UNITED
      STATES


SECURITIES
      AND EXCHANGE COMMISSION


Washington,
      D.C. 20549




FORM
      10-QSB/A





Amendment
      No. 4




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


THE
      SECURITIES EXCHANGE ACT OF 1934


For
      the
      quarterly period ending September 30, 2005




Commission
      File Number 0-21138




**ENER1,
      INC.**


(Exact
      name of registrant as specified in its charter)




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








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


**Ft.
      Lauderdale, Florida 33309**


(Address
      of principal executive offices) (Zip Code)




**(954)
      556-4020**


(Registrant's
      telephone number, including area code)




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




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




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




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




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




Class
              Common
                stock, par value
              $.01
                per share
            Outstanding
                as of
              December
                31, 2005
              347,455,751







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














**ENER1,
      INC. AND SUBSIDIARIES**


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




INDEX




PagePart
                  I. FINANCIAL INFORMATIONItem
                  1.  Financial StatementsCondensed
                  Consolidated Balance Sheet (unaudited) as ofSeptember
                  30, 2005and
                  December 31, 2004
              5Condensed
                  Consolidated Statements of Operations (unaudited)for
                  the three and nine months ended September 30, 2005 and
                  2004
              6Condensed
                  Consolidated Statements of Cash Flows (unaudited)for
                  the nine months ended September 30, 2005 and 2004
              7Notes
                  to Condensed Consolidated Financial Statements (unaudited)
              8Item
                  2.  Management's Discussion and Analysis of FinancialCondition
                  and Results of Operations
              29Item
                  3A.  Controls and Procedures
              32Part
                  II. OTHER INFORMATIONItem
                  1. Legal Proceedings
              33Item
                  5. Other
              33Item
                  6. Exhibits
              34Signatures
              35


2





**Explanatory
      Note**




The
      consolidated financial statements for the three and nine months ended September
      30, 2004 and 2005 and related disclosures included in this Amendment No. 4
      to Quarterly Report on Form 10-QSB have been restated.





During
      the fourth quarter of 2005, Ener1 determined that it was necessary to restate
      its previously issued financial statements for the three and nine months ended
      September 30, 2004 to reflect additional gains and losses related to the
      classification of and accounting for: (1) the conversion features of Ener1's
      senior secured convertible debentures issued in January 2004 (the "2004
      Debentures") and in March 2005 (the "2005 Debentures") and the associated
      warrants, (2) the amortization expense associated with the discount recorded
      with respect to 2004 Debentures and 2005 Debentures and financing costs incurred
      in connection with the issuance of this debt, (3) the  conversion features
      associated with the preferred stock issued by Ener1's subsidiary and
      the associated warrants and (4) warrants issued by Ener1 including the
      warrants issued to Ener1 Group, Inc. in September 2002 and warrants associated
      with Ener1's preferred stock.





On
      January 5, 2006, Ener1 filed a Quarterly Report on Form 10-QSB for the three
      and
      nine months ended September 30, 2005 (the "September 2005 10-QSB") including
      restatements of Ener1's previously issued financial statements for the three
      and
      nine months ended September 30, 2004.





On
      March
      2, 2006, Ener1 determined that it was necessary to restate the financial
      statements included in the September 2005 10-QSB for the three and nine months
      ended September 30, 2004 and 2005 in order to reflect additional gains and
      losses related to the classification of and accounting for (1) options to
      purchase Ener1's common stock issued to a business partner in July 2003 and
      (2)
      warrants to purchase Ener1's common stock issued to Ener1's majority stockholder
      in November 2003. On March 3, 2006, Ener1 filed Amendment No. 1 to the September
      2005 10-QSB which included restatements of Ener1's previously issued financial
      statements for the three and nine months ended September 30, 2005 that reflected
      the additional gains and losses described in this paragraph.





On
      March
      10, 2006, Ener1 determined that it was necessary to restate the financial
      statements included in Amendment No. 1 to the September 2005 10-QSB for the
      three and nine months ended September 30, 2004 and 2005 in order to record
      deferred debenture costs and associated interest expense related to warrants
      issued to the placement agent for the 2004 Debentures. On
      March
      16, 2006, Ener1 filed Amendment No. 2 to the September 2005 10-QSB which
      included restatements of Ener1's previously issued financial statements for
      the
      three and nine months ended September 30, 2004 and 2005 that reflected the
      additional costs and expenses described in this paragraph.




On
      May
      18, 2006, Ener1 concluded that it would be necessary to restate the financial
      statements for the three and nine months ended September 30, 2004 and 2005
      included in Amendment No. 2 to the September 2005 10-QSB to (1)
      report the EnerDel Series A Preferred Stock and Ener1 Series B Preferred Stock
      as temporary equity between long term liabilities and stockholders' equity
      (deficit) at September 30, 2004 and 2005 rather than as long term liabilities
      and (2) correct its calculation of diluted earnings or loss per share. Ener1
      filed Amendment No. 3 to the September 2005 10-QSB on May 25, 2006, which filing
      included restated financial statements for the three and nine months ended
      September 30, 2004 and 2005 that reflected these changes.




In
        July
        2006, Ener1 concluded that it was necessary to restate its financial statements
        for the three and nine month periods ended September 30, 2004 and 2005 included
        in Amendment No. 3 to the September 2005 10-QSB to (1) reflect the
        corrected accounting for and valuation of additional compound embedded
        derivatives in the 2004 Debentures and 2005 Debentures, (2) revise the
        valuation of additional initial discount and interest accretion on the 2004
        Debentures and 2005 Debentures resulting from the revaluation of the compound
        embedded derivatives, (3) record the correct value of the warrants issued
        with the 2004 Debentures, (4) record the value of Ener1's right to require
        Ener1
        Group, Inc. to purchase Series B Preferred Stock and (5) reflect
        the Series A Preferred Stock dividends payable to the minority interest owner
        as
        a reduction in minority interest income.


3




The
      financial statements and other financial information included in this Amendment
      No. 4 to the September 30, 2005 10-QSB have been restated accordingly.
      Ener1's shareholders should no longer rely on Ener1's previously filed financial
      statements for the three and nine months ended September 30, 2004 and 2005.
      These
      matters have been discussed by Ener1's authorized executive officers with the
      Company’s independent registered public accounting firm.





In
      order
      to preserve the nature and character of the disclosures set forth in this
      Quarterly Report as originally filed, no attempt has been made in this Amendment
      No. 4 to modify or update the disclosures in the original Quarterly Report
      except that Ener1 has included the foregoing restatements in Part I, Item 1,
      Ener1 has made conforming changes to Management's Discussion and Analysis of
      Results of Operations and Financial Condition in Part 1, Item 2 to reflect
      these
      restatements and Ener1 has included
      additional information in its financial statements and in Management’s
      Discussion and Analysis of Results of Operations Financial Condition in
      Part I, Item 2 regarding its derivatives and related accounting treatment and
      Enerl has included additional information in Part II, Item 5, Other information,
      regarding these matters.





4


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


Item
      1. - Financial Statements


ENER1,
      INC. AND
      SUBSIDIARIES


CONDENSED
      CONSOLIDATED BALANCE SHEET


(Unaudited)


(In
      thousands except share data)





**September
                  30,**
              
              **December
                  31,****2005**
              
              **2004****(Restated)**
              
              **(Restated)****ASSETS**Current
                  assetsCash
                  and equivalents
              
              $
              7,012
              
              $
              14,091Prepaid
                  expenses and other current assets
              
              
              544
              
              
              190Due
                  from related parties
              
              
              204
              
              
              119Total
                  current assets
              
              
              7,760
              
              
              14,400Property
                  and equipment, net
              
              
              2,944
              
              
              13,390Investment
                  in EnerStruct, Inc.
              
              
              899
              
              
              1,185Deferred
                  debenture costs, net of amortizationof
                  $1,748 and $905
              
              
              4,056
              
              
              3,621Other
              
              
              255
              
              
              443Total
                  assets
              
              $
              15,914
              
              $
              33,039**LIABILITIES
                  AND STOCKHOLDERS' DEFICIT**Current
                  liabilitiesCurrent
                  portion of installment loan
              
              $
              24
              
              
              23Accounts
                  payable and accrued expenses
              
              
              1,598
              
              
              2,301Liabilities
                  of discontinued operations
              
              
              307
              
              
              307Derivative
                  liability
              
              
              74,608
              
              
              113,875Total
                  current liabilities
              
              
              76,537
              
              
              116,506Long-term
                  portion of installment loan
              
              
              73
              
              
              91$19,700
                  convertible debentures, net of discount of $14,823 and
                  $17,141
              
              
              4,877
              
              
              2,559$14,225
                  convertible debentures, net of discount of $10,653 and
                  $0
              
              
              3,572
              
              
              -Total
                  liabilities
              
              
              85,059
              
              
              119,156
 Redeemable
                  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
              
              
              4,369
              
              
              2,569Series
                  B Preferred, $.01 par value, 180,000 shares
                  authorized,152,500
                  shares issued and outstanding, liquidation preference
                  $15,250
              
              
              12,471
              
              
              10,105
 Minority
                    interest
                
                
                -
                
                
                3,951Commitments
                    and contingencies
 **STOCKHOLDERS'
                  DEFICIT**Common
                  Stock, $.01 par value, 750,000,000 shares authorized347,455,751
                  issued and outstanding
              
              
              3,475
              
              
              3,475Paid
                  in capital
              
              
              73,939
              
              
              76,675Accumulated
                  deficit
              
              
              (163,399
              )
              
              (182,892
              )Total
                  stockholders' deficit
              
              
              (85,985
              )
              
              (102,742
              )Total
                  liabilities and stockholders' deficit
              
              $
              15,914
              
              $
              33,039


See
      notes
      to condensed consolidated financial statements.


5





ENER1,
      INC. AND
      SUBSIDIARIES


CONDENSED
      CONSOLIDATED STATEMENTS OF OPERATIONS


(unaudited)


(In
      thousands except per share data)




**Three
                  Months Ended**
              
              **Nine
                  Months Ended****September
                  30,**
              
              **September
                  30,****2005**
              
              **2004**
              
              **2005**
              
              **2004****(Restated)**
              
              **(Restated)**
              
              **(Restated)**
              
              **(Restated)**Net
                  sales
              
              $
              25
              
              $
              -
              
              $
              60
              
              $
              41Operating
                  expensesCost
                  of sales
              
              
              -
              
              
              -
              
              
              -
              
              
              10Manufacturing
                  pre-production costs
              
              
              -
              
              
              532
              
              
              2,132
              
              
              1,048General
                  and administrative
              
              
              2,500
              
              
              1,278
              
              
              7,565
              
              
              5,138Research
                  and development
              
              
              1,194
              
              
              576
              
              
              17,936
              
              
              1,753Total
                  operating expenses
              
              
              3,694
              
              
              2,386
              
              
              27,633
              
              
              7,949Net
                  Loss from operations
              
              
              (3,669
              )
              
              (2,386
              )
              
              (27,573
              )
              
              (7,908
              )Other
                  income and (expense)Interest
              
              
              (2,853
              )
              
              (1,727
              )
              
              (7,603
              )
              
              (4,125
              )Equity
                  in loss of EnerStruct, Inc.
              
              
              (59
              )
              
              (139
              )
              
              (286
              )
              
              (426
              )Other
              
              
              83
              
              
              77
              
              
              223
              
              
              150Gain
                  (loss) on derivative liability
              
              
              (23,604
              )
              
              7,663
              
              
              51,122
              
              
              79,221Total
                  other income (expense)
              
              
              (26,433
              )
              
              5,874
              
              
              43,456
              
              
              74,820Income
                  (loss) before income taxes
              
              
              (30,102
              )
              
              3,488
              
              
              15,883
              
              
              66,912Income
                  taxes
              
              
              -
              
              
              -
              
              
              -
              
              
              -Net
                  income (loss) before minority interestand
                  discontinued operations
              
              
              (30,102
              )
              
              3,488
              
              
              15,883
              
              
              66,912Minority
                  interest
              
              
              (595
              )
              
              -
              
              
              2,222
              
              
              -Net
                  income (loss) from continuing operations
              
              
              (30,697
              )
              
              3,488
              
              
              18,105
              
              
              66,912Loss
                  from discontinued operations
              
              
              -
              
              
              (5
              )
              
              -
              
              
              (7
              )Net
                  income (loss)
              
              
              (30,697
              )
              
              3,483
              
              
              18,105
              
              
              66,905Preferred
                  stock dividends
              
              
              (729
              )
              
              -
              
              
              (2,209
              )
              
              -Net
                  income (loss) attributableto
                  common shareholders
              
              $
              (31,426
              )
              $
              3,483
              
              $
              15,896
              
              $
              66,905Net
                  income (loss) per share, basicContinuing
                  operations
              
              $
              (0.09
              )
              $
              0.01
              
              $
              0.05
              
              $
              0.19Discontinued
                  operations
              
              $
              -
              
              $
              -
              
              $
              -
              
              $
              -Net
                  income (loss) per share, dilutedContinuing
                  operations
              
              $
              (0.09
              )
              $
              (0.01
              )
              $
              (0.02
              )
              $
              0.02Discontinued
                  operations
              
              $
              -
              
              $
              -
              
              $
              -
              
              $
              -Weighted
                  average shares outstanding:Weighted
                  average shares outstanding - Basic
              
              
              347,456
              
              
              347,276
              
              
              347,456
              
              
              346,966Weighted
                  average shares outstanding - Diluted
              
              
              347,456
              
              
              422,941
              
              
              433,042
              
              
              432,298





See
      notes
      to condensed consolidated financial statements.


