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 **September
      30, 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 No o





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 November 1, 2006**Common
                Stock, par value $.01 per share
            
            417,004,338




Transitional
      Small Business Format (check one): Yes o No x









**ENER1,
      INC. AND SUBSIDIARIES**




**Form
      10-QSB for the Quarter Ended September 30, 2006**




INDEX





Part
                I. FINANCIAL INFORMATION
            
            
            PageItem 1.  Financial StatementsConsolidated Balance Sheets (unaudited) as ofSeptember 30, 2006 and December 31, 2005
            
            
            3Consolidated Statements of Operations (unaudited)for the three and nine months ended September 30, 2006 and
                2005
            
            
            4Consolidated
                Statements of Cash Flows (unaudited)for the nine months ended September 30, 2006 and 2005
            
            
            5Notes to Consolidated Financial Statements (unaudited)
            
            
            6Item 2.  Management's Discussion and Analysis of
                FinancialCondition and Results of Operations
            
            
            23Item 3.  Controls and Procedures
            
            
            32Part
                II. OTHER INFORMATIONItem
                1.  Legal Proceedings
            
            
            33Item
                2.  Unregistered Sales of Equity Securities and Use of
                Proceeds
            
            
            33Item
                6.  Exhibits
            
            
            34Signatures
            
            
            37





2





ENER1,
      INC. AND SUBSIDIARIES


CONSOLIDATED
      BALANCE SHEETS


(Unaudited)


(In
      thousands except share data)




**September
                  30,**
              
              **December
                  31,****2006**
              
              **2005****ASSETS**Current
                  assetsCash
                  and equivalents
              
              $
              142
              
              $
              2,082Cash
                  - restricted
              
              
              224
              
              
              224Prepaid
                  expenses and other current assets
              
              
              337
              
              
              189Due
                  from related parties
              
              
              81
              
              
              157Total
                  current assets
              
              
              784
              
              
              2,652Property
                  and equipment, net
              
              
              3,809
              
              
              3,042Investment
                  in EnerStruct, Inc.
              
              
              197
              
              
              805Deferred
                  debenture costs, net of amortizationof
                  $3,029 and $2,082
              
              
              3,152
              
              
              3,748Other
              
              
              75
              
              
              202Total
                  assets
              
              $
              8,017
              
              $
              10,449**LIABILITIES
                  AND STOCKHOLDERS' DEFICIT**Current
                  liabilitiesCurrent
                  portion of installment loan
              
              
              26
              
              
              24Accounts
                  payable and accrued expenses
              
              
              6,383
              
              
              3,276Derivative
                  liability
              
              
              8,419
              
              
              54,979Total
                  current liabilities
              
              
              14,828
              
              
              58,279Long-term
                  portion of installment loan
              
              
              46
              
              
              67Convertible
                  notes, advances and accrued interest due to related party,net
                  of discounts of $3,898
              
              
              3,656
              
              
              -$19,700
                  convertible debentures, net of discount of $11,190 and
                  $13,970
              
              
              8,510
              
              
              5,730$14,225
                  convertible debentures, net of discount of $8,168 and
                  $10,064
              
              
              6,057
              
              
              4,161Total
                  liabilities
              
              
              33,097
              
              
              68,237Redeemable
                  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
              
              
              6,754
              
              
              4,967Series
                  B Preferred, $.01 par value, 180,000 shares authorized,152,500
                  shares issued and outstanding; liquidation preference
                  $15,250
              
              
              15,221
              
              
              13,188Minority
                  interest
              
              
              -
              
              
              -Commitments
                  and contingencies**STOCKHOLDERS'
                  DEFICIT**Common
                  Stock, $.01 par value, 750,000,000 shares authorized417,004,338
                  and 347,455,751 issued and outstanding, respectively
              
              
              4,170
              
              
              3,475Paid
                  in capital
              
              
              136,789
              
              
              72,830Accumulated
                  deficit
              
              
              (188,014
              )
              
              (152,248
              )Total
                  stockholders' deficit
              
              
              (47,055
              )
              
              (75,943
              )Total
                  liabilities and stockholders' deficit
              
              $
              8,017
              
              $
              10,449




See
      notes
      to consolidated financial statements.




3




ENER1,
      INC. AND SUBSIDIARIES


CONSOLIDATED
      STATEMENTS OF OPERATIONS


(Unaudited)


(In
      thousands except per share data)


**Three
                  Months Ended**
              
              **Nine
                  Months Ended****September
                  30,**
              
              **September
                  30,****2006**
              
              **2005**
              
              **2006**
              
              **2005**Net
                  sales
              
              $
              -
              
              $
              25
              
              $
              27
              
              $
              60Cost
                  of sales
              
              
              -
              
              
              -
              
              
              -
              
              
              -Gross
                  profit
              
              
              -
              
              
              25
              
              
              27
              
              
              60Operating
                  expensesGeneral
                  and administrative
              
              
              1,434
              
              
              2,425
              
              
              17,903
              
              
              9,224Depreciation
              
              
              124
              
              
              75
              
              
              323
              
              
              473Research
                  and development
              
              
              1,911
              
              
              1,194
              
              
              4,016
              
              
              17,936Total
                  operating expenses
              
              
              3,469
              
              
              3,694
              
              
              22,242
              
              
              27,633Loss
                  from operations
              
              
              (3,469
              )
              
              (3,669
              )
              
              (22,215
              )
              
              (27,573
              )Other
                  income and (expense)Interest
                  expense
              
              
              (3,515
              )
              
              (2,853
              )
              
              (9,520
              )
              
              (7,603
              )Registration
                  delay expenses
              
              
              (498
              )
              
              -
              
              
              (2,016
              )
              
              -Equity
                  in loss of EnerStruct, Inc.
              
              
              (279
              )
              
              (59
              )
              
              (608
              )
              
              (286
              )Other
              
              
              (5
              )
              
              83
              
              
              (5
              )
              
              223Gain
                  (loss) on derivative liability
              
              
              2,346
              
              
              (23,604
              )
              
              (1,402
              )
              
              51,122Total
                  other income (expense)
              
              
              (1,951
              )
              
              (26,433
              )
              
              (13,551
              )
              
              43,456Income
                  (loss) before income taxes
              
              
              (5,420
              )
              
              (30,102
              )
              
              (35,766
              )
              
              15,883Income
                  taxes
              
              
              -
              
              
              -
              
              
              -
              
              
              -Net
                  income (loss) before minority interest
              
              
              (5,420
              )
              
              (30,102
              )
              
              (35,766
              )
              
              15,883Minority
                  interest
              
              
              (595
              )
              
              (595
              )
              
              (1,787
              )
              
              2,222Net
                  income (loss)
              
              
              (6,015
              )
              
              (30,697
              )
              
              (37,553
              )
              
              18,105Preferred
                  stock dividends
              
              
              (661
              )
              
              (729
              )
              
              (2,033
              )
              
              (2,209
              )Net
                  income (loss) attributableto
                  common shareholders
              
              $
              (6,676
              )
              $
              (31,426
              )
              $
              (39,586
              )
              $
              15,896Net
                  income (loss) per share, basic
              
              $
              (0.02
              )
              $
              (0.09
              )
              $
              (0.10
              )
              $
              0.05Net
                  income (loss) per share, diluted
              
              $
              (0.02
              )
              $
              (0.09
              )
              $
              (0.10
              )
              $
              (0.02
              )Weighted
                  average shares outstanding:Weighted
                  average shares outstanding - Basic
              
              
              416,993
              
              
              347,456
              
              
              396,297
              
              
              347,456Weighted
                  average shares outstanding - Diluted
              
              
              416,993
              
              
              347,456
              
              
              396,297
              
              
              433,042




See
      notes
      to consolidated financial statements.




4




ENER1,
      INC. AND SUBSIDIARIES


CONSOLIDATED
      STATEMENTS OF CASH FLOWS


(Unaudited)


(In
      thousands)




**Nine
                  Months Ended****September
                  30,****2006**
              
              **2005**Net
                  income (loss)
              
              $
              (37,553
              )
              $
              18,105Adjustments
                  to reconcile net income (loss) to cash used in operating
                  activities:(Gain)
                  loss on derivative liability
              
              
              1,402
              
              
              (51,122
              )Minority
                  interest
              
              
              1,787
              
              
              (2,222
              )Research
                  and development assets expensed
              
              
              -
              
              
              10,527Accretion
                  of discount and deferred interest on debentures and notes
              
              
              4,908
              
              
              3,520Non
                  cash interest expense related to financing costs
              
              
              947
              
              
              842Depreciation
              
              
              323
              
              
              473Compensation
                  expense for stock options
              
              
              1,168
              
              
              815Equity
                  in loss from investment in EnerStruct
              
              
              608
              
              
              286Assets
                  transferred under Warrant Exercise Agreement
              
              
              10,127
              
              
              -Changes
                  in current assets and liabilities
              
              
              2,853
              
              
              (1,338
              )Net
                  cash used in operating activities
              
              
              (13,430
              )
              
              (20,114
              )Investing
                  Activities - capital expenditures, net
              
              
              (1,091
              )
              
              (556
              )Financing
                  Activities:Proceeds
                  from issuance of senior secured debenture, net of costs
              
              
              -
              
              
              13,134Proceeds
                  from sale of preferred stock
              
              
              -
              
              
              250Repayment
                  of bank installment loan
              
              
              (19
              )
              
              (17
              )Cash
                  proceeds from convertible notes and advances from related
                  party
              
              
              7,080
              
              
              -Proceeds
                  from exercise of warrants
              
              
              5,520
              
              
              -Net
                  cash provided by financing activities
              
              
              12,581
              
              
              13,367Net
                  decrease in cash and equivalents
              
              
              (1,940
              )
              
              (7,303
              )Cash
                  and cash equivalents beginning balance
              
              
              2,082
              
              
              14,091Cash
                  and cash equivalents ending balance
              
              $
              142
              
              $
              6,788


See
      notes to consolidated financial statements.




5


ENER1,
        INC. AND SUBSIDIARIES
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS
 
 1.  BASIS
        OF
        PRESENTATION
 
 The
        accompanying unaudited consolidated financial statements for Ener1, Inc.
        (“Ener1”) 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. 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 and nine months ended September 30,
        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 Ener1's Annual Report on Form 10-KSB/A for the year
        ended
        December 31, 2005, should be read in conjunction with these condensed
        consolidated financial statements.
 
 Certain
        amounts in the prior periods have been reclassified to conform to the current
        period presentation.
 
 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 $188,000,000 and negative working capital
        of
        $14,044,000 as of September 30, 2006. It is likely that Ener1’s operations will
        continue to incur negative cash flows through December 31, 2006 and 2007
        and
        that additional financing will be required to fund Ener1’s planned operations
        and meet its current obligations through those periods. Such conditions raise
        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 and nine months ended September 30, 2006, Ener1 obtained interim
        operating funding from Ener1 Group, Inc. ("Ener1 Group"), its controlling
        shareholder, through the shareholder's exercise of certain warrants and the
        shareholder's purchase of a convertible note with detachable warrants. Ener1
        will require additional interim working capital financing until it raises
        permanent capital. Ener1 plans to raise substantial additional capital during
        2006 and 2007 from strategic or financial investors and potentially from
        government sources, including grants or public financing. If Ener1 is unable
        to
        procure additional funding from any of the above sources during the remainder
        of
        calendar 2006, it plans to seek additional funds from Ener1 Group on terms
        similar to those contained in the Ener1's convertible notes payable to Ener1
        Group as described herein, until such other funds can be obtained. There
        is no
        assurance that Ener1 Group will provide such funds. If Ener1 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
 
 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. Ener1’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 Ener1 are held by Ener1 Battery
        Company
        (“Ener1 Battery” or the “Battery Company”). Ener1 owns 100% of EnerFuel, Ener1
        Battery and NanoEner and 80.5% of EnerDel. Ener1 owns approximately 42% of
        EnerStruct, a technology development joint venture with ITOCHU
        Corporation.
 
 4.  SEGMENT
        REPORTING
 
 As
        of
        September 30, 2006, Ener1 is organized based upon the following segments:
        battery, fuel cell and nanotechnology. The battery business develops and
        markets
        advanced lithium batteries. The fuel cell business develops and markets fuel
        cells and fuel cell systems. The nanotechnology business is developing
        nanotechnology-related manufacturing processes and materials.
 
 Transactions
        between segments, consisting principally of intercompany loans and advances
        and
        intercompany administrative charges, are recorded at cost and eliminated
        in
        consolidation. Ener1 determines reportable segments based on the way management
        organizes segments for decision making and performance assessment purposes.
        Ener1 regularly reviews the performance of its segments and allocates resources
        to them based on anticipated future contribution.
  6
  **Three
                    Months Ended**
                
                **Nine
                    Months Ended**(in
                    thousands)
                
                **September
                    30,**
                
                **September
                    30,****2006**
                
                **2005**
                
                **2006**
                
                **2005****Net
                    sales**Battery
                    business
                
                $
                -
                
                $
                25
                
                $
                -
                
                $
                45Fuel
                    Cell business
                
                
                -
                
                
                -
                
                
                27
                
                
                15Nanotechnology
                
                
                -
                
                
                -
                
                
                -
                
                
                -Total
                    net sales
                
                $
                -
                
                $
                25
                
                $
                27
                
                $
                60**Net
                    income (loss)**Corporate
                
                
                3,436
                
                
                (27,770
                )
                
                (23,023
                )
                
                38,512Battery
                    business
                
                
                (3,661
                )
                
                (2,239
                )
                
                (7,213
                )
                
                (18,629
                )Fuel
                    Cell business
                
                
                (545
                )
                
                (424
                )
                
                (1,663
                )
                
                (1,003
                )Nanotechnology
                
                
                (5,245
                )
                
                (264
                )
                
                (5,654
                )
                
                (775
                )Net
                    income (loss)
                
                $
                (6,015
                )
                $
                (30,697
                )
                $
                (37,553
                )
                $
                18,105**Assets**Corporate
                
                
                
                
                
                
                
                
                4,273
                
                
                9,882Battery
                    business
                
                
                
                
                
                
                
                
                3,427
                
                
                5,878Fuel
                    Cell business
                
                
                
                
                
                
                
                
                272
                
                
                49Nanotechnology
                
                
                
                
                
                
                
                
                45
                
                
                105Total
                    assets
                
                
                
                
                
                
                
                $
                8,017
                
                $
                15,914
  5.  $19,700,000
        CONVERTIBLE DEBENTURES
 
 On
        January 20, 2004, Ener1 issued $20,000,000 in aggregate principal amount
        of
        senior secured convertible debentures due January 20, 2009 (the “2004
        Debentures”) and warrants to purchase 16,000,000 shares of Ener1’s common stock.
        The net proceeds were $18,527,000. Debentures in the amount of $300,000 have
        been converted to date.
 
