UNITED
      STATES


SECURITIES
      AND EXCHANGE COMMISSION


Washington,
      D.C. 20549





FORM
      10-QSB


AMENDMENT
      No. 1





QUARTERLY
      REPORT UNDER SECTION 13 OR 15(d)


OF
      THE
      SECURITIES EXCHANGE ACT OF 1934





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





Commission
      File Number **0-21138**





**ENER1,
      INC.**


(Exact
      name of registrant as specified in its charter)





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





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




ENER1,
      INC. AND SUBSIDIARIES





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





INDEX


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








2


Explanatory
        Note
 
 
 The
        consolidated financial statements for the three months ended March 31, 2005
        and
        2006 and related disclosures in this Amendment No.1 to Quarterly Report on
        Form
        10-QSB have been restated in accordance with the changes described
        below.
 
 In
            July
            2006, Ener1 concluded that it was necessary to amend this Quarterly Report
            in
            order to restate its financial statements for the periods ended March
            31, 2006
            and March 31, 2005 to (1) reflect the corrected accounting for and valuation
            of
            the compound embedded derivatives in our 2004 Debentures and 2005 Debentures,
            (2) revise the valuation of the initial discount and interest accretion
            on the
            2004 Debentures and 2005 Debentures resulting from the revaluation of
            the
            compound embedded derivatives, (3) record the correct value of
            the warrants issued with the 2004 Debentures, (4) record the value
            of Ener1’s
            right to require
            Ener1 Group to purchase Series B Preferred Stock, (5) correct the reported
            derivative gain on the Battery Warrants and record as paid in capital
            the value
            of the warrants at the date of exercise and (6) reflect
            the Series A Preferred Stock dividends payable to the minority interest
            owner as
            a reduction in minority interest income..
  The
        financial statements and other financial information
        included in this Amendment No. 1 to the March 31, 2006 10-QSB have been restated
        accordingly. Ener1's shareholders should no longer rely on Ener1's previously
        filed financial statements for the three months ended March 31, 2006 and
        2005.
        These matters have been discussed by Ener1’s authorized executive officers with
        the Company’s independent registered public accounting firm.
  In
        order
        to preserve the nature and character of the disclosures set forth in this
        Quarterly Report as originally filed, no attempt has been made in this Amendment
        No. 1 to modify or update the disclosures in the original Quarterly Report
        except that Ener1 has included the foregoing restatements in Part 1, Item
        1,
        Ener1 has made conforming changes to Management's Discussion and Analysis
        of
        Results of Operations and Financial Condition in Part 1, Item 2 to reflect
        these
        restatements and Ener1 has included additional information in its financial
        statements and Management's Discussion and Analysis of Results of Operations
        and
        Financial Condition regarding its derivatives and related accounting
        treatment.


3


ENER1,
      INC. AND SUBSIDIARIES


CONDENSED
      CONSOLIDATED BALANCE SHEET


(Unaudited)


(In
      thousands except share data)




**March
                        31,2006**
                      **Restated**
                
                **December
                        31,**
                      **2005**
                      **Restated****ASSETS**Current
                    assetsCash
                    and equivalents
                
                $
                890
                
                $
                2,306Prepaid
                    expenses and other current assets
                
                
                639
                
                
                189Due
                    from related parties
                
                
                —
                
                
                157Total
                    current assets
                
                
                1,529
                
                
                2,652Property
                    and equipment, net
                
                
                2,996
                
                
                3,042Investment
                    in EnerStruct, Inc.
                
                
                658
                
                
                805Deferred
                      debenture costs, net of amortization of $2,390 and
                      $2,082
                
                
                3,441
                
                
                3,748Other
                
                
                74
                
                
                202Total
                    assets
                
                $
                8,698
                
                $
                10,449**LIABILITIES
                    AND STOCKHOLDERS' DEFICIT**Current
                    liabilitiesCurrent
                    portion of installment loan
                
                $
                25
                
                
                24Accounts
                    payable and accrued expenses
                
                
                4,349
                
                
                3,276Derivative
                    liability
                
                
                28,998
                
                
                54,979Total
                    current liabilities
                
                
                33,372
                
                
                58,279Long-term
                    portion of installment loan
                
                
                60
                
                
                67$19,700
                    convertible debentures, net of discount of $13,095 and
                    $13,970
                
                
                6,605
                
                
                5,730$14,225
                    convertible debentures, net of discount of $9,464 and
                    $10,064
                
                
                4,761
                
                
                4,161Total
                    liabilities
                
                
                44,798
                
                
                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
                
                
                5,563
                
                
                4,967Series
                      B Preferred, $.01 par value, 180,000 shares authorized, 152,500
                      shares
                      issued and outstanding; liquidation preference
                      $15,250
                
                
                13,882
                
                
                13,188Minority
                    interest
                
                
                —
                
                
                —Commitments
                    and contingencies**STOCKHOLDERS'
                    DEFICIT**Common
                    Stock, $.01 par value, 750,000,000 shares authorized 392,104,469
                    and
                    347,455,751 issued and outstanding, respectively
                
                
                3,921
                
                
                3,475Paid
                    in capital
                
                
                91,232
                
                
                72,830Accumulated
                    deficit
                
                
                (150,698
                )
                
                (152,248
                )Total
                    stockholders' deficit
                
                
                (55,545
                )
                
                (75,943
                )Total
                    liabilities and stockholders' deficit
                
                $
                8,698
                
                $
                10,449






See
      notes
      to condensed consolidated financial statements.


4


ENER1,
      INC. AND SUBSIDIARIES


CONDENSED
      CONSOLIDATED STATEMENTS OF OPERATIONS


(Unaudited)


(In
      thousands except share data)




**Three
                        Months Ended**
                      **March
                        31,****2006**
                      **Restated**
                  
                  
                  **2005**
                      **Restated**Net
                      sales
                  
                  $
                  18
                  
                  $
                  21Cost
                      of sales
                  
                  
                  —
                  
                  
                  —Gross
                      profit
                  
                  
                  18
                  
                  
                  21Operating
                      expensesManufacturing
                      pre-production costs
                  
                  
                  —
                  
                  
                  793General
                      and administrative
                  
                  
                  3,969
                  
                  
                  2,768Depreciation
                  
                  
                  101
                  
                  
                  302Research
                      and development
                  
                  
                  919
                  
                  
                  1,952Total
                      operating expenses
                  
                  
                  4,989
                  
                  
                  5,815Net
                      Loss from operations
                  
                  
                  (4,971
                  )
                  
                  (5,794
                  )Other
                      income and (expense)Interest
                      expense
                  
                  
                  (2,843
                  )
                  
                  (1,931
                  )Registration
                      delay payment
                  
                  
                  (871
                  )
                  
                  —Equity
                      in loss of EnerStruct, Inc.
                  
                  
                  (147
                  )
                  
                  (169
                  )Other
                  
                  
                  10
                  
                  
                  52Gain
                      on derivative liability
                  
                  
                  10,372
                  
                  
                  30,412Total
                      other income (expense)
                  
                  
                  6,521
                  
                  
                  28,364Income
                      before income taxes
                  
                  
                  1,550
                  
                  
                  22,570Income
                      taxes
                  
                  
                  —
                  
                  
                  —Net
                      income before minority interest
                  
                  
                  1,550
                  
                  
                  22,570Minority
                      interest
                  
                  
                  (596
                  )
                  
                  174Net
                      income
                  
                  
                  954
                  
                  
                  22,744Preferred
                      stock dividends
                  
                  
                  (693
                  )
                  
                  (741
                  )Net
                        income attributable to common shareholders
                  
                  $
                  261
                  
                  $
                  22,003Net
                      income per share, basic
                  
                  $
                  0.00
                  
                  $
                  0.06Net
                      income per share, diluted
                  
                  $
                  (0.01
                  )
                  $
                  0.02Weighted
                      average shares outstanding:Weighted
                      average shares outstanding - Basic
                  
                  
                  368,458
                  
                  
                  347,456Weighted
                      average shares outstanding - Diluted
                  
                  
                  436,181
                  
                  
                  436,379


See
      notes
      to condensed consolidated financial statements.


5


ENER1,
      INC. AND SUBSIDIARIES


CONDENSED
      CONSOLIDATED STATEMENTS OF CASH FLOWS


(Unaudited)


(In
      thousands)


**Three
                    Months Ended**
                  **March
                    31,****2006****Restated**
                
                
                **2005****Restated**Net
                    income
                
                $
                954
                
                $
                22,744Adjustments
                    to reconcile net loss to cash used by operating
                    activities:Gain
                    on derivative liability
                
                
                (10,372
                )
                
                (30,412
                )Minority
                    interest
                
                
                596
                
                
                (174
                )Accretion
                    of discount on debentures
                
                
                1,479
                
                
                830Non
                    cash interest expense related to financing costs
                
                
                308
                
                
                245Depreciation
                
                
                101
                
                
                302Compensation
                    expense for stock options
                
                
                385
                
                
                282Equity
                    in loss from investment in Enerstruct
                
                
                147
                
                
                169Assets
                    transferred under Warrant Exercise Agreement
                
                
                803
                
                
                —Changes
                    in current assets and liabilities
                
                
                685
                
                
                (324
                )Net
                    cash used in operating activities
                
                
                (4,914
                )
                
                (6,338
                )Investing
                    Activities:Capital
                    expenditures
                
                
                (55
                )
                
                (153
                )Net
                    cash used in investing activities
                
                
                (55
                )
                
                (153
                )Financing
                    Activities:Proceeds
                    from issuance of senior secured debenture, net of costs
                
                
                —
                
                
                13,134Repayment
                    of bank installment loan
                
                
                (7
                )
                
                (6
                )Proceeds
                    from exercise of warrants
                
                
                3,560
                
                
                —Net
                    cash provided by financing activities
                
                
                3,553
                
                
                13,128Net
                    increase (decrease) in cash and equivalents
                
                
                (1,416
                )
                
                6,637Cash
                    and cash equivalents beginning balance
                
                
                2,306
                
                
                14,091Cash
                    and cash equivalents ending balance
                
                $
                890
                
                $
                20,728


See
        notes
        to condensed consolidated financial statements.  6


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 months ended March 31, 2006 are not necessarily indicative
        of the results that may be expected for the year ending December 31, 2006.
        The
        audited financial statements at December 31, 2005, which are included in
        the
        Company’s Annual Report on Form 10-KSB/A for the year ended December 31, 2005,
        should be read in conjunction with these condensed consolidated financial
        statements.
 
 2.    
        GOING CONCERN
 
 The
        accompanying condenced 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 $151,000,000 as
        of
        March 31, 2006. It is likely that Ener1’s operations will continue to incur
        negative cash flows through December 31, 2006 and 2007 and additional financing
        will be required to fund Ener1’s planned operations through that time. If
        additional financing is not obtained, such a condition will give rise to
        substantial doubt about Ener1’s ability to continue as a going concern. The
        consolidated financial statements do not include any adjustments relating
        to the
        recoverability and classification of recorded asset amounts or the amounts
        and
        classifications of liabilities that might be necessary should Ener1 not be
        able
        to continue as a going concern.
 
 During
        the three months ended March 31, 2006, the Company obtained interim operating
        funding from its controlling shareholder through the exercise of certain
        warrants. The Company requires additional interim working capital financing
        until it raises permanent capital. The Company plans to raise substantial
        additional capital during 2006 from government sources including grants or
        public financing, or from strategic or financial investors. If the Company
        is
        unable to raise adequate permanent capital for its current plan of operations,
        it would have to curtail its research and development activities and adopt
        an
        alternative operating model to continue as a going concern.
 
 3.    
        NATURE OF BUSINESS AND DISCONTINUED OPERATIONS
 
 Nature
        of
        Business
 
 Ener1,
        Inc. is a Florida corporation, founded in 1985 and headquartered in Fort
        Lauderdale, Florida. Ener1’s primary lines of business consist of the
        development and marketing of advanced Lithium-ion (“Li-ion”) batteries, fuel
        cells and nanotechnology-related manufacturing processes and materials.
 
 In
        January 2002, Ener1 Group, Inc. (“Ener1 Group”) acquired a majority interest in
        the Company and owned approximately 90% of the outstanding common stock of
        the
        Company as of March 31, 2006. Prior to 2002, the Company manufactured set
        top
        boxes and other digital entertainment products. These operations were conducted
        through the Company’s Digital Media Technologies Division after 2002, and those
        activities were discontinued as an operation in 2003. The Company sold
        substantially all of the remaining assets of the Digital Media Technologies
        Division to TVR Communications LLC (“TVRC”) in return for a 5% membership
        interest in TVRC, which was valued at $115,000. On March 30, 2006, the Company
        transferred its 5% membership interest in TVRC to Ener1 Group at fair
        value, which approximates the carrying value, as partial consideration for
        the
        exercise of certain warrants prior to their expiration. See Note
        15.
 
 In
        August
        2003, the Company formed a joint venture company, named EnerStruct, Inc.,
        with
        ITOCHU Corporation of Japan to pursue technology development and marketing
        opportunities for lithium batteries in Japan. The Company and ITOCHU have
        each
        licensed to EnerStruct some of their respective battery technologies for
        use in
        Japanese markets.
 
 7
 The
        Company’s operations are conducted by Ener1 and three of its subsidiaries:
        EnerDel, Inc. (“EnerDel”), EnerFuel Inc. (EnerFuel”) and NanoEner, Inc.
        (“NanoEner”). Certain real estate and equipment assets used by the Company are
        held by Ener1 Battery Company (“Ener1 Battery” or the “Battery
        Company”)
 
 On
        October 20, 2004, the Company and a unit of Delphi Corporation each contributed
        Li-ion battery related assets to EnerDel. The Company owns 80.5% of EnerDel’s
        outstanding common stock, and Delphi owns 19.5% of EnerDel’s outstanding common
        stock and 8,000 shares of EnerDel’s Series A Preferred Stock. All of the
        Company’s Li-ion battery business has been conducted through EnerDel since its
        formation. The Company formed NanoEner on April 2, 2004 to develop new markets
        and applications for Ener1’s proprietary technologies to manufacture
        nanomaterials. The Company formed EnerFuel on October 29, 2004 to conduct
        the
        Company’s fuel cell related operations.
 
 4. RESTATEMENT
        AND RECLASSIFICATION OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS
  ***Summary of
        Restatement
        Items***
 
 The
        consolidated financial statements for the three months ended March 31, 2005
        and
        2006 and related disclosures in this Amendment No. 1 to the Quarterly Report
        on
        Form 10-QSB have been restated in accordance with the changes described
        below.
 
