UNITED
      STATES


SECURITIES
      AND EXCHANGE COMMISSION


Washington,
      D.C. 20549





FORM
      10-QSB





QUARTERLY
      REPORT UNDER SECTION 13 OR 15(d)


OF
      THE
      SECURITIES EXCHANGE ACT OF 1934





For
      the
      quarterly period ended **June
      30, 2006**





Commission
      File Number **0-21138**




**ENER1,
      INC.**


(Exact
      name of registrant as specified in its charter)





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





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


**Ft.
      Lauderdale, Florida 33309**


(Address
      of principal executive offices) (Zip Code)





**(954)
      556-4020**


(Registrant’s
      telephone number, including area code)





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





Indicate
      by check mark whether the registrant (1) has filed all reports required to
      be
      filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
      the
      preceding 12 months (or for such shorter period that the registrant was required
      to file such reports), and (2) has been subject to such filing requirements
      for
      the past 90 days.


Yes x No o





Indicate
      by check mark whether registrant is a shell company (as defined in Rule 12b-2
      of
      the Exchange Act)


Yes o No x





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





**Class**
            **Outstanding
                as of August 15, 2006**Common
                Stock, par value $.01 per share
            416,974,874





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







**ENER1,
      INC. AND SUBSIDIARIES**





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





INDEX





PagePart
              I. FINANCIAL INFORMATIONItem
                1. Financial StatementsCondensed
                Consolidated Balance Sheet (unaudited) as of June 30, 2006 and December
                31, 2005
            
            3Condensed
                Consolidated Statements of Operations (unaudited) for the three and
                six
                months ended June 30, 2006 and 2005
            
            4Condensed
                Consolidated Statements of Cash Flows (unaudited) for the six months
                ended
                June 30, 2006 and 2005
            
            5Notes
                to Condensed Consolidated Financial Statements (unaudited)
            
            6Item
                2. Management's Discussion and Analysis of Financial Condition and
                Results
                of Operations
            
            24Item
                3. Controls and Procedures
            
            33Part
                II. OTHER INFORMATIONItem
                1. Legal Proceedings
            
            34Item
                2. Unregistered Sales of Equity Securities and Use of
                Proceeds
            
            36Item
                6. Exhibits and Reports on Form 8-K
            
            36Signatures
            
            38




2


ENER1,
      INC. AND SUBSIDIARIES


CONDENSED
      CONSOLIDATED BALANCE SHEET


(Unaudited)


(In
      thousands except share data)




**June
                30,**
              **2006**
            
            **December
                31,**
              **2005****ASSETS**Current
                assetsCash
                and equivalents
            
            $
            873
            
            $
            2,306Prepaid
                expenses and other current assets
            
            
            169
            
            
            189Due
                from related parties
            
            
            41
            
            
            157Total
                current assets
            
            
            1,083
            
            
            2,652Property
                and equipment, net
            
            
            3,706
            
            
            3,042Investment
                in EnerStruct, Inc.
            
            
            476
            
            
            805Deferred
                debenture costs, net of amortization of $2,697 and $2,082
            
            
            3,383
            
            
            3,748Other
            
            
            74
            
            
            202Total
                assets
            
            $
            8,722
            
            $
            10,449**LIABILITIES
                AND STOCKHOLDERS' DEFICIT**Current
                liabilitiesCurrent
                portion of installment loan
            
            
            25
            
            
            24Accounts
                payable and accrued expenses
            
            
            6,154
            
            
            3,276Derivative
                liability
            
            
            10,765
            
            
            54,979Total
                current liabilities
            
            
            16,944
            
            
            58,279Long-term
                portion of installment loan
            
            
            54
            
            
            67Convertible
                note due to related party, net of discount of $1,592
            
            
            1,287
            
            
            -$19,700
                convertible debentures, net of discount of $12,170 and
                $13,970
            
            
            7,530
            
            
            5,730$14,225
                convertible debentures, net of discount of $8,832 and
                $10,064
            
            
            5,393
            
            
            4,161Total
                liabilities
            
            
            31,208
            
            
            68,237Redeemable
                convertible preferred stock:EnerDel,
                Inc. Series A Preferred, $.01 par value, 500,000 shares authorized,8,000
                shares issued and outstanding; liquidation preference
                $8,000
            
            
            6,159
            
            
            4,967Series
                B Preferred, $.01 par value, 180,000 shares authorized, 152,500 shares
                issued and outstanding; liquidation preference $15,250
            
            
            14,560
            
            
            13,188Minority
                interest
            
            
            -
            
            
            -Commitments
                and contingencies**STOCKHOLDERS'
                DEFICIT**Common
                Stock, $.01 par value, 750,000,000 shares authorized 416,974,874
                and
                347,455,751 issued and outstanding, respectively
            
            
            4,170
            
            
            3,475Paid
                in capital
            
            
            135,223
            
            
            72,830Accumulated
                deficit
            
            
            (182,598
            )
            
            (152,248
            )Total
                stockholders' deficit
            
            
            (43,205
            )
            
            (75,943
            )Total
                liabilities and stockholders' deficit
            
            $
            8,722
            
            $
            10,449





See
      notes
      to condensed consolidated financial statements.


3




ENER1,
      INC. AND SUBSIDIARIES


CONDENSED
      CONSOLIDATED STATEMENTS OF OPERATIONS


(Unaudited)


(In
      thousands except share data)




**Three
                Months Ended June 30,**
            
            **Six
                Months Ended June 30,****2006**
            
            **2005**
            
            **2006**
            
            **2005**Net
                sales
            
            $
            9
            
            $
            14
            
            $
            27
            
            $
            35Cost
                of sales
            
            
            -
            
            
            -
            
            
            -
            
            
            -Gross
                profit
            
            
            9
            
            
            14
            
            
            27
            
            
            35Operating
                expensesManufacturing
                pre-production costs
            
            
            -
            
            
            1,340
            
            
            -
            
            
            2,132General
                and administrative
            
            
            12,510
            
            
            2,200
            
            
            16,469
            
            
            5,015Depreciation
            
            
            98
            
            
            96
            
            
            199
            
            
            398Research
                and development
            
            
            1,186
            
            
            14,488
            
            
            2,105
            
            
            16,394Total
                operating expenses
            
            
            13,794
            
            
            18,124
            
            
            18,773
            
            
            23,939Net
                Loss from operations
            
            
            (13,785
            )
            
            (18,110
            )
            
            (18,746
            )
            
            (23,904
            )Other
                income and (expense)Interest
                expense
            
            
            (3,162
            )
            
            (2,819
            )
            
            (6,005
            )
            
            (4,750
            )Registration
                delay payment
            
            
            (647
            )
            
            -
            
            
            (1,518
            )
            
            -Equity
                in loss of EnerStruct, Inc.
            
            
            (182
            )
            
            (58
            )
            
            (329
            )
            
            (227
            )Other
            
            
            -
            
            
            88
            
            
            -
            
            
            140Gain
                on derivative liability
            
            
            (14,120
            )
            
            44,314
            
            
            (3,748
            )
            
            74,726Total
                other income (expense)
            
            
            (18,111
            )
            
            41,525
            
            
            (11,600
            )
            
            69,889Income
                (loss) before income taxes
            
            
            (31,896
            )
            
            23,415
            
            
            (30,346
            )
            
            45,985Income
                taxes
            
            
            -
            
            
            -
            
            
            -
            
            
            -Net
                income (loss) before minority interest
            
            
            (31,896
            )
            
            23,415
            
            
            (30,346
            )
            
            45,985Minority
                interest
            
            
            (596
            )
            
            2,643
            
            
            (1,192
            )
            
            2,817Net
                income (loss)
            
            
            (32,492
            )
            
            26,058
            
            
            (31,538
            )
            
            48,802Preferred
                stock dividends
            
            
            (679
            )
            
            (739
            )
            
            (1,372
            )
            
            (1,480
            )Net
                income (loss) attributable to common shareholders
            
            $
            (33,171
            )
            $
            25,319
            
            $
            (32,910
            )
            $
            47,322Net
                income (loss) per share, basic
            
            $
            (0.08
            )
            $
            0.07
            
            $
            (0.09
            )
            $
            0.14Net
                income (loss) per share, diluted
            
            $
            (0.08
            )
            $
            (0.01
            )
            $
            (0.09
            )
            $
            0.01Weighted
                average shares outstanding:Weighted
                average shares outstanding - Basic
            
            
            402,907
            
            
            347,456
            
            
            385,778
            
            
            347,456Weighted
                average shares outstanding - Diluted
            
            
            402,907
            
            
            435,110
            
            
            385,778
            
            
            439,464





See
      notes
      to condensed consolidated financial statements.


4




ENER1,
      INC. AND SUBSIDIARIES


CONDENSED
      CONSOLIDATED STATEMENTS OF CASH FLOWS


(Unaudited)


(In
      thousands)




**Six
                Months Ended June 30,****2006**
            
            **2005**Net
                income (loss)
            
            $
            (31,538
            )
            $
            48,802Adjustments
                to reconcile net loss to cash used by operating
                activities:(Gain)
                loss on derivative liability
            
            
            3,748
            
            
            (74,726
            )Minority
                interest
            
            
            1,192
            
            
            (2,817
            )Research
                and development costs
            
            
            -
            
            
            10,527Accretion
                of discount on debentures
            
            
            3,032
            
            
            2,138Non
                cash interest expense related to financing costs
            
            
            615
            
            
            554Depreciation
            
            
            199
            
            
            398Compensation
                expense for stock options
            
            
            774
            
            
            502Equity
                in loss from investment in EnerStruct
            
            
            329
            
            
            227Assets
                transferred under Warrant Exercise Agreement
            
            
            10,003
            
            
            -Changes
                in current assets and liabilities
            
            
            2,939
            
            
            (918
            )Net
                cash used in operating activities
            
            
            (8,707
            )
            
            (15,313
            )Investing
                Activities:Capital
                expenditures
            
            
            (863
            )
            
            (255
            )Net
                cash used in investing activities
            
            
            (863
            )
            
            (255
            )Financing
                Activities:Proceeds
                from issuance of senior secured debenture, net of costs
            
            
            -
            
            
            13,134Proceeds
                from sale of preferred stock
            
            
            -
            
            
            250Repayment
                of bank installment loan
            
            
            (12
            )
            
            (11
            )Cash
                proceeds from convertible note related party
            
            
            2,629
            
            
            -Proceeds
                from exercise of warrants
            
            
            5,520
            
            
            -Net
                cash provided by financing activities
            
            
            8,137
            
            
            13,373Net
                increase in cash and equivalents
            
            
            (1,433
            )
            
            (2,195
            )Cash
                and cash equivalents beginning balance
            
            
            2,306
            
            
            14,091Cash
                and cash equivalents ending balance
            
            $
            873
            
            $
            11,896




See
      notes to condensed consolidated financial statements.


5





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 (the
      “Exchange Act”). Accordingly, they do not include all of the information and
      footnotes required by accounting principles generally accepted in the United
      States of America for complete financial statements. In the opinion of
      management, all adjustments considered necessary for a fair presentation have
      been included and such adjustments are of a normal recurring nature. Operating
      results for the three and six months ended June 30, 2006 are not necessarily
      indicative of the results that may be expected for the year ending December
      31,
      2006. The audited financial statements at December 31, 2005, which are included
      in the Company’s Annual Report on Form 10-KSB/A for the year ended December 31,
      2005, should be read in conjunction with these condensed consolidated financial
      statements.





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. Ener1 has
      experienced net operating losses since 1997 and negative cash flows from
      operations since 1999, and had an accumulated deficit of $183,000,000 as of
      June
      30, 2006. It is likely that Ener1’s operations will continue to incur negative
      cash flows through December 31, 2006 and 2007 and additional financing will
      be
      required to fund Ener1’s planned operations through that time. If additional
      financing is not obtained, such a condition will give rise to substantial doubt
      about Ener1’s ability to continue as a going concern. The consolidated financial
      statements do not include any adjustments relating to the recoverability and
      classification of recorded asset amounts or the amounts and classifications
      of
      liabilities that might be necessary should Ener1 not be able to continue as
      a
      going concern.





During
      the three months ended June 30, 2006, the Company obtained interim operating
      funding from Ener1 Group, Inc. ("Ener1 Group") its controlling shareholder,
      through the shareholder's exercise of certain warrants and the shareholder's
      purchase of a convertible note with detachable warrants. The Company requires
      additional interim working capital financing until it raises permanent capital.
      The Company plans to raise substantial additional capital during 2006 from
      government sources including grants or public financing, or from strategic
      or
      financial investors. If the Company is unable to raise adequate permanent
      capital for its current plan of operations, it would have to curtail its
      research and development activities and adopt an alternative operating model
      to
      continue as a going concern.





3. NATURE
      OF
      BUSINESS





Ener1,
      Inc. is a Florida corporation, founded in 1985 and headquartered in Fort
      Lauderdale, Florida. Ener1’s primary lines of business consist of the
      development and marketing of advanced Lithium-ion (“Li-ion”) batteries, fuel
      cells and nanotechnology-related manufacturing processes and
      materials.




The
      Company’s operations are conducted by Ener1 and three of its subsidiaries:
      EnerDel, Inc. (“EnerDel”), EnerFuel Inc. (EnerFuel”) and NanoEner, Inc.
      (“NanoEner”). Certain real estate and equipment assets used by the Company are
      held by Ener1 Battery Company (“Ener1 Battery” or the “Battery Company”). The
      Company owns 100% of EnerFuel and NanoEner and 90.5% of EnerDel. The Company
      owns approximately 48% of EnerStruct, a technology development joint venture
      with ITOCHU Corporation.





4.  
        SEGMENT REPORTING





As
      of
      June 30, 2006, the Company is organized based upon the following segments:
      battery, fuel cell and nanotechnology. The battery business develops and markets
      advanced lithium batteries. The fuel cell business develops and markets fuel
      cells and fuel cell systems. The nanotechnology business is developing
      nanotechnology related manufacturing processes and materials.





The
      accounting policies of the segments are the same as those described in the
      “Summary of Significant Accounting Policies.” Transactions between segments,
      consisting principally of product sales and purchases, are recorded at the
      consummated sales price. The Company determines reportable segments based on
      the
      way management organizes segments for decision making and performance assessment
      purposes. The Company regularly reviews the performance of its segments and
      allocates resources to them based on anticipated future
      contribution.


6





**Three
                Months Ended June 30,**
            
            **Six
                Months Ended June 30,****2006**
            
            **2005**
            
            **2006**
            
            **2005****Net
                sales**Battery
                business
            
            $
            -
            
            $
            14
            
            
            
            
            $
            20Fuel
                Cell business
            
            
            9
            
            
            
            
            
            27
            
            
            15Nanotechnology
            
            
            -
            
            
            -
            
            
            -
            
            
            -Total
                Net Sales
            
            $
            9
            
            $
            14
            
            $
            27
            
            $
            35**Net
                income (loss)**Corporate
            
            
            (30,168
            )
            
            39,888
            
            
            (26,459
            )
            
            66,282Battery
                business
            
            
            (1,626
            )
            
            (13,298
            )
            
            (3,552
            )
            
            (16,390
            )Fuel
                Cell business
            
            
            (510
            )
            
            (309
            )
            
            (1,118
            )
            
            (579
            )Nanotechnology
            
            
            (188
            )
            
            (223
            )
            
            (409
            )
            
            (511
            )Net
                income (loss)
            
            $
            (32,492
            )
            $
            26,058
            
            $
            (31,538
            )
            $
            48,802**Assets**Corporate
            
            
            
            
            
            
            
            
            5,156
            
            
            13,529Battery
                business
            
            
            
            
            
            
            
            
            3,386
            
            
            7,533Fuel
                Cell business
            
            
            
            
            
            
            
            
            128
            
            
            10Nanotechnology
            
            
            
            
            
            
            
            
            52
            
            
            12Total
                assets
            
            
            
            
            
            
            
            $
            8,722
            
            $
            21,084





5. 
      $19,700,000 CONVERTIBLE DEBENTURES





On
      January 20, 2004, Ener1 issued $20,000,000 in aggregate principal amount of
      senior secured convertible debentures due January 2009 (the “2004 Debentures”)
      and warrants to purchase 16,000,000 shares of Ener1’s common stock. The net
      proceeds of the issuance totaled $18,527,000 after direct placement costs of
      $1,473,000, of which $1,200,000 was paid to the placement agent. In addition,
      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.
      The fair market value of these warrants was $3,053,000. The direct placement
      costs and the fair market value of the warrants issued to the placement agent
      were recorded as deferred debenture costs. 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, 2006, the
      conversion price was $1.17. Ener1 may require that a specified amount of the
      principal of the 2004 Debentures be converted if certain conditions are
      satisfied for a period of 22 consecutive trading days.