6





ENER1, INC. AND
      SUBSIDIARIES


CONDENSED
      CONSOLIDATED STATEMENTS OF CASH FLOWS


(Unaudited)


(In
      thousands)





**Nine
                  Months Ended****September
                  30,****2005**
              
              **2004****(Restated)**
              
              **(Restated)**Net
                  income
              
              $
              18,105
              
              $
              66,905Adjustments
                  to reconcile net income to cash used by operating
                  activities:Gain
                  on derivative liability
              
              
              (51,122
              )
              
              (79,221
              )Research
                  and development costs
              
              
              10,527
              
              
              -Minority
                  interest
              
              
              (2,222
              )
              
              -Accretion
                  of discount on debentures
              
              
              3,520
              
              
              1,845Non
                  cash interest expense related to financing costs
              
              
              842
              
              
              980Depreciation
              
              
              473
              
              
              172Compensation
                  expense for stock options
              
              
              815
              
              
              925Equity
                  in loss from investment in Enerstruct
              
              
              286
              
              
              426Changes
                  in current assets and liabilities
              
              
              (1,114
              )
              
              (1,175
              )Changes
                  in assets and liabilities held for disposal
              
              
              -
              
              
              (5
              )Net
                  cash used in operating activities
              
              
              (19,890
              )
              
              (9,148
              )Investing
                  Activities:Capital
                  expenditures
              
              
              (556
              )
              
              (1,322
              )Investment
                  in Splinex
              
              
              -
              
              
              (150
              )Net
                  cash used in investing activities
              
              
              (556
              )
              
              (1,472
              )Financing
                  Activities:Proceeds
                  from issuance of senior secured debenture, net of costs
              
              
              13,134
              
              
              18,527Proceeds
                  from sale of preferred stock
              
              
              250
              
              
              -Repayment
                  of related party notes
              
              
              -
              
              
              (1,041
              )Repayment
                  of guaranteed related party debt
              
              
              -
              
              
              (2,200
              )Repayment
                  of mortgage note payable
              
              
              -
              
              
              (704
              )Repayment
                  of bank loan
              
              
              -
              
              
              (1,600
              )Repayment
                  of bank installment loan
              
              
              (17
              )
              
              (8
              )Proceeds
                  from employee stock options exercised
              
              
              -
              
              
              22Proceeds
                  from exercise of warrants
              
              
              -
              
              
              1,050Net
                  cash provided by financing activities
              
              
              13,367
              
              
              14,046Net
                  increase (decrease) in cash and equivalents
              
              
              (7,079
              )
              
              3,426Cash
                  and cash equivalents beginning balance
              
              
              14,091
              
              
              200Cash
                  and cash equivalents ending balance
              
              $
              7,012
              
              $
              3,626





See
      notes
      to condensed consolidated financial statements.


7





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


**NOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**








1. BASIS
      OF PRESENTATION





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





2. STOCK-BASED
      COMPENSATION





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


**Three
                  Months Ended**
              
              **Nine
                  Months Ended****September
                  30,**
              
              **September
                  30,****2005**
              
              **2004**
              
              **2005**
              
              **2004****(Restated)**
              
              **(Restated)**
              
              **(Restated)**
              
              **(Restated)**Net
                  income (loss)
              
              $
              (30,697
              )
              $
              3,483
              
              $
              18,105
              
              $
              66,905Add
                  stock-based compensationdetermined
                  under intrinsicvalue-based
                  method
              
              
              265
              
              
              197
              
              
              794
              
              
              517Less
                  stock-based compensationdetermined
                  under fair value-based
                  method
              
              
              (856
              )
              
              (798
              )
              
              (2,707
              )
              
              (1,685
              )Net
                  income (loss) pro forma
              
              
              (31,288
              )
              
              2,882
              
              
              16,192
              
              
              65,737Preferred
                  stock dividends
              
              
              (729
              )
              
              -
              
              
              (2,209
              )
              
              -Net
                  income (loss) attributableto
                  common shareholders
              
              $
              (32,017
              )
              $
              2,882
              
              $
              13,983
              
              $
              65,737Net
                  income (loss) per share, basicContinuing
                  operations
              
              $
              (0.09
              )
              $
              0.01
              
              $
              0.04
              
              $
              0.19Net
                  income (loss) per share, dilutedContinuing
                  operations
              
              $
              (0.09
              )
              $
              (0.01
              )
              $
              (0.02
              )
              $
              0.02








The
      weighted average fair value of the stock options granted during fiscal 2005 and
      2004 was $.42 and $.62, respectively. Variables used in the Black-Scholes
      option-pricing model include (1) 3.5%
      risk-free interest rate, (2) expected option life is the actual remaining life
      of the options as of each year end, (3) expected volatility was 100%, and (4)
      no
      dividends are expected to be paid.




8


3. GOING
      CONCERN




The
      accompanying condensed 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 $163 million as of
      September 30, 2005. It is likely that Ener1's operations will continue to incur
      negative cash flows through September 30, 2006 and additional financing will
      be
      required to fund Ener1's planned operations through that time. If additional
      financing is not obtained, such a condition, among others, will give rise to
      substantial doubt about Ener1's ability to continue as a going concern for
      a
      reasonable period of time. The consolidated financial statements do not include
      any adjustments relating to the recoverability and classification of recorded
      asset amounts or the amounts and classifications of liabilities that might
      be
      necessary should Ener1 not be able to continue as a going concern.





4. 
      SEGMENT REPORTING





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





**Three
                  Months Ended**
              
              **Nine
                  Months Ended****September
                  30,**
              
              **September
                  30,****2005**
              
              **2004**
              
              **2005**
              
              **2004****(Restated)**
              
              **(Restated)**
              
              **(Restated)**
              
              **(Restated)****Net
                  sales**EnerFuel,
                  Inc.
              
              $
              -
              
              $
              -
              
              $
              15
              
              $
              -EnerDel,
                  Inc.
              
              
              25
              
              
              -
              
              
              45
              
              
              -Ener1
                  Battery
              
              
              -
              
              
              -
              
              
              -
              
              
              41Total
                  Net Sales
              
              $
              25
              
              $
              -
              
              $
              60
              
              $
              41**Net
                  income (loss)**Discontinued
                  segments
              
              $
              -
              
              $
              (5
              )
              $
              -
              
              $
              (7
              )Corporate
              
              
              (27,770
              )
              
              4,598
              
              
              38,512
              
              
              76,697EnerDel,
                  Inc.
              
              
              (1,621
              )
              
              -
              
              
              (20,732
              )
              
              (6,781
              )Ener1
                  Battery
              
              
              (23
              )
              
              (828
              )
              
              (119
              )
              
              (2,092
              )Ener1
                  Technologies Inc.
              
              
              -
              
              
              (3
              )
              
              -
              
              
              (13
              )EnerFuel
              
              
              (424
              )
              
              (197
              )
              
              (1,003
              )
              
              (739
              )NanoEner
              
              
              (264
              )
              
              (82
              )
              
              (775
              )
              
              (160
              )Minority
                  interest
              
              
              (595
              )
              
              -
              
              
              2,222
              
              
              -Net
                  income (loss)
              
              $
              (30,697
              )
              $
              3,483
              
              $
              18,105
              
              $
              66,905**Assets**Discontinued
                  segments
              
              
              
              
              
              
              
              $
              -
              
              $
              2Corporate
              
              
              
              
              
              
              
              
              9,881
              
              
              9,608EnerDel,
                  Inc.
              
              
              
              
              
              
              
              
              4,527
              
              
              -Ener1
                  Battery
              
              
              
              
              
              
              
              
              1,351
              
              
              22,530Ener1
                  Technologies Inc.
              
              
              
              
              
              
              
              
              1
              
              
              10EnerFuel
              
              
              
              
              
              
              
              
              49
              
              
              305NanoEner
              
              
              
              
              
              
              
              
              105
              
              
              68Total
                  assets
              
              
              
              
              
              
              
              $
              15,914
              
              $
              32,523





9


5. $19,700,000
      CONVERTIBLE DEBENTURES





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




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




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





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





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





Interest
      is due quarterly. All or a portion of the accrued and unpaid interest may be
      converted at the option of the debenture holder at any time under the same
      conversion terms as the principal. To date, interest of $1,614,340 has been
      paid, $0.00 interest was accrued at September 30, 2005 and $261,506 interest
      has
      been converted.




The
      initial interest rate was 5%, subject to increases to 7.5% if Ener1 did not
      achieve all of the specific milestones set forth in the 2004 Debentures by
      180
      days following the date of issuance of the 2004 Debentures and to 15% if Ener1
      did not achieve all of the milestones within 365 days after issuance of the
      2004
      Debentures. The milestones were as follows: (1) the registration statement
      is
      available to cover resales of such shares or such shares may be immediately
      sold
      to the public under Rule 144(k); (2) the Company’s common stock is listed on the
      NASDAQ ® National
      Market, NASDAQ ® SmallCap
      Market or the New York Stock Exchange and trading on the stock has not been
      suspended; (3) an Event of Default (as defined in the 2004 Debentures) or an
      event that, with the passage of time or giving of notice, would constitute
      an
      Event of Default, shall not have occurred and be continuing; and (4) the closing
      bid price for the common stock shall be greater than $1.75 (subject to
      adjustment for stock splits, stock dividends and similar events). As a result
      of
      Ener1’s failure to achieve all of the milestones except the milestone related to
      Events of Default and the registration of the resale of the underlying shares,
      the interest rate was increased to 7.5% as of July 19, 2004 and 15% as of
      January 30, 2005.





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





Ener1
      is required
      under the terms of the 2004 Debentures agreements to register the resale of
      the
      common stock underlying the debentures and associated warrants. If the
      registration statements are not available for use, Ener1 is required to make
      certain payments to the purchasers of the 2004 Debentures (the "registration
      delay payments"). The registration delay p ayments
      accrue at the rate of 1.5% of principal or approximately $295,000 per month
      until January 20, 2006, at which time the obligation to maintain the
      effectiveness of the resale registration statement for the common stock
      underlying the 2004 Debentures and associated warrants ends.





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





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




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




10


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





As
      discussed in Note 8, Ener1 is accounting for the conversion option in the 2004
      Debentures and the associated warrants as derivative liabilities in accordance
      with SFAS 133 “Accounting for Derivative Instruments and Hedging Activities”
("SFAS 133") and EITF 00-19 "Accounting for Derivative Financial Instruments
      Indexed to and Potentially Settled in a Company's Own Stock ("EITF 00-19").
      The
      2004 Debentures contain more than one embedded derivative feature which SFAS
      133
      requires be accounted for as derivative instruments. The various embedded
      derivative features have been bundled together as a 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 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.





6. $14,225,000
      CONVERTIBLE DEBENTURES





On
      March
      14, 2005, Ener1 issued $14,225,000 in aggregate principal amount of senior
      secured convertible debentures due March 2009 (the "2005 Debentures") and
      warrants to purchase 7,112,500 shares of Ener1's common stock. The net proceeds
      of the issuance totaled $13,134,000 after direct placement costs of $1,091,000.
      Proceeds from the sale were used to pay expenses of the sale and for working
      capital.




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





Ener1
      is
      required under the terms of the 2005 Debentures agreements to register the
      resale of the common stock underlying the debentures and associated warrants
      and
      maintain the listing or
      quotation of its common stock on the
      OTC
      Bulletin Board, the NASDAQ ® National
      Market, NASDAQ ® SmallCap
      Market or the New York Stock Exchange. If the registration statements are not
      available for use or Ener1’s common stock is not listed or quoted on the OTC
      Bulletin Board, the NASDAQ ® National
      Market, NASDAQ ® SmallCap
      Market or the New York Stock Exchange, Ener1 is required to make certain
      payments to the purchasers of the 2005 Debentures (the "registration delay
      payments"). Registration
      delay payments would accrue at a fixed rate of $213,375 per month until the
      2005
      Debenture holders are able to use the resale registration statement and until
      Ener1’s common stock is quoted on the OTC Bulletin Board or other exchange.




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




Ener1
      may
      require that a specified amount of the principal of the 2005 Debentures be
      converted if certain conditions are satisfied for a period of 22 consecutive
      trading days.




Interest
      is due quarterly. The current interest rate is 7.5%. All or a portion of the
      accrued and unpaid interest may be converted at the option of the debenture
      holder at any time under the same conversion terms as the principal. To date,
      interest of $298,234 has been paid, no interest was accrued at September 30,
      2005 and no interest has been converted.





