**UNITED
        STATES**
 **SECURITIES
        AND EXCHANGE COMMISSION**
 
 WASHINGTON,
        D.C. 20549
 _________________
  Form
        10-KSB/A
  AMENDMENT
        NO. 2
  x       
        ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
        ACT OF
        1934
 
 For
        The
        Fiscal Year Ended December 31, 2005
 
 o       
        TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
        ACT
        OF 1934
 
 For
        The
        Transition Period From ____________ to ____________
 
 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**
 **Fort
        Lauderdale, Florida 33309**
 **(954)
        556-4020**
 (Address,
        including zip code, and telephone number, including area code, of principal
        executive offices)
 
 Securities
        registered pursuant to Section 12(b) of the Act: NONE
 
 Securities
        registered pursuant to Section 12(g) of the Act:
 
 COMMON
        STOCK, par value $0.01 per share
 (title
        of
        class)
 
 Check
        whether the issuer is not required to file reports pursuant to Section 13
        or
        15(d) of the Exchange Act. o
 
 Indicate
        by check mark whether the issuer (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 issuer was required
        to
        file such reports), and (2) has been subject to such filing requirements
        for the
        past 90 days.
 
 Yes x
        No o
 
 Check
        if
        there is no disclosure of delinquent filers in response to Item 405 of
        Regulation S-B contained in this form, and no disclosure will be contained,
        to
        the best of the issuer’s knowledge, in definitive proxy or information
        statements incorporated by reference in Part III of this Form 10-KSB or any
        amendment to this Form 10-KSB. o
 
 Indicate
        by check mark whether the registrant is a shell company (as defined in Rule
        12b-2 of the Exchange Act).  Yes o
        No x
 
 The
        issuer’s revenue for its fiscal year ended December 31, 2005 was
        $60,122.
 
 The
        aggregate market value of voting stock held by non-affiliates (22,797,948
        shares) as of March 6, 2006: $9,575,000 **** based
        on
        the $.42 closing bid price for the common stock quoted on the OTC Pink Sheets
        on
        such date.
 
 Shares
        of
        Common Stock outstanding as of March 6, 2006: 382,104,469 **s** hares.
 
 Transitional
        Small Business Disclosure Format: Yes o No x
  
  **ENER1,
        INC. ANNUAL REPORT ON FORM**
 **10-KSB
        FOR THE YEAR ENDED DECEMBER 31, 2005**
 
 **INDEX**
 **Page****PART
                  I**ITEM
                  1
              BUSINESS
              1ITEM
                  2
              PROPERTIES
              21ITEM
                  3
              LEGAL
                  PROCEEDINGS
              22ITEM
                  4
              SUBMISSION
                  OF MATTERS TO A VOTE OF SECURITY HOLDERS
              22**PART
                  II**ITEM
                  5
              MARKET
                  FOR THE REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER
                  MATTERS AND SMALL BUSINESS ISSUER PURCHASES OF EQUITY
                  SECURITIES
              23ITEM
                  6
              MANAGEMENT’S
                  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
                  AND RISK FACTORS AND
                  RESULTS OF OPERATIONS
              24ITEM
                  7
              FINANCIAL
                  STATEMENTS
              42ITEM
                  8
              CHANGES
                  IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
                  ACCOUNTING AND FINANCIAL DISCLOSURE
              76ITEM
                  8A
              CONTROLS
                  AND PROCEDURES
              76ITEM
                  8B
              OTHER
                  INFORMATION
              76**PART
                  III**ITEM
                  9
              DIRECTORS
                  AND EXECUTIVE OFFICERS OF REGISTRANT
              77ITEM
                  10
              EXECUTIVE
                  COMPENSATION
              81ITEM
                  11
              SECURITY
                  OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
                  RELATED STOCKHOLDER MATTERS
              85ITEM
                  12
              CERTAIN
                  RELATIONSHIPS AND RELATED TRANSACTIONS
              88ITEM
                  13
              EXHIBITS,
                  LISTS AND REPORTS ON FORM 8-K
              91ITEM
                  14
              PRINCIPAL
                  ACCOUNTING FEES AND SERVICES
              97
 
 
  **Explanatory
          Note**
  Ener1,
          Inc. filed this Annual Report on Form 10-KSB on March 10, 2006. In May
          2006,
          Ener1 concluded that it was necessary to amend this Annual Report in order
          to
          restate its financial statements for the years ended December 31, 2004
          and 2005
          to (1) report the EnerDel Series A Preferred Stock and Ener1 Series B Preferred
          Stock as temporary equity between long term liabilities and stockholders'
          equity
          (deficit) at December 31, 2004 and 2005 rather than as long term liabilities
          and
          (2) correct its calculation of diluted earnings or loss per share. Ener1
          filed
          Amendment No. 1 to this Annual Report on May 23, 2006, which filing included
          restated financial statements for the years ended December 31, 2004 and
          2005
          that reflected these changes.
 
 In
          July
          2006, Ener1 concluded that it was necessary to amend Amendment No. 1 to
          this
          Annual Report in order to restate its financial statements for the years
          ended
          December 31, 2004 and 2005 again to (1) reflect the corrected accounting
          for
          and valuation of additional compound embedded derivatives in Ener1's
          senior secured convertible debentures issued in January 2004 (the "2004
          Debentures") and in March 2005 (the "2005 Debentures"), (2) revise the
          valuation
          of the initial discount and interest accretion on the 2004 and 2005 Debentures
          resulting from the revaluation of the compound embedded derivatives, (3)
          record
          the correct value of the warrants issued with the 2004 Debentures, (4)
          record
          the value of Ener1's right to require Ener1 Group, Inc. to purchase shares
          of
          Series B Preferred Stock, and (5) reflect
          the Series A Preferred Stock dividends payable to the minority interest
          owner as
          a reduction in minority interest income. The financial statements and
          other financial information included in this Amendment No. 2 to this Annual
          Report have been restated accordingly.  Ener1's shareholders should no
          longer rely on Ener1's previously filed financial statements for the fiscal
          years ended December 31, 2004 and 2005. These matters have been discussed
          by
          Enerl's authorized officers with Ener1's independent registered public
          accounting firm.
 