 The
        balance sheet as of December 31, 2005 included in the Quarterly Report at
        the
        time of the initial filing on May 22, 2006 (the "March 2006 10-QSB") had
        been
        restated to classify the Ener1 Series A Preferred Stock totaling $4,967,000
        and
        the Ener1 Series B Preferred Stock totaling $13,188,000 as temporary equity
        in
        accordance with EITF D-98, because both the Series A Preferred Stock and
        the
        Series B Preferred Stock contain conditional redemption features. The Company
        previously reported the Series A Preferred Stock and Series B Preferred Stock
        as
        long-term liabilities.
  In
            July
            2006, Ener1 concluded that it was necessary to restate its financial
            statements
            for the periods ended March 31, 2006 and March 31, 2005 to (1) reflect
            the
            corrected accounting for and valuation of the compound embedded derivatives
            in the 2004 Debentures and 2005 Debentures, (2) revise the valuation
            of the
            initial discount and interest accretion on the 2004 Debentures and 2005
            Debentures resulting from the revaluation of the compound embedded derivatives,
            (3) record the correct value of the warrants issued with the 2004
            Debentures, (4) record the value of Ener1’s right to require Ener1 Group to
            purchase Series B Preferred Stock (the "Series B Preferred Stock Put."),
            (5)
            correct the reported gain on the Battery Warrants and record as paid
            in capital
            the value of the warrants at the date of exercise. Earnings per share
            and
            weighted average shares outstanding have been restated to reflect the
            restated
            net income, and (6) reflect
            the Series A Preferred Stock dividends payable to the minority interest
            owner as
            a reduction in minority interest income.
  8
 The
          impact of the above restatement items on Ener1’s consolidated
          statements of operations for the three months ended March 31, 2006 and
          2005 are
          summarized below (the
          following tables compare specific line items from these financial statements
          (1)
          for the three months ended March 31, 2006 with the same line items from
          the
          financial statements for this period as initially reported in the March
          2006
          10-QSB, and (2) for the three months ended March 31, 2005 with the same
          line
          items from the financial statements for this period as initially reported
          in the
          March 2005 10-QSB): (dollars and shares in thousands, other than per
          share information).
 **Three
                      Months Ended****March
                    31, 2006****As
                      Initially****Reported**
                
                
                **Adjustment**
                
                
                
                
                **As
                    restated**Gross
                    profit
                
                $
                18
                
                
                
                
                
                
                $
                18Total
                    operating expenses
                
                
                4,405
                
                
                584
                
                *(a*)**
                
                
                4,989Loss
                    from operations
                
                
                (4,387
                )
                
                (584
                )
                
                
                
                (4,971
                )Other
                    income and (expense)Interest
                
                
                (2,956
                )
                
                113
                
                *(b*)**
                
                
                (2,843
                )Other
                    income (expense)
                
                
                (1,008
                )
                
                
                
                
                
                
                (1,008
                )Gain
                    on derivative liability
                
                
                27,458
                
                
                (17,086
                )
                *(c**)*
                
                
                10,372Total
                    other income (expense)
                
                
                23,494
                
                
                (16,973
                )
                
                
                
                6,521Income
                    (loss) before income taxes
                
                
                19,107
                
                
                (17,557
                )
                
                
                
                1,550Income
                    taxes
                
                
                —
                
                
                —
                
                
                
                
                —Net
                    income (loss) before minority interest
                
                
                19,107
                
                
                (17,557
                )
                
                
                
                1,550Minority
                  interest
                
                
                —
                
                
                (596
                )
                *(g*)**
                
                
                (596
                )Net
                  income
                
                
                19,107
                
                
                (18,153
                )
                
                
                
                954Preferred
                    stock dividends
                
                
                (1,289
                )
                
                596
                
                *(g*)**
                
                
                (693
                )Net
                      income (loss) attributable to common shareholders
                
                $
                17,818
                
                $
                (17,557
                )
                
                
                $
                261Net
                    income per share, basic
                
                $
                0.05
                
                $
                (0.05
                )
                *(d*)**
                
                $
                0.00Net
                    income per share, diluted
                
                $
                (0.01
                )
                $
                0.00
                
                *(e**)*
                
                $
                (0.01
                )Weighted
                    average shares outstanding:Weighted
                    average shares outstanding - Basic
                
                
                368,458
                
                
                —
                
                
                
                
                368,458Weighted
                    average shares outstanding - Diluted
                
                
                420,165
                
                
                16,016
                
                *(f**)*
                
                
                436,181





*(a)*
                *To
                    record additional expense for modification of warrant
                    terms.*
 *(b)*
                *Change
                    due to reduced accretion of discount of bond issuance
                    costs.*
 *(c)*
                *To
                    correct net gain on derivative liability based upon fair values
                    at end of
                    period.*
 *(d)*
                *To
                    reflect basic earnings per share based upon corrected net
                    income.*
 *(e)*
                *To
                    reflect diluted earnings per share based upon corrected net income
                    as
                    adjusted for diluted shares outstanding and the effects of dilutive
                    adjustments to reported
                    earnings.*
 *(f)*
                *To
                    reflect additional diluted shares outstanding  for shares underlying
                    the 2004 Debentures.* *(g)*
                *To reflect the
                  Series A Preferred Stock dividends payable to the minority interest
                  owner
                  as a reduction in minority interest
                  income.*
  **Three
                      Months Ended****March
                      31, 2005****As
                      Initially****Reported**
                  
                  **Adjustment**
                  
                  
                  
                  **As
                      restated**Gross
                      profit
                  
                  $
                  21
                  
                  
                  
                  
                  
                  
                  
                  $
                  21Total
                      operating expenses
                  
                  
                  5,982
                  
                  
                  (167
                  )
                  
                  *(a*
                  *)*
                  
                  5,815Loss
                      from operations
                  
                  
                  (5,961
                  )
                  
                  167
                  
                  
                  
                  
                  
                  (5,794
                  )Other
                      income and (expense)Interest
                  
                  
                  (750
                  )
                  
                  (1,181
                  )
                  
                  *(b*
                  *)*
                  
                  (1,931
                  )Other
                      income (expense)
                  
                  
                  (117
                  )
                  
                  -
                  
                  
                  
                  
                  
                  (117
                  )Gain
                      on derivative liability
                  
                  
                  -
                  
                  
                  30,412
                  
                  
                  *(c*
                  *)*
                  
                  30,412Total
                      other income (expense)
                  
                  
                  (867
                  )
                  
                  29,231
                  
                  
                  
                  
                  
                  28,364Income
                      before income taxes
                  
                  
                  (6,828
                  )
                  
                  29,398
                  
                  
                  
                  
                  
                  22,570Income
                      taxes
                  
                  
                  -
                  
                  
                  -
                  
                  
                  
                  
                  
                  -Net
                      income before minority interest
                  
                  
                  (6,828
                  )
                  
                  29,398
                  
                  
                  
                  
                  
                  22,570Minority
                      interest
                  
                  
                  643
                  
                  
                  (469
                  )
                  
                  *(g*
                  *)*
                  
                  174Net
                      income
                  
                  
                  (6,185
                  )
                  
                  28,929
                  
                  
                  
                  
                  
                  22,744Preferred
                      stock dividends
                  
                  
                  (987
                  )
                  
                  246
                  
                  
                  
                  
                  
                  (741
                  )Net
                      income attributableto
                      common shareholders
                  
                  $
                  (7,172
                  )
                  $
                  29,175
                  
                  
                  
                  
                  $
                  22,003Net
                      income per share, basic
                  
                  $
                  (0.02
                  )
                  $
                  0.08
                  
                  
                  *(d*
                  *)*
                  $
                  0.06Net
                      income per share, diluted
                  
                  $
                  (0.02
                  )
                  $
                  0.04
                  
                  
                  *(e*
                  *)*
                  $
                  0.02Weighted
                      average shares outstanding:Weighted
                      average shares outstanding - Basic
                  
                  
                  347,456
                  
                  
                  -
                  
                  
                  
                  
                  
                  347,456Weighted
                      average shares outstanding - Diluted
                  
                  
                  347,456
                  
                  
                  88,923
                  
                  
                  *(f*
                  *)*
                  
                  436,379
  *(a)*
                  *Change
                      due to reclassification of deferred financing cost on the 2004
                      Debentures
                      as interest expense.**(b)*
                  *Change
                      due to accretion of discount of bond issuance costs and amortization
                      of
                      deferred financing costs.**(c)*
                  *To
                      record net gain on derivatives based upon fair values at end
                      of
                      period.**(d)*
                  *To
                      reflect basic earnings per share based upon corrected net
                      income.**(e)*
                  *To
                      reflect diluted earnings per share based upon corrected net
                      income as
                      adjusted for**diluted
                      shares outstanding and the effects of dilutive adjustments
                      to reported
                      earnings.**(f)*
                  *To
                      reflect additional diluted shares outstanding from warrants
                      and
                      convertible securities *and
                      the reduction of diluted shares outstanding for shares underlying 
                      anti-dilutive stock options.***(g)*
                  *To
                      reflect the
                      Series A Preferred Stock dividends payable to the minority
                      interest owner
                      as a reduction in minority interest income.*


***Balance
          Sheet Impact***
 
 In
          addition to the effects on Ener1's 2006 and 2005 consolidated statements
          of
          operations discussed above, the restatement impacted Ener1's consolidated
          balance sheets as of March 31, 2006 and December 31, 2005. The following
          tables
          set forth the effects of the restatement adjustments on Ener1's consolidated
          balance sheets as of March 31, 2006 and December 31, 2005 as
          compared to the consolidated balance sheets as of March 31, 2006 and December
          31, 2005included
          in the March 2006 10-QSB and the March 2005 10-QSB, respectively(dollars
          in thousands):
  **March
                        31,**
                      **2006**
                  
                  
                  
                  
                  
                  
                  
                  **March
                        31,**
                      **2006****As
                        Initially**
                      **Reported**
                  
                  
                  **Adjustment**
                  
                  
                  
                  
                  **As
                      Restated****ASSETS**Current
                      assetsCash
                      and equivalents
                  
                  $
                  890
                  
                  $
                  —
                  
                  
                  
                  $
                  890Prepaid
                      expenses and other current assets
                  
                  
                  639
                  
                  
                  —
                  
                  
                  
                  
                  639Due
                      from related parties
                  
                  
                  -
                  
                  
                  —
                  
                  
                  
                  
                  -Total
                      current assets
                  
                  
                  1,529
                  
                  
                  —
                  
                  
                  
                  
                  1,529Property
                      and equipment, net
                  
                  
                  2,996
                  
                  
                  —
                  
                  
                  
                  
                  2,996Investment
                      in EnerStruct, Inc.
                  
                  
                  658
                  
                  
                  —
                  
                  
                  
                  
                  658Deferred
                        debenture costs, net of amortizationof
                        $2,390
                  
                  
                  3,441
                  
                  
                  —
                  
                  
                  
                  
                  3,441Other
                  
                  
                  74
                  
                  
                  —
                  
                  
                  
                  
                  74Total
                      assets
                  
                  $
                  8,698
                  
                  $
                  —
                  
                  
                  
                  $
                  8,698**LIABILITIES
                      AND STOCKHOLDERS' DEFICIT**Current
                      liabilitiesCurrent
                      portion of installment loan
                  
                  $
                  25
                  
                  $
                  —
                  
                  
                  
                  $
                  25Accounts
                      payable and accrued expenses
                  
                  
                  4,349
                  
                  
                  —
                  
                  
                  
                  
                  4,349Derivative
                      liability
                  
                  
                  26,952
                  
                  
                  2,046
                  
                  *(a)*
                  
                  
                  28,998Total
                      current liabilities
                  
                  
                  31,326
                  
                  
                  2,046
                  
                  
                  
                  
                  33,372Long-term
                      portion of installment loan
                  
                  
                  60
                  
                  
                  —
                  
                  
                  
                  
                  60$19,700
                      convertible debentures, net of discount of $13,095
                  
                  
                  8,868
                  
                  
                  (2,263
                  )
                  *(b*)**
                  
                  
                  6,605$14,225
                      convertible debentures, net of discount of $9,464
                  
                  
                  4,870
                  
                  
                  (109
                  )
                  *(c)*
                  
                  
                  4,761Total
                      liabilities
                  
                  
                  45,124
                  
                  
                  (326
                  )
                  
                  
                  
                  44,798Redeemable
                      convertible preferred stock:EnerDel,
                      Inc. Series A Preferred, $.01 par value
                  
                  
                  5,563
                  
                  
                  —
                  
                  
                  
                  
                  5,563Series
                      B Preferred, $.01 par value
                  
                  
                  13,882
                  
                  
                  —
                  
                  
                  
                  
                  13,882Minority
                      interest
                  
                  
                  —
                  
                  
                  —
                  
                  
                  
                  
                  —Commitments
                      and contingencies**STOCKHOLDERS'
                      DEFICIT**Common
                      Stock, $.01 par value
                  
                  
                  3,921
                  
                  
                  —
                  
                  
                  
                  
                  3,921Paid
                      in capital
                  
                  
                  74,395
                  
                  
                  16,837
                  
                  *(d)*
                  
                  
                  91,232Accumulated
                      deficit
                  
                  
                  (134,187
                  )
                  
                  (16,511
                  )
                  *(e)*
                  
                  
                  (150,698
                  )Total
                      stockholders' deficit
                  
                  
                  (55,871
                  )
                  
                  326
                  
                  
                  
                  
                  (55,545
                  )Total
                      liabilities and stockholders' deficit
                  
                  $
                  8,698
                  
                  $
                  —
                  
                  
                  
                  $
                  8,698
 
 *(a)*
                  *To
                      correct derivative liability on 2004 Debentures and 2005
                      Debentures.**(b)*
                  *To
                      correct accretion of discount on 2004 Debentures.**(c)*
                  *To
                      correct accretion of discount on 2005 Debentures.**(d)*
                  *To
                      increase paid in capital for value of Series B Preferred Stock
                      Put
                      derivative issued in 2004 and the value of Battery Warrants
                      exercised
                      during the 2006 quarter.**(e)*
                  *To
                      reflect aggregate effect of income statement
                      adjustments.*
 
  **December
                        31,****2005**
                  
                  
                  
                  
                  
                  
                  
                  **December
                        31,****2005****ASSETS**
                  
                  
                  **As
                        Initially****Reported**
                  
                  
                  **Adjustment**
                  
                  
                  
                  
                  **As
                      Restated**Current
                      assetsCash
                      and equivalents
                  
                  $
                  2,306
                  
                  
                  
                  
                  
                  
                  $
                  2,306Prepaid
                      expenses and other current assets
                  
                  
                  189
                  
                  
                  
                  
                  
                  
                  
                  189Due
                      from related parties
                  
                  
                  157
                  
                  
                  
                  
                  
                  
                  
                  157Total
                      current assets
                  
                  
                  2,652
                  
                  
                  
                  
                  
                  
                  
                  2,652Property
                      and equipment, net
                  
                  
                  3,042
                  
                  
                  
                  
                  
                  
                  
                  3,042Investment
                      in EnerStruct, Inc.
                  