The
      initial interest rate on the 2005 Debentures was initially 7.5% per year. The
      2005 Debentures provided that the interest rate will increase to 15% per year
      effective 365 days after issuance of the 2005 Debentures if Ener1 fails to
      meet
      and maintain any of milestones set forth in the 2005 Debentures. The milestones
      were as follows: (1) the registration statement registering the resale of the
      shares underlying the 2005 Debentures and warrants is made and kept effective
      until the date on which the holders of the 2005 Debentures and warrants may
      sell
      all of their underlying shares; (2) Ener1’s common stock is listed on the
      NASDAQ ® National
      Market, NASDAQ ® SmallCap
      Market or the New York Stock Exchange and trading on the stock has not been
      suspended; (3) an Event of Default (as defined in the 2005 Debentures) or an
      event that, with the passage of time or giving of notice, would constitute
      an
      Event of Default, shall not have occurred and be continuing; (4) the closing
      bid
      price for Ener1’s common stock shall be greater than $1.50; and (5) trading
      volume of Ener1’s common stock shall have exceeded $500,000 per day for each of
      the preceding 30 days.





At
      any
      time on or after March 14, 2008, Ener1 may prepay some or the entire principal
      of the 2005 Debentures at 103% of the principal, plus accrued
      interest.





The
      2005
      Debentures are senior to Ener1's existing and future indebtedness and pari
      passu
      with the 2004 Debentures (see Note 5).





11


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





The
      warrants issued in connection with the issuance of the 2005 Debentures were
      divided into Series A and Series B. Each Series A warrant entitles the holder
      to
      purchase a number of shares of common stock equal to 30% of the number of shares
      of common stock that would be issuable upon conversion of the original principal
      amount of the 2005 Debenture divided by the conversion price for an exercise
      price of $1.15 per share. Each Series B warrant entitles the holder to purchase
      a number of shares of common stock equal to 20% of the number of shares of
      common stock that would be issuable upon conversion of the original principal
      amount of the 2005 Debenture divided by the conversion price for an exercise
      price of $1.25 per share. Both Series A and Series B warrants are subject to
      adjustment upon certain events such as the sale of equity securities by Ener1
      at
      a price below the exercise price. The warrants are exercisable, in whole or
      in
      part, at any time on or before March 14, 2010. The number of common shares
      issuable under the Series A and Series B warrants issued in connection with
      the
      2005 Debentures are 4,267,500 and 2,845,000, respectively.





Ener1
      issued warrants to purchase up to 426,750 shares of common stock with an
      exercise price of $1.00 to the placement agent for the 2005 Debentures issuance.
      The fair market value of these warrants was $213,000 and was allocated to
      deferred debenture costs. Ener1 also incurred $1,091,000 in placement
      fees.





As
      discussed in Note 8, Ener1 is accounting for the conversion option in the 2005
      Debentures and the associated warrants as derivative liabilities in accordance
      with SFAS 133. The
      2005
      Debentures contain more than one embedded derivative feature which SFAS 133
      requires be accounted for as derivative instruments. The various embedded
      derivative features 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 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.




7.    
      REDEEMABLE PREFERRED STOCK




*Ener1,
      Inc. Series B Cumulative and Redeemable Convertible Preferred
      Stock*




In
        October 2004, Ener1 sold 150,000 shares of Series B Preferred Stock plus
        warrants to purchase 4,166,666 shares of common stock at an exercise price
        of
        $1.25 and warrants to purchase 4,166,666 shares of common stock at an exercise
        price of $1.50 per share, for an aggregate purchase price of $15,000,000.
        The
        Series B Preferred Stock has a liquidation preference of $100 per share.
        Ener1
        is accounting for the warrants in accordance with SFAS 133 and EITF 00-19.
        Also,
        in October 2004, the Company entered into an agreement with Ener1 Group under
        which Ener1 Group agreed to purchase, from time to time, at the Company’s
        request, up to 30,000 shares of the Series B Preferred Stock (“Series B
        Preferred Stock Put”) at a purchase price of $100 per share (or an aggregate
        purchase price of $3,000,000), and warrants to purchase up to 833,334 shares
        of
        its common stock at an exercise price of $1.25 per share, and warrants to
        purchase up to 833,334 shares of its common stock at an exercise price of
        $1.50
        per share. Under the agreement, if the Company requires Ener1 Group to purchase
        any of the Series B Preferred Stock and warrants pursuant to this agreement,
        the
        Company is required to pay Ener1 Group a fee equal to one-third of the aggregate
        purchase price for the securities purchased in return for the Ener1 Group’s
        assistance in arranging a prior sale of Series B Preferred Stock. In February
        2005, Ener1 sold to Ener1 Group 2,500 shares of Series B Preferred Stock,
        plus
        warrants to purchase 69,445 shares of common stock at an exercise price of
        $1.25
        and warrants to purchase 69,445 shares of common stock at an exercise price
        of
        $1.50 per share, for an aggregate purchase price of $250,000.


The
      proceeds were first allocated to the fair value of the freestanding warrants,
      and the remaining proceeds were allocated to the Series B Preferred
      Stock.




The
      conversion feature for the Series B Preferred Stock is contingent upon Ener1
      filing a registration statement with the Securities and Exchange Commission
      to
      register an underwritten offering of common stock. The holders of Series B
      Preferred Stock will have the right to convert up to one-half of their shares
      of
      Series B Preferred Stock into common stock for sale pursuant to the registration
      statement, subject to the discretion of the underwriters of the offering. The
      conversion ratio shall be established by dividing the liquidation value per
      share of the Series B Preferred Stock by the price for the common stock sold
      in
      the registered offering. Because of this contingency, the conversion option
      is
      not within the scope of SFAS 133 and EITF 00-19. If the contingency is triggered
      in the future and the holder receives the ability to convert, Ener1 will need
      to
      reassess whether the conversion feature meets the definition of a derivative
      under SFAS 133.




The
        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 kind
        in
        the form of additional shares of Series B Preferred Stock for the first two
        years after issuance, and thereafter is payable in cash. The dividends are
        cumulative.




The
      Series B Preferred Stock is redeemable at the option of Ener1 at any time,
      in
      part or whole, at 100% of the liquidation value, plus accrued and unpaid
      dividends. The Series B Preferred Stock is redeemable at the option of the
      holder when none of the 2004 Debentures are outstanding. The 2004 Debentures
      mature on January 20, 2009. The
      Series B Preferred Stock is classified as temporary equity in accordance with
      EITF D-98 as the redemption features are not solely within the control of
      the Company.




12


In
      connection with the issuances of is Series B Preferred Stock, Ener1 issued
      warrants to purchase up to 4,236,111 shares of common stock at an exercise
      price
      of $1.25 per share and warrants to purchase up to 4,236,111 shares of common
      stock at an exercise price of $1.50 per share. These warrants have a ten year
      term. Ener1 is not required to register the resale of the warrants or of the
      common stock issuable upon exercise of the warrants. The fair value was of
      the
      warrants determined utilizing the Black-Scholes stock option valuation
      model. The significant assumptions used in the valuation are: the exercise
      prices as noted above; the market value of Ener1's common stock on the date
      of
      issuance, $0.65 and $0.80 for October 2004 and February 2005, respectively;
      expected volatility of 207%; risk free interest rate of approximately 1.79%
      and
      2.50% for October 2004 and February 2005, respectively; and a term of ten
      years.




*EnerDel
      Non-Voting, Cumulative and Redeemable Series A Convertible Preferred
      Stock*




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




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 option
      expired in January 2005, the remaining liability of $1,183,000 was recorded
      as a reduction in the derivative liability and a
      corresponding gain on derivative liability in 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 the 4th anniversary of the filing date of the certificate of designation
      for the Series A Preferred Stock, the holders will have the option to require
      EnerDel to redeem all of the Series A Preferred shares on 10 days notice. The
      Series A Preferred Stock is classified as temporary equity in accordance with
      EITF D-98 as the redemption features are not solely within the control of the
      Company.




In
      connection with the issuance of the Series A Preferred Stock, EnerDel issued
      warrants to purchase up to 1,750,000 shares of common stock at an exercise
      price
      of $0.70 per share and warrants to purchase up to 5,250,000 shares of common
      stock at an exercise price of $1.00 per share. These warrants have a 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; expected volatility of 207%; risk free interest rate of
      approximately 1.8%; and a term of ten years.




13


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




**Ener1**
              
              **EnerDel****Series
                  B**
              
              **Series
                  A**Face
                  value
              
              $
              15,250
              
              $
              8,000Less
                  initial fair value ofwarrant
                  derivative
              
              
              (5,514
              )
              
              (4,620
              )Less
                  initial fair value ofconversion
                  option
              
              
              -
              
              
              (1,183
              )Fair
                value at date of issuance
              
              
              9,736
              
              
              2,197Accumulated
                  accretionof
                  discounts
              
              
              1,735
              
              
              1,548Cumulative
                  dividends
              
              
              1,000
              
              
              624Carrying
                  value December 31, 2005
              
              $
              12,471
              
              $
              4,369


8.
      Derivatives




Ener1
            evaluated the application of SFAS 133 and EITF 00-19 for the
            following:
  ·
                  
                  the
                      2004 Debentures conversion, interest rate adjustment, registration
                      delay
                      payments, redemption premium, forced conversion, default premimum
                      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
                      payments, default premimum 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”)·
                  
                  warrants
                      to purchase common stock issued to Ener1 Group in connection
                      with the
                      exchange of stock, notes and warrants for debt (the "Exchange
                      Warrants");
                      and·
                  
                  options
                      to purchase common stock issued to ITOCHU Corporation (“ITOCHU
                      Options").
 
 Based
            on
            the guidance in SFAS 133 and EITF 00-19, Ener1 concluded all of these
            instruments, other than the conversion feature of the Series B Preferred
            Stock
            were required to be accounted for as derivatives. SFAS 133 and EITF 00-19
            require Ener1 to bifurcate and separately account for the conversion
            and other
            derivatives features of the 2004 Debentures, 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 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.”
  The
            Company 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 the Company as a result of the facts that: (1) the holder of the Battery
            Warrants was the controlling shareholder of the Company, 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,
            the
            Company could not conclude that it had sufficient authorized and unissued
            shares
            to issue the number of shares potentially issuable under the Battery
            Warrants.
            The Company 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 the Company as described above.
            As a
            result, the Company determined that these warrants would also be treated
            as
            derivative liabilities because the Company 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.
  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 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.
 
 The
            Company also determined that an agreement entered into in October 2004
            under
            which Ener1 Group agreed to purchase at the Company’s 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 the Company is required to value
            as a
            derivative asset and mark to market at each balance sheet
            date.


14


The
          impact of the application of SFAS 133 and EITF 00-19 on the balance sheets
          as of
September
          30, 2005 and the impact on the statements of operations ended
          September 30, 2005 and 2004 are as follows (dollars in thousands): is as
          follows:
  **December
                      31,**
                  
                  **September
                      30,**
                  
                  **Gain**
                  
                  **December
                      31,**
                  
                  **September
                      30,**
                  
                  **Gain****2004**
                  
                  **2005**
                  
                  **(Loss)**
                  
                  **2003**
                  
                  **2004**
                  
                  **(Loss)****Restated**
                  
                  **Restated**
                  
                  **Restated**
                  
                  **Restated**
                  
                  **Restated**
                  
                  **Restated**2004
                      Debenture Conversion
                  
                  
                  14,319
                  
                  $
                  7,453
                  
                  $
                  6,866
                  
                  $
                  -
                  
                  $
                  13,012
                  
                  
                  (1,507
                  )2004
                      Debenture Warrants
                  
                  
                  11,040
                  
                  
                  6,720
                  
                  
                  4,320
                  
                  
                  -
                  
                  
                  8,320
                  
                  
                  1752005
                      Debenture Conversion
                  
                  
                  -
                  
                  
                  6,325
                  
                  
                  1,718
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -2005
                      Debenture Warrants
                  
                  
                  -
                  
                  
                  3,343
                  
                  
                  469
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -EnerDel
                      Series A Preferred Stock Conversion
                  
                  
                  1,183
                  
                  
                  -
                  
                  
                  1,183
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -Series
                      A Warrants
                  
                  
                  5,944
                  
                  
                  3,426
                  
                  
                  2,518
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -Series
                      B Warrants
                  
                  
                  7,095
                  
                  
                  4,145
                  
                  
                  2,950
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -Series
                      B Preferred Stock Put
                  
                  
                  (266
                  )
                  
                  (414
                  )
                  
                  148Battery
                      Warrants
                  
                  
                  57,960
                  
                  
                  33,810
                  
                  
                  24,150
                  
                  
                  96,600
                  
                  
                  37,950
                  
                  
                  58,650Exchange
                      Warrants
                  
                  
                  16,600
                  
                  
                  9,800
                  
                  
                  6,800
                  
                  
                  19,600
                  
                  
                  11,000
                  
                  
                  8,600Itochu
                      Options
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  13,957
                  
                  
                  654
                  
                  
                  13,303$
                  113,875
                  
                  $
                  74,608
                  
                  $
                  51,122
                  
                  $
                  130,157
                  
                  $
                  70,936
                  
                  $
                  79,221
 
 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.
 