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





Interest
      is due quarterly. All or a portion of the accrued and unpaid interest may be
      converted at the option of the debenture holder at any time under the same
      conversion terms as the principal. Coupon interest expense was $747,000 and
      $1,486,000 for the three and six months ended June 30, 2006 and 2005,
      respectively. All interest was paid, and no interest was converted. Through
      June
      30, 2006, $262,000 of interest has been converted.




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


7




From
      January 20, 2007 to January 20, 2008, Ener1 may prepay some or all of the
      principal at a price of 103% of unpaid principal plus accrued interest. From
      January 21, 2008 to January 20, 2009, Ener1 may prepay some or all of the
      principal at 101% of unpaid principal plus accrued interest. The 2004 Debentures
      are senior to Ener1’s existing and future indebtedness and pari passu with the
      2005 Convertible Debentures (see Note 7). In the event of any “Default or
      Fundamental Change” as defined under the 2004 Debentures, the holder will be
      entitled to require Ener1 to redeem the 2004 Debentures at a price equal
      to 101% of the unpaid principal plus accrued interest.





Ener1
      is
      required under the terms of the 2004 Debentures agreements to register the
      resale of the common stock underlying the debentures and associated warrants.
      If
      the registration statements are not available for use, Ener1 is required to
      make
      certain payments to the purchasers of the 2004 Debentures (the “registration
      delay payments”). The registration delay payments 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 ended. The registration statements became unavailable for use in
      November 2005, and registration delay payments of $591,000 had accrued through
      the period ending January 20, 2006 and were unpaid at June 30, 2006. A holder
      that owns $10 million of the 2004 Debentures and $9.5 million of the 2005
      Debentures (as defined below) has agreed to forbear for a specified time period
      from taking any action against the Company related to the non-payment of the
      registration delay payments as discussed in Note 17 - Subsequent
      Events.





Ener1
      issued warrants to purchase 16,000,000 shares of common stock to the purchasers
      of the 2004 Debentures; the warrants 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, 2006, the adjusted exercise price was $2.23 per share. The warrants
      are exercisable at any time through January 20, 2010.




Ener1
      is
      accounting for the conversion option in the 2004 Debentures and the associated
      warrants as derivative liabilities in accordance with SFAS 133 “Accounting for
      Derivative Instruments and Hedging Activities” (“SFAS 133”) and EITF 00-19
“Accounting for Derivative Financial Instruments Indexed to and Potentially
      Settled in a Company’s Own Stock (“EITF 00-19”). The terms of the 2004
      Debentures include several features that Ener1 is required to account for as
      derivatives, including (1) the conversion feature, (2) the holder's right to
      force Ener1 to redeem the debentures after an event of default, (3) the holder's
      right to force Ener1 to redeem the debentures after a change in control, (4)
      Ener1's right to redeem the debentures after 3 years, (5) the requirement to
      pay
      an increased interest rate if Ener1 fails to achieve certain milestones and
      (6)
      Ener1's right to convert the debentures into common stock if certain conditions
      are satisfied. These derivatives must be bundled together as a single, compound
      embedded derivative instrument that is bifurcated and accounted for separately
      from the debenture under SFAS 133 and Derivatives Implementation Group Issue
      No.
      B15.




6. 
      $14,225,000 CONVERTIBLE DEBENTURES





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





Ener1
      is
      required under the terms of the 2005 Debentures agreements to register the
      resale of the common stock underlying the debentures and associated warrants
      and
      maintain the listing or quotation of its common stock on the OTC Bulletin Board,
      the NASDAQ ® National
      Market, NASDAQ ® SmallCap
      Market or the New York Stock Exchange. If the registration statements are not
      available for use or Ener1’s common stock is not listed or quoted on the OTC
      Bulletin Board, the NASDAQ ® National
      Market, NASDAQ ® SmallCap
      Market or the New York Stock Exchange, Ener1 is required to make certain
      payments to the purchasers of the 2005 Debentures (the “registration delay
      payments”). Registration delay payments accrue at a fixed rate of $213,375 per
      month until the 2005 Debenture holders are able to use the resale registration
      statement and until Ener1’s common stock is quoted on the OTC Bulletin Board or
      other exchange. The registration statements became unavailable for use in
      November 2005, and the Company’s stock was neither traded or quoted or listed,
      as applicable, on the OTC Bulletin Board or other exchange from December 22,
      2005 to April 6, 2006. Registration delay payments of $1,572,000 had accrued
      at
      June 30, 2006. A holder that owns $9.5 million of the 2005 Debentures and $10
      million of the 2004 Debentures has agreed to forbear for a specified time period
      from taking any action against the Company related to the non-payment of the
      registration delay payments as discussed in the Note 17 - Subsequent
      Events.


8




At
      the
      issuance date, the 2005 Debentures were convertible by the holder at any time
      into common shares at a price of $1.00 per share subject to adjustment upon
      certain events, such as the sale of equity securities by Ener1 at a price below
      the then current conversion price of the debenture. As of June 30, 2006, the
      conversion price was $0.96. Ener1 may require that a specified amount of the
      principal of the 2005 Debentures be converted if certain conditions are
      satisfied for a period of 22 consecutive trading days. At any time on or after
      March 14, 2008, Ener1 may prepay some or all of the principal of the 2005
      Debentures at 103% of the principal, plus accrued interest. The 2005 Debentures
      are senior to Ener1’s existing and future indebtedness and pari passu with the
      2004 Debentures.




Interest
      is due quarterly. The current annual interest rate is 15%. All or a portion
      of
      the accrued and unpaid interest may be converted at the option of the debenture
      holder at any time under the same conversion terms as the principal. Coupon
      interest expense was $539,000 and $859,000 for the three and six months ended
      June 30, 2006, respectively. All interest was paid, and no interest has been
      converted.





The
      initial interest rate on the 2005 Debentures was initially 7.5% per year. The
      2005 Debentures provided that the interest rate will increase to 15% per year
      effective 365 days after issuance of the 2005 Debentures if Ener1 fails to
      meet
      and maintain any of milestones set forth in the 2005 Debentures. The milestones
      were as follows: (1) the registration statement registering the resale of the
      shares underlying the 2005 Debentures and warrants is made and kept effective
      until the date on which the holders of the 2005 Debentures and warrants may
      sell
      all of their underlying shares; (2) Ener1’s common stock is listed on the NASDAQ ® National
      Market, NASDAQ ® SmallCap
      Market or the New York Stock Exchange and trading on the stock has not been
      suspended; (3) an Event of Default (as defined in the 2005 Debentures) or an
      event that, with the passage of time or giving of notice, would constitute
      an
      Event of Default, shall not have occurred and be continuing; (4) the closing
      bid
      price for Ener1’s common stock shall be greater than $1.50; and (5) trading
      volume of Ener1’s common stock shall have exceeded $500,000 per day for each of
      the preceding 30 days. As a result of Ener1’s failure to meet and maintain any
      of the milestones except the milestone related to Events of Default and the
      registration of the resale of the underlying shares, the interest rate increased
      to 15% per year, effective March 14, 2006.





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





The
      warrants issued in connection with the issuance of the 2005 Debentures were
      divided into Series A and Series B. Each Series A warrant entitles the holder
      to
      purchase a number of shares of common stock equal to 30% of the number of shares
      of common stock that would be issuable upon conversion of the original principal
      amount of the 2005 Debenture divided by the conversion price for an exercise
      price of $1.15 per share. As of June 30, 2006, the adjusted exercise price
      of
      the Series A warrant was $1.10. 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. As of June 30, 2006, the adjusted exercise price
      of
      the Series B warrant was $1.19. Both Series A and Series B warrants are subject
      to adjustment upon certain events such as the sale of equity securities by
      Ener1
      at a price below the exercise price. The warrants are exercisable, in whole
      or
      in part, at any time on or before March 14, 2010. The number of common shares
      issuable under the Series A and Series B warrants issued in connection with
      the
      2005 Debentures are 4,267,500 and 2,845,000, respectively.





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


9




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.  The terms of the 2005 Debentures include several features that
      Ener1 is required to account for as derivatives, including (1) the conversion
      feature, (2) the holder's right to force Ener1 to redeem the debentures after
      an
      event of default, (3) the holder's right to force Ener1 to redeem the debentures
      after a change in control, (4) Ener1's right to redeem the debentures after
      3
      years, (5) the requirement to pay an increased interest rate if Ener1 fails
      to
      achieve certain milestones and (6) Ener1's right to convert the debentures
      into
      common stock if certain conditions are satisfied. These derivatives must be
      bundled together as a single, compound embedded derivative instrument that
      is
      bifurcated and accounted for separately from the debenture under SFAS 133 and
      Derivatives Implementation Group Issue No. B15.




7.    
      REDEEMABLE PREFERRED STOCK





Ener1,
      Inc. Series B Convertible Preferred Stock





In
      October 2004, Ener1 sold 150,000 shares of Series B Convertible Preferred Stock
      (“Series B Preferred Stock”), plus warrants to purchase 4,166,666 shares of
      common stock at an exercise price of $1.25 and warrants to purchase 4,166,666
      shares of common stock at an exercise price of $1.50 per share, for an aggregate
      purchase price of $15,000,000. Ener1 is accounting for the warrants in
      accordance with SFAS 133 and EITF 00-19. The proceeds were first allocated
      to
      the fair value of the freestanding warrants, and the remaining proceeds were
      allocated to the Series B Preferred Stock.




Also,
      in
      October 2004, the Company entered into an agreement with Ener1 Group under
      which
      Ener1 Group agreed to purchase, from time to time, at the Company's request,
      up
      to 30,000 shares of the Series B Preferred Stock (“Series B Preferred Stock
      Put”) at a purchase price of $100 per share (or an aggregate purchase price of
      $3,000,000), and warrants to purchase up to 833,334 shares of its common stock
      at an exercise price of $1.25 per share, and warrants to purchase up to 833,334
      shares of its common stock at an exercise price of $1.50 per share. Under the
      agreement, if the Company requires Ener1 Group to purchase any of the Series
      B
      Preferred Stock and warrants pursuant to this agreement, the Company is required
      to pay Ener1 Group a fee equal to one-third of the aggregate purchase price
      for
      the securities purchased in return for the Ener1 Group’s assistance in arranging
      a prior sale of Series B Preferred Stock. In February 2005, Ener1 sold 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 Series B Preferred Stock Put was terminated
      on
      March 30, 2006, in conjunction with an agreement with Ener1 Group to exercise
      certain Battery Warrants early.




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




The
      Series B Preferred Stock is redeemable by the Company at any time in part or
      whole at 100% of the liquidation value as set forth in the Certificate of
      Designations for the Series B Preferred Stock, plus accrued and unpaid
      dividends. The Series B Preferred Stock is also redeemable at the option of
      the
      holder once none of the 2004 Debentures are outstanding. If such redemption
      occurs in full before maturity of the 2004 Debentures on January 20, 2009,
      the
      redemption price would be paid in 24 equal monthly installments beginning 30
      days from the date of the Company’s receipt of a redemption notice from the
      holder. If such redemption occurs on January 20, 2009, the redemption price
      will
      be paid in twelve equal monthly installments, the first payment beginning
      February 19, 2009. In each case, the redemption payments would include all
      accrued and unpaid dividends. There are no registration rights associated with
      the warrants issued to the purchasers of the Series B Preferred Stock, or with
      the common stock underlying such warrants.




The
      Series B Preferred Stock is classified as temporary equity in accordance with
      EITF D-98 as the redemption features are not solely within the control of the
      Company. The holders of the Series B Preferred Stock are entitled to dividends
      payable semi-annually in arrears at the annual rate of 7%, which is payable
      in
      kind in the form of additional shares of Series B Preferred Stock for the first
      two years after issuance, and thereafter is payable in cash. The dividends
      are
      cumulative.




In
      connection with the issuances of its Series B Preferred Stock, Ener1 issued
      warrants to purchase up to 4,236,111 shares of common stock at an exercise
      price
      of $1.25 per share and warrants to purchase up to 4,236,111 shares of common
      stock at an exercise price of $1.50 per share. These warrants have a ten year
      term. Ener1 is not required to register the resale of the warrants or of the
      common stock issuable upon exercise of the warrants. The fair value of the
      warrants was determined utilizing the Black-Scholes valuation model. The
      significant assumptions used in the valuation are: the exercise prices as noted
      above; the market value of Ener1’s common stock on the date of issuance, $0.65
      and $0.80 for October 2004 and February 2005, respectively; expected volatility
      of 207%; risk free interest rate of approximately 1.8%; and a term of ten
      years.


10





EnerDel
      Series A Convertible Preferred Stock




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





Ener1
      is
      accounting for the freestanding warrants and embedded conversion feature of
      the
      Series A Preferred Stock in accordance with SFAS 133. The proceeds were first
      allocated to the freestanding warrants at their fair value. The remaining
      proceeds were next allocated based on the with-and-without method first to
      the
      embedded conversion feature of the Series A Preferred Stock and then to the
      host
      instrument (Series A Preferred Stock).




When
      the
      term of the conversion feature expired in January 2005 with no value, the
      remaining liability of $1,183,000 was recorded as a reduction in the
      derivative liability and a corresponding gain on derivative liability in the
      first quarter of 2005.




The
      holders of the Series A Preferred Stock are entitled to dividends as declared
      by
      the Board of Directors at the annual rate of 8.25%, which is payable in cash
      annually on December 31. The dividends are cumulative.





If
      EnerDel has not redeemed all of the shares of Series A Preferred Stock on or
      before the 4th anniversary of the filing date of the certificate of designation
      for the Series A Preferred Stock, the holders will have the option to require
      EnerDel to redeem all of the Series A Preferred shares on 10 days notice. The
      Series A Preferred Stock is reported as temporary equity in accordance with
      EITF
      D-98 as the redemption features are not solely within the control of the
      Company.




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





The
      following are the components of redeemable preferred stock as of June 30, 2006
      (in thousands):





**Ener1**
              **Series
                B**
            
            **EnerDel**
              **Series
                A**Face
                value
            
            $
            15,250
            
            $
            8,000Less
                initial fair value of warrant derivative
            
            
            (5,514
            )
            
            (4,620
            )Less
                initial fair value of conversion option
            
            
            -
            
            
            (1,183
            )Fair
                value at date of issue
            
            
            9,736
            
            
            2,197Accumulated
                accretion of discounts
            
            
            3,025
            
            
            2,844Cumulative
                dividends
            
            
            1,799
            
            
            1,118Carrying
                value as of June 30, 2006
            
            $
            14,560
            
            $
            6,159




8. 
      ENERDEL FORMATION





On
      October 26, 2004, the Company and each of Delphi Automotive Systems, LLC and
      Delphi Technologies, Inc. (collectively, “Delphi”) contributed certain assets to
      a newly organized Delaware corporation, EnerDel, Inc. (“EnerDel”). The Company
      received 80.5% of EnerDel’s common stock. Delphi received 19.5% of EnerDel's
      common stock, 100% of EnerDel’s Series A Preferred Stock, warrants with a seven
      year term to purchase up to 1.75 million shares of the Company's common stock
      for $0.70 per share, and 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.


11





The
      consolidated financial statements include 100% of the assets and liabilities
      of
      EnerDel, and the ownership interest of Delphi, the minority investor, is
      recorded as a minority interest. The consolidated statement of operations
      includes 100% of the operations of EnerDel, and the minority interest income
      equal to 19.5% of EnerDel’s operating losses and 100% of the dividends on the
      EnerDel Series A Preferred Stock, which is owned by Delphi, is reflected in
      minority interest income.