 At
        the
        issuance date, the 2004 Debentures were convertible at any time into common
        shares at a price of $1.25 per share, subject to adjustment. As of September
        30,
        2006, the adjusted conversion price was $1.13 per share. The warrants to
        purchase 16,000,000 shares of common stock had an exercise price of $2.51
        per
        share at the issuance date, subject to adjustment. As of September 30, 2006,
        the
        adjusted exercise price was $2.13 per share. The warrants are exercisable
        at any
        time through January 20, 2010. In addition, Ener1 issued warrants to purchase
        1,920,000 shares of common stock with an exercise price of $2.51 per share
        to
        the placement agent for the 2004 Debentures.
 
 Interest
        payments on the 2004 Debentures were $755,000 and $2,241,000 for the three
        and
        nine months ended September 30, 2006, respectively. All or a portion of the
        accrued and unpaid interest may be converted at the option of the debenture
        holder at any time under the same conversion terms as the principal. Interest
        is
        due quarterly. All interest through September 30, 2006 has been paid, and
        no
        interest has been converted. The initial annual interest rate was 5%, which
        was
        increased to 7.5% as of July 19, 2004 and 15% as of January 20, 2005 because
        Ener1 failed to achieve certain milestone requirements in the
        debentures.
  Ener1
        may
        prepay principal at 103% of unpaid principal from January 20, 2007 to January
        20, 2008 and 101% of unpaid principal from January 21, 2008 to January 20,
        2009.
        The 2004 Debentures are senior to Ener1’s existing and future indebtedness and
        pari passu with the 2005 Convertible Debentures (see Note 6). In the event
        of
        any “Default or Fundamental Change” as defined under the 2004 Debentures, the
        holder may require Ener1 to redeem the 2004 Debentures at a price equal
        to 101% of the unpaid principal plus accrued interest. Ener1’s obligations
        under the 2004 Debentures are secured by collateral, including land, building
        and battery production equipment owned by Ener1 Battery and used by
        EnerDel.
 
 Pursuant
        to the Registration Rights Agreement executed in connection with the issuance
        of
        the 2004 Debentures, Ener1 was required for a period of two years to register
        the resale of the common stock underlying the 2004 Debentures and associated
        warrants. The 2004 Registration Rights Agreement provided that if the
        registration statements were not available for use by the holders of the
        2004
        Debentures during the two year period (subject to minor exceptions), Ener1
        would
        be required to pay to the 2004 Debenture holders an amount equal 1.5% of
        the
        outstanding principal of the 2004 Debentures (or approximately $295,000)
        for
        each month (prorated for portions thereof) for all periods during which the
        registration statements were not available for use (the “registration delay
        expenses”). The registration statement for the 2004 Debentures became
        unavailable for use on November 22, 2005, and registration delay expenses
        of
        $601,000 have been accrued for the period November 22, 2005 through January
        20,
        2006, when the registration requirement for the 2004 Debentures expired.
        As of
        September 30, 2006, none of the registration delay expenses for the 2004
        Debentures had been paid. A holder that owns $9.5 million of the 2004 Debentures
        and $10.0 million of the 2005 Debentures (as defined below) has agreed to
        forbear from taking any action against Ener1 related to the non-payment of
        the
        registration delay expenses for the 2004 Debentures until December 24, 2006
        subject to the terms of a Forbearance Agreement effective as of November
        9,
        2006 .
 
 7
  Ener1
        is
        accounting for the conversion option in the 2004 Debentures as a derivative
        liability in accordance with Statement of Financial Accounting Standards
        (“SFAS”) No. 133, “Accounting for Derivative Instruments and Hedging Activities”
(“SFAS 133”) and EITF Issue 00-19, “Accounting for Derivative Financial
        Instruments Indexed to and Potentially Settled in a Company’s Own Stock” (“EITF
        00-19”). The terms of the 2004 Debentures include several features that Ener1 is
        required to account for as derivatives, including (1) the conversion feature,
        (2) the holder's right to force Ener1 to redeem the debentures after an event
        of
        default, (3) the holder's right to force Ener1 to redeem the debentures after
        a
        change in control, (4) Ener1's right to redeem the debentures after 3 years,
        (5)
        the requirement to pay an increased interest rate if Ener1 fails to achieve
        certain milestones and (6) Ener1's right to force conversion of the debentures
        into common stock if certain conditions are satisfied. These derivatives
        must be
        bundled together as a single, compound embedded derivative instrument that
        is
        bifurcated and accounted for separately from the debenture under SFAS 133
        and
        Derivatives Implementation Group Issue No. B15. The 2004 Debenture warrants
        were
        treated as a derivative liability until June 30, 2006 at which time Ener1
        determined that it had sufficient available authorized and unissued shares
        as a
        result of the exercise of certain other previously issued warrants (see Note
        9).
  6.  $14,225,000
        CONVERTIBLE DEBENTURES
 
 On
        March
        14, 2005, Ener1 issued $14,225,000 in aggregate principal amount of senior
        secured convertible debentures due March 14, 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. As a result of Ener1’s failure to meet
        certain milestone requirements in the 2005 Debentures, the holders of the
        2005
        Debentures now have a security interest all of EnerDel common stock owned
        by
        Ener1.
 
 At
        the
        issuance date, the 2005 Debentures were convertible at any time into common
        shares at a price of $1.00 per share subject to adjustment. As of September
        30,
        2006, the conversion price was $0.93 per share. The warrants issued in
        connection with the issuance of the 2005 Debentures were divided into Series
        A
        and Series B. Ener1 issued Series A warrants to purchase 4,267,500 shares
        of
        common stock with an exercise price of $1.15 per share at the issuance date,
        subject to adjustment. As of September 30, 2006, the adjusted exercise price
        was
        $1.06 per share. Ener1 issued Series B warrants to purchase 2,845,000 shares
        of
        common stock with an exercise price of $1.25 per share at the issuance date,
        subject to adjustment. As of September 30, 2006, the adjusted exercise price
        was
        $1.15 per share. The warrants are exercisable, in whole or in part, at any
        time
        on or before March 14, 2010. In addition, Ener1 issued warrants to purchase
        up
        to 426,750 shares of common stock with an exercise price of $1.00 per share
        to
        the placement agent for the 2005 Debentures.
  Ener1
        may
        require that a specified amount of the principal of the 2005 Debentures be
        converted if certain conditions are satisfied for a period of 22 consecutive
        trading days. At any time on or after March 14, 2008, Ener1 may prepay some
        or
        all of the principal of the 2005 Debentures at 103% of the principal, plus
        accrued interest. The 2005 Debentures are senior to Ener1’s existing and future
        indebtedness and pari passu with the 2004 Debentures.
 
 Interest
        is due quarterly. The initial annual interest rate was 7.5%, which was increased
        to 15% as of March 14, 2006 because Ener1 failed to achieve certain milestone
        requirements of the debentures. Interest payments on the 2005 Debentures
        were
        $545,000 and $1,405,000 for the three and nine months ended September 30,
        2006,
        respectively. All or a portion of the accrued and unpaid interest may be
        converted at the option of the debenture holder at any time under the same
        conversion terms as the principal. All interest through September 30, 2006
        has
        been paid, and no interest has been converted.
 
 Pursuant
        to the terms of the Registration Rights Agreement executed in connection
        with
        the issuance of the 2005 Debentures, Ener1 was required to register the resale
        of the common stock underlying the 2005 Debentures and associated warrants
        for a
        period of two years and to maintain the listing or quotation of its common
        stock
        on the OTC Bulletin Board or certain other stock exchanges. If the registration
        statements are not available for use during the two year period from March
        2005
        to March 2007 or Ener1’s common stock is not listed or quoted on the OTC
        Bulletin Board, Ener1 is required to pay registration delay expenses to the
        holders of the 2005 Debentures at a fixed rate of $213,375 per month (prorated
        for portions of a month) for all periods during which such requirements are
        not
        met. The registration statements became unavailable for use in November 2005,
        and Ener1’s stock was neither traded or quoted or listed, as applicable, on the
        OTC Bulletin Board or other required exchange from December 22, 2005 to April
        6,
        2006. Registration delay expenses of $2,070,000 had accrued through September
        8,
        2006, at which time Ener1’s registration statement for the 2005 Debentures was
        again available for use by the 2005 Debenture holders. A holder that owns
        $9.5
        million of the 2004 Debentures and $10.0 million of the 2005 Debentures has
        agreed to forbear from taking any action against Ener1 related to the
        non-payment of the registration delay expenses for the 2005 Debentures until
        December 24, 2006, subject to the terms of a Forbearance Agreement effective
        as
        of November 9, 2006 (see Note 16) .
 
 8
  In
        an
“Event of Default” as defined under the 2005 Debentures, the holder may require
        Ener1 to redeem the 2005 Debentures at a price equal to the greater of (1)
        105%
        of the unpaid principal and accrued interest or (2) the value of the shares
        that the principal and accrued interest could be converted into at the time
        of
        default. In the event of any fundamental change, the holder can redeem the
        2005
        Debentures at a price equal to 115% of the unpaid principal and accrued interest
        if the fundamental change occurs between March 14, 2006 and March 14, 2007,
        and
        110% of the unpaid principal and accrued interest if the fundamental change
        occurs after March 14, 2007.
  Ener1
        is
        accounting for the conversion option in the 2005 Debentures as derivative
        liabilities in accordance with SFAS 133 and EITF 00-19.  The terms of the
        2005 Debentures include several features that Ener1 is required to account
        for
        as derivatives, including (1) the conversion feature, (2) the holder's right
        to
        force Ener1 to redeem the debentures after an event of default, (3) the holder's
        right to force Ener1 to redeem the debentures after a change in control,
        (4)
        Ener1's right to redeem the debentures after 3 years, (5) the requirement
        to pay
        an increased interest rate if Ener1 fails to achieve certain milestones and
        (6)
        Ener1's right to force conversion the debentures into common stock if certain
        conditions are satisfied. These derivatives must be bundled together as a
        single, compound embedded derivative instrument that is bifurcated and accounted
        for separately from the debenture under SFAS 133 and Derivatives Implementation
        Group Issue No. B15.
  7.  REDEEMABLE
        PREFERRED STOCK
 
 *Ener1,
        Inc. Series B Convertible Preferred Stock*
 
 In
        October 2004, Ener1 sold 150,000 shares of Series B Convertible Preferred
        Stock
        (“Series B Preferred Stock”), plus warrants to purchase 4,166,666 shares of
        common stock at an exercise price of $1.25 per share and warrants to purchase
        4,166,666 shares of common stock at an exercise price of $1.50 per share,
        for an
        aggregate purchase price of $15,000,000. Ener1 is accounting for the warrants
        in
        accordance with SFAS 133 and EITF 00-19. The proceeds were first allocated
        to
        the fair value of the freestanding warrants, and the remaining proceeds were
        allocated to the Series B Preferred Stock.
  Also,
        in
        October 2004, Ener1 entered into an agreement with Ener1 Group under which
        Ener1
        Group agreed to purchase, from time to time, at Ener1's request, up to 30,000
        shares of the Series B Preferred Stock (“Series B Preferred Stock Put”) and
        warrants to purchase up to 833,334 shares of its common stock at an exercise
        price of $1.25 per share, and warrants to purchase up to 833,334 shares of
        its
        common stock at an exercise price of $1.50 per share. Under the agreement,
        if
        Ener1 requires Ener1 Group to purchase any of the Series B Preferred Stock
        and
        warrants pursuant to this agreement, Ener1 is required to pay Ener1 Group
        a fee
        equal to one-third of the aggregate purchase price for the securities purchased
        in return for the Ener1 Group’s assistance in arranging a prior sale of Series B
        Preferred Stock. To date, Ener1 has sold 2,500 shares of Series B Preferred
        Stock, at a purchase price of $100 per share, plus warrants to purchase 69,445
        shares of common stock at an exercise price of $1.25 per share and warrants
        to
        purchase 69,445 shares of common stock at an exercise price of $1.50 per
        share,
        for an aggregate purchase price of $250,000. The Series B Preferred Stock
        Put
        was terminated on March 30, 2006, in conjunction with an agreement with Ener1
        Group to exercise certain Battery Warrants early. The above Series B Preferred
        Stock and warrants issued thereunder remained outstanding as of September
        30,
        2006.
  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 is calculated 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 by Ener1 at any time in part or whole
        at
        100% of the liquidation value as set forth in the Certificate of Designation
        for
        the Series B Preferred Stock, plus accrued and unpaid dividends. The Series
        B
        Preferred Stock is also redeemable at the option of the holder once none
        of the
        2004 Debentures are outstanding. If such redemption occurs in full before
        maturity of the 2004 Debentures on January 20, 2009, the redemption price
        would
        be paid in 24 equal monthly installments beginning 30 days from the date
        of
        Ener1’s receipt of a redemption notice from the holder. If such redemption
        occurs on January 20, 2009, the redemption price will be paid in twelve equal
        monthly installments, the first payment beginning February 19, 2009. In each
        case, the redemption payments would include all accrued and unpaid dividends.
        There are no registration rights associated with the warrants issued to the
        purchasers of the Series B Preferred Stock, or with the common stock underlying
        such warrants.
  9
  The
        Series B Preferred Stock is classified as temporary equity in accordance
        with
        EITF Topic D-98, “Classification and Measurement of Redeemable Securities”
(“EITF D-98”), as the redemption features are not solely within the control of
        Ener1. The holders of the Series B Preferred Stock are entitled to dividends
        payable semi-annually in arrears at the annual rate of 7%, which is payable
        in
        additional shares of Series B Preferred Stock for the first two years after
        issuance, and thereafter is payable in cash. The dividends are
        cumulative.
  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 of the
        warrants 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 per share for October 2004 and February 2005, respectively; expected
        volatility of 207%; a 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. No shares were
        converted, and the conversion feature expired in January 2005.
 