 For
          instruments with a single derivative, such as the warrants and the conversion
          feature derivatives of preferred stock, the Company uses the Black Scholes
          pricing model for determining the fair values. For instruments with compound
          embedded derivatives such as the 2004 Debentures and 2005 Debentures,
          the Company uses a lattice valuation model to value the compound
          embedded derivatives.
  The
          Company valued the compound embedded derivative instruments in the 2004
          Debentures and 2005 Debentures using a lattice valuation 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. The Company 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, the Company 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.
  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 payments, (4) the likelihood that an
          event of
          default or a change in control will occur, (4) the likelihood that the
          conversion price will be adjusted, (5) the likelihood that the Ener1 common
          stock will be listed on an exchange, (6) the likelihood that Ener1 will
          be able
          to obtain alternative financing and (7) 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, 2005 determined using the lattice valuation model was based on the
            following
            assumptions:
 
 ·
                  the
                      price of Ener1's common stock would increase at a rate commensurate
                      with
                      the cost of equity, with a volatility of 120%;
 ·
                  95%
                      likelihood that Ener1 would not be in default of its obligations
                      under the
                      resale registration agreement relating to the 2004
                      Debentures;
 ·
                  5%
                      likelihood that an event of default or a fundamental change
                      would occur,
                      increasing over time;
 ·
                  reset
                      events projected to occur with a weighted average adjustment
                      factor of
                      .989;
 ·
                  95%
                      likelihood that Ener1 would force the conversion of the 2004
                      Debentures if
                      the stock price reached $1.75;
 ·
                  the
                      holders of the 2004 Debentures would convert the 2004 Debentures
                      if
                      Ener1's common stock price was $3.50, the resale registration
                      statement
                      was effective and Ener1 was not in default under the 2004
                      Debentures;
 ·
                  Ener1
                      would redeem the 2004 Debentures following the third anniversary
                      of the
                      issue date if Ener1's common stock price reached $1.50 or higher;
 ·
                  0%
                      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%; and
 ·
                  0%
                      likelihood that Ener1's common stock would be listed on an
                      exchange
                      increasing 10% quarterly to a maximum of
                      90%.
 
 Based
            on
            these management assumptions, the fair value of these embedded derivatives
            as of
            Septermber 30, 2005 was calculated by management to be
            $7,453,000.
 
 The
            fair
            value of the compound derivative embedded in the 2004 Debentures as of
            September
            30, 2004 determined using the lattice valuation model was based on the
            following
            assumptions:
 
 ·
                  the
                      price of Ener1's common stock would increase at a rate commensurate
                      with
                      the cost of equity, with a volatility of 130%;
 ·
                  95%
                      likelihood that Ener1 would not be in default of its obligations
                      under the
                      resale registration agreement relating to the 2004
                      Debentures;
 ·
                  5%
                      likelihood that an event of default or a fundamental change
                      would occur,
                      increasing over time;
 ·
                  reset
                      events projected to occur with a weighted average adjustment
                      factor of
                      .989;
 ·
                  95%
                      likelihood that Ener1 would force the conversion of the 2004
                      Debentures if
                      the stock price reached $1.75;
 ·
                  the
                      holders of the 2004 Debentures would convert the 2004 Debentures
                      if
                      Ener1's common stock price was $3.50, the resale registration
                      statement
                      was effective and Ener1 was not in default under the 2004
                      Debentures;
 ·
                  Ener1
                      would redeem the 2004 Debentures following the third anniversary
                      of the
                      issue date if Ener1's common stock price reached $1.50 or higher;
 ·
                  0%
                      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%; and
 ·
                  0%
                      likelihood that Ener1's common stock would be listed on an
                      exchange,
                      increasing 10% quarterly to a maximum of
                      90%.
 
 Based
            on
            these management assumptions, the fair value of these embedded derivatives
            as of
            September 30, 2004 was calculated by management to be
            $13,012,000.
  The
            fair
            value of the compound derivative embedded in the 2005 Debentures as of
            September
            30, 2005 determined using the lattice valuation model was based on the
            following
            assumptions:
 
 ·
                  the
                      price of Ener1's common stock would increase at a rate commensurate
                      with
                      the cost of equity, with a volatility of 120%;
 ·
                  95%
                      likelihood that Ener1 would not be in default of its obligations
                      under the
                      resale registration agreement relating to the 2005
                      Debentures;
 ·
                  5%
                      likelihood that an event of default or a fundamental change
                      would
                      occur;
 ·
                  reset
                      events projected to occur with a weighted average adjustment
                      factor of
                      .967;
 ·
                  95%
                      likelihood that Ener1 would force the conversion of the 2005
                      Debentures if
                      the Ener1 common stock price reached
                      $1.50;
 ·
                  the
                      holders of the 2005 Debentures would convert the 2005 Debentures
                      if
                      Ener1's common stock price reached $1.75, the resale registration
                      statement was effective and Ener1 was not in default under
                      the 2004
                      Debentures;
 ·
                  Ener1
                      would redeem the 2005 Debentures following the third anniversary
                      of the
                      issue date if Ener1's common stock price reached $1.25 or higher;
 ·
                  0%
                      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%; and
 ·
                  0%
                      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%.
 
 Based
            on
            these management assumptions, the fair value of the compound embedded
            derivative
            in the 2005 Debentures as of September 30, 2005 was calculated by management
            to
            be $6,325,000.
 
 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 material affect
            the
            valuation.
  The
          Company 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
          Company used the Black Scholes pricing model to determine the fair values
          of its
          warrants and the conversion feature 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 the
          Company underwent a change in control. Ener1 determined that share prices
          prior
          to this period do not reflect the ongoing business valuation of its
          current operations. Ener1 uses a risk free interest rate 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 ending 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. 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.
 
 **Issue
                    Date**
                
                **Volatility**
                
                **Risk
                    Free 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 Conversion
                
                
                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
                
                
                10Debt
                    Exchange Warrants
                
                
                11/14/2003
                
                
                296
                %
                
                1.0
                %
                
                $
                0.98
                
                
                10ITOCHU
                    options
                
                
                7/1/2003
                
                
                296
                %
                
                1.0
                %
                
                $
                1.40
                
                
                6
                    mos.Battery
                    Warrants
                
                
                9/6/2002
                
                
                201
                %
                
                1.7
                %
                
                $
                0.05
                
                
                10Series
                    B Preferred Stock Put
                
                
                10/15/2004
                
                
                450
                %
                
                4.0
                %
                
                $
                0.65
                
                
                10Prices
                    and average rates at Year End:December
                    31, 2003
                
                
                
                
                
                296
                %
                
                4.3
                %
                
                $
                1.40December
                    31, 2004
                
                
                
                
                
                155
                %
                
                4.1
                %
                
                $
                0.85December
                    31, 2005
                
                
                
                
                
                145
                %
                
                4.1
                %
                
                $
                0.39


15




9.    
      ENER1 GROUP FINANCING





Effective
      as of October 15, 2004, the Company entered into an agreement with Ener1 Group
      under which Ener1 Group agreed to purchase, from time to time, at the Company’s
      request, up to 30,000 shares of the Series B Preferred Stock at a purchase
      price
      of $100.00 per share (or an aggregate purchase price of $3,000,000), warrants
      to
      purchase up to 833,334 shares of its common stock at an exercise price of $1.25
      per share, and warrants to purchase up to 833,334 shares of its common stock
      at
      an exercise price of $1.50 per share. Under the agreement, if the Company
      requires Ener1 Group to purchase any of the Series B Preferred Stock and
      warrants pursuant to this agreement, the Company is required to pay Ener1 Group
      a fee equal to one third of the aggregate purchase price for the securities
      purchased by Ener1 Group in return for Ener1 Group’s assistance in arranging a
      prior sales of Series B Preferred Stock. In March 2005, at the Company’s
      request, Ener1 Group purchased 2,500 of the Company’s Series B Preferred Stock
      and warrants to purchase 138,890 shares of the Company’s common stock, for an
      aggregate purchase price of $250,000, and Ener1 paid Ener1 Group a fee of
      $83,333.




10. ITOCHU
      CORPORATION INVESTMENT AND INVESTMENT IN ENERSTRUCT





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




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




16


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





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




11. RELATED
      PARTY TRANSACTIONS





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





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




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




12.  COSTS
      ASSOCIATED WITH EXIT OR DISPOSAL ACTIVITIES




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





17


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





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





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





13. COMMITMENTS
      AND CONTINGENCIES





Lease
      Commitments





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





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





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





14. RESTATEMENT
      AND RECLASSIFICATIONS OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS





***Summary
      of Restatement Items***





The
      consolidated financial statements for the three and nine months ended September
      30, 2004 and 2005 and related disclosures included in this Amendment No. 4
      to Quarterly Report on Form 10-QSB (the "September 2005 10-QSB")  have been
      restated.




On
      March
      2, 2006, Ener1 determined that it was necessary to restate the financial
      statements included in the September 2005 10-QSB for the three and nine months
      ended September 30, 2004 and 2005 in order to reflect additional gains and
      losses related to the classification of and accounting for (1) options to
      purchase Ener1's common stock issued to a business partner in July 2003 and
      (2)
      warrants to purchase Ener1's common stock issued to Ener1's majority stockholder
      in November 2003. On March 3, 2006, Ener1 filed Amendment No. 1 to Quarterly
      Report on Form 10-QSB for the three and nine months ended September 30, 2005
      including restatements of Ener1's previously issued financial statements for
      the
      three and nine months ended September 30, 2004.




18


On
      March
      10, 2006, Ener1 determined that it was necessary to restate the financial
      statements included in Amendment No. 1 to the September 2005 10-QSB for the
      three and nine months ended September 30, 2004 and 2005 in order to reflect
      additional interest expense related to the classification of and accounting
      for
      warrants issued to the placement agent for the 2004 Debentures. Ener1
      filed Amendment No. 2 to the September 2005 10-QSB on May 25, 2006, which
      filing included restated financial statements for the three and nine months
      ended September 30, 2004 and 2005 that reflected these changes.





On
        May
        18, 2006, Ener1 concluded that it was necessary to restate the financial
        statements for the three and nine months ended September 30, 2004 and 2005
        included in Amendment No. 2 to the September 2005 10-QSB to (1) report the
        EnerDel Series A Preferred Stock and Ener1 Series B Preferred Stock as temporary
        equity between long term liabilities and stockholders' equity (deficit) at
        September 30, 2004 and 2005 rather than as long term liabilities and (2)
        correct
        its calculation of diluted earnings or loss per share. Ener1 filed Amendment
        No.
        3 to the September 2005 10-QSB on May 25, 2006, which filing included restated
        financial statements for the three and nine months ended September 30, 2004
        and
        2005 that reflected these changes.




In
        July
        2006, Ener1 concluded that it was necessary to restate its financial statements
        for the three and nine month periods ended September 30, 2004 and 2005 included
        in Amendment No. 3 to the September 2005 10-QSB to (1)
        reflect the corrected accounting for and valuation of additional
        compound embedded derivatives in the 2004 Debentures and 2005 Debentures,
        (2) revise the valuation of the initial discount and interest accretion on
        the
        2004 Debentures and 2005 Debentures resulting from the revaluation of the
        compound embedded derivatives, (3) record the correct value of the warrants
        associated with the 2004 Debentures, (4) record the value of Ener1's right
        to
        require Ener1 Group to purchase Series B Preferred Stock, and (5) reflect
        the Series A Preferred Stock dividends payable to the minority interest owner
        as
        a reduction in minority interest income.


The
      financial statements and other financial information included in this Amendment
      No. 4 to the September 30, 2005 10-QSB have been restated accordingly.


19


The
      impact of the above restatement items on Ener1's consolidated statements of
      operations for the three and nine months ended September 30, 2005 and 2004
      are
      summarized below  (the
      following tables compare specific line items from these financial statements
      for
      the three and nine months ended September 30, 2004 and 2005 with the same line
      items from the financial statements for the three and nine months ended
      September 30, 2004 and 2005 as initially reported by the Company on November
      11,
      2004 and January 5, 2006, respectively):(dollars and shares in
      thousands, other than per share information).





**Three
                  Months Ended September 30, 2004****As
                  Initially****Reported**
              
              **Adjustment**
              
              
              
              **As
                  Restated**Gross
                  profit
              
              $
              -
              
              $
              -
              
              
              
              
              $
              -Total
                  operating expenses
              
              
              2,538
              
              
              (152
              )
              
              *(a*)**
              
              
              2,386Loss
                  from operations
              
              
              (2,538
              )
              
              152
              
              
              
              
              
              (2,386
              )Other
                  income and (expense)Interest
              
              
              (666
              )
              
              (1,061
              )
              
              *(b*)**
              
              
              (1,727
              )Equity
                  in loss of EnerStruct, Inc.
              