The
      Company recorded a minority interest in consolidated subsidiaries representing
      the 19.5% equity ownership in EnerDel held by Delphi at the date of the initial
      capitalization of EnerDel in October 2004. The minority interest balance sheet
      amount was reduced by minority interest income in 2004 and 2005 equal to
      19.5% of EnerDel’s annual operating losses. Minority interest income was reduced
      by the dividends and accretion on the EnerDel Series A Preferred Stock in
      the amount of $596,000 and $1,192,000 for the three and six months ended June
      30, 2006 and $589,000 and $1,171,000 for the three and six months ended June
      30,
      2005 respectively. The minority interest balance sheet amount was reduced
      to zero as of September 2005 as a result of the minority interest in the
      cumulative losses, and no additional minority interest income or loss will
      be
      recorded until the minority interest account returns to a positive balance.
      The
      Company is accreting the discount on the EnerDel Series A Preferred Stock to
      the
      face amount of $8,000,000 through the earliest redemption date in October
      2008.




9. 
      DERIVATIVES




Ener1
      evaluated the features of the convertible note and 9,000,000 associated warrants
      issued to Ener1 Group on June 30, 2006 and the 20,000,000 warrants issued to
      Ener1 Group on June 30, 2006 under the Warrant Exercise Agreement, and
      determined that the instruments were not derivatives under SFAS 133 and EITF
      00-19.




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




·
            
            the
                2004 Debentures conversion, interest rate adjustment, registration
                delay
                payments, redemption premium, forced conversion default premium and
                change
                in control premium features;·
            
            warrants
                to purchase common stock associated with the 2004 Debentures (the
                "2004
                Debenture Warrants");·
            
            the
                2005 Debentures conversion, interest rate adjustment, registration
                delay
                payments, default premium and change in control premium
                features;·
            
            warrants
                to purchase common stock associated with the 2005 Debentures (the
                "2005
                Debenture Warrants");·
            
            EnerDel
                Series A Preferred Stock conversion feature;·
            
            warrants
                to purchase common stock issued to Delphi Corporation (the "Delphi
                Warrants");·
            
            Series
                B Preferred Stock conversion feature;·
            
            Series
                B Preferred Stock Put;·
            
            warrants
                to purchase common stock issued to the purchasers of the Series B
                Preferred Stock (the "Series B Preferred Stock
                Warrants");·
            
            warrants
                to purchase common stock issued to Ener1 Group, Inc. in connection
                with
                the acquisition by Ener1 Group, Inc. of Ener1 Battery Company
                from Ener1 Group, Inc. (“Battery Warrants”)·
            
            warrants
                to purchase common stock issued to Ener1 Group in connection with
                the
                exchange of stock, notes and warrants for debt (the "Exchange Warrants");
                and·
            
            options
                to purchase common stock issued to ITOCHU Corporation (“ITOCHU
                Options").





Based
      on
      the guidance in SFAS 133 and EITF 00-19, Ener1 concluded all of these
      instruments, other than the conversion feature of the Series B Preferred Stock
      were required to be initially accounted for as derivatives. SFAS 133 and EITF
      00-19 require Ener1 to bifurcate and separately account for the conversion
      and
      other derivatives features of the 2004 Debentures, 2005 Debentures and Series
      A
      preferred stock as embedded derivatives. Ener1 is required to record the
      fair value of the conversion features and the warrants and options on its
      balance sheet at fair value with changes in the values of these derivatives
      reflected in the consolidated statement of operations as “Gain (loss) on
      derivative liability.”




The
      Company previously determined that the Battery Warrants were a derivative
      liability under EITF 00-19 because share settlement of these warrants was not
      within the control of the Company as a result of the facts that: (1) the holder
      of the Battery Warrants was the controlling shareholder of the Company, and
      (2)
      the Battery Warrants contained dilution protection features, with no limit
      or
      cap on the number of shares that could be issued under the Battery Warrants.
      Therefore, the Company could not conclude that it had sufficient authorized
      and
      unissued shares to issue the number of shares potentially issuable under the
      Battery Warrants. The Company also determined that it could not conclude it
      had
      sufficient authorized and unissued shares to issue the number of shares required
      under the other warrants subsequently issued by the Company as described above.
      As a result, the Company determined that these warrants would also be treated
      as
      derivative liabilities because the Company could not conclude that it had
      sufficient authorized and unissued shares to settle the potential share
      issuances required under these warrants as long as the Battery Warrants were
      outstanding.


12





As
      of
      June 30, 2006, the Battery Warrants had been fully exercised. As a result,
      the
      Company determined that it could conclude that it had sufficient authorized
      and
      unissued shares to issue the number of shares required under the other warrants
      described above and, therefore, all of these warrants, other than the 2005
      Debenture Warrants, should not be treated as derivative liabilities as of June
      30, 2006. The fair value of these warrants was marked to market on the date
      they
      no longer were accounted for as derivatives and derivative gain or loss was
      recorded. The balance of the derivative liability was then recorded as a
      contribution to paid in capital on June 30, 2006. The Company determined that
      the conversion and other derivative features of the 2004 Debentures and 2005
      Debentures and the 2005 Debenture Warrants should continue to be treated as
      derivative liabilities as of June 30, 2006.





The
      2004
      Debentures and 2005 Debentures both contain more than one embedded derivative
      feature which SFAS 133 requires be accounted for as separate derivative
      instruments. The various embedded derivative features of each series of
      debentures have been bundled together as a single, compound embedded derivative
      instrument that has been bifurcated from the debenture in accordance with
      Derivatives Implementation Group Issue No. B15. The derivative features that
      have been bundled together in the compound embedded derivative include: (1)
      the
      conversion feature of the debentures, (2) the holder's right to force Ener1
      to
      redeem the debentures after an event of default, (3) the holder's right to
      force
      Ener1 to redeem the debentures after a change in control, (4) Ener1's right
      to
      redeem the debentures after 3 years, (5) the requirement to pay an increased
      interest rate if Ener1 fails to achieve certain milestones, and (6) Ener1's
      right to convert the debentures into common stock if certain conditions are
      satisfied. The value of the compound embedded derivative liability was
      bifurcated from the debenture and recorded as a derivative liability, which
      results in a reduction of the initial carrying amount (as unamortized discount)
      of the related debenture at inception. The unamortized discount is being
      amortized to interest expense using the effective interest method over the
      life
      of the debenture.




The
      Company also determined that an agreement entered into in October 2004 under
      which Ener1 Group agreed to purchase at the Company’s request up to $3,000,000
      of the Series B Preferred Stock plus warrants was a financial instrument (the
      "Series B Preferred Stock Put") which the Company was required to value as
      a
      derivative asset and mark to market at each balance sheet date. The Series
      B
      Preferred Stock Put was terminated on March 30, 2006. The fair value of Series
      B
      Preferred Stock Put was marked to market at the date of termination and a
      derivative gain was recorded. The balance of the derivative asset was then
      recorded as a reduction in paid in capital on the date of
      termination.


13




The
        impact of the application of SFAS 133 and EITF 00-19 on the balance sheets
        as
        of June 30, 2006 and 2005 and the statements of operations for
        the six months ended June 30, 2006 and 2005 are as follows:
 **December
                    31,**
                
                **June
                    30,**
                
                **Gain**
                
                **December
                    31,**
                
                **June
                    30,**
                
                **Gain****2005**
                
                **2006**
                
                **(Loss)**
                
                **2004**
                
                **2005**
                
                **(Loss)**2004
                    Debentures conversion
                
                $
                5,980
                
                $
                5,029
                
                
                951
                
                $
                14,319
                
                $
                6,431
                
                $
                7,8882004
                    Debenture Warrants
                
                
                3,520
                
                
                -
                
                
                (3,361
                )
                      (b)
                
                11,040
                
                
                3,040
                
                
                8,0002005
                    Debenture conversion
                
                
                4,555
                
                
                3,204
                
                
                1,351
                
                
                -
                
                
                4,087
                
                
                3,9562005
                    Debenture Warrants
                
                
                2,205
                
                
                2,532
                
                
                (327
                )
                
                -
                
                
                1,920
                
                
                1,892EnerDel
                    Series A Preferred Stock conversion
                
                
                -
                
                
                -
                
                
                -
                
                
                1,183
                
                
                -
                
                
                1,183Delphi
                    Warrants
                
                
                2,660
                
                
                -
                
                
                (228
                )
                    (b)
                
                5,944
                
                
                2,447
                
                
                3,497Series
                    B Preferred Stock Warrants
                
                
                3,135
                
                
                -
                
                
                (593
                )
                    (b)
                
                7,095
                
                
                3,916
                
                
                3,179Series
                    B Preferred Stock Put
                
                
                (496
                )
                
                -
                
                
                88
                (a)
                
                (266
                )
                
                (685
                )
                
                419Battery
                    Warrants
                
                
                26,220
                
                
                -
                
                
                (229
                )
                    (c)
                
                57,960
                
                
                23,460
                
                
                34,500Debt
                    Exchange Warrants
                
                
                7,200
                
                
                -
                
                
                (1,400
                )
                    (b)
                
                16,600
                
                
                6,388
                
                
                10,212$
                54,979
                
                $
                10,765
                
                $
                (3,748
                )
                $
                113,875
                
                $
                51,004
                
                $
                74,726
  (a)
              The
                  Series B Preferred Stock Put was terminated on March 30, 2006 and
                  has no
                  value on June 30, 2006.
  (b)
              As
                  a result of the conversion of all of the Battery Warrants on June
                  30,
                  2006, these warrants were deemed to no longer be derivatives under
                  SFAS
                  133 and EITF 00-19. The warrants were valued at fair value on June
                  30,
                  2006 with a corresponding gain or loss on derivatives. The warrants
                  were
                  then recorded as paid in capital on that date.
  (c)
              The
                  Battery Warrants were exercised at various dates during the six
                  months
                  ending June 30, 2006, and there were no remaining unexercised warrants
                  at
                  June 30, 2006. Each warrant was valued at fair value on the date
                  of
                  exercise and a corresponding derivative gain or loss was recorded,
                  and the
                  remaining derivative liability was recorded as paid in capital
                  on that
                  date. Proceeds from exercise were also recorded as paid in
                  capital.
 
 Because
        the conversion option for the Series B Preferred Stock is contingent, the
        Series
        B Preferred Stock is not within the scope of SFAS 133 and EITF 00-19. If
        the
        contingency is resolved in the future and the holder becomes able to
        convert, Ener1 will assess whether the conversion option meets the definition
        of
        a derivative under SFAS 133.
 
 The
        Company uses the Black Scholes pricing model for determining the fair values
        of
        its warrant derivatives and the conversion feature of the preferred stock.
        The
        Company uses a lattice valuation model to value the compound embedded
        derivatives in the 2004 Debentures and 2005 Debentures.
  *Lattice
        Valuation Model*
 
 The
        Company valued the compound embedded derivatives in the 2004 Debentures and
        2005
        Debentures using a Lattice Model with the assistance of a valuation consultant.
        The lattice model values the compound embedded derivatives based on a
        probability weighted discounted cash flow model. This model is based on future
        projections of the five primary alternatives possible for settlement of the
        features included within the compound embedded derivative, including: (1)
        payments are made in cash, (2) payments are made in stock, (3) the holder
        exercises its right to convert the debentures, (4) Ener1 exercises its right
        to
        convert the debentures and (5) Ener1 defaults on the debentures. The Company
        uses the model to analyze (a) the underlying economic factors that
        influence which of these events will occur, (b) when they are likely to occur,
        and (c) the common stock price and specific terms of the debentures such
        as
        interest rate and conversion price that will be in effect when they occur.
        Based
        on the analysis of these factors, the Company uses the model to
        develop a set of potential scenarios. Probabilities of each scenario occurring
        during the remaining term of the debentures are determined based on management’s
        projections. These probabilities are used to create a cash flow projection
        over
        the term of the debentures and determine the probability that the projected
        cash
        flow would be achieved. A discounted weighted average cash flow for each
        scenario is then calculated and compared to the discounted cash flow of the
        debentures without the compound embedded derivative in order to determine
        a
        value for the compound embedded derivative.
 
 The
        primary determinants of the economic value of a compound embedded derivative
        under the lattice model are (1) the price of Ener1's common stock, (2) the
        volatility of Ener1's common stock price, (3) the likelihood that Ener1 will
        be
        required to pay registration delay payments, (4) the likelihood that an event
        of
        default or a change in control will occur, (5) the likelihood that the
        conversion price will be adjusted, (6) the likelihood that Ener1's common
        stock
        will be listed on an exchange, (7) the likelihood that Ener1 will be able
        to
        obtain alternative financing and (8) the likelihood that Ener1 would be able
        to
        force conversion of the debentures.
  14
  
 The
        fair
        value of the compound derivative embedded in the 2004 Debentures as of June
        30,
        2006 and 2005 determined using the lattice valuation model were based on
        the
        following management assumptions:
 **2004
                    Debentures****at
                    June 30, 2006**
                
                **at
                    June 30, 2005*****Assumptions:***The
                    price of Ener1's common stock would increase at a rate commensurate
                    with
                    the cost of equity, with a volatility of:
                
                
                120
                %
                
                100
                %Percent
                    likelihood that Ener1 would not be in default of its obligations
                    under the
                    resale registration agreement relating to the 2004
                    Debentures:
                
                
                95
                %
                
                95
                %Percent
                    likelihood that an event of default or a fundamental change would
                    occur,
                    increasing over time:
                
                
                5
                %
                
                5
                %Reset
                    events projected to occur with a weighted average adjustment
                    factor of
                    :
                
                
                0.989
                
                
                0.989Percent
                    likelihood that Ener1 would force the conversion of the 2004
                    Debentures if
                    the stock price reached $1.75:
                
                
                95
                %
                
                95
                %The
                    holders of the 2004 Debentures would convert the 2004 Debentures
                    if the
                    resale registration statement was effective, Ener1 was not in
                    default
                    under the 2004 Debentures, and Ener1's common stock price
                    was:
                
                $
                3.50
                
                $
                3.50Ener1
                    would redeem the 2004 Debentures following the third anniversary
                    of the
                    issue date if Ener1's common stock price reached:
                
                $
                1.50
                
                $
                1.50Percent
                    likelihood that Ener1 would be able to obtain alternative financing
                    that
                    would enable it to redeem the 2004 Debentures, increasing 2.5%
                    per quarter
                    to a maximum of 25%:
                
                
                0
                %
                
                0
                %Percent
                    likelihood that Ener1's common stock would be listed on an exchange
                    increasing 10% quarterly to a maximum of 90%:
                
                
                0
                %
                
                0
                %
 Based
        on
        these management assumptions, the fair value of these embedded derivatives
        as of
        June 30, 2006 and 2005 were calculated by management to be $5,029,000 and
        $6,431,000, respectively.
  15
 
 The
        fair
        value of the compound derivative embedded in the 2005 Debentures as of June
        30,
        2006 and 2005 determined using the lattice valuation model were based on
        the
        following management assumptions:
 **2005
                    Debentures****at
                    June 30, 2006**
                
                **at
                    June 30, 2005*****Assumptions:***The
                    price of Ener1's common stock would increase at a rate commensurate
                    with
                    the cost of equity, with a volatility of:
                
                
                120
                %
                
                100
                %In
                    2006, number of months that Ener1 would remain in default of
                    the resale
                    registration agreement relating to the 2005 Debentures, and in
                    2006 and
                    2005 the percent likelihood that Ener1 would not be in default
                    of its
                    obligations under that agreement:
                
                
                2
                    months/ 95
                %
                
                95
                %Percent
                    likelihood that an event of default or a fundamental change would
                    occur:
                
                
                5
                %
                
                5
                %Reset
                    events projected to occur with a weighted average adjustment
                    factor
                    of:
                
                
                0.973
                
                
                0.973Percent
                    likelihood that Ener1 would force the conversion of the 2005
                    Debentures if
                    the Ener1 common stock price reached $1.50:
                
                
                95
                %
                
                95
                %The
                    holders of the 2005 Debentures would convert the 2005 Debentures
                    if the
                    resale registration statement was effective, Ener1 was not in
                    default
                    under the 2004 Debentures and Ener1's common stock price
                    reached:
                
                $
                1.75
                
                $
                1.75Ener1
                    would redeem the 2005 Debentures following the third anniversary
                    of the
                    issue date if Ener1's common stock price reached:
                
                $
                1.25
                
                $
                1.25Percent
                    likelihood that Ener1 would be able to obtain alternative financing
                    that
                    would enable it to redeem the 2005 Debentures, increasing 2.5%
                    per quarter
                    to a maximum likelihood of 25%:
                
                
                0
                %
                
                0
                %Percent
                    likelihood that Ener1's common stock would be listed on an exchange
                    and
                    meet the volume requirements set forth in the 2005 Debentures,
                    increasing
                    10% quarterly to a maximum likelihood of 90%:
                
                
                0
                %
                
                0
                %
  Based
        on
        these management assumptions, the fair value of the compound embedded derivative
        in the 2005 Debentures as of June 30, 2006 and 2005 were calculated by
        management to be $3,204,000 and $4,087,000, respectively.
 