 In
          order
          to preserve the nature and character of the disclosures set forth in this
          Annual
          Report as originally filed, no attempt was made in either of the amendments
          described above to modify or update the disclosures in the original Annual
          Report or in the first amendment except Ener1 included the restatements
          described above in Part II, Item 7 and Ener1 has made changes to Management's
          Discussion and Analysis of Results of Operations and Financial Condition
          in Part
          II, Item 6 and the Risk Factors to conform to these restatements and include
          additional information regarding its derivatives and related accounting
          treatment.
  **PART
        I**
 **ITEM
        1 BUSINESS**
 
 **Overview**
 
 We
        have
        three business lines which we conduct through our three operating subsidiaries.
        EnerDel, Inc., which is an 80.5% owned subsidiary that we operate as a joint
        venture with Delphi Corporation, develops lithium-ion (“Li-ion”) batteries,
        battery packs and components such as Li-ion battery electrodes and lithium
        electronic controllers for lithium battery packs. Our wholly-owned subsidiary,
        EnerFuel, Inc., develops fuel cell products and services. Our wholly-owned
        subsidiary, NanoEner, Inc., develops technologies, materials and equipment
        for nanostructured
        materials processing , *i.e* .,
        manufacturing processes that operate on a microscopic level.
 
 EnerDel
        was formed in October 2004. Its research and development activities focus
        on
        development of battery material, battery cells, electronic controls and
        manufacturing processes, and production and testing of prototypes of battery
        cells.
 
 In
        June
        2005, we restructured EnerDel's operations based on a change in strategy
        to
        focus development and marketing efforts on U.S.-based production of Li-ion
        batteries for U.S. manufacturers of hybrid electric vehicles, or "HEVs".
        HEVs
        are cars
        that
        are powered by combining an electric motor with a combustion engine. HEVs
        require "high-rate" or "high power" batteries, which are batteries that can
        discharge rapidly, providing high levels of power output quickly, in order
        to
        power high-stress applications such as driving in stop-and-go traffic,
        accelerating and braking. EnerDel's change
        in strategy was based on our determination that the high-rate battery technology
        and automated manufacturing process technologies we were able to acquire
        from
        our affiliate, EnerStruct, Inc. ("EnerStruct") would enable us to pursue
        the
        emerging market for HEV batteries more effectively. At this time, we
        discontinued all work on the Bellcore technology EnerDel had acquired from
        Delphi, which we determined EnerDel could not commercialize on a profitable
        basis due to the cost and complexity of the manufacturing process
        required.
 
 During
        the second half of 2005, we decided to consolidate our development engineering
        and production activities in our Indianapolis, Indiana facility. During the
        next
        24 months, we intend to build a pilot production line to produce samples
        and
        ultimately produce product for HEVs. In order to execute these plans, we
        currently expect that during the next two years we will need to make capital
        expenditures of $20,000,000 ** and
        increase our research and development expenses to approximately
        $10,000,000 ** annually.
        We will need to raise between $30,000,000 and $40,000,000 over the next two
        years to implement this strategy, and 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
        believe that the market for HEVs will grow dramatically in the next few years.
        We also believe that Li-ion batteries will replace existing battery technology
        for HEVs once the technology is adopted for automotive use because Li-ion
        batteries weigh less and have more power than existing HEV batteries. In
        addition, more and more major auto makers are introducing new HEV models
        and
        announcing plans for more HEVs. We believe that EnerDel has a battery technology
        and manufacturing process capability that will give it a competitive edge
        in
        this emerging market. Therefore, EnerDel is focusing primarily on the HEV
        market.
 
 EnerDel
        is obtaining certain key elements of its technology from EnerStruct, which
        we
        formed with ITOCHU Corporation in 2003 to pursue technology development and
        marketing opportunities for Li-ion batteries in Japan. We and ITOCHU have
        each
        licensed to EnerStruct some of our respective battery technologies for use
        in
        Japanese markets. EnerStruct and EnerDel have entered into a technology transfer
        agreement under which EnerStruct is working with EnerDel to develop high-rate
        battery and manufacturing technologies for use by EnerDel under a license
        requiring initial payments and minimum annual royalty payments.
  1
 
 We
        restructured EnerFuel's fuel cell business plan and operations in January
        2006.
        EnerFuel now focuses on developing
        what it believes will be the next generation of high-temperature fuel cells,
        intended to address the fuel cell industry's need for fuel cells that are
        smaller, less costly and less complex. EnerFuel is pursuing fuel cell related
        opportunities in the portable power, auxiliary power, distributed power and
        backup power markets. As part of the restructuring, EnerFuel has hired a
        president with ten years of experience, having built a fuel cell company
        from
        startup and operated it successfully. EnerFuel has expanded its development
        capability by hiring a team of engineers with experience from a major fuel
        cell
        industry participant. EnerFuel has also acquired additional fuel cell
        development equipment and leased a fuel cell development facility into which
        it
        has moved most of its operations.
 
 NanoEner,
        our nanotechnology subsidiary, has built prototype equipment that utilizes
        our
        patent pending vapor deposition/solidification (“VDS”) process for depositing
        materials onto battery electrodes as part of the battery cell manufacturing
        process. We are currently evaluating NanoEner's operations and business
        prospects in order to determine whether to pursue our nanotechnology operations
        as a separate line of business. We are also continuing to evaluate NanoEner’s
        capabilities of providing nanotechnology to our other business units.
 
 **Company
        History**
 
 Ener1
        is
        a Florida corporation, founded in 1985 and headquartered in Fort Lauderdale,
        Florida. In October 2002, we changed our name from Boca Research, Inc. to
        Ener1,
        Inc. In 2002 and a portion of 2003, we provided computer-related engineering
        and
        consulting services and developed and marketed associated hardware and software,
        including set top boxes for use in hotels and hospitals. These set top boxes
        were used as a platform for providing various menu-oriented software and
        communications services and capabilities for customers and patients. This
        business was an outgrowth of our previous business of developing and marketing
        modems and network communications systems, devices and software.
 
 During
        the past four years, we have substantially changed our business focus. We
        have
        transformed from a computer hardware/software-oriented company to an alternative
        energy technology company, a process that began shortly after Ener1 Group,
        Inc.,
        a privately held technology incubator company headquartered in Fort Lauderdale
        ("Ener1 Group"), acquired an 80% stake in our company in early 2002. Ener1
        Group
        now owns approximately
        90% of our
        outstanding common stock and four of our six directors are affiliated with
        Ener1
        Group.
 
 In
        September 2002, we acquired Ener1 Battery Company ("Ener1 Battery"), which
        was
        engaged in research, development and marketing of lithium battery technologies,
        from Ener1 Group in return for a combination of equity and debt consideration.
        This acquisition provided us with several pending patents for various lithium
        battery technologies a staff of research and development engineers; the land
        and
        building where Ener1 Battery conducted its operations; and lithium battery
        research, development and production equipment.
 