                  
                  805
                  
                  
                  
                  
                  
                  
                  
                  805Deferred
                      debenture costs, net of amortization
                  
                  
                  3,748
                  
                  
                  
                  
                  
                  
                  
                  3,748Other
                  
                  
                  202
                  
                  
                  
                  
                  
                  
                  
                  202Total
                      assets
                  
                  $
                  10,449
                  
                  
                  
                  
                  
                  
                  $
                  10,449**LIABILITIES
                      AND STOCKHOLDERS’ DEFICIT**Current
                      liabilitiesCurrent
                      portion of installment loan
                  
                  
                  24
                  
                  
                  
                  
                  
                  
                  
                  24Accounts
                      payable and accrued expenses
                  
                  
                  2,969
                  
                  
                  
                  
                  
                  
                  
                  2,969Liabilities
                      of discontinued operations
                  
                  
                  307
                  
                  
                  
                  
                  
                  
                  
                  307Derivative
                      liability, net
                  
                  
                  54,410
                  
                  
                  1,816
                  
                  ***(a***)******
                  
                  
                  54,979(496
                  )
                  ***(b***)******131
                  
                  ***(c***)******(882
                  )
                  ***(d***)******Total
                      current liabilities
                  
                  
                  57,710
                  
                  
                  569
                  
                  
                  
                  
                  58,279Long-term
                      portion of installment loan
                  
                  
                  67
                  
                  
                  
                  
                  
                  
                  
                  67$19,700
                      convertible debentures, net of discount of $13,970
                  
                  
                  7,883
                  
                  
                  (2,153
                  )
                  ***(e***)******
                  
                  
                  5,730$14,225
                      convertible debentures, net of discount of $10,064
                  
                  
                  4,269
                  
                  
                  (108
                  )
                  ***(f***)******
                  
                  
                  4,161Total
                      liabilities
                  
                  
                  69,929
                  
                  
                  (1,692
                  )
                  
                  
                  
                  68,237Redeemable
                      preferred stock:EnerDel,
                      Inc. Series A Preferred, $.01 par value,
                  
                  
                  4,967
                  
                  
                  
                  
                  
                  
                  
                  4,967Series
                      B Convertible Preferred, $.01 par value
                  
                  
                  13,188
                  
                  
                  
                  
                  
                  
                  
                  13,188Commitments
                      and contingenciesMinority
                      interest
                  
                  
                  —
                  
                  
                  
                  
                  
                  
                  
                  —**STOCKHOLDERS’
                      DEFICIT**Common
                      stock, $.01 par value
                  
                  
                  3,475
                  
                  
                  
                  
                  
                  
                  
                  3,475Additional
                      paid in capital
                  
                  
                  72,185
                  
                  
                  645
                  
                  ***(g******)***
                  
                  
                  72,830Accumulated
                      deficit
                  
                  
                  (153,295
                  )
                  
                  1,047
                  
                  ***(h***)******
                  
                  
                  (152,248
                  )Total
                      stockholders’
                      deficit
                  
                  
                  (77,635
                  )
                  
                  1,692
                  
                  
                  
                  
                  (75,943
                  )Total
                      liabilities and stockholders’ deficit
                  
                  $
                  10,449
                  
                  
                  —
                  
                  
                  
                  $
                  10,449
 
 *(a)*
                  *To
                      correct derivative liability on 2004 Debentures.**(b)*
                  *To
                      record value of Series B Preferred Stock Put
                      derivative.**(c)*
                  *To
                      correct derivative liability on 2005 Debentures.**(d)*
                  *To
                      correct derivative liability on 2005 Debenture
                      warrants.**(e)*
                  *To
                      correct accretion of discount on 2004 Debentures.**(f)*
                  *To
                      correct accretion of discount on 2005 Debentures.**(g)*
                  *To
                      increase paid in capital for value of Series B Preferred Stock
                      Put
                      derivative.**(h)*
                  *To
                      reflect aggregate effect of income statement
                      adjustments.*




9




5.
      SEGMENT REPORTING





As
      of
      March 31, 2006, the Company is organized based upon the following segments:
      battery, fuel cell and nanotechnology. The battery business develops and markets
      advanced lithium batteries. The fuel cell business develops and markets fuel
      cells and fuel cell systems. The nanotechnology business is developing
      nanotechnology related manufacturing processes and materials.





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




**Three
                        Months
                        Ended****March
                        31,****2006**
                    
                    **2005****Net
                        sales**
                    
                    **Restated**
                    
                    **Restated**Battery
                        business
                    
                    $
                    —
                    
                    $
                    —Fuel
                        Cell business
                    
                    
                    18
                    
                    
                    15Nanotechnology
                    
                    
                    —
                    
                    
                    6Total
                        Net Sales
                    
                    $
                    18
                    
                    $
                    21**Net
                        income (loss)**Corporate
                    
                    
                    3,709
                    
                    
                    26,394Battery
                        business
                    
                    
                    (1,926
                    )
                    
                    (3,092
                    )Fuel
                        Cell business
                    
                    
                    (608
                    )
                    
                    (270
                    )Nanotechnology
                    
                    
                    (221
                    )
                    
                    (288
                    )Net
                        income (loss)
                    
                    $
                    954
                    
                    $
                    22,744**Assets**Corporate
                    
                    
                    5,902
                    
                    
                    17,612Battery
                        business
                    
                    
                    2,664
                    
                    
                    22,857Fuel
                        Cell business
                    
                    
                    120
                    
                    
                    8Nanotechnology
                    
                    
                    12
                    
                    
                    6Total
                        assets
                    
                    $
                    8,698
                    
                    $
                    40,483


6. 
      $19,700,000 CONVERTIBLE DEBENTURES





On
      January 20, 2004, Ener1 issued $20,000,000 in aggregate principal amount of
      senior secured convertible debentures due January 2009 (the “2004 Debentures”)
      and warrants to purchase 16,000,000 shares of Ener1’s common stock. The net
      proceeds of the issuance totaled $18,527,000 after direct placement costs of
      $1,473,000. The 2004 Debentures mature on January 20, 2009. Ener1’s obligations
      under the 2004 Debentures are secured by collateral including land, building
      and
      battery production equipment owned by Ener1 Battery and used by
      EnerDel.




At
      the
      issuance date, the 2004 Debentures were convertible by the holder at any time
      into common shares at a price of $1.25 per share subject to adjustment upon
      certain events such as the sale of equity securities by Ener1 at a price below
      the then current conversion price of the debenture. As of March 31, 2006, the
      conversion price was $1.23. Ener1 may require that a specified amount of the
      principal of the 2004 Debentures be converted if certain conditions are
      satisfied for a period of 22 consecutive trading days.





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





Interest
      is due quarterly. All or a portion of the accrued and unpaid interest may be
      converted at the option of the debenture holder at any time under the same
      conversion terms as the principal. Interest expense was $738,000 and $661,000
      for the three months ended March 31, 2006 and 2005, respectively. All interest
      was paid. Through March 31, 2006, $262,000 of interest has been converted.




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





10


From
      January 20, 2007 to January 20, 2008, Ener1 may prepay some or all of the
      principal at a price of 103% of unpaid principal plus accrued interest. From
      January 21, 2008 to January 20, 2009, Ener1 may prepay some or all of the
      principal at 101% of unpaid principal plus accrued interest. The 2004 Debentures
      are senior to Ener1’s existing and future indebtedness and pari passu with the
      2005 Convertible Debentures (see Note 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 p ayments
      accrue at the rate of 1.5% of principal or approximately $295,000 per month
      until January 20, 2006, at which time the obligation to maintain the
      effectiveness of the resale registration statement for the common stock
      underlying the 2004 Debentures and associated warrants ends. The registration
      statements became unavailable for use in November 2005, and registration delay
      payments of $591,000 had accrued through the period ending January 20, 2006
      and
      were outstanding at March 31, 2006. A holder of the 2004 Debentures has demanded
      payment of the registration delay payments, but has not declared an event of
      default for non-payment of such amounts under the applicable agreement, and
      the
      Company is negotiating terms for extended payment.





The
      warrants issued in connection with the issuance of the 2004 Debentures had
      an
      exercise price of $2.51 at the issuance date, subject to adjustment upon certain
      events such as the sale of equity securities by Ener1 at a price below the
      then
      current exercise price. As of March 31, 2006, the exercise price was $2.37
      per
      share. The warrants are exercisable at any time through January 20,
      2010.




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





Ener1
      is
      accounting for the conversion option in the 2004 Debentures and the associated
      warrants as derivative liabilities in accordance with SFAS 133 “Accounting for
      Derivative Instruments and Hedging Activities” (“SFAS 133”) and EITF 00-19
“Accounting for Derivative Financial Instruments Indexed to and Potentially
      Settled in a Company’s Own Stock (“EITF 00-19”). 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 FAS 133 and Derivatives
      Implementation Group Issue No. B15.




7. 
      $14,225,000 CONVERTIBLE DEBENTURES





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




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





Ener1
      is
      required under the terms of the 2005 Debentures agreements to register the
      resale of the common stock underlying the debentures and associated warrants
      and
      maintain the listing or
      quotation of its common stock on the
      OTC
      Bulletin Board, the NASDAQ ® National
      Market, NASDAQ ® SmallCap
      Market or the New York Stock Exchange. If the registration statements are not
      available for use or Ener1’s common stock is not listed or quoted on the OTC
      Bulletin Board, the NASDAQ ® National
      Market, NASDAQ ® SmallCap
      Market or the New York Stock Exchange, Ener1 is required to make certain
      payments to the purchasers of the 2005 Debentures (the “registration delay
      payments”). Registration
      delay payments accrue at a fixed rate of $213,375 per month until the 2005
      Debenture holders are able to use the resale registration statement and until
      Ener1’s common stock is quoted on the OTC Bulletin Board or other exchange. The registration
      statements became unavailable for use in November 2005, and the Company’s stock
      was neither traded or quoted or listed, as applicable, on the OTC Bulletin
      Board
      or other exchange from December 22, 2005 to April 6, 2006, and registration
      delay payments of $925,000 had accrued at March 31, 2006. A holder of the 2005
      Debentures has demanded payment of the registration delay payments, but has
      not
      declared an event of default for non-payment under the applicable agreement;
      the
      Company is negotiating terms for extended payment.





11


At
      the
      issuance date, the 2005 Debentures were convertible by the holder at any time
      into common shares at a price of $1.00 per share subject to adjustment upon
      certain events, such as the sale of equity securities by Ener1 at a price below
      the then current conversion price of the debenture. As of March 31, 2006, the
      conversion price was $1.00. Ener1 may require that a specified amount of the
      principal of the 2005 Debentures be converted if certain conditions are
      satisfied for a period of 22 consecutive trading days. At any time on or after
      March 14, 2008, Ener1 may prepay some or all of the principal of the 2005
      Debentures at 103% of the principal, plus accrued interest. The 2005 Debentures
      are senior to Ener1’s existing and future indebtedness and pari passu with the
      2004 Debentures.




Interest
      is due quarterly. The current annual interest rate is 15%. All or a portion
      of
      the accrued and unpaid interest may be converted at the option of the debenture
      holder at any time under the same conversion terms as the principal. Interest
      expense was $320,000 and $53,000 for the three months ended March 31, 2006
      and
      2005, respectively. All interest was paid, and no interest has been
      converted.





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





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





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





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





12


Ener1
      is
      accounting for the conversion option in the 2005 Debentures and the associated
      warrants as derivative liabilities in accordance with SFAS 133 and EITF
      00-19. 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 FAS 133 and Derivatives
      Implementation Group Issue No. B15.




8.    
      REDEEMABLE PREFERRED STOCK





Ener1,
      Inc. Series B Convertible Preferred Stock





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


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. The 2004 Debentures mature on January
      20,
      2009. If such redemption occurs in full before 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 30
      days from January 20, 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.





EnerDel
      Series A Convertible Preferred Stock




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





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





13


When
      the
      term of the conversion feature expired in January 2005 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 featurs 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 March 31,
      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 issuance
                
                
                9,736
                
                
                2,197Accumulated
                    accretion of discounts
                
                
                2,613
                
                
                2,413Cumulative
                    dividends
                
                
                1,533
                
                
                953Carrying
                    value December 31, 2005
                
                $
                13,882
                
                $
                5,563





14


9. 
      DERIVATIVES


Ener1
        evaluated the application of SFAS 133 and EITF 00-19 for the
        following:
  ·
              
              the
                  2004 Debentures conversion, interest
                  rate adjustment, registration delay payments, redemption premium,
                  forced
                  conversion default premimum and change in control premium
                  features;
 ·
              
              warrants
                  to purchase common stock associated with the 2004 Debentures (the
                  "2004
                  Debenture Warrants");
 ·
              
              the
                  2005 Debentures conversion, interest
                  rate adjustment, registration delay payments, default premimum
                  and change
                  in control premium features;
 ·
              
              warrants
                  to purchase common stock associated with the 2005 Debentures (the
                  "2005
                  Debenture Warrants");
 ·
              
              EnerDel
                  Series A Preferred Stock conversion feature;·
              
              warrants
                  to purchase common stock issued to Delphi Corporation (the "Delphi
                  Warrants");
 ·
              
              Series
                  B Preferred Stock conversion feature;·
              
              Series
                  B Preferred Stock Put;·
              
              warrants
                  to purchase common stock issued to the purchasers of the Series
                  B
                  Preferred Stock (the "Series B Preferred Stock Warrants");
 ·
              
              warrants
                  to purchase common stock issued to Ener1 Group, Inc. in connection
                  with
                  the acquisition by Ener1 Group, Inc. of Ener1 Battery Company
                  from Ener1 Group, Inc. (“Battery Warrants”)·
              
              warrants
                  to purchase common stock issued to Ener1 Group in connection with
                  the
                  exchange of stock, notes and warrants for debt (the "Exchange Warrants");
                  and·
              
              options
                  to purchase common stock issued to ITOCHU Corporation (“ITOCHU
                  Options").
 
 Based
        on
        the guidance in SFAS 133 and EITF 00-19, Ener1 concluded all of these
        instruments, other than the conversion feature of the Series B Preferred
        Stock
        were required to be accounted for as derivatives. SFAS 133 and EITF 00-19
        require Ener1 to bifurcate and separately account for the conversion and
        other
        derivatives features of the 2004 Debentures, 2005 Debentures and Series A
        preferred stock as embedded derivatives. Ener1 is required to record the
        fair value of the conversion features and the warrants and options on its
        balance sheet at fair value with changes in the values of these derivatives
        reflected in the consolidated statement of operations as “Gain (loss) on
        derivative liability.”
 The
            Company determined that the Battery Warrants were a derivative liability
            under
            EITF 00-19 because share settlement of these warrants was not within
            the control
            of the Company as a result of the facts that: (1) the holder of the Battery
            Warrants was the controlling shareholder of the Company, and (2) the
            Battery
            Warrants contained dilution protection features, with no limit or cap
            on the
            number of shares that could be issued under the Battery Warrants. Therefore,
            the
            Company could not conclude that it had sufficient authorized and unissued
            shares
            to issue the number of shares potentially issuable under the Battery
            Warrants.
            The Company also determined that it could not conclude it had sufficient
            authorized and unissued shares to issue the number of shares required
            under the
            other warrants subsequently issued by the Company as described above.
            As a
            result, the Company determined that these warrants would also be treated
            as
            derivative liabilities because the Company could not conclude that it
            had
            sufficient authorized and unissued shares to settle the potential share
            issuances required under these warrants as long as the Battery Warrants
            were
            outstanding.
 The
            2004
            Debentures and 2005 Debentures both contain more than one embedded derivative
            feature which SFAS 133 requires be accounted for as separate derivative
            instruments. The various embedded derivative features of each series
            of
            debentures have been bundled together as a single, compound embedded
            derivative
            instrument that has been bifurcated from the debenture in accordance
            with
            Derivatives Implementation Group Issue No. B15. The derivative features
            that
            have been bundled together in the compound embedded derivative include:
            (1) the
            conversion feature of the debentures, (2) the holder's right to force
            Ener1 to
            redeem the debentures after an event of default, (3) the holder's right
            to force
            Ener1 to redeem the debentures after a change in control, (4) Ener1's
            right to
            redeem the debentures after 3 years, (5) the requirement to pay an increased
            interest rate if Ener1 fails to achieve certain milestones, and (6) Ener1's
            right to convert the debentures into common stock if certain conditions
            are
            satisfied. The value of the compound embedded derivative liability was
            bifurcated from the debenture and recorded as a derivative liability,
            which
            results in a reduction of the initial carrying amount (as unamortized
            discount)
            of the related debenture at inception. The unamortized discount is being
            amortized to interest expense using the effective interest method over
            the life
            of the debenture.
 The
          Company also determined that an agreement entered into in October 2004
          under
          which Ener1 Group agreed to purchase at the Company’s request up to $3,000,000
          of the Series B Preferred Stock plus warrants was a financial instrument
          (the
          "Series B Preferred Stock Put") which the Company is required to value
          as a
          derivative asset and mark to market at each balance sheet
          date.
  The
        impact of the application of SFAS 133 and EITF 00-19 on the balance sheets
        as
        of March 31, 2006 and 2005 and the statements of operations for
        the three months ended March 31, 2006 and 2005 are as follows:
  **December
                    31,**
                