 All
        of
        the above assumptions are reviewed quarterly and are subject to change based
        primarily on management’s assessment of the probability of the events described
        occurring. Accordingly, changes to these assessments could materially affect
        the
        valuation.
  *Black
        Scholes Valuation Model*
 
 The
        Company valued the asset value of the Series B Preferred Stock Put using
        the
        Black Scholes pricing model with the assistance of a valuation consultant.
        The model uses a number of inputs including the value of the Series B Preferred
        Stock Warrants and the cost of alternative financing in order to compute
        the
        value of the Series B Preferred Stock Put. The assumptions used in the Black
        Scholes valuation model were: a risk free interest rate of 4.03%; the current
        stock price at date of issuance of $0.65 per share; the exercise price of
        the
        warrants of $1.25 and $1.50; the term of ten years; volatility of 450%; and
        dividend yield of 0.0%. The Series B Preferred Stock Put was terminated on
        March
        30, 2006 in conjunction with an agreement with Ener1 Group. Accordingly,
        the
        Series B Preferred Stock Put had no value at June 30, 2006.
 
 The
        Company used the Black Scholes pricing model to determine the fair values
        of the
        conversion feature derivatives of its warrants and preferred stocks. The
        model
        uses market sourced inputs such as interest rates, stock prices, and option
        volatilities, the selection of which requires management’s judgment, and which
        may impact net income or loss.  Ener1 uses volatility rates based upon the
        closing stock price of its common stock since January 2002, when the
        Company underwent a change in control. Ener1 determined that share prices
        prior
        to this period do not reflect the ongoing business valuation of its
        current operations. Ener1 uses a risk free interest rate which is the U. S.
        Treasury bill rate for securities with a maturity that approximates the
        estimated expected life of a derivative or security. Ener1 uses the closing
        market price of the common stock on the date of issuance of a derivative
        or at
        the end of a quarter when a derivative is valued at fair value. The volatility
        factor used in the Black Scholes pricing model has a significant effect on
        the resulting valuation of the derivative liabilities on the balance sheet.
        The
        volatility has ranged from 296% to 135% during the years ending December
        31,
        2003, 2004 and 2005. The following table shows the volatility, risk free
        rate
        and market price used in the calculation of the Black Scholes call value
        for
        each derivative at issuance date and at the end of each year and June 30,
        2006.
  16
  **Issue
                    Date**
                
                **Volatility**
                
                **Risk
                    Free Interest Rate**
                
                **Market
                    Price**
                
                **Term
                    in Years**At
                    Issuance date for:2004
                    Debenture Warrants
                
                
                1/21/2004
                
                
                296
                %
                
                3.5
                %
                $
                1.65
                
                
                102005
                    Debenture Warrants
                
                
                3/11/2005
                
                
                135
                %
                
                3.5
                %
                $
                0.75
                
                
                5EnerDel
                    Series A Preferred Stock
                
                
                10/20/2004
                
                
                207
                %
                
                1.8
                %
                $
                0.66
                
                
                3
                    mos.Delphi
                    Warrants
                
                
                10/20/2004
                
                
                207
                %
                
                1.8
                %
                $
                0.66
                
                
                7Series
                    B Preferred Stock Warrants
                
                
                10/15/2004
                
                
                207
                %
                
                1.8
                %
                $
                0.65
                
                
                10Series
                    B Preferred Stock Put
                
                
                10/15/2004
                
                
                450
                %
                
                4.0
                %
                $
                0.65
                
                
                10Battery
                    Warrants
                
                
                9/6/2002
                
                
                201
                %
                
                1.7
                %
                $
                0.05
                
                
                10Debt
                    Exchange Warrants
                
                
                11/14/2003
                
                
                296
                %
                
                1.0
                %
                $
                0.98
                
                
                10Prices
                    and average rates at:December
                    31, 2003
                
                
                
                
                
                296
                %
                
                4.3
                %
                $
                1.40December
                    31, 2004
                
                
                
                
                
                155
                %
                
                4.1
                %
                $
                0.85December
                    31, 2005
                
                
                
                
                
                145
                %
                
                4.1
                %
                $
                0.39June
                    30, 2006
                
                
                
                
                
                141
                %
                
                5.1
                %
                $
                0.47
  
 10.    
        INVESTMENT IN ENERSTRUCT
  In
        2003,
        the Company invested $2,003,000 in EnerStruct, Inc. (“EnerStruct”), a Japanese
        company, in exchange for an initial 49% ownership interest. ITOCHU Corporation
        (“ITOCHU”) invested $1,100,000 plus equipment totaling approximately $500,000
        for an initial 51% ownership interest. Through June 30, 2006, the Company’s
        investment in EnerStruct was reduced by $1,527,000 which represents the
        Company’s share of EnerStruct losses through that date. As a result of
        subsequent ITOCHU and third party investments in EnerStruct, Ener1’s interest in
        EnerStruct has been reduced to 42% at June 30, 2006.
 
 In
        April
        2005, EnerDel entered into an agreement with EnerStruct, under which EnerDel
        paid EnerStruct $1,000,000 in prepayment for engineering services related
        to
        optimization of EnerDel’s planned lithium battery production and further
        development of EnerStruct’s high-rate battery technology. If development of this
        technology is successfully completed, use of such technology would be licensed
        to EnerDel on terms set forth in the agreement and certain other terms to
        be
        negotiated at that time.
  17
  Summarized
        financial information of EnerStruct is as follows as of June 30, 2006 and
        for
        the three month period then ended:
 Cash
                
                $
                1,376,000Total
                    assets
                
                
                2,511,000Total
                    liabilities
                
                
                223,000Net
                    (loss)
                
                
                (182,000
                )
 11.
          RELATED PARTY TRANSACTIONS
 
 *Intercompany
        transactions with Ener1 Group*
 
 Ener1
        Group and its subsidiaries have from time to time used various services and
        employees of 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. As of June 30, 2006, the net balance due to
        the
        Company from Ener1 Group and its subsidiaries was $41,000.
 
 In
        January 2006, Ener1 Group agreed to assume Ener1’s lease on an office in New
        York City, New York, for which the monthly rent is $35,520. The lease expires
        in
        September 2010. Ener1 expensed the leasehold improvements made to this office
        space in the amount of $60,000 during the quarter ending March 31, 2006.
        The
        lease payments on the office space are secured by a letter of credit in the
        name
        of Ener1; the letter of credit is secured by a cash collateral account in
        the
        amount of $224,000. The Company intends to cancel the letter of credit so
        that
        the collateral will be released. The letter of credit has not been cancelled
        as
        of June 30, 2006.
 
 *Ener1
        Group Financing*
 
 Effective
        as of October 15, 2004, the Company entered into an agreement with Ener1
        Group
        under which Ener1 Group agreed to purchase, from time to time, at the Company’s
        request, up to 30,000 shares of the Series B Preferred Stock ( the “Series B
        Preferred Stock Put ” ) at a purchase price of $100.00 per share (or an
        aggregate purchase price of $3,000,000), and warrants to purchase up to 833,334
        shares of its common stock at an exercise price of $1.25 per share, and warrants
        to purchase up to 833,334 shares of its common stock at an exercise price
        of
        $1.50 per share. Under the agreement, if the Company requires Ener1 Group
        to
        purchase any of the Series B Preferred Stock and warrants pursuant to this
        agreement, the Company is required to pay Ener1 Group a fee equal to one
        third
        of the aggregate purchase price for the securities purchased by Ener1 Group
        in
        return for Ener1 Group’s assistance in arranging a prior sale of Series B
        Preferred Stock. In February 2005, at the Company’s request, Ener1 Group
        purchased 2,500 of the Company’s Series B Preferred stock and warrants to
        purchase 138,890 shares of the Company’s common stock, for an aggregate purchase
        price of $250,000, and Ener1 paid Ener1 Group a fee of $83,333. In consideration
        of Ener1 Group’s exercise of certain warrants prior to their expiration as
        described below, the Company agreed on March 30, 2006 to terminate Ener1
        Group’s
        obligation to purchase additional Series B Preferred Stock.
 
 *Warrant
        Exercise Agreement*
 
 On
        March
        30, 2006, the Company and Ener1 Group entered into an agreement (the “Warrant
        Exercise Agreement”), under which: (1) Ener1 Group agreed to exercise certain
        warrants; (2) Ener1 agreed to transfer Ener1’s entire equity interest in Ener EL
        Holdings, Inc. (“Ener EL”), to Ener1 Group; (3) Ener1 and Ener1 Group terminated
        the letter agreement between Ener1 Group and Ener1 dated October 15, 2004
        regarding Ener1 Group’s commitment to purchase shares of Ener1 Series B
        Preferred Stock and warrants to purchase Ener1 stock; (4) each of Ener1 and
        Ener1 Group agreed to release the other company from outstanding obligations
        with respect to intercompany services provided by each company to the other
        as
        of March 30, 2005, and (5) the companies agreed that after Ener1 Group exercises
        the balance of the Battery Warrants to purchase 24,500,000 shares of Ener1
        common stock, Ener1 shall issue to Ener1 Group a new immediately exercisable,
        ten-year warrant to purchase 20,000,000 shares of Ener1 common stock at an
        exercise price of $0.50 per share. In connection with the transactions
        contemplated by the Warrant Exercise Agreement, Ener1 expensed (1) $115,000
        in
        connection with the transfer of Ener1’s entire equity interest in Ener EL to
        Ener1 Group which was recorded at fair value which approximated the carrying
        value, (2) $584,000 representing the fair value of the Series B Preferred
        Put
        that was terminated, and (3) $228,000 of intercompany receivables, at fair
        value
        which approximates cost, from Ener1 Group in order to release Ener1 Group
        from
        outstanding obligations to Ener1 for intercompany services and payments provided
        to Ener1 Group as of March 30, 2006. On June 30, 2006, Ener1 Group completed
        the
        exercise of the remaining Battery Warrants. The Company issued the warrants
        described above to purchase 20,000,000 shares to Ener1 Group and recorded
        the
        fair value of these warrants, $9,200,000, as an expense on the date they
        were
        issued on June 30, 2006.
  18
 
 Ener1
        Group exercised the Battery Warrants to purchase an aggregate of 44,500,000
        and
        24,500,000 shares of the Company’s common stock at an exercise price of $.08 per
        share during the quarters ending March 31 and June 30, 2006, respectively.
        Total
        proceeds to the Company from the exercise transactions were $3,560,000 and
        $1,960,000 during the quarters ending March 31 and June 30, 2006, respectively.
        The expiration date of the exercised warrants was 2012. Paid in capital
        increased $11,972,000 and $31,279,000 during the three and six months ended
        June
        30, 2006 due to the exercise of the Battery Warrants comprised of
        $3,115,000 and $1,715,000, respectively, from the proceeds in excess of the
        par
        value of the Common Stock and $16,192,000 and $10,257,000, respectively,
        from
        the fair value of the Battery Warrant derivative at the dates of
        exercise.
 
 *Ener1
        Group 2006 Convertible Note and Warrants*
 
 On
        June
        30, 2006, the Company issued a subordinated, convertible note to Ener1 Group
        in
        the principal amount of $3,250,000, which amount included $250,000 that Ener1
        was required to pay as a financing fee to Ener1 Group. The net loan proceeds
        of
        $3,000,000, of which $2,629,000 was received at June 30, 2006 and $371,000
        was
        received in July 2006, will be used for working capital. The note bears interest
        at the rate of 10% per annum. All interest accrues until the maturity of
        the
        note on April 15, 2009, at which time all principal and accrued interest
        are
        payable in full. The note is subordinated to the rights of the holders of
        the
        2004 Debentures and 2005 Debentures. Once all of the Company's obligations
        under
        the 2004 Debentures and 2005 Debentures have been satisfied, the note will
        be
        convertible at Ener1 Group's option into shares of the Company’s common stock at
        the conversion price of $.50 per share. Ener1 Group may accelerate the amounts
        due under the note if none of the 2004 or 2005 Debentures are outstanding
        and
        certain bankruptcy events occur with respect to the Company.
 
 In
        connection with the note, the Company issued to Ener1 Group immediately
        exercisable warrants to purchase up to 9,000,000 shares of the Company’s common
        stock at an exercise price of $.50 per share. These warrants have a five
        year
        term.
 
 Ener1
        is
        accounting for the warrant and conversion feature of the note issued to Ener1
        Group in accordance with EITF 00-27 “Application of Issue No. 98-5 to Certain
        Convertible Instruments.” The proceeds were first allocated to the warrants at
        their relative fair value, which was $1,592,000 at June 30, 2006, and credited
        to paid in capital. The Company recorded a discount to the convertible note
        in
        the amount of $1,592,000, which will be amortized over the life of the note
        as
        interest expense. The
        intrinsic value of the conversion feature was $1,419,000 at June 30, 2006. 
No entry was made to record the value of the conversion feature because the
        ability of the holder to convert is contingent on Ener1’s repayment of the 2004
        Debentures and 2005 Debentures which is considered outside of the holder’s
        control.  Once the 2004 Debentures and 2005 Debentures are repaid, Ener1
        will revalue the benefit of the conversion feature and, depending on the
        results
        of that valuation, possibly record that value as a credit to paid in
        capital.
  12.  STOCK
        ISSUANCES DURING QUARTER ENDED JUNE 30, 2006
 
 Ener1
        issued 51,091 shares of common stock to a firm as compensation for public
        relations services during the quarter ended June 30, 2006 and recorded general
        and administrative expense of $20,000.
  13.
        STOCK
        BASED COMPENSATION
 
 *Adoption
        of New Accounting Guidance and Transition*
 
 At
        January 1, 2006, the Company has five stock-based employee, executive and
        director compensation plans. Prior to December 31, 2005, the Company accounted
        for these plans under the recognition and measurement provisions of APB Opinion
        No. 25, *Accounting
        for Stock Issued to Employees* , and
        related Interpretations, (“APB 25”) as permitted by FASB Statement No. 123, *Accounting
        for Stock-Based Compensation* (“SFAS
        No. 123”).
  Effective
        January 1, 2006, the Company adopted the fair value recognition provisions
        of
        FASB Statement No. 123R, *Share-Based
        Payment* ,
        and
        related interpretations (“SFAS No. 123R”) using the modified-prospective
        transition method. Under that method, compensation cost recognized in the
        first
        quarter of 2006 includes (a) compensation cost for all share-based payments
        granted prior to, but not yet vested as of, December 31, 2005 based on the
        grant
        date fair value estimated in accordance with the original provisions of SFAS
        No. 123 and (b) compensation cost for all share-based payments granted
        on or subsequent to January 1, 2006, based on the grant-date fair value
        estimated in accordance with the provisions of SFAS No. 123R. Compensation
        cost is being recognized on a straight-line basis over the requisite service
        period for the entire award in accordance with the provisions of SFAS
        No. 123R. Results for the prior periods have not been
        restated.
  19
 
 *Valuation
        and Expense Information under SFAS No. 123R*
 
 As
        a
        result of adopting Statement 123(R) on January 1, 2006, the Company’s income
        before income taxes and net income for the quarter ended June 30, 2006 are
        $389,000 lower than if it had continued to account for share-based compensation
        under APB 25. Basic and diluted loss per share for the quarter ended June
        30,
        2006 would have been $(0.08) and ($0.08), respectively, if the Company had
        not
        adopted Statement 123(R), compared to reported basic and diluted loss per
        share
        $(0.08) and ($0.08), respectively. The Company recorded share based compensation
        costs of $389,000 for the second quarter of 2006.
  As
        required by SFAS No. 123R, the Company estimates forfeitures of employee
        stock options and recognizes compensation cost only for the portion of those
        awards expected to vest. Forfeiture rates are estimated to be 10% of total
        outstanding options. Estimated forfeitures are adjusted to actual forfeiture
        experience as needed.
 