 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 the
        host
        instrument (Series A Preferred Stock).
  When
        the
        term of the conversion feature expired in January 2005 with no value, the
        remaining liability of $1,183,000 was recorded as a reduction in the
        derivative liability and a corresponding gain on derivative liability was
        recorded for the first quarter of 2005.
  The
        holders of the Series A Preferred Stock are entitled to dividends as declared
        by
        the Board of Directors at the annual rate of 8.25%, which is payable in cash
        annually on December 31. The dividends are cumulative.
 
 If
        EnerDel has not redeemed all of the shares of Series A Preferred Stock on
        or
        before October 20, 2008, the holders may require EnerDel to redeem all of
        the
        Series A Preferred shares on 10 days notice. Ener1 can extend payment of
        the
        redemption over a period of one year. The Series A Preferred Stock is reported
        as temporary equity in accordance with EITF D-98 as the redemption features
        are
        not solely within the control of Ener1.
  In
        connection with the issuance of the Series A Preferred Stock, Ener1 issued
        warrants to purchase up to 1,750,000 shares of common stock at an exercise
        price
        of $0.70 per share and warrants to purchase up to 5,250,000 shares of common
        stock at an exercise price of $1.00 per share. These warrants have a seven
        year
        term. Ener1 is not required to register the resale of the warrants or of
        the
        common stock issuable upon exercise of the warrants. The fair value of the
        warrants was determined utilizing the Black-Scholes stock option valuation
        model. The significant assumptions used in the valuation are: the exercise
        prices as noted above; the market value of Ener1’s common stock on the date of
        issuance, $0.66 per share; expected volatility of 207%; a risk free interest
        rate of approximately 1.74%; and a term of seven years.
 
 10
  The
        following are the components of redeemable preferred stock as of September
        30,
        2006 (in thousands):
 **Ener1**
                
                **EnerDel****Series
                    B**
                
                **Series
                    A**Face
                    value
                
                $
                15,250
                
                $
                8,000Less
                    initial fair value of warrant derivative
                
                
                (5,514
                )
                
                (4,620
                )Less
                    initial fair value of conversion option
                
                
                -
                
                
                (1,183
                )Fair
                    value at date of issue
                
                
                9,736
                
                
                2,197Accumulated
                    accretion of discounts
                
                
                3,417
                
                
                3,273Cumulative
                    dividends
                
                
                2,068
                
                
                1,284Carrying
                    value as of September 30, 2006
                
                $
                15,221
                
                $
                6,754
 
 8.  ENERDEL
 
 On
        October 26, 2004, Ener1 and each of Delphi Automotive Systems, LLC and Delphi
        Technologies, Inc. (collectively, “Delphi”) contributed certain assets to a
        newly organized Delaware corporation, EnerDel, Inc. Ener1 received 80.5%
        of
        EnerDel’s common stock. Delphi received 19.5% of EnerDel's common stock, 100% of
        EnerDel’s Series A Preferred Stock, warrants with a seven year term to purchase
        up to 1.75 million shares of Ener1's common stock for $0.70 per share, and
        warrants with a seven year term to purchase up to 5.25 million shares of
        Ener1’s
        common stock for $1.00 per share.
 
 The
        consolidated financial statements include 100% of the assets and liabilities
        of
        EnerDel, and the ownership interest of Delphi, the minority investor, is
        recorded as a minority interest. The consolidated statement of operations
        includes 100% of the operations of EnerDel, and the minority interest income
        equal to 19.5% of EnerDel’s operating losses and 100% of the dividends on the
        EnerDel Series A Preferred Stock, which is owned by Delphi, is reflected
        in
        minority interest income.
  Ener1
        recorded a minority interest in consolidated subsidiaries representing the
        19.5%
        equity ownership in EnerDel held by Delphi at the date of the initial
        capitalization of EnerDel in October 2004. The minority interest balance
        sheet
        amount was reduced by minority interest income in 2004 and 2005 equal to
        19.5% of EnerDel’s annual operating losses. Minority interest income was reduced
        by the dividends and accretion on the EnerDel Series A Preferred Stock in
        the amount of $595,000 and $1,787,000 for the three and nine months ended
        September 30, 2006 and $595,000 and $1,766,000 for the three and nine months
        ended September 30, 2005 respectively. The minority interest balance sheet
        amount was reduced to zero as of September 2005 as a result of the minority
        interest in the cumulative losses, and no additional minority interest income
        or
        loss will be recorded until the minority interest account returns to a positive
        balance. Ener1 is accreting the discount on the EnerDel Series A Preferred
        Stock
        to the face amount of $8,000,000 through the earliest redemption date in
        October
        2008.
 
 9.  DERIVATIVES
  Ener1
        evaluated the features of the convertible note and 9,000,000 associated warrants
        issued to Ener1 Group on June 30, 2006, the 20,000,000 warrants issued to
        Ener1
        Group on June 30, 2006 under the Warrant Exercise Agreement, and the convertible
        note and 18,000,000 associated warrants issued to Ener1 Group on September
        30,
        2006 and determined that the instruments were not derivatives under SFAS
        133 and
        EITF 00-19. The convertible notes were deemed to be conventional convertible
        debt under EITF 00-19 and therefore were accounted for as convertible
        instruments under EITF Issue 00-27, “Application of Issue No. 98-5 to Certain
        Convertible Instruments” (“EITF 00-27”).
 
 11
  Ener1
        previously evaluated the application of SFAS 133 and EITF 00-19 for the
        following:
  ·
              
              the
                  2004 Debentures conversion, interest rate adjustment, registration
                  delay
                  expenses, redemption premium, forced conversion default premium
                  and change
                  in control premium features;·
              
              warrants
                  to purchase common stock associated with the 2004 Debentures (the
                  "2004
                  Debenture Warrants");·
              
              the
                  2005 Debentures conversion, interest rate adjustment, registration
                  delay
                  expenses, default premium and change in control premium
                  features;·
              
              warrants
                  to purchase common stock associated with the 2005 Debentures (the
                  "2005
                  Debenture Warrants");·
              
              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;·
              
              Series
                  B Preferred Stock Put;·
              
              warrants
                  to purchase common stock issued to the purchasers of the Series
                  B
                  Preferred Stock (the "Series B Preferred Stock
                  Warrants");·
              
              warrants
                  to purchase common stock issued to Ener1 Group, Inc. in connection
                  with
                  the acquisition by Ener1 Group, Inc. of Ener1 Battery Company
                  from Ener1 Group, Inc. (“Battery Warrants”); and·
              
              warrants
                  to purchase common stock issued to Ener1 Group in connection with
                  the
                  exchange of stock, notes and warrants for debt (the "Exchange
                  Warrants").
 
 Based
        on
        the guidance in SFAS 133 and EITF 00-19, Ener1 concluded all of these
        instruments, other than the conversion feature of the Series B Preferred
        Stock,
        were required to be initially accounted for as derivatives. SFAS 133 and
        EITF
        00-19 require Ener1 to bifurcate and separately account for the conversion
        and
        other derivatives features of the 2004 Debentures, 2005 Debentures and Series
        A
        preferred stock as embedded derivatives. Ener1 is required to record the
        fair value of the conversion features and the warrants and options that are
        classified as derivatives on its balance sheet at fair value with changes
        in the
        values of these derivatives reflected in the consolidated statement of
        operations as “Gain (loss) on derivative liability.”
  Ener1
        previously determined that the Battery Warrants were a derivative liability
        under EITF 00-19 because share settlement of these warrants was not within
        the
        control of Ener1 as a result of the facts that: (1) the holder of the Battery
        Warrants was the controlling shareholder of Ener1, and (2) the Battery Warrants
        contained dilution protection features, with no limit or cap on the number
        of
        shares that could be issued under the Battery Warrants. Therefore, Ener1
        could
        not conclude that it had sufficient authorized and unissued shares to issue
        the
        number of shares potentially issuable under the Battery Warrants. Ener1 also
        determined that it could not conclude it had sufficient authorized and unissued
        shares to issue the number of shares required under the other warrants
        subsequently issued by Ener1 as described above. As a result, Ener1 determined
        that these warrants would also be treated as derivative liabilities because
        Ener1 could not conclude that it had sufficient authorized and unissued shares
        to settle the potential share issuances required under these warrants as
        long as
        the Battery Warrants were outstanding.
 
 As
        of
        June 30, 2006, the Battery Warrants had been fully exercised. As a result,
        Ener1
        determined that it could conclude that it had sufficient authorized and unissued
        shares to issue the number of shares required under the other warrants described
        above and, therefore, all of these warrants, other than the 2005 Debenture
        Warrants, should not be treated as derivative liabilities as of June 30,
        2006.
        The fair value of these warrants was marked to market on the date they no
        longer
        were accounted for as derivatives and derivative gain or loss was recorded.
        The
        balance of the derivative liability was then recorded as a contribution to
        paid
        in capital on June 30, 2006. Ener1 determined that the conversion and other
        derivative features of the 2004 Debentures and 2005 Debentures and the 2005
        Debenture Warrants should continue to be treated as derivative liabilities
        as of
        June 30, 2006.
 
 The
        2004
        Debentures and 2005 Debentures both contain more than one embedded derivative
        feature which SFAS 133 requires be accounted for as separate derivative
        instruments. The various embedded derivative features of each series of
        debentures have been bundled together as a single, compound embedded derivative
        instrument that has been bifurcated from the debenture in accordance with
        Derivatives Implementation Group Issue No. B15. The derivative features that
        have been bundled together in the compound embedded derivative include: (1)
        the
        conversion feature of the debentures, (2) the holder's right to force Ener1
        to
        redeem the debentures after an event of default, (3) the holder's right to
        force
        Ener1 to redeem the debentures after a change in control, (4) Ener1's right
        to
        redeem the debentures after 3 years, (5) the requirement to pay an increased
        interest rate if Ener1 fails to achieve certain milestones, and (6) Ener1's
        right to force conversion of the debentures into common stock if certain
        conditions are satisfied. The value of the compound embedded derivative
        liability was bifurcated from the debenture and recorded as a derivative
        liability, which results in a reduction of the initial carrying amount (as
        unamortized discount) of the related debenture at inception. The unamortized
        discount is being amortized to interest expense using the effective interest
        method over the life of the debenture.
  12
  Ener1
        also determined that the Series B Preferred Stock Put is required to be valued
        as a derivative asset and marked to market at each balance sheet date. The
        Series B Preferred Stock Put was terminated on March 30, 2006. The fair value
        of
        Series B Preferred Stock Put was marked to market at the date of termination,
        and a derivative gain was recorded. The balance of the derivative asset was
        then
        recorded as a reduction in paid in capital on the date of
        termination.
  The
        impact of the application of SFAS 133 and EITF 00-19 on the balance sheets
        as
        of September 30, 2006 and 2005 and the statements of
        operations for the nine months ended September 30, 2006 and 2005
        are as follows (in thousands):
 **December
                    31,**
                
                **September
                    30,**
                
                **Gain**
                
                
                
                **December
                    31,**
                
                **September
                    30,**
                
                **Gain****2005**
                
                **2006**
                
                **(Loss)**
                
                
                
                **2004**
                
                **2005**
                
                **(Loss)**2004
                    Debentures conversion
                
                $
                5,980
                
                $
                2,737
                
                $
                3,243
                
                
                
                
                $
                14,319
                
                $
                7,453
                
                $
                6,8662004
                    Debenture Warrants
                
                
                3,520
                
                
                -
                
                
                (3,361
                )
                
                (b)
                
                
                11,040
                
                
                6,720
                
                
                4,3202005
                    Debenture conversion
                
                
                4,555
                
                
                4,188
                
                
                367
                
                
                
                
                
                -
                
                
                6,325
                
                
                1,7182005
                    Debenture Warrants
                
                
                2,205
                
                
                1,494
                
                
                711
                
                
                
                
                
                -
                
                
                3,343
                
                
                469EnerDel
                    Series A Preferred Stock conversion
                
                
                -
                
                
                -
                
                
                -
                
                
                
                
                
                1,183
                
                
                -
                
                
                1,183Delphi
                    Warrants
                
                
                2,660
                
                
                -
                
                
                (228
                )
                
                (b)
                
                
                5,944
                
                
                3,426
                
                
                2,518Series
                    B Preferred Stock Warrants
                
                
                3,135
                
                
                -
                
                
                (593
                )
                
                (b)
                
                
                7,095
                
                
                4,145
                
                
                2,950Series
                    B Preferred Stock Put
                
                
                (496
                )
                
                -
                
                
                88
                
                
                (a)
                
                
                (266
                )
                
                (414
                )
                
                148Battery
                    Warrants
                
                
                26,220
                
                
                -
                
                
                (229
                )
                
                (c)
                
                
                57,960
                
                
                33,810
                
                
                24,150Debt
                    Exchange Warrants
                
                
                7,200
                
                
                -
                
                
                (1,400
                )
                
                (b)
                
                
                16,600
                
                
                9,800
                
                
                6,800$
                54,979
                
                $
                8,419
                
                $
                (1,402
                )
                
                
                
                $
                113,875
                
                $
                74,608
                
                $
                51,122
  (a)
            The
                Series B Preferred Stock Put was terminated on March 30, 2006 and
                has no
                value on September 30, 2006.  (b)
            As
                a result of the conversion of all of the Battery Warrants on June
                30,
                2006, these warrants were deemed to no longer be derivatives under
                SFAS
                133 and EITF 00-19. The warrants were valued at fair value on June
                30,
                2006 with a corresponding gain or loss on derivatives. The warrants
                were
                then recorded as paid in capital on that date.  (c)
            The
                Battery Warrants were exercised at various dates during the six months
                ended June 30, 2006, and there were no remaining unexercised Battery
                Warrants at June 30, 2006. Each Battery Warrant was valued at fair
                value
                on the date of exercise and a corresponding derivative gain or loss
                was
                recorded, and the remaining derivative liability was recorded as
                a
                contribution to paid in capital on that date. Proceeds from exercise
                of
                the warrants were also recorded as paid in
                capital. 
 Because
        the conversion option for the Series B Preferred Stock is contingent, the
        Series
        B Preferred Stock is not within the scope of SFAS 133 and EITF 00-19. If
        the
        contingency is resolved in the future and the holder becomes able to
        convert, Ener1 will assess whether the conversion option meets the definition
        of
        a derivative under SFAS 133.
 
