UNITED
      STATES


SECURITIES
      AND EXCHANGE COMMISSION


Washington,
      D.C. 20549




FORM
      10-QSB/A





Amendment
      No. 2




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


THE
      SECURITIES EXCHANGE ACT OF 1934




For
      the
      quarterly period ending **June 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
            (I.R.S.
                Employerof
                incorporation or organization
            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
      the number of shares outstanding of each of the issuer's classes of common
      stock, as of the latest practicable date.




Class
            Outstanding
                as ofCommon
                stock, par value
            August
                11, 2005$.01
                per share
            347,
                455,751




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













**ENER1,
      INC. AND SUBSIDIARIES**




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




INDEX


Part
                  I. FINANCIAL INFORMATION
              PageItem
                  1.  Financial StatementsCondensed
                  Consolidated Balance Sheet (unaudited) as ofJune
                  30, 2005 and December 31, 2004
              4Condensed
                  Consolidated Statements of Operations (unaudited)for
                  the three and six months ended June 30, 2005 and
                  2004
              5Condensed
                  Consolidated Statements of Cash Flows (unaudited)for
                  the six months ended June 30, 2005 and 2004
              6Notes
                  to Condensed Consolidated Financial Statements
                  (unaudited)
              7Item
                  2.  Management's Discussion and Analysis of
                  FinancialCondition
                  and Results of Operations
              34Item
                  3.  Controls and Procedures
              37Part
                II. OTHER INFORMATIONItem
                  1.  Legal Proceedings
              38Item
                  6.  Exhibits and Reports on Form 8-K
              38Signatures
              39
  2
  **Explanatory
        Note**





The
      consolidated financial statements for the three and six months ended June 30,
      2004 and 2005 and related disclosures included in this Amendment No. 2 to
      Quarterly Report on Form 10-QSB have been restated.





On
      December 15, 2005, Ener1 concluded that it would be necessary to restate its
      financial results for the fiscal year ended December 31, 2004 and for the
      interim periods ended June 30, 2004 and June 30, 2005 to reflect additional
      non-operating gains and losses related to the classification of and accounting
      for: (1) the conversion feature of the 2004 and 2005 Debentures, the warrants
      to
      purchase common stock associated with the 2004 and 2005 Debentures and the
      amortization expense associated with the discount recorded with respect to
      the
      2004 and 2005 Debentures and financing costs incurred in connection with the
      2004 Debentures, (2) the EnerDel Inc. Series A Convertible Preferred Stock
      issued in November, 2004 ("Preferred Stock") and associated warrants and (3)
      the
      warrants to purchase common stock issued to Ener1 Group, Inc. in September
      2002
      and warrants to purchase common stock issued to purchasers of Ener1's Series
      B Preferred Stock.  On January 5, 2006, Ener1 filed a Quarterly Report
      on Form 10-QSB for the three and nine months ended September 30, 2005 (the
      "September 2005 10-QSB") including restatements of Ener1's previously issued
      financial statements for the three and nine months ended September 30, 2004.
      In
      March 2006, Ener1 determined that it was also necessary to restate its
      previously issued financial statements for the three and six months ended June
      30, 2004 and 2005 to reflect additional gains and losses related to the
      classification of and accounting for options to purchase Ener1's common stock
      issued to a business partner in July 2003 and warrants to purchase Ener1's
      common stock issued to Ener1's majority stockholder in November 2003, and to
      reflect additional interest expense related to the classification of and
      accounting for warrants issued to the placement agent for the 2004
      Debentures.





Ener1
      had
      previously classified the value of these conversion features and warrants and
      options to purchase common stock, when applicable, as equity. After further
      review, Ener1 has determined that these instruments should have been classified
      as derivative liabilities and therefore, the fair value of each instrument
      must
      be recorded as a derivative liability on Ener1's balance sheet. Changes in
      the
      fair values of these instruments will result in adjustments to the amount of
      the
      recorded derivative liabilities and the corresponding gain or loss will be
      recorded in Ener1's statement of operations. At the date of the respective
      conversion of the each respective instrument (or exercise of the warrants,
      or
      options as the case may be), the corresponding derivative liability will be
      reclassified as equity.





On
      March
      27, 2006, Ener1 filed Amendment No. 1 to this Quarterly Report on Form 10-QSB
      ("Amendment No. 1"), which included restated financial statements for the three
      and six months ended June 30, 2004 and 2005 reflecting the accounting changes
      described above. On May 18, 2006, Ener1 concluded that it would be necessary
      to
      restate the financial statements for the three and six months ended June 30,
      2004 and 2005 included in Amendment No. 1 to reflect (1) the reclassification
      of
      preferred stock as temporary equity and (2) corrected diluted earnings or loss
      per share, as further described below. Ener1's
      shareholders should no longer rely on Ener1's previously filed financial
      statements for the three and six months ended June 30, 2004 and 2005. These
      matters have been discussed by Ener1's authorized executive officers with the
      Company’s independent registered public accounting firm .





The
      Company previously reported the Series A Preferred Stock issued by its
      subsidiary EnerDel, Inc., and the Series B Preferred Stock issued by the Company
      as long term liabilities at June 30, 2005 and December 31, 2005. The balance
      sheets at December 31, 2005 and June 30, 2005 included in this Amendment No.
      2
      to Quarterly Report on Form 10-QSB ("Amendment No. 2") have been restated to
      classify the Series A Preferred Stock and Series B Preferred Stock as temporary
      equity.





The
      Company previously reported diluted earnings per share for the three and six
      months ended June 30, 2005 of $0.05 and $0.11 per share, respectively based
      upon
      weighted average shares of 412,008,000 and 414,756,000, respectively. The
      Company previously reported diluted earnings per share for the three and six
      months ended June 30, 2004 of $0.02 and $0.16 per share, respectively based
      upon
      weighted average shares of 415,652,000 and 418,989,000, respectively. Diluted
      earnings per share are calculated by dividing the Company’s net income for the
      applicable period by the number of shares of the Company's common stock
      outstanding on a fully diluted basis. The previously reported diluted earnings
      per share did not reflect adjustments required to be made to the numerator
      of
      the fraction used in this calculation, specifically, excluding from net income
      the gain on derivative liability reported for the applicable period. Making
      these adjustments to the calculation resulted in the determination that the
      Company's 2004 Debentures and 2005 Debentures were dilutive securities and
      that
      the shares of Company common stock underlying the debentures should be
      considered outstanding for purposes of calculating diluted earnings per share.
      The restated diluted earnings (loss) per share for the three and six months
      ended June 30, 2005 is $(0.01) and $0.01 per share, respectively based upon
      restated weighted average shares of 429,686,987 and 439,464,139, respectively.
      The restated diluted earnings per share for the three and six months ended
      June
      30, 2004 is $0.00 and $0.04 per share, respectively, based upon restated
      weighted average shares of 431,483,926 and 433,220,483, respectively.





The
      financial statements and other financial information included in this Amendment
      No. 2 to the June 30, 2005 10-QSB have been restated accordingly.





3


In
      order
      to preserve the nature and character of the disclosures set forth in this
      Quarterly Report as originally filed, no attempt was made in Amendment No.
      1 to
      modify or update the disclosures in the original Quarterly Report except Ener1
      included the restatements described above 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 updated the disclosure in Part 1, Item 3 in order
      to
      reflect the impact the need for these restatements has had on its evaluation
      of
      the effectiveness of its disclosure controls and procedures as of June 30,
      2005.
      In addition, no attempt was made in Amendment No. 2 to modify or update the
      disclosures in the original Quarterly Report or in Amendment No. 1 except Ener1
      included the restatements described above in Part I, Item 1 and Ener1 has
      included additional information in its financial statements and in Management's
      Discussion and Analysis of Results of Operations and Financial Condition in
      Part
      1, Item 2 regarding its derivatives and related accounting
      treatment.





4


**Part
      I. FINANCIAL INFORMATION**


Item
      1. -
      Financial Statements




**ENER1,
      INC. AND SUBSIDIARIES**


**CONDENSED
      CONSOLIDATED** **BALANCE SHEET**


**(Unaudited)**


**(In
      thousands except share data)**






**December
                  31,****June
                  30, 2005**
              
              **2004****(Restated)**
              
              **(Restated)****ASSETS**Current
                  assetsCash
                  and equivalents
              
              $
              11,896
              
              $
              14,091Prepaid
                  expenses and other current assets
              
              
              665
              
              
              190Due
                  from related parties
              
              
              161
              
              
              119Total
                  current assets
              
              
              12,722
              
              
              14,400Property
                  and equipment, net
              
              
              2,719
              
              
              13,390Investment
                  in EnerStruct, Inc.
              
              
              958
              
              
              1,185Deferred
                  debenture costs, net of amortization of $1,467 and $905
              
              
              4,364
              
              
              3,621Other
              
              
              321
              
              
              443Total
                  assets
              
              $
              21,084
              
              $
              33,039**LIABILITIES
                  AND STOCKHOLDERS' DEFICIT**Current
                  liabilitiesCurrent
                  portion of installment loan
              
              $
              24
              
              
              23Accounts
                  payable and accrued expenses
              
              
              1,444
              
              
              2,301Liabilities
                  of discontinued operations
              
              
              307
              
              
              307Accrued
                  exit costs
              
              
              497
              
              
              -Derivative
                  liability
              
              
              47,757
              
              
              111,450Total
                  current liabilities
              
              
              50,029
              
              
              114,081Long-term
                  portion of installment loan
              
              
              79
              
              
              91$19,700
                  convertible debentures, net of discount of $13,787 and
                  $15,756
              
              
              5,913
              
              
              3,944$14,225
                  convertible debentures, net of discount of $11,081
              
              
              3,144
              
              
              -Total
                  liabilities
              
              
              59,165
              
              
              118,116Minority
                  interest
              
              
              17
              
              
              3,951Commitments
                  and contingenciesRedeemable
                  convertible preferred stock:EnerDel,
                  Inc. Series A Preferred, $.01 par value, 500,000 shares
                  authorized,8,000
                  shares issued and outstanding; liquidation preference
                  $8,000
              
              
              3,774
              
              
              2,569Series
                  B Preferred, $.01 par value, 180,000 shares
                  authorized,152,500
                  shares issued and outstanding; liquidation preference
                  $15,250
              
              
              11,742
              
              
              10,105**STOCKHOLDERS'
                  DEFICIT**Common
                  Stock, $.01 par value, 750,000,000 shares authorized347,455,751
                  issued and outstanding
              
              
              3,475
              
              
              3,475Paid
                  in capital
              
              
              74,304
              
              
              76,030Accumulated
                  deficit
              
              
              (131,393
              )
              
              (181,207
              )Total
                  stockholders' deficit
              
              
              (53,614
              )
              
              (101,702
              )Total
                  liabilities and stockholders' deficit
              
              $
              21,084
              
              $
              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**
              
              **Six
                  Months Ended****June
                  30,**
              
              **June
                  30,****2005**
              
              **2004**
              
              **2005**
              
              **2004****(Restated)**
              
              **(Restated)**
              
              **(Restated)**
              
              **(Restated)**Net
                  sales
              
              $
              14
              
              $
              11
              
              $
              35
              
              $
              41Operating
                  expensesCost
                  of sales
              
              
              -
              
              
              -
              
              
              -
              
              
              10Manufacturing
                  pre-production costs
              
              
              1,340
              
              
              516
              
              
              2,132
              
              
              516General
                  and administrative
              
              
              2,296
              
              
              1,553
              
              
              5,065
              
              
              3,860Research
                  and development
              
              
              14,488
              
              
              667
              
              
              16,742
              
              
              1,177Total
                  operating expenses
              
              
              18,124
              
              
              2,736
              
              
              23,939
              
              
              5,563Net
                  Loss from operations
              
              
              (18,110
              )
              
              (2,725
              )
              
              (23,904
              )
              
              (5,522
              )Other
                  income and (expense)Interest
              
              
              (3,019
              )
              
              (1,633
              )
              
              (5,269
              )
              
              (3,235
              )Equity
                  in loss of EnerStruct, Inc.
              
              
              (58
              )
              
              (131
              )
              
              (227
              )
              
              (287
              )Other
              
              
              88
              
              
              50
              
              
              140
              
              
              73Gain
                  on derivative liability
              
              
              40,883
              
              
              14,461
              
              
              75,471
              
              
              77,700Total
                  other income (expense)
              
              
              37,894
              
              
              12,747
              
              
              70,115
              
              
              74,251Income
                  before income taxes
              
              
              19,784
              
              
              10,022
              
              
              46,211
              
              
              68,729Income
                  taxes
              
              
              -
              
              
              -
              
              
              -
              
              
              -Net
                  income before minority interestand
                  discontinued operations
              
              
              19,784
              
              
              10,022
              
              
              46,211
              
              
              68,729Minority
                  interest
              
              
              3,117
              
              
              -
              
              
              3,760
              
              
              -Net
                  income from continuing operations
              
              
              22,901
              
              
              10,022
              
              
              49,971
              
              
              68,729Loss
                  from discontinued operations
              
              
              -
              
              
              -
              
              
              -
              
              
              (2
              )Net
                  income
              
              
              22,901
              
              
              10,022
              
              
              49,971
              
              
              68,727Preferred
                  stock dividends
              
              
              (1,213
              )
              
              -
              
              
              (2,423
              )
              
              -Net
                  income attributableto
                  common shareholders
              
              $
              21,688
              
              $
              10,022
              
              $
              47,548
              
              $
              68,727Net
                  income per share, basicContinuing
                  operations
              
              $
              0.06
              
              $
              0.03
              
              $
              0.14
              
              $
              0.20Discontinued
                  operations
              
              $
              -
              
              $
              -
              
              $
              -
              
              $
              -Net
                  income per share, dilutedContinuing
                  operations
              
              $
              (0.01
              )
              $
              -
              
              $
              0.01
              
              $
              0.04Discontinued
                  operations
              
              $
              -
              
              $
              -
              
              $
              -
              
              $
              -Weighted
                  average shares outstanding:Weighted
                  average shares outstanding - Basic
              
              
              347,456
              
              
              347,173
              
              
              347,456
              
              
              347,089Weighted
                  average shares outstanding - Diluted
              
              
              429,687
              
              
              431,484
              
              
              439,464
              
              
              433,220







See
      notes
      to condensed consolidated financial statements.