 In
        connection with the adoption of SFAS No. 123R, the Company estimates the
        fair value of each stock option on the date of grant using a Black Scholes
        Model
        valuation model, applying the following assumptions, and amortizes the estimated
        fair value to expense over the option’s vesting period using the straight-line
        attribution approach.
 
 *Expected
        Term:* The
        expected term represents the period over which the share-based awards are
        expected to be outstanding. It has been determined using the “shortcut method”
described in Staff Accounting Bulletin Topic 14.D.2, which is based on a
        calculation that determines the midpoint between the vesting date and the
        end of
        the contractual term.
 
 *Risk-Free
        Interest Rate:* The
        Company based the risk-free interest rate used in its assumptions on the
        implied
        yield currently available on U.S. Treasury issues with a remaining term
        equivalent to the stock option award’s expected term. The average risk free
        interest rate used through June 30, 2006 was 3.5%.
 
 *Expected
        Volatility:* The
        Company uses volatility rates based upon the weekly closing stock price of
        the
        Company’s common stock since January 2002, when the Company underwent a change
        in control. The Company determined that share prices prior January 2002 do
        not
        reflect the ongoing business valuation of the Company’s operations. The average
        expected volatility used during the period options were granted was
        100%.
 
 *Expected
        Dividend Yield* :
        The
        Company does not intend to pay dividends on its common stock for the foreseeable
        future. Accordingly, the Company uses a dividend yield of zero in its
        assumptions.
  A
        summary
        of option activity under the Company’s stock plans as of June 30, 2006 and the
        changes during the second quarter of 2006 is presented below:
 **Options**
                
                **Number
                    of Options**
                
                **Weighted
                    Average Price**
                
                **Average
                    Remaining Contractual Term**
                
                **Intrinsic
                    Value**Outstanding
                    at December 31, 2005
                
                
                24,605,617
                
                $
                0.53Granted
                
                
                -Exercised
                
                
                (319,314
                )Forfeited
                    or expired
                
                
                (10,484,198
                )
                $
                0.59Outstanding
                    at June 30, 2006
                
                
                13,802,105
                
                $
                0.45
                
                
                7.0
                
                $
                1,756Vested
                    or expected to vest at June 30, 2006
                
                
                12,327,858
                
                $
                0.49
                
                
                7.5
                
                $
                1,694Exercisable
                    at June 30, 2006
                
                
                8,059,637
                
                $
                0.50
                
                
                7.4
                
                $
                1,130
  No
        options were granted and options to purchase 319,314 shares were exercised
        in
        the second quarter of 2006. As of June 30, 2006, there was $1,066,000 of
        total
        unrecognized compensation cost related to the stock options granted under
        the
        Company stock plans. That cost is expected to be recognized over a
        weighted-average period of 8.0 years.
 
 *Performance
        Share Option Plan*
 
 Effective
        October 1, 2005, an officer of EnerDel was granted an option to purchase
        1,000,000 shares of Ener1, Inc. common stock at the exercise price of $.49
        per
        share, vesting 25% on each of the first four anniversaries of the date of
        the
        grant. The officer’s right to exercise this option is subject to EnerDel
        achieving certain revenue thresholds. The performance goals are not expected
        to
        be met at this time, and no compensation cost has been recognized in the
        three
        months ended June 30, 2006 in connection with this plan.
  20
 
 *Pro
        Forma Information Under SFAS No.123 for Periods Prior to 2006*
 
 Until
        January 1, 2006, the Company accounted for stock options under the intrinsic
        value method specified in APB 25 and adopted the disclosure-only provisions
        of
        SFAS No. 123 for periods prior to January 1, 2006. Accordingly, compensation
        cost for prior reported periods has been recognized for grants under the
        stock
        option plans only when the exercise prices of employee stock options were
        less
        than the market prices or fair values of the underlying stock on the date
        of
        grant.
 
 The
        table
        below illustrates the effect on net earnings and earnings per share if the
        Company had applied the fair value recognition provisions of SFAS No. 123
        to options granted in the three and six months ending June 30,
        2005.
 **Three
                    Months Ended June 30, 2005**
                
                **Six
                    Months Ended June 30, 2005**Net
                    income as reported
                
                $
                26,058
                
                $
                48,802Add
                    stock-based compensationdetermined
                    under intrinsicvalue-based
                    method
                
                
                265
                
                
                529Less
                    stock-based compensationdetermined
                    under fair value-based
                    method
                
                
                (931
                )
                
                (1,851
                )Net
                    income pro forma
                
                
                25,392
                
                
                47,480Preferred
                    stock dividends
                
                
                (739
                )
                
                (1,480
                )Net
                    income attributableto
                    common shareholders pro forma
                
                $
                24,653
                
                $
                46,000Net
                    income per share, pro forma basic
                
                $
                0.07
                
                $
                0.13Net
                    income per share, pro forma diluted
                
                $
                (0.01
                )
                $
                0.01
  15.
          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, 2006 do not include the common stock equivalents represented by
        common
        stock options and the 2004 Debentures because their inclusion would be
        anti-dilutive. The Company’s Series B Convertible Preferred Stock was not
        convertible at June 30, 2006 or June 30, 2005 and these common stock equivalents
        were excluded from the earnings per share calculations. Diluted earnings
        per
        share is computed using the net income attributable to common shareholders
        and
        adjusted by the income statement effect of warrants, options and convertible
        instruments as if the dilutive securities had been converted at the beginning
        of
        the period. If a debt security is deemed to be dilutive, the related interest
        expense, including accretion of debenture discounts, and the gain or loss
        on the
        related embedded derivative liability are added back to the income or loss
        for
        the purposes of computing diluted earnings or loss per share. The dilutive
        effect of outstanding stock options and warrants is reflected in diluted
        net
        income or loss per share by application of the treasury stock method. The
        dilutive effect of outstanding convertible securities is reflected in diluted
        net income or loss per share by application of the if-converted
        method.
  21
 
 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,****2006**
                
                **2005**
                
                **2006**
                
                **2005**(in
                    thousands)Weighted
                    Average Shares Outstanding - Basic
                
                
                402,907
                
                
                347,456
                
                
                385,778
                
                
                347,456Plus
                    net shares from assumed conversion of warrantsunder
                    treasury stock method
                
                
                -
                
                
                57,413
                
                
                -
                
                
                60,265Plus
                    net shares from assumed conversion of optionsunder
                    treasury stock method
                
                
                -
                
                
                -
                
                
                -
                
                
                6,925Plus
                    shares from assumed conversion ofconvertible
                    instruments:2004
                    Debentures
                
                
                -
                
                
                16,016
                
                
                -
                
                
                16,0162005
                    Debentures
                
                
                -
                
                
                14,225
                
                
                -
                
                
                8,802Weighted
                    Average Shares Outstanding - Diluted
                
                
                402,907
                
                
                435,110
                
                
                385,778
                
                
                439,464
  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,****2006**
                
                **2005**
                
                **2006**
                
                **2005**(in
                    thousands)Net
                    income as reported
                
                $
                (32,492
                )
                $
                26,058
                
                $
                (31,538
                )
                $
                48,802Less
                    preferred stock dividends and accretion
                
                
                (679
                )
                
                (739
                )
                
                (1,372
                )
                
                (1,480
                )Add
                    interest expense and accretion of discount onconvertible
                    debentures
                
                
                -
                
                
                2,634
                
                
                -
                
                
                4,431Less
                    derivative gain on convertible debentures
                
                
                -
                
                
                (10,527
                )
                
                -
                
                
                (11,844
                )Less
                    derivative gain on warrants
                
                
                -
                
                
                (22,770
                )
                
                -
                
                
                (34,971
                )Net
                    loss computed for diluted net loss per share
                
                $
                (33,171
                )
                $
                (5,344
                )
                $
                (32,910
                )
                $
                4,938
  16. COMMITMENTS
        AND CONTINGENCIES
 
 *Litigation*
 
 The
        Company receives communications from time to time alleging various claims.
        These
        claims include, but are not limited to, allegations that certain of the
        Company’s products infringe the patent rights of other third parties. The
        Company cannot predict the outcome of any such claims or the effect of any
        such
        claims on the Company’s operating results, financial condition, or cash
        flows.
 
 On
        February 10, 2006, Kevin P. Fitzgerald, Ener1’s former Chairman and Chief
        Executive Officer, filed a complaint against the Company in the Circuit
        Court for Broward County, Florida for breach of contract and specific
        performance based on an alleged breach of his employment agreement
        dated September 8, 2003.  Mr. Fitzgerald was dismissed as Ener1’s Chairman
        and Chief Executive Officer on January 9, 2006.
 
 The
        court
        has granted summary final judgment in favor of Ener1 on the claims in Count
        2 of
        Mr. Fitzgerald's complaint.  The claims in Count 2 included a request for
        relief in the form of an injunction extending the then-expired time period
        for
        Mr. Fitzgerald to exercise his rights under his employment contract to require
        Ener1 to pay him an amount equal to the cash value of his vested stock
        options.  Count 2 also sought relief in the form of an injunction
        requiring Ener1 to continue to vest options in favor of Mr. Fitzgerald during
        the 45 days following his termination.  Mr. Fitzgerald had claimed that he
        was entitled to 45 days prior notice of a decision to terminate his
        employment and therefore his termination did not become effective and his
        options continued to vest for 45 days after January 9, 2006.  Count 1 of
        Mr. Fitzgerald's complaint, which alleges claims for breach of contract for
        failure to pay two years of severance, is still pending.  The
        Company intends to vigorously defend against the charges made in this
        litigation.
  22
 
 17.
          SUBSEQUENT EVENTS
 
 On
        August
        9, 2006, Ener1, Inc., entered into a Forbearance Agreement with Satellite
        Asset
        Management, L.P. ("Satellite"), a holder of the Company's 2004 Debentures
        and
        2005 Debentures. Satellite had delivered a letter, dated August 7, 2006,
        to the
        Company pursuant to Section 6(d)(ii) of the 2004 Debentures and Section 6(e)(ii)
        of the 2005 Debentures providing notice of a default under the 2004 and 2005
        Debentures as a result of the Company's failure to make certain payments
        to
        Satellite totaling $1,549,750 as of July 31, 2006, required under the terms
        of
        the Registration Rights Agreements relating to the Debentures. Under the
        Forbearance Agreement, Satellite rescinded this notice of default and agreed
        to
        forbear from any action for the "Forbearance Period" (as defined below) arising
        from Ener1's failure to make payments due to Satellite under the terms of
        the
        Registration Rights Agreements relating to the 2004 and 2005 Debentures.
 
 Ener1
        agreed under the Forbearance Agreement to issue a promissory note in the
        principal amount of $750,000 to Ener1 Group and deposit proceeds of such
        note
        equal to $739,375, representing the amount of interest that will be due and
        payable to Satellite under the 2004 and 2005 Debentures on September 30,
        2006,
        in a trust account for Satellite's benefit. These funds will be paid to
        Satellite on September 30, 2006 in accordance with the terms of an Interest
        Payment Deposit Agreement, dated August 9, 2006, among Ener1, Ener1 Group,
        Satellite and Wilmington Trust.
 
 The
        "Forbearance Period" will remain in effect until November 1, 2006, unless
        a
        "Termination Event" occurs prior to November 1, 2006. A "Termination Event"
        includes, among other things, Ener1's failure to comply with the Interest
        Payment Deposit Agreement, the occurrence of certain bankruptcy-related events,
        Ener1's failure to become current in its reporting obligations under the
        Securities Exchange Act of 1933, as amended, by September 1, 2006 or the
        inaccuracy of any representation made by Ener1 in the Forbearance Agreement
        or
        the 2004 and 2005 Debentures.
 
 On
        August
        9, 2006, in accordance with the Forbearance Agreement, Ener1 borrowed $750,000
        from Ener1 Group under the terms of a promissory note. The note bears interest
        at a rate of 10% per year; no interest is payable until the note matures
        on
        April 15, 2009. Ener1 Group's rights under the note are subordinated to the
        prior payment in full of all Ener1's obligations under the Debentures. If
        none
        of the 2004 and 2005 Debentures are outstanding, Ener1 Group may elect to
        convert the principal and accrued interest under the note into shares of
        Ener1
        common stock at a conversion price of $0.41 per share. Ener1's failure to
        pay
        any amount due under the note, or the occurrence of certain bankruptcy-related
        events, will constitute an event of default under the note.
  23
 
 **Item
        2. Management’s Discussion and Analysis of Financial Condition and Results of
        Operations**
 
 This
        report on Form 10-QSB contains forward-looking statements within the meaning
        of
        Section 27A of the Securities Act of 1933, as amended, and Section 23E of
        the
        Securities Act of 1934, as amended. These statements relate to our expectations
        regarding future events or future financial performance. Any statements
        contained in this report that are not statements of historical fact may be
        deemed forward-looking statements. In some cases, forward-looking statements
        can
        be identified by terminology such as “may,” “will,” “should,” “expect,” “plan,”
“anticipate,” “intend”, “believe,” “estimate,” “predict,” “potential” or
“continue,” or the negative of such terms or other comparable terminology. These
        statements are only predictions and are subject to a number of assumptions,
        risks and uncertainties that could cause actual results to differ materially
        from those expressed or implied in the forward-looking statements. The following
        important factors, in addition to those discussed in our filings with the
        Securities and Exchange Commission from time to time, and other unforeseen
        events or circumstances, could affect our future results and could cause
        those
        results or other outcomes to differ materially from those expressed or implied
        in our forward-looking statements: our ability to raise capital, general
        economic conditions; competition; our ability to control costs; changes within
        our industries; release of new and upgraded products and services by us or
        our
        competitors; development of our sales force; employee retention; managerial
        execution; legal and regulatory issues; changes in accounting policies or
        practices; and successful adoption of our products and services.
 
 All
        forward-looking statements are based on information available to us on the
        date
        of this filing, and we assume no obligation to update such statements. The
        following discussion should be read in conjunction with our Annual Reports
        on
        Form 10-KSB, Quarterly Reports on Form 10-QSB and other filings with the
        Securities and Exchange Commission and the condensed consolidated financial
        statements and related notes included in this Quarterly Report.
 
 Overview
 
 We
        have
        three business lines which we conduct through our three operating subsidiaries.
        EnerDel which is an 80.5% owned subsidiary that we operate as a joint venture
        with Delphi, develops Li-ion batteries, battery packs and components such
        as
        Li-ion battery electrodes and lithium electronic controllers for lithium
        battery
        packs. EnerFuel develops fuel cell products and services. NanoEner develops
        technologies, materials and equipment for nanomanufacturing.
 
 Currently,
        we generate minimal revenue from sales of samples of our products. All of
        our
        planned products are still under development. We will require significant
        capital investment to continue our product development activities.
 
 The
        accompanying consolidated financial statements have been prepared on a going
        concern basis, which contemplates the realization of assets and the satisfaction
        of liabilities in the normal course of business. Ener1 has experienced net
        operating losses since 1997 and negative cash flows from operations since
        1999
        and had an accumulated deficit of $183,000,000 as of June 30, 2006. It is
        likely
        that Ener1’s operations will continue to incur negative cash flows through
        December 31, 2006 and 2007 and additional financing will be required to fund
        Ener1’s planned operations through those periods. If additional financing is not
        obtained, such a condition, among others, will give rise to substantial doubt
        about Ener1’s ability to continue as a going concern.
 