                **March
                    31,**
                
                **Gain**
                
                **December
                    31,**
                
                **March
                    31,**
                
                **Gain****2005**
                
                **2006**
                
                **(Loss)**
                
                **2004**
                
                **2005**
                
                **(Loss)****Restated**
                
                **Restated**
                
                **Restated**
                
                **Restated**
                
                **Restated**
                
                **Restated**2004
                    Debenture conversion
                
                $
                5,980
                
                $
                5,025
                
                
                954
                
                $
                14,319
                
                $
                12,903
                
                $
                1,4162004
                    Debenture Warrants
                
                
                3,520
                
                
                3,360
                
                
                160
                
                
                11,040
                
                
                4,960
                
                
                6,0802005
                    Debenture conversion
                
                
                4,555
                
                
                3,532
                
                
                1,023
                
                
                —
                
                
                8,143
                
                
                (100
                )2005
                    Debenture Warrants
                
                
                2,205
                
                
                1,465
                
                
                740
                
                
                —
                
                
                3,172
                
                
                640EnerDel
                    Series A Preferred Stock conversion
                
                
                —
                
                
                —
                
                
                —
                
                
                1,183
                
                
                —
                
                
                1,183Series
                    A Warrants
                
                
                2,660
                
                
                1,698
                
                
                962
                
                
                5,944
                
                
                4,008
                
                
                1,936Series
                    B Warrants
                
                
                3,135
                
                
                2,203
                
                
                932
                
                
                7,096
                
                
                5,700
                
                
                1,396Series
                    B Preferred Stock Put
                
                
                (496
                )
                
                —
                (1)
                
                88
                
                
                (268
                )
                
                (299
                )
                
                31Battery
                    Warrants
                
                
                26,220
                
                
                6,615
                
                
                3,413
                
                
                57,960
                
                
                46,230
                
                
                11,730Exchange
                    Warrants
                
                
                7,200
                
                
                5,100
                
                
                2,100
                
                
                16,600
                
                
                10,500
                
                
                6,100$
                54,979
                
                $
                28,998
                
                $
                10,372
                
                $
                113,874
                
                $
                95,317
                
                $
                30,412
 
 (1)
          The
          Series B Preferred Stock Put was terminated on March 30, 2006 and has no
          value
          on March 31, 2006.
  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 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.
 The
              fair
              value of the compound derivative embedded in the 2004 Debentures as
              of March 31,
              2006 determined using the lattice valuation model was based on the
              following
              assumptions:
 
 -
                  the
                      price of Ener1's common stock would increase at a rate commensurate
                      with
                      the cost of equity, with a volatility of 120%; -
                  Ener1
                      would remain in default of the resale registration agreement
                      relating to
                      the 2004 Debentures for three months, followed by a 95% likelihood
                      that
                      Ener1 would not be in default of its obligations under that
                      agreement; -
                  5%
                      likelihood that an event of default or a fundamental change
                      would occur,
                      increasing over time; -
                  reset
                      events projected to occur with a weighted average adjustment
                      factor of
                      .989; -
                  95%
                      likelihood that Ener1 would force the conversion of the 2004
                      Debentures if
                      the stock price reached $1.75; -
                  the
                      holders of the 2004 Debentures would convert the 2004 Debentures
                      if
                      Ener1's common stock price was $3.50, the resale registration
                      statement
                      was effective and Ener1 was not in default under the 2004
                      Debentures; -
                  Ener1
                      would redeem the 2004 Debentures following the third anniversary
                      of the
                      issue date if Ener1's common stock price reached $1.50 or higher; -
                  0%
                      likelihood that Ener1 would be able to obtain alternative financing
                      that
                      would enable it to redeem the 2004 Debentures increasing 2.5%
                      per quarter
                      to a maximum of 25%; and -
                  0%
                      likelihood that Ener1's common stock would be listed on an
                      exchange
                      increasing 10% quarterly to a maximum of
                      90%. 
 Based
                on
                these management assumptions, the fair value of these embedded derivatives
                as of
                March 31, 2006 was calculated by management to be
                $5,025,000.
 
 The
                fair
                value of the compound derivative embedded in the 2004 Debentures
                as of March 31,
                2005 determined using the lattice valuation model was based on the
                following
                assumptions:
 
 -
                    the
                        price of Ener1's common stock would increase at a rate commensurate
                        with
                        the cost of equity, with a volatility of 100%; -
                    95%
                        likelihood that Ener1 would not be in default of its obligations
                        under the
                        resale registration agreement relating to the 2004
                        Debentures; -
                    5%
                        likelihood that an event of default or a fundamental change
                        would occur,
                        increasing over time; -
                    reset
                        events projected to occur with a weighted average adjustment
                        factor of
                        .989; -
                    95%
                        likelihood that Ener1 would force the conversion of the 2004
                        Debentures if
                        the stock price reached $1.75; -
                    the
                        holders of the 2004 Debentures would convert the 2004 Debentures
                        if
                        Ener1's common stock price was $3.50, the resale registration
                        statement
                        was effective and Ener1 was not in default under the 2004
                        Debentures; -
                    Ener1
                        would redeem the 2004 Debentures following the third anniversary
                        of the
                        issue date if Ener1's common stock price reached $1.50 or
                        higher; -
                    0%
                        likelihood that Ener1 would be able to obtain alternative
                        financing that
                        would enable it to redeem the 2004 Debentures increasing
                        2.5% per quarter
                        to a maximum of 25%; and -
                    0%
                        likelihood that Ener1's common stock would be listed on an
                        exchange,
                        increasing 10% quarterly to a maximum of
                        90%. 
 Based
                  on
                  these management assumptions, the fair value of these embedded
                  derivatives as of
                  March 31, 2005 was calculated by management to be
                  $12,903,000.
 
 The
                fair
                value of the compound derivative embedded in the 2005 Debentures
                as of March 31,
                2006 determined using the lattice valuation model was based on the
                following
                assumptions:
 
 -
                    the
                        price of Ener1's common stock would increase at a rate commensurate
                        with
                        the cost of equity, with a volatility of 120%; -
                    Ener1
                        would remain in default of the resale registration agreement
                        relating to
                        the 2005 Debentures for three months, followed by a 95% likelihood
                        that
                        Ener1 would not be in default of its obligations under that
                        agreement; -
                    5%
                        likelihood that an event of default or a fundamental change
                        would
                        occur; -
                    reset
                        events projected to occur with a weighted average adjustment
                        factor of
                        .973; -
                    95%
                        likelihood that Ener1 would force the conversion of the 2005
                        Debentures if
                        the Ener1 common stock price reached
                        $1.50; -
                    the
                        holders of the 2005 Debentures would convert the 2005 Debentures
                        if
                        Ener1's common stock price reached $1.75, the resale registration
                        statement was effective and Ener1 was not in default under
                        the 2004
                        Debentures; -
                    Ener1
                        would redeem the 2005 Debentures following the third anniversary
                        of the
                        issue date if Ener1's common stock price reached $1.25 or
                        higher; -
                    0%
                        likelihood that Ener1 would be able to obtain alternative
                        financing that
                        would enable it to redeem the 2005 Debentures, increasing
                        2.5% per quarter
                        to a maximum likelihood of 25%; and -
                    0%
                        likelihood that Ener1's common stock would be listed on an
                        exchange and
                        meet the volume requirements set forth in the 2005 Debentures,
                        increasing
                        10% quarterly to a maximum likelihood of
                        90%. 
 Based
                  on
                  these management assumptions, the fair value of the compound embedded
                  derivative
                  in the 2005 Debentures as of March 31, 2006 was calculated by management
                  to be
                  $3,532,000.
 
 The
                fair
                value of the compound derivative embedded in the 2005 Debentures
                as of March 31,
                2005 determined using the lattice valuation model was based on the
                following
                assumptions:
 
 -
                    the
                        price of Ener1's common stock would increase at a rate commensurate
                        with
                        the cost of equity, with a volatility of 100%; -
                    95%
                        likelihood that Ener1 would not be in default of its obligations
                        under the
                        resale registration agreement relating to the 2005
                        Debentures; -
                    5%
                        likelihood that an event of default or a fundamental change
                        would
                        occur; -
                    reset
                        events projected to occur with a weighted average adjustment
                        factor of
                        .986; -
                    95%
                        likelihood that Ener1 would force the conversion of the 2005
                        Debentures if
                        the Ener1 common stock price reached
                        $1.50; -
                    the
                        holders of the 2005 Debentures would convert the 2005 Debentures
                        if
                        Ener1's common stock price reached $1.75, the resale registration
                        statement was effective and Ener1 was not in default under
                        the 2004
                        Debentures; -
                    Ener1
                        would redeem the 2005 Debentures following the third anniversary
                        of the
                        issue date if Ener1's common stock price reached $1.25 or
                        higher; -
                    0%
                        likelihood that Ener1 would be able to obtain alternative
                        financing that
                        would enable it to redeem the 2005 Debentures, increasing
                        2.5% per quarter
                        to a maximum likelihood of 25%; and -
                    0%
                        likelihood that Ener1's common stock would be listed on an
                        exchange and
                        meet the volume requirements set forth in the 2005 Debentures,
                        increasing
                        10% quarterly to a maximum likelihood of
                        90%. 
 Based
                  on
                  these management assumptions, the fair value of the compound embedded
                  derivative
                  in the 2005 Debentures as of March 31, 2005 was calculated by management
                  to be
                  $8,143,000.
  All
                of
                the above assumptions are reviewed quarterly and are subject to change
                based
                primarily on management’s assessment of the probability of the events described
                occurring. Accordingly, changes to these assessments could materially
                affect the
                valuation.
  The
            Company valued the asset value of the Series B Preferred Stock Put using
            the
            Black Scholes pricing model with the assistance of a valuation consultant.
            The model uses a number of inputs including the value of the Series B
            Preferred
            Stock Warrants and the cost of alternative financing in order to compute
            the
            value of the Series B Preferred Stock Put. The assumptions used in the
            Black
            Scholes valuation model were: a risk free interest rate of 4.03%; the
            current
            stock price at date of issuance of $0.65 per share; the exercise price
            of the
            warrants of $1.25 and $1.50; the term of ten years; volatility of 450%;
            and
            dividend yield of 0.0%. The Series B Preferred Stock Put was terminated
            on March
            30, 2006 in conjunction with an agreement with Ener1 Group. See Note
            15.
            Accordingly, the Series B Preferred Stock Put had no value at March 31,
            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.


15


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


10.    
      ITOCHU CORPORATION INVESTMENT AND INVESTMENT IN ENERSTRUCT





On
      July
      25, 2003, the Company entered into a Subscription and Investment Agreement
      with
      ITOCHU Corporation (“ITOCHU”), under which the Company issued 14,000,000 shares
      of its common stock in a private sale to ITOCHU at a price of $0.25 per share,
      for $3.5 million. In addition, the Company granted the following options to
      ITOCHU to purchase Ener1 common stock at the following prices: During the six
      month period from July 25, 2003 through January 24, 2004, ITOCHU had the option
      to purchase up to 12,461,861 shares of common stock, for $0.70 per share. During
      January 2004, ITOCHU exercised a portion of these options and purchased
      1,500,000 shares for $1,050,000. During the period from January 25, 2004 through
      January 31, 2005, ITOCHU had the option to purchase up to 9,346,396 shares
      of
      common stock for $4.00 per share. These options expired unexercised on January
      31, 2005.




16


Using
      the
      proceeds of the ITOCHU investment, the Company invested $2,003,000 in a new
      Japanese company called EnerStruct, Inc. (“EnerStruct”), in exchange for an
      initial 49% ownership interest in EnerStruct. As a result of subsequent third
      party investments in EnerStruct Ener1’s interest in EnerStruct has been reduced
      to 48% at March 31, 2006. ITOCHU initially owned 51% of EnerStruct, for which
      it
      invested $1,100,000 plus equipment totaling approximately $500,000. At March
      31,
      2006, the Company’s original investment in EnerStruct was reduced by $1,345,000
      which represents the Company’s share of EnerStruct losses through that
      date.





In
      connection with the foregoing activities, the Company and Ener1 Battery entered
      into a license agreement with ITOCHU and EnerStruct to provide EnerStruct with
      an exclusive license (for Japan only) to use the technologies covered by two
      of
      Ener1 Battery’s pending patent applications. In July 2004, this license became
      non-exclusive. In October 2004, this license was transferred to EnerDel. ITOCHU
      has also licensed to EnerStruct, on an exclusive basis, several of its patents
      relating to its lithium battery technologies. In April 2005, EnerDel entered
      into an agreement with EnerStruct, under which EnerDel paid EnerStruct
      $1,000,000 in prepayment for engineering services related to optimization of
      EnerDel’s planned lithium battery production and further development of
      EnerStruct’s high-rate battery technology. If development of this technology is
      successfully completed, use of such technology would be licensed to EnerDel
      on
      terms set forth in the agreement and certain other terms to be negotiated at
      that time.





Summarized
      financial information of EnerStruct is as follows as of March 31, 2006 and
      for
      the three month period then ended:


Cash
              
              $
              144,000Total
                  assets
              
              
              900,000Total
                  liabilities
              
              
              105,000Net
                  (loss)
              
              
              (306,000
              )





11.  RELATED
      PARTY TRANSACTIONS





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





Ener1’s
      primary business purpose in approving the Splinex merger was to provide its
      shareholders with the opportunity to participate in the future value of Splinex,
      which Ener1’s Board of Directors believed had the potential to become a leading
      three-dimensional graphics software company.  A
      director of Ener1, Dr. Peter Novak, is a director of Splinex. Dr. Novak was
      also
      the president of Splinex from its inception on February 7, 2004 to August 31,
      2004 and became the Chairman of Splinex on September 1, 2005. A former director
      and officer of Ener1, Mr. Fitzgerald, was the chairman and a director of
      Splinex; he resigned as chairman and director of Splinex in December
      2005.





17


Two
      of
      the Company’s directors, Dr. Peter Novak and Mike Zoi, collectively beneficially
      own 31% of the outstanding common stock of Ener1 Group, which owns approximately
      90% of the outstanding common stock of the Company.





Messrs.
      Novak and Zoi also beneficially own an aggregate of 25% of the voting membership
      interests (and an aggregate of 25.5% of the economic membership interests)
      of
      Splinex, LLC, which currently holds 63% of the outstanding common stock of
      Splinex.





Effective
      March 1, 2006, Ener1 Group assumed the Company’s lease on office space in New
      York City, New York. As a result, the Company expensed the book value of
      leasehold improvements totaling $60,000 during the quarter ending March 31,
      2006.





12.    
      ENER1 GROUP FINANCING





Effective
        as of October 15, 2004, the Company entered into an agreement with Ener1
        Group
        under which Ener1 Group agreed to purchase, from time to time, at the Company’s
        request, up to 30,000 shares of the Series B Preferred Stock (“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, the Company agreed on March 30, 2006 to terminate
        Ener1 Group’s obligation to purchase additional Series B Preferred Stock. See
        Note 15.


13.    
      COMMITMENTS AND CONTINGENCIES





Litigation





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





On
      February 10, 2005, Kevin P. Fitzgerald, Ener1’s former Chairman and Chief
      Executive Officer, filed a complaint against the Company in the Circuit
      Court for Broward County, Florida for breach of contract and specific
      performance based on an alleged breach of his employment agreement
      dated September 8, 2003.  Mr. Fitzgerald was dismissed as Ener1’s Chairman
      and Chief Executive Officer on January 9, 2006.  Mr. Fitzgerald’s
      complaint claims he is entitled to additional salary, stock options,
      severance pay equal to his annual salary for two years and unreimbursed expenses
      and benefits in an unspecified amount and seeks a court order extending the
      period during which he may require us to repurchase certain vested
      options through and including April 10, 2006.  The complaint
      also seeks attorney’s fees. The Company intends to vigorously defend
      against the charges made in this litigation.  Mr. Fitzgerald has not filed
      a notice of intent to exercise his right to have the Company repurchase vested
      stock options and the time period for which he sought an extension has
      expired.