6


**ENER1,
      INC. AND SUBSIDIARIES**


**CONDENSED
      CONSOLIDATED STATEMENTS OF** **CASH FLOWS**


**(Unaudited)**


**(In
      thousands)**


**Six
                  Months Ended****June
                  30,****2005**
              
              **2004****(Restated)**
              
              **(Restated)**Net
                  income
              
              $
              49,971
              
              $
              68,727Adjustments
                  to reconcile net income to cash used by operating
                  activities:Gain
                  on derivative liability
              
              
              (75,471
              )
              
              (77,700
              )Asset
                  impairmentResearch
                  and development costs
              
              
              10,527
              
              
              -Minority
                  interest
              
              
              (3,760
              )
              
              -Accretion
                  of discount on debentures
              
              
              2,847
              
              
              2,000Non
                  cash interest expense related to financing costs
              
              
              554
              
              
              451Depreciation
                  and amortization
              
              
              196
              
              
              102Compensation
                  expense for stock options
              
              
              502
              
              
              728Equity
                  in loss from investment in Enerstruct
              
              
              227
              
              
              287Changes
                  in current assets and liabilities
              
              
              (906
              )
              
              (1,614
              )Changes
                  in assets and liabilities held for disposal
              
              
              -
              
              
              (30
              )Net
                  cash used in operating activities
              
              
              (15,313
              )
              
              (7,049
              )Investing
                  Activities:Capital
                  expenditures
              
              
              (255
              )
              
              (638
              )Net
                  cash used in investing activities
              
              
              (255
              )
              
              (638
              )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
              
              
              (11
              )
              
              (3
              )Proceeds
                  from employee stock options exercised
              
              
              -
              
              
              20Proceeds
                  from exercise of warrants
              
              
              -
              
              
              1,050Net
                  cash provided by financing activities
              
              
              13,373
              
              
              14,049Net
                  increase (decrease) in cash and equivalents
              
              
              (2,195
              )
              
              6,362Cash
                  and cash equivalents beginning balance
              
              
              14,091
              
              
              200Cash
                  and cash equivalents ending balance
              
              $
              11,896
              
              $
              6,562





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. (“Ener1” or the “Company”) have been prepared in accordance with accounting
      principles generally accepted in the United States of America for interim
      financial information and with the instructions to Form 10-QSB for quarterly
      reports under Section 13 or 15 (d) of the Securities Exchange Act of 1934.
      Accordingly, they do not include all of the information and footnotes required
      by accounting principles generally accepted in the United States of America
      for
      complete financial statements. In the opinion of management, all adjustments
      considered necessary for a fair presentation have been included and such
      adjustments are of a normal recurring nature. Operating results for the three
      and six months ended June 30, 2005 are not necessarily indicative of the results
      that may be expected for the year ending December 31, 2005. These condensed,
      consolidated financial statements should be read in conjunction with the
      Company's audited financial statements at December 31, 2004, which are included
      in the Company's Annual Report on Form 10-KSB for the year ended December 31,
      2005. The Company's significant accounting policies are set forth in Note 4
      in
      these Notes to the Condensed Consolidated Financial Statements.





2.
      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. The Company has
      experienced net operating losses since 1997 and negative cash flows from
      operations since 1999, and had an accumulated deficit of $131 million as of
      June
      30, 2005. It is likely that the Company's operations will continue to incur
      negative cash flows through June 30, 2006 and additional financing will be
      required to fund the Company's planned operations through June 30, 2006. If
      additional financing is not obtained, such a condition, among others, will
      give
      rise to substantial doubt about the Company's ability to continue as a going
      concern for a reasonable period of time. The condensed 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 the Company be unable to continue
      as
      a going concern.





3.
      NATURE
      OF BUSINESS AND DISCONTINUED OPERATIONS





Nature
      of Business





Ener1's
      primary lines of business consist of development and marketing of 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. The Company's current business focus
      is
      the result of changes over the past several years arising from new investments
      in the Company, changes in research and development activities and the
      acquisition of a battery business from its majority shareholder in
      2002.





Ener1
      is
      a Florida corporation founded in 1985 under the name Boca Research, Inc., which
      was subsequently changed to Inprimis, Inc. In January 2002, Ener1 Group, Inc.
      (“Ener1 Group”) acquired a majority interest in the Company and as a result of
      subsequent transactions (primarily the acquisition by the Company of Ener1
      Group's battery business (see below), owned approximately 88% of the outstanding
      common stock of the Company at June 30, 2005.





During
      2002 and to a lesser extent in 2003, the Company manufactured set-top boxes
      and
      other digital entertainment products through subcontractors and marketed those
      products to the hospitality and healthcare markets through its 49% owned
      subsidiary, Ener EL Holdings, Inc. (f/k/a EnerLook Solutions, Inc.)
      (“EnerLook”), and to other markets through its former Digital Media Technologies
      Division. After the Company moved into the battery business (see below), the
      majority of the assets in the Digital Media Technologies Division were
      transferred to EnerLook in 2003 (see “Discontinued Operations and Sale of Assets
      of EnerLook” below), and EnerLook subsequently sold these assets to a third
      party (see Note 7).





One
      of
      Ener1 Group's subsidiaries, Ener1 Battery Company (“Ener1 Battery”), became a
      wholly owned subsidiary of the Company on September 6, 2002 when the Company
      acquired 100% of its outstanding capital stock from Ener1 Group. Ener1 Battery
      was in the business of developing and marketing lithium ion and other lithium
      technology batteries for use in military, industrial and consumer
      applications.





Concurrently
      with the acquisition of Ener1 Battery, the Company began to transition its
      business away from the set-top box and engineering services businesses of
      EnerLook and the Company's Digital Media Technologies Division and to focus
      instead on the alternative energy business and lithium batteries in
      particular.





8


In
      August
      2003, the Company formed a joint venture company, named Enerstruct, Inc.
      (“Enerstruct”), with ITOCHU Corporation to pursue technology development and
      marketing opportunities for lithium batteries in Japan. The Company and ITOCHU
      have each licensed to Enerstruct certain battery-related technologies for use
      in
      Japanese markets.





In
      September 2003, Ener1 Battery completed its acquisition of its former research
      and development partner company in Ukraine, Ener1 Ukraine. Ener1 Ukraine has
      conducted battery-related research and development activities at facilities
      in
      Ukraine. Ener1 Ukraine's battery-related patents and patent applications were
      assigned to EnerDel, Inc. a subsidiary of the Company, in October
      2004.





Also
      in
      September 2003, consistent with its focus on developing an alternative energy
      business, the Company began developing fuel cell systems and components. The
      Company formed a new subsidiary, EnerFuel, Inc. (“EnerFuel”), on October 29,
      2004 to conduct fuel cell operations. EnerFuel has developed a fuel cell testing
      fixture using technologies contained in one of its pending patent applications
      and plans to market such fixtures and related services either directly or
      through licensing arrangements.





In
      April 2004, the Company formed NanoEner, Inc. to pursue development and
      marketing of proprietary nanotechnologies in support of its battery and fuel
      cell businesses and for other markets. The Company currently uses these
      technologies in the development of nanomaterials for lithium batteries and
      other
      high-energy storage devices.





In
      October 2004, the Company formed EnerDel with Delphi Automotive Systems, LLC
      (a
      subsidiary of Delphi Corporation) (“Delphi”) as the Company's new vehicle for
      pursuing its battery business. Accordingly, at that time, Ener1 Battery
      transferred its personnel, patents and other intellectual property, along with
      exclusive rights to use of its equipment (with a $1 buyout option after release
      of liens on the equipment) and a lease to its land and building, to EnerDel.
      Delphi contributed its lithium battery equipment, patents and other intellectual
      property and personnel to EnerDel. The Company owns 80.5% of EnerDel's
      outstanding common stock, and Delphi owns 19.5% of EnerDel's outstanding common
      stock. The Company's lithium battery business has been conducted through EnerDel
      was formed.





On
      April
      12, 2005, EnerDel and Enerstruct entered an agreement under which Enerstruct
      agreed to provide engineering and consulting services and also gave EnerDel
      the
      option to license certain product and manufacturing technologies for high-rate
      battery manufacturing produced by Enerstruct. On June 23, 2005, EnerDel decided
      to acquire these technologies. EnerDel also decided to closed its manufacturing
      facility in Indianapolis, Indiana and consolidate its battery operations in
      Ft.
      Lauderdale, Florida. (See Notes 13 and 16.)





Discontinued
      Operations





Effective
      in December 2003, the Company's Digital Media Technologies/Enerlook segment
      was
      deemed by the Company to be held-for-sale and certain of the revenues, expenses,
      assets, and liabilities of this segment were classified as discontinued
      operations. Substantially all remaining resources were redirected to the
      Company's continuing operations, accordingly, these costs are included in
      continuing operations.





On
      December 15, 2003, the Company, EnerLook, Ener1 Group and T.&V. Rental Co.,
      Inc. (“TVR”) entered into an arrangement pursuant to which (1) TVR agreed to
      manage EnerLook's business for up to six months in return for any profits earned
      by EnerLook, (2) EnerLook was granted the option, exercisable at any time on
      or
      before June 15, 2004, to acquire 100% of TVR's outstanding stock for $16,000,000
      in cash, plus 4,000,000 shares of the Company's stock held by Ener1 Group;
      and
      (3) TVR was granted the option to acquire substantially all of the assets of
      EnerLook in exchange for 5% of TVR Communications, LLC, a limited liability
      company that would own all the respective assets of TVR and EnerLook, such
      option to become exercisable if EnerLook did not exercise the option described
      in clause (2) above. EnerLook did not exercise the option described in clause
      2
      above and on June 15, 2004, TVR notified EnerLook of TVR's intent to exercise
      its option to acquire substantially all of the assets of EnerLook, and shortly
      thereafter the EnerLook employees were transferred to, and became employees
      of,
      TVR Communications, LLC, a limited liability company formed by TVR to hold
      all
      of TVR's assets and EnerLook’s assets.





The
      Company, EnerLook, Ener1 Group and TVR Communications, LLC entered into an
      Asset
      Purchase Agreement dated as of September 30, 2004, providing for the sale of
      substantially all of EnerLook's assets to TVR Communications, LLC, in exchange
      for a 5% membership interest in TVR Communications, LLC. The asset sale to
      TVR
      closed on December 7, 2004.





TVR
      paid
      EnerLook approximately $550,000 to fund EnerLook's losses from operations from
      December 15, 2003 through June 15, 2004 and the 5% membership interest acquired
      by EnerLook as part of the December 7, 2004 asset sale to TVR was valued at
      $115,000.





9


4.  
      SIGNIFICANT ACCOUNTING POLICIES




Principles
      of Consolidation *:* The
      accompanying condensed consolidated financial statements include Ener1, Inc.
      and
      its wholly owned subsidiaries, as well as 80.5%-owned EnerDel and the
      discontinued operations of 49%-owned EnerLook. In addition to the Company's
      operating units, consisting of EnerDel, EnerFuel and NanoEner, there are a
      number of other subsidiaries: Ener1 Battery owns battery-related land building
      and equipment, but has no ongoing operations; Ener1 Ukraine remains as a
      subsidiary of Ener1 Battery; Ener1 Technologies Inc. which has a license to
      certain technologies from another subsidiary of Ener1 Group, has no ongoing
      operations; EnerNow Technologies, Inc. was involved with the Company's former
      set top box business, but has no ongoing operations; Boca Research
      International, Inc., Boca Research Holland B.V., Boca Research (UK) Limited,
      Boca Research International Holdings Ltd., Boca Global, Inc., Boca Research
      of
      Delaware, Inc. and AppsCom, Inc. are all dormant, having ceased operations
      when
      the Company was previously in the computer technology business. Intercompany
      accounts and transactions have been eliminated in consolidation.





Use
      of
      Estimates *:* The
      preparation of consolidated financial statements in conformity with accounting
      principles generally accepted in the United States of America requires
      management to make estimates and assumptions that affect the reported amounts
      of
      assets and liabilities and disclosure of contingent assets and liabilities
      at
      the date of the financial statements and the reported amounts of revenues and
      expenses during the reporting period. Actual results could differ materially
      from those estimates.





Investment
      in EnerStruct :
      The
      Company's 49% investment in EnerStruct is accounted for using the equity method
      (Note 13).





Research
      and Development Costs *:* Research
      and development costs, including the cost of equipment and other assets used
      in
      research and development activities that do not have alternative future use,
      are
      expensed as incurred.