 We
        are
        required under the terms of our senior secured convertible debentures due
        2009,
        issued in January 2004 (the “2004 Debentures”), and our senior secured
        convertible debentures due 2009, issued in March 2005 (the “2005 Debentures”),
        to register the resale of the common stock underlying the debentures and
        associated warrants. If the registration statements we filed to register
        these
        resales are not available for use, we are required to make certain payments
        to
        the purchasers of the 2004 and 2005 Debentures (the “registration delay
        payments”). These registration statements have not been available for use since
        November 21, 2005. At June 30, 2006, the accumulated registration delay payments
        for the 2004 and 2005 Debentures aggregated $2.2 million. Payments accrued
        at
        the rate of 1.5% of principal approximately $295,000 per month for the 2004
        Debentures until January 20, 2006, at which time our obligation to maintain
        the
        effectiveness of the resale registration statement for the common stock
        underlying the 2004 Debentures and associated warrants ended. These registration
        delay payments will continue to accrue at a fixed rate of $213,375 per month
        for
        the 2005 Debentures until the 2005 Debenture holders are able to use the
        resale
        registration statement or until our obligation to maintain the effectiveness
        of
        the resale registration statement for the common stock underlying the 2005
        Debentures and associated warrants ends. Our ability to raise additional
        funds
        for our operations is adversely affected by our inability to file and have
        declared effective by the SEC any post-effective amendments or new registration
        statements. A holder that owns $9.5 million of the 2005 Debentures and $10
        million of the 2004 Debentures has agreed to forbear for a specified time
        period
        from taking any action against the Company related to the non-payment of
        the
        registration delay payments.
  24
 
 Results
        of Operations
 
 We
        had no
        significant sales or gross margin from continuing operations in either of
        the
        three or six month periods ended June 30, 2006 and 2005. Sales in the quarter
        and six months ending June 30, 2006 were for services provided by our fuel
        cell
        business.
 
 ***Three
        Months Ending June 30, 2006***
 
 *Net
        income* .
        We
        reported a net loss of $32,492,000 for the quarter ended June 30, 2006, a
        decrease of $58,550,000 when compared to net income of $26,058,000 for the
        quarter ended June 30, 2005. The decrease is due primarily to: 1) increased
        general and administrative expenses due to $9,200,000 of costs associated
        with
        the modification of the terms of certain warrants issued to Ener1 Group in
        exchange for Ener1 Group's agreement to exercise the warrants during the
        quarter, and 2) decreased derivative gains and losses of $58,434,000 which
        resulted primarily from declines in the price of the Company’s common stock,
        partially offset by a decrease research and development expense of approximately
        $13,302,000 due primarily to the expensing in fiscal 2005 of (a) $10,500,000
        for
        the value of equipment charged to research and development expense and (b)
        $1,000,000 of costs associated with a research and development contract with
        EnerStruct, Inc.
 
 *Losses
        from operations* .
        We
        reported losses from operations of $13,785,000 for the quarter ended June
        30,
        2006, a decrease of $4,325,000 when compared to losses from operations of
        $18,110,000 for the quarter ended June 30, 2005. The decrease in operating
        losses was attributable primarily to decreases in research and development
        expenses of $13,465,000 and manufacturing pre-production costs of $1,340,000,
        offset by an increase in general and administrative expenses of
        $10,310,000.
  *Research
        and development (“R&D”) Expenses* .
        Our
        R&D expenses were $1,186,000 and $14,488,000 for the quarters ending June
        30, 2006 and 2005, respectively. The reduction in R&D expenses of
        $13,302,000 is primarily due to the expensing in fiscal 2005 of (a) $10,500,000
        for the value of equipment charged to research and development expense and
        (b)
        $1,000,000 of costs associated with a research and development contract with
        EnerStruct, Inc., and (c) decreases in salaries and contract labor in the
        2006
        quarter. During the quarter ending March 31, 2006, our battery business
        consolidated its operations, equipment and personnel into the Indiana
        manufacturing and R&D facility, and began accelerating its Li-ion battery
        development activities, and R&D activity began increasing during the June
        quarter. Although R&D expenses were lower during this transition period, we
        expect our battery business to increase its R&D expenditures substantially
        during 2006. Our fuel cell business increased its R&D activity during the
        quarter as it moved its personnel into our West Palm Beach facility and began
        new product development activities. Overall, R&D salaries and benefits
        decreased $448,000, and contract labor decreased $1,350,000 during the quarter
        ending June 30, 2006 compared to the quarter ending June 30, 2005.
  *General
        and administrative expenses (“G&A”).* G&A
        increased $10,310,000 to $12,510,000 in the second quarter ending June 30,
        2006
        compared to $2,200,000 for the quarter ending June 30, 2005. The major
        components of general and administrative expenses are wages and benefits,
        professional fees, rent, stock compensation expense and costs associated
        with
        the Warrant Exercise Agreement. **** G&A
        wages and benefits decreased $26,000 to $974,000 from $1,000,000 in the prior
        year six month period. Stock compensation expense increased $124,000 to $389,000
        due to the January 1, 2006 adoption of SFAS 123R which requires us to record
        the
        fair value of shares issuable under employee stock options as compensation
        cost.
        Professional fees increased $223,000 to $728,000 in the quarter ending June
        30,
        2006 due to higher legal and accounting services necessary to complete the
        restatement of our historical financial statements primarily to comply with
        derivative accounting requirements. General and administrative expenses in
        2005
        included $745,000 of activity exit costs.
 
 General
        and administrative expenses include $9,200,000 for the three months ending
        June
        30, 2006 of expenses related to the modification of the terms of Battery
        Warrants under an agreement (the “Warrant Exercise Agreement”) with Ener1 Group
        entered into on March 30, 2006. Under the Warrant Exercise Agreement, Ener1
        Group agreed (1) to exercise certain warrants issued to it in September 2002
        (the "Battery Warrants") prior to their expiration, and we agreed to transfer
        our entire equity interest in Ener EL Holdings, Inc. (“Ener EL”), to Ener1
        Group, (2) we and Ener1 Group terminated the letter agreement between Ener1
        Group and Ener1 dated October 15, 2004 regarding Ener1 Group’s commitment to
        purchase shares of Ener1 Series B Preferred Stock and warrants to purchase
        our
        stock (the "Series B Preferred Stock Put"), (3) we and Ener1 Group each agreed
        to release the other company from outstanding obligations with respect to
        intercompany services provided by each company to the other as of March 30,
        2005, and (4) we agreed that after Ener1 Group exercises additional warrants
        to
        purchase 24,500,000 shares of Ener1 common stock, we shall issue to Ener1
        Group
        a new immediately exercisable, ten-year warrant to purchase 20,000,000 shares
        of
        our common stock at an exercise price of $0.50 per share. On June 30, 2006,
        Ener1 Group completed the exercise of the Battery Warrants, and we expensed
        the
        fair value of the new warrant issued to Ener1 Group to purchase up to 20,000,000
        shares of our common stock, $9,200,000, as a cost of modification of the
        terms
        of the Battery Warrants.
  25





***Six
      Months Ending June 30, 2006***





*Net
      income* .
      We
      reported a net loss of $31,538,000 for the six months ended June 30, 2006,
      a
      decrease of $80,340,000 when compared to net income of $48,802,000 for the
      six
      months ended June 30, 2005. The decrease is due primarily to: 1) increased
      general and administrative expenses of $11,454,000 due primarily to $10,527,000
      of costs associated with the modification of the terms of certain warrants
      issued to Ener1 Group in exchange for Ener1 Group's agreement to exercise the
      warrants during the quarter, and 2) decreased derivative gains and losses of
      $78,474,000 which resulted primarily from declines in the price of the Company’s
      common stock, partially offset by decreased research and development expense
      of
      approximately $14,289,000 due primarily to the expensing in fiscal 2005 of
      (a)
      $10,500,000 for the value of equipment charged to research and development
      expense and (b) $1,000,000 of costs associated with a research and development
      contract with EnerStruct, Inc.





*Losses
      from operations* .
      We
      reported losses from operations of $18,746,000 for the six months ended June
      30,
      2006, a decrease of $5,158,000 when compared to losses from operations of
      $23,904,000 for the six months ended June 30, 2005. The decrease in operating
      losses was attributable primarily to decreases in research and development
      expenses of $14,289,000 and manufacturing pre-production costs of $1,340,000,
      partially offset by an increase in general and administrative expenses of
      $11,454,000.




*Research
      and development Expenses (“R&D”)* .
      Our
      R&D expenses were $2,105,000 and $16,394,000 for the six months ending June
      30, 2006 and 2005, respectively. The reduction in R&D expenses of
      $14,289,000 is primarily due to due to (a) the expensing in fiscal 2005 of
      $10,500,000 for the value of equipment charged to research and development
      expense and $1,000,000 of costs associated with a research and development
      contract with EnerStruct, Inc. and (b) decreases in salaries, rent, and contract
      labor. Overall, R&D salaries and benefits decreased $813,000, rent decreased
      $332,000, and contract labor decreased $1,567,000 during the six months. The
      rent decrease was due to a rent credit of $313,000 resulting from the
      termination of leasehold improvement obligations on our Indiana
      facility.




*General
      and administrative expenses (“G&A”).* G&A
      increased $11,454,000 to $16,467,000 in the six months ending June 30, 2006
      compared to $5,015,000 for the six months ending June 30, 2005. The major
      components of general and administrative expenses are wages and benefits,
      professional fees, rent, stock compensation expense and costs associated with
      the Warrant Exercise Agreement described below. **** G&A
      wages and benefits decreased $253,000 to $1,957,000 from $2,209,000 in the
      prior
      year six month period primarily due to lower executive salaries. Stock
      compensation expense increased $245,000 to $775,000 due to the January 1, 2006
      adoption of SFAS 123(R). Professional fees increased $424,000 to $1,536,000
      in
      the six months ending June 30, 2006 due primarily to higher legal and accounting
      services necessary to complete the restatement of the prior year financial
      statements primarily to comply with derivative accounting requirements. General
      and administrative expenses in 2005 included $745,000 of activity exit costs.





In
      accordance with the Warrant Exercise Agreement, during the six months ending
      June 30, 2006, we expensed as a cost of modification of the terms of the Battery
      Warrant (1) $228,000 of intercompany receivables from Ener1 Group in order
      to
      release Ener1 Group from outstanding obligations to Ener1 for intercompany
      services and payments provided to Ener1 Group as of March 30, 2006, (2) $115,000
      in connection with the transfer of Ener1’s entire equity interest in Ener EL to
      Ener1 Group which was recorded at fair value which approximated the remaining
      book value, (3) $584,000 representing the fair value of the Series B Preferred
      Put which was terminated, and (4) $9,200,000 for the fair value of the warrants
      issued to Ener1 Group to purchase up to 20,000,000 shares of our common
      stock.




*Provision
      for income taxes.* The
      effective tax rate in 2005 and 2006 was zero percent. The gain on derivative
      liability is not considered income for federal income tax purposes. As a result,
      we reported a net operating loss (“NOL”) for tax purposes, and the NOL was
      entirely offset by an increase in our deferred tax asset valuation
      allowance.





*Interest
      expense and Registration Delay Payments.* Interest
      expense increased $343,000 to $3,162,000 for the three months ended June 30,
      2006 compared to $2,819,000 in the quarter ended June 30, 2005. Interest expense
      increased $1,255,000 to $6,005,000 for the six months ended June 30, 2006
      compared to $4,750,000 for the six months ended June 30, 2005. Interest expense
      for the six month period increased due to the inclusion of a full six months
      of
      interest on the 2005 Debentures, and increase in the interest rate to 15% on
      the
      2005 Debentures and an increase in the interest rate to 15% on the 2004
      Debentures. We accrued $647,000 and $1,518,000 of registration delay payment
      obligations in the three and six months ending June 30, 2006; the payments
      are
      accruing under our registration rights agreements with the purchasers of the
      2004 Debentures, which accrued through January 20, 2006 when they ceased
      accruing, and the 2005 Debentures, which are continuing to accrue due to the
      unavailability of a registration statement for resale of the common stock
      underlying the 2004 and 2005 Debentures.


26





*Minority
      Interest.* Minority
      interest income or loss decreased $3,239,000 and $4,009,000 for the three and
      six months ending June 30, 2006 compared to the prior year periods. The minority
      interest balance sheet amount was reduced to zero as of September 2005 as a
      result of the minority interest in EnerDel’s cumulative losses, and no
      additional minority interest income or loss will be recorded until the minority
      interest account returns to a positive balance. Minority interest in fiscal
      2006
      represents 100% of the dividends payable on the Series A Preferred Stock due
      to
      Delphi.





*Manufacturing
      Pre-production Costs.* Beginning in June 2004, we began preparing our battery manufacturing plant
      in
      Fort Lauderdale to begin production, in addition to continuing our
      battery-related research and development activities. Manufacturing
      pre-production cost for the three and six months ended June 30, 2005 were
      $1,340,000 and $2,132,000, respectively. These expenses were incurred for
      implementing new manufacturing infrastructure, including new personnel,
      policies, and procedures. We ceased these activities and did not incur any
      similar expense in the quarter ended June 30, 2006.





*Gain
      or loss on derivative liability.* Our gain
      or loss on derivative liability decreased $58,434,000 and $78,474,000 for the
      three months and six months ending June 30, 2006 compared to the prior year
      periods. The gains in fiscal 2005 resulted from a corresponding decrease in
      the
      reported value of derivative liabilities resulting primarily from decreases
      in
      the market value of our common stock at June 30, 2005.





Liquidity
      and Capital Resources





We
      do not
      presently have sufficient funds to execute our business plans, and need to
      raise
      $30,000,000 to $40,000,000 in additional capital to conduct our planned
      operations during 2006 and 2007, including planned capital expenditures for
      pilot production equipment and facilities upgrades at EnerDel and funding of
      continuing R&D expenses. We intend to raise this capital through a
      combination of funds from government sources, including research and development
      grants and public financing such as revenue bonds, and equity or debt financing
      from strategic or financial investors. We also need additional short term
      working capital to fund our operations through September 30, 2006, at which
      time
      we intend to seek to raise the additional financing described above. If
      additional financing is not obtained, such a condition, among others, will
      give
      rise to substantial doubt about our ability to continue as a going concern
      for a
      reasonable period of time.





We
      are
      required under the terms of the 2004 and 2005 Debentures to register the resale
      of the common stock underlying the debentures and associated warrants. These
      registration statements have not been available for use since November 21,
      2004.
      As a result of the restatement of our financial statements for 2004, 2005 and
      2006 and the amendment of certain of our prior filings with the SEC containing
      such financial information, we have not yet filed post-effective amendments
      to
      these registration statements with updated financial statements. Under the
      terms
      of the registration agreements for the 2004 Debentures and 2005 Debentures,
      we
      have incurred $2,173,000 as of June 30, 2006 of registration delay payment
      requirements due to the debenture holders.





On
      August
      9, 2006, we entered into a Forbearance Agreement with Satellite Asset
      Management, L.P. ("Satellite"), a holder of our 2004 Debentures and 2005
      Debentures. Satellite had delivered a letter dated August 7, 2006, to us
      pursuant to Section 6(d)(ii) of the 2004 Debentures and Section 6(e)(ii) of
      the
      2005 Debentures providing notice of a default under the 2004 and 2005 Debentures
      as a result of our failure to make certain payments to Satellite totaling
      $1,549,750 as of July 31, 2006, required under the terms of the Registration
      Rights Agreements relating to the Debentures. Under the Forbearance Agreement,
      Satellite rescinded this notice of default and agreed to forbear from any action
      for the "Forbearance Period" (as defined below) arising from our failure to
      make
      payments due to Satellite under the terms of the Registration Rights Agreements
      relating to the 2004 and 2005 Debentures.





The
      "Forbearance Period" will remain in effect until November 1, 2006, unless a
      "Termination Event" occurs prior to November 1, 2006. A "Termination Event"
      includes, among other things, our failure to comply with the Interest Payment
      Deposit Agreement, the occurrence of certain bankruptcy-related events, our
      failure to become current in our reporting obligations under the Securities
      Exchange Act of 1933, as amended, by September 1, 2006 or the inaccuracy of
      any
      representation made by us in the Forbearance Agreement or the 2004 and 2005
      Debentures.




At
      June
      30, 2006, we had a working capital deficit of $15,861,000 primarily due to
      aggregate derivative liabilities of $10,765,000 and accounts payable and accrued
      expenses of $6,154,000. Accounts payable increased due to delayed payments
      to
      vendors and accrued expenses increased due to the registration delay penalties
      accruing since November 2005. Our working capital deficit excluding the
      derivative liability was $5,096,000. Our cash at June 30, 2006 was $873,000
      of
      which $224,000 is unavailable for corporate use because it remains as collateral
      for the letter of credit issued in favor of the landlord for the New York City
      office space now occupied by Ener1 Group. During the six months ending June
      30,
      2006, we used $8,707,000 of cash in operations which was funded through
      financing activities of $8,137,000 and beginning cash on hand of
      $2,306,000.