 After
        we
        acquired Ener1 Battery, we began to phase out our software engineering and
        consulting/set top box business. In May 2003, we transferred substantially
        all
        of that business and related assets to one of our subsidiaries, EnerLook
        Health
        Care Solutions, Inc. (“EnerLook”), which continued to develop and market set top
        box technologies, products and services to hotel and hospital customers.
        In
        December 2004, we transferred all of the assets of EnerLook to TVR
        Communications, LLC in return for a 5% equity interest in TVR
        Communications.
  2
 
 To
        complement our battery operations and expand our alternative energy business,
        in
        September 2003 we began a research and development program focusing on fuel
        cells and related products and technologies. Since that time, we have hired
        numerous scientists and engineers for our fuel cell staff and filed several
        utility patent applications for various fuel cell technologies, systems and
        components, one of which has led to a patent issuance.
 
 In
        April
        2004 we formed NanoEner, Inc. to pursue technologies for nanomaterials and
        nanomanufacturing. Initially, these activities focused on applying
        nanotechnology to improving the performance of Li-ion battery electrodes.
 
 In
        October 2004 we formed EnerFuel, Inc. to conduct all of our fuel cell activities
        going forward.
 
 In
        October 2004, we combined Ener1 Battery’s lithium battery assets with the
        lithium battery assets of Delphi Corporation in order to form
        EnerDel.
 
 At
        December 31, 2005, we had a total of 62 full time employees, including 31
        full
        time and one part time at EnerDel employees, 17 full time EnerFuel employees,
        6
        full time NanoEner employees and 8 full time Ener1, Inc. employees located
        in
        our administrative offices. We also had one part-time EnerDel employee and
        one
        part-time EnerFuel employee.
 
 **Our
        Battery Business**
 *Overview*
 
 We
        have
        been researching and developing various types of batteries since 2002, when
        we
        acquired Ener1 Battery Company and its lithium battery business from Ener1
        Group. Since that time, we have pursued a number of different battery
        chemistries, both primary (non-rechargeable) and secondary (rechargeable),
        developed various battery and battery cell prototypes and filed several patent
        applications relating to lithium battery technology and processes.
 
 In
        July
        2003 we and Ener1 Battery entered into a joint venture with ITOCHU Corporation
        for the development of lithium battery technologies. As part of this joint
        venture, we and ITOCHU formed EnerStruct and licensed certain of our
        battery-related technologies to EnerStruct. Since July 2003 EnerStruct has
        pursued the development of high-rate battery technologies, filed its own
        patent
        applications in Japan and elsewhere and worked with us to advance our respective
        battery technologies. These activities have become increasingly important
        for
        our operations during the last year.
 
 In
        October 2004 we and Delphi combined our respective lithium battery operations
        to
        form EnerDel.
 
 Delphi,
        which had ten years of experience in Li-ion battery research and development,
        contributed the following assets to EnerDel: testing and production equipment,
        Delphi's Li-ion patent portfolio, manufacturing facilities in Indianapolis
        and
        technical resources including the services of engineers and technical
        information. We contributed the following assets to EnerDel: $15,000,000
        in cash
        for working capital, substantially all of our battery-related patents and
        patent
        applications, technical resources including scientists and engineers and
        exclusive use of all of the battery testing and production equipment located
        at
        our Ft. Lauderdale facilities. We own 80.5% of EnerDel’s outstanding common
        stock and Delphi owns the remaining 19.5%. Delphi also owns 8,000 shares
        of
        EnerDel 8% Non-Voting Cumulative and Redeemable Series A Preferred Stock,
        which
        has a liquidation value of $8 million plus accrued dividends.
  3
 
 *EnerDel’s
        Business Strategy*
 
 Our
        goal
        is to become a leader in the markets for high-rate (high power) and high
        energy
        density batteries by developing and marketing a Li-ion battery capable of
        being
        mass-manufactured in the U.S. to service the North American HEV market using
        proprietary cell technology. High energy batteries have high capacity i.e.,
        they
        provide power for longer periods, but do not generally have the “burst” power
        capability of high-rate/high power batteries. Initially, we intend to target
        our
        Li-ion batteries to North American HEV manufacturers. We also intend to seek
        government funding of our research and development activities through select
        projects tailored to HEV applications.
 
 We
        believe that the market potential for a high-performance Li-ion battery in
        automotive and other applications is significant. Li-ion batteries are superior
        in several respects to the nickel hydride ("NiMH") batteries currently used
        by
        car manufacturers: they are more powerful (i.e., they can discharge their
        power
        quickly to provide bursts of energy for high-stress applications) have a
        longer
        life, and they occupy less space, each of which is a critical consideration
        for
        automotive manufacturers. We believe that the domestic HEV market may grow
        dramatically if a better Li-ion battery for HEVs is successfully developed.
        The
        consumer electronics industry began its explosive growth after Li-ion batteries
        were developed that enabled manufacturers to make smaller electronic devices.
 
 Currently,
        HEVs use the larger and less powerful nickel metal hydride (“NiMH”) batteries.
        The Li-ion technology for HEVs has not yet been fully proven and tested,
        and
        significant technological and manufacturing cost hurdles remain. However,
        the
        industry leader in HEVs and other battery and automotive manufacturers have
        announced plans to develop Li-ion batteries during the next several years.
        We
        believe that the first companies to develop a proven (and cost-effective)
        Li-ion
        battery for HEVs will have a significant competitive advantage in this market.
        We believe we have certain advantages that will enable us to create a Li-ion
        battery for use in HEVs: access to proprietary material and manufacturing
        process technology and an experienced management team with significant Li-ion
        battery experience.
 
 However,
        the development process will take several years and require significant capital
        investment before we reach efficient production levels. We will seek to team
        up
        with automotive, battery or other companies to pursue this market. We intend
        to
        target the North American HEV manufacturers because we believe they will
        find it
        advantageous to purchase advanced performance batteries from local, United
        States battery manufacturers. In addition, consumer electronic manufacturers
        have historically controlled battery production for their own products and
        we
        expect Japanese automotive manufacturers will similarly seek to control
        production of batteries for their HEVs.
 