 Ener1
        uses the Black Scholes pricing model for determining the fair values of its
        warrant derivatives and the conversion feature of the preferred stock. Ener1
        uses a lattice valuation model to value the compound embedded derivative
        features in the 2004 Debentures and 2005 Debentures.
  *Lattice
        Valuation Model*
 
 Ener1
        valued the compound embedded derivative features in the 2004 Debentures and
        2005
        Debentures using a Lattice Model with the assistance of a valuation consultant.
        The lattice model values the compound embedded derivatives based on a
        probability weighted discounted cash flow model. This model is based on future
        projections of the five primary alternatives possible for settlement of the
        features included within the compound embedded derivative, including: (1)
        payments are made in cash, (2) payments are made in stock, (3) the holder
        exercises its right to convert the debentures, (4) Ener1 exercises its right
        to
        convert the debentures and (5) Ener1 defaults on the debentures. Ener1 uses
        the model to analyze (a) the underlying economic factors that
        influence which of these events will occur, (b) when they are likely to occur,
        and (c) the common stock price and specific terms of the debentures such
        as
        interest rate and conversion price that will be in effect when they occur.
        Based
        on the analysis of these factors, Ener1 uses the model to develop a set of
        potential scenarios. Probabilities of each scenario occurring during the
        remaining term of the debentures are determined based on management’s
        projections. These probabilities are used to create a cash flow projection
        over
        the term of the debentures and determine the probability that the projected
        cash
        flow would be achieved. A discounted weighted average cash flow for each
        scenario is then calculated and compared to the discounted cash flow of the
        debentures without the compound embedded derivative in order to determine
        a
        value for the compound embedded derivative.
  13
 
 The
        primary determinants of the economic value of a compound embedded derivative
        under the lattice model are (1) the price of Ener1's common stock, (2) the
        volatility of Ener1's common stock price, (3) the likelihood that Ener1 will
        be
        required to pay registration delay expenses, (4) the likelihood that an event
        of
        default or a change in control will occur, (5) the likelihood that the
        conversion price will be adjusted, (6) the likelihood that Ener1's common
        stock
        will be listed on an exchange, (7) the likelihood that Ener1 will be able
        to
        obtain alternative financing and (8) the likelihood that Ener1 would be able
        to
        force conversion of the debentures.
  The
        fair
        value of the compound derivative embedded in the 2004 Debentures as of September
        30, 2006 and 2005 determined using the lattice valuation model were based
        on the
        following management assumptions:
 **2004
                    Debentures*****Assumptions:***
                
                **at
                    September 30, 2006**
                
                **at
                    September 30, 2005**The
                    price of Ener1's common stock would increase at a rate commensurate
                    with
                    the cost of equity, with a volatility of:
                
                
                100
                %
                
                120
                %Percent
                    likelihood that Ener1 would not be in default of its obligations
                    under the
                    registration rights agreement relating to the 2004
                    Debentures:
                
                
                95
                %
                
                95
                %Percent
                    likelihood that an event of default or a fundamental change would
                    occur,
                    increasing over time:
                
                
                5
                %
                
                5
                %Reset
                    events projected to occur with a weighted average adjustment
                    factor of
                    :
                
                
                0.879
                
                
                0.989Percent
                    likelihood that Ener1 would force the conversion of the 2004
                    Debentures if
                    the stock price reached $1.75:
                
                
                95
                %
                
                95
                %The
                    holders of the 2004 Debentures would convert the 2004 Debentures
                    if the
                    registration rights agreement was effective, Ener1 was not in
                    default
                    under the 2004 Debentures, and Ener1's common stock price
                    was:
                
                $
                3.50
                
                $
                3.50Ener1
                    would redeem the 2004 Debentures following the third anniversary
                    of the
                    issue date if Ener1's common stock price reached:
                
                $
                1.50
                
                $
                1.50Percent
                    likelihood that Ener1 would be able to obtain alternative financing
                    that
                    would enable it to redeem the 2004 Debentures, increasing 2.5%
                    per quarter
                    to a maximum of 25%:
                
                
                0
                %
                
                0
                %Percent
                    likelihood that Ener1's common stock would be listed on an exchange
                    increasing 10% quarterly to a maximum of 90%:
                
                
                0
                %
                
                0
                %
  Based
        on
        these management assumptions, the fair value of these embedded derivatives
        as of
        September 30, 2006 and 2005 were calculated by management to be $2,737,000
        and $7,453,000, respectively.
  14
 
 The
        fair
        value of the compound derivative embedded in the 2005 Debentures as of September
        30, 2006 and 2005 determined using the lattice valuation model were based
        on the
        following management assumptions:
 **2005
                    Debentures*****Assumptions:***
                
                **at
                    September 30, 2006**
                
                **at
                    September 30, 2005**The
                    price of Ener1's common stock would increase at a rate commensurate
                    with
                    the cost of equity, with a volatility of:
                
                
                100
                %
                
                120
                %Percent
                    likelihood that Ener1 would not be in default of its obligations
                    under the
                    registration rights agreement relating to the 2005
                    Debentures:
                
                
                95
                %
                
                95
                %Percent
                    likelihood that an event of default or a fundamental change would
                    occur:
                
                
                5
                %
                
                5
                %Reset
                    events projected to occur with a weighted average adjustment
                    factor
                    of:
                
                
                0.973
                
                
                0.967Percent
                    likelihood that Ener1 would force the conversion of the 2005
                    Debentures if
                    the Ener1 common stock price reached $1.50:
                
                
                95
                %
                
                95
                %The
                    holders of the 2005 Debentures would convert the 2005 Debentures
                    if the
                    registration rights agreement was effective, Ener1 was not in
                    default
                    under the 2004 Debentures and Ener1's common stock price
                    reached:
                
                $
                1.75
                
                $
                1.75Ener1
                    would redeem the 2005 Debentures following the third anniversary
                    of the
                    issue date if Ener1's common stock price reached:
                
                $
                1.25
                
                $
                1.25Percent
                    likelihood that Ener1 would be able to obtain alternative financing
                    that
                    would enable it to redeem the 2005 Debentures, increasing 2.5%
                    per quarter
                    to a maximum likelihood of 25%:
                
                
                0
                %
                
                0
                %Percent
                    likelihood that Ener1's common stock would be listed on an exchange
                    and
                    meet the volume requirements set forth in the 2005 Debentures,
                    increasing
                    10% quarterly to a maximum likelihood of 90%:
                
                
                0
                %
                
                0
                %
  Based
        on
        these management assumptions, the fair value of the compound embedded derivative
        in the 2005 Debentures as of September 30, 2006 and 2005 were calculated
        by
        management to be $4,188,000 and $6,325,000, respectively.
 
 All
        of
        the above assumptions are reviewed quarterly and are subject to change based
        primarily on management’s assessment of the probability of the events described
        occurring. Accordingly, changes to these assessments could materially affect
        the
        valuation.
  *Black
        Scholes Valuation Model*
 
 Ener1
        valued the asset value of the Series B Preferred Stock Put using the Black
        Scholes pricing model with the assistance of a valuation consultant. The
        model uses a number of inputs including the value of the Series B Preferred
        Stock Warrants and the cost of alternative financing in order to compute
        the
        value of the Series B Preferred Stock Put. The assumptions used in the Black
        Scholes valuation model were: a risk free interest rate of 4.03%; the current
        stock price at date of issuance of $0.65 per share; the exercise price of
        the
        warrants of $1.25 and $1.50; the term of ten years; volatility of 450%; and
        dividend yield of 0.0%. The Series B Preferred Stock Put was terminated on
        March
        30, 2006 in conjunction with an agreement with Ener1 Group. Accordingly,
        the
        Series B Preferred Stock Put had no value at September 30, 2006.
 
 Ener1
        used the Black Scholes pricing model to determine the fair values of the
        warrants and the conversion feature derivatives of its preferred stocks.
        The
        model uses market sourced inputs such as interest rates, stock prices, and
        option volatilities, the selection of which requires management’s judgment, and
        which may impact net income or loss.  Ener1 uses volatility rates based
        upon the closing stock price of its common stock since January 2002, when
        Ener1 underwent a change in control. Ener1 determined that share prices prior
        to
        this period do not reflect the ongoing business valuation of its
        current operations. Ener1 uses a risk free interest rate which is the U. S.
        Treasury bill rate for securities with a maturity that approximates the
        estimated expected life of a derivative or security. Ener1 uses the closing
        market price of the common stock on the date of issuance of a derivative
        or at
        the end of a quarter when a derivative is valued at fair value. The volatility
        factor used in the Black Scholes pricing model has a significant effect on
        the resulting valuation of the derivative liabilities on the balance sheet.
        The
        volatility has ranged from 296% to 135% during the years ended December 31,
        2003, 2004 and 2005. The following table shows the volatility, risk free
        rate
        and market price used in the calculation of the Black Scholes call value
        for
        each derivative at issuance date and at the end of each year and at September
        30, 2006.
  15
 
 **Issue
                    Date**
                
                **Volatility**
                
                **Risk
                    Free Interest Rate**
                
                **Market
                    Price**
                
                **Term
                    in Years**At
                    Issuance date for:2004
                    Debenture Warrants
                
                
                1/21/2004
                
                
                296
                %
                
                3.5
                %
                $
                1.65
                
                
                102005
                    Debenture Warrants
                
                
                3/11/2005
                
                
                135
                %
                
                3.5
                %
                $
                0.75
                
                
                5EnerDel
                    Series A Preferred Stock
                
                
                10/20/2004
                
                
                207
                %
                
                1.8
                %
                $
                0.66
                
                
                3
                    mos.Delphi
                    Warrants
                
                
                10/20/2004
                
                
                207
                %
                
                1.8
                %
                $
                0.66
                
                
                7Series
                    B Preferred Stock Warrants
                
                
                10/15/2004
                
                
                207
                %
                
                1.8
                %
                $
                0.65
                
                
                10Series
                    B Preferred Stock Put
                
                
                10/15/2004
                
                
                450
                %
                
                4.0
                %
                $
                0.65
                
                
                10Battery
                    Warrants
                
                
                9/6/2002
                
                
                201
                %
                
                1.7
                %
                $
                0.05
                
                
                10Debt
                    Exchange Warrants
                
                
                11/14/2003
                
                
                296
                %
                
                1.0
                %
                $
                0.98
                
                
                10Prices
                    and average rates at:December
                    31, 2003
                
                
                
                
                
                296
                %
                
                4.3
                %
                $
                1.40December
                    31, 2004
                
                
                
                
                
                155
                %
                
                4.1
                %
                $
                0.85December
                    31, 2005
                
                
                
                
                
                145
                %
                
                4.1
                %
                $
                0.39September
                    30, 2006
                
                
                
                
                
                138
                %
                
                4.6
                %
                $
                0.31
 10.  INVESTMENT
        IN ENERSTRUCT
  In
        2003,
        Ener1 invested $2,003,000 in EnerStruct, Inc., a Japanese company, in exchange
        for an initial 49% ownership interest. ITOCHU Corporation invested $1,100,000
        plus equipment totaling approximately $500,000 for an initial 51% ownership
        interest. Through September 30, 2006, Ener1’s investment in EnerStruct was
        reduced by $1,806,000 which represents Ener1’s share of EnerStruct losses
        through that date. As a result of subsequent ITOCHU and third party investments
        in EnerStruct, Ener1’s interest in EnerStruct has been reduced to 42% at
        September 30, 2006.
 
 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 September 30, 2006
        and
        for the three month period then ended (in thousands):
 Cash
                
                $
                376Total
                    assets
                
                
                1,777Total
                    liabilities
                
                
                111Net
                    (loss)
                
                
                (279
                )
 11.  RELATED
        PARTY TRANSACTIONS
 
 *Intercompany
        transactions with Ener1 Group*
 
 Ener1
        Group and its subsidiaries have from time to time used various services and
        employees of Ener1. Ener1 billed Ener1 Group and its subsidiaries for the
        actual
        cost of these services and employees. Similarly, Ener1 has from time to time
        used various services and employees of Ener1 Group and its subsidiaries,
        and
        Ener1 Group has billed Ener1 for the actual cost of these services and
        employees. As of September 30, 2006, the net balance due to Ener1 from Ener1
        Group and its subsidiaries was $81,000. Effective October 12, 2006, Ener1
        entered into an agreement with Ener1 Group under which Ener1 Group agreed
        to pay
        31% of Ener1’s salary and other costs for Ajit Habbu, who became at that time
        Chief Financial Officer of Ener1.
 
 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 of $60,000 during the quarter ended 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 of $224,000. The
        letter
        of credit has not been cancelled as of September 30, 2006.
  16
 
 *Series
        B Preferred Stock Put*
 
 On
        October 15, 2004, Ener1 Group agreed to purchase, from time to time at Ener1’s
        request, up to 30,000 shares of the Series B Preferred Stock, Series B Preferred
        Stock Put, 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 Ener1 requires Ener1 Group to purchase any
        of the
        Series B Preferred Stock and warrants pursuant to this agreement, Ener1 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 February 2005, at Ener1’s request, Ener1 Group purchased 2,500 of
        Ener1’s Series B Preferred stock and warrants to purchase 138,890 shares of
        Ener1’s common stock, for $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 as described below, Ener1 agreed on March 30, 2006 to terminate
        this
        obligation – see next paragraph.
 
 *Warrant
        Exercise Agreement*
 
 On
        March
        30, 2006, Ener1 Group agreed to exercise certain warrants and purchase Ener1's
        entire equity interest in Ener EL Holdings, Inc. Ener1 also issued 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
        thus expensed (1) $115,000 in connection with the transfer of Ener1’s entire
        equity interest in Ener EL to Ener1 Group which was recorded at fair value
        which
        approximated the carrying value, (2) $584,000 representing the fair value
        of the
        Series B Preferred Put that was terminated, and (3) $228,000 of intercompany
        receivables. On June 30, 2006, Ener1 Group exercised the remaining Battery
        Warrants. Ener1 issued the warrants described above to purchase 20,000,000
        shares to Ener1 Group and recorded the fair value of these warrants, $9,200,000,
        as an expense on the date they were issued on June 30, 2006.
 