During
      the six months ended June 30, 2006, our working capital provided by financing
      sources was $8,137,000 consisting primarily of the proceeds of $5,520,000 from
      the exercise by Ener1 Group of the Battery Warrants to purchase our common
      stock
      and net proceeds from issuance of a convertible note due to Ener1 Group in
      the
      amount of $2,629,000. During the six months ending June 30, 2006, Ener1 Group
      exercised battery Warrants to purchase an aggregate 69,000,000 shares of our
      common stock at an exercise price of $.08 per share. The expiration date of
      the
      exercised warrants was 2012.


27





If
      additional financing is not obtained, such a condition, among others, will
      give
      rise to substantial doubt about our ability to continue as a going concern for a
      reasonable period of time.




***Critical
      Accounting Policies***  ****




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





*Accounting
      for Derivative Instruments*




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





In
      September 2000, the Emerging Issues Task Force ("EITF") issued EITF 00-19,
      "Accounting for Derivative Financial Instruments Indexed to and Potentially
      Settled in, a Company's Own Stock," ("EITF 00-19") which requires freestanding
      contracts that are settled in a company's own stock, including common stock
      warrants, to be designated as an equity instrument, asset or a liability. Under
      the provisions of EITF 00-19, a contract designated as an asset or a liability
      must be carried at fair value on a company’s balance sheet, with any changes in
      fair value recorded in the company’s results of operations. A contract
      designated as an equity instrument must be included within equity, and no fair
      value adjustments are required. In accordance with SFAS No. 133 and EITF 00-19,
      we determined that several of the outstanding warrants to purchase our common
      stock and the embedded conversion feature and certain other features of several
      of our financial instruments should be separately accounted for as assets or
      liabilities. Our financial statements for the years ended December 31, 2004
      and
      2005 and six months ended June 30, 2005 and 2006 reflect the fair value of
      these
      warrants and the conversion and other embedded derivatives features on our
      balance sheet and the unrealized changes in the values of these derivatives
      in
      our consolidated statement of operations as “Gain (loss) on derivative
      liabilities.”




Prior
      to
      their exercise, we determined that the Battery Warrants were a derivative
      liability under EITF 00-19 because share settlement of these warrants was not
      within the control of the company as a result of the facts that: (1) the holder
      of the Battery Warrants was the controlling shareholder of the Company, and
      (2)
      the Battery Warrants contained dilution protection features, with no limit
      or
      cap on the number of shares potentially issuable under the Battery Warrants.
      Therefore, we could not conclude we had sufficient authorized unissued shares
      to
      issue the number of shares required under the other warrants subsequently issued
      by the Company as described above. As a result, we determined that these
      warrants would also be treated as derivative liabilities because we could not
      conclude that we had sufficient authorized and unissued shares to settle the
      potential share issuances required under these warrants as long as the Battery
      Warrants were outstanding. All of the Battery Warrants were exercised by June
      30, 2006 and, accordingly, the derivative liabilities of the Battery Warrants
      were eliminated as well as the derivative liabilities associated with certain
      other because once the Battery Warrants were no longer outstanding, we were
      able
      to determine that we had sufficient authorized unissued shares to issue the
      number of shares required.





We
      have
      evaluated our provisions of the registration rights agreements issued in
      connection with our 2004 Debentures which require us to make registration delay
      payments in combination with the respective financial instruments involved.
      The
      EITF recently deliberated the impact of liquidated damages clauses in
      registration rights agreements and the effect on accounting and classification
      of instruments subject to the scope of EITF 00-19 in EITF 05-04 *The
      Effect of a Liquidated Damages Clause on a Freestanding Financial Instrument
      Subject to Issue No. 00-19.* The EITF
      has not reached a consensus on this issue and has deferred deliberation until
      the FASB addresses certain questions which could impact a conclusion on this
      issue. Specifically, EITF 05-04 presents alternative views on whether the
      liquidated damages provisions in registration rights agreements should be
      combined with or treated separately from the associated financial instrument.
      As
      discussed above, we view the registration rights agreement and the financial
      instrument as one combined freestanding instrument under View A of EITF 05-04.
      If the EITF were to adopt the view that the registration rights agreement should
      be viewed as a separate instrument from the financial instrument, we may have
      to
      account for additional derivatives or liabilities.


28





The
      2004
      Debentures and 2005 Debentures both contain more than one embedded derivative
      feature which SFAS 133 requires be accounted for as derivatives. The various
      embedded derivative features of each series of debentures have been bundled
      together as a single, compound embedded derivative instrument that has been
      bifurcated from the debenture in accordance with Derivatives Implementation
      Group Issue No. B15. The derivative features that have been bundled together
      in
      the compound embedded derivative include: (1) the conversion feature of the
      debentures, (2) the holder's right to force us to redeem the debentures after
      an
      event of default, (3) the holder's right to force us to redeem the debentures
      after a change in control, (4) our right to redeem the debentures after 3 years,
      (5) the requirement to pay an increased interest rate if we fail to achieve
      certain milestones, and (6) our right to convert the debentures into common
      stock if certain conditions are satisfied. The value of the compound embedded
      derivative liability was bifurcated from the debenture and recorded as a
      derivative liability, which results in a reduction of the initial carrying
      amount (as unamortized discount) of the related debenture at inception. The
      unamortized discount is being amortized to interest expense using the effective
      interest method over the life of the debenture.





We
      also
      determined that an agreement entered into in October 2004 under which Ener1
      Group agreed to purchase at our request up to $3,000,000 of the Series B
      Preferred Stock plus warrants was a financial instrument (the "Series B
      Preferred Stock Put") which we are required to value as a derivative asset
      and
      mark to market at each balance sheet date. . The Series B Preferred Stock Put
      was terminated on March 30, 2006, and, accordingly, are no longer subject to
      SFAS 133 and EITF 00-19.





For
      instruments with a single derivative, such as our warrants and the conversion
      feature derivative of preferred stock, we use the Black Scholes pricing model
      for determining the derivatives' fair values. For instruments with compound
      embedded derivatives, such as the 2004 Debentures and 2005 Debentures, we use
      a
      lattice valuation model to value the derivatives. We believe the application
      of
      the Black Scholes model provides the most reliable valuation of single
      derivatives, whereas the lattice model provides the ability to value compound
      embedded derivatives.




*Lattice
      Valuation Model*





We
      valued
      the compound embedded derivatives in the 2004 Debentures and 2005 Debentures
      using a lattice model, with the assistance of a valuation consultant. The
      lattice model values the compound embedded derivatives based on a probability
      weighted discounted cash flow model. This model is based on future projections
      of the five primary alternatives possible for settlement of the features
      included within the compound embedded derivative, including: (1) payments are
      made in cash, (2) payments are made in stock, (3) the holder exercises its
      right
      to convert the debentures, (4) Ener1 exercises its right to convert the
      debentures and (5) Ener1 defaults on the debentures. We use the model
      to analyze (a) the underlying economic factors that influence which of these
      events will occur, (b) when they are likely to occur, and (c) the common stock
      price and specific terms of the debentures such as interest rate and conversion
      price that will be in effect when they occur. Based on the analysis of these
      factors, We use the model to develop a set of potential scenarios.
      Probabilities of each scenario occurring during the remaining term of the
      debentures are determined based on management's projections. These probabilities
      are used to create a cash flow projection over the term of the debentures and
      determine the probability that the projected cash flow would be achieved. A
      discounted weighted average cash flow for each scenario is then calculated
      and
      compared to the discounted cash flow of the debentures without the compound
      embedded derivative in order to determine a value for the compound embedded
      derivative.




The
      primary determinants of the economic value of a compound embedded derivative
      under the lattice model are (1) the price of our common stock, (2) the
      volatility of our common stock price, (3) the likelihood that we will be
      required to pay registration delay payments, (4) the likelihood that an event
      of
      default or a change in control will occur, (5) the likelihood that the
      conversion price will be adjusted, (6) the likelihood that the our common stock
      will be listed on an exchange, (7) the likelihood that we will be able to obtain
      alternative financing and (8) the likelihood that we would be able to force
      conversion of the debentures.


29





The
      fair
      value of the compound derivative embedded in the 2004 Debentures as of June
      30,
      2006 and 2005 determined using the lattice valuation model were based on the
      following management assumptions:





**2004
                Debentures*****Assumptions:***
            
            **at
                June 30, 2006**
            
            **at
                June 30, 2005**The
                price of Ener1's common stock would increase at a rate commensurate
                with
                the cost of equity, with a volatility of:
            
            
            120
            %
            
            100
            %Percent
                likelihood that Ener1 would not be in default of its obligations
                under the
                resale registration agreement relating to the 2004
                Debentures:
            
            
            95
            %
            
            95
            %Percent
                likelihood that an event of default or a fundamental change would
                occur,
                increasing over time:
            
            
            5
            %
            
            5
            %Reset
                events projected to occur with a weighted average adjustment factor
                of
                :
            
            
            0.989
            
            
            0.989Percent
                likelihood that Ener1 would force the conversion of the 2004 Debentures
                if
                the stock price reached $1.75:
            
            
            95
            %
            
            95
            %The
                holders of the 2004 Debentures would convert the 2004 Debentures
                if the
                resale registration statement was effective, Ener1 was not in default
                under the 2004 Debentures, and Ener1's common stock price
                was:
            
            $
            3.50
            
            $
            3.50Ener1
                would redeem the 2004 Debentures following the third anniversary
                of the
                issue date if Ener1's common stock price reached:
            
            $
            1.50
            
            $
            1.50Percent
                likelihood that Ener1 would be able to obtain alternative financing
                that
                would enable it to redeem the 2004 Debentures, increasing 2.5% per
                quarter
                to a maximum of 25%:
            
            
            0
            %
            
            0
            %Percent
                likelihood that Ener1's common stock would be listed on an exchange
                increasing 10% quarterly to a maximum of 90%:
            
            
            0
            %
            
            0
            %




Based
      on
      these management assumptions, the fair value of these embedded derivatives
      as of
      June 30, 2006 and 2005 were calculated by management to be $5,029,000 and
      $6,431,000, respectively.


30





The
      fair
      value of the compound derivative embedded in the 2005 Debentures as of June
      30,
      2006 and 2005 determined using the lattice valuation model were based on the
      following management assumptions:


**2005
                  Debentures*****Assumptions:***
              
              **at
                  June 30, 2006**
              
              **at
                  June 30, 2005**The
                  price of Ener1's common stock would increase at a rate commensurate
                  with
                  the cost of equity, with a volatility of:
              
              
              120
              %
              
              100
              %In
                  2006, number of months that Ener1 would remain in default of the
                  resale
                  registration agreement relating to the 2005 Debentures, and in
                  2006 and
                  2005 the percent likelihood that Ener1 would not be in default
                  of its
                  obligations under that agreement:
              
              
              2
                  months/ 95
              %
              
              95
              %Percent
                  likelihood that an event of default or a fundamental change would
                  occur:
              
              
              5
              %
              
              5
              %Reset
                  events projected to occur with a weighted average adjustment factor
                  of:
              
              
              0.973
              
              
              0.973Percent
                  likelihood that Ener1 would force the conversion of the 2005 Debentures
                  if
                  the Ener1 common stock price reached $1.50:
              
              
              95
              %
              
              95
              %The
                  holders of the 2005 Debentures would convert the 2005 Debentures
                  if the
                  resale registration statement was effective, Ener1 was not in default
                  under the 2004 Debentures and Ener1's common stock price
                  reached:
              
              $
              1.75
              
              $
              1.75Ener1
                  would redeem the 2005 Debentures following the third anniversary
                  of the
                  issue date if Ener1's common stock price reached:
              
              $
              1.25
              
              $
              1.25Percent
                  likelihood that Ener1 would be able to obtain alternative financing
                  that
                  would enable it to redeem the 2005 Debentures, increasing 2.5%
                  per quarter
                  to a maximum likelihood of 25%:
              
              
              0
              %
              
              0
              %Percent
                  likelihood that Ener1's common stock would be listed on an exchange
                  and
                  meet the volume requirements set forth in the 2005 Debentures,
                  increasing
                  10% quarterly to a maximum likelihood of 90%:
              
              
              0
              %
              
              0
              %





Based
      on
      these management assumptions, the fair value of the compound embedded derivative
      in the 2005 Debentures as of June 30, 2006 and 2005 were calculated by
      management to be $3,204,000 and $4,087,000, respectively.





All
      of
      the above assumptions are reviewed quarterly and are subject to change based
      primarily on management’s assessment of the probability of the events described
      occurring. Accordingly, changes to these assessments could material affect
      the
      valuation.




*Black
      Scholes Valuation Model*




Each
      of
      these factors is reassessed at each balance sheet date, and the value of each
      derivative liability or asset is recalculated. The projections used, and
      managements’ assessment of the likelihood of different events, can greatly
      affect the value of our derivatives assets and liabilities, which can
      significantly affect our financial statements.




We valued
      the asset value of our Series B Preferred Stock Put using the Black Scholes
      pricing model, with the assistance of a valuation consultant. The model uses
      a
      number of inputs including the value of the warrants associated with the Series
      B Preferred Stock (the "Series B Preferred Stock Warrants") and the cost of
      alternative financing, in order to compute the value of the put feature. The
      assumptions used in the Black Scholes valuation model were: a risk free interest
      rate of 4.03%; the current stock price at date of issuance of $0.65 per share;
      the exercise price of the warrants of $1.25 and $1.50; a term of ten years;
      volatility of 450%; and dividend yield of 0.0%.


31





We
      used
      the Black Scholes pricing model to determine the fair values of our warrants
      and
      the conversion feature of our preferred stock. The model uses market sourced
      inputs such as interest rates, stock prices, and option volatilities, the
      selection of which requires management’s judgment, and which may impact net
      income or loss. In particular, we use volatility rates based upon the closing
      stock price of our common stock since January 2002, when our company
      underwent a change in control. We determined that share prices prior to this
      period do not reflect the ongoing business valuation of our current operations.
      We use a risk free interest rate which is equal to the U. S. Treasury bill
      rate
      for securities with a maturity that approximates the estimated expected life
      of
      a derivative or security. We use the closing market price of our common stock
      on
      the date of issuance of a derivative or at the end of a quarter when a
      derivative is valued at fair value. The volatility factor used in the Black
      Scholes pricing model has a significant effect on the resulting valuation of
      the
      derivative liabilities on our balance sheet. The volatility of our stock price
      has ranged from 296% to 135% during the years ending December 31, 2003, 2004
      and
      2005. Our volatility rate will likely change in the future. Our stock price
      will
      also change in the future. To the extent that our stock price increases, our
      derivative liability will also increase, absent any change in volatility rates.
      To the extent that our volatility decreases in the future, the value of the
      derivative liability will also decrease, absent any change in our stock price.
      The following table shows the volatility, risk free rate and market price used
      in the calculation of the Black Scholes call value for each derivative at
      issuance date and at the end of each year.