              
              (139
              )
              
              -
              
              
              
              
              
              (139
              )Other
              
              
              77
              
              
              -
              
              
              
              
              
              77Gain
                  on embedded derivative liability
              
              
              -
              
              
              7,663
              
              
              *(c*)**
              
              
              7,663Total
                  other income (expense)
              
              
              (728
              )
              
              6,602
              
              
              
              
              
              5,874Net
                  income (loss) from continuing operations
              
              
              (3,266
              )
              
              6,754
              
              
              
              
              
              3,488Loss
                  from discontinued operations
              
              
              (5
              )
              
              -
              
              
              
              
              
              (5
              )Net
                  income (loss)
              
              $
              (3,271
              )
              $
              6,754
              
              
              
              
              $
              3,483Net
                  income (loss) per share, basicContinuing
                  operations
              
              $
              (0.01
              )
              
              0.02
              
              
              *(d*)**
              
              $
              0.01Discontinued
                  operations
              
              $
              -
              
              
              -
              
              
              
              
              $
              -Net
                  income (loss) per share, dilutedContinuing
                  operations
              
              $
              (0.01
              )
              
              -
              
              
              *(e*)**
              
              $
              (0.01
              )Discontinued
                  operations
              
              $
              -
              
              
              -
              
              
              
              
              $
              -Weighted
                  average shares outstanding:Weighted
                  average shares outstanding - Basic
              
              
              347,276
              
              
              -
              
              
              
              
              
              347,276Weighted
                  average shares outstanding - Diluted
              
              
              412,256
              
              
              10,685
              
              
              *(f*)**
              
              
              422,941
  *(a)*
              *Change
                  due to reclassification of deferred financing cost on the 2004
                  Debentures
                  as interest expense.**(b)*
              *Change
                  due to accretion of discount of bond issuance costs and amortization
                  of
                  deferred financing costs.**(c)*
              *To
                  record gain on derivatives based upon fair values at end of
                  period.**(d)*
              *To
                  reflect basic earnings per share based upon corrected net
                  income.**(e)*
              *To
                  reflect diluted earnings per share based upon corrected net income
                  as
                  adjusted for *diluted
                  shares outstanding and the effects of dilutive adjustments to reported
                  earnings.***(f)*
              *To
                  reflect additional diluted shares outstanding from conversion of
                  2004
                  Debentures and the reduction of diluted shares outstanding for
                  anti-dilutive stock
                  options.*





20
  **Nine
                    Months Ended September 30, 2004****As
                    Initially****Reported**
                
                **Adjustment**
                
                
                
                **As
                    Restated**Gross
                    profit
                
                $
                31
                
                $
                -
                
                
                
                
                $
                31Total
                    operating expenses
                
                
                8,397
                
                
                (458
                )
                
                *(a*)**
                
                
                7,939Loss
                    from operations
                
                
                (8,366
                )
                
                458
                
                
                
                
                
                (7,908
                )Other
                    income and (expense)Interest
                
                
                (1,143
                )
                
                (2,982
                )
                
                *(b*)**
                
                
                (4,125
                )Equity
                    in loss of EnerStruct, Inc.
                
                
                (426
                )
                
                -
                
                
                
                
                
                (426
                )Other
                
                
                150
                
                
                -
                
                
                
                
                
                150Gain
                    on embedded derivative liability
                
                
                -
                
                
                79,221
                
                
                *(c*)**
                
                
                79,221Total
                    other income (expense)
                
                
                (1,419
                )
                
                76,239
                
                
                
                
                
                74,820Net
                    income (loss) from continuing operations
                
                
                (9,785
                )
                
                76,697
                
                
                
                
                
                66,912Loss
                    from discontinued operations
                
                
                (7
                )
                
                -
                
                
                
                
                
                (7
                )Net
                    income (loss)
                
                $
                (9,792
                )
                $
                76,697
                
                
                
                
                $
                66,905Net
                    income (loss) per share, basicContinuing
                    operations
                
                $
                (0.03
                )
                
                0.22
                
                
                *(d*)**
                
                $
                0.19Discontinued
                    operations
                
                $
                -
                
                
                -
                
                
                
                
                $
                -Net
                    income (loss) per share, dilutedContinuing
                    operations
                
                $
                (0.03
                )
                
                0.05
                
                
                *(e*)**
                
                $
                0.02Discontinued
                    operations
                
                $
                -
                
                
                -
                
                
                
                
                $
                -Weighted
                    average shares outstanding:Weighted
                    average shares outstanding - Basic
                
                
                346,966
                
                
                -
                
                
                
                
                
                346,966Weighted
                    average shares outstanding - Diluted
                
                
                417,624
                
                
                14,674
                
                
                *(f*)**
                
                
                432,298
  *(a)*
                  *Change
                      due to reclassification of deferred financing cost on the 2004
                      Debentures
                      as interest expense.**(b)*
                  *Change
                      due to accretion of discount of bond issuance costs and amortization
                      of
                      deferred financing costs.**(c)*
                  *To
                      record gain on derivatives based upon fair values at end of
                      period.**(d)*
                  *To
                      reflect basic earnings per share based upon corrected net
                      income.**(e)*
                  *To
                      reflect diluted earnings per share based upon corrected net
                      income as
                      adjusted for *diluted
                      shares outstanding and the effects of dilutive adjustments
                      to reported
                      earnings.***(f)*
                  *To
                      reflect additional diluted shares outstanding from conversion
                      of 2004
                      Debentures.*




21


**Three
                  Months Ended September 30, 2005****As
                  Initially****Reported**
              
              **Adjustment**
              
              
              
              **As
                  Restated**Gross
                  profit
              
              $
              25
              
              $
              -
              
              
              
              
              $
              25Total
                  operating expenses
              
              
              4,001
              
              
              (307
              )
              
              *(a*)**
              
              
              3,694Loss
                  from operations
              
              
              (3,976
              )
              
              307
              
              
              
              
              
              (3,669
              )Other
                  income and (expense)Interest
              
              
              (2,566
              )
              
              (287
              )
              
              *(b*)**
              
              
              (2,853
              )Equity
                  in loss of EnerStruct, Inc.
              
              
              (59
              )
              
              -
              
              
              
              
              
              (59
              )Other
              
              
              83
              
              
              -
              
              
              
              
              
              83Gain
                  on embedded derivative liability
              
              
              (26,101
              )
              
              2,497
              
              
              *(c*)**
              
              
              (23,604
              )Total
                  other income (expense)
              
              
              (28,643
              )
              
              2,210
              
              
              
              
              
              (26,433
              )Net income
                  (loss) before minority interest
                and
                  discontinued operations
              
              
              (32,619
              )
              
              2,517
              
              
              
              
              
              (30,102
              )Minority
                Interest
              
              
              -
              
              
              (595
              )
              
              *(f*)**
              
              
              (595
              )Net
                  (loss) from continuing operations
              
              
              (32,619
              )
              
              1,922
              
              
              
              
              
              (30,697
              )Loss
                  from discontinued operations
              
              
              -
              
              
              -
              
              
              
              
              
              -Net
                  (loss)
              
              
              (32,619
              )
              
              1,922
              
              
              
              
              
              (30,697
              )Preferred
                  stock dividends
              
              
              (1,024
              )
              
              295
              
              
              
              
              
              (729
              )Net
                  (loss) attributableto
                  common shareholders
              
              $
              (33,643
              )
              $
              2,217
              
              
              
              
              $
              (31,426
              )Net
                  income (loss) per share, basicContinuing
                  operations
              
              $
              (0.09
              )
              $
              (0.00
              )
              
              *(d*)**
              
              $
              (0.09
              )Discontinued
                  operations
              
              $
              -
              
              $
              -
              
              
              
              
              $
              -Net
                  income (loss) per share, dilutedContinuing
                  operations
              
              $
              (0.09
              )
              $
              (0.00
              )
              
              *(e*)**
              
              $
              (0.09
              )Discontinued
                  operations
              
              $
              -
              
              $
              -
              
              
              
              
              $
              -Weighted
                  average shares outstanding:Weighted
                  average shares outstanding - Basic
              
              
              347,456
              
              
              -
              
              
              
              
              
              347,456Weighted
                  average shares outstanding - Diluted
              
              
              347,456
              
              
              -
              
              
              
              
              
              347,456
  *(a)*
              *Change
                  due to reclassification of deferred financing cost on the 2004
                  Debentures
                  as interest expense.**(b)*
              *Change
                  due to accretion of discount on 2004 Debentures and amortization
                  of
                  deferred financing costs.**(c)*
              *To
                  record additional gain on Exchange Warrant derivative liability
                  based upon
                  fair values at end of period.**(d)*
              *To
                  reflect basic earnings per share based upon corrected net
                  income.**(e)*
              *To
                  reflect diluted earnings per share based upon corrected net
                  income.**(f)*
              *To
                    reflect the Series A Preferred Stock dividends payable to the
                    minority
                    interest owner as a reduction in minority interest
                    income.*





22


**Nine
                Months Ended September 30, 2005****As
                Initially****Reported**
            
            **Adjustment**
            
            
            
            **As
                Restated**Gross
                profit
            
            $
            60
            
            $
            -
            
            
            
            
            $
            60Total
                operating expenses
            
            
            28,502
            
            
            (869
            )
            
            *(a)*
            
            
            27,633Loss
                from operations
            
            
            (28,442
            )
            
            869
            
            
            
            
            
            (27,573
            )Other
                income and (expense)Interest
            
            
            (6,968
            )
            
            (635
            )
            
            *(b)*
            
            
            (7,603
            )Equity
                in loss of EnerStruct, Inc.
            
            
            (286
            )
            
            -
            
            
            
            
            
            (286
            )Other
            
            
            223
            
            
            -
            
            
            
            
            
            223Gain
                on embedded derivative liability
            
            
            39,158
            
            
            11,964
            
            
            *(c)*
            
            
            51,122Total
                other income (expense)
            
            
            32,127
            
            
            11,329
            
            
            
            
            
            43,456Net
                income (loss) before minority interestand
                discontinued operations
            
            
            3,685
            
            
            12,198
            
            
            
            
            
            15,883Minority
                interest
            
            
            3,760
            
            
            (1,538
            )
            
            *(h)*
            
            
            2,222Net
                income (loss) from continuing operations
            
            
            7,445
            
            
            10,660
            
            
            
            
            
            18,105Loss
                from discontinued operations
            
            
            -
            
            
            -
            
            
            
            
            
            -Net
                income (loss)
            
            
            7,445
            
            
            10,660
            
            
            
            
            
            18,105Preferred
                stock dividends
            
            
            (2,855
            )
            
            646
            
            
            *(d)*
            
            
            (2,209
            )Net
                income (loss) attributableto
                common shareholders
            
            $
            4,590
            
            $
            11,306
            
            
            
            
            $
            15,896Net
                income (loss) per share, basicContinuing
                operations
            
            $
            0.02
            
            
            0.03
            
            
            *(e)*
            
            $
            0.05Discontinued
                operations
            
            $
            -
            
            
            -
            
            
            
            
            $
            -Net
                income (loss) per share, dilutedContinuing
                operations
            
            $
            0.02
            
            
            0.04
            
            
            *(f)*
            
            $
            (0.02
            )Discontinued
                operations
            
            $
            -
            
            
            -
            
            
            
            
            $
            -Weighted
                average shares outstanding:Weighted
                average shares outstanding - Basic
            
            
            347,456
            
            
            -
            
            
            
            
            
            347,456Weighted
                average shares outstanding - Diluted
            
            
            412,126
            
            
            20,916
            
            
            *(g)*
            
            
            433,042




*(a)*
              *Change
                  due to reclassification of deferred financing cost on the 2004
                  Debentures
                  as interest expense.**(b)*
              *Change
                  due to accretion of discount of bond issuance costs and amortization
                  of
                  deferred financing costs.**(c)*
              *To
                  record gain on derivatives based upon fair values at end of
                  period.**(d)*
              *To correct
                  preferred dividends and accretion.**(e)*
              *To
                    reflect basic earnings per share based upon corrected net
                    income.**(f)*
              *To
                  reflect diluted earnings per share based upon corrected net
                  income.**(g)*
              *To
                  reflect additional diluted shares outstanding from conversion of
                  2004
                  Debentures and 2005 Debentures and the reduction of diluted shares
                  outstanding for anti-dilutive stock options.**(h)*
              *To
                  reflect the Series A Preferred Stock dividends payable to the minority
                  interest owner as a reduction in minority interest
                  income.*




23




***Balance
      Sheet Impact***





In
      addition to the effects on Ener1's 2005 and 2004 consolidated statements of
      operations discussed above, the restatement impacted Ener1's consolidated
      balance sheets as of September 30, 2005 and December 31, 2004. The following
      tables set forth the effects of the restatement adjustments on Ener1's
      consolidated balance sheet as of September 30, 2005 and December 31, 2004 (as
      compared to the consolidated balance sheets as of September 30, 2005 and
      December 31, 2004 as initially reported on January 5, 2006 and April 15, 2005,
      respectively) (dollars in thousands, including, notes):





**As
                  of September 30, 2005****As
                  Initially****Reported**
              
              **Adjustment**
              
              
              
              **As
                  Restated****ASSETS**Current
                  assetsCash
                  and equivalents
              
              $
              7,012
              
              
              
              
              
              
              
              $
              7,012Prepaid
                  expenses and other current assets
              
              
              544
              
              
              
              
              
              
              
              
              544Due
                  from related parties
              
              
              204
              
              
              
              
              
              
              
              
              204Total
                  current assets
              
              $
              7,760
              
              
              
              
              
              
              
              
              7,760Property
                  and equipment, net
              
              
              2,944
              
              
              
              
              
              
              
              
              2,944Investment
                  in EnerStruct, Inc.
              