 We
        believe the Li-ion battery technologies that we are developing for HEV solutions
        will also have applications in other industry sectors. The following chart
        indicates some of the automotive and some of the additional sectors we plan
        to
        pursue based on technologies developed for the HEV sector:
  4
 
 *Battery
                  Categories*
              
              Automotive
                  Applications
              
              Other
                  Applications*High
                  Power Battery*
              
              Hybrid
                  Electric Vehicles (light vehicles, tanks, buses, and others) and
                  Fuel Cell
                  Vehicles
              
              Power
                  tools, marine motors, load leveling, back up power (UPS- uninterrupted
                  power supply), auxiliary power, and mobility devices.*High
                  Capacity Battery*
              
              Plug-in
                  Hybrid Electric Vehicle, Electric Vehicles Fuel Cell or Solar Cell
                  Vehicles
              
              Military
                  applications (power vests, “UAVs” or unmanned aerial vehicles), load
                  leveling and storage
 
 Batteries
        we develop and market for the HEV market and other automotive applications
        must
        meet high requirements for battery life and safety. We believe we will also
        be
        able to utilize the technology we develop for HEV applications for military,
        aerospace and medical applications as these markets also have stringent life
        and
        safety requirements.
 
 We
        are
        also working with nationally recognized research institutes and commercial
        material developers to develop and evaluate the best compounds for use with
        our
        battery technologies.
 
 *Key
        Advantages of our Technology for HEVs*
 
 We
        believe that our planned Li-ion battery products will have several key
        advantages over existing technology as a result of our proprietary technology
        and our planned highly automated manufacturing method:
 
 ·
              Distinctive
                  cell design that we believe is well-suited for HEV battery packs
                  because
                  it facilitates maximum power output per unit of weight
 ·
              High
                  power capability resulting from high discharge rate characteristics
                  of our
                  battery cell technology
 ·
              High
                  level of safety
 ·
              Advanced
                  electronics control the charge and discharge process of our
                  batteries
 ·
              Automated
                  assembly process promotes high quality and minimizes human error
                  and the
                  need for human intervention
 
 *Our
        Planned Products*
 
 Our
        planned products and product designs consist of rechargeable battery cells,
        battery packs and electronics for controlling the operation of the cells
        and
        packs. Our primary products will consist of batteries and battery packs for
        HEVs. Battery packs consist of multiple battery cells that are linked together
        and controlled by electronic circuits that manage the battery pack’s operation
        and monitor its performance and safety compliance. Our Li-ion battery packs
        will
        be developed in accordance with HEV manufacturing specifications and the
        particular specifications of the HEV manufacturers that purchase our
        products.
 
 EnerDel’s
        engineers develop and design battery cells and battery packs that can be
        based
        on our own cells or cells sourced elsewhere. We obtained significant battery
        pack design and production capability from Delphi as part of our joint venture
        with them, and this includes significant knowledge-base regarding larger
        battery
        pack systems suitable for HEV applications.
  5
  Additional
        (Non-HEV) Applications
 
 We
        are
        currently evaluating cells from established battery cell suppliers for use
        in
        our battery pack products for non-HEV market opportunities. If we are able
        to
        complete our existing battery pack designs to incorporate outsourced battery
        cells pending completion of testing for our internally developed battery
        cells,
        we intend to provide samples of our modified battery pack products to potential
        customers who have already expressed an interest in the battery pack products
        in
        non-HEV applications.
 
 Our
        low
        voltage battery pack design is intended to power transmitters and receivers
        used
        in asset tracking applications.  Engineering samples of this product have
        been developed and are undergoing testing and evaluation.  Based on initial
        test data, we believe this product can offer a significant improvement in
        useful
        life compared to the lead-acid and NiMH batteries prevalent in asset tracking
        applications today.  Because batteries used in asset tracking applications
        can not typically be recharged frequently, lead acid batteries rapidly
        deteriorate and fail to provide the required energy.  We believe the longer
        life of our batteries will give our planned asset tracking battery pack a
        competitive advantage in asset tracking.
 
 Lithium
        Electronic Battery Management Controllers (“LECs”)
 
 We
        have
        designed two families of lithium battery management systems to provide control,
        optimization, and advanced user features for batteries and battery packs.
        The 2
        families are:
 
 ·
              Low
                  Voltage (8 - 16V) Controls - 12V4 type for asset tracking and other
                  lower
                  voltage applications.
 
 ·
              High
                  Voltage Distributed Controls (HEV) - for HEV and other automotive
                  applications.
 
 Through
        the use of algorithms implemented through electronic circuitry, these
        controllers are designed to regulate the operation of our batteries and battery
        packs to make them operate more efficiently and safely. Our LECs are designed
        to
        regulate cell voltage limits and cell temperature limits and provide protection
        from overcharge. They are also designed to indicate the state of charge and
        overall condition of the cells and/or pack, as well as provide a data bus
        for
        digital communications. The LEC monitors each cell’s condition, and maintains
        the voltage balance among the cells making up the battery in order to optimize
        cell life. Based on customer requirements, the LEC may also be programmed
        to
        optimize charging, discharging and other operating characteristics or
        application features.
 
 *Our
        Markets*
 
 Our
        primary market will be batteries and battery packs for HEVs. Forecasts for
        the
        size and growth of this market vary widely. We believe this market will grow
        significantly over the next several years. One commentator has forecast that
        the
        market for advanced (hybrid and 42 volt) batteries for vehicles to rise from
        $70,000,000 in 2001 to $200,000,000 this year and over $500,000,000 by 2008.
        (Anderman, “Critical Assessment of New Automotive Battery Trends,” April 2002).
        There are other forecasts of both greater and lesser size and growth for
        this
        market. Many auto makers are already producing or have announced plans to
        produce HEVs in the near future. Increasingly, production is being moved
        to the
        U.S., and we believe that our plan to provide a reliable U.S.-based
        manufacturing source for HEV batteries will be well received by auto makers
        producing HEVs in the U.S.
 
 In
        reaction to dramatic increases in energy prices, the federal government,
        automotive industry and consumers are seeking alternative energy solutions
        that
        reduce the cost of energy and dependence on foreign oil and gas. The HEV
        is a
        readily available technology that helps accomplish these goals. The automotive
        industry participants are expected to increase production of HEVs as quickly
        as
        possible, and they have announced such plans, although consumer demand will
        greatly determine the ultimate production rates. Toyota has been leading
        the
        production of HEVs, but a number of other automobile manufacturers have
        introduced HEVs sold in the United States, including Honda, GM, Lexus and
        Ford.
        Other manufacturers, including Daimler-Chrysler, Nissan, BMW, Volkswagen,
        Audi
        and Porsche, have reported that they will develop and market HEV models.
  6
 
 Toyota
        has stated that it is planning to sell 1,000,000 HEVs per year within the
        next
        few years and that they will offer HEV versions of all of their car models
        in
        the future.  In addition, Toyota has announced plans to begin
        production of the Toyota Camry in the U.S. in 2006 or 2007.  Toyota is
        currently the largest producer of HEVs, selling a reported 200,000-250,000
        cars
        annually in the world. Subaru, Nissan and Mitsubishi have recently produced
        concept cars that use Li-ion batteries.
 