On
      January 13, 2006, Pankaj Dhingra, former President of the Company’s Energy
      Division, filed a complaint against the Company in the Circuit Court for Broward
      County Florida. The complaint claims that Ener1 breached Mr. Dhingra’s
      employment agreement dated December 5, 2004 and that he is entitled to an
      additional $25,000 in compensation, a discretionary bonus of $250,000 and
      business expenses of $3,500. The complaint also seeks attorney’s fees in an
      unspecified sum. The Company intends to vigorously defend against the charges
      made in this litigation.





On
      February 24, 2006, A. Ernest Toth, Jr., the Company’s former Chief Financial
      Officer filed a one count complaint against us in the Circuit Court for Broward
      County, Florida for breach of contract. The complaint alleges breach of his
      employment agreement dated June 1, 2005 and that he is entitled to six months
      of
      severance pay in the amount of $112,500, as well as $2,743.89 in additional
      reimbursable expenses.   The complaint alleges Mr. Toth was dismissed
      without cause and that he is therefore entitled to the severance.  The
      Company dismissed Mr. Toth on January 7, 2006 for cause. The complaint also
      seeks attorney’s fees.  The Company intends to vigorously defend against
      the charges made in this litigation.








18


14.     STOCK
      AND OPTION ISSUANCES DURING QUARTER ENDED MARCH 31, 2006





Effective
      January 2, 2006, a consultant to the Company exercised warrants to purchase
      200,000 shares of common stock in a cashless exercise, and the Company delivered
      148,718 shares to the consultant.





15.
      WARRANT EXERCISE AGREEMENT AND INTERCOMPANY TRANSACTIONS WITH ENER1
      GROUP





In
        January 2006, Ener1 Group agreed to assume Ener1’s lease on an office in New
        York City, New York, for which the monthly rent is $35,520. The lease expires
        in
        September 2010. Ener1 expensed the leasehold improvements made to this office
        space in the amount of $60,000 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 March 31, 2006.


On
      January 27, 2006, February 7, 2006 and, in accordance with the agreement
      described below, March 30, 2006, Ener1 Group exercised warrants to purchase
      an
      aggregate of 44,500,000 shares of the Company’s common stock at an exercise
      price of $.08 per share. Total proceeds to the Company from the exercise
      transactions were $3,560,000. The expiration date of the exercised warrants
      was
      2012. Paid in capital increased $19,307,000 during the quarter ended March
      31, 2006 due to the exercise of the Battery Warrants comprised of
      $3,115,000 from the proceeds in excess of the par value of the Common Stock
      and
      $16,192,000 from the fair value of the Battery Warrant derivative at the
      dates of exercise. On
      March
      30, 2006, the Company and Ener1 Group entered into an agreement (the “Warrant
      Exercise Agreement”), under which Ener1 Group agreed to exercise certain
      warrants, and Ener1
      agreed to transfer Ener1’s entire equity interest in Ener EL Holdings, Inc.
      (“Ener EL”), to Ener1 Group, Ener1 and Ener1 Group
      terminated the letter agreement between Ener1 Group
      and
      Ener1 dated October 15, 2004 regarding Ener1 Group’s
      commitment to purchase shares of Ener1 Series B Preferred Stock and warrants
      to
      purchase Ener1 stock, each of Ener1 and Ener1 Group
      agreed to release the other company from outstanding obligations with respect
      to
      intercompany services provided by each company to the other as of March 30,
      2005, and the companies agreed that after Ener1 Group exercises the balance
      of
      the Battery Warrants to purchase 24,500,000 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) $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,
      (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 carrying value, and (3) $584,000 representing the fair value
      of
      the Series B Preferred Put which was terminated. The Company will record the
      value of the new warrant at such time as the balance of the Battery
      Warrants to purchase 24,500,000 shares is
      exercised.





Ener1
      Group and its subsidiaries have from time to time used various services and
      employees of the Company. The Company billed Ener1 Group and its subsidiaries
      for the actual cost of these services and employees. Similarly, the Company
      has
      from time to time used various services and employees of Ener1Group and its
      subsidiaries, and Ener1 Group has billed the Company for the actual cost of
      these services and employees. As of March 31, 2006, the net balance due to
      the
      Company from Ener1 Group and its subsidiaries was $0. In accordance with the
      agreement described above, during the three months ending March 31, 2006, the
      Company expensed $228,000 of intercompany receivables from Ener1 Group in order to
      release Ener1 Group from outstanding obligations to Ener1 for intercompany
      services and payments provided to Ener1 Group as of March 30, 2006.




16.
      STOCK
      BASED COMPENSATION





*Adoption
      of New Accounting Guidance and Transition*





At
      January 1, 2006, the Company has five stock-based employee, executive and
      director compensation plans. Prior to December 31, 2005, the Company accounted
      for these plans under the recognition and measurement provisions of APB Opinion
      No. 25, *Accounting
      for Stock Issued to Employees* ,
      and
      related Interpretations, (“APB 25”) as permitted by FASB Statement No. 123, *Accounting
      for Stock-Based Compensation* (“SFAS
      No. 123”). The Company recorded compensation expense related to the CEO
      option Plan of approximately $194,000 during the year ending December 31,
      2005.





19


Effective
      January 1, 2006, the Company adopted the fair value recognition provisions of
      FASB Statement No. 123R, *Share-Based
      Payment* ,
      and
      related interpretations (“SFAS No. 123R”) using the modified-prospective
      transition method. Under that method, compensation cost recognized in the first
      quarter of 2006 includes (a) compensation cost for all share-based payments
      granted prior to, but not yet vested as of, December 31, 2005 based on the
      grant
      date fair value estimated in accordance with the original provisions of SFAS
      No. 123 and (b) compensation cost for all share-based payments granted
      on or subsequent to January 1, 2006, based on the grant-date fair value
      estimated in accordance with the provisions of SFAS No. 123R. Compensation
      cost is being recognized on a straight-line basis over the requisite service
      period for the entire award in accordance with the provisions of SFAS
      No. 123R. Results for the prior periods have not been restated.





*Valuation
      and Expense Information under SFAS No. 123R*





As
      a
      result of adopting Statement 123(R) on January 1, 2006, the Company’s income
      before income taxes and net income for the quarter ended March 31, 2006 are
      $385,000 lower than if it had continued to account for share-based compensation
      under APB 25. Basic and diluted earnings or (loss) per share for the quarter
      ended March 31, 2006 would have been $0.05 and ($0.001), respectively, if the
      Company had not adopted Statement 123(R), compare to reported basic and diluted
      earnings per share of $0.05 and ($0.002), respectively. The Company recorded
      share based compensation costs of $385,000 for the first quarter of
      2006.




As
      required by SFAS No. 123R, the Company estimates forfeitures of employee
      stock options and recognizes compensation cost only for the portion of those
      awards expected to vest. Forfeiture rates are estimated to be 10% of total
      outstanding options. Estimated forfeitures are adjusted to actual forfeiture
      experience as needed.





In
      connection with the adoption of SFAS No. 123R, the Company estimates the
      fair value of each stock option on the date of grant using a Black Scholes
      Model
      valuation model, applying the following assumptions, and amortizes the estimated
      fair value to expense over the option’s vesting period using the straight-line
      attribution approach.





*Expected
      Term:* The
      expected term represents the period over which the share-based awards are
      expected to be outstanding. It has been determined using the “shortcut method”
described in Staff Accounting Bulletin Topic 14.D.2, which is based on a
      calculation that determines the midpoint between the vesting date and the end
      of
      the contractual term.





*Risk-Free
      Interest Rate:* The
      Company based the risk-free interest rate used in its assumptions on the implied
      yield currently available on U.S. Treasury issues with a remaining term
      equivalent to the stock option award’s expected term. The average risk free
      interest rate used through March 31, 2006 was 3.5%.





*Expected
      Volatility:* The
      Company uses volatility rates based upon the weekly closing stock price of
      the
      Company’s common stock since January 2002, when the Company underwent a change
      in control. The Company determined that share prices prior January 2002 do
      not
      reflect the ongoing business valuation of the Company’s operations. The average
      expected volatility used during the period options were granted was
      100%.





*Expected
      Dividend Yield* :
      The
      Company does not intend to pay dividends on its common stock for the foreseeable
      future. Accordingly, the Company uses a dividend yield of zero in its
      assumptions.





20


A
      summary
      of option activity under the Company’s stock plans as of March, 31, 2006 and the
      changes during the first quarter of 2006 is presented below:





**Options**
              
              **Number
                  of Options**
              
              **Weighted
                  Average Price**
              
              **Average
                  Remaining Contractual Term**
              
              **Intrinsic
                  Value**Outstanding
                  at December 31, 2005
              
              
              24,605,617
              
              $
              0.53Granted
              
              
              -Exercised
              
              
              -Forfeited
                  or expired
              
              
              (2,518,167
              )
              $
              0.60Outstanding
                  at March 31, 2006
              
              
              22,087,450
              
              $
              0.50
              
              
              7.7
              
              $
              284Vested
                  or expected to vest at March 31, 2006
              
              
              21,003,129
              
              $
              0.52
              
              
              8.0
              
              $
              276Exercisable
                  at March 31, 2006
              
              
              11,248,745
              
              $
              0.49
              
              
              7.7
              
              $
              207




No
      options were granted or exercised in the first quarter of 2006. As of March
      31,
      2006, there was $1,456,000 of total unrecognized compensation cost related
      to
      the stock options granted under the Company stock plans. That cost is expected
      to be recognized over a weighted-average period of 8.0 years.





*Performance
      Share Option Plan*





Effective
      October 1, 2005, an officer of EnerDel was granted an option to purchase
      1,000,000 shares of Ener1, Inc. common stock at the exercise price of $.49
      per
      share, vesting 25% on each of the first four anniversaries of the date of the
      grant. The officer’s right to exercise this option is subject to EnerDel
      achieving certain revenue thresholds. The performance goals are not expected
      to
      be met at this time, and no compensation cost has been recognized in the three
      months ended March 31, 2006 in connection with this plan.





*Pro
      Forma Information Under SFAS No.123 for Periods Prior to 2006*





The
      Company accounted for stock options under the intrinsic value method specified
      in APB 25 and adopted the disclosure-only provisions of SFAS No. 123 for periods
      prior to the quarter ending March 31, 2006. Accordingly, compensation cost
      for
      prior reported periods has been recognized for grants under the stock option
      plans only when the exercise prices of employee stock options were less than
      the
      market prices or fair values of the underlying stock on the date of grant.





The
      table
      below illustrates the effect on net earnings and earnings per share if the
      Company had applied the fair value recognition provisions of SFAS No. 123
      to options granted in the first quarter of 2005.





Net
                    income as reported
                
                $
                22,744Plus
                    stock-based compensationdetermined
                    under intrinsic value-based method
                
                
                265Less
                    stock-based compensationdetermined
                    under fair value-based method
                
                
                (931
                )Net
                    income pro forma
                
                
                22,078Preferred
                    stock dividends
                
                
                (741
                )Net
                    income attributable to common shareholders
                
                $
                21,337Net
                    income per share, pro forma basic
                
                $
                0.06Net
                    income per share, pro forma diluted
                
                $
                0.02





21


17.  EARNINGS
      PER SHARE





Basic
      net
      income per share is computed by dividing the net income attributable to common
      shareholders by the weighted-average number of common shares outstanding during
      the period. Diluted net income per share is computed using the weighted-average
      number of common shares outstanding during the period, adjusted for the dilutive
      effect of common stock equivalents, consisting of shares that would be issued
      upon exercise of common stock warrants and from the conversion of the Company’s
      convertible debentures. Weighted-average common shares for the quarter ending
      March 31, 2006 do not include the common stock equivalents represented by common
      stock options and the 2004 Debentures because their inclusion would be
      anti-dilutive. The Company’s Series B Convertible Preferred Stock was not
      convertible at March 31, 2006 or March 31, 2005 and these common stock
      equivalents were excluded from the earnings per share calculations. Diluted
      earnings per share is computed using the net income attributable to common
      shareholders and adjusted by the income statement effect of warrants, options
      and convertible instruments as if the dilutive securities had been converted
      at
      the beginning of the period. If a debt security is deemed to be dilutive, the
      related interest expense, including accretion of debenture discounts, and the
      gain or loss on the related embedded derivative liability are added back to
      the
      income or loss for the purposes of computing diluted earnings or loss per share. The
      dilutive effect of outstanding stock options and warrants is reflected in
      diluted net income or loss per share by application of the treasury stock
      method. The dilutive effect of outstanding convertible securities is reflected
      in diluted net income or loss per share by application of the if-converted
      method.





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





**Quarter
                  EndedMarch 31,****2006**
              
              **2005****(Restated)**
              
              **(Restated)**Weighted
                  Average Shares Outstanding - Basic
              
              
              368,457,582
              
              
              347,455,751Plus
                  net shares from assumed conversion of warrantsunder
                  treasury stock method
              
              
              37,482,548
              
              
              61,831,169Plus
                  net shares from assumed conversion of optionsunder
                  treasury stock method
              
              
              -
              
              
              8,230,987Plus
                  shares from assumed conversion ofconvertible
                  instruments:2004
                  Debentures
              
              
              16,016,260
              
              
              16,016,2602005
                  Debentures
              
              
              14,225,000
              
              
              2,845,000Weighted
                  Average Shares Outstanding - Diluted
              
              
              436,181,390
              
              
              436,379,167





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







**Quarter
                    EndedMarch 31,****2006**
                
                **2005**in
                    thousands
                
                **(Restated)**
                
                **(Restated)**Net
                    income as reported
                
                $
                954
                
                $
                22,744Less
                    preferred stock dividends and accretion
                
                
                (693
                )
                
                (741
                )Add
                    interest expense and accretion of discount onconvertible
                    debentures
                
                
                2,843
                
                
                1,931Less
                    derivative gain on convertible debentures
                
                
                (1,977
                )
                
                (1,316
                )Less
                    derivative gain on warrants
                
                
                (3,413
                )
                
                (11,730
                )Net
                    loss computed for diluted net loss per share
                
                $
                (2,286
                )
                $
                10,888
 22


18.  SUBSEQUENT
      EVENTS





On
      May 4,
      2006, the Company received a notice from a holder of 2004 Debentures and 2005
      Debentures demanding the payment of accrued registration delay payments, which
      through April 30, 2006 aggregated $1.7 million in aggregate for all debenture
      holders of the 2004 Debentures and 2005 Debentures combined. The debenture
      holder has informed Ener1 in writing that the demand was not to be considered
      a
      notice of default under the 2004 Debentures or 2005 Debentures. The Company
      is
      in discussions with the debenture holder about restructuring the payment terms
      of the registration delay payments and the debenture terms.