              
              899
              
              
              
              
              
              
              
              
              899Deferred
                  debenture costs, net of amortization of $1,748
              
              
              2,099
              
              
              1,957
              
              
              *(1)*
              
              
              4,056Other
              
              
              255
              
              
              -
              
              
              
              
              
              255Total
                  assets
              
              $
              13,957
              
              $
              1,957
              
              
              
              
              $
              15,914**LIABILITIES
                  AND STOCKHOLDERS' DEFICIT**Current
                  liabilitiesCurrent
                  portion of installment loan
              
              $
              24
              
              
              -
              
              
              
              
              
              24Accounts
                  payable and accrued expenses
              
              
              1,598
              
              
              -
              
              
              
              
              
              1,598Liabilities
                  of discontinued operations
              
              
              307
              
              
              -
              
              
              
              
              
              307Derivative
                  liability on conversion features of securities
              
              
              66,385
              
              
              8,223
              
              
              *(2)*
              
              
              74,608Total
                  current liabilities
              
              
              68,314
              
              
              8,223
              
              
              
              
              
              76,537Long-term
                  portion of installment loan
              
              
              73
              
              
              -
              
              
              
              
              
              73$19,700
                  convertible debentures
              
              
              6,898
              
              
              (2,021
              )
              
              *(3)*
              
              
              4,877$14,225
                  convertible debentures
              
              
              3,694
              
              
              (122
              )
              
              *(4)*
              
              
              3,572Total
                  liabilities
              
              
              78,979
              
              
              6,080
              
              
              
              
              
              85,059
 Redeemable
                  convertible preferred stock:EnerDel,
                  Inc. Series A Preferred
              
              
              3,790
              
              
              579
              
              
              *(5)*
              
              
              4,369Series
                  B Preferred
              
              
              12,065
              
              
              406
              
              
              *(6)*
              
              
              12,471
 Minority
                    interest
                
                
                
                
                
                -
                
                
                
                
                
                -Commitments
                    and contingencies
 **STOCKHOLDERS'
                  DEFICIT**Common
                  Stock, $.01 par value
              
              
              3,475
              
              
              -
              
              
              
              
              
              3,475Paid
                  in capital
              
              
              72,349
              
              
              1,590
              
              
              *(7)*
              
              
              73,939Accumulated
                  deficit
              
              
              (156,701
              )
              
              (6,698
              )
              
              *(8)*
              
              
              (163,399
              )Total
                  stockholders' deficit
              
              
              (80,877
              )
              
              (5,108
              )
              
              
              
              
              (85,985
              )Total
                  liabilities and stockholders' deficit
              
              $
              13,957
              
              $
              1,957
              
              
              
              
              $
              15,914
  *(1)*
                  
                  *Change
                      due to recording additional deferred financing cost on the
                      2004 Debentures
                      less amortization.**(2)*
                  
                  *To
                      record Exchange Warrant derivative based upon fair value at
                      end of period
                      and cumulative changes in value of derivatives for 2004 Debentures
                      and
                      2005 Debentures.**(3)*
                  
                  *Change
                        due to accretion of discount of bond issuance costs of $4,361
                        and
                        conversion of $300 of 2004 Debentures.**(4)*
                  
                  *Change
                        due to correct initial recording and accretion of bond discount
                        on 2005
                        Debentures.**(5)*
                  
                  *To
                      correct the value of the Series A Preferred Stock.**(6)*
                  
                  *To
                      correct the value of the Series B Preferred Stock.**(7)*
                  
                  *To
                      reduce paid in capital for correction of cumulative dividends
                      and
                      accretion of preferred stock, and increase paid in capital
                      for the value
                      of the Series B Preferred Stock Put of $645.**(8)*
                  
                  *To
                      reflect aggregate effect of income statement
                      adjustments.*
 24
 **December
                    31, 2004**
                
                
                
                
                
                **December
                    31, 2004****As
                    Initially Reported**
                
                **Adjustment**
                
                
                
                **(Restated)****ASSETS**Current
                    assetsCash
                    and equivalents
                
                $
                14,091
                
                
                
                
                
                
                
                $
                14,091Prepaid
                    expenses and other current assets
                
                
                190
                
                
                
                
                
                
                
                
                190Due
                    from related parties
                
                
                119
                
                
                
                
                
                
                
                
                119Total
                    current assets
                
                
                14,400
                
                
                
                
                
                
                
                
                14,400Property
                    and equipment, net
                
                
                13,390
                
                
                
                
                
                
                
                
                13,390Investment
                    in EnerStruct, Inc.
                
                
                1,185
                
                
                
                
                
                
                
                
                1,185Deferred
                    debenture costs, net of amortization of $905
                
                
                -
                
                
                3,621
                
                
                *(a)*
                
                
                3,621Other
                
                
                443
                
                
                
                
                
                
                
                
                443Total
                    assets
                
                $
                29,418
                
                
                3,621
                
                
                
                
                $
                33,039**LIABILITIES
                    AND STOCKHOLDERS' DEFICIT**Current
                    liabilitiesCurrent
                    portion of installment loan
                
                
                23
                
                
                
                
                
                
                
                
                23Accounts
                    payable and accrued expenses
                
                
                2,301
                
                
                
                
                
                
                
                
                2,301Liabilities
                    of discontinued operations
                
                
                307
                
                
                
                
                
                
                
                
                307Derivative
                    liability, net
                
                
                
                
                
                130,157
                
                
                *(b)*
                
                
                113,87548,996
                
                
                *(c)*-
                
                
                (65,278
                )
                
                *(d)*Total
                    current liabilities
                
                
                2,631
                
                
                
                
                
                
                
                
                116,506Long-term
                    portion of installment loan
                
                
                91
                
                
                
                
                
                
                
                
                91$19,700
                    convertible debentures
                
                
                -
                
                
                2,559
                
                
                *(e)*
                
                
                2,559Total
                    liabilities
                
                
                2,722
                
                
                
                
                
                
                
                
                119,156Redeemable
                    preferred stock:EnerDel,
                    Inc. Series A Preferred, $.01 par value
                
                
                4,130
                
                
                (1,561
                )
                
                *(f)*
                
                
                2,569Series
                    B Convertible Preferred, $.01 par value
                
                
                10,893
                
                
                (788
                )
                
                *(g)*
                
                
                10,105Minority
                    interest
                
                
                3,951
                
                
                
                
                
                
                
                
                3,951Commitments
                    and contingencies**STOCKHOLDERS'
                    DEFICIT**Common
                      stock, $.01 par value,
                
                
                3,475
                
                
                
                
                
                
                
                
                3,475Additional
                    paid in capital
                
                
                100,246
                
                
                (23,571
                )
                
                *(h)*
                
                
                76,675Accumulated
                    deficit
                
                
                (95,999
                )
                
                (86,893
                )
                
                *(i)*
                
                
                (182,892
                )Total
                    stockholders' deficit
                
                
                7,722
                
                
                
                
                
                
                
                
                (102,742
                )Total
                    liabilities and stockholders' deficit
                
                $
                29,418
                
                
                3,621
                
                
                
                
                $
                33,039
  25
 Notes
            to
            2004 Balance Sheet Table
  *(a)*
                  
                  *Change
                      due to recording deferred financing cost on the 2004 Debentures
                      less
                      amortization.**(b)*
                  
                  *To
                        record initial carrying value of 2003 derivatives of $130,157, which
                        includes $96,600 for Battery Warrants, $19,600 for Debt Exchange
                        Warrants
                        and $13,957 for ITOCHU options.**(c)*
                  
                  *To
                        record initial carrying value of derivatives in 2004 including
                        $26,400 for
                        the 2004 Debenture Warrants, $11,505 for the 2004 Debentures
                        combined
                        embedded derivative, $4,620 for the Delphis Warrants, $1,183
                        for the
                        Series A Preferred Stock, and $5,288 for the Series B Preferred Stock
                        Warrants.**(d)*
                  
                  *To
                      record gain on derivatives based upon fair values at December
                      31,
                      2004.**(e)*
                  
                  *Change
                      due to accretion of discount of bond issuance costs of $2,859
                      and
                      conversion of $300 of 2004 Debentures.**(f)*
                  
                  *To
                        correct the value of the Series A Preferred Stock by $1,503
                        and correct
                        prior period accretion of discount on preferred stock of
                        $58.**(g)*
                  
                  *To
                        correct the value of the Series B Preferred Stock by $750
                        and correct
                        prior period accretion of discount on preferred stock of
                        $36.**(h)*
                  
                  *To
                      reduce paid in capital for value of 2004 Debentures of
                      $18,527, Delphi Warrants of $3,725, Series B Preferred Stock Warrants
                      of $4,666, and beginning paid in capital of $575, and increase
                      paid in
                      capital for deferred debenture costs paid with warrants of
                      $3,053,
                      accretion and conversion totaling $223, and the value of the
                      Series B
                      Preferred Stock Put of $645.**(i)*
                  
                  *To
                      reflect aggregate effect of income statement adjustments*
 26


15. STOCK
      OPTION ISSUANCES




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




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




On
      June
      25, 2005, as compensation for serving as Board Director and Chairman of the
      Audit Committee, Karl Gruns received 50,000 options to purchase shares at $.35,
      which vested immediately.




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




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




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




16.  EARNINGS
      PER SHARE





Basic
      net
      income per share is computed by dividing the net income attributable to common
      shareholders by the weighted-average number of common shares outstanding during
      the period. Diluted net income per share is computed using the weighted-average
      number of common shares outstanding during the period, adjusted for the dilutive
      effect of common stock equivalents, consisting of shares that would be issued
      upon exercise of common stock warrants and from the conversion of the Company’s
      convertible debentures. Weighted-average common shares for the quarter ending
      June 30, 2005 do not include the common stock equivalents represented by common
      stock options and the 2004 Debentures because their inclusion would be
      anti-dilutive. The Company’s Series B Convertible Preferred Stock was not
      convertible at June 30, 2005 or June 30, 2004 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.





27


The
      following potential common shares have been included in the computation of
      diluted net loss per share for all periods presented:





**Quarter
                  Ended September 30,**
              
              **Nine Months
                  Ended September 30,****2005**
              
              **2004**
              
              **2005**
              
              **2004****(Restated)**
              
              **(Restated)**
              
              **(Restated)**
              
              **(Restated)**Weighted
                  Average Shares Outstanding - Basic
              
              
              347,456
              
              
              347,276
              
              
              347,456
              
              
              346,966Plus
                  net shares from assumed conversion of warrantsunder
                  treasury stock method
              
              
              -
              
              
              59,649
              
              
              58,940
              
              
              62,444Plus
                  net shares from assumed conversion of optionsunder
                  treasury stock method
              
              
              -
              
              
              -
              
              
              -
              
              
              7,986Plus
                  shares from assumed conversion ofconvertible
                  instruments:2004
                  Debentures
              
              
              -
              
              
              16,016
              
              
              16,016
              
              
              14,9022005
                  Debentures
              
              
              -
              
              
              -
              
              
              10,630
              
              
              -Weighted
                  Average Shares Outstanding - Diluted
              
              
              347,456
              
              
              422,941
              
              
              433,042
              
              
              432,298





The
      following is a reconciliation of net income as reported and net income used
      in
      the numerator for the calculation of diluted earnings per share:





**Quarter
                  Ended September 30,**
              
              **Nine Months
                  Ended September 30,****2005**
              
              **2004**
              
              **2005**
              
              **2004**(In
                  thousands)
              
              **(Restated)**
              
              **(Restated)**
              
              **(Restated)**
              
              **(Restated)**Net
                  income as reported
              
              $
              (30,697
              )
              $
              3,488
              
              $
              18,105
              
              $
              66,912Less
                  preferred stock dividends and accretion
              
              
              (729
              )
              
              -
              
              
              (2,209
              )
              
              -Add
                  interest expense and accretion of discount onconvertible
                  debentures
              
              
              -
              
              
              1,266
              
              
              7,148
              
              
              3,342Less
                  derivative gain on convertible debentures
              
              
              -
              
              
              (2,875
              )
              
              (5,989
              )
              
              (2,302
              )Less
                  derivative gain on warrants
              
              
              -
              
              
              (5,520
              )
              
              (24,150
              )
              
              (58,650
              )Net
                  income (loss) computed for diluted netincome
                  (loss) per share
              
              $
              (31,426
              )
              $
              (3,641
              )
              $
              (7,095
              )
              $
              9,302




17. ENERDEL
        FORMATION
 
 On
        October 26, 2004, the Company and each of Delphi Automotive Systems, LLC
        and
        Delphi Technologies, Inc. (collectively, “Delphi”) contributed their lithium
        battery assets to a newly organized Delaware corporation, EnerDel, Inc.
        (“EnerDel”). The Company completed the transactions pursuant to, among other
        documents, a Formation, Subscription and Stockholders’ Agreement (the “Formation
        Agreement”) by and between the Company and Delphi, dated as of October 20, 2004.
        Pursuant to the Formation Agreement, the Company received 80.5% of EnerDel’s
        issued and outstanding shares of common stock in consideration for the
        contribution by the Company and its subsidiaries of $15 million in cash,
        the
        right to use a building and certain lithium battery equipment owned by the
        Battery Company with an option to purchase such equipment for $1, and ownership
        of certain intellectual property, subject to exclusive, perpetual and
        royalty-free licenses granting Ener1 the right to use such intellectual property
        in areas not related to lithium batteries.
 