 Among
        our
        planned secondary markets, Mr. Hideo
        Takeshita of the Institute of Information Technology  Ltd .
        has
        predicted that Li-ion cell demand for power tools will rise ten-fold between
        2005 and 2013, to 300,000,000 cells (Takeshita Presentation, IIT, September
        18,
        2005). He estimated the total demand for Li-ion cells in 2005 was been estimated
        to be approximately 1.7 billion cells, and would grow to approximately 2.9
        billion cells in 2013. (Takeshita Presentation, IIT, September 18,
        2005)
 
 In
        addition to the HEV market, we intend to pursue other alternative vehicle
        battery markets as they develop, such as Electric Vehicles (EVs), and Plug-in
        Hybrid Electric Vehicles (P-HEVs).
  *HEVs*
 
 HEVs
        are
        cars that are powered a combination of an electric motor and a combustion
        engine. HEVs use a gasoline engine as the primary source of power, and an
        electric motor provides additional power when needed. In addition, HEVs can
        use
        the electric motor as the sole source of propulsion for low-speed,
        low-acceleration driving, such as in stop-and-go traffic or for backing up.
        This
        electric-only driving mode further increases fuel efficiency.
 
 Some
        factors that we believe will drive US demand for HEVs are: (1) rapidly
        increasing prices for gasoline and related products; (2) increasing emphasis
        on
        reducing dependence on fossil fuels (including government sponsored incentives);
        (3) resurgence of “green” or environmentally friendly thinking in large segments
        of the US population; and (4) overall economic pressures that are causing
        many
        consumers to look for lower cost alternatives for basic power
        needs.
  The
        market for HEVs is in the early stages of its evolution and the predictions
        vary
        greatly as to what share HEVs will gain of the total automobile market. Total
        automobile sales in the U.S. market are approximately 17 to 18,000,000 units
        per
        year. R.L. Polk has predicted that HEVs will account for up to 35% of the
        U.S.
        auto market by 2015 **.** EnerDel’s
        initial primary market focus will be U.S. production operations of HEV
        manufacturers. We believe that U.S. auto makers that manufacture HEVs in
        the
        U.S. will prefer to source HEV components from U.S. suppliers.
 
 *Additional
        Battery Markets*
 
 We
        are
        working on applications for our Li-ion technologies in remote asset tracking
        applications, including tracking construction and military equipment, containers
        or other items considered of value that are important to track. Existing
        battery
        technologies for tracking devices are based primarily on lead-acid and NiMH
        batteries, which have limited life and are expensive and time-consuming to
        replace. High energy density Li-ion batteries offer longer life, reduced
        lifetime cost and potentially greater reliability.
  7
 
 We
        are
        also exploring opportunities for our planned products in the following markets:
        power tools, uninterrupted power supply (“UPS”) and backup power, electric
        propulsion for wheel chairs and other personal mobility devices, military
        applications and medical devices.
 
 *Government
        Projects*
 
 We
        are
        pursuing government-funded battery research and development opportunities
        that
        we believe will help fund and promote our development efforts. These include
        projects funded by the Department of Energy (DOE) and the Department of Defense
        ("DOD"). We believe these projects involve development of technology that
        would
        be applicable to and relevant for our target markets, especially the HEV
        market
        and military applications. One of these opportunities involves development
        of
        special materials for use in high-rate batteries. We have submitted a proposal
        for a research grant to be awarded under this project from a major,
        government-sponsored, automotive related consortium and plan to enter into
        a
        contract for this work in the near future. Finalization of the contract will
        be
        subject to the consortium’s approval of any further submissions (if any)
        required from us and review of EnerDel’s financial information and other
        standard representations and certifications already submitted.
 
 The
        U.S.
        Congress has also appropriated $1,000,000 for use by a military facility
        to fund
        a project for EnerDel's development of asset tracking applications using
        Li-ion
        battery technologies.  We expect to finalize contractual arrangements
        to perform this work in the near future. Our ability to enter into a
        contract to perform this work is subject to our reaching a final agreement
        with
        the DOD on the scope of work and contract terms.
 
 *P-HEVs*
 
 The
        P-HEV
        generally refers to a car that is based on a hybrid concept and has a battery
        that powers an electric motor, as well as a combustion engine. In contrast
        to
        the HEV, the P-HEV uses a battery as its primary energy source, and the
        combustion engine is available for situations where the battery needs to
        be
        recharged for long trips or rapid acceleration. In order to recharge the
        battery, the user would connect the P-HEV car to an electric outlet, either
        at
        home or at work or other places where access to the electric grid is provided,
        when it is necessary to recharge the battery.
 
 P-HEV
        batteries will generally be much larger and will have a higher capacity than
        batteries for the HEV. As a result, batteries with high energy density cells
        (density is the overall amount of energy available for expending over time)
        are
        essential for use in P-HEVs, while batteries with high power (rapid discharge
        rate/charge capability) are favored for HEVs. A study by the HEV Working
        Group
        (led by the Electric Power Research Institute (EPRI) entitled
“Plug-In HEVs” (presented by Dean Taylor of Southern California Edison
        dated August 21, 2003) estimates that a mid-size sedan with a combustion
        engine
        consumes over 500 gallons of gasoline annually. A comparable car with a P-HEV
        system with a battery offering a 60 mile range could potentially reduce the
        annual gasoline consumption to under 100 gallons, i.e. a reduction of over
        80%.
        The potential for comparable savings was also shown for a compact sedan,
        mid-size SUV and full-size SUV.
 
 Li-ion
        batteries with the size and weight required to work effectively in P-HEVs
        are
        still under development, and we are also exploring solutions in this area.
        As
        battery technology and hybrid technology in particular advance, we believe
        that
        P-HEVs could present a viable growth market/product opportunity for
        EnerDel.
  8
 
 *Potential
        Customers*
 
 Our
        potential customers are primarily industrial corporations, including major
        auto
        manufacturers. We also plan to market our products to agencies and departments
        of the United States government for research grants and contract work. In
        the
        battery business, the selling cycle is generally quite long. There is ordinarily
        an iterative, interactive process involved, in which the customer tests and
        evaluates prototypes or samples, and the supplier then modifies the product
        characteristics to match the particular requirements of the customer involved.
        Due to the longevity of life required by the auto manufacturers, this testing
        and evaluation could take several years, and include the delivery of samples,
        prototypes and final product. In addition, the procurement cycle for auto
        makers
        is quite long due to the requirements for design and retooling associated
        with
        new auto models, as a result of the need for to assure conformity to automotive
        engineering and safety requirements and the complexity of the auto manufacturing
        process in general.
 