Income
      Taxes *:* The
      Company provides for income taxes in accordance with the liability method.
      Deferred income tax assets and liabilities are computed based on the differences
      between the financial statement carrying values and the tax bases of assets
      and
      liabilities and carry-forwards that will result in taxable or deductible amounts
      in the future based on enacted tax laws and rates applicable to the periods
      in
      which the differences are expected to affect taxable income. Valuation
      allowances are established when necessary to reduce deferred tax assets to
      the
      amount more likely than not to be realized. Income tax expense or benefit is
      the
      tax payable or refundable for the period plus or minus the change during the
      period in deferred tax assets and liabilities.




Income
      per share *:* Basic
      income per share is computed by dividing the income attributable to common
      shareholders by the weighted-average number of common shares outstanding for
      the
      period. Diluted loss per share reflects the potential dilution that could occur
      if securities or other contracts to issue common stock were exercised or
      converted into common stock or resulted in the issuance of common stock that
      then shared in the earnings of the Company. Diluted income per share is computed
      by dividing income available to common shareholders by the sum of the weighted
      average number of common shares outstanding for the period plus common shares
      issuable under common stock equivalents (all related to outstanding stock
      options and warrants), unless consideration of such common shares would result
      in anti-dilution.





Stock
      compensation *:* Options
      granted to employees under the Company's stock option plans are accounted for
      using the intrinsic method under Accounting Principles Board Opinion No. 25,
      “Accounting for Stock Issued to Employees” (“APB 25”). In October 1995, the
      Financial Accounting Standards Board issued Statement of Financial Accounting
      Standards No. 123, “Accounting for Stock-Based Compensation” (“SFAS 123”), which
      defines the fair value based method of accounting for stock options. Certain
      aspects of the accounting standards prescribed by SFAS 123 are optional and
      therefore, the Company has continued to account for stock options under the
      intrinsic value method specified in APB 25. The Company has adopted the
      disclosure-only provisions of SFAS No. 123. Accordingly, compensation cost
      has
      been recognized for the stock options plans only when the exercise prices of
      employee stock options are less than the market prices of the underlying stock
      on the date of grant. If compensation cost had been determined based on the
      fair
      value at the grant date for all option awards consistent with the provisions
      of
      SFAS 123, the Company's net loss and loss per share would have been as indicated
      below for the periods ended June 30, 2005 and 2004:





10


**Three
                  Months Ended**
              
              **Six
                  Months Ended****June
                  30,**
              
              **June
                  30,****2005**
              
              **2004**
              
              **2005**
              
              **2004****(Restated)**
              
              **(Restated)**
              
              **(Restated)**
              
              **(Restated)**Net
                  income as reported
              
              $
              22,901
              
              $
              10,022
              
              $
              49,971
              
              $
              68,727Add
                  stock-based compensationdetermined
                  under intrinsicvalue-based
                  method
              
              
              265
              
              
              271
              
              
              529
              
              
              320Less
                  stock-based compensationdetermined
                  under fair value-based
                  method
              
              
              (931
              )
              
              (637
              )
              
              (1,851
              )
              
              (888
              )Net
                  income pro forma
              
              
              22,235
              
              
              9,656
              
              
              48,649
              
              
              68,159Preferred
                  stock dividends
              
              
              (1,213
              )
              
              -
              
              
              (2,423
              )
              
              -Net
                  income attributableto
                  common shareholders pro forma
              
              $
              21,022
              
              $
              9,656
              
              $
              46,226
              
              $
              68,159Net
                  income per share, pro forma basic
              
              $
              0.06
              
              $
              0.03
              
              $
              0.13
              
              $
              0.20Net
                  income per share, pro forma diluted
              
              $
              (0.01
              )
              $
              0.00
              
              $
              0.01
              
              $
              0.04





Recently
      Issued Accounting Pronouncements and Interpretations :





In
      November 2004, the FASB issued SFAS No. 151, “Inventory Costs, an amendment of
      ARB No. 43.” SFAS No.151 amends the guidance in ARB No. 43, “Inventory Pricing,”
for abnormal amounts of idle facility expense, freight, handling costs, and
      wasted material (spoilage) requiring that those items be recognized as
      current-period expenses regardless of whether they meet the criterion of “so
      abnormal.” This statement also requires that allocation of fixed production
      overheads to the costs of conversion be based on the normal capacity of the
      production facilities. The statement is effective for inventory costs incurred
      during the fiscal years beginning after June 15, 2005. Management does not
      expect this statement to have a material impact on the Company's consolidated
      financial position or results of operations.





In
      December 2004, the FASB issued SFAS No. 153, which is effective for fiscal
      periods beginning after June 15, 2005. In the past, the net book value of the
      assets relinquished in a non-monetary transaction was used to measure the value
      of the assets exchanged. Under SFAS No. 153, assets exchanged in a non-monetary
      transaction will be valued at fair value instead of the net book value of the
      asset relinquished, as long as the transaction has commercial substance and
      the
      fair value of the assets exchanged is determinable within reasonable limits.
      The
      adoption of SFAS No. 153 is not anticipated to have a material effect on the
      Company's financial statements.





In
      December 2004, the FASB issued SFAS No. 123 (revised 2004), Share-Based Payment
      (Statement 123(R)), which is a revision of FASB Statement No. 123, Accounting
      for Stock-Based Compensation (Statement 123). Statement 123(R) supersedes APB
      Opinion No 25, Accounting for Stock Issued to Employees, and amends FASB
      Statement No. 95, Statement of Cash Flows. Statement 123 (R) requires all
      share-based payments to employees, including grants of employee stock options,
      to be recognized at the date of grant in the income statement based on their
      fair values. Pro forma disclosure is no longer an alternative. Statement 123(R)
      is effective at the beginning of the first interim or annual period beginning
      after December 15, 2005. The impact of adoption of Statement 123(R) cannot
      be
      accurately predicted at this time because it will depend on levels of
      share-based payments in the future. However, had the Company adopted Statement
      123(R) in prior periods, the impact of the standard would have approximated
      the
      impact of Statement 123 as described in the disclosure of pro forma net income
      and earnings per share in the note above. Statement 123(R) also requires the
      benefits of tax deductions in excess of recognized compensation cost to be
      reported as a financing cash flow, rather than as an operating cash flow as
      required under current literature. This requirement will reduce net operating
      cash flows and increase financing cash flows in periods after adoption. The
      Company cannot estimate what those amounts will be in the future because they
      depend on, among other things, when employees exercise stock options. The
      Company expects to adopt Statement 123(R) on January 1, 2006.





SFAS
      No.
      154, Accounting Changes and Error Corrections, was issued in May 2005 and
      replaces APB Opinion No. 20 (Accounting Changes) and SFAS No. 3 (Reporting
      Accounting Changes in Interim Financial Statements). SFAS No. 154 requires
      retrospective application for voluntary changes in accounting principle in
      most
      instances and is required to be applied to all accounting changes made in fiscal
      years beginning after December 15, 2005. The Company's expected January 1,
      2006
      adoption of SFAS No. 154 is not expected to have a material impact on the
      Company's consolidated financial condition or results of
      operations.





11





5.    
      SEGMENT REPORTING




The
      Company 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 advanced lithium batteries. 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 six month periods ended June
      30, 2005 and 2004.




The
      accounting policies of the segments are the same as those described in Note
      4.
      The Company evaluates the performance of its segments and allocates resources
      to
      them based on anticipated future contribution.


**Three
                  Months Ended**
              
              **Six
                  Months Ended****June
                  30,**
              
              **June
                  30,****2005**
              
              **2004**
              
              **2005**
              
              **2004****(Restated)**
              
              **(Restated)**
              
              **(Restated)**
              
              **(Restated)****Net
                  sales**EnerFuel,
                  Inc.
              
              $
              -
              
              $
              -
              
              $
              15
              
              $
              -EnerDel,
                  Inc.
              
              
              14
              
              
              -
              
              
              20
              
              
              -Ener1
                  Battery
              
              
              -
              
              
              11
              
              
              -
              
              
              41Total
                  Net Sales
              
              $
              14
              
              $
              11
              
              $
              35
              
              $
              41**Net
                  income (loss)**Discontinued
                  segments
              
              $
              -
              
              $
              -
              
              $
              -
              
              $
              (2
              )Corporate
              
              
              36,257
              
              
              11,203
              
              
              66,508
              
              
              70,623EnerDel,
                  Inc.
              
              
              (15,896
              )
              
              -
              
              
              (19,111
              )
              
              -Ener1
                  Battery
              
              
              (45
              )
              
              (826
              )
              
              (96
              )
              
              (1,264
              )Ener1
                  Technologies Inc.
              
              
              -
              
              
              (10
              )
              
              -
              
              
              (10
              )EnerFuel
              
              
              (309
              )
              
              (267
              )
              
              (579
              )
              
              (542
              )NanoEner
              
              
              (223
              )
              
              (78
              )
              
              (511
              )
              
              (78
              )Minority
                  interest
              
              
              3,117
              
              
              -
              
              
              3,760
              
              
              -Net
                  income (loss)
              
              $
              22,901
              
              $
              10,022
              
              $
              49,971
              
              $
              68,727**Assets**Discontinued
                  segments
              
              
              
              
              
              
              
              $
              -
              
              $
              27Corporate
              
              
              
              
              
              
              
              
              13,529
              
              
              13,070EnerDel,
                  Inc.
              
              
              
              
              
              
              
              
              6,172
              
              
              -Ener1
                  Battery
              
              
              
              
              
              
              
              
              1,360
              
              
              22,506Ener1
                  Technologies Inc.
              
              
              
              
              
              
              
              
              1
              
              
              10EnerFuel
              
              
              
              
              
              
              
              
              10
              
              
              -NanoEner
              
              
              
              
              
              
              
              
              12
              
              
              -Total
                  assets
              
              
              
              
              
              
              
              $
              21,084
              
              $
              35,613








12





6.    
      ACCRUED EXPENSES AND OTHER LIABILITIES




Accrued expenses and other liabilities principally consist of accrued salaries,
      and accrued legal and accounting fees which are included in accounts payable
      and
      accrued expenses on the accompanying condensed consolidated balance
      sheet.




7.  
      CONSOLIDATION OF 49% ENERLOOK SUBSIDIARY





EnerLook
      Health Care Solutions, Inc. was formed in February 2002 as a 51% subsidiary
      of
      the Company. EnerLook's name was changed to EnerLook Solutions, Inc. in May
      2003
      and then to Ener EL Holdings, Inc. in December 2004. In early 2003, EnerLook
      issued 333,333 shares of common stock to Solution Investment Group, LLC in
      exchange for $250,000 and 125,000 shares to an employee, reducing the Company's
      ownership to approximately 49%. Ener1 Group owns approximately 43% of the
      outstanding common stock of EnerLook. Since EnerLook was formed, the Company
      has
      consolidated EnerLook's results of operations and its balance sheet as part
      of
      the Company's consolidated financial statements. Ownership of a subsidiary
      below
      51% is most often recorded under the equity method of accounting, rather than
      consolidating the subsidiary's results of operations with the less than 51%
      parent company, as it is presumed that the less than 51% parent company does
      not
      control the subsidiary. The Company has elected to continue consolidating this
      subsidiary as part of its financial statements because the Company and Ener1
      Group are related parties, which exercise substantial control over the
      activities of EnerLook and own an aggregate of 92% of EnerLook's outstanding
      common stock. Management believes that the reduction in its ownership percentage
      of EnerLook's common stock from 51% to 49% does not materially reduce the
      control the Company exercises over EnerLook's operations. In the second quarter
      of 2003, the Company transferred certain assets of its Digital Media division
      to
      EnerLook in order to consolidate the Company's set top box business. As part
      of
      this restructuring, the Company transferred net assets in the amount of
      approximately $1.0 million to EnerLook, resulting in an intercompany receivable
      from EnerLook in the amount of $1.0 million. In December 2003, management
      decided to discontinue the operations of this segment and conveyed operating
      control of this operating segment to T. & V. Rental Co., Inc. (TVR) a third
      party. In December, 2004 the Company sold substantially all of the assets of
      EnerLook to TVR.




8.  
      DEBT AND DEBT GUARANTEES





In
      January 2004, the Company issued $20,000,000 in aggregate principal amount
      of
      senior secured convertible debentures due January 2009, and warrants to purchase
      up to 16,000,000 shares of common stock, in a private placement (See Note 9.)
      Ener1 Battery guaranteed the Company's repayment of the debentures and this
      commitment was collateralized by a security interest in Ener1 Battery's land,
      building and equipment. In connection with the issuance of the debentures,
      the
      Company was required to obtain releases of all existing security interests
      in
      the land, building, patents, and production equipment owned by Ener1 Battery,
      and this was done. In order to effect some of the required releases, in January
      2004 the Company paid: $2,200,000 to Meliorbanca Gallo S.P.A. to satisfy certain
      obligations of Ener1 S.R.L. an Italian company related to the Company by common
      ownership; $704,000, representing all of the outstanding balances due to
      Interbay Funding on a mortgage note collateralized by the land and building
      owned by Ener1 Battery; and $1,600,000 to Saint Petersburg Joint Stock Bank
      Tavrichesky to satisfy two notes which were secured by a pledge of a patent
      owned by Ener1 Ukraine.





In
      March
      2005, the Company issued $14,225,000 in aggregate principal amount of senior
      secured convertible debentures due March 2009 and warrants to purchase up to
      7,112,500 shares of the Company's common stock, in a private placement (See
      Note
      10).





In
      March
      2004, Ener1 Battery obtained a loan secured by a vehicle. The total amount
      due
      under the loan as of June 30, 2005 is $103,105. The loan is payable over 5
      years
      in equal monthly payments of approximately $2,600.




9. $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 June 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.