 Also,
        pursuant to the Formation Agreement, Delphi received 19.5% of EnerDel's issued
        and outstanding shares of common stock, 8,000 shares of EnerDel’s Series A
        Preferred Stock (see Note 7); immediately exercisable warrants with a seven
        year
        term to purchase up to 1.75 million shares of the Company's common stock
        for
        $0.70 per share; and immediately exercisable warrants with a seven year term
        to
        purchase up to 5.25 million shares of the Company’s common stock for $1.00 per
        share. In consideration of the foregoing, Delphi contributed to EnerDel its
        lithium battery-related equipment valued at $8,517,600 and its lithium
        battery-related patent portfolio valued at $5,100,000, which is licensed
        back to
        Delphi for non-lithium battery uses under an exclusive, perpetual and
        royalty-free license. In addition, Delphi entered into an agreement with
        EnerDel
        pursuant to which EnerDel subleased those portions of Delphi’s Indianapolis
        facilities that contain lithium battery operations.




The
        Company recorded a charge to additional paid in capital of approximately
        $1
        million as a result of its contribution of assets to EnerDel in excess of
        its
        proportionate ownership of EnerDel.
  Some
        of
        the assets transferred by Delphi and Ener1 to EnerDel were considered to
        be
        assets to be used in Research and Development ("R&D") activities because the
        assets were being used in product development and prototyping efforts at
        the
        time of the contribution and none of the products under development were
        considered to be technologically or economically feasible. Although EnerDel
        expects to use the transferred assets in R&D activities on future product
        development and prototyping projects or for production of lithium batteries,
        because such uses are contingent upon the successful completion of current
        R&D projects, this equipment was expensed to R&D upon acquisition in
        accordance with Statement of Financial Accounting Standards No. 2, "Accounting
        for Research and Development Costs” ("SFAS No. 2"), which requires that assets
        to be used in R&D activities are to be immediately charged to income unless
        an “alternative future use” for the asset exists.
  Consequently,
        due to the inability to meet the requirements for “alternative future uses” set
        forth in SFAS No. 2, the Company recorded the value of these assets as a
        charge
        to R&D expense. The schedule below sets forth the components of this charge
        to R&D expense:
  Value
                  of machinery and equipment transferred from Ener1 Battery Company
                  to be
                  used in research and development activities
              
              $
              1,162,000Value
                  of intellectual property transferred from Delphi
              
              
              5,100,000Value
                  of machinery and equipment transferred from Delphi
              
              
              8,518,000R
                  & D materials acquired from Delphi
              
              
              143,000Total
                  charges to R&D expense for transferred assets
              
              $
              14,923,000
  The
        Company, with the assistance of an independent valuation consultant, used
        the
        income approach to value the lithium battery related equipment and intellectual
        property contributed by Delphi to EnerDel. In developing a value for the
        developed and in-process technology, the Company considered all available
        valuation methods and employed a form of the Income Approach known as the
        Multi-Period Excess Earnings Model. Management attempted to quantify the
        magnitude of earnings generated by the specific asset being examined and
        then
        discount that flow of cash to present value using a discount rate reflective
        of
        the relevant level of associated risk.
 
 The
        primary assumption used in the application of the Multi-Period Excess Earnings
        Model is the discount rate used to calculate present value. The discount
        rate
        employed in the valuation of the assets contributed by Delphi to EnerDel
        was
        26.3%
 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.
 The
          Company 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 subsequently 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 $1,766,000 for the three and nine months,
          respectively ended September 30, 2005. 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.
 
 The
          Company 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.
          The EnerDel Series A Preferred Stock is owned 100% by Delphi, which owns
          the
          minority interest in EnerDel.


28


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





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





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





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




**Overview**





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





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





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





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





We
      have
      experienced net operating losses since 1997, negative cash flows from operations
      since 1999, and have an accumulated deficit of $163 million as of September
      30,
      2005. It is likely that our operations will continue to incur negative cash
      flows through September 30, 2006 and additional financing will be required
      to
      fund our planned operations through that time. If additional financing is not
      obtained, such a condition, among others, will give rise to substantial doubt
      about our ability to continue as a going concern for a reasonable period of
      time.





**Results
      of Operations**





Net
      Sales




Our
      net
      sales for the three-month and nine-month periods ended September 30, 2005 were
      $25,000 and $60,000, respectively. Net sales for the three and nine month
      periods ended September 30, 2004 were $0 and $41,000, respectively. All sales
      consisted of sample sales of lithium batteries and fuel cell
      components.





29





Manufacturing
      Pre-production Costs




For
      the
      three and nine month periods ended September 30, 2005, manufacturing
      pre-production costs decreased by 100% from $532,000 to $0 and increased by
      $1.1
      million or 104% from $1 million to $2.1 million, when compared to the same
      periods in 2004.





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





The
      increase of $1.1 million for the nine month period September 30, 2005 was
      primarily due to additional hiring of manufacturing personnel and increases
      in
      the costs of implementing manufacturing processes and procedures until June
      of
      2005.





Research
      and Development (“R&D”) Expenses





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




General
      and Administrative (“G&A”) Expenses





G&A
      expenses for the three and nine month periods ended September 30, 2005 increased
      by 96% or $1,222,000 to $2,500,000 and 47% or $2,427,000 to 7,565,000,
      respectively, when compared to the same periods in 2004. The increase of
      $1,222,000 for the three months ended September 30, 2005 was due primarily
      to an
      increase of $1.1 million as a result of the inclusion of EnerDel expenses for
      the three month period ended September 30, 2005, an increase of $24,000 due
      to
      hiring by NanoEner of executive personnel, an increase in rent of $64,000 due
      to
      three new operating leases for Corporate Administration, Fuel Cell and NanoEner,
      and an increase of $57,000 in professional fees. The increase of $2.4 million
      for the nine months ended September 30 was due primarily to an increase of
      approximately $3.8 million as a result of the inclusion of EnerDel expenses
      in
      the nine month period ended September 30, 2005, offset by a decrease of
      approximately $800,000 due to the termination of supercapacitor R&D
      activities by Ener1, Inc. and Ener1 Ukraine.




Gain
      (loss) on derivative liability




The
      gain
      (loss) on derivative liability for the three months ended September 30, 2005
      decreased by $31 million from a gain of $7,663,000 in fiscal 2004 to a loss
      of
      $23,604,000 in fiscal 2005. The gain on derivative liability for the nine months
      ended September 30, 2005 decreased by $28,099,000 from $79,221,000 to
      $51,122,000, compared to the prior year period. These decreases were due to
      corresponding decreases in the reported value of freestanding derivatives and
      embedded derivatives resulting primarily from decreases in the market value
      of our common stock as of each period-end.







**Liquidity
      and Capital Resources**




As
        of
        December 31, 2004, we had a working capital deficit of $102 million. During
        the
        nine months ended September 30, 2005, our working capital increased by $30
        million, resulting in negative working capital of $68 million as of September
        30, 2005. Working capital as of September 30, 2005 included $7.0 million
        in cash
        and $0.7 million in prepaid expenses and other current assets, offset by
        $1.6
        million in accounts payable, accrued expenses and accrued exit costs and
        $76
        million in derivative liabilities on conversion features of securities. For
        the
        nine months ended September 30, 2005, net cash used in operating activities
        totaled $19.9 million. However, during the same period, we received $13.1
        million from the sale of our $14,225,000 Senior Secured Convertible Debentures
        due in March 2009 and $250,000 from the sale of our Series B Preferred Stock
        to
        Ener1 Group, Inc.


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





30
 
  We
          will
          require additional capital within the next twelve months to support the
          activities of EnerDel, EnerFuel, and NanoEner. We intend to seek additional
          financing, which may take the form of equity or debt funding. We cannot
          assure
          you that any such required capital will be available on terms acceptable
          to us,
          if at all, or at such time or times as we require it. If additional financing
          is
          not obtained, such condition, among others, will give rise to substantial
          doubt
          about our ability to continue as a going concern for a reasonable period of
          time.
  **Critical
          Accounting Policies**
  The
        preparation of financial statements and related disclosures in conformity
        with
        accounting principles generally accepted in the United States (“GAAP”) requires
        management to make estimates and assumptions that affect the reported amounts
        of
        assets and liabilities, the fair value of financial instruments such as
        derivatives, the disclosure of contingent assets and liabilities at the date
        of
        the financial statements and expenses during the period reported. The following
        accounting policies involve a “critical accounting estimate” because they are
        particularly dependent on estimates and assumptions made by management about
        matters that are highly uncertain at the time the accounting estimates are
        made.
        In addition, while we have used our best estimates based on facts and
        circumstances available to us at the time, different estimates reasonably
        could
        have been used in the current period. Changes in the accounting estimates
        we
        used are reasonably likely to occur from period to period, which may have
        a
        material impact on the presentation of our financial condition and results of
        operations. We review these estimates and assumptions periodically and reflect
        the effects of revisions in the period that they are determined to be
        necessary.
  *Accounting
        for Derivative Instruments*
  Statement
        of Financial Accounting Standard (“SFAS”) No. 133, “Accounting for Derivative
        Instruments and Hedging Activities,” as amended, requires all derivatives to be
        recorded on the balance sheet at fair value. These derivatives, including
        embedded derivatives in our structured borrowings, are separately valued
        and
        accounted for on our balance sheet. Fair values for exchange-traded securities
        and derivatives are based on quoted market prices. Where market prices are
        not
        readily available, fair values are determined using market based pricing
        models
        incorporating readily observable market data and requiring judgment and
        estimates.
  In
        September 2000, the Emerging Issues Task Force ("EITF") issued EITF 00-19,
        "Accounting for Derivative Financial Instruments Indexed to and Potentially
        Settled in, a Company's Own Stock," ("EITF 00-19") which requires freestanding
        contracts that are settled in a company's own stock, including common stock
        warrants, to be designated as an equity instrument, asset or a liability.
        Under
        the provisions of EITF 00-19, a contract designated as an asset or a liability
        must be carried at fair value on a company’s balance sheet, with any changes in
        fair value recorded in the company’s results of operations. A contract
        designated as an equity instrument must be included within equity, and no
        fair
        value adjustments are required. In accordance with SFAS No. 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 reflect the fair value of these warrants and the conversion and other
        embedded derivatives features on our balance sheet and the unrealized
        changes in the values of these derivatives in our consolidated statement
        of
        operations as “Gain (loss) on derivative liabilities.”
  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
        the Company as a result of the facts that: (1) the holder of the Battery
        Warrants was the controlling shareholder of the Company, 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,
        we
        could not conclude that we had sufficient authorized and unissued shares
        to
        issue the number of shares potentially issuable under the Battery Warrants.
        We
        also determined that we could not conclude we had sufficient authorized and
        unissued shares to issue the number of shares required under the other warrants
        subsequently issued by the Company 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.
  We
        have
        evaluated our provisions of the registration rights agreements issued
        in connection with our 2004 Debentures which require us to
        make registration delay payments 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 05-04 *The
        Effect of a Liquidated Damages Clause on a Freestanding Financial Instrument
        Subject to Issue No. 00-19.* The
        EITF
        has not reached a consensus on this issue and has deferred deliberation until
        the FASB 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.
  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 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.
  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 our 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,
        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 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 payments, (4) the likelihood that an event
        of
        default or a change in control will occur, (4) the likelihood that the
        conversion price will be adjusted, (5) the likelihood that the Ener1 common
        stock will be listed on an exchange, (6) the likelihood that Ener1 will be
        able
        to obtain alternative financing and (7) 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, 2005 determined using the lattice valuation model was based on the
            following
            assumptions:
  ·
              the
                  price of Ener1's common stock would increase at a rate commensurate
                  with
                  the cost of equity, with a volatility of 120%;
 ·
              95%
                  likelihood that Ener1 would not be in default of its obligations
                  under the
                  resale registration agreement relating to the 2004
                  Debentures;
 ·
                5%
                    likelihood that an event of default or a fundamental change would
                    occur,
                    increasing over time;
 ·
                reset
                    events projected to occur with a weighted average adjustment
                    factor of
                    .989;
 ·
                95%
                    likelihood that Ener1 would force the conversion of the 2004
                    Debentures if
                    the stock price reached $1.75;
 ·
                the
                    holders of the 2004 Debentures would convert the 2004 Debentures
                    if
                    Ener1's common stock price was $3.50, the resale registration
                    statement
                    was effective and Ener1 was not in default under the 2004
                    Debentures;
 ·
                Ener1
                    would redeem the 2004 Debentures following the third anniversary
                    of the
                    issue date if Ener1's common stock price reached $1.50 or higher;
 ·
                0%
                    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%; and
 ·
                0%
                    likelihood that Ener1's common stock would be listed on an exchange
                    increasing 10% quarterly to a maximum of
                    90%.
  Based
          on
          these management assumptions, the fair value of these embedded derivatives
          as of
          Septermber 30, 2005 was calculated by management to be $7,453,000.
  The
          fair
          value of the compound derivative embedded in the 2004 Debentures as of
          September
          30, 2004 determined using the lattice valuation model was based on the
          following
          assumptions:
  ·
                the
                    price of Ener1's common stock would increase at a rate commensurate
                    with
                    the cost of equity, with a volatility of 130%;
 ·
                95%
                    likelihood that Ener1 would not be in default of its obligations
                    under the
                    resale registration agreement relating to the 2004
                    Debentures;
 ·
                5%
                    likelihood that an event of default or a fundamental change would
                    occur,
                    increasing over time;
 ·
                reset
                    events projected to occur with a weighted average adjustment
                    factor of
                    .989;
 ·
                95%
                    likelihood that Ener1 would force the conversion of the 2004
                    Debentures if
                    the stock price reached $1.75;
 ·
                the
                    holders of the 2004 Debentures would convert the 2004 Debentures
                    if
                    Ener1's common stock price was $3.50, the resale registration
                    statement
                    was effective and Ener1 was not in default under the 2004
                    Debentures;
 ·
                Ener1
                    would redeem the 2004 Debentures following the third anniversary
                    of the
                    issue date if Ener1's common stock price reached $1.50 or higher;
 ·
                0%
                    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%; and
 ·
                0%
                    likelihood that Ener1's common stock would be listed on an exchange,
                    increasing 10% quarterly to a maximum of
                    90%.
  Based
          on
          these management assumptions, the fair value of these embedded derivatives
          as of
          September 30, 2005 was calculated by management to be
          $13,012,000.
  The
              fair
              value of the compound derivative embedded in the 2005 Debentures as
              of September
              30, 2005 determined using the lattice valuation model was based on
              the following
              assumptions:
  ·
                the
                    price of Ener1's common stock would increase at a rate commensurate
                    with
                    the cost of equity, with a volatility of 120%;
 ·
                95%
                    likelihood that Ener1 would not be in default of its obligations
                    under the
                    resale registration agreement relating to the 2005
                    Debentures;
 ·
                5%
                    likelihood that an event of default or a fundamental change would
                    occur;
 ·
                reset
                    events projected to occur with a weighted average adjustment
                    factor of
                    .973;
 ·
                95%
                    likelihood that Ener1 would force the conversion of the 2005
                    Debentures if
                    the Ener1 common stock price reached
                    $1.50;
 ·
                the
                    holders of the 2005 Debentures would convert the 2005 Debentures
                    if
                    Ener1's common stock price reached $1.75, the resale registration
                    statement was effective and Ener1 was not in default under the
                    2004
                    Debentures;
 ·
                Ener1
                    would redeem the 2005 Debentures following the third anniversary
                    of the
                    issue date if Ener1's common stock price reached $1.25 or higher;
 ·
                0%
                    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%; and
 ·
                0%
                    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%.
  Based
          on
          these management assumptions, the fair value of the compound embedded derivative
          in the 2005 Debentures as of September 30, 2005 was calculated by
          management to be $6,325,000.
  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 material affect
          the
          valuation.
  ***Black Scholes Valuation
            Model***
 We
          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 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 ending December 31, 2003,
          2004 and
          2005. The initial volatility for the calculation of the embedded and
          freestanding derivatives ranged from 296% to 135%. 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.