 Once
        we
        have established that our proposed products meet a customer's specifications,
        we
        must establish that we have the ability to manufacture the specific product
        in
        sufficient volumes to be cost-effective and with the required quality. This
        process accentuates the importance of product and process engineering, areas
        in
        which we believe we have a competitive advantage over other Li-ion manufacturers
        because of the high level of experience of our team of engineers and management
        in these particular areas.
 
 At
        this
        time, we cannot predict the extent to which our sales, if any, will be dependent
        on a single customer or small group of customers. However, given the limited
        number of expected HEV automotive manufacturers and our focus on them as
        our
        primary market, it is reasonable to believe that the bulk of our expected
        sales
        will be concentrated in a very small number of customers. We intend to offer
        our
        products to military markets as well as several “niche” markets for asset
        tracking, medical, and other uses, which may mitigate the risks of customer
        concentration inherent in the HEV market. The sales cycle in these segments
        may
        also be lengthy depending on the longevity of life requirement for the specific
        application. We expect customers in these segments will also perform thorough
        testing and evaluation of samples and prototypes before approving a final
        product.
 
 Customers
        for our planned asset tracking products include both government and commercial
        users. Government agencies or departments and companies that ship large amounts
        of product, have large fleets of vehicles, deal in containerized storage
        or
        transport, have significant assets that are widely dispersed and/or sensitive
        or
        valuable are all potential customers for devices (either on a new or replacement
        basis) that facilitate tracking of such assets.
 
 *Sales
        and Marketing*
 
 We
        plan
        to market our lithium battery products through internal marketing and technical
        sales personnel. Our marketing activities are currently conducted by our
        Business Development group.
 
 We
        plan
        to hire qualified sales engineers and project managers in our Indianapolis
        facility with automotive industry experience, to complement our existing
        team of
        engineers. We intend to establish customer specific and dedicated teams over
        time to address our customers’ needs in an effective manner and in anticipation
        of their requirements, consistent with automotive procurement cycle
        timing.
 
 *Competition* ******
 
 Competition
        in the battery industry currently is, and is expected to remain, intense
        and
        fierce. The competition ranges from development stage companies to major
        domestic and international companies, many of which have financial, technical,
        marketing, sales, manufacturing, distribution and other resources significantly
        greater than ours. We compete against companies producing lithium batteries
        as
        well as other non-rechargeable and rechargeable battery technologies. We
        compete
        on the basis of design flexibility, performance, reliability and cost. Through
        our technology partnership with EnerStruct, we have access to expertise in
        battery manufacturing that we believe would be difficult to reproduce without
        substantial time and expense in the non-rechargeable battery market.
  9
  Key
        factors that we believe will shape the HEV market in the U.S. and competition
        for market share include:
 
 ·
              performance
                  level of HEV Li-ion battery packs in relation to current NiMH battery
                  packs;
 
 ·
              longevity
                  and reliability (estimated battery life requirements range from
                  8-15
                  years) and recyclability
 
 ·
              space
                  displacement and weight - auto makers are seeking to reduce size
                  and
                  weight in future generations of HEV batteries
 
 ·
              reputation
                  for safety - given the sensitivity in the auto industry to safety
                  issues
                  generally and the history of safety concerns involving Li-ion battery
                  applications
 
 ·
              cost
                  of battery packs, both absolutely and in relation to overall automobile
                  cost to the consumer
 
 ·
              reliability
                  and convenience of supply - both U.S. and foreign auto makers have
                  indicated a heightened interest in having local U.S. sources of
                  HEV
                  batteries; this is in large part due to the cost and regulatory
                  difficulties of importing complete HEV battery packs into the U.S.
                  from
                  foreign manufacturing locations; and the traditional auto maker
                  requirement of having several sources of supply for its basic automotive
                  subsystems.
 
 The
        Li-ion industry is dominated by major Asian battery manufacturers, such as
        Matsushita (Panasonic), Sanyo, Sony, Toshiba and NEC of Japan, and LG Chemical
        and Samsung SDI of Korea. In addition, there are a number of smaller development
        companies, e.g. Valence, A123 and Electro Energy (EEI) in the U.S. and
        Electrovaya in Canada. Additional potential competitors in Li-ion markets
        based
        in the United States are Saft, Eagle Picher, UltraLife and Yardney. There
        are
        also a growing number of battery manufacturers in China, which have a low
        cost
        manufacturing base due to low labor costs and use of semi-automatic
        manufacturing process.
 
 Johnson
        Controls, Inc., one of the world’s largest suppliers of automotive subsystems to
        major auto makers, recently announced its intent to enter the Li-ion based
        HEV
        battery market. A number of other companies have also indicated their intent
        to
        develop and market lithium based batteries for HEV use **.** On
        December 18, 2005, it was reported that Toyota would accelerate efforts to
        develop a reliable and cost-effective Li-ion battery to power hybrid motor
        vehicles in a joint venture with Panasonic EV.
 
 Although
        other market competitors may attempt to take advantage of the growth of the
        lithium battery market, the lithium battery industry has certain technological
        and economic barriers to entry. The development of technology, equipment
        and
        manufacturing techniques and the operation of a facility for the automated
        production of lithium batteries require large capital expenditures, which
        may
        deter new entrants from commencing production.
  *Battery
        Market Technology Trends*
 
 We
        plan
        to operate in selected segments of the “rechargeable” battery market.
        Rechargeable batteries are distinguished from “primary” (or “nonrechargeable”
batteries, which are disposed of after their power output is exhausted) or
        “multi-charge” batteries which are rechargeable for a very limited number of
        times). There are four main types of rechargeable battery technologies:
        lead-acid (also defined as Pb), nickel-cadmium (NiCd), NiMH and Li-ion.
  10
 
 Rechargeable
        batteries have been in commercial use since lead-acid batteries were introduced
        many decades ago. The main market for lead-acid batteries is storage and
        output
        of power for starting automobiles and running vehicle electrical-based systems.
        Lead-acid batteries are also used in a number of other applications, including
        industrial applications such as data back-up systems for buildings.
 
 NiCd
        battery technology was introduced in the 1960s and used extensively in aerospace
        applications, and this technology coincided with and assisted in the development
        of portable electronic devices. As newer technologies have been introduced,
        the
        NiCd technology has been used mainly in power tools and toy applications.
        NiCd
        batteries are limited essentially to a single type of battery chemistry:
        Nickel
        oxyhydroxide is used as the positive electrical source and Cadmium is used
        as
        the negative electrical source.
 