13


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





Interest
      is due quarterly. All or a portion of the accrued and unpaid interest may be
      converted at the option of the debenture holder at any time under the same
      conversion terms as the principal. To date, interest of $2,603,000 has been
      paid, $0 interest was accrued at June 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 Convertible Debentures (see Note 10).





In
      the
      event of any default or fundamental change as defined under the 2004 Debentures,
      the holder will be entitled to require Ener1 to redeem the 2004 Debentures
      at a
      price equal to 101% of the unpaid principal and 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"). Registration
      delay payments would 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 ends.




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 June 30, 2005, the exercise price was $2.37 per
      share. The warrants are exercisable at any time through January 20,
      2010.




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





As
      discussed in Note 12, 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").





14




10. $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 June 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 $323,000 has been paid, no interest was accrued at June 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 Convertible Debentures (see Note 9).





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.





15


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.





Ener1
      is
      accounting for the conversion option in the 2005 Debentures and the associated
      warrants as derivative liabilities in accordance with SFAS 133 and EITF
      00-19.





11.    
      REDEEMABLE PREFERRED STOCK





Ener1,
      Inc. Series B Convertible Preferred Stock





In
      October 2004, Ener1 sold 150,000 shares of Series B Convertible Preferred Stock
      ("Series B Preferred Stock"), plus warrants to purchase 4,166,666 shares of
      common stock at an exercise price of $1.25 and warrants to purchase 4,166,666
      shares of common stock at an exercise price of $1.50 per share, for an aggregate
      purchase price of $15,000,000.





In
      February 2005, Ener1 sold 2,500 shares of Series B Preferred Stock, plus
      warrants to purchase 69,445 shares of common stock at an exercise price of
      $1.25
      and warrants to purchase 69,445 shares of common stock at an exercise price
      of
      $1.50 per share, for an aggregate purchase price of $250,000.





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





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




The
      Series B Preferred Stock is redeemable at the option of Ener1 at any time,
      in
      part or whole, at 100% of the liquidation value, plus accrued and unpaid
      dividends. The Series B Preferred Stock is redeemable at the option of the
      holder when none of the 2004 Debentures are outstanding. The 2004 Debentures
      mature on January 20, 2009. Due to the mandatory redemption feature, the Series
      B Preferred Stock is reported as a liability consistent with SFAS 150,
“Accounting for Certain Financial Instruments with Characteristics of Both
      Liabilities and Equity” (“SFAS 150”).




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





EnerDel
      Series A Convertible Preferred Stock





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





Ener1
      is
      accounting for the freestanding warrants and embedded conversion feature of
      the
      Series A Preferred Stock in accordance with SFAS 133. The proceeds were first
      allocated to the freestanding warrants at their fair value. The remaining
      proceeds were next allocated based on the with-and-without method first to
      the
      embedded conversion feature of the Series A Preferred Stock and then to of
      the
      host instrument (Series A Preferred Stock). When the term of the conversion
      option expired in January 2005, the remaining liability of $1,183,000
      was recorded as unrealized gain on embedded derivative in the first
      quarter of 2005.





16


If
      EnerDel has not redeemed all of the shares of Series A Preferred Stock on or
      before the 4th anniversary of the filing date of the certificate of designation
      for the Series A Preferred Stock, the holders will have the option to require
      EnerDel to redeem all of the Series A Preferred shares on 10 days notice. As
      a
      result, Ener1 has determined the preferred stock is mandatorily redeemable.
      Due
      to the mandatory redemption feature, the Series A Preferred Stock is reported
      as
      a liability consistent with SFAS 150.





In
      connection with the issuance of the Series A Preferred Stock, EnerDel issued
      warrants to purchase up to 1,750,000 shares of common stock at an exercise
      price
      of $0.70 per share and warrants to purchase up to 5,250,000 shares of common
      stock at an exercise price of $1.00 per share. These warrants have a ten year
      term. Ener1 is not required to register the resale of the warrants or of the
      common stock issuable upon exercise of the warrants. The fair value was
      determined utilizing the Black-Scholes stock option valuation model. The
      significant assumptions used in the valuation are: the exercise prices as noted
      above; the market value of Ener1's common stock on the date of issuance, $0.66;
      expected volatility of 207%; risk free interest rate of approximately 1.74%;
      and
      a term of ten years.





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


**Ener1**
              
              **EnerDel****Series
                  B**
              
              **Series
                  A**
              
              **Total**Face
                  value
              
              $
              15,250
              
              $
              8,000
              
              $
              23,250Less
                  fair value of warrant derivativeat
                  issue date
              
              
              (5,514
              )
              
              (4,620
              )
              
              (10,134
              )Less
                  fair value of conversion optionat
                  issue date
              
              
              -
              
              
              (1,183
              )
              
              (1,183
              )Accumulated
                  accretionof
                  discounts
              
              
              1,274
              
              
              1,120
              
              
              2,079Cumulative
                  dividends
              
              
              732
              
              
              457
              
              
              1,189Carrying
                  value
              
              $
              11,742
              
              $
              3,774
              
              $
              15,201




12. Derivatives





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




·the
                2004 Debenture conversion feature;·warrants
                to purchase common stock associated with the 2004
                Debentures;·the
                2005 Debenture conversion feature;·warrants
                to purchase common stock associated with the 2005
                Debentures;·EnerDel
                Series A Preferred Stock conversion feature;·Warrants
                to purchase common stock issued to Delphi Corporation (the "Delphi
                Warrants");·Series
                B Preferred Stock conversion feature;·warrants
                to purchase common stock issued to the purchasers of the Series B
                Preferred Stock (the "Series B Warrants");·warrants
                to purchase common stock issued to Ener1 Group, Inc. in connection
                with
                the acquisition by Ener1 of Ener1 Battery Company from Ener1 Group,
                Inc.
                (“Battery Warrants”);·warrants
                to purchase common stock issued to Ener1 Group, Inc. in connection
                with
                the exchange of stock, notes and warrants in exchange for debt (the
                “Exchange Warrants”); and·options
                to purchase common stock issued to ITOCHU Corporation (“ITOCHU Options”)





17


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





The
      impact on the balance sheet as of June 30, 2005 and the statements of income
      for
      the three months ended June 30, 2005 and 2004 is as follows (dollars in
      thousands):





**December
                  31,**
              
              **June
                  30,**
              
              **Gain**
              
              
              
              **December
                  31,**
              
              **June
                  30,**
              
              **Gain****2004**
              
              **2005**
              
              **(Loss)**
              
              
              
              **2003**
              
              **2004**
              
              **(Loss)**2004
                  Debenture
              
              $
              11,627
              
              $
              3,684
              
              $
              7,943
              
              
              
              
              $
              -
              
              $
              8,480
              
              $
              1,760
              
              
              (a
              )2004
                  Debenture Warrants
              
              
              11,040
              
              
              3,040
              
              
              8,000
              
              
              
              
              
              -
              
              
              7,840
              
              
              1,920
              
              
              (a
              )2005
                  Debenture
              
              
              -
              
              
              2,134
              
              
              5,832
              
              
              (a
              )
              
              -
              
              
              -
              
              
              -2005
                  Debenture Warrants
              
              
              -
              
              
              2,688
              
              
              1,124
              
              
              (a
              )
              
              -
              
              
              -
              
              
              -EnerDel
                  Series A Preferred Stock
              
              
              1,183
              
              
              -
              
              
              1,183
              
              
              
              
              
              -
              
              
              -
              
              
              -Series
                  A Warrants
              
              
              5,944
              
              
              2,447
              
              
              3,497
              
              
              
              
              
              -
              
              
              -
              
              
              -Series
                  B Warrants
              
              
              7,096
              
              
              3,916
              
              
              3,180
              
              
              
              
              
              -
              
              
              -
              
              
              -Battery
                  Warrants
              
              
              57,960
              
              
              23,460
              
              
              34,500
              
              
              
              
              
              96,600
              
              
              43,470
              
              
              53,130Exchange
                  Warrants
              
              
              16,600
              
              
              6,388
              
              
              10,212
              
              
              
              
              
              19,600
              
              
              12,200
              
              
              7,400Itochu
                  Stock Options
              
              
              -
              
              
              -
              
              
              -
              
              
              
              
              
              13,957
              
              
              467
              
              
              13,490$
              111,450
              
              $
              47,757
              
              $
              75,471
              
              
              
              
              $
              130,157
              
              $
              72,457
              
              $
              77,700





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





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





The
      Battery Warrants are immediately exercisable at an exercise price of $.08 per
      share and have a term of ten years. The warrants have provisions requiring
      that
      the number of shares available for exercise and/or the exercise price for the
      shares be adjusted to reflect stock splits, stock dividends and similar
      transactions, as well as the issuance of other shares of our common stock,
      except for employee stock options, at prices below the exercise price stated
      in
      the warrants. The warrants also provide for cashless exercise in accordance
      with
      a formula stated in the warrants.





The
      Company uses the Black Scholes valuation model for calculation of the value
      of
      derivative liabilities. Ener1 uses volatility rates based upon the closing
      stock
      price of its common stock since January 2002, when the company underwent a
      change in control. Ener1 determined that share prices prior to this period
      do
      not reflect the ongoing business valuation of its current operations. Ener1
      uses
      a risk free interest rate that is equal to the U. S. Treasury bill rate with
      a
      maturity that approximates the estimated expected life of a derivative or
      security. Ener1 uses the closing market price of the common stock on the date
      of
      issuance of a derivative or at the end of a quarter when a derivative is valued
      at fair value. The volatility factor used in the Black Scholes valuation model
      has a significant effect on the resulting valuation of the derivative
      liabilities on the balance sheet. The volatility of Ener1’s stock prices has
      ranged from 296% to 145% during the period from 2002 through 2005. At volatility
      rates above 140%, the call value of the options calculated under the Black
      Scholes valuation model approaches the market price of the stock, and additional
      volatility does not further materially increase the value of the derivatives.
      The initial volatility for the calculation of the embedded and freestanding
      derivatives ranged from 135% to 296%.





18


The
      following table shows the volatility, risk free interest rate and market price
      used in the calculation of the call value under the Black Scholes valuation
      model for each derivative at issuance date and at the end of each
      year.





**Issue
                  Date**
              
              **Volatility**
              
              **Risk
                  Free**
                **Interest
                  Rate**
              
              **Market
                  Price**
              
              **Term
                  in Years**At
                  Issuance date for:2004
                  Debentures
              
              
              1/21/2004
              
              
              296
              %
              
              3.5
              %
              $
              1.65
              
              
              52004
                  Debenture Warrants
              
              
              1/21/2004
              
              
              296
              %
              
              3.5
              %
              $
              1.65
              
              
              102005
                  Debentures
              
              
              3/11/2005
              
              
              104
              %
              
              3.5
              %
              $
              0.75
              
              
              52005
                  Debenture Warrants
              
              
              3/11/2005
              
              
              104
              %
              
              3.5
              %
              $
              0.75
              
              
              5EnerDel
                  Series A Preferred Stock
              
              
              10/20/2004
              
              
              207
              %
              
              1.8
              %
              $
              0.66
              
              
              5Delphi
                  Warrants
              
              
              10/20/2004
              
              
              207
              %
              
              1.8
              %
              $
              0.66
              
              
              7Series
                  B Preferred Stock Warrants
              
              
              10/15/2004
              
              
              207
              %
              
              1.8
              %
              $
              0.65
              
              
              10Debt
                  Exchange Warrants
              
              
              11/14/2003
              
              
              296
              %
              
              1.0
              %
              $
              0.98
              
              
              10ITOCHU
                  options
              
              
              7/1/2003
              
              
              296
              %
              
              1.0
              %
              $
              1.40
              
              
              6
                  mos.Battery
                  Warrants
              
              
              9/6/2002
              
              
              201
              %
              
              1.7
              %
              $
              0.05
              
              
              10Prices
                  and average rates at Year End:December
                  31, 2003
              
              
              
              
              
              296
              %
              
              4.3
              %
              $
              1.40December
                  31, 2004
              
              
              
              
              
              155
              %
              
              4.1
              %
              $
              0.85December
                  31, 2005
              
              
              
              
              
              145
              %
              
              4.1
              %
              $
              0.39





13.    
      AGREEMENT WITH ENER1 GROUP




Effective
      as of October 15, 2004, the Company entered into an agreement with Ener1 Group,
      Inc., its majority shareholder, 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 at a purchase price of $100.00 per share (or an aggregate purchase
      price of $3 million), together with warrants to purchase up to 833,334 shares
      of
      its common stock at an exercise price of $1.25 per share, and warrants to
      purchase up to 833,334 shares of its common stock at an exercise price of $1.50
      per share. If the Company requires Ener1 Group to purchase any of the Series
      B
      Preferred and warrants pursuant to this agreement, it will pay Ener1 Group
      a fee
      equal to one third of the aggregate purchase price for the securities purchased
      specifically by Ener1 Group, in return for Ener1 Group's assistance in arranging
      the sales of Series B Preferred. In March 2005, at the Company's request, Ener1
      Group purchased 2,500 of the Company's Series B Preferred shares, and warrants
      to purchase 138,890 shares of the Company's common stock, for an aggregate
      purchase price of $250,000. Ener1 Group was paid a commission of $83,333 in
      connection with this transaction.