19. ENERDEL
          FORMATION
 
 On
          October 26, 2004, the Company and each of Delphi Automotive Systems, LLC
          and
          Delphi Technologies, Inc. (collectively, “Delphi”) contributed their lithium
          battery assets to a newly organized Delaware corporation, EnerDel, Inc.
          (“EnerDel”). The Company completed the transactions pursuant to, among other
          documents, a Formation, Subscription and Stockholders’ Agreement (the “Formation
          Agreement”) by and between the Company and Delphi, dated as of October 20, 2004.
          Pursuant to the Formation Agreement, the Company received 80.5% of EnerDel’s
          issued and outstanding shares of common stock in consideration for the
          contribution by the Company and its subsidiaries of $15 million in cash,
          the
          right to use a building and certain lithium battery equipment owned by
          the
          Battery Company with an option to purchase such equipment for $1, and ownership
          of certain intellectual property, subject to exclusive, perpetual and
          royalty-free licenses granting Ener1 the right to use such intellectual
          property
          in areas not related to lithium batteries.
 
 Also,
          pursuant to the Formation Agreement, Delphi received 19.5% of EnerDel's
          issued
          and outstanding shares of common stock, 8,000 shares of EnerDel’s Series A
          Preferred Stock (see Note 8); immediately exercisable warrants with a seven
          year
          term to purchase up to 1.75 million shares of the Company's common stock
          for
          $0.70 per share; and immediately exercisable warrants with a seven year
          term to
          purchase up to 5.25 million shares of the Company’s common stock for $1.00 per
          share. In consideration of the foregoing, Delphi contributed to EnerDel
          its
          lithium battery-related equipment valued at $8,517,600 and its lithium
          battery-related patent portfolio valued at $5,100,000, which is licensed
          back to
          Delphi for non-lithium battery uses under an exclusive, perpetual and
          royalty-free license. In addition, Delphi entered into an agreement with
          EnerDel
          pursuant to which EnerDel subleased those portions of Delphi’s Indianapolis
          facilities that contain lithium battery operations.
  The
          Company recorded a charge to additional paid in capital of approximately
          $1
          million as a result of its contribution of assets to EnerDel in excess
          of its
          proportionate ownership of EnerDel.
  Some
          of
          the assets transferred by Delphi and Ener1 to EnerDel were considered to
          be
          assets to be used in Research and Development ("R&D") activities because the
          assets were being used in product development and prototyping efforts at
          the
          time of the contribution and none of the products under development were
          considered to be technologically or economically feasible. Although EnerDel
          expects to use the transferred assets in R&D activities on future product
          development and prototyping projects or for production of lithium batteries,
          because such uses are contingent upon the successful completion of current
          R&D projects, this equipment was expensed to R&D upon acquisition in
          accordance with Statement of Financial Accounting Standards No. 2, "Accounting
          for Research and Development Costs” ("SFAS No. 2"), which requires that assets
          to be used in R&D activities are to be immediately charged to income unless
          an “alternative future use” for the asset exists.
  Consequently,
          due to the inability to meet the requirements for “alternative future uses” set
          forth in SFAS No. 2, the Company recorded the value of these assets as
          a charge
          to R&D expense. The schedule below sets forth the components of this charge
          to R&D expense:
  Value
                    of machinery and equipment transferred from Ener1 Battery Company
                    to be
                    used in research and development activities
                
                $
                1,162,000Value
                    of intellectual property transferred from Delphi
                
                
                5,100,000Value
                    of machinery and equipment transferred from Delphi
                
                
                8,518,000R
                    & D materials acquired from Delphi
                
                
                143,000Total
                    charges to R&D expense for transferred assets
                
                $
                14,923,000
  The
            Company, with the assistance of an independent valuation consultant, used
            the income approach to value the lithium battery related equipment and
            intellectual property contributed by Delphi to EnerDel. In developing
            a value
            for the developed and in-process technology, the Company considered all
            available valuation methods and employed a form of the Income Approach
            known as
            the Multi-Period Excess Earnings Model. Management attempted to quantify
            the
            magnitude of earnings generated by the specific asset being examined
            and then
            discounts that flow of cash to present value using a discount rate reflective
            of
            the relevant level of associated risk.
 
 The
          primary assumption used in the application of the Multi-Period Excess Earnings
          Model is the discount rate used to calculate present value. The discount
          rate
          employed in the valuation of the assets contributed by Delphi to EnerDel
          was
          26.3%
 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 Corporation 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 $582,000 for the three
            months
            ended March 31, 2006 and 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. The
            EnerDel Series A Preferred Stock is owned 100% by Delphi, which owns
            the
            minority interest in EnerDel.
 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 $151,000,000 as of March 31, 2006. It is
      likely that Ener1’s operations will continue to incur negative cash flows
      through December 31, 2006 and 2007 and additional financing will be required
      to
      fund Ener1’s planned operations through those periods. If additional financing
      is not obtained, such a condition, among others, will give rise to substantial
      doubt about Ener1’s ability to continue as a going concern.





We
      are
      required under the terms of our senior secured convertible debentures due 2009,
      issued in January 2004 (the “2004 Debentures”), and our senior secured
      convertible debentures due 2009, issued in March 2005 (the “2005 Debentures”),
      to register the resale of the common stock underlying the debentures and
      associated warrants. If the registration statements we filed to register these
      resales are not available for use, we are required to make certain payments
      to
      the purchasers of the 2004 and 2005 Debentures (the “registration delay
      payments”). These registration statements have not been available for use since
      November 21, 2005. At April 30, 2006, the accumulated registration delay
      payments for the 2004 and 2005 Debentures aggregated $1.7 million. Payments
      accrued at the rate of 1.5% of principal approximately $295,000 per month for
      the 2004 Debentures until January 20, 2006, at which time our obligation to
      maintain the effectiveness of the resale registration statement for the common
      stock underlying the 2004 Debentures ended. Registration delay payments will
      continue to accrue at a fixed rate of $213,375 per month for the 2005 Debentures
      until the 2005 Debenture holders are able to use the resale registration
      statement. The obligations to make registration delay payments have adversely
      affected our ability to raise additional funds for our operations and may
      continue to do so until any post-effective amendments or new registration
      statements we file are declared effective by the SEC.





24


Results
      of Operations





We
      had no
      significant sales or gross margin from continuing operations in either of the
      three month periods ended March 31, 2006 and 2005. Sales in the quarter ending
      March 31, 2006 were for services provided by our fuel cell
      business.





*Net
        income* .
        We
        reported net income of $954,000 for the quarter ended March 31, 2006, a decrease
        of $21,790,000 when compared to net income of $22,744,000 for the quarter
        ended
        March 31, 2005. Our
        net
        income includes $10,372,000 and $30,412,000 in gain on derivative liability
        resulting from changes in the accounting value of derivative liabilities
        for the
        quarters ended March 31, 2006 and 2005, respectively. The decrease in net
        income
        for the quarter ended March 31, 2006 as compared to the quarter ended March
        31,
        2005 was primarily the result of the decrease in gain on derivative
        liability.





*Losses
      from operations* .
      We
      reported losses from operations of $4,971,000 for the quarter ended March 31,
      2006, a decrease of $823,000 when compared to losses from operations of
      $5,794,000 for the quarter ended March 31, 2005. The decrease in operating
      losses was attributable primarily to decreases in research and development
      expenses of $1,033,000 and manufacturing pre-production costs of $793,000,
      partially offset by an increase in general and administrative expenses of
      $1,201,000.




*Research
        and development (“R&D”) Expenses*. Our R&D expenses were $919,000
        and $1,952,000 for the quarters ending March 31, 2006 and 2005, respectively.
        The 53% reduction in R&D expenses of $1,033,000 is primarily due to
        decreases in salaries, rent, contract labor and materials. During the quarter
        ending March 31, 2006, our battery business consolidated its operations,
        equipment and personnel into the Indiana manufacturing and R&D facility, and
        began accelerating its Li-ion battery development activities. Although R&D
        expenses were lower during this transition period, we expect our battery
        business to increase its R&D expenditures substantially during 2006. Our
        fuel cell business increased its R&D activity during the quarter as it moved
        most of its personnel into our West Palm Beach facility and began new product
        development activities. Overall, R&D salaries and benefits decreased
        $351,000, rent decreased $334,000, materials decreased $447,000 and contract
        labor decreased $216,000 during the quarter. The rent decrease was due to
        a rent
        credit of $313,000 resulting form the termination of leasehold improvement
        obligations on our Indiana facility.


*General
        and administrative expenses (“G&A”).* G&A
        increased $1,201,000, or 43%, to $3,969,000 in the first quarter ending March
        31, 2006 compared to $2,768,000 for the quarter ending March 31, 2005. The
        major
        components of general and administrative expenses are wages and benefits,
        professional fees, rent, stock compensation expense and costs associated
        with
        the Warrant Exercise Agreement described below. G&A wages and benefits
        decreased $35,000 to $990,000 primarily due to lower executive salaries.
        Rent
        increased $105,000 due to the cost associated with rental of our New York
        City
        administrative offices through February 2006. Stock compensation expense
        increased $120,000 to $385,000 due to the January 1, 2006 adoption of SFAS
        123(R) which requires us to record the fair value of shares issuable under
        employee stock options as compensation cost. Professional fees increased
        $201,000 to $808,000 in the quarter ending March 31, 2006 due to higher legal
        and accounting services necessary to complete the restatement of the prior
        year
        financial statements to comply with derivative accounting requirements.
 
 On
        March
        30, 2006, we entered into an agreement (the “Warrant Exercise Agreement”) with
        Ener1 Group, under which Ener1 Group agreed to exercise certain warrants,
        and
        we agreed
        to transfer our entire equity interest in Ener EL Holdings, Inc. (“Ener EL”), to
        Ener1 Group, we and Ener1 Group
        terminated the letter agreement between Ener1 Group
        and
        Ener1 dated October 15, 2004 regarding Ener1 Group’s
        commitment to purchase shares of Ener1 Series B Preferred Stock and warrants
        to
        purchase our stock, we and Ener1 Group
        each agreed to release the other company from outstanding obligations with
        respect to intercompany services provided by each company to the other as
        of
        March 30, 2005, and we agreed that after Ener1 Group exercises additional
        warrants to purchase 24,500,000 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. In
        accordance with the Warrant Exercise Agreement, during the three months ending
        March 31, 2006, we expensed (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, and (3) $584,000 representing the fair value of the Series B
        Preferred Put which was terminated. In addition, Ener1 Group agreed to assume
        our lease on office space in New York City e ffective
        March 1, 2006. As a result, we expensed the book value of leasehold improvements
        to this office totaling $60,000 during the quarter ended March 31,
        2006.
 
 25
 *Provision
        for income taxes* The
        effective tax rate in 2005 and 2006 was zero percent. The gain on derivative
        liability is not considered income for federal income tax purposes. As a
        result,
        we reported a net operating loss (“NOL”) for tax purposes, and the NOL was
        entirely offset by an increase in our deferred tax asset valuation allowance.
 
 *Interest
        expense and Registration Delay Payments* Interest
        expense increased $912,000 to $2,843,000 for the three months ended March
        31,
        2006 compared to $1,931,000 in the quarter ended March 31, 2005. Interest
        expense increased due to the inclusion of a full quarter of interest on the
        2005
        Debentures, and increase in the interest rate to 15% on the 2005 Debentures
        and
        an increase in the interest rate to 15% on the 2004 Debentures. First quarter
        interest payments were $1,067,000 and $714,000 for the three months ending
        March
        31, 2006 and 2005, respectively. Interest expense also increased due to higher
        accretion of bond discount, which increased $649,000 to $1,479,000 in the
        quarter ended March 31, 2006 compared to $830,000 in quarter ended March
        31,
        2005. We accrued $871,000 of registration delay payment obligations in the
        quarter ending March 31, 2006; the payments are accruing under our registration
        rights agreements with the purchasers of the 2005 and 2004 Debentures due
        to the
        unavailability of a registration statement for resale of the common stock
        underlying the 2004 and 2005 Debentures.
 
 *Manufacturing
        Pre-production Costs.* Beginning in June 2004, we began preparing our battery manufacturing plant
        in
        Fort Lauderdale to begin production, in addition to continuing our
        battery-related research and development activities. Manufacturing
        pre-production cost for the three months ended March 31, 2006 and 2005 were
        0
        and $793,000, respectively. These expenses were incurred for implementing
        new
        manufacturing infrastructure, including new personnel, policies, and procedures.
        We ceased these activities and did not incur any similar expense in the quarter
        ended March 31, 2006.
 
 *Gain
        on derivative liability.* The gain
        on derivative liability for the three months ended March 31, 2006 decreased
        by
        $20,040,000 to $10,372,000 compared to $30,412,000 in the period ended March
        31,
        2005. The decrease was due to a corresponding decrease in the reported value
        of
        freestanding derivatives and embedded derivatives resulting from decreases
        in the market value of our common stock at the end of the quarter and from
        a
        decrease in the number of shares underlying warrants recorded as a derivative
        liability outstanding at the end of the period.
 
 Liquidity
        and Capital Resources
 
 We
        do not
        presently have sufficient funds to execute our business plans, and need to
        raise
        $30,000,000 to $40,000,000 in additional capital to conduct our planned
        operations during 2006 and 2007, including planned
        capital expenditures for pilot production equipment and facilities upgrades
        at
        EnerDel and funding of continuing R&D expenses. We intend to raise this
        capital through a combination of funds from government sources, including
        research and development grants and public financing such as revenue bonds,
        and
        equity or debt financing from strategic or financial investors. We also need
        additional short term working capital to fund our operations through June
        2006,
        at which time we intend to seek to raise the additional financing described
        above. If
        additional financing is not obtained, such a condition, among others, will
        give
        rise to substantial doubt about our ability to continue as a going concern
        for a
        reasonable period of time.
 
 We
        are
        required under the terms of the 2004 and 2005 Debentures to register the
        resale
        of the common stock underlying the debentures and associated warrants. These
        registration statements have not been available for use since November 21,
        2004. As
        a
        result of the restatement of our financial statements for 2004 and 2005 and
        the
        amendment of certain of our prior filings with the SEC containing such financial
        information, we have not yet filed post-effective amendments to these
        registration statements with updated financial statements. Under the terms
        of
        the registration agreements for the 2004 Debentures and 2005 Debentures,
        we have
        incurred $1.7 million as of April 30, 2006 of registration delay payment
        requirements due to the debenture holders. We have received a demand from
        a
        holder of the 2005 and 2004 Debentures for us to pay the registration delay
        payments, and if we do not make such payments, the debenture holders could
        declare an event of default on all of the Debentures which could result in
        the
        acceleration of the requirement to pay all principal and accrued interest.
        The
        debenture holder has informed us in writing that the demand was not to be
        considered a notice of default under the 2004 Debentures or 2005 Debentures.
        We
        are in discussions with the debenture holder about restructuring the payment
        terms of the registration delay payments and the terms of the 2005 and 2004
        Debentures.
 
 26
 At
        March
        31, 2006, we had a working capital deficit of $31,843,000 primarily due to
        an
        aggregate derivative liability of $28,998,000. Our working capital deficit
        excluding the derivative liability was $2,845,000. Our cash at March 31,
        2006
        was $890,000. During the three months ending March 31, 2006, w e
        used
        $4,914,000 of cash in operations which was funded through financing activities
        of $3,553,000 and beginning cash on hand of $2,306,000.
 
 During
        the three months ended March 31, 2006, our working capital provided by financing
        sources was $3,553,000 consisting primarily of the proceeds from the exercise
        of
        warrants to purchase our common stock by Ener1 Group. On
        January 27, 2006, February 7, 2006 and March 30, 2006, Ener1 Group exercised
        warrants to purchase an aggregate 44,500,000 shares of our common stock at
        an
        exercise price of $.08 per share. Total proceeds from the exercise transactions
        were $3,560,000. The expiration date of the exercised warrants was
        2012.
 