 Ener1
        Group exercised the Battery Warrants to purchase an aggregate of 69,000,000
        shares of Ener1’s common stock at an exercise price of $0.08 per share during
        the six months ended June 30, 2006. Total proceeds to Ener1 from the exercise
        transactions were $5,520,000. The expiration date of the exercised warrants
        was
        2012. Paid in capital increased $31,279,000 during the six months ended June
        30, 2006 due to the exercise of the Battery Warrants comprised of
        $4,830,000 from the proceeds in excess of the par value of the Common Stock
        and
        $26,449,000 from the fair value of the Battery Warrant derivative at the
        dates of exercise.
 
 *Ener1
        Group 2006 Convertible Notes and Warrants*
 
 From
        June
        29, 2006 through September 30, 2006, Ener1 Group loaned Ener1 $7,430,000,
        of
        which a note for $3,250,000 ("Group Note I") and a note for
        $3,100,000 ("Group Note II") have been structured as subordinated convertible
        debt, and the remaining advances ("Group Advances") have been classified
        as long
        term debt until the conversion terms and price have been established (in
        the
        aggregate, the "Group Notes and Advances"). The net loan proceeds of $7,080,000
        have been used for working capital. Under the terms of the Group Note I and
        Group Note II, Ener1 agreed to pay $250,000 and $100,000, respectively, as
        financing fees to Ener1 Group; the amounts have been added to the principal
        balance of the notes payable and recorded as deferred financing costs which
        are
        being amortized over the life of the notes. The notes bear interest at the
        rate
        of 10% per annum. All interest accrues until the maturity of the notes on
        April
        15, 2009, at which time all principal and accrued interest are payable in
        full.
        The notes are subordinated to the rights of the holders of the 2004 Debentures
        and 2005 Debentures. Once all of Ener1's obligations under the 2004 Debentures
        and 2005 Debentures have been satisfied, the notes will be convertible at
        Ener1
        Group's option into shares of Ener1’s common stock at the conversion price of
        $0.50 per share. Ener1 Group may accelerate the amounts due under the notes
        if
        none of the 2004 or 2005 Debentures are outstanding and certain default or
        bankruptcy events occur with respect to Ener1.
  17
 
 In
        connection with Group Note I, Ener1 issued to Ener1 Group immediately
        exercisable warrants to purchase up to 9,000,000 shares of Ener1’s common stock
        at an exercise price of $0.50 per share. These warrants have a five year
        term.
        In connection with Group Note II, Ener1 issued to Ener1 Group immediately
        exercisable warrants to purchase up to 9,000,000 shares of Ener1’s common stock
        at an exercise price of $0.40 per share and 9,000,000 shares of Ener1’s common
        stock at an exercise price of $0.60 per share. These warrants have a five
        year
        term.
 
 Ener1
        is
        accounting for the warrant and conversion features of Group Note I and Group
        Note II in accordance with EITF 00-27. The proceeds of Group Note I and Group
        Note II were first allocated to the warrants at their relative fair value
        and
        credited to paid in capital. Ener1 used the Black Sholes pricing model to
        value
        the warrants issued with the Group Notes I and II. For Group Note I, the
        model
        assumes a risk free interest rate of 5.1%, the current stock price at date
        of
        issuance of $0.47 per share, the exercise price of the warrants of $0.50,
        the
        term of five years and volatility of 141%. For Group Note II, the model assumes
        a risk free interest rate of 4.6%, the current stock price at date of issuance
        of $0.31 per share, the exercise price of the warrants of $0.40 and $0.60,
        the
        term of five years and volatility of 138%. Ener1 recorded a discount
        to each convertible note equal to the relative fair value of the warrants,
        which will be amortized over each life of each note as interest
        expense. The intrinsic value of the conversion feature was $1,602,000 and
        $1,032,000 for Group Note I and Group Note II, respectively, at the dates
        of
        issuance. No entry was made to record the value of the conversion feature
        because the ability of the holder to convert is contingent upon Ener1’s
        repayment of the 2004 and 2005 Debentures which is considered outside the
        holder’s control. Once the 2004 Debentures and 2005 Debentures are repaid, Ener1
        will revalue the benefit of the conversion feature and record the intrinsic
        value, if any, as a credit to paid in capital.
 
 The
        components of the Group Notes and Advances at September 30, 2006 are as follows
        (in thousands):
 **Group
                    Note I**
                
                **Group
                    Note II**
                
                **Group
                    Advances**
                
                **Total
                    Group Notes and Advances**Note
                    proceeds
                
                $
                3,000
                
                $
                3,000
                
                $
                1,080
                
                $
                7,080Financing
                    fees
                
                
                250
                
                
                100
                
                
                -
                
                
                350Total
                    Notes
                
                
                3,250
                
                
                3,100
                
                
                1,080
                
                
                7,430Discount
                    equal to relative fair value of warrants
                
                
                (1,797
                )
                
                (2,209
                )
                
                -
                
                
                (4,006
                )Accretion
                    of discount
                
                
                108
                
                
                -
                
                
                -
                
                
                108Accrued
                    interest payable at maturity
                
                
                83
                
                
                40
                
                
                1
                
                
                124Balance
                    at September 30, 2006
                
                $
                1,644
                
                $
                931
                
                $
                1,081
                
                $
                3,656
  12.  STOCK
        AND
        OPTION ISSUANCES DURING QUARTER ENDED SEPTEMBER 30, 2006
 
 Ener1
        issued 29,464 shares of common stock to a firm as compensation for public
        relations services during the quarter ended September 30, 2006 and recorded
        general and administrative expense of $12,000.
  13.  STOCK-BASED
        COMPENSATION
 
 *Adoption
        of New Accounting Guidance and Transition*
 
 At
        January 1, 2006, Ener1 has five stock-based employee, executive and director
        compensation plans. Prior to December 31, 2005, Ener1 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 SFAS No. 123, “Accounting for Stock-Based
        Compensation” (“SFAS 123”).
  Effective
        January 1, 2006, Ener1 adopted the fair value recognition provisions of SFAS
        No.
        123R, “Share-Based Payment,” and related Interpretations (“SFAS 123R”) using the
        modified-prospective transition method. Under that method, compensation cost
        recognized in 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 123 and (b) compensation cost for all
        share-based payments granted on or subsequent to January 1, 2006, based on
        the
        grant-date fair value estimated in accordance with the provisions of SFAS
        123R.
        Compensation cost is being recognized on a straight-line basis over the
        requisite service period for the entire award in accordance with the provisions
        of SFAS 123R. Results for the prior periods have not been restated.
  18
 
 *Valuation
        and Expense Information under SFAS 123R*
 
 As
        a
        result of adopting SFAS 123R on January 1, 2006, Ener1’s income before income
        taxes and net income for the quarter ended September 30, 2006 are $394,000
        lower
        than if it had continued to account for share-based compensation under APB
        25.
        Basic and diluted loss per share for the quarter ended September 30, 2006
        would
        have been $(0.02) and $(0.02), respectively, if Ener1 had not adopted SFAS
        123R,
        compared to reported basic and diluted loss per share $(0.02) and $(0.02),
        respectively. Ener1 recorded share based compensation costs of $394,000 for
        the
        third quarter of 2006.
  As
        required by SFAS 123R, Ener1 estimates forfeitures of employee stock options
        and
        recognizes compensation cost only for the portion of those awards expected
        to
        vest. Forfeiture rates are estimated to be 10% of total outstanding options
        based on actual experience through December 31, 2005. Estimated forfeitures
        are
        adjusted annually to actual forfeiture experience as needed.
 
 In
        connection with the adoption of SFAS 123R, Ener1 estimates the fair value
        of
        each stock option on the date of grant using a Black Scholes Model option
        valuation model, applying the 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:* Ener1
        based the risk-free interest rate used in its assumptions on the implied
        yield
        currently available on U.S. Treasury issues with a remaining term equivalent
        to
        the stock option award’s expected term. The average risk free interest rate used
        through September 30, 2006 was 3.5%.
 
 *Expected
        Volatility:* Ener1
        uses volatility rates based upon the weekly closing stock price of Ener1’s
        common stock since January 2002, when Ener1 underwent a change in control.
        Ener1
        determined that share prices prior January 2002 do not reflect the ongoing
        business valuation of Ener1’s operations. The average expected volatility used
        during the period options were granted was 100%.
 
 *Expected
        Dividend Yield* : Ener1
        does not intend to pay dividends on its common stock for the foreseeable
        future.
        Accordingly, Ener1 uses a dividend yield of zero in its
        assumptions.
  A
        summary
        of option activity under Ener1’s stock plans as of September 30, 2006 and the
        changes during the third quarter of 2006 is presented below:
 **Options**
                
                **Number
                    of Options**
                
                **Weighted
                    Average Price**
                
                **Average
                    Remaining Contractual Term in Years**
                
                **Intrinsic
                    Value**Outstanding
                    at December 31, 2005
                
                
                24,605,617
                
                $
                0.53Granted
                
                
                -Exercised
                
                
                (319,314
                )
                $
                0.10Forfeited
                    or expired
                
                
                (9,619,098
                )
                $
                0.56Outstanding
                    at September 30, 2006
                
                
                14,667,205
                
                $
                0.45
                
                
                7.5
                
                $
                312,774Vested
                    or expected to vest at September 30, 2006
                
                
                13,200,484
                
                $
                0.45
                
                
                7.5
                
                $
                281,497Exercisable
                    at September 30, 2006
                
                
                12,767,204
                
                $
                0.52
                
                
                7.3
                
                $
                183,774
 
 No
        options were granted and no options to purchase shares were exercised in
        the
        third quarter of 2006. As of September 30, 2006, there was $673,000 of total
        unrecognized compensation cost related to the stock options granted under
        Ener1
        stock plans. That cost is expected to be recognized over a weighted-average
        period of one year.
 
 *Performance
        Share Option Plan*
 
 On
        October 1, 2005, an officer of EnerDel was granted an option to purchase
        1,000,000 shares of Ener1 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
        and
        nine months ended September 30, 2006 in connection with this plan.
 
 19
  *Pro
        Forma Information Under SFAS 123 for Periods Prior to 2006*
 
 Until
        January 1, 2006, Ener1 accounted for stock options under the intrinsic value
        method specified in APB 25 and adopted the disclosure-only provisions of
        SFAS
        123 for periods prior to January 1, 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 Ener1
        had
        applied the fair value recognition provisions of SFAS 123 to options granted
        in
        the three and nine months ended September 30, 2005 (in thousands):
 **Three
                    Months Ended September 30, 2005**
                
                **Nine
                    Months Ended September 30, 2005**Net
                    income (loss) as reported
                
                $
                (30,697
                )
                $
                18,105Add
                    stock-based compensationdetermined
                    under intrinsicvalue-based
                    method
                
                
                265
                
                
                794Less
                    stock-based compensationdetermined
                    under fair value-based
                    method
                
                
                (856
                )
                
                (2,707
                )Net
                    income (loss) pro forma
                
                
                (31,288
                )
                
                16,192Preferred
                    stock dividends
                
                
                (729
                )
                
                (2,209
                )Net
                    income (loss) attributableto
                    common shareholders pro forma
                
                $
                (32,017
                )
                $
                13,983Net
                    income (loss) per share, pro forma basic
                
                $
                (0.09
                )
                $
                0.04Net
                    income (loss) per share, pro forma diluted
                
                $
                (0.09
                )
                $
                (0.02
                )
  14.  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 Ener1’s
        convertible debentures. Weighted-average common shares for the quarter ended
        September 30, 2006 do not include the common stock equivalents represented
        by
        common stock options and the 2004 Debentures because their inclusion would
        be
        anti-dilutive. Ener1’s Series B Convertible Preferred Stock was not convertible
        at September 30, 2006 or September 30, 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.
 
 20


The
        following potential common shares have been included in the computation of
        diluted net loss per share for all periods presented (in
        thousands):
 **Three
                    Months Ended**
                
                **Nine
                    Months Ended****September
                    30,**
                
                **September
                    30,****2006**
                
                **2005**
                
                **2006**
                
                **2005**Weighted
                    Average Shares Outstanding - Basic
                
                
                416,993
                
                
                347,456
                
                
                396,297
                
                
                347,456Plus
                    net shares from assumed conversion of warrantsunder
                    treasury stock method
                
                
                -
                
                
                -
                
                
                -
                
                
                58,940Plus
                    shares from assumed conversion ofconvertible
                    instruments:2004
                    Debentures
                
                
                -
                
                
                -
                
                
                -
                
                
                16,0162005
                    Debentures
                
                
                -
                
                
                -
                
                
                -
                
                
                10,630Weighted
                    Average Shares Outstanding - Diluted
                
                
                416,993
                
                
                347,456
                
                
                396,297
                
                
                433,042
 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 (in
        thousands):
 **Three
                    Months Ended**
                
                **Nine
                    Months Ended****September
                    30,**
                
                **September
                    30,****2006**
                
                **2005**
                
                **2006**
                
                **2005**Net
                    income (loss) as reported
                
                $
                (6,015
                )
                $
                (30,697
                )
                $
                (37,553
                )
                $
                18,105Less
                    preferred stock dividends and accretion
                
                
                (661
                )
                
                (729
                )
                
                (2,033
                )
                
                (2,209
                )Add
                    interest expense and accretion of discount onconvertible
                    debentures
                
                
                -
                
                
                -
                
                
                -
                
                
                7,148Less
                    derivative gain on convertible debentures
                
                
                -
                
                
                -
                
                
                -
                
                
                (5,989
                )Less
                    derivative gain on warrants
                
                
                -
                
                
                -
                
                
                -
                
                
                (24,150
                )Net
                    loss computed for diluted net loss per share
                
                $
                (6,676
                )
                $
                (31,426
                )
                $
                (39,586
                )
                $
                (7,095
                )
  15.  COMMITMENTS
        AND CONTINGENCIES
 
 *Litigation*
 
 Ener1
        receives communications from time to time alleging various claims. These
        claims
        include, but are not limited to, allegations that certain of Ener1’s products
        infringe the patent rights of other third parties. Ener1 cannot predict the
        outcome of any such claims or the effect of any such claims on Ener1’s operating
        results, financial condition, or cash flows.
 