14. 
      ITOCHU CORPORATION INVESTMENT AND INVESTMENT IN ENERSTRUCT




On
      July
      25, 2003, the Company entered into a Subscription and Investment Agreement
      with
      ITOCHU Corporation, under which the Company issued 14,000,000 shares of its
      common stock in a private sale to ITOCHU Corporation at a price of $0.25 per
      share, for $3.5 million. In addition, the Company granted the following options
      to ITOCHU to increase its ownership of common stock at the following prices:
      During the six month period from July 25, 2003 through January 24, 2004, ITOCHU
      had the option to purchase up to 12,461,861 shares of common stock, for $0.70
      per share. During January 2004, ITOCHU exercised a portion of these options
      and
      purchased 1,500,000 shares for $1,050,000. During the period from January 25,
      2004 through January 31, 2005, ITOCHU had the option to purchase up to 9,346,396
      shares of common stock for $4.00 per share. These options expired unexercised
      on
      January 31, 2005.




Using
      the
      proceeds of the ITOCHU investment, the Company invested $2,003,339 in a new
      Japanese company called Enerstruct, Inc. (“Enerstruct”), in exchange for a 49%
      ownership interest in Enerstruct. ITOCHU owns the remaining 51% of Enerstruct,
      for which it invested $1,100,000 plus equipment totaling approximately $500,000.
      At June 30, 2005, the Company's original investment in Enerstruct was reduced
      by
      $1,045,344, which represents the Company's share of Enerstruct's losses through
      that date.




In
      connection with the foregoing activities, the Company and Ener1 Battery entered
      into a license agreement with ITOCHU and Enerstruct and agreed to provide
      Enerstruct with an exclusive license (for Japan only) to use the technologies
      covered by two of Ener1 Battery's pending patent applications. In July 2004,
      this license became non-exclusive. In October 2004, this license was transferred
      to EnerDel. ITOCHU has also licensed to Enerstruct, on an exclusive basis,
      several of its patents relating to its lithium battery
      technologies.




19


On
      April
      12, 2005, EnerDel entered into an agreement with Enerstruct, under which EnerDel
      paid Enerstruct $1 million as a non-refundable prepayment for engineering
      services related to optimization of EnerDel's lithium battery production lines
      and further development of Enerstruct's high-rate battery technology. The
      agreement included the option for the high rate battery cell and lithium battery
      mass production technology to be licensed to EnerDel on terms set forth in
      the
      agreement and certain other terms to be negotiated. On June 23, 2005, EnerDel
      decided to acquire these technologies. As part of the agreement, Enerstruct
      has
      agreed to provide the services of a team of production integration experts.
      EnerDel plans to use the automated mass production processes acquired from
      Enerstruct to manufacture a new high-rate lithium battery cell designed by
      Enerstuct for use in lithium power modules for hybrid electric vehicles and
      other select markets. The $1 million payment to EnerStruct is included in
      research and development expenses for the three and six month periods ended
      June
      30, 2005.




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





Cash
            
            $
            1,527,879Total
                assets
            
            $
            2,016,576Total
                liabilities
            
            $
            788,331Net
                loss
            
            $
            (464,214
            )




15.   
      RELATED PARTY TRANSACTIONS




Ener1
      Group and its subsidiaries have from time to time used various services and
      employees of the Company. The Company billed Ener1 Group and its subsidiaries
      for the actual cost of these services and employees. Similarly, the Company
      has
      from time to time used various services and employees of Ener1 Group and its
      subsidiaries and Ener1 Group has billed the Company for the actual cost of
      these
      services and employees. Ener1 Group and its subsidiaries billed the Company
      $38,930 and $40,240, respectively, for the three and six months ended June
      30,
      2005. The Company billed Ener1 Group and its subsidiaries $54,780 and $85,830,
      respectively, for the three and six months ended June 30, 2005. As of June
      30,
      2005, the net balance due to the Company from Ener1 Group and its subsidiaries
      was $105,682.





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.





20


Two
      of
      the Company's directors, Dr. Peter Novak and Mike Zoi, collectively beneficially
      own 75% of the outstanding common stock of Ener1 Group, Inc., which owns
      approximately 88% of the outstanding common stock of the Company. Novak and
      Zoi
      also beneficially own an aggregate of 25% of the voting membership interests
      (and an aggregate of 25.5% of the economic membership interests) of Splinex,
      LLC, which holds approximately 95% of the outstanding common stock of Splinex.
      The remaining membership interests of Splinex, LLC are held by Mikhail
      Zingarevich (a director of Splinex and the brother of Boris Zingarevich, a
      25%
      shareholder of Ener1 Group), who beneficially owns 12.75% of the economic
      membership interests (and 12.5% of the voting membership interests) of Splinex,
      LLC and Alexander Malovik, who beneficially owns 50% of the voting membership
      interests (and 49% of the economic membership interests) of Splinex,
      LLC.





Two
      of
      the Company's directors, Kevin P. Fitzgerald and 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.





Also,
      see
      Note 12, above.




16.    
      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 18); 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





21


An
      independent valuation expert employed by the Company 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 valuation expert considered all available valuation
      methods and employed a form of the Income Approach known as the Multi-Period
      Excess Earnings Model. This model attempts to quantify the magnitude of earnings
      generated by the specific asset being examined and then discounts 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%





17.    
      COSTS ASSOCIATED WITH EXIT OR DISPOSAL ACTIVITIES




On
      June
      23, 2005, as discussed in Note 13, EnerDel, Inc. decided to acquire automated
      manufacturing technology from Enerstruct, Ener1 Inc.'s joint venture with
      Itochu, for high-rate battery production, which EnerDel expects to substantially
      reduce manufacturing labor costs and lower its cash burn rate. In connection
      therewith, the Company changed its battery manufacturing strategy and has
      decided to focus on developing batteries and technology for use in the hybrid
      vehicle market. As a result, on June 23, 2005 EnerDel began restructuring its
      manufacturing facilities in Indianapolis and Fort Lauderdale. A total of 37
      employees were terminated in Indianapolis and Fort Lauderdale. Management has
      determined that going forward, the equipment in the Fort Lauderdale facility
      will be used for research and development activities and therefore, has charged
      the net book value of the equipment of approximately $10.5 million to research
      and development expenses (see note 18). EnerDel plans to retain selected
      equipment and battery pack/systems integration engineers at the Indianapolis
      facility. EnerDel will evaluate the suitability of each item of equipment at
      the
      Indianapolis facility for possible use in the new manufacturing process and
      do
      one of the following: (1) transfer it to its Ft. Lauderdale facility if usable,
      with or without modification; (2) if the equipment cannot be used, attempt
      to
      sell the equipment; or (3) if the equipment cannot be sold, dispose of the
      equipment. In the event of sale of any of the items of equipment, the proceeds,
      when received, would partially offset the costs incurred in connection with
      exiting the business. 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, and general, and administrative expenses on the
      accompanying condensed consolidated income statements. Exit costs incurred
      for
      the three months ended June 30, 2005 were $745,262, which represented:
      outplacement costs of $192,000; severance payments totaling $281,000; accrued
      vacation pay through June 23, 2005 of $53,500; health care benefits of $24,676;
      security costs of $2,726; and the cancellation of EnerDel's engineering services
      contract with Delphi in the amount of $191,360.





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





Amount
                Incurred
            
            Cumulative
                AmountDescription
                of
            
            Expected
                Liability
            
            For
                Three Month Period
            
            Incurred
                As OfDisposal
                Activity
            
            Of
                Exit Activity
            
            Ended
                June 30, 2005
            
            June
                30, 2005Personnel
                termination costs
            
            $
            951,028
            
            $
            745,262
            
            $
            745,262Contract
                termination costs****(1)
            
            
            1,830,908
            
            
            --
            
            
            --Equipment
                relocation costs
            
            
            150,000
            
            
            --
            
            
            --Total
                activity exit costs
            
            $
            2,931,936
            
            $
            745,262
            
            $
            745,262





Table
      Notes:


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





22


18.    
      COMMITMENTS AND CONTINGENCIES





Litigation





The
      Company receives communications from time to time alleging various claims.
      These
      claims include, but are not limited to, allegations that certain of the
      Company's products infringe the proprietary rights of third parties. The Company
      cannot predict the outcome of any such claims or the effect of any such claims
      on its operating results, financial condition, or cash flows.





Lease
      Commitments





In
      January 2004, the Company entered into a six-year operating lease for office
      facilities. The lease requires the Company to pay monthly rent of approximately
      $9,000 in the first year, increasing to approximately $14,000 in the sixth
      year,
      plus the Company's proportionate share of operating costs.





In
      April
      2005, the Company entered into a 5 year and 2 month operating lease for office
      facilities located in New York City. The lease provides for fixed rent of
      $426,240 per annum through the balance of the lease term.





On
      June
      20, 2005, the Company entered into a 3 year and 1 month operating lease for
      office facilities for EnerFuel, Inc. The lease provides for fixed rent in
      aggregate of $326,293 per annum plus additional rent (including taxes and common
      area costs).





See,
      Note
      1 to the table in Note 16, above.





Other
      Commitments





Ener1
      Battery entered into a Cooperative Research and Development Agreement (“CRADA”)
      in June 2004 with Battelle, the operator of Pacific Northwest National
      Laboratories under a contract with the U.S. Department of Energy, for research
      and development work involving lithium batteries. The CRADA requires Ener1
      Battery to expend a total $399,000 each year in furtherance of the research
      and
      development activities, a substantial portion of which will be in the form
      of
      in-kind contributions such as labor and use of equipment. The CRADA could have
      a
      term of up to two years. Ener1 Battery's contribution during the six months
      ended June 30, 2005 was approximately $100,000, which includes $60,000 of
      in-kind lithium battery research by Ener1 Ukraine, approximately $30,000 of
      research and development salaries incurred by Ener1 Battery, and $10,000 of
      travel and miscellaneous expenses.





19.
      RESEARCH AND DEVELOPMENT COSTS





EnerDel,
      Inc. charged research and development expenses in the quarter ended June 30,
      2005, in the amount of $10,527,432 representing the net asset book value of
      equipment and supplies located in Fort Lauderdale, Florida (See Note 16.) This
      equipment is now dedicated to research and development purposes, rather than
      imminent production use, as a result of management's change in product
      manufacturing strategy.




During
      the quarter ended June 30, 2005, EnerDel entered into an agreement that allowed
      it to acquire automated manufacturing technology from EnerStruct, Inc. for
      high-rate battery production. On June 23, 2005 EnerDel decided to acquire this
      technology and therefore began restructuring its manufacturing operations.
      EnerDel management, in consultation with Ener1, Inc., has subsequently decided
      that the Fort Lauderdale plant facilities, which include 3 production lines
      and
      raw materials processing equipment, will be used for research and development
      purposes going forward, and that one of the production lines (Line 3), would
      be
      used as a pilot plant line. In accordance with FASB No. 2 activities
      constituting research and development includes the operation of pilot
      plants.





Statement
      of Financial Accounting Standards No. 2 “Accounting for Research and Development
      Costs” require that assets to be used in R&D activities be immediately
      charged to income unless an alternative future use for the asset exists. AICPA
      Practice Aid, “Assets Acquired in a Business Combination to be Used in Research
      and Development Activities” states that for an asset acquired for use in R&D
      activity to have an alternative future use; (a) “it is reasonably expected that
      the combined enterprise will use the asset acquired in the alternative manner”
and that the asset embodies an anticipated capacity singly or in combination
      with other assets, to contribute directly or indirectly to future net cash
      flows
      (“economic benefit”) from that alternative use;” (b) the combined enterprise's
      use of the asset acquired is not contingent on further development of the asset
      subsequent to the acquisition date; and (c) is identified by the acquiring
      company at the acquisition date.





Although
      EnerDel intends to use the equipment in future product development projects
      and
      possibly for future production, due to the Company's change in battery
      production strategy it is now unable to specifically identify the projects
      and
      products at this time and therefore does not meet the requirement for
      alternative future uses in accordance with SFAS No. 2 “Accounting for Research
      and Development Costs”. Similarly, because of the indeterminable nature of
      future customer needs a projection cannot be made of the economic benefit of
      future R&D projects and or future anticipated customer production and
      therefore the equipment involved no longer meets the requirement of alternative
      future uses. As such the Company is expensing the equipment to Research and
      Development during the three and six months ended June 30, 2005.





23


20. RESTATEMENT
      AND RECLASSIFICATIONS OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS





***Summary
      of Restatement Items***





The
      consolidated financial statements for the three and six months ended June 30,
      2004 and 2005 and related disclosures included in this Amendment No. 2 to
      Quarterly Report on Form 10-QSB have been restated.





On
      December 15, 2005, Ener1 concluded that it would be necessary to restate its
      financial results for the fiscal year ended December 31, 2004 and for the
      interim periods ended June 30 and June 30, 2005 to reflect additional
      non-operating gains and losses related to the classification of and accounting
      for: (1) the conversion feature of the 2004 and 2005 Debentures, the warrants
      to
      purchase common stock associated with the 2004 and 2005 Debentures and the
      amortization expense associated with the discount recorded with respect to
      the
      2004 and 2005 Debentures and financing costs incurred in connection with the
      2004 Debentures, (2) the EnerDel Inc. Series A Convertible Preferred Stock
      issued in November, 2004 ("Preferred Stock") and associated warrants and (3)
      the
      warrants to purchase common stock issued to Ener1 Group, Inc. in September
      2002
      and warrants to purchase common stock issued to purchasers of Ener1's Series
      B Preferred Stock.  On January 5, 2006, Ener1 filed a Quarterly Report
      on Form 10-QSB for the three and nine months ended September 30, 2005 (the
      "September 2005 10-QSB") including restatements of Ener1's previously issued
      financial statements for the three and nine months ended September 30, 2004.
      In
      March 2006, Ener1 determined that it was also necessary to restate its
      previously issued financial statements for the three and six months ended June
      30, 2004 and 2005 to reflect additional gains and losses related to the
      classification of and accounting for options to purchase Ener1's common stock
      issued to a business partner in July 2003 and warrants to purchase Ener1's
      common stock issued to Ener1's majority stockholder in November 2003, and to
      reflect additional interest expense related to the classification of and
      accounting for warrants issued to the placement agent for the 2004
      Debentures.