**Issue
                Date**
            
            **Volatility**
            
            **Risk
                Free Interest Rate**
            
            
            **Market
                Price**
            
            **Term
                in Years**At
                Issuance date for:2004
                Debenture Warrants
            
            
            1/21/2004
            
            
            296
            %
            
            3.5
            %
            
            $
            1.65
            
            
            102005
                Debenture Warrants
            
            
            3/11/2005
            
            
            135
            %
            
            3.5
            %
            
            $
            0.75
            
            
            5EnerDel
                Series A Preferred Stock
            
            
            10/20/2004
            
            
            207
            %
            
            1.8
            %
            
            $
            0.66
            
            
            3
                mos.Delphi
                Warrants
            
            
            10/20/2004
            
            
            207
            %
            
            1.8
            %
            
            $
            0.66
            
            
            7Series
                B Preferred Stock Warrants
            
            
            10/15/2004
            
            
            207
            %
            
            1.8
            %
            
            $
            0.65
            
            
            10Series
                B Preferred Stock Put
            
            
            10/15/2004
            
            
            450
            %
            
            4.0
            %
            
            $
            0.65
            
            
            10Battery
                Warrants
            
            
            9/6/2002
            
            
            201
            %
            
            1.7
            %
            
            $
            0.05
            
            
            10Debt
                Exchange Warrants
            
            
            11/14/2003
            
            
            296
            %
            
            1.0
            %
            
            $
            0.98
            
            
            10Prices
                and average rates at:December
                31, 2003
            
            
            
            
            
            296
            %
            
            4.3
            %
            
            $
            1.40December
                31, 2004
            
            
            
            
            
            155
            %
            
            4.1
            %
            
            $
            0.85December
                31, 2005
            
            
            
            
            
            145
            %
            
            4.1
            %
            
            $
            0.39June
                30, 2006
            
            
            
            
            
            141
            %
            
            5.1
            %
            
            $
            0.47





*Accounting
      for Share-based Payments*





The
      preparation of financial statements and related disclosures in conformity with
      accounting principles generally Stock-Based Compensation. Statement of Financial
      Accounting Standards (“SFAS”) No. 123R, “Accounting for Stock-Based
      Compensation,” requires companies to record employee stock option compensation
      at fair value. We adopted SFAS 123R during the quarter ending March 31,
      2006.


32





Item
      3.  Controls and Procedures





As
      of
      June 30, 2006, we carried out an evaluation, under the supervision and with
      the
      participation of our management, including the individuals serving as our Chief
      Executive Officer and our Chief Financial Officer, of the effectiveness of
      the
      design and operation of our disclosure controls and procedures.  During the
      course of this evaluation, we identified deficiencies in our internal controls
      and inadequacies in our disclosure controls relating to our calculation of
      diluted earnings or loss per share and our accounting for redeemable preferred
      stock.  As a result of the identification of these deficiencies, on August
      9, 2006, we amended our Quarterly Report on Form 10-QSB for the period ended
      June 30, 2005 to restate our financial statements for the quarter and six-month
      period ended June 30, 2005 in order to reflect the financial effect of
      derivative gains on the calculation of diluted earnings or loss per share and
      to
      show the redeemable preferred stock as temporary equity.  We also
      identified inadequacies in our disclosure controls relating to financial
      reporting by EnerDel, Inc. to executive officers of its parent company, Ener1,
      Inc. As a result of these inadequacies in our disclosure controls and
      deficiencies in our internal controls, our Chief Executive Officer and Chief
      Financial Officer concluded that our disclosure controls and procedures were
      not
      effective as of June 30, 2006 to ensure that information required to be
      disclosed by us in reports that we file or submit under the Exchange Act is
      recorded, processed, summarized and reported within the time periods specified
      in Securities and Exchange Commission rules and forms.





We
      are in
      the process of improving our internal controls and disclosure controls in an
      effort to remediate these deficiencies and inadequacies through the following
      efforts: 1) implementing better controls and procedures over the
      calculation of diluted earnings or loss per share and our accounting for
      preferred stock, 2) improving supervision and training of our accounting staff
      and 3) implementing procedures to require more timely disclosure of EnerDel's
      activities to Ener1, Inc. In addition, Ener1, Inc. and EnerDel are conducting
      a
      search for a qualified corporate controller at EnerDel who would have dual
      reporting responsibility to EnerDel and Ener1, Inc. We are continuing our
      efforts to improve and strengthen our control processes and procedures to fully
      remedy these deficiencies. Our management and directors will continue to work
      with our auditors and other outside advisors to ensure that our controls and
      procedures are adequate and effective.


33


PART
      II.  OTHER INFORMATION





Item
      1.  Legal Proceedings





We
      receive communications from time to time alleging various claims against us
      and
      our subsidiaries. These claims include, but are not limited to, allegations
      that
      certain of our products infringe the patent rights of other third parties.
      We
      cannot predict the outcome of any such claims or the effect of any such claims
      on our operating results, financial condition, or cash flows.





As
      previously reported in the Company’s Form 10-KSB/A and Form 10-QSB/A for the
      period ended March 31, 2006, both filed August 9, 2006, on February 10, 2006,
      Kevin P. Fitzgerald, Ener1’s former Chairman and Chief Executive Officer, filed
      a complaint against the Company in the Circuit Court for Broward County,
      Florida for breach of contract and specific performance based
      on an alleged breach of his employment agreement dated September 8,
      2003.  Mr. Fitzgerald was dismissed as Ener1’s Chairman and Chief Executive
      Officer on January 9, 2006.





The
      court
      has granted summary final judgment in favor of Ener1 on the claims in Count
      2 of
      Mr. Fitzgerald's complaint.  The claims in Count 2 included a request for
      relief in the form of an injunction extending the then-expired time period
      for
      Mr. Fitzgerald to exercise his rights under his employment contract to require
      Ener1 to pay him an amount equal to the cash value of his vested stock
      options.  Count 2 also sought relief in the form of an injunction
      requiring Ener1 to continue to vest options in favor of Mr. Fitzgerald during
      the 45 days following his termination.  Mr. Fitzgerald had claimed that he
      was entitled to 45 days prior notice of a decision to terminate his
      employment and therefore his termination did not become effective and his
      options continued to vest for 45 days after January 9, 2006.  Count 1 of
      Mr. Fitzgerald's complaint, which alleges claims for breach of contract for
      failure to pay two years of severance, is still pending.  The
      Company intends to vigorously defend against the charges made in this
      litigation.





Item
      2.  Unregistered Sales of Equity Securities and Use of
      Proceeds





On
      April
      20, May 20 and May 22, 2006, we issued to Marston Webb International, Inc.
      19,513, 21,052 and 10,526 shares, respectively, of our unregistered common
      stock
      as compensation for public relations services.





On
      April
      20, 2006, we issued to Ener1 Group upon its exercise of warrants, 1,250,000
      shares of our common stock for an aggregate purchase price of
      $100,000.





On
      April
      26, 2006, we issued to Ener1 Group upon its exercise of warrants, 1,000,000
      shares of our common stock for an aggregate purchase price of
      $80,000.





On
      May 1,
      2006, we issued to Ener1 Group upon its exercise of warrants, 4,437,500 shares
      of our common stock for an aggregate purchase price of $355,000.





On
      May
      12, 2006, we issued to Ener1 Group upon its exercise of warrants, 625,000 shares
      of our common stock for an aggregate purchase price of $50,000.





On
      May
      15, 2006, we issued to Ener1 Group, upon its exercise of warrants, 250,000
      shares of our common stock for an aggregate purchase price of
      $20,000.




On
      May
      17, 2006, we issued to Ener1 Group, upon its exercise of warrants, 112,500
      shares of our common stock for an aggregate purchase price of
      $9,000.





On
      May
      18, 2006, we issued to Ener1 Group, upon its exercise of warrants, 2,500,000
      shares of our common stock for an aggregate purchase price of
      $200,000.





On
      May
      22, 2006, we issued to Ener1 Group, upon its exercise of warrants, 2,187,500
      shares of our common stock for an aggregate purchase price of
      $175,000.





On
      May
      23, 2006, we issued to Ener1 Group, upon its exercise of warrants, 1,687,500
      shares of our common stock for an aggregate purchase price of
      $135,000.


34





On
      May
      26, 2006, we issued to Ener1 Group, upon the exercise of warrants, 2,875,000
      shares of our common stock for an aggregate purchase price of
      $230,000.





On
      June
      9, 2006, we issued to Ener1 Group, upon its exercise of warrants, 4,625,000
      shares of our common stock, for an aggregate purchase price of
      $370,000.





On
      June
      16, 2006, we issued to Ener1 Group, upon its exercise of warrants, 250,000
      shares of our common stock for an aggregate purchase price of
      $20,000.





On
      June
      23, 2006, we issued to Ener1 Group, upon its exercise of warrants, 1,187,500
      shares of our common stock for an aggregate purchase price of
      $95,000.





On
      June
      29, 2006, we issued to Ener1 Group, upon its exercise of warrants, 1,512,000
      shares of our common stock for an aggregate purchase price of
      $121,000.





On
      June
      30, 2006, in accordance with the terms of the Warrant Exercise Agreement, we
      issued to Ener1 Group a warrant to purchase up to 20,000,000 shares of our
      common stock at an exercise price of $0.50 per share.





On
      June
      30, 2006, in accordance with the terms of a convertible note purchased by Ener1
      Group, we issued to Ener1 Group a warrant to purchase up to 9,000,000 shares
      of
      our common stock at an exercise price of $0.50 per share.





All
      of
      the security issuances described above were exempt from registration under
      Rule
      506 of Regulation D and under Section 4(2) of the Securities Act of 1933, as
      sales not involving a public offering.


35




Item
      6.  Exhibits




3.1
            
            Amended
                and Restated Articles of Incorporation of the Registrant, dated February
                12, 1993, incorporated by reference to Exhibit 3(i) to the Registrant’s
                Quarterly Report on Form 10-Q for the quarter ended September 30,
                2000.3.2
            
            Amendment
                to Amended and Restated Articles of Incorporation, dated March 11,
                2002,
                incorporated by reference to Exhibit 3.2 of the Registrant’s Annual Report
                on Form 10-K for the year ended December 31, 2001.3.3
            
            Amendment
                to Amended and Restated Articles of Incorporation, dated October
                21, 2002,
                incorporated by reference to Exhibit 3.1 of the Registrant’s current
                report on Form 8-K dated October 28, 2002.3.4
            
            Certificate
                of Designations of Series B Preferred Stock of Ener1, Inc. dated
                October
                15, 2004, incorporated by reference to Exhibit 3.6 to the Registrant’s
                Annual Report on Form 10-KSB for the year ended December 31, 2004.
                .3.5
            
            Amendment
                to Amended and Restated Articles of Incorporation, dated December
                2004,
                incorporated by reference to Exhibit A of the Registrant’s Schedule 14C
                dated December 6, 2004.3.6
            
            Bylaws
                of the Registrant, incorporated by reference to Exhibit 3.4 of the
                Registrant’s Registration Statement (Commission File No. 333-112837) filed
                with the Commission on February 13, 2004.3.7
            
            Amendment
                to Bylaws of the Registrant, dated January 5, 2005, incorporated
                by
                reference to Exhibit 3.2 of the Registrant’s current report on Form 8-K
                dated January 12, 2005.4.1
            
            Form
                of 5% Senior Secured Convertible Debenture incorporated by reference
                to
                Exhibit 4.1 to our Current Report on Form 8-K dated January 21,
                2004.4.2
            
            Form
                of Warrant to Purchase Common Stock incorporated by reference to
                Exhibit
                4.2 to our Current Report on Form 8-K dated January 21,
                2004.4.3
            
            Registration
                Rights Agreement, dated as of January 16, 2004, by and among the
                Registrant the entities whose names appear on the signature pages
                thereof
                incorporated by reference to Exhibit 4.3 to the Registrant’s Current
                Report on Form 8-K dated January 21, 2004.4.4
            
            Form
                of 7.5% Senior Secured Convertible Debenture incorporated by reference
                to
                Exhibit 4.1 to the Registrant’s Current Report on Form 8-K dated March 15,
                2005.4.5
            
            Form
                of Warrant to Purchase Common Stock incorporated by reference to
                Exhibit
                4.2 to the Registrant’s Current Report on Form 8-K dated March 15,
                2005.4.6
            
            Registration
                Rights Agreement, dated as of March 14, 2005, by and among the Registrant
                the entities whose names appear on the signature pages thereof
                incorporated by reference to Exhibit 4.3 to the Registrant’s Current
                Report on Form 8-K dated March 15, 2005.4.7
            
            Certificate
                of Designation of Non-Voting, Cumulative and Redeemable Series A
                Preferred
                Stock of EnerDel, Inc., dated October 20, 2004, incorporated by reference
                to Exhibit 4.6 to Amendment No. 1 to Ener1‘s Quarterly Report on Form
                10-QSB/A for the period ending September 30,
                2004.


4.8
            
            Registration
                Rights Agreement by and between Ener1 and Delphi Automotive Systems
                LLC,
                dated October 20, 2004, incorporated by reference to Exhibit 4.5
                to
                Ener1‘s Quarterly Report on Form 10-QSB for the period ending September
                30, 2004.




36




4.9
            
            Form
                of Warrant to Purchase Common Stock of Ener1, dated October 20, 2004
                Issued to Delphi Automotive Systems, LLC, incorporated by reference
                to
                Exhibit 4.4 to Amendment No. 1 to Ener1‘s Quarterly Report on Form
                10-QSB/A for the period ending September 30, 2004.4.10
            
            Form
                of Warrant to Purchase Common Stock of Ener1, dated December 9, 2004
                Issued to Merriman Curhan Ford & Co, incorporated by reference to
                Exhibit 4.10 of the Registrant’s Registration Statement on Form SB-2 filed
                on May 9, 2005 (Commission File No. 333-124745).


4.11
            
            Warrant
                issued to Cofis Compagnie Fiduciaire S.A. dated October 15, 2004
                to
                purchase from Ener1, Inc., 4,166,666 shares of Common Stock of the
                Company
                at a price per share of $1.25, incorporated by reference to Exhibit
                4.4 to
                the Registrant’s Annual Report on Form 10-KSB for the period ending
                December 31, 2004.4.12
            
            Warrant
                issued to Cofis Compagnie Fiduciaire S.A. dated October 15, 2004
                to
                purchase from Ener1, Inc., 4,166,666 shares of Common Stock of the
                Registrant at a price per share of $1.50, incorporated by reference
                to
                Exhibit 4.5 to the Registrant’s Annual Report on Form 10-KSB for the
                period ending December 31, 2004.4.13
            
            Form
                of Security Agreement dated as of March 14, 2005 by and among Ener1,
                Inc.
                and the purchasers of Ener1’s 7.5% Senior Secured Convertible Debentures
                incorporated by reference to Item 10.2 of Registrant’s Current Report on
                Form 8-K dated March 15, 2005.4.14
            
            Form
                of Securities Purchase Agreement, dated as of March 11, 2005 by and
                among
                Ener1, Inc. and the purchasers of Ener1’s 7.5% Senior Secured Convertible
                Debentures incorporated by reference to Item 10.1 of Registrant’s Current
                Report on Form 8-K dated March 15, 20054.15
            
            Form
                of Intercreditor Agreement dated as of March 11, 2004, among Ener1,
                Inc.,
                the purchasers of Ener1‘s 7.5% Senior Secured Convertible Debentures and
                the purchasers of Ener1, Inc.‘s 5% Senior Secured Convertible Debentures
                incorporated by reference to Item 10.3 of Registrant’s Current Report on
                Form 8 K dated March 15, 20054.16
            
            Convertible
                Note issued to Ener1 Group, Inc. dated June 30, 20064.17
            
            Warrant
                issued to Ener1 Group, Inc. dated June 30, 2006 to purchase 9,000,000
                shares of Common Stock of the Registrant4.18
            
            Warrant
                issued to Ener1 Group, Inc. dated June 30, 2006 to purchase 20,000,000
                shares of Common Stock of the Registrant31.1
            
            Certification
                of Principal Executive Officer pursuant to Section 302 of the
                Sarbanes-Oxley Act of 200231.2
            
            Certification
                of Principal Financial Officer pursuant to Section 302 of the
                Sarbanes-Oxley Act of 200232.1
            
            Certification
                of Principal Executive Officer pursuant to 18 U.S.C. Sec. 1350, as
                adopted
                pursuant to Section 906 of the Sarbanes-Oxley Act of
                200232.2
            
            Certification
                of Principal Financial Officer pursuant to 18 U.S.C. Sec. 1350, as
                adopted
                pursuant to Section 906 of the Sarbanes-Oxley Act of
                2002




37




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




**SIGNATURES**




In
      accordance with the requirements of the Securities Exchange Act, the registrant
      has duly caused this Quarterly Report on Form 10-QSB to be signed on its behalf
      by the undersigned thereunto duly authorized.




ENER1,
                INC.Dated:
                August 21, 2006
            
            /s/ Ronald
                StewartRonald
                StewartInterim
                Chief Executive Officer
              (Principal
                Executive Officer)




Dated: August
                21, 2006
            
            /s/ Gerard
                HerlihyGerard
                HerlihyChief
                Financial Officer
              (Principal
                Financial and Accounting Officer)




38