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. 
 **Issue
                  Date**
              
              **Volatility**
              
              **Risk
                  Free 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 Conversion
              
              
              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
              
              
              10Debt
                  Exchange Warrants
              
              
              11/14/2003
              
              
              296
              %
              
              1.0
              %
              
              $
              0.98
              
              
              10ITOCHU
                  options
              
              
              7/1/2003
              
              
              296
              %
              
              1.0
              %
              
              $
              1.40
              
              
              6
                  mos.Battery
                  Warrants
              
              
              9/6/2002
              
              
              201
              %
              
              1.7
              %
              
              $
              0.05
              
              
              10Series
                  B Preferred Stock Put
              
              
              10/15/2004
              
              
              450
              %
              
              4.0
              %
              
              $
              0.65
              
              
              10Prices
                  and average rates at Year End:December
                  31, 2003
              
              
              
              
              
              296
              %
              
              4.3
              %
              
              $
              1.40December
                  31, 2004
              
              
              
              
              
              155
              %
              
              4.1
              %
              
              $
              0.85December
                  31, 2005
              
              
              
              
              
              145
              %
              
              4.1
              %
              
              $
              0.39


31


**ITEM
      3A. CONTROLS AND PROCEDURES**




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




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





As
      a
      result of the identification of the material weakness in our internal control
      over financial reporting described above and our determination that as a result
      of this material weakness, it was necessary to restate our financial statements
      for the quarters ended September 30, 2004 and 2005, we re-evaluated, under
      the
      supervision and with the participation of the individuals now serving as our
      Chief Executive Officer and our Chief Financial Officer, of the effectiveness
      of
      the design and operation of our disclosure controls and procedures as of June
      30, 2005. Based on that evaluation, our Chief Executive Officer and our Chief
      Financial Officer concluded that our disclosure controls and procedures were
      ineffective as of September 30, 2005.





There
      were no changes in our internal control over financial reporting during the
      quarter ended September 30, 2005 that have materially affected, or are
      reasonably likely to materially affect, our internal control over financial
      reporting.





32


**PART
      II. OTHER INFORMATION**





**Item
      1. - Legal Proceedings**





We
      receive communications from time to time alleging various claims. These claims
      include, but are not limited to, allegations that certain of our products
      infringe the patent rights of other third parties. We cannot predict the outcome
      of any such claims or the effect of any such claims on our operating results,
      financial condition, or cash flows. We are not currently a party to any lawsuit
      or proceeding that, in the opinion of our management, is likely to have a
      material adverse effect on our financial position or results of
      operations.





**Item
      5. Other Information**





The
      consolidated financial statements for the three and nine months ended September
      30, 2004 and 2005 and related disclosures included in this Amendment No. 4
      to Quarterly Report on Form 10-QSB have been restated.





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





On
      December 21, 2005, Ener1 filed a Current Report on Form 8-K with the Securities
      and Exchange Commission announcing its determination that its previously issued
      financial statements contained in its Annual Report on Form 10-KSB for the
      fiscal year ended December 31, 2004 and its Quarterly Reports on Form 10-QSB
      for
      the interim periods ended March 31 and June 30, 2005 will be restated. On
      January 5, 2006, Ener1 filed a Quarterly Report on Form 10-QSB for the three
      and
      nine months ended September 30, 2005 (the "September 2005 10-QSB") including
      restatements of Ener1's previously issued financial statements for the three
      and
      nine months ended September 30, 2004.





On
      March
      2, 2006, Ener1 determined that it was necessary to restate the financial
      statements included in the September 2005 10-QSB for the three and nine months
      ended September 30, 2004 and 2005 in order to reflect additional gains and
      losses related to the classification of and accounting for (1) options to
      purchase Ener1's common stock issued to a business partner in July 2003 and
      (2)
      warrants to purchase Ener1's common stock issued to Ener1's majority stockholder
      in November 2003. In accordance with Statement of Financial Accounting Standard
      No. 133, “Accounting for Derivative Instruments and Hedging Activities" and EITF
      00-19 "Accounting for Derivative Financial Instruments Indexed to and
      Potentially Settled in a Company's Own Stock," Ener1 determined that these
      options and warrants were derivatives because there was no explicit cap on
      the
      amount of shares that could be issued pursuant to the warrant and option
      agreements. On March 3, 2006, Ener1 filed Amendment No. 1 to the September
      2005
      10-QSB (the "Amended September 2005 10-QSB") which included restatements of
      Ener1's previously issued financial statements for the three and nine months
      ended September 30, 2005 that reflected the additional gains and losses
      described in this paragraph.





On
      March
      10, 2006, Ener1 determined that it was necessary to restate the financial
      statements included in the Amended September 2005 10-QSB for the three and
      nine
      months ended September 30, 2004 and 2005 in order to reflect additional interest
      expense related to the classification of and accounting for warrants issued
      to
      the placement agent for Ener1's senior secured convertible debentures due 2009
      issued in January 2004. In
      July
      2006, Ener1 concluded that it was necessary to amend this Quarterly Report
      in
      order to restate its financial statements for the three and nine month periods
      ended September 30, 2005 and 2006 to (1) reflect a change in the valuation
      of
      the compound embedded derivatives in our 2004 Debentures and 2005 Debentures,
      (2) revise the value of the initial discount and interest accretion on the
      2004
      Debentures and 2005 Debentures resulting from the revaluation of the compound
      embedded derivatives, (3) record the correct value of the conversion feature
      derivative of the warrants associated with the 2004 Debentures, and (4) record
      the value of our right to require Ener1 Group to purchase Series B Preferred
      Stock.The financial statements and other financial information included
      in this Amendment No. 4 to the September 2005 10-QSB have been restated
      accordingly. Ener1's
      shareholders should no longer rely on Ener1's previously filed financial
      statements for the three and nine months ended September 30, 2004 and 2005.
      These matters have been discussed by Ener1's authorized executive officers
      with
      Malone & Bailey, the independent registered public accounting firm that
      reviewed Ener1's financial statements included in the September 2005
      10-QSB.


33


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





Exhibits





3.1
       Amended and Restated Articles of Incorporation of the Registrant, dated
      February 12, 1993, incorporated by reference to Exhibit 3(i) to the Registrant's
      Quarterly Report on Form 10-Q for the quarter ended September 30,
      2000.





3.2
       Amendment to Amended and Restated Articles of Incorporation, dated March
      11, 2002, incorporated by reference to Exhibit 3.2 of the Registrant's Annual
      Report on Form 10-K for the year ended December 31, 2001.





3.3
       Amendment to Amended and Restated Articles of Incorporation, dated October
      21, 2002, incorporated by reference to Exhibit 3.1 of the Registrant's current
      report on Form 8-K dated October 28, 2002.





3.4
       Amendment to Amended and Restated Articles of Incorporation, dated
      December 29, 2004, incorporated by reference to Exhibit A of the Registrant's
      Schedule 14C dated December 7, 2004.





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





3.6
       Amendment to Bylaws of the Registrant, dated January 5, 2005, incorporated
      by reference to Exhibit 3.2 of the Registrant's current report on Form 8-K
      dated
      January 11, 2005.





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





4.2
       Registration Rights Agreement, dated as of January 16, 2004, by and among
      the Registrant the entities whose names appear on the signature pages thereof
      incorporated by reference to Exhibit 4.3 to the Registrant's Current Report
      on
      Form 8-K dated January 21, 2004.





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





4.4
       Registration Rights Agreement, dated as of March 14, 2005, by and among
      the Registrant the entities whose names appear on the signature pages thereof
      incorporated by reference to Exhibit 4.3 to the Registrant's Current Report
      on
      Form 8-K dated March 15, 2005.




31.1 Certification
        of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
        Act
        of 2002
 
 31.2 Certification
        of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
        Act
        of 2002
 
 32.1 Certification
        of Principal Executive Officer pursuant to 18 U.S.C. Sec. 1350, as adopted
        pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 
 32.2 Certification
        of Principal Financial Officer pursuant to 18 U.S.C. Sec. 1350, as adopted
        pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
  34







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





**SIGNATURES**




Pursuant
      to the requirements of the Securities Exchange Act of 1934, the registrant
      has
      duly caused this Amendment No. 4 to Quarterly Report on Form 10-QSB to be
      signed on its behalf of the undersigned thereunto duly authorized.





Dated:
                August 4, 2006
              
              
              
              
              
              
              
              
              Dated: August
                4, 2006
            ENER1,
                INC.
              
              By:
                /s/ Ronald Stewart
              Ronald
                Stewart
              Interim
                Chief Executive Officer
              (Principal
                Executive Officer)
              
              
              
              
              
              By:
                /s/ Gerard Herlihy
              Gerard
                Herlihy
              Chief
                Financial Officer
              (Principal
                Financial and Accounting Officer)











35