 16.  SUBSEQUENT
        EVENTS
 
 On
        November 9, 2006, Ener1 entered into a Forbearance Agreement with Satellite
        Asset Management, L.P. ("Satellite"), a holder of Ener1's 2004 Debentures
        and
        2005 Debentures. Satellite agreed to forbear until December 24, 2006 from
        any
        action for arising from Ener1's failure to make payments of registration
        delay
        expenses to Satellite under the terms of the Registration Rights Agreements
        relating to the 2004 and 2005 Debentures. Ener1 will place $450,000 in an
        escrow account for the benefit of Satellite and if by December 24, 2006
        Satellite has not received from Ener1 a term sheet for restructuring the
        debentures on terms satisfactory to Satellite, Satellite may either apply
        the
        escrowed amount toward payment of registration delay expenses owed to Satellite
        or have the escrow applied toward Satellite’s portion of the interest payment
        for the debentures due December 31, 2006.
 
 Ener1
        borrowed $455,000 from Ener1 Group to fund the escrow account and pay related
        legal expenses. The remaining loan proceeds will be used to pay legal expenses
        related to the Forbearance Agreement. These funds will be paid to Satellite
        as
        indicated above, in accordance with the terms of a Deposit Agreement, dated
        November 9, 2006, among Ener1, Ener1 Group, Satellite and Wilmington Trust.
  21
 
 The
        forbearance can be terminated prior to December 24, 2006 in the event of
        Ener1's
        failure to comply with the Deposit Agreement, the occurrence of certain
        bankruptcy-related events, or the inaccuracy of any representation made by
        Ener1
        in the Forbearance Agreement or the 2004 and 2005 Debentures.
 
 The $455,000
        Ener1 Group loan bears interest at a rate of 10% per year and principal and
        interest is payable at maturity on April 15, 2009. Ener1 Group's rights under
        the note are subordinated to the prior payment in full of all Ener1's
        obligations under the 2004 and 2005 Debentures. If none of the 2004 and 2005
        Debentures are outstanding, Ener1 Group may elect to convert the principal
        and
        accrued interest under the note into shares of Ener1 common stock at a
        conversion price of $0.50 per share. Ener1's failure to pay any amount due
        under
        the note, or the occurrence of certain bankruptcy-related events, will
        constitute an event of default under the note.
 
 On
        October 12, 2006, Ener1 hired Mr. Ajit Habbu as its Chief Financial Officer.
        Mr.
        Habbu’s salary is initially $325,000 per year, of which $100,000 will be paid by
        Ener1 Group in accordance with a separate arrangement between Ener1 Group
        and
        Ener1. The agreement awards Mr. Habbu an option to purchase 2.5 million shares
        of Ener1 common stock, which would vest 30%, 30% and 40%, respectively, on
        the
        first three anniversaries of the date of grant. Mr. Habbu will spend a portion
        of his time performing services for Ener1 Group as its Chief Financial Officer.
        On October 16, 2006, Gerard Herlihy resigned as CFO of Ener1 to resume, on
        a
        full time basis, his duties as President and CFO of Splinex Technology Inc.,
        an
        Ener1 Group related company.
 
 On
        November 7, 2006, Ener1 entered into settlement agreements in connection
        with
        two lawsuits previously filed against it by Pankaj Dhingra and A. Ernest
        Toth,
        Jr. in amounts that will not have a material effect on the consolidated
        financial statements.
  22
  
 **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 $188,000,000 and negative working capital
        of
        $14,044,000 as of September 30, 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 and
        meet its current obligations through those periods. Such conditions raise
        substantial doubt about Ener1’s ability to continue as a going concern.
        Management believes that our ability to raise additional funds for our
        operations and further execute our business plan has been adversely affected
        by
        our previous inability to file and have declared effective by the SEC any
        post-effective amendments or new registration statements.
  23
 
 The
        terms
        of the Registration Rights Agreements executed in connection with the issuance
        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”) require us to register the resale
        of the common stock underlying the 2004 Debentures and associated warrants
        until
        January 20, 2006 and to register the resale of the common stock underlying
        the
        2005 Debentures and associated warrants until March 14, 2007. In addition,
        the
        Registration Statement for the 2005 Debentures requires us to maintain a
        listing
        for our common stock on the OTC Bulletin Board or major exchange. If either
        of
        those registration statements are not available for use at any time during
        the
        required periods or we fail to maintain the required stock listing, we are
        required to make certain payments to the purchasers of the 2004 and/or 2005
        Debentures, as the case may be (the “registration delay expenses”). The
        registration statement for the 2005 Debentures was not available for use
        from
        November 21, 2005 through September 8, 2006, and the registration statement
        for
        the 2004 Debentures was not available for use from November 21, 2005 through
        September 12, 2006 (the required registration period for the 2004 Debentures
        and
        resulting accrual of registration delay expenses ended on January 20, 2006).
        As
        a result of our failure to file timely reports with the Securities and Exchange
        Commission, our stock was delisted from the OTC Bulletin Board from December
        22,
        2005 to April 6, 2006. As a result of these events, as of September 30, 2006
        we
        had accrued but not paid a total of $2.7 million in registration delay expenses
        under the 2004 and 2005 Debentures. Effective as of November 9, 2006, we
        entered
        into a Forbearance Agreement with the holders of $9.5 million of our 2004
        Debentures and $10.0 million of our 2005 Debentures. The Forbearance Agreement
        provides that the holder will take no action in connection with our nonpayment
        until December 24, 2006, subject to the terms of the Forbearance
        Agreement.
 
 ***Results
        of Operations***
 
 We
        had no
        significant sales or gross margin from continuing operations in either of
        the
        three or nine month periods ended September 30, 2006 and 2005. Sales in the
        nine
        months ended September 30, 2006 were for services provided by our fuel cell
        business.
 
 ***Three
        Months Ended September 30, 2006***
 
 *Net
        income* .
        We
        reported a net loss of $6,015,000 for the quarter ended September 30, 2006,
        a
        decrease of $24,682,000 when compared to net loss of $30,697,000 for the
        quarter
        ended September 30, 2005. The decrease is due primarily to a decrease in
        gain or
        (loss) on derivative liability of $25,950,000 which resulted primarily from
        declines in the price of Ener1’s common stock and the cessation of registration
        delay penalties, partially offset by higher interest expenses due to a higher
        interest rate and higher registration delay expenses.
 
 *Losses
        from operations* .
        We
        reported losses from operations of $3,469,000 for the quarter ended September
        30, 2006, a decrease of $200,000 when compared to losses from operations
        of
        $3,669,000 for the quarter ended September 30, 2005. The decrease in operating
        losses was attributable primarily to a decrease in general and administrative
        expenses of $991,000 offset by an increase in research and development expenses
        of $717,000.
  *Research
        and development (“R&D”) expenses* .
        R&D
        expenses were $1,911,000 and $1,194,000 for the quarters ended September
        30,
        2006 and 2005, respectively. The increase in R&D expenses of $717,000 is
        primarily due to increases in salaries and benefits, contracted labor for
        producing samples and professional fees in the 2006 quarter. During the quarter
        ended 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. We expect our
        battery business to increase its R&D expenditures substantially during the
        remainder of 2006 and during 2007. Our fuel cell business increased its R&D
        activity during fiscal 2006 as it moved its personnel into our West Palm
        Beach
        facility in the first quarter and began new product development activities.
        Overall, our R&D salaries and benefits increased $294,000, contracted labor
        increased $174,000, and professional fees increased $104,000 during the quarter
        ended September 30, 2006 compared to the quarter ended September 30, 2005.
        Professional fees include legal fees for patent work and consulting fees
        to
        assist Ener1 in obtaining government grants. R&D expenses were offset by
        $146,000 of expense reimbursement from the advanced battery consortium
        (USABC).
  *General
        and administrative expenses (“G&A”).* G&A
        decreased $991,000 to $1,434,000 in the third quarter ended September 30,
        2006
        compared to $2,425,000 for the quarter ended September 30, 2005. The major
        components of G&A are compensation, which includes salaries and benefits and
        severance, professional fees and stock compensation expense. **** G&A
        compensation decreased $683,000 to $768,000 from $1,451,000 in the prior
        year
        quarter primarily due to a decrease in wages and benefits of $399,000 and
        decrease in severance of $284,000. Stock compensation expense increased $129,000
        to $394,000 due to the January 1, 2006 adoption of SFAS 123R which requires
        us
        to record the fair value of shares issuable under employee stock options
        as
        compensation cost. Professional fees decreased $279,000 in the quarter ended
        September 30, 2006 due to the completion and filing of three resale registration
        statements during the quarter ended September 30, 2006.
 
 *Gain
        or loss on derivative liability.* We
        recorded a gain on derivative liability of $2,346,000 for the three months
        ended
        September 30, 2006, versus a loss on derivative liability of $23,604,000
        for the
        three months ended September 30, 2005, a difference of $25,950,000. The overall
        magnitude of derivative gains and losses declined in the quarter ended September
        30, 2006 due to the determination that certain warrants would no longer be
        treated as derivative liabilities as a result of the exercise of all of the
        Battery Warrants. As a result of the conversion of all of the Battery Warrants
        on June 30, 2006, all warrants except for the 2005 Debenture Warrants were
        deemed no longer to be derivatives under SFAS 133 and EITF 00-19. The warrants
        previously treated as derivative liabilities were valued at fair value on
        June
        30, 2006 with a corresponding gain or loss on derivatives.
  24
 
 ***Nine
        Months Ended September 30, 2006***
 
 *Net
        income* .
        We
        reported a net loss of $37,553,000 for the nine months ended September 30,
        2006,
        a decrease of $55,658,000 when compared to net income of $18,105,000 for
        the
        nine months ended September 30, 2005. The decrease is due primarily to: (1)
        increased G&A expenses of $8,679,000 due primarily to $10,127,000 of warrant
        modification costs associated offset by an overall reduction in G&A
        spending, (2) decreased derivative gains and losses of $52,524,000 which
        resulted primarily from declines in the price of Ener1’s common stock and the
        cessation of registration delay penalties, (3) decreased R&D expenses of
        approximately $13,920,000 due primarily to the expensing in fiscal 2005 of
        (a)
        $10,527,000 for the value of assets charged to research and development expense,
        (b) $1,000,000 of costs associated with a research and development contract
        with
        EnerStruct, Inc., (4) higher interest expenses of $1,917,000 due to a higher
        interest rate on the 2005 Debentures and due to the 2005 Debentures being
        outstanding for only seven months in fiscal 2005, (5) higher registration
        delay
        expenses of $2,016,000, and 6) a reduction of $4,009,000 in minority interest
        income.
 
 *Losses
        from operations* .
        We
        reported losses from operations of $22,215,000 for the nine months ended
        September 30, 2006, a decrease of $5,358,000 when compared to losses from
        operations of $27,573,000 for the nine months ended September 30, 2005. The
        decrease in operating losses was attributable primarily to decreases in research
        and development expenses of $13,920,000, offset by an increase in general
        and
        administrative expenses of $8,679,000.
  *Research
        and development (“R&D”) expenses* .
        R&D
        expenses were $4,016,000 and $17,936,000 for the nine months ended September
        30,
        2006 and 2005, respectively. The reduction in R&D expenses of $13,920,000 is
        primarily due to due to (1) the expensing in fiscal 2005 of $10,527,000 for
        the
        value of Fort Lauderdale assets charged to R&D expense and $1,000,000 of
        costs associated with a research and development contract with EnerStruct,
        Inc.
        and (2) decreases in salaries, R&D materials, recruiting, rent, and contract
        labor. Overall, R&D salaries and benefits decreased $411,000, professional
        fees increased $104,000, rent decreased $309,000, contract labor decreased
        $365,000, and R&D materials and equipment expense decreased $1,140,000
        during the nine months ended September 30, 2006. The rent decrease was due
        to a
        rent credit of $313,000 resulting from the termination of leasehold improvement
        payment obligations on our Indiana facility.
  *General
        and administrative expenses (“G&A”).* G&A
        increased $8,679,000 to $17,903,000 in the nine months ended September 30,
        2006
        compared to $9,224,000 for the nine months ended September 30, 2005. The
        major
        components of G&A expenses are compensation, professional fees, outside
        services, insurance, stock compensation expense and warrant modification
        expense. **** G&A
        compensation costs decreased $1,106,000 to $2,978,000 from $4,084,000 in
        the
        prior year nine month period primarily due to lower salaries, bonuses and
        severance. Professional fees increased $365,000 to $1,741,000 in the nine
        months
        ended September 30, 2006 due primarily to higher legal and accounting services
        necessary to complete and file amended financial statements in response to
        comment letters from the Securities and Exchange Commission, which were
        completed in August 2006, and updated registration statements based on the
        amended financial statements, which registration statements were completed
        and
        filed in September 2006. Stock compensation expense increased $375,000 to
        $1,168,000 due to the January 1, 2006 adoption of SFAS 123R.
 
 G&A
        expenses for the nine months ended September 30, 2006 include $10,127,000
        of
        expenses related to the modification of the terms of Battery Warrants under
        an
        agreement (the “Warrant Exercise Agreement”) with Ener1 Group entered into on
        March 30, 2006. The costs included (1) $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, (2) $115,000 in connection with the transfer of Ener1’s entire equity
        interest in Ener EL to Ener1 Group which was recorded at fair value which
        approximated the remaining book value, (3) $584,000 representing the fair
        value
        of the Series B Preferred Put which was terminated, and (4) $9,200,000 for
        the
        fair value of the warrants issued to Ener1 Group to purchase up to 20,000,000
        shares of our common stock.
  *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 expenses.* Interest
        expense increased $662,000 to $3,515,000 for the three months ended September
        30, 2006 compared to $2,853,000 in the quarter ended September 30, 2005.
        Interest expense increased $1,917,000 to $9,520,000 for the nine months ended
        September 30, 2006 compared to $7,603,000 for the nine months ended September
        30, 2005. Interest expense for the nine month period increased due to the
        inclusion of a full nine months of interest on the 2005 Debentures, and increase
        in the interest rate to 15% on both the 2004 Debentures and 2005 Debentures.
        We
        accrued $498,000 and $2,016,000 of registration delay expenses under our
        Debenture agreements in the three and nine months ended September 30, 2006;
        the
        expenses accrued through January 20, 2006 for the 2004 Debentures and through
        September 8, 2006 for the 2005 Debentures, at which time we obtained
        effectiveness of the registration statement for the 2005
        Debentures.
  25
 
 *Minority
        interest.* Minority
        interest income or loss decreased $4,009,000 for the nine months ended September
        30, 2006 compared to the prior year period. The minority interest balance
        sheet
        amount was reduced to zero as of September 2005 as a result of the minority
        interest in EnerDel’s cumulative losses, and no additional minority interest
        income or loss will be recorded until the minority interest account returns
        to a
        positive balance. Minority interest in 2006 represents 100% of the dividends
        payable on the Series A Preferred Stock due to Delphi.
 