 If
        additional financing is not obtained, such a condition, among others, will
        give
        rise to substantial doubt about our ability to continue as a going concern
        for a
        reasonable period of time.
  ***Critical
          Accounting Policies*** ****
  The
              preparation of financial statements and related disclosures in conformity
              with
              accounting principles generally accepted in the United States (“GAAP”) requires
              management to make estimates and assumptions that affect the reported
              amounts of
              assets and liabilities, the fair value of financial instruments such
              as
              derivatives, the disclosure of contingent assets and liabilities at
              the date of
              the financial statements and expenses during the period reported. The
              following
              accounting policies involve a “critical accounting estimate” because they are
              particularly dependent on estimates and assumptions made by management
              about
              matters that are highly uncertain at the time the accounting estimates
              are made.
              In addition, while we have used our best estimates based on facts and
              circumstances available to us at the time, different estimates reasonably
              could
              have been used in the current period. Changes in the accounting estimates
              we
              used are reasonably likely to occur from period to period, which may
              have a
              material impact on the presentation of our financial condition and
              results of
              operations. We review these estimates and assumptions periodically
              and reflect
              the effects of revisions in the period that they are determined to
              be
              necessary.
 
 *Accounting
              for Derivative Instruments*
  Statement
              of Financial Accounting Standard (“SFAS”) No.
              133, “Accounting for Derivative Instruments and Hedging Activities,” as amended,
              requires all derivatives to be recorded on the balance sheet at fair
              value.
              These derivatives, including embedded derivatives in our structured
              borrowings,
              are separately valued and accounted for on our balance sheet. Fair
              values for
              exchange-traded securities and derivatives are based on quoted market
              prices.
              Where market prices are not readily available, fair values are determined
              using
              market based pricing models incorporating readily observable market
              data and
              requiring judgment and estimates.
 In
                September 2000, the Emerging Issues Task Force ("EITF") issued EITF
                00-19,
                "Accounting for Derivative Financial Instruments Indexed to and Potentially
                Settled in, a Company's Own Stock," ("EITF 00-19") which requires
                freestanding
                contracts that are settled in a company's own stock, including common
                stock
                warrants, to be designated as an equity instrument, asset or a liability.
                Under
                the provisions of EITF 00-19, a contract designated as an asset or
                a liability
                must be carried at fair value on a company’s balance sheet, with any changes in
                fair value recorded in the company’s results of operations. A contract
                designated as an equity instrument must be included within equity,
                and no fair
                value adjustments are required. In accordance with SFAS No. 133 and
                EITF 00-19,
                we determined that several of the outstanding warrants to purchase
                our common
                stock and the embedded conversion feature and certain other features
                of several
                of our financial instruments should be separately accounted for as
                assets or
                liabilities. Our financial statements for the years ended December
                31, 2004 and
                2005 reflect the fair value of these warrants and the conversion
                and other
                embedded derivatives features on our balance sheet and the unrealized
                changes in
                the values of these derivatives in our consolidated statement of
                operations as
“Gain (loss) on derivative liabilities.”
  We
                determined that the Battery Warrants were a
                derivative liability under EITF 00-19 because share settlement of
                these warrants
                was not within the control of the company as a result of the facts
                that: (1) the
                holder of the Battery Warrants was the controlling shareholder of
                the Company,
                and (2) the Battery Warrants contained dilution protection features,
                with no
                limit or cap on the number of shares 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 conlude that we had sufficient authorized and
                unissued
                shares to settle the potential share issuances required under these
                warrants as
                long as the Battery Warrants were outstanding.
  We
                have
                evaluated our provisions of the registration rights agreements issued
                in
                connection with our 2004 Debentures which require us to make registration
                delay
                payments in combination with the respective financial instruments
                involved. The
                EITF recently deliberated the impact of liquidated damages clauses
                in
                registration rights agreements and the effect on accounting and classification
                of instruments subject to the scope of EITF 00-19 in EITF 05-04 *The
                Effect of a Liquidated Damages Clause on a Freestanding Financial
                Instrument
                Subject to Issue No. 00-19.* The
                EITF
                has not reached a consensus on this issue and has deferred deliberation
                until
                the FASB addresses certain questions which could impact a conclusion
                on this
                issue. Specifically, EITF 05-04 presents alternative views on whether
                the
                liquidated damages provisions in registration rights agreements should
                be
                combined with or treated separately from the associated financial
                instrument. As
                discussed above, we view the registration rights agreement and the
                financial
                instrument as one combined freestanding instrument under View A of
                EITF 05-04.
                If the EITF were to adopt the view that the registration rights agreement
                should
                be viewed as a separate instrument from the financial instrument,
                we may have to
                account for additional derivatives or liabilities.
  The
                2004
                Debentures and 2005 Debentures both contain more than one embedded
                derivative
                feature which SFAS 133 requires be accounted for as 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.
 
 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
                    is used 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, (4) the likelihood that
                the
                conversion price will be adjusted, (5) the likelihood that the our
                common stock
                will be listed on an exchange, (6) the likelihood that we will be
                able to obtain
                alternative financing and (7) the likelihood that we would be able
                to force
                conversion of the debentures.
 The
                    fair
                    value of the compound derivative embedded in the 2004 Debentures
                    as of March 31,
                    2006 determined using the lattice valuation model was based on
                    the following
                    assumptions:
 
 -
                        the
                            price of Ener1's common stock would increase at a rate
                            commensurate with
                            the cost of equity, with a volatility of 120%; -
                        Ener1
                            would remain in default of the resale registration agreement
                            relating to
                            the 2004 Debentures for three months, followed by a 95%
                            likelihood that
                            Ener1 would not be in default of its obligations under
                            that
                            agreement; -
                        5%
                            likelihood that an event of default or a fundamental
                            change would occur,
                            increasing over time; -
                        reset
                            events projected to occur with a weighted average adjustment
                            factor of
                            .989; -
                        95%
                            likelihood that Ener1 would force the conversion of the
                            2004 Debentures if
                            the stock price reached $1.75; -
                        the
                            holders of the 2004 Debentures would convert the 2004
                            Debentures if
                            Ener1's common stock price was $3.50, the resale registration
                            statement
                            was effective and Ener1 was not in default under the
                            2004
                            Debentures; -
                        Ener1
                            would redeem the 2004 Debentures following the third
                            anniversary of the
                            issue date if Ener1's common stock price reached $1.50
                            or higher; -
                        0%
                            likelihood that Ener1 would be able to obtain alternative
                            financing that
                            would enable it to redeem the 2004 Debentures increasing
                            2.5% per quarter
                            to a maximum of 25%; and -
                        0%
                            likelihood that Ener1's common stock would be listed
                            on an exchange
                            increasing 10% quarterly to a maximum of
                            90%. 
 Based
                      on
                      these management assumptions, the fair value of these embedded
                      derivatives as of
                      March 31, 2006 was calculated by management to be
                      $5,025,000.
 27
 The
            fair
            value of the compound derivative embedded in the 2004 Debentures as of
            March 31,
            2005 determined using the lattice valuation model was based on the following
            assumptions:
 
 -
                the
                    price of Ener1's common stock would increase at a rate commensurate
                    with
                    the cost of equity, with a volatility of 100%; -
                95%
                    likelihood that Ener1 would not be in default of its obligations
                    under the
                    resale registration agreement relating to the 2004
                    Debentures; -
                5%
                    likelihood that an event of default or a fundamental change would
                    occur,
                    increasing over time; -
                reset
                    events projected to occur with a weighted average adjustment
                    factor of
                    .989; -
                95%
                    likelihood that Ener1 would force the conversion of the 2004
                    Debentures if
                    the stock price reached $1.75; -
                the
                    holders of the 2004 Debentures would convert the 2004 Debentures
                    if
                    Ener1's common stock price was $3.50, the resale registration
                    statement
                    was effective and Ener1 was not in default under the 2004
                    Debentures; -
                Ener1
                    would redeem the 2004 Debentures following the third anniversary
                    of the
                    issue date if Ener1's common stock price reached $1.50 or
                    higher; -
                0%
                    likelihood that Ener1 would be able to obtain alternative financing
                    that
                    would enable it to redeem the 2004 Debentures increasing 2.5%
                    per quarter
                    to a maximum of 25%; and -
                0%
                    likelihood that Ener1's common stock would be listed on an exchange,
                    increasing 10% quarterly to a maximum of
                    90%. 
 Based
              on
              these management assumptions, the fair value of these embedded derivatives
              as of
              March 31, 2005 was calculated by management to be
              $12,903,000.
 
 The
            fair
            value of the compound derivative embedded in the 2005 Debentures as of
            March 31,
            2006 determined using the lattice valuation model was based on the following
            assumptions:
 
 -
                the
                    price of Ener1's common stock would increase at a rate commensurate
                    with
                    the cost of equity, with a volatility of 120%; -
                Ener1
                    would remain in default of the resale registration agreement
                    relating to
                    the 2005 Debentures for three months, followed by a 95% likelihood
                    that
                    Ener1 would not be in default of its obligations under that
                    agreement; -
                5%
                    likelihood that an event of default or a fundamental change would
                    occur; -
                reset
                    events projected to occur with a weighted average adjustment
                    factor of
                    .973; -
                95%
                    likelihood that Ener1 would force the conversion of the 2005
                    Debentures if
                    the Ener1 common stock price reached
                    $1.50; -
                the
                    holders of the 2005 Debentures would convert the 2005 Debentures
                    if
                    Ener1's common stock price reached $1.75, the resale registration
                    statement was effective and Ener1 was not in default under the
                    2004
                    Debentures; -
                Ener1
                    would redeem the 2005 Debentures following the third anniversary
                    of the
                    issue date if Ener1's common stock price reached $1.25 or higher; -
                0%
                    likelihood that Ener1 would be able to obtain alternative financing
                    that
                    would enable it to redeem the 2005 Debentures, increasing 2.5%
                    per quarter
                    to a maximum likelihood of 25%; and -
                0%
                    likelihood that Ener1's common stock would be listed on an exchange
                    and
                    meet the volume requirements set forth in the 2005 Debentures,
                    increasing
                    10% quarterly to a maximum likelihood of
                    90%. 
 Based
              on
              these management assumptions, the fair value of the compound embedded
              derivative
              in the 2005 Debentures as of March 31, 2006 was calculated by management
              to be
              $3,532,000.
 
 The
            fair
            value of the compound derivative embedded in the 2005 Debentures as of
            March 31,
            2005 determined using the lattice valuation model was based on the following
            assumptions:
 
 -
                the
                    price of Ener1's common stock would increase at a rate commensurate
                    with
                    the cost of equity, with a volatility of 100%; -
                95%
                    likelihood that Ener1 would not be in default of its obligations
                    under the
                    resale registration agreement relating to the 2005
                    Debentures; -
                5%
                    likelihood that an event of default or a fundamental change would
                    occur; -
                reset
                    events projected to occur with a weighted average adjustment
                    factor of
                    .986; -
                95%
                    likelihood that Ener1 would force the conversion of the 2005
                    Debentures if
                    the Ener1 common stock price reached
                    $1.50; -
                the
                    holders of the 2005 Debentures would convert the 2005 Debentures
                    if
                    Ener1's common stock price reached $1.75, the resale registration
                    statement was effective and Ener1 was not in default under the
                    2004
                    Debentures; -
                Ener1
                    would redeem the 2005 Debentures following the third anniversary
                    of the
                    issue date if Ener1's common stock price reached $1.25 or higher; -
                0%
                    likelihood that Ener1 would be able to obtain alternative financing
                    that
                    would enable it to redeem the 2005 Debentures, increasing 2.5%
                    per quarter
                    to a maximum likelihood of 25%; and -
                0%
                    likelihood that Ener1's common stock would be listed on an exchange
                    and
                    meet the volume requirements set forth in the 2005 Debentures,
                    increasing
                    10% quarterly to a maximum likelihood of
                    90%. 
 Based
              on
              these management assumptions, the fair value of the compound embedded
              derivative
              in the 2005 Debentures as of March 31, 2005 was calculated by management
              to be
              $8,143,000.
  All
            of
            the above assumptions are reviewed quarterly and are subject to change
            based
            primarily on management’s assessment of the probability of the events described
            occurring. Accordingly, changes to these assessments could material affect
            the
            valuation.
 Black
                  Scholes Valuation Model
 Each
              of
              these factors is reassessed at each balance sheet date, and the value
              of each
              derivative liability or asset is recalculated. The projections used,
              and
              managements’ assessment of the likelihood of different events, can greatly
              affect the value of our derivatives assets and liabilities, which can
              significantly affect our financial statements.
 
 We valued
                the asset value of our Series B Preferred Stock Put using the Black
                Scholes
                pricing model, with the assistance of a valuation consultant. The
                model uses a
                number of inputs including the value of the warrants associated with
                the Series
                B Preferred Stock (the "Series B Preferred Stock Warrants") and the
                cost of
                alternative financing, in order to compute the value of the put feature.
                The
                assumptions used in the Black Scholes valuation model were: a risk
                free interest
                rate of 4.03%; the current stock price at date of issuance of $0.65
                per share;
                the exercise price of the warrants of $1.25 and $1.50; a term of
                ten years;
                volatility of 450%; and dividend yield of 0.0%.
  We
              used
              the Black Scholes pricing model to determine the fair values of our
              warrants and
              the conversion feature of our preferred stock. The model uses market
              sourced
              inputs such as interest rates, stock prices, and option volatilities,
              the
              selection of which requires management’s judgment, and which may impact net
              income or loss. In particular, we use volatility rates based upon the
              closing
              stock price of our common stock since January 2002, when our company
              underwent a change in control. We determined that share prices prior
              to this
              period do not reflect the ongoing business valuation of our current
              operations.
              We use a risk free interest rate which is equal to the U. S. Treasury
              bill rate
              for securities with a maturity that approximates the estimated expected
              life of
              a derivative or security. We use the closing market price of our common
              stock on
              the date of issuance of a derivative or at the end of a quarter when
              a
              derivative is valued at fair value. The volatility factor used in the
              Black
              Scholes pricing model has a significant effect on the resulting valuation
              of the
              derivative liabilities on our balance sheet. The volatility of our
              stock price
              has ranged from 296% to 135% during the years 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 Rate**
                          
                          **Market
                              Price**
                          
                          **Term
                              in Years**At
                              Issuance date for:2004
                              Debenture Warrants
                          
                          
                          1/21/2004
                          
                          
                          296
                          %
                          
                          3.5
                          %
                          $
                          1.65
                          
                          
                          102005
                              Debenture Warrants
                          
                          
                          3/11/2005
                          
                          
                          135
                          %
                          
                          3.5
                          %
                          $
                          0.75
                          
                          
                          5EnerDel
                              Series A Preferred Stock conversion
                          
                          
                          10/20/2004
                          
                          
                          207
                          %
                          
                          1.8
                          %
                          $
                          0.66
                          
                          
                          3
                              mos.Delphi
                              Warrants
                          
                          
                          10/20/2004
                          
                          
                          207
                          %
                          
                          1.8
                          %
                          $
                          0.66
                          
                          
                          7Series
                              B Preferred Stock Warrants
                          
                          
                          10/15/2004
                          
                          
                          207
                          %
                          
                          1.8
                          %
                          $
                          0.65
                          
                          
                          10Debt
                              Exchange Warrants
                          
                          
                          11/14/2003
                          
                          
                          296
                          %
                          
                          1.0
                          %
                          $
                          0.98
                          
                          
                          10ITOCHU
                              options
                          
                          
                          7/1/2003
                          
                          
                          296
                          %
                          
                          1.0
                          %
                          $
                          1.40
                          
                          
                          6
                              mos.Battery
                              Warrants
                          
                          
                          9/6/2002
                          
                          
                          201
                          %
                          
                          1.7
                          %
                          $
                          0.05
                          
                          
                          10Series
                              B Preferred Stock Put
                          
                          
                          10/15/2004
                          
                          
                          450
                          %
                          
                          4.0
                          %
                          $
                          0.65
                          
                          
                          10Prices
                              and average rates at Year End:December
                              31, 2003
                          
                          
                          
                          
                          
                          296
                          %
                          
                          4.3
                          %
                          $
                          1.40December
                              31, 2004
                          
                          
                          
                          
                          
                          155
                          %
                          
                          4.1
                          %
                          $
                          0.85December
                              31, 2005
                          
                          
                          
                          
                          
                          145
                          %
                          
                          4.1
                          %
                          $
                          0.39
 *Accounting
          for Long-Lived Assets*
 
 We
        account for the impairment and disposition of long-lived assets in accordance
        with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived
        Assets.” In accordance with SFAS No. 144, long-lived assets are reviewed for
        impairment whenever events or changes in circumstances indicate that the
        carrying amount of the asset may not be recoverable. An asset is considered
        impaired if the sum of the undiscounted cash flows we estimate will be generated
        by that asset is less than its carrying value.
 