Ener1
      had
      previously classified the value of these conversion features and warrants and
      options to purchase common stock, when applicable, as equity. After further
      review, Ener1 has determined that these instruments should have been classified
      as derivative liabilities and therefore, the fair value of each instrument
      must
      be recorded as a derivative liability on Ener1's balance sheet. Changes in
      the
      fair values of these instruments will result in adjustments to the amount of
      the
      recorded derivative liabilities and the corresponding gain or loss will be
      recorded in Ener1's statement of operations. At the date of the respective
      conversion of the each respective instrument (or exercise of the warrants,
      or
      options as the case may be), the corresponding derivative liability will be
      reclassified as equity.





On
      March
      27, 2006, Ener1 restated its financial statements for the three and six months
      ended June 30, 2004 and 2005 to reflect the accounting changes described above.
      In May 2006, Ener1 concluded that it would be necessary to restate its financial
      statements for the three and six months ended June 30, 2004 and 2005 to reflect the
      changes described below in Ener1's accounting for preferred stock and its
      calculation of diluted earnings or loss per share.





The
      Company previously reported the Series A Preferred Stock issued by its
      subsidiary EnerDel, Inc., and the Series B Preferred Stock issued by the Company
      as long term liabilities at June 30, 2005 and December 31, 2004. The balance
      sheets at December 31, 2004 and June 30, 2005 included in this Quarterly Report
      on Form 10-QSB have been restated to classify the Series A Preferred Stock
      and
      Series B Preferred Stock as temporary equity.





The
      Company previously reported diluted earnings per share for the three and six
      months ended June 30, 2005 of $0.05 and $0.11 per share, respectively based
      upon
      weighted average shares of 412,008,000 and 414,756,000, respectively. The
      Company previously reported diluted earnings per share for the three and six
      months ended June 30, 2004 of $0.02 and $0.16 per share, respectively based
      upon
      weighted average shares of 415,652,000 and 418,989,000, respectively. Diluted
      earnings per share are calculated by dividing the Company’s net income for the
      applicable period by the number of shares of the Company's common stock
      outstanding on a fully diluted basis. The previously reported diluted earnings
      per share did not reflect adjustments required to be made to the numerator
      of
      the fraction used in this calculation, specifically, excluding from net income
      the gain on derivative liability reported for the applicable period. Making
      these adjustments to the calculation resulted in the determination that the
      Company's 2004 Debentures and 2005 Debentures were dilutive securities and
      that
      the shares of Company common stock underlying the debentures should be
      considered outstanding for purposes of calculating diluted earnings per share.
      The restated diluted earnings (loss) per share for the three and six months
      ended June 30, 2005 is $(0.01) and $0.01 per share, respectively based upon
      restated weighted average shares of 429,686,987 and 439,464,139, respectively.
      The restated diluted earnings per share for the three and six months ended
      June
      30, 2004 is $0.00 and $0.04 per share, respectively based upon restated weighted
      average shares of 431,483,926 and 433,220,483, respectively.





The
      impact of the above restatement items on Ener1's consolidated statements of
      operations for the three and six months ended June 30, 2005 and 2004 are
      summarized below:  (dollars and shares in thousands, other than per share
      information).





24




**Three
                  Months Ended****June
                  30, 2005****As
                  Previously****Reported**
              
              **Adjustment**
              
              
              
              **As
                  restated**Gross
                  profit
              
              $
              14
              
              
              
              
              
              
              
              $
              14Total
                  operating expenses
              
              
              18,355
              
              
              (231
              )
              
              *(a*
              *)*
              
              18,124Loss
                  from operations
              
              
              (18,341
              )
              
              231
              
              
              
              
              
              (18,110
              )Other
                  income and (expense)Interest
              
              
              (1,314
              )
              
              (1,705
              )
              
              *(b*
              *)*
              
              (3,019
              )Equity
                  in loss of EnerStruct, Inc.
              
              
              (58
              )
              
              -
              
              
              
              
              
              (58
              )Other
              
              
              88
              
              
              -
              
              
              
              
              
              88Gain
                  on derivative liability
              
              
              -
              
              
              40,883
              
              
              *(c*
              *)*
              
              40,883Total
                  other income (expense)
              
              
              (1,284
              )
              
              39,178
              
              
              
              
              
              37,894Net
                  income (loss) before minority interestand
                  discontinued operations
              
              
              (19,625
              )
              
              39,409
              
              
              
              
              
              19,784Minority
                  interest
              
              
              3,117
              
              
              -
              
              
              
              
              
              3,117Net
                  income (loss) from continuing operations
              
              
              (16,508
              )
              
              39,409
              
              
              
              
              
              22,901Loss
                  from discontinued operations
              
              
              -
              
              
              -
              
              
              
              
              
              -Net
                  income (loss)
              
              
              (16,508
              )
              
              39,409
              
              
              
              
              
              22,901Preferred
                  stock dividends
              
              
              (1,102
              )
              
              (111
              )
              
              *(d*
              *)*
              
              (1,213
              )Net
                  income (loss) attributableto
                  common shareholders
              
              $
              (17,610
              )
              $
              39,298
              
              
              
              
              $
              21,688Net
                  income (loss) per share, basicContinuing
                  operations
              
              $
              (0.05
              )
              $
              0.11
              
              
              *(e*
              *)*
              $
              0.06Discontinued
                  operations
              
              $
              -
              
              $
              -
              
              
              
              
              $
              -Net
                  income (loss) per share, dilutedContinuing
                  operations
              
              $
              (0.05
              )
              $
              0.04
              
              
              *(f*
              *)*
              $
              (0.01
              )Discontinued
                  operations
              
              $
              -
              
              $
              -
              
              
              
              
              $
              -Weighted
                  average shares outstanding:Weighted
                  average shares outstanding - Basic
              
              
              347,456
              
              
              
              
              
              
              
              
              347,456Weighted
                  average shares outstanding - Diluted
              
              
              347,456
              
              
              82,231
              
              
              *(g*
              *)*
              
              429,687
  *(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 accretion of preferred stock as a dividend**(e)*
              *To
                  reflect basic earnings per share based upon corrected net
                  income.**(f)*
              *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.**(g)*
              *To
                  reflect additional diluted shares outstanding from warrants and
                  convertible securities**and
                  the reduction of diluted shares outstanding for anti-dilutive stock
                  options.*


25




**Three
                Months Ended****June
                  30, 2004****As
                  Previously****Reported**
              
              **Adjustment**
              
              
              
              **As
                  restated**Gross
                  profit
              
              
              
              
              $
              11
              
              $
              -
              
              
              
              
              $
              11Total
                  operating expenses
              
              
              
              
              
              2,889
              
              
              (153
              )
              
              *(a*
              *)*
              
              2,736Loss
                  from operations
              
              
              
              
              
              (2,878
              )
              
              153
              
              
              
              
              
              (2,725
              )Other
                  income and (expense)Interest
              
              
              
              
              
              (254
              )
              
              (1,379
              )
              
              *(b*
              *)*
              
              (1,633
              )Equity
                  in loss of EnerStruct, Inc.
              
              
              
              
              
              (131
              )
              
              -
              
              
              
              
              
              (131
              )Other
              
              
              
              
              
              50
              
              
              -
              
              
              
              
              
              50Gain
                  on derivative liability
              
              
              
              
              
              -
              
              
              14,461
              
              
              *(c*
              *)*
              
              14,461Total
                  other income (expense)
              
              
              
              
              
              (335
              )
              
              13,082
              
              
              
              
              
              12,747Net
                  income (loss)
              
              
              
              
              $
              (3,213
              )
              $
              13,235
              
              
              
              
              $
              10,022Net
                  income (loss) per share, basic
              
              
              
              
              $
              (0.01
              )
              
              0.04
              
              
              *(d*
              *)*
              $
              0.03Net
                  income (loss) per share, diluted
              
              
              
              
              $
              (0.01
              )
              
              0.01
              
              
              *(e*
              *)*
              $
              -Weighted
                  average shares outstanding:Weighted
                  average shares outstanding - Basic
              
              
              
              
              
              347,173
              
              
              
              
              
              
              
              
              347,173Weighted
                  average shares outstanding - Diluted
              
              
              
              
              
              347,173
              
              
              84,311
              
              
              *(f*
              *)*
              
              431,484
  *(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 warrants and
                    convertible securities**and
                    the reduction of diluted shares outstanding for anti-dilutive
                    stock
                    options.*





26




**Six
                  Months Ended****June
                  30, 2005****As
                  Previously****Reported**
              
              **Adjustment**
              
              
              
              **As
                  restated**Gross
                  profit
              
              $
              35
              
              $
              -
              
              
              
              
              $
              35Total
                  operating expenses
              
              
              24,337
              
              
              (398
              )
              
              *(a*
              *)*
              
              23,939Loss
                  from operations
              
              
              (24,302
              )
              
              398
              
              
              
              
              
              (23,904
              )Other
                  income and (expense)Interest
              
              
              (2,064
              )
              
              (3,205
              )
              
              *(b*
              *)*
              
              (5,269
              )Equity
                  in loss of EnerStruct, Inc.
              
              
              (227
              )
              
              -
              
              
              
              
              
              (227
              )Other
              
              
              140
              
              
              -
              
              
              
              
              
              140Gain
                  on derivative liability
              
              
              -
              
              
              75,471
              
              
              *(c*
              *)*
              
              75,471Total
                  other income (expense)
              
              
              (2,151
              )
              
              72,266
              
              
              
              
              
              70,115Net
                  income (loss) before minority interestand
                  discontinued operations
              
              
              (26,453
              )
              
              72,664
              
              
              
              
              
              46,211Minority
                  interest
              
              
              3,760
              
              
              -
              
              
              
              
              
              3,760Net
                  income (loss) from continuing operations
              
              
              (22,693
              )
              
              72,664
              
              
              
              
              
              49,971Preferred
                  stock dividends
              
              
              (2,089
              )
              
              (334
              )
              
              *(d*
              *)*
              
              (2,423
              )Net
                  income (loss) attributableto
                  common shareholders
              
              $
              (24,782
              )
              $
              72,330
              
              
              
              
              $
              47,548Net
                  income (loss) per share, basicContinuing
                  operations
              
              $
              (0.07
              )
              
              0.21
              
              
              *(e*
              *)*
              $
              0.14Discontinued
                  operations
              
              $
              -
              
              
              
              
              
              
              
              $
              -Net
                  income (loss) per share, dilutedContinuing
                  operations
              
              $
              (0.07
              )
              
              0.08
              
              
              *(f*
              *)*
              $
              0.01Discontinued
                  operations
              
              $
              -
              
              
              
              
              
              
              
              $
              -Weighted
                  average shares outstanding:Weighted
                  average shares outstanding - Basic
              
              
              347,456
              
              
              
              
              
              
              
              
              347,456Weighted
                  average shares outstanding - Diluted
              
              
              347,456
              
              
              92,008
              
              
              *(g*
              *)*
              
              439,464
  *(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 accretion of preferred stock as a dividend**(e)*
              *To
                  reflect basic earnings per share based upon corrected net
                  income.**(f)*
              *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.**(g)*
              *To
                  reflect additional diluted shares outstanding from warrants and
                  convertible securities**and
                  the reduction of diluted shares outstanding for anti-dilutive stock
                  options.*




27




**Six
                  Months Ended****June
                  30, 2004****As
                  Previously****Reported**
              
              **Adjustment**
              
              
              
              **As
                  restated**Gross
                  profit
              
              $
              31
              
              $
              -
              
              
              
              
              $
              31Total
                  operating expenses
              
              
              5,859
              
              
              (306
              )
              
              *(a*
              *)*
              
              5,553Loss
                  from operations
              
              
              (5,828
              )
              
              306
              
              
              
              
              
              (5,522
              )Other
                  income and (expense)Interest
              
              
              (477
              )
              
              (2,758
              )
              
              *(b*
              *)*
              
              (3,235
              )Equity
                  in loss of EnerStruct, Inc.
              