 NiMH
        battery technology was introduced in the late 1980s and improved on the NiCd
        technology by replacing cadmium (a toxic material) with a metal hydride
        solution, alleviating the environmental concerns associated with cadmium
        and
        reducing the so-called “memory effect” that plagued NiCd batteries - if they
        were not fully discharged before recharging, they tended to lose capacity
        in
        subsequent recharges. NiMH provides some additional variations of battery
        chemistries beyond those of NiCd. NiMH and NiCd have similar performance
        characteristics. However, NiMH batteries also provides higher energy density
        than NiCd batteries. Energy density is a measure of how much energy can be
        extracted from a battery per unit of battery weight or volume. This feature
        is
        considered very important for many applications.
 
 Li-ion
        technology was introduced in 1991-92 by Sony of Japan. The main advantage
        of
        Li-ion technology is that it provides a higher energy density than the
        nickel-based technologies, which means that a Li-ion cell contains more energy
        than a comparable nickel-based cell per unit of volume or weight. A further
        advantage of Li-ion technology is that it has a higher nominal voltage than
        the
        nickel-based technologies (3.6-3.7 Volt versus 1.2 Volt), which allows fewer
        cells to be used to produce the same amount of power. It is also more durable
        at
        elevated temperatures (greater than 40oC). Li-ion battery technology is capable
        of using a very wide variety of chemistries and therefore provides a more
        flexible solution for many different types of applications. Generally, Li-ion
        batteries provide significantly more energy per unit of size and weight than
        predecessor technologies, NiMH and Ni-Cd.
 
 One
        challenge associated with Li-ion technology is that if a Li-ion battery is
        “overcharged” it can overheat and present a safety risk. Battery chemistry and
        battery systems integration are the key to preventing Li-ion batteries from
        overcharging. Batteries containing Li-ion cells are generally fitted with
        electronics that regulate the charge and discharge of the cells to ensure
        they
        occur within safety and performance defined limits. Li-ion cells must also
        be
        designed to mitigate any risks if overheating occurs. EnerDel has patents
        for
        devices and systems that perform these functions. We believe that our experience
        with lithium electronic controllers and systems controls will enable us to
        control safety risk to within industry standard limits.
 
 The
        various basic battery technologies discussed above have gradually been adopted
        sequentially in the same order set forth above by the portable electronics
        industry with each technology supplanting the previous one. For example,
        today
        virtually all notebook computers and cell phones use Li-ion batteries although
        they initially used NiCd batteries, progressing to NiMH before adopting Li-ion
        technology.
  11
 
 We
        believe that a similar type of fundamental transition will take place in
        the HEV
        market. Today, virtually all HEVs use NiMH-based batteries. We expect that
        within the next decade HEV automotive manufacturers will switch completely
        to
        Li-ion because of the advantages Li-ion batteries offer over NiMH.
 
 *Intellectual
        Property*
 
 EnerDel
        has 24 **** patents
        issued in the U.S., 20 patents issued in Ukraine (most of which have associated
        PCT or international applications) and 30 pending patents, all relating to
        lithium battery or related technologies. The majority of these were obtained
        from Delphi when EnerDel was formed, and were issued during a period of several
        years preceding the formation of EnerDel. The majority of the issued patents
        will expire 20 years from the date of issuance. EnerDel continues to file
        patents, as appropriate, to protect its interests in new inventions. In addition
        to filing for patents on our inventions, we require our employees to sign
        confidentiality and work-for-hire agreements. We also enter into confidentiality
        agreement with third parties before discussing sensitive information with
        them.
  EnerDel
        also has rights to license high-rate battery technologies and associated
        manufacturing processes developed by its technology partner, EnerStruct,
        as
        described below.
 
 *Our
        Technology Partnership with EnerStruct*
 
 We
        and
        ITOCHU Corporation formed EnerStruct, Inc., a Japanese corporation, in August
        2003 when ITOCHU Corporation also purchased 14,000,000 shares of our common
        stock. At that time, EnerStruct licensed various Li-ion battery technologies
        from ITOCHU and from Ener1 Battery Company. Ener1 Battery transferred these
        rights to EnerDel in October 2004. For the past two years, EnerStruct has
        been
        performing research and development for rechargeable, high-rate Li-ion battery
        technologies and associated high volume, highly automated mass production
        technologies.
 
 Since
        EnerStruct’s inception, we have worked closely with it to advance each company’s
        high-rate battery capabilities and potential market opportunities for products
        and applications incorporating those capabilities. In April 2005 we entered
        into
        an agreement with EnerStruct that has made it possible for us to focus our
        technologies on the emerging large market for HEV power modules. Under this
        agreement, EnerStruct agreed to develop and license or sell to EnerDel advanced
        Li-ion battery cell technology with high-rate capability and a highly automated,
        modular technique for manufacturing these battery cells. EnerDel and EnerStruct
        will hold worldwide exclusive manufacturing rights for these technologies
        which
        we and EnerStruct may license to third parties on a shared royalty basis.
        EnerDel will pay EnerStruct an annual royalty equal to 1.5% of net sales
        of
        battery cells and 1% of net sales of battery packs. There will be a minimum
        overall annual royalty of $2,000,000. EnerStruct will have the sole right
        to
        import batteries using its technology into Asian countries and enter into
        joint
        development agreements with Nissan and/or university or national laboratories
        throughout the world. EnerStruct agreed to make available to us, on a “most
        favored customer” basis, all other technologies it develops related to the
        high-rate Li-ion battery technology.
 
 EnerStruct
        has been delivering battery cell prototypes to us since September 2005, and
        we
        are working closely with EnerStruct to evaluate and test these prototypes
        before
        providing to samples to prospective customers. EnerStruct has also constructed
        cell production machine prototypes that are being tested in EnerStruct’s
        facilities. We expect to continue this design and development work with
        EnerStruct during the first half of 2006. Mr. Zenzo Hashimoto, who has been
        EnerStruct’s Chief Research Officer since 2003, has joined us as EnerDel’s Chief
        Technology Officer. EnerStruct also hired additional process engineers in
        Japan
        to support its efforts for us in Japan and the U.S.
  12
 
 EnerStruct
        also agreed to provide technical consulting services to EnerDel, including
        the
        services of several highly experienced process engineers who were active
        in
        developing, designing and installing advanced, automated Li-ion battery
        production facilities for some of the world’s largest manufactures, including
        Sony and Sanyo.
 
