        gains
        on the calculation of diluted earnings or loss per share and to show the
        redeemable preferred stock as temporary equity.  Due to our determination
        that it was necessary to restate our financial statements for the quarter
        ended
        March 31 2005, our Chief Executive Officer and Chief Financial Officer concluded
        that our disclosure controls and procedures were not effective  as of March
        31, 2006 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 .
 
 We
        are in
        the process of improving our internal controls and disclosure controls in
        an
        effort to remediate these deficiencies through the following efforts: 1)
        implementing better controls and procedures over the calculation of diluted
        earnings or loss per share and our accounting for 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.
 
  29
  PART
        II.  OTHER INFORMATION
 
 Item
        1.  Legal Proceedings
 
 We
        receive communications from time to time alleging various claims against
        us and
        our subsidiaries. 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.
 
 On
        February 10, 2005, Kevin P. Fitzgerald, our former Chairman and Chief Executive
        Officer, filed a complaint against us in the Circuit Court for Broward
        County, Florida for breach of contract and specific performance based
        on our alleged breach of his employment agreement dated September 8,
        2003.  Mr. Fitzgerald was dismissed as our Chairman and Chief Executive
        Officer on January 9, 2006.  Mr. Fitzgerald’s complaint claims he
        is entitled to additional salary, stock options, severance pay equal to his
        annual salary for two years and unreimbursed expenses and benefits in an
        unspecified amount and seeks a court order extending the period during
        which he may require us to repurchase certain vested options through
        and including April 10, 2006.  The complaint
        also seeks attorney’s fees. We intend to vigorously defend against the
        charges made in this litigation.  At this time Mr. Fitzgerald has not filed
        a notice of intent to exercise his right to have the company repurchase vested
        stock options and the time period for which he sought an extension has
        expired.
 
 On
        January 13, 2006, Pankaj Dhingra, the former president of our energy division,
        filed a complaint against us in the Circuit Court for Broward County Florida.
        The complaint claims we breached Mr. Dhingra's employment agreement dated
        December 5, 2004 and that he is entitled to an additional $25,000 in
        compensation, a discretionary bonus of $250,000 and business expenses of
        $3,500.
        The complaint also seeks attorney's fees in an unspecified sum. We intend
        to
        vigorously defend against the charges made in this litigation.
 
 On
        February 24, 2006, A. Ernest Toth, Jr., our former Chief Financial Officer
        filed
        a one count complaint against us in the Circuit Court for Broward County,
        Florida for breach of contract. The complaint alleges breach of his employment
        agreement dated June 1, 2005 and that he is entitled to six months of severance
        pay in the amount of $112,500, as well as $2,743.89 in additional reimbursable
        expenses.   The complaint alleges Mr. Toth was dismissed without cause
        and that he is therefore entitled to the severance.  The company dismissed
        Mr. Toth on January 7, 2006 for cause. The complaint also seeks attorney's
        fees.  We intend to vigorously defend against the charges made in this
        litigation.
 
 
 Item
        2.  Unregistered Sales of Equity Securities and Use of
        Proceeds
 
 Effective
        January 2, 2006, one of our consultants exercised warrants to purchase 200,000
        shares of our common stock in a cashless exercise, and we issued 148,718
        shares
        to the consultant.
 
 On
        March
        30, 2006, Ener1 Group, Inc. exercised warrants to purchase 10,000,000 shares
        of
        our common stock for an aggregate purchase price of $800,000.
 
 On
        April
        20, 2006 Ener1 Group exercised warrants to purchase 1,250,000 shares of our
        common stock, for an aggregate purchase price of $100,000.
 
 On
        April
        26, 2006 Ener1 Group exercised warrants to purchase 1,000,000 shares of our
        common stock, for an aggregate purchase price of $80,000.
 
 On
        May 1,
        2006 Ener1 Group exercised warrants to purchase 4,437,500 shares of our common
        stock, for an aggregate purchase price of $355,000.
 
 On
        May
        12, 2006 Ener1 Group exercised warrants to purchase 625,000 shares of our
        common
        stock, for an aggregate purchase price of $50,000.
 
 On
        May
        15, 2006 Ener1 Group exercised warrants to purchase 250,000 shares of our
        common
        stock, for an aggregate purchase price of $20,000.
 
 30
 On
        May
        17, 2006 Ener1 Group exercised 112,500 warrants to purchase our common stock,
        for an aggregate purchase price of $9,000.
 
 On
        May
        18, 2006 Ener1 Group exercised 2,500,000 warrants to purchase our common
        stock,
        for an aggregate purchase price of $200,000.
 
 All
        of
        the security issuances described above were exempt from registration under
        Rule
        506 of Regulation D and under Section 4(2) of the Securities Act of 1933, as
        sales not involving a public offering.
  31
  