              
              (287
              )
              
              -
              
              
              
              
              
              (287
              )Other
              
              
              73
              
              
              -
              
              
              
              
              
              73Gain
                  on derivative liability
              
              
              -
              
              
              77,700
              
              
              *(c*
              *)*
              
              77,700Total
                  other income (expense)
              
              
              (691
              )
              
              74,942
              
              
              
              
              
              74,251Net
                  income (loss) from continuing operations
              
              
              (6,519
              )
              
              75,248
              
              
              
              
              
              68,729Loss
                  from discontinued operations
              
              
              (2
              )
              
              -
              
              
              
              
              
              (2
              )Net
                  income (loss)
              
              $
              (6,521
              )
              $
              75,248
              
              
              
              
              $
              68,727Net
                  income (loss) per share, basicContinuing
                  operations
              
              $
              (0.02
              )
              
              0.22
              
              
              *(d*
              *)*
              $
              0.20Discontinued
                  operations
              
              $
              -
              
              
              
              
              
              
              
              $
              -Net
                  income (loss) per share, dilutedContinuing
                  operations
              
              $
              (0.02
              )
              
              0.06
              
              
              *(e*
              *)*
              $
              0.04Discontinued
                  operations
              
              $
              -
              
              
              
              
              
              
              
              $
              -Weighted
                  average shares outstanding:Weighted
                  average shares outstanding - Basic
              
              
              347,089
              
              
              
              
              
              
              
              
              347,089Weighted
                  average shares outstanding - Diluted
              
              
              346,809
              
              
              86,411
              
              
              *(f*
              *)*
              
              433,220
  *(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 warrants and
                  convertible securities**and
                  the reduction of diluted shares outstanding for anti-dilutive stock
                  options.*






28


***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 June 30, 2005 and December 31, 2004. The following tables
      set forth the effects of the restatement adjustments on Ener1's consolidated
      balance sheets as of June 30, 2005 and December 31, 2004 (dollars in
      thousands):





**As
                  of June 30, 2005****As
                  Previously****Reported**
              
              **Adjustment**
              
              
              
              **As
                  restated****ASSETS**Current
                  assetsTotal
                  current assets
              
              
              12,722
              
              
              -
              
              
              
              
              
              12,722Property
                  and equipment, net
              
              
              2,719
              
              
              -
              
              
              
              
              
              2,719Investment
                  in EnerStruct, Inc.
              
              
              958
              
              
              -
              
              
              
              
              
              958Deferred
                  debenture costs
              
              
              970
              
              
              3,394
              
              
              *(1*
              *)*
              
              4,364Other
              
              
              321
              
              
              -
              
              
              
              
              
              321Total
                  assets
              
              $
              17,690
              
              $
              3,394
              
              
              
              
              $
              21,084**LIABILITIES
                  AND STOCKHOLDERS' DEFICIT**Current
                  liabilitiesDerivative
                  liability
              
              
              -
              
              
              130,157
              
              
              *(2*
              *)*
              
              47,75731,091
              
              
              *(3*
              *)*11,778
              
              
              *(4*
              *)*(125,269
              )
              
              *(5*
              *)*Current
                  portion of installment loan
              
              
              24
              
              
              -
              
              
              
              
              
              24Accounts
                  payable and accrued expenses
              
              
              1,444
              
              
              -
              
              
              
              
              
              1,444Liabilities
                  of discontinued operations
              
              
              307
              
              
              -
              
              
              
              
              
              307Other
                  current liabilities
              
              
              497
              
              
              -
              
              
              
              
              
              497Total
                  current liabilities
              
              
              2,272
              
              
              47,757
              
              
              
              
              
              50,029Long-term
                  debt
              
              
              79
              
              
              
              
              
              
              
              
              79$19,700
                  convertible debentures
              
              
              -
              
              
              5,913
              
              
              *(6*
              *)*
              
              5,913$14,225
                  convertible debentures
              
              
              11,601
              
              
              (8,457
              )
              
              *(7*
              *)*
              
              3,144Total
                  liabilities
              
              
              13,952
              
              
              45,213
              
              
              
              
              
              59,165Minority
                  interest
              
              
              17
              
              
              -
              
              
              
              
              
              17Commitments
                  and contingenciesRedeemable
                  convertible preferred stock:EnerDel,
                  Inc. Series A Preferred
              
              
              5,113
              
              
              (1,339
              )
              
              *(8*
              *)*
              
              3,774Series
                  B Preferred
              
              
              12,341
              
              
              (599
              )
              
              *(9*
              *)*
              
              11,742**STOCKHOLDERS'
                  DEFICIT**Common
                  Stock, $.01 par value, 750,000,000 shares authorized347,455,751
                  issued and outstanding
              
              
              3,475
              
              
              -
              
              
              
              
              
              3,475Paid
                  in capital
              
              
              101,634
              
              
              (27,330
              )
              
              *(10*
              *)*
              
              74,304Accumulated
                  deficit
              
              
              (118,842
              )
              
              (12,551
              )
              
              *(11*
              *)*
              
              (131,393
              )Total
                  stockholders' deficit
              
              
              (13,733
              )
              
              (39,881
              )
              
              
              
              
              (53,614
              )Total
                  liabilities and stockholders' deficit
              
              $
              17,690
              
              $
              3,394
              
              
              
              
              $
              21,084


Notes
      on
      following page.


29




*(1)*
              
              Change
                  due to recording deferred financing cost of $5,831 and amortization
                  of
                  $1,467 on the 2004 Debentures*(2)*
              
              Change
                  due to recording of January 1, 2003 derivative balances of $130,157,
                  which
                  includes $96,600 for Battery Warrants,$19,600
                  for Exchange Warrants and $13,957 for ITOCHU options. See Note
                  12.*(3)*
              
              To
                  record initial carrying value of derivatives in 2004 including
                  $20,000 for
                  the 2004 Debenture warrant derivative,$4,620 for theDelphi
                  Warrants, $1,183 related to the Series A Preferred conversion value,
                  and
                  $5,288 for the value of the Series B warrants.*(4)*
              
              To
                  record initial carrying value of derivatives in 2005 including
                  $3,812 for
                  the 2005 Debenture warrant derivative and$7,966
                  for the 2005 Debenture conversion feature derivative.*(5)*
              
              To
                  record 2004 and 2005 gain on derivatives based upon fair values
                  at June
                  30, 2005.*(6)*
              
              Change
                  due to accretion of discount of bond issuance costs of $4,424 and
                  conversion of $300 of 2004 Debentures*(7)*
              
              Change
                  due to correct initial recording of $2,447 and accretion of bond
                  discount
                  of $697 on 2005 Debentures*(8)*
              
              To
                  correct the value of the Series A Preferred by $1,503 and correct
                  cumulative accretion of discount on preferred of $164*(9)*
              
              To
                  correct the value of the Series B Preferred by $750 and correct
                  cumulative
                  accretion of discount on preferred of $151*(10)*
              
              To
                  reduce paid in capital for value of 2004 Debentures of $18,527,
                  Series A
                  Warrants of $4,300, Series B Preferred Warrantsof
                  $4,666 and cumulative dividends and accretion on preferred stock
                  of $2,890
                  and increase paid in capital for deferred debenturecosts
                  paid with warrants of $3,053 and accretion and conversion totaling
                  $223.*(11)*
              
              To
                  reflect aggregate effect of income statement adjustments







30




**As
                  of December 31, 2004****2004**
              
              
              
              
              
              **2004****As
                  Previously Reported**
              
              **Adjustment**
              
              
              
              **(Restated)****ASSETS**Current
                  assetsCash
                  and equivalents
              
              $
              14,091
              
              
              
              
              
              
              
              $
              14,091Prepaid
                  expenses and other current assets
              
              
              190
              
              
              
              
              
              
              
              
              190Due
                  from related parties
              
              
              118
              
              
              
              
              
              
              
              
              119Total
                  current assets
              
              
              14,399
              
              
              
              
              
              
              
              
              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
              
              
              *(1*
              *)*
              
              3,621Other
              
              
              443
              
              
              
              
              
              
              
              
              443Total
                  assets
              
              $
              29,417
              
              
              
              
              
              
              
              $
              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
              
              
              
              
              
              130,157
              
              
              *(2*
              *)*
              
              111,45031,091
              
              
              *(3*
              *)*(49,798
              )
              
              *(4*
              *)*Total
                  current liabilities
              
              
              2,631
              
              
              
              
              
              
              
              
              114,081Long-term
                  portion of installment loan
              
              
              91
              
              
              
              
              
              
              
              
              91$19,700
                  convertible debentures
              
              
              -
              
              
              3,944
              
              
              *(5*
              *)*
              
              3,944Total
                  liabilities
              
              
              2,722
              
              
              
              
              
              
              
              
              118,116Redeemable
                  convertible preferred stock:EnerDel,
                  Inc. Series A Preferred
              
              
              4,130
              
              
              (1,561
              )
              
              *(6*
              *)*
              
              2,569Series
                  B Preferred
              
              
              10,892
              
              
              (787
              )
              
              *(7*
              *)*
              
              10,105Minority
                  interest
              
              
              3,951
              
              
              
              
              
              
              
              
              3,951Commitments
                  and contingencies**STOCKHOLDERS'
                  DEFICIT**Common
                  stock, $.01 par value, 750,000,000 shares authorized347,455,751
                  issued and outstanding
              
              
              3,475
              
              
              
              
              
              
              
              
              3,475Additional
                  paid in capital
              
              
              100,246
              
              
              (24,216
              )
              
              *(8*
              *)*
              
              76,030Accumulated
                  deficit
              
              
              (95,999
              )
              
              (85,208
              )
              
              *(9*
              *)*
              
              (181,207
              )Total
                  stockholders' deficit
              
              
              7,722
              
              
              
              
              
              
              
              
              (101,702
              )Total
                  liabilities and stockholders' deficit
              
              $
              29,417
              
              
              
              
              
              
              
              $
              33,039







**Notes
      on following page.**






31




Notes
                  to 2004 Balance Sheet Table*(1)*
              
              Change
                  due to recording deferred financing cost of $4,526 and amortization
                  of
                  $905 on the 2004 Debentures*(2)*
              
              Change
                  due to recording of January 1, 2003 derivative balances of $130,157,
                  which
                  includes $96,600 for Battery Warrants,$19,600
                  for Exchange Warrants and $13,957 for ITOCHU options.*(3)*
              
              To
                  record initial carrying value of derivatives in 2004 including
                  $20,000 for
                  the 2004 Debenture warrant derivative,$4,620 for theDelphi
                  Warrants, $1,183 related to the Series A Preferred conversion value,
                  and
                  $5,288 for the value of the Series B warrants.*(4)*
              
              To
                  record gain on derivatives based upon fair values at December 31,
                  2004*(5)*
              
              Change
                  due to accretion of discount of bond issuance costs of $4,424 and
                  conversion of $300 of 2004 Debentures*(6)*
              
              To
                  correct the value of the Series B Preferred by $750 and correct
                  prior
                  period accretion of discounton
                  preferred of $36.*(7)*
              
              To
                  correct the value of the Series A Preferred by $1,503 and correct
                  prior
                  period accretion of discounton
                  preferred of $58.*(8)*
              
              To
                  reduce paid in capital for value of 2004 Debentures of $18,527,
                  Series A
                  Warrants of $4,300, Series B Preferred Warrants of $4,666,and
                  increase paid in capital for deferred debenture costs paid with
                  warrants
                  of $3,053 and accretion and conversion totaling $223.*(9)*
              
              To
                  reflect aggregate effect of income statement adjustments




21.    
      STOCK AND OPTION ISSUANCES DURING THE SIX MONTHS ENDED JUNE 30,
      2005




Effective
      March 1, 2005, pursuant to a financing commitment agreement between the Company
      and Ener1 Group, (Note 12), the Company issued to Ener1 Group 2,500 shares
      of
      Series B Convertible Preferred Stock, warrants to purchase 69,445 shares of
      the
      Company's common stock at an exercise price of $1.25 per share, and warrants
      to
      purchase 69,445 shares of the Company's common stock at an exercise price of
      $1.50 per share.




Effective
      March 14, 2005, pursuant to the issuance of a convertible debenture in the
      amount of $7,122,000, (Note 10), 2,136,600 shares of warrants to purchase common
      stock at an exercise price of $1.15 and 1,424,400 shares at an exercise price
      of
      $1.25 were granted to Satellite Strategic Finance Partners, Ltd.




Effective
      March 14, 2005, pursuant to the issuance of a convertible debenture in the
      amount of $2,878,000, (See Note 10), 863,400 shares of detachable warrants
      at an
      exercise price of $1.15 and 575,600 shares of detachable warrants at an exercise
      price of $1.25 were granted to Satellite Strategic Finance Associates,
      LLC.





Effective
      March 14, 2005, pursuant to the issuance of a convertible debenture in the
      amount of $2,000,000, (See Note 10), 600,000 shares of detachable warrants
      at an
      exercise price of $1.15 and 400,000 shares of detachable warrants at an exercise
      price of $1.25 were granted to Omicron Master Trust.




Effective
      March 14, 2005, pursuant to the issuance of a convertible debenture in the
      amount of $750,000, (See Note 10), 225,000 shares of Series A detachable
      warrants at an exercise price of $1.15 and 150,000 shares of Series B detachable
      warrants at an exercise price of $1.25 were granted to Castle Creek Technology
      Partners, LLC.




Effective
      March 14, 2005, pursuant to the issuance of a convertible debenture in the
      amount of $725,000, (See Note 10), 217,500 shares of detachable warrants at
      an
      exercise price of $1.15 and 145,000 shares of detachable warrants at an exercise
      price of $1.25 were granted to SG Private Banking (Suisse) S.A.




Effective
      March 14, 2005, pursuant to the issuance of a convertible debenture in the
      amount of $385,000, (See Note 10), 115,500 shares of detachable warrants at
      an
      exercise price of $1.15 and 77,000 shares of detachable warrants at an exercise
      price of $1.25 were granted to Basso Multi-Strategy Holding Fund,
      Ltd.




Effective
      March 14, 2005, pursuant to the issuance of a convertible debenture in the
      amount of $115,000, (See Note 10), 34,500 shares of detachable warrants at
      an
      exercise price of $1.15 and 23,000 shares of detachable warrants at an exercise
      price of $1.25 were granted to Basso Private Opportunity Holding Fund,
      Ltd.




Effective
      March 14, 2005, pursuant to the issuance of a convertible debenture in the
      amount of $250,000, (See Note 10), 75,000 shares of detachable warrants at
      an
      exercise price of $1.15 and 50,000 shares of detachable warrants at an exercise
      price of $1.25 were granted to Iroquois Capital LP.