 *Accounting
        for Share-based Payments*
 
 The
        preparation of financial statements and related disclosures in conformity
        with
        accounting principles generally Stock-Based
        Compensation. Statement of Financial Accounting Standards (“SFAS”)
        No. 123R, “Accounting for Stock-Based Compensation,” requires companies to
        record employee stock option compensation at fair value. We adopted SFAS
        123R
        during the quarter ending March 31, 2006.
 28
  Item
        3.  Controls and Procedures
 
 As
        of
        March 31, 2006, we carried out an evaluation, under the supervision and with
        the
        participation of our management, including the individuals serving as our
        Chief
        Executive Officer and our Chief Financial Officer, of the effectiveness of
        the
        design and operation of our disclosure controls and procedures.  During the
        course of this evaluation, we identified deficiencies in our internal controls
        and disclosure controls relating to our calculation of diluted earnings or
        loss
        per share and our accounting for redeemable preferred stock.  As a result
        of the identification of these deficiencies, the financial statements for
        the
        quarter ended March 31, 2005 included in this Quarterly Report on Form 10-QSB
        have been restated in order to reflect the financial effect of derivative
        gains
        on the calculation of diluted earnings or loss per share and to show the
        redeemable preferred stock as temporary equity.  Due to our determination
        that it was necessary to restate our financial statements for the quarter
        ended
        March 31 2005, our Chief Executive Officer and Chief Financial Officer concluded
        that our disclosure controls and procedures were not effective  as of March
        31, 2006 to
        ensure
        that information required to be disclosed by us in reports that we file or
        submit under the Exchange Act is recorded, processed, summarized and reported
        within the time periods specified in Securities and Exchange Commission rules
        and forms .
 
 We
        are in
        the process of improving our internal controls and disclosure controls in
        an
        effort to remediate these deficiencies through the following efforts: 1)
        implementing better controls and procedures over the calculation of diluted
        earnings or loss per share and our accounting for preferred stock, and 2)
        improving supervision and training of our accounting staff. We are continuing
        our efforts to improve and strengthen our control processes and procedures
        to
        fully remedy these deficiencies. Our management and directors will continue
        to
        work with our auditors and other outside advisors to ensure that our controls
        and procedures are adequate and effective.
 
  29
  PART
        II.  OTHER INFORMATION
 
 Item
        1.  Legal Proceedings
 
 We
        receive communications from time to time alleging various claims against
        us and
        our subsidiaries. These claims include, but are not limited to, allegations
        that
        certain of our products infringe the patent rights of other third parties.
        We
        cannot predict the outcome of any such claims or the effect of any such claims
        on our operating results, financial condition, or cash flows.
 
 On
        February 10, 2005, Kevin P. Fitzgerald, our former Chairman and Chief Executive
        Officer, filed a complaint against us in the Circuit Court for Broward
        County, Florida for breach of contract and specific performance based
        on our alleged breach of his employment agreement dated September 8,
        2003.  Mr. Fitzgerald was dismissed as our Chairman and Chief Executive
        Officer on January 9, 2006.  Mr. Fitzgerald’s complaint claims he
        is entitled to additional salary, stock options, severance pay equal to his
        annual salary for two years and unreimbursed expenses and benefits in an
        unspecified amount and seeks a court order extending the period during
        which he may require us to repurchase certain vested options through
        and including April 10, 2006.  The complaint
        also seeks attorney’s fees. We intend to vigorously defend against the
        charges made in this litigation.  At this time Mr. Fitzgerald has not filed
        a notice of intent to exercise his right to have the company repurchase vested
        stock options and the time period for which he sought an extension has
        expired.
 
 On
        January 13, 2006, Pankaj Dhingra, the former president of our energy division,
        filed a complaint against us in the Circuit Court for Broward County Florida.
        The complaint claims we breached Mr. Dhingra’s employment agreement dated
        December 5, 2004 and that he is entitled to an additional $25,000 in
        compensation, a discretionary bonus of $250,000 and business expenses of
        $3,500.
        The complaint also seeks attorney’s fees in an unspecified sum. We intend to
        vigorously defend against the charges made in this litigation.
 
 On
        February 24, 2006, A. Ernest Toth, Jr., our former Chief Financial Officer
        filed
        a one count complaint against us in the Circuit Court for Broward County,
        Florida for breach of contract. The complaint alleges breach of his employment
        agreement dated June 1, 2005 and that he is entitled to six months of severance
        pay in the amount of $112,500, as well as $2,743.89 in additional reimbursable
        expenses.   The complaint alleges Mr. Toth was dismissed without cause
        and that he is therefore entitled to the severance.  The company dismissed
        Mr. Toth on January 7, 2006 for cause. The complaint also seeks attorney’s
        fees.  We intend to vigorously defend against the charges made in this
        litigation.
 
 
 Item
        2.  Unregistered Sales of Equity Securities and Use of
        Proceeds
 
 Effective
        January 2, 2006, one of our consultants exercised warrants to purchase 200,000
        shares of our common stock in a cashless exercise, and we issued 148,718
        shares
        to the consultant.
 
 On
        March
        30, 2006, Ener1 Group, Inc. exercised warrants to purchase 10,000,000 shares
        of
        our common stock for an aggregate purchase price of $800,000.
 
 On
        April
        20, 2006 Ener1 Group exercised warrants to purchase 1,250,000 shares of our
        common stock, for an aggregate purchase price of $100,000.
 
 On
        April
        26, 2006 Ener1 Group exercised warrants to purchase 1,000,000 shares of our
        common stock, for an aggregate purchase price of $80,000.
 
 On
        May 1,
        2006 Ener1 Group exercised warrants to purchase 4,437,500 shares of our common
        stock, for an aggregate purchase price of $355,000.
 
 On
        May
        12, 2006 Ener1 Group exercised warrants to purchase 625,000 shares of our
        common
        stock, for an aggregate purchase price of $50,000.
 
 On
        May
        15, 2006 Ener1 Group exercised warrants to purchase 250,000 shares of our
        common
        stock, for an aggregate purchase price of $20,000.
 
 30
 On
        May
        17, 2006 Ener1 Group exercised 112,500 warrants to purchase our common stock,
        for an aggregate purchase price of $9,000.
 
 On
        May
        18, 2006 Ener1 Group exercised 2,500,000 warrants to purchase our common
        stock,
        for an aggregate purchase price of $200,000.
 
 All
        of
        the security issuances described above were exempt from registration under
        Rule
        506 of Regulation D and under Section 4(2) of the Securities Act of 1933,
        as
        sales not involving a public offering.
  31
 Item
        6.  Exhibits
  3.1
                  Amended
                      and Restated Articles of Incorporation of the Registrant, dated
                      February
                      12, 1993, incorporated by reference to Exhibit 3(i) to the
                      Registrant’s
                      Quarterly Report on Form 10-Q for the quarter ended September
                      30,
                      2000.3.2
                  Amendment
                      to Amended and Restated Articles of Incorporation, dated March
                      11, 2002,
                      incorporated by reference to Exhibit 3.2 of the Registrant’s Annual Report
                      on Form 10-K for the year ended December 31, 2001.3.3
                  Amendment
                      to Amended and Restated Articles of Incorporation, dated October
                      21, 2002,
                      incorporated by reference to Exhibit 3.1 of the Registrant’s current
                      report on Form 8-K dated October 28, 2002.3.4
                  Certificate
                      of Designations of Series B Preferred Stock of Ener1, Inc.
                      dated October
                      15, 2004, incorporated by reference to Exhibit 3.6 to the Registrant’s
                      Annual Report on Form 10-KSB for the year ended December 31,
                      2004.
                      .3.5
                  Amendment
                      to Amended and Restated Articles of Incorporation, dated December
                      2004,
                      incorporated by reference to Exhibit A of the Registrant’s Schedule 14C
                      dated December 6, 2004.3.6
                  Bylaws
                      of the Registrant, incorporated by reference to Exhibit 3.4
                      of the
                      Registrant’s Registration Statement (Commission File No. 333-112837) filed
                      with the Commission on February 13, 2004.3.7
                  Amendment
                      to Bylaws of the Registrant, dated January 5, 2005, incorporated
                      by
                      reference to Exhibit 3.2 of the Registrant’s current report on Form 8-K
                      dated January 12, 2005.4.1
                  Form
                      of 5% Senior Secured Convertible Debenture incorporated by
                      reference to
                      Exhibit 4.1 to our Current Report on Form 8-K dated January
                      21,
                      2004.4.2
                  Form
                      of Warrant to Purchase Common Stock incorporated by reference
                      to Exhibit
                      4.2 to our Current Report on Form 8-K dated January 21,
                      2004.4.3
                  Registration
                      Rights Agreement, dated as of January 16, 2004, by and among
                      the
                      Registrant the entities whose names appear on the signature
                      pages thereof
                      incorporated by reference to Exhibit 4.3 to the Registrant’s Current
                      Report on Form 8-K dated January 21, 2004.4.4
                  Form
                      of 7.5% Senior Secured Convertible Debenture incorporated by
                      reference to
                      Exhibit 4.1 to the Registrant’s Current Report on Form 8-K dated March 15,
                      2005.4.5
                  Form
                      of Warrant to Purchase Common Stock incorporated by reference
                      to Exhibit
                      4.2 to the Registrant’s Current Report on Form 8-K dated March 15,
                      2005.4.6
                  Registration
                      Rights Agreement, dated as of March 14, 2005, by and among
                      the Registrant
                      the entities whose names appear on the signature pages thereof
                      incorporated by reference to Exhibit 4.3 to the Registrant’s Current
                      Report on Form 8-K dated March 15, 2005.4.7
                  Certificate
                      of Designation of Non-Voting, Cumulative and Redeemable Series
                      A Preferred
                      Stock of EnerDel, Inc., dated October 20, 2004, incorporated
                      by reference
                      to Exhibit 4.6 to Amendment No. 1 to Ener1‘s Quarterly Report on Form
                      10-QSB/A for the period ending September 30, 2004.4.8
                  Registration
                      Rights Agreement by and between Ener1 and Delphi Automotive
                      Systems LLC,
                      dated October 20, 2004, incorporated by reference to Exhibit
                      4.5 to
                      Ener1‘s Quarterly Report on Form 10-QSB for the period ending September
                      30, 2004.4.9
                  Form
                      of Warrant to Purchase Common Stock of Ener1, dated October
                      20, 2004
                      Issued to Delphi Automotive Systems, LLC, incorporated by reference
                      to
                      Exhibit 4.4 to Amendment No. 1 to Ener1‘s Quarterly Report on Form
                      10-QSB/A for the period ending September 30, 2004.4.10
                  Form
                      of Warrant to Purchase Common Stock of Ener1, dated December
                      9, 2004
                      Issued to Merriman Curhan Ford & Co, incorporated by reference to
                      Exhibit 4.10 of the Registrant’s Registration Statement on Form SB-2 filed
                      on May 9, 2005 (Commission File No. 333-124745).
  32
 4.11
                  Warrant
                      issued to Cofis Compagnie Fiduciaire S.A. dated October 15,
                      2004 to
                      purchase from Ener1, Inc., 4,166,666 shares of Common Stock
                      of the Company
                      at a price per share of $1.25, incorporated by reference to
                      Exhibit 4.4 to
                      the Registrant’s Annual Report on Form 10-KSB for the period ending
                      December 31, 2004.4.12
                  Warrant
                      issued to Cofis Compagnie Fiduciaire S.A. dated October 15,
                      2004 to
                      purchase from Ener1, Inc., 4,166,666 shares of Common Stock
                      of the Company
                      at a price per share of $1.50, incorporated by reference to
                      Exhibit 4.5 to
                      the Registrant’s Annual Report on Form 10-KSB for the period ending
                      December 31, 2004.4.13
                  Form
                      of Security Agreement dated as of March 14, 2005 by and among
                      Ener1, Inc.
                      and the purchasers of Ener1’s 7.5% Senior Secured Convertible Debentures
                      incorporated by reference to Item 10.2 of Registrant’s Current Report on
                      Form 8-K dated March 15, 2005.4.14
                  Form
                      of Securities Purchase Agreement, dated as of March 11, 2005
                      by and among
                      Ener1, Inc. and the purchasers of Ener1’s 7.5% Senior Secured Convertible
                      Debentures incorporated by reference to Item 10.1 of Registrant’s Current
                      Report on Form 8-K dated March 15, 20054.15
                  Form
                      of Intercreditor Agreement dated as of March 11, 2004, among
                      Ener1, Inc.,
                      the purchasers of Ener1‘s 7.5% Senior Secured Convertible Debentures and
                      the purchasers of Ener1, Inc.‘s 5% Senior Secured Convertible Debentures
                      incorporated by reference to Item 10.3 of Registrant’s Current Report on
                      Form 8 K dated March 15, 200510.1
                  Warrant
                      Exercise Agreement, dated as of March 30, 2006, by and between
                      the Company
                      and Ener1 Group, Inc., incorporated by reference to Exhibit
                      10.1 of
                      Registrant’s Current Report on Form 8-K dated April 5, 2006.31.1
                  Certification
                      of Principal Executive Officer pursuant to Section 302 of the
                      Sarbanes-Oxley Act of 200231.2
                  Certification
                      of Principal Financial Officer pursuant to Section 302 of the
                      Sarbanes-Oxley Act of 200232.1
                  Certification
                      of Principal Executive Officer pursuant to 18 U.S.C. Sec. 1350,
                      as adopted
                      pursuant to Section 906 of the Sarbanes-Oxley Act of
                      200232.2
                  Certification
                      of Principal Financial Officer pursuant to 18 U.S.C. Sec. 1350,
                      as adopted
                      pursuant to Section 906 of the Sarbanes-Oxley Act of
                      2002
 
  33
  
 **ENER1,
        INC.** **AND SUBSIDIARIES**
 
 **SIGNATURES**
  In
        accordance with the requirements of the Securities Exchange Act, the registrant
        has duly caused this Amendement No.1 to Quarterly Report on Form 10-QSB to
        be
        signed on its behalf by the undersigned thereunto duly authorized.
  ENER1,
                    INC.Dated:
                    August 8, 2006
                  By:
                  /s/ Ronald
                    StewartRonald
                    StewartInterim
                      Chief Executive Officer
                    (Principal Executive
                      Officer)
 Dated: August
                    8, 2006
                  By:
                  /s/ Gerard
                    HerlihyGerard
                    HerlihyChief
                      Financial Officer
                    (Principal Financial and Accounting
                      Officer)
   34