 Item
        6.  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
                  Certificate
                      of Designations of Series B Preferred Stock of Ener1, Inc.
                      dated October
                      15, 2004, incorporated by reference to Exhibit 3.6 to the Registrant's
                      Annual Report on Form 10-KSB for the year ended December 31,
                      2004.
                      .3.5
                  Amendment
                      to Amended and Restated Articles of Incorporation, dated December
                      2004,
                      incorporated by reference to Exhibit A of the Registrant's
                      Schedule 14C
                      dated December 6, 2004.3.6
                  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, 2004.3.7
                  Amendment
                      to Bylaws of the Registrant, dated January 5, 2005, incorporated
                      by
                      reference to Exhibit 3.2 of the Registrant's current report
                      on Form 8-K
                      dated January 12, 2005.4.1
                  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
                  Form
                      of Warrant to Purchase Common Stock incorporated by reference
                      to Exhibit
                      4.2 to our Current Report on Form 8-K dated January 21,
                      2004.4.3
                  Registration
                      Rights Agreement, dated as of January 16, 2004, by and among
                      the
                      Registrant the entities whose names appear on the signature
                      pages thereof
                      incorporated by reference to Exhibit 4.3 to the Registrant’s Current
                      Report on Form 8-K dated January 21, 2004.4.4
                  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,
                      2005.4.5
                  Form
                      of Warrant to Purchase Common Stock incorporated by reference
                      to Exhibit
                      4.2 to the Registrant’s Current Report on Form 8-K dated March 15,
                      2005.4.6
                  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, 2005.4.7
                  Certificate
                      of Designation of Non-Voting, Cumulative and Redeemable Series
                      A Preferred
                      Stock of EnerDel, Inc., dated October 20, 2004, incorporated
                      by reference
                      to Exhibit 4.6 to Amendment No. 1 to Ener1‘s Quarterly Report on Form
                      10-QSB/A for the period ending September 30, 2004.4.8
                  Registration
                      Rights Agreement by and between Ener1 and Delphi Automotive
                      Systems LLC,
                      dated October 20, 2004, incorporated by reference to Exhibit
                      4.5 to
                      Ener1‘s Quarterly Report on Form 10-QSB for the period ending September
                      30, 2004.4.9
                  Form
                      of Warrant to Purchase Common Stock of Ener1, dated October
                      20, 2004
                      Issued to Delphi Automotive Systems, LLC, incorporated by reference
                      to
                      Exhibit 4.4 to Amendment No. 1 to Ener1‘s Quarterly Report on Form
                      10-QSB/A for the period ending September 30, 2004.4.10
                  Form
                      of Warrant to Purchase Common Stock of Ener1, dated December
                      9, 2004
                      Issued to Merriman Curhan Ford & Co, incorporated by reference to
                      Exhibit 4.10 of the Registrant’s Registration Statement on Form SB-2 filed
                      on May 9, 2005 (Commission File No. 333-124745).
  32
 4.11
                  Warrant
                      issued to Cofis Compagnie Fiduciaire S.A. dated October 15,
                      2004 to
                      purchase from Ener1, Inc., 4,166,666 shares of Common Stock
                      of the Company
                      at a price per share of $1.25, incorporated by reference to
                      Exhibit 4.4 to
                      the Registrant’s Annual Report on Form 10-KSB for the period ending
                      December 31, 2004.4.12
                  Warrant
                      issued to Cofis Compagnie Fiduciaire S.A. dated October 15,
                      2004 to
                      purchase from Ener1, Inc., 4,166,666 shares of Common Stock
                      of the Company
                      at a price per share of $1.50, incorporated by reference to
                      Exhibit 4.5 to
                      the Registrant’s Annual Report on Form 10-KSB for the period ending
                      December 31, 2004.4.13
                  Form
                      of Security Agreement dated as of March 14, 2005 by and among
                      Ener1, Inc.
                      and the purchasers of Ener1’s 7.5% Senior Secured Convertible Debentures
                      incorporated by reference to Item 10.2 of Registrant’s Current Report on
                      Form 8-K dated March 15, 2005.4.14
                  Form
                      of Securities Purchase Agreement, dated as of March 11, 2005
                      by and among
                      Ener1, Inc. and the purchasers of Ener1’s 7.5% Senior Secured Convertible
                      Debentures incorporated by reference to Item 10.1 of Registrant’s Current
                      Report on Form 8-K dated March 15, 20054.15
                  Form
                      of Intercreditor Agreement dated as of March 11, 2004, among
                      Ener1, Inc.,
                      the purchasers of Ener1‘s 7.5% Senior Secured Convertible Debentures and
                      the purchasers of Ener1, Inc.‘s 5% Senior Secured Convertible Debentures
                      incorporated by reference to Item 10.3 of Registrant’s Current Report on
                      Form 8 K dated March 15, 200510.1
                  Warrant
                      Exercise Agreement, dated as of March 30, 2006, by and between
                      the Company
                      and Ener1 Group, Inc., incorporated by reference to Exhibit
                      10.1 of
                      Registrant's Current Report on Form 8-K dated April 5, 2006.31.1
                  Certification
                      of Principal Executive Officer pursuant to Section 302 of the
                      Sarbanes-Oxley Act of 200231.2
                  Certification
                      of Principal Financial Officer pursuant to Section 302 of the
                      Sarbanes-Oxley Act of 200232.1
                  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
                      200232.2
                  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
 
  33
  
 **ENER1,
        INC.** **AND SUBSIDIARIES**
 
 **SIGNATURES**
  In
        accordance with the requirements of the Securities Exchange Act, the registrant
        has duly caused this Quarterly Report on Form 10-QSB to be signed on its
        behalf
        by the undersigned thereunto duly authorized.
 
  ENER1,
                INC.Dated:
                May 22, 2006
              By:
              /s/ Ronald
                StewartRonald
                StewartChief
                  Executive Officer
                (Principal Executive
                  Officer)
 Dated: May
                22, 2006
              By:
              /s/ Gerard
                HerlihyGerard
                HerlihyChief
                  Financial Officer
                (Principal Financial and Accounting
                  Officer)
   34