Effective
      April 11, 2005, pursuant to his appointment as Director of Ener1, Inc., Mr.
      Ludovico Manfredi was granted 110,000 options to purchase shares of Ener1,
      Inc.
      Common Stock at an exercise price of $.0.70 per share, vesting 33 1/3% on each
      of the first three anniversaries of the option grant date.





32


Effective
      June 25, 2005, as compensation for serving as Board Director and Chairman of
      the
      Audit Committee of Ener1 Inc., the Company granted Mr. Karl Gruns 50,000 options
      to purchase shares of Ener1, Inc. Common Stock at an exercise price of $ 0.57,
      vesting immediately upon the grant date.





Effective
      June 1, 2005, pursuant to his employment agreement as Chief Financial Officer
      for Ener1, Inc., Mr. Ernie Toth was granted 250,000 options to purchase shares
      of Ener1, Inc. common stock, 25% of which would vest on each of the first four
      anniversaries of the option grant at an exercise price of $0.28 per
      share.




During
      the six months ended June 30, 2005 options to purchase 410,000 shares of common
      stock were granted under the Company's 2002 Stock Option Plan, 200,000 options
      were terminated, and 0 options were exercised.





During
      the six months ended June 30, 2005, the Company recorded $502,000 compensation
      expense for all stock and option related transactions.





22.  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.





33


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





**Quarter
                  Ended June 30,**
              
              **Six
                  Months Ended June 30,****2005**
              
              **2004**
              
              **2005**
              
              **2004****(Restated)**
              
              **(Restated)**
              
              **(Restated)**
              
              **(Restated)**Weighted
                  Average Shares Outstanding - Basic
              
              
              347,455,751
              
              
              347,173,000
              
              
              347,455,751
              
              
              347,089,000Plus
                  net shares from assumed conversion of warrantsunder
                  treasury stock method
              
              
              57,412,766
              
              
              61,171,014
              
              
              60,264,516
              
              
              63,306,383Plus
                  net shares from assumed conversion of optionsunder
                  treasury stock method
              
              
              -
              
              
              7,123,651
              
              
              6,925,401
              
              
              8,490,104Plus
                  shares from assumed conversion ofconvertible
                  instruments:2004
                  Debentures
              
              
              16,016,260
              
              
              16,016,260
              
              
              16,016,260
              
              
              14,334,9952005
                  Debentures
              
              
              8,802,210
              
              
              -
              
              
              8,802,210
              
              
              -Weighted
                  Average Shares Outstanding - Diluted
              
              
              429,686,987
              
              
              431,483,925
              
              
              439,464,138
              
              
              433,220,482








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 June 30,**
              
              **Six
                  Months Ended June 30,****2005**
              
              **2004**
              
              **2005**
              
              **2004**in
                  thousands
              
              
              
              **(Restated)**
              
              **(Restated)**
              
              **(Restated)**
              
              **(Restated)**Net
                  income as reported
              
              
              
              
              $
              22,901
              
              $
              10,022
              
              $
              49,971
              
              $
              68,727Less
                  preferred stock dividends and accretion
              
              
              
              
              
              (1,213
              )
              
              -
              
              
              (2,423
              )
              
              -Add
                  interest expense and accretion of discount onconvertible
                  debentures
              
              
              
              
              
              3,017
              
              
              1,479
              
              
              5,140
              
              
              2,914Less
                  derivative gain on convertible debentures
              
              
              
              
              
              (22,770
              )
              
              (8,280
              )
              
              (34,971
              )
              
              (53,130
              )Less
                  derivative gain on warrants
              
              
              
              
              
              (6,972
              )
              
              (1,677
              )
              
              (13,775
              )
              
              (1,760
              )Net
                  income (loss) computed for diluted net income (loss) per
                  share
              
              
              
              
              $
              (5,037
              )
              $
              1,544
              
              $
              3,942
              
              $
              16,751








34


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





This
      report on Form 10-QSB contains forward-looking statements within the meaning
      of
      Section 27A of the Securities Act of 1933, as amended, and Section 23E of the
      Securities Act of 1934, as amended. These statements relate to 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. 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.





**Results
      of Operations**





Net
      Sales




Our
      net
      sales for the three-month and six-month periods ended June 30, 2005, were
      $14,000 and $35,000 respectively, representing sample sales of lithium
      batteries. Net sales for the three and six month period ended June 30, 2004
      was
      $11,000 and $41,000, respectively.





Manufacturing
      Pre-production Costs





During
      the three month period ended June 30, 2004, we began preparing our battery
      manufacturing operations to begin production, in addition to continuing our
      research and development activities. For the three and six months ended June
      30,
      2005 manufacturing pre-production costs increased by 160% to $1.3 million and
      313% to $2.1 million when compared to the same periods in 2004. This is mainly
      due to the continued reallocation of a significant portion of resources
      previously devoted to battery research and development and selling, general
      and
      administrative expenses to implementing manufacturing infrastructure, including
      new personnel, policies and procedures up until June 23, 2005. On June 23,
      2005,
      EnerDel entered into an agreement that allowed it to acquire automated
      manufacturing technology from EnerStruct. Management believes that the new
      manufacturing approach which enables EnerDel to implement automated mass
      production processes for high-rate lithium batteries will make it possible
      for
      EnerDel to substantially reduce manufacturing labor and pre-production costs
      and
      lower its cash burn rate.





Research
      and Development Expenses (“R&D”)





R&D
      for the three and six month periods ended June 30, 2005 increased by
      approximately $13,821,000 to $14,488,000 and $15,565,000 to $16,742,000,
      respectively, when compared to the same periods in 2004. These increases were
      due primarily to a $10,500,000 charge to research and development expense for
      the book value of equipment and supplies, which were determined to have no
      alternative future use due to changes in production strategy (See Notes 16
      and
      18); and the formation of the Company's joint venture, EnerDel, Inc., with
      Delphi Corporation in October of 2004, and the related acquisition of research
      and development assets, materials, and personnel from Delphi Corporation. On
      April 12, 2005, the Company entered into a research and development contract
      with Enerstruct, Inc., its 49% owned joint venture with Itochu resulting in
      a
      charge to research and development costs of $1,000,000.





General
      and Administrative Expenses (“G&A”)





G&A
      for the three and six month periods ended June 30, 2005 increased by 48% or
      $743,000 to $2,296,000 and 31% or $1,205,000 to $5,065,000, respectively, when
      compared to the same periods in 2004. These increases were primarily in salaries
      and benefits, rent, outside services, professional fees, and computer and IT
      expense due to the acquisition of 7 administrative personnel and 52,000 square
      feet of facilities in Indianapolis from Delphi Corporation by EnerDel, Inc.
      in
      October of 2004. Included in G&A are activity exit costs of approximately
      $745,000.





35


Gain
      on derivative liability




The
      gain
      on derivative liability for the three months ended June 30, 2005 increased
      by
      $27 million to $41 million compared to $14 million in the prior year period.
      The
      increase was due to corresponding decrease in the reported value of freestanding
      derivatives and embedded derivatives resulting from decreases in the market
      value of our common stock at the end of the quarter.





**Liquidity
      and Capital Resources**





At
      June
      30, 2005, we had a working capital deficit of $37 million primarily due to
      a
      derivative liability of $48 million. A s
      of
      December 31, 2004, we had working capital excluding
      derivative liability of
      $11.8
      million compared to $10.5 million as of June 30, 2005. Our working capital
      at
      June 30, 2005 included $11.9 million of cash and equivalents offset by $2.2
      million in current liabilities. We used $15.3 million in operating activities
      which were funded primarily by $13.1 million in new debenture financing.
      .





The
      Company has $2.75 million in unused portion of financing commitment from Ener1
      Group from October 15, 2004; however, takedown of such commitment is subject
      to
      payments to Ener1 Group totaling approximately $930,000.




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, and, 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 the Company's ability to continue as a going concern for a
      reasonable period of time.





**Critical
      Accounting Policies**





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





Accounting
      for employee stock options





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




**** *Accounting
      for Derivative Instruments*





Statement
      of Financial Accounting Standard (“SFAS”) No. 133, “Accounting for Derivative
      Instruments and Hedging Activities,” as amended, requires all derivatives to be
      recorded on the balance sheet at fair value. These derivatives, including
      embedded derivatives in our structured borrowings, are separately valued and
      accounted for on our balance sheet. Fair values for exchange-traded securities
      and derivatives are based on quoted market prices. Where market prices are
      not
      readily available, fair values are determined using market based pricing models
      incorporating readily observable market data and requiring judgment and
      estimates.





The
      pricing model we use for determining fair values of our derivatives is the
      Black
      Scholes pricing model. Valuations derived from this model are subject to ongoing
      internal and external verification and review. The model uses market-sourced
      inputs such as interest rates, exchange rates and option volatilities. Selection
      of these inputs involves management’s judgment and may impact net income.





In
      particular, we use volatility rates based upon the closing stock price of our
      common stock since January 2002, when our company underwent a change in control.
      We determined that share prices prior to this period do not reflect the ongoing
      business value of our current operations. We use a risk free interest rate
      which
      is the U. S. Treasury bill rate for securities with a maturity that approximates
      the estimated expected life of our derivative or security. We use the closing
      market price of our common stock at the close of business on the date of
      issuance of a derivative or at the end of a quarter when determining the fair
      value of a derivative. The volatility factor used in the Black Scholes pricing
      model has a significant effect on the resulting valuation of the derivative
      liabilities on our balance sheet. The volatility has ranged from 296% to 145%
      during the years ending December 31, 2003 and 2004 and the six months ended
      June
      30, 2005. The initial volatility for the calculation of the embedded and
      freestanding derivatives ranged from 135% to 296%. Our volatility rate will
      likely change in the future. Our stock price will also likely change in the
      future. To the extent that our stock price increases, our derivative liability
      will also increase, absent any change in volatility rates.





36


In
      September 2000, the Emerging Issues Task Force issued EITF 00-19, "Accounting
      for Derivative Financial Instruments Indexed to and Potentially Settled in,
      a
      Company's Own Stock," ("EITF 00-19") which requires freestanding contracts
      that
      are settled in a company's own stock, including common stock warrants, to be
      designated as an equity instrument, asset or a liability. Under the provisions
      of EITF 00-19, a contract designated as an asset or a liability must be carried
      at fair value on a company’s balance sheet, with any changes in fair value
      recorded in the company’s results of operations. A contract designated as an
      equity instrument must be included within equity, and no fair value adjustments
      are required. In accordance with EITF 00-19, in December 2005, we determined
      that several of the outstanding warrants to purchase our common stock and the
      embedded conversion feature of several of our financial instruments, should
      be
      separately accounted for as liabilities. We have recorded the fair value of
      these warrants and conversion features on our balance sheet and record
      unrealized changes in the values of these derivatives in our consolidated
      statement of operations as “Gain (loss) on derivative liability.”




37


Item
      3A.  Controls and Procedures





We
      maintain disclosure controls and procedures that are designed to ensure that
      information required to be disclosed in our reports filed or submitted under
      the
      Exchange Act is recorded, processed, summarized and reported, within the time
      periods specified in the SEC’s rules and forms, and that such information is
      accumulated and communicated to our management, including our Chief Executive
      Officer and Chief Financial Officer, as appropriate, to allow for timely
      decisions regarding required disclosure. In designing and evaluating the
      disclosure controls and procedures, management recognized that any controls
      and
      procedures, no matter how well designed and operated, can provide only
      reasonable assurance of achieving the desired control objectives, and management
      is required to apply its judgment in evaluating the cost-benefit relationship
      of
      possible controls and procedures.





As
      of
      June 30, 2005, we carried out an evaluation, under the supervision and with
      the
      participation of our management, including the individuals then 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. Based on
      the
      foregoing, our Chief Executive Officer and Chief Financial Officer concluded
      that our disclosure controls and procedures were effective and were operating
      at
      the reasonable assurance level.


After
      the
      conclusion of the evaluation described above, in connection with the completion
      of its review of our financial statements for the quarter ended September 30,
      2005, our independent registered public accounting firm 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. The financial statements for the
      quarters ended June 30, 2004 and 2005 included in this Quarterly Report on
      Form
      10-QSB have been restated in order to properly classify mandatorily redeemable
      preferred stock as a liability and appropriately account for convertible debt
      with detachable warrants and convertible preferred stock with detachable
      warrants.





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 June 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 June 30, 2005.





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








38





**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
      6. - Exhibits and Reports on Form 8-K**





(a)    Exhibits





·
            31.1Certification
                of Principal Executive Officer pursuant to Section 302 of the
                Sarbanes-Oxley Act of 2002


·
            31.2Certification 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





39




**ENER1,
      INC. AND SUBSIDIARIES**




**SIGNATURES**




Pursuant
      to the requirements of the Securities Exchange Act of 1934, the registrant
      has
      duly caused this Amendment No. 2 to Quarterly Report on Form 10-QSB to be signed
      on its behalf of the undersigned thereunto duly authorized.





Dated:
                May 24, 2006
              
              
              
              
              Dated: May
                24, 2006
            ENER1,
                INC.
              
              By:
                /s/ Ronald Stewart
              Ronald
                Stewart
              Chief
                Executive Officer
              (Principal
                Executive Officer)
              
              By:
                /s/ Gerard Herlihy
              Gerard
                Herlihy
              Chief
                Financial Officer
              (Principal
                Financial and Accounting Officer)








40