 *Gain
        or loss on derivative liability.* For the
        nine months ended September 30, 2006, we reported a loss on derivative liability
        of $1,402,000 versus a gain on derivative liability of $52,122,000 for the
        nine
        months ended September 30, 2005, a difference of $52,524,000. The gain in
        the
        nine months ended September 30, 2005 resulted from a decrease in the reported
        value of derivative liabilities due primarily to decreases in the market
        value
        of our common stock at September 30, 2005. The overall magnitude of derivative
        gains and losses declined in the nine months ended September 30, 2006 due
        to the
        determination that certain warrants would no longer be treated as derivative
        liabilities as a result of the exercise of all of the Battery Warrants. As
        a
        result of the conversion of all of the Battery Warrants on June 30, 2006,
        all
        warrants except for the 2005 Debenture Warrants were deemed no longer to
        be
        derivatives under SFAS 133 and EITF 00-19. The warrants previously treated
        as
        derivative liabilities were valued at fair value on June 30, 2006 with a
        corresponding gain or loss on derivatives.
 
 ***Liquidity
        and Capital Resources***
 
 We
        do not
        presently have sufficient funds to execute our business plans, and estimate
        that
        we will need to raise $40,000,000 to $50,000,000 in additional capital to
        conduct our planned operations during the remainder of 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 December 31, 2006, at which time we intend to seek to
        raise
        the additional financing described above. If we are unable to raise adequate
        permanent capital for our current plan of operations and
        obligations, we would have to adopt an alternative operating model to
        continue as a going concern. If we are unable to obtain sufficient funding
        for
        the remainder of 2006 from outside investors or other public sources, we
        plan to
        seek funding from Ener1 Group, our majority shareholder, on terms similar
        to
        those involving the convertible notes issued to Ener1 Group during the second
        and third quarters of 2006. There is no assurance that Ener1 Group will provide
        such funds.
 
 Effective
        as of November 9, 2006, we entered into a Forbearance Agreement with Satellite
        Asset Management, L.P. ("Satellite"), a holder of our 2004 Debentures and
        2005
        Debentures. Under the Forbearance Agreement, Satellite agreed to forbear
        until
        December 24, 2006 from any action arising from our failure to make payments
        of
        registration delay expenses totaling $1,744,750 due to Satellite under the
        terms
        of the Registration Rights Agreements relating to the 2004 and 2005 Debentures
        as a result of our failure to keep resale registration statements for the
        debenture available for its use during certain periods in 2005 and 2006.
        The
        Forbearance Agreement requires us to borrow certain amounts from Ener1 Group
        and
        escrow such amounts for payment of a portion of Satellite’s share of accrued but
        unpaid registration delay expenses or the debenture interest payments due
        December 31, 2006, at Satellite’s option based on its acceptance or not of a
        term sheet from us by December 24, 2006 regarding possible terms of
        restructuring of the debentures. Satellite may terminate its forbearance
        in the
        event of our failure to comply with the Deposit Agreement, the occurrence
        of
        certain bankruptcy-related events or the inaccuracy of any representation
        made
        by us in the Forbearance Agreement or the 2004 and 2005 Debentures.
  At
        September 30, 2006, we had a working capital deficit of $14,044,000 primarily
        due to aggregate derivative liability of $8,419,000 and accounts payable
        and
        accrued expenses of $6,383,000. Accounts payable increased due to delayed
        payments to vendors and accrued expenses increased due to the registration
        delay
        expenses accruing from November 2005 to September 2006. Our working capital
        deficit excluding the derivative liability was $5,625,000. Our cash at September
        30, 2006 was $142,000. In addition, we have restricted cash of $224,000 which
        is
        unavailable for corporate use because it remains as collateral for the letter
        of
        credit issued in favor of the landlord for the New York City office space
        now
        occupied by Ener1 Group. During the nine months ended September 30, 2006,
        we
        used $13,430,000 of cash in operations which was funded through financing
        activities of $12,581,000 and beginning cash on hand of $2,082,000.
 
 During
        the nine months ended September 30, 2006, our working capital provided by
        financing activities was $12,581,000 consisting primarily of the proceeds
        of
        $5,520,000 from the exercise by Ener1 Group of the Battery Warrants to purchase
        our common stock and net proceeds from issuance of convertible notes and
        advances due to Ener1 Group totaling $7,080,000. During the nine months ended
        September 30, 2006, Ener1 Group exercised Battery Warrants to purchase an
        aggregate 69,000,000 shares of our common stock at an exercise price of $0.08
        per share. The expiration date of the exercised warrants was 2012.
  26
  ***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 Standards (“SFAS”) No. 133, “Accounting for Derivative
        Instruments and Hedging Activities” (“SFAS 133”), 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.
 
 In
        September 2000, the Emerging Issues Task Force ("EITF") issued EITF Issue
        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 Ener1’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 SFAS 133 and EITF 00-19, we
        determined that several of the outstanding warrants to purchase our common
        stock
        and the embedded conversion feature and certain other features of several
        of our
        financial instruments should be separately accounted for as assets or
        liabilities. Our financial statements for the years ended December 31, 2004
        and
        2005 and nine months ended September 30, 2005 and 2006 reflect the fair value
        of
        these warrants and the conversion and other embedded derivatives features
        on our
        balance sheets and the unrealized changes in the values of these derivatives
        in
        our consolidated statements of operations as “Gain (loss) on derivative
        liability.”
  Prior
        to
        their exercise, we determined that the Battery Warrants were a derivative
        liability under EITF 00-19 because share settlement of these warrants was
        not
        within the control of Ener1 as a result of the facts that: (1) the holder
        of the
        Battery Warrants was the controlling shareholder of Ener1, and (2) the Battery
        Warrants contained dilution protection features, with no limit or cap on
        the
        number of shares potentially issuable under the Battery Warrants. Therefore,
        we
        could not conclude we had sufficient authorized unissued shares to issue
        the
        number of shares required under the other warrants subsequently issued by
        Ener1
        as described above. As a result, we determined that these warrants would
        also be
        treated as derivative liabilities because we could not conclude that we had
        sufficient authorized and unissued shares to settle the potential share
        issuances required under these warrants as long as the Battery Warrants were
        outstanding. All of the Battery Warrants were exercised by September 30,
        2006
        and, accordingly, the derivative liabilities of the Battery Warrants were
        eliminated as well as the derivative liabilities associated with certain
        other
        warrants because once the Battery Warrants were no longer outstanding, we
        were
        able to determine that we had sufficient authorized unissued shares to issue
        the
        number of shares required under these warrants.
  We
        have
        evaluated our provisions of the registration rights agreements issued in
        connection with our 2004 Debentures which require us to make registration
        delay
        expenses in combination with the respective financial instruments involved.
        The
        EITF recently deliberated the impact of liquidated damages clauses in
        registration rights agreements and the effect on accounting and classification
        of instruments subject to the scope of EITF 00-19 in EITF Issue 05-04, “The
        Effect of a Liquidated Damages Clause on a Freestanding Financial Instrument
        Subject to Issue No. 00-19” (“EITF 05-04”). The EITF has not reached a consensus
        on this issue and has deferred deliberation until the Financial Accounting
        Standards Board addresses certain questions which could impact a conclusion
        on
        this issue. Specifically, EITF 05-04 presents alternative views on whether
        the
        liquidated damages provisions in registration rights agreements should be
        combined with or treated separately from the associated financial instrument.
        As
        discussed above, we view the registration rights agreement and the financial
        instrument as one combined freestanding instrument under View A of EITF 05-04.
        If the EITF were to adopt the view that the registration rights agreement
        should
        be viewed as a separate instrument from the financial instrument, we may
        have to
        account for additional derivatives or liabilities.
  27
  The
        2004
        Debentures and 2005 Debentures both contain more than one embedded derivative
        feature which SFAS 133 requires be accounted for as derivatives. The various
        embedded derivative features of each series of debentures have been bundled
        together as a single, compound embedded derivative instrument that has been
        bifurcated from the debenture in accordance with Derivatives Implementation
        Group Issue No. B15. The derivative features that have been bundled together
        in
        the compound embedded derivative include: (1) the conversion feature of the
        debentures, (2) the holder's right to force us to redeem the debentures after
        an
        event of default, (3) the holder's right to force us to redeem the debentures
        after a change in control, (4) our right to redeem the debentures after 3
        years,
        (5) the requirement to pay an increased interest rate if we fail to achieve
        certain milestones, and (6) our right to convert the debentures into common
        stock if certain conditions are satisfied. The value of the compound embedded
        derivative liability was bifurcated from the debenture and recorded as a
        derivative liability, which results in a reduction of the initial carrying
        amount (as unamortized discount) of the related debenture at inception. The
        unamortized discount is being amortized to interest expense using the effective
        interest method over the life of the debenture.
 
 We
        also
        determined that an agreement entered into in October 2004 under which Ener1
        Group agreed to purchase at our request up to $3,000,000 of the Series B
        Preferred Stock plus warrants was a financial instrument (the "Series B
        Preferred Stock Put") which we are required to value as a derivative asset
        and
        mark to market at each balance sheet date. The Series B Preferred Stock Put
        was
        terminated on March 30, 2006, and, accordingly, is no longer subject to SFAS
        133
        and EITF 00-19.
 
 For
        instruments with a single derivative, such as our warrants and the conversion
        feature derivative of preferred stock, we use the Black Scholes pricing model
        for determining the derivatives' fair values. For instruments with compound
        embedded derivatives, such as the 2004 Debentures and 2005 Debentures, we
        use a
        lattice valuation model to value the derivatives. We believe the application
        of
        the Black Scholes model provides the most reliable valuation of single
        derivatives, whereas the lattice model provides the ability to value compound
        embedded derivatives.
  *Lattice
        Valuation Model*
 
 We
        valued
        the compound embedded derivatives in the 2004 Debentures and 2005 Debentures
        using a lattice model, with the assistance of a valuation consultant. The
        lattice model values the compound embedded derivatives based on a probability
        weighted discounted cash flow model. This model is based on future projections
        of the five primary alternatives possible for settlement of the features
        included within the compound embedded derivative, including: (1) payments
        are
        made in cash, (2) payments are made in stock, (3) the holder exercises its
        right
        to convert the debentures, (4) Ener1 exercises its right to convert the
        debentures and (5) Ener1 defaults on the debentures. We use the model
        to analyze (a) the underlying economic factors that influence which of these
        events will occur, (b) when they are likely to occur, and (c) the common
        stock
        price and specific terms of the debentures such as interest rate and conversion
        price that will be in effect when they occur. Based on the analysis of these
        factors, we use the model to develop a set of potential scenarios.
        Probabilities of each scenario occurring during the remaining term of the
        debentures are determined based on management's projections. These probabilities
        are used to create a cash flow projection over the term of the debentures
        and
        determine the probability that the projected cash flow would be achieved.
        A
        discounted weighted average cash flow for each scenario is then calculated
        and
        compared to the discounted cash flow of the debentures without the compound
        embedded derivative in order to determine a value for the compound embedded
        derivative.
  The
        primary determinants of the economic value of a compound embedded derivative
        under the lattice model are (1) the price of our common stock, (2) the
        volatility of our common stock price, (3) the likelihood that we will be
        required to pay registration delay expenses, (4) the likelihood that an event
        of
        default or a change in control will occur, (5) the likelihood that the
        conversion price will be adjusted, (6) the likelihood that the our common
        stock
        will be listed on an exchange, (7) the likelihood that we will be able to
        obtain
        alternative financing and (8) the likelihood that we would be able to force
        conversion of the debentures.
  28
  The
        fair
        value of the compound derivative embedded in the 2004 Debentures as of September
        30, 2006 and 2005 determined using the lattice valuation model were based
        on the
        following management assumptions:
 **2004
                    Debentures*****Assumptions:***
                
                **at
                    September 30, 2006**
                
                **at
                    September 30, 2005**The
                    price of Ener1's common stock would increase at a rate commensurate
                    with
                    the cost of equity, with a volatility of:
                
                
                100
                %
                
                120
                %Percent
                    likelihood that Ener1 would not be in default of its obligations
                    under the
                    registration rights agreement relating to the 2004
                    Debentures:
                
                
                95
                %
                
                95
                %Percent
                    likelihood that an event of default or a fundamental change would
                    occur,
                    increasing over time:
                
                
                5
                %
                
                5
                %Reset
                    events projected to occur with a weighted average adjustment
                    factor of
                    :
                
                
                0.879
                
                
                0.989Percent
                    likelihood that Ener1 would force the conversion of the 2004
                    Debentures if
                    the stock price reached $1.75:
                
                
                95
                %
                
                95
                %The
                    holders of the 2004 Debentures would convert the 2004 Debentures
                    if the
                    registration rights agreement was effective, Ener1 was not in
                    default
                    under the 2004 Debentures, and Ener1's common stock price
                    was:
                
                $
                3.50
                
                $
                3.50Ener1
                    would redeem the 2004 Debentures following the third anniversary
                    of the
                    issue date if Ener1's common stock price reached:
                
                $
                1.50
                
                $
                1.50Percent
                    likelihood that Ener1 would be able to obtain alternative financing
                    that
                    would enable it to redeem the 2004 Debentures, increasing 2.5%
                    per quarter
                    to a maximum of 25%:
                
                
                0
                %
                
                0
                %Percent
                    likelihood that Ener1's common stock would be listed on an exchange
                    increasing 10% quarterly to a maximum of 90%:
                
                
                0
                %
                
                0
                %
 Based
        on
        these management assumptions, the fair value of these embedded derivatives
        as of
        September 30, 2006 and 2005 were calculated by management to be $2,737,000
        and $7,453,000, respectively.
 
 The
        fair
        value of the compound derivative embedded in the 2005 Debentures as of September
        30, 2006 and 2005 determined using the lattice valuation model were based
        on the
        following management assumptions:
 **2005
                    Debentures*****Assumptions:***
                
                **at
                    September 30, 2006**
                
                **at
                    September 30, 2005**The
                    price of Ener1's common stock would increase at a rate commensurate
                    with
                    the cost of equity, with a volatility of:
                
                
                100
                %
                
                120
                %Percent
                    likelihood that Ener1 would not be in default of its obligations
                    under the
                    registration rights agreement relating to the 2005
                    Debentures:
                
                
                95
                %
                
                95
                %Percent
                    likelihood that an event of default or a fundamental change would
                    occur:
                
                
                5
                %
                
                5
                %Reset
                    events projected to occur with a weighted average adjustment
                    factor
                    of:
                
                
                0.973
                
                
                0.967Percent
                    likelihood that Ener1 would force the conversion of the 2005
                    Debentures if
                    the Ener1 common stock price reached $1.50:
                
                
                95
                %
                
                95
                %The
                    holders of the 2005 Debentures would convert the 2005 Debentures
                    if the
                    registration rights agreement was effective, Ener1 was not in
                    default
                    under the 2004 Debentures and Ener1's common stock price
                    reached:
                
                $
                1.75
                
                $
                1.75Ener1
                    would redeem the 2005 Debentures following the third anniversary
                    of the
                    issue date if Ener1's common stock price reached:
                
                $
                1.25
                
                $
                1.25Percent
                    likelihood that Ener1 would be able to obtain alternative financing
                    that
                    would enable it to redeem the 2005 Debentures, increasing 2.5%
                    per quarter
                    to a maximum likelihood of 25%:
                
                
                0
                %
                
                0
                %Percent
                    likelihood that Ener1's common stock would be listed on an exchange
                    and
                    meet the volume requirements set forth in the 2005 Debentures,
                    increasing
                    10% quarterly to a maximum likelihood of 90%:
                
                
                0
                %
                
                0
                %
 Based
        on
        these management assumptions, the fair value of the compound embedded derivative
        in the 2005 Debentures as of September 30, 2006 and 2005 were calculated
        by
        management to be $4,188,000 and $6,325,000, respectively.
 
 All
        of
        the above assumptions are reviewed quarterly and are subject to change based
        primarily on management’s assessment of the probability of the events described
        occurring. Accordingly, changes to these assessments could materially affect
        the
        valuation.
  29
  *Black
        Scholes Valuation Model*
  Each
        of
        these factors is reassessed at each balance sheet date, and the value of
        each
        derivative liability or asset is recalculated. The projections used, and
        managements’ assessment of the likelihood of different events, can greatly
        affect the value of our derivatives assets and liabilities, which can
        significantly affect our financial statements.
  We valued
        the asset value of our Series B Preferred Stock Put using the Black Scholes
        pricing model, with the assistance of a valuation consultant. The model uses
        a
        number of inputs including the value of the warrants associated with the
        Series
        B Preferred Stock (the "Series B Preferred Stock Warrants") and the cost
        of
        alternative financing, in order to compute the value of the put feature.
        The
        assumptions used in the Black Scholes valuation model were: a risk free interest
        rate of 4.03%; the current stock price at date of issuance of $0.65 per share;
        the exercise price of the warrants of $1.25 and $1.50; a term of ten years;
        volatility of 450%; and dividend yield of 0.0%.
  We
        used
        the Black Scholes pricing model to determine the fair values of our warrants
        and
        the conversion feature of our preferred stock. The model uses market sourced
        inputs such as interest rates, stock prices, and option volatilities, the
        selection of which requires management’s judgment, and which may impact net
        income or loss. 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 valuation of our current operations.
        We use a risk free interest rate which is equal to the U. S. Treasury bill
        rate
        for securities with a maturity that approximates the estimated expected life
        of
        a derivative or security. We use the closing market price of our common stock
        on
        the date of issuance of a derivative or at the end of a quarter when a
        derivative is valued at fair value. The volatility factor used in the Black
        Scholes pricing model has a significant effect on the resulting valuation
        of the
        derivative liabilities on our balance sheet. The volatility of our stock
        price
        has ranged from 296% to 135% during the years ended December 31, 2003, 2004
        and
        2005. Our volatility rate will likely change in the future. Our stock price
        will
        also change in the future. To the extent that our stock price increases,
        our
        derivative liability will also increase, absent any change in volatility
        rates.
        To the extent that our volatility decreases in the future, the value of the
        derivative liability will also decrease, absent any change in our stock price.
        The following table shows the volatility, risk free rate and market price
        used
        in the calculation of the Black Scholes call value for each derivative at
        issuance date and at the end of each year and at September 30,
        2006.
 **Issue
                    Date**
                
                **Volatility**
                
                **Risk
                    Free Interest Rate**
                
                **Market
                    Price**
                
                **Term
                    in Years**At
                    Issuance date for:2004
                    Debenture Warrants
                
                
                1/21/2004
                
                
                296
                %
                
                3.5
                %
                $
                1.65
                
                
                102005
                    Debenture Warrants
                
                
                3/11/2005
                
                
                135
                %
                
                3.5
                %
                $
                0.75
                
                
                5EnerDel
                    Series A Preferred Stock
                
                
                10/20/2004
                
                
                207
                %
                
                1.8
                %
                $
                0.66
                
                
                3
                    mos.Delphi
                    Warrants
                
                
                10/20/2004
                
                
                207
                %
                
                1.8
                %
                $
                0.66
                
                
                7Series
                    B Preferred Stock Warrants
                
                
                10/15/2004
                
                
                207
                %
                
                1.8
                %
                $
                0.65
                
                
                10Series
                    B Preferred Stock Put
                
                
                10/15/2004
                
                
                450
                %
                
                4.0
                %
                $
                0.65
                
                
                10Battery
                    Warrants
                
                
                9/6/2002
                
                
                201
                %
                
                1.7
                %
                $
                0.05
                
                
                10Debt
                    Exchange Warrants
                
                
                11/14/2003
                
                
                296
                %
                
                1.0
                %
                $
                0.98
                
                
                10Prices
                    and average rates at:December
                    31, 2003
                
                
                
                
                
                296
                %
                
                4.3
                %
                $
                1.40December
                    31, 2004
                
                
                
                
                
                155
                %
                
                4.1
                %
                $
                0.85December
                    31, 2005
                
                
                
                
                
                145
                %
                
                4.1
                %
                $
                0.39September
                    30, 2006
                
                
                
                
                
                138
                %
                
                4.6
                %
                $
                0.31
 
 *Accounting
        for Share-Based Payments*
 
 Prior
        to
        December 31, 2005, Ener1 accounted for its stock-based compensation 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 SFAS No. 123, “Accounting for Stock-Based
        Compensation” (“SFAS 123”).
  Effective
        January 1, 2006, Ener1 adopted the fair value recognition provisions of SFAS
        No.
        123R, “Share-Based Payment,” and related Interpretations (“SFAS 123R”) using the
        modified-prospective transition method. Under that method, compensation cost
        recognized in 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 123 and (b) compensation cost for all
        share-based payments granted on or subsequent to January 1, 2006, based on
        the
        grant-date fair value estimated in accordance with the provisions of SFAS
        123R.
        Compensation cost is being recognized on a straight-line basis over the
        requisite service period for the entire award in accordance with the provisions
        of SFAS 123R. Results for the prior periods have not been restated.
  30
 
 *Recent
        Accounting Pronouncements*
 
 In
        July
        2006, the Financial Accounting Standards Board (“FASB”) issued FASB
        Interpretation No. 48, “Accounting for Uncertainty in Income Taxes—an
        Interpretation of FASB Statement No. 109” (“FIN 48”), which clarifies the
        accounting for uncertainty in income tax positions. This Interpretation requires
        that the Company recognize in its financial statements the impact of a tax
        position if that position is more likely than not of being sustained on audit,
        based on the technical merits of the position. The provisions of FIN 48 are
        effective for the Company on January 1, 2007, with the cumulative effect
        of the
        change in accounting principle, if any, recorded as an adjustment to opening
        retained earnings. The Company is currently evaluating the impact of adopting
        FIN 48 on its financial position, cash flows, and results of
        operations.
 
 In
        September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS
        157”), which clarifies the definition of fair value, establishes guidelines for
        measuring fair value, and expands disclosures regarding fair value measurements.
        SFAS 157 does not require any new fair value measurements and eliminates
        inconsistencies in guidance found in various prior accounting pronouncements.
        SFAS 157 will be effective for the Company on January 1, 2008. The Company
        is
        currently evaluating the impact of adopting SFAS 157 on its financial position,
        cash flows, and results of operations.
 
 In
        September 2006, the Securities and Exchange Commission (“SEC”) released Staff
        Accounting Bulletin No. 108, “Considering the Effects of Prior Year
        Misstatements when Quantifying Misstatements in Current Year Financial
        Statements” (“SAB 108”). SAB 108 provides interpretive guidance on the SEC’s
        views on how the effects of the carryover or reversal of prior year
        misstatements should be considered in quantifying a current year misstatement.
        The provisions of SAB 108 will be effective for the Company for the fiscal
        year
        ended December 31, 2006. The Company is currently evaluating the impact of
        applying SAB 108 but does not believe that the application of SAB 108 will
        have
        a material effect on its financial position, cash flows, and results of
        operations.
 
 *Off-Balance
        Sheet Arrangements*
 
 At
        September 30, 2006, we did not have any off-balance sheet arrangements, as
        defined in item 303(c)(2) of Regulation S-B.
  31
  Item
        3.  Controls and Procedures
 
 As
        of
        September 30, 2006, we carried out an evaluation, under the supervision and
        with
        the participation of our management, including the individuals serving as
        our
        Interim 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 inadequacies in our disclosure
        controls relating to accounting for additional compound embedded derivatives
        in
        our debentures, recording additional discount and interest accretion on the
        debentures, valuing warrants issued with the 2004 Debentures, recording of
        the
        value of the Series B Preferred Stock Put, and reflecting the presentation
        of
        the Series A Preferred Stock dividend as a reduction in minority interest
        income. On August 4, 2006, we amended our Quarterly Report on Form 10-QSB
        for
        the period ended September 30, 2005 to restate our financial statements for
        the
        quarter and nine-month periods ended September 30, 2005. As a result of
        these inadequacies in our disclosure controls and deficiencies in our internal
        controls, our Interim Chief Executive Officer and Chief Financial Officer
        concluded that our disclosure controls and procedures were not effective
        as of
        September 30, 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 and inadequacies through the following
        efforts: 1) implementing better controls and procedures over the evaluation
        of derivative liabilities in financial instruments 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.
  32
  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
        November 7, 2006 we entered into settlement agreements for each of the lawsuits
        previously filed against us by Pankaj Dhingra and A. Ernest Toth, Jr. in
        amounts
        that will not have a material effect on our consolidated financial statements.
 
 Item
        2.  Unregistered Sales of Equity Securities and Use of
        Proceeds
 
 On
        July
        1, August 1 and September 1, 2006, we issued to Marston Webb International,
        Inc.
        8,511, 9,524 and 11,429 shares, respectively, of our unregistered common
        stock
        as compensation for public relations services.
 
 On
        September 30, 2006, in accordance with the terms of a convertible note purchased
        by Ener1 Group, we issued to Ener1 Group a warrant to purchase up to 9,000,000
        shares of our common stock at an exercise price of $0.40 per share and a
        warrant
        to purchase up to 9,000,000 shares of our common stock at an exercise price
        of
        $0.60 per share.
 
 All
        of
        the security issuances described above were exempt from registrationunder
        Section 4(2) of the Securities Act of 1933, as sales not involving a public
        offering. The shareholders were deemed accredited and the securities issued
        contain the appropriate restrictive legends.
  33
  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.
  34
  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).
 
 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
                  Registrant 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, 2005.4.15
              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, 2005.4.16
              Convertible
                  Note issued to Ener1 Group, Inc. dated June 30, 2006, incorporated
                  by
                  reference to Item 4.16 of Registrant’s Quarterly Report on Form 10-QSB for
                  the period ended June 30, 2006.4.17
              Warrant
                  issued to Ener1 Group, Inc. dated June 30, 2006 to purchase 9,000,000
                  shares of Common Stock of the Registrant, incorporated by reference
                  to
                  Item 4.17 of Registrant’s Quarterly Report on Form 10-QSB for the period
                  ended June 30, 2006.4.18
              Warrant
                  issued to Ener1 Group, Inc. dated June 30, 2006 to purchase 20,000,000
                  shares of Common Stock of the Registrant, incorporated by reference
                  to
                  Item 4.18 of Registrant’s Quarterly Report on Form 10-QSB for the period
                  ended June 30, 2006.4.19
              Convertible
                  Note issued to Ener1 Group, Inc. dated September 30, 2006.
                  *4.20
              Warrant
                  issued to Ener1 Group, Inc. dated September 30, 2006 to purchase
                  9,000,000
                  shares of Common Stock of the Registrant.*4.21
              Warrant
                  issued to Ener1 Group, Inc. dated September 30, 2006 to purchase
                  9,000,000
                  shares of Common Stock of the Registrant.*4.22
              Agreement
                  dated October 3, 2006 between Ener1 Group, Inc. and Ener1, Inc.
                  regarding
                  payment of salary and other costs of Ener1, Inc. for Victor
                  Mendes*
  35
  4.23
              Agreement
                  dated October 3, 2006 between Ener1 Group, Inc. and Ener1, Inc.
                  regarding
                  payment of salary and other costs of Ener1, Inc. for Ajit
                  Habbu*4.24
              Employment
                  Agreement between Ener1, Inc. and Ajit Habbu*31.1
              Certification
                  of Principal Executive Officer pursuant to Section 302 of the
                  Sarbanes-Oxley Act of 2002.31.2
              Certification
                  of Principal Financial Officer pursuant to Section 302 of the
                  Sarbanes-Oxley Act of 2002.32.1
              Certification
                  of Principal Executive Officer pursuant to 18 U.S.C. Sec. 1350,
                  as adopted
                  pursuant to Section 906 of the Sarbanes-Oxley Act of
                  2002.32.2
              Certification
                  of Principal Financial Officer pursuant to 18 U.S.C. Sec. 1350,
                  as adopted
                  pursuant to Section 906 of the Sarbanes-Oxley Act of
                  2002.
  *
        Filed
        herewith
  36
  **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:
                  November 14, 2006
              By:
              /s/ Ronald
                  StewartRonald
                  StewartInterim
                  Chief Executive Officer
                (Principal
                  Executive Officer)
  Dated: November
                  14, 2006
              By:
              /s/ Ajit
                  HabbuAjit
                  HabbuChief
                  Financial Officer
                (Principal
                  Financial and Accounting Officer)
  37