 *Research
        and Development*
 
 We
        believe that the technologies we are using and developing will allow us to
        produce batteries for both high-rate (power output capability) and high capacity
        (overall amount of available energy over time) batteries. We are working
        with
        national laboratories here in the U.S. and worldwide material developers
        to
        develop their materials for mass manufacturing. We believe application of
        our
        own treatments to these materials will improve their suitability for our
        specific battery applications. We have substantial knowledge of coating
        technology, which involves the coating of electrodes with lithium ions and
        other
        active materials; our employees' expertise in this area dates back to the
        introduction of Li-ion technology in Japan in the early 1990s. We believe
        this
        expertise gives us a competitive advantage in this area.
 
 Developing
        new battery materials and chemistry combinations can require substantial
        capital. Therefore, we will seek to continue to work closely with national
        laboratories and universities in this area in order to spread the costs of
        this
        research. Our primary focus will continue to be development of commercially
        viable battery cells, emphasizing production engineering and cell design
        as our
        core activities near term.
 
 *Manufacturing*
 
 Our
        goal
        is to develop a battery cell that is well-suited for mass manufacturing and
        a
        manufacturing process that is as close to fully automated as possible. This
        is
        necessary to minimize labor requirements that could materially adversely
        affect
        our ability to be cost competitive. We have adopted production technology
        that
        combines known battery manufacturing processes with those from other high
        technology production processes. In order to accomplish our business plan
        of
        becoming a leading U.S. based manufacturer of Li-ion batteries for HEVs,
        we will
        need to purchase approximately $20,000,000 of production and testing equipment
        at our Indianapolis pilot plant over the next two years.
 
 We
        believe that our cell manufacturing process, developed through our technology
        partnership with EnerStruct, will give us a significant cost advantage due
        to
        its high degree of automation and accuracy which will enable us to manufacture
        batteries with high quality, reliability and yields (i.e., percentage of
        product
        that passes quality standards), and achieve cost competitive production and
        acceptance in the automotive market.
 *Engineering
        and Manufacturing Capabilities*
 
 Our
        Li-ion battery engineering team has strong skill bases in the material
        evaluation, coating process, electrode assembly process, formation process
        and
        cell design areas, which we believe are keys to developing products and
        establishing and maintaining a strong Li-ion battery manufacturing operation.
        As
        noted above, we also have access to manufacturing process engineering know-how
        through our technology partnership with EnerStruct. Our systems engineering
        experience includes all major areas of battery cell, battery pack and battery
        electronics design, testing and integration.
 
 *Testing
        and Quality Control*
 
 Consistent
        with industry practice, we perform a wide range of safety and other testing
        for
        our planned battery products. This includes testing for performance under
        nail
        penetration, bar crush, impact, overcharge, overdischarge, short circuit,
        thermal cycling, vibration, shock, altitude, salt, fog and humidity. All
        of our
        planned products will be tested to determine if they meet industry standards
        and
        safety requirements.
  13
 
 In
        the
        battery business, particularly in the case of lithium batteries, safety is
        a
        paramount concern. The potential for batteries to overheat, explode and react
        to
        stress or impact must be carefully evaluated and eliminated to the fullest
        extent possible. Our batteries and battery packs are designed to include
        three
        distinct and independent levels of safety protection: (1) cells are designed
        so
        that internal shut-down separators cause improperly operating cells to be
        shut
        down; (2) our cells have electronic controls of cell charge and discharge
        functions, temperature monitoring and circuitry; and (3) thermal shielding
        case
        materials surround the outside of the battery pack. ****
 
 *Raw
        Materials and Suppliers*
 
 Initially,
        we expect to source many of our raw materials for our batteries from companies
        in Asia with whose quality and procedures we are most familiar. As we are
        actively pursuing development of new types of materials for use in our
        batteries, our sources of supply for such materials may change over
        time.
 
 Longer
        term, we expect to source a significant portion of our raw materials from
        U.S.
        market sources. We expect to work closely with U.S. government laboratories
        and
        university technical laboratories in refining new materials qualifications
        and
        performance and take those requirements to U.S. suppliers. We have a strategic
        relationship with PrioVista Laboratories, Inc., a materials science and
        industrial incubator company owned by Ener1 Group, ITOCHU and EnerStruct
        that
        provides, among other things, for our right of first refusal and most favored
        customer prices and terms for new materials that PrioVista develops or acquires
        for Li-ion batteries. We expect to work closely with PrioVista and select
        national laboratories in developing and producing new electrode and other
        materials that could have significant positive impact on the performance
        of our
        batteries.
 
 *Facilities*
 
 We
        have
        two facilities, one in Ft. Lauderdale, Florida, which is used mostly for
        research and development of prototype battery products, and our primary facility
        in Indianapolis, Indiana, where we have production capacity and where our
        battery pack/systems integration activities are conducted. These operations
        include integration of battery cells with electronic systems into a complete
        battery pack. The Ft. Lauderdale facility has three prototype lines and a
        testing laboratory, plus office space within a building of about 22,000 square
        feet. The Indianapolis facility consists of 48,000 square feet of manufacturing
        space and 12,000 square feet of office space, and has been designed for cell
        and
        battery manufacturing on a larger scale.
 
 We
        own
        the land and building at our Fort Lauderdale, facility. The land, building
        and
        certain equipment at the Fort Lauderdale facility are pledged as collateral
        to
        secure Ener1 Battery Company’s corporate guarantee of our repayment of
        approximately $19,700,000 principal amount of our senior debentures. The
        collateralized equipment is allocated by agreement for EnerDel’s exclusive use,
        pending release of the debenture holders’ security interests in the equipment,
        at which time, EnerDel’s option to purchase all of the equipment from Ener1
        Battery for $1 will be automatically exercised.
 
 We
        sublet
        our Indianapolis space from Delphi under a sublease requiring rent of
        approximately $46,000 per month. Delphi has filed for protection under Chapter
        11 of the bankruptcy statutes and has rejected its prime lease, and we are
        currently negotiating a separate lease with the prime landlord. We are currently
        evaluating the possibility of expanding this facility for use in substantial
        manufacturing of our planned Li-ion battery cells and associated battery
        packs
        for sale to HEV automotive makers.
  14
 
 **Our
        Fuel Cell Business**
 
 *Overview*
 
 EnerFuel
        plans to produce fuel cell products and provide fuel cell related services,
        including fuel cells testing services. A fuel cell is an electrochemical
        energy
        conversion device. There are many types of fuel cells; each using a different
        chemistry. We intend to focus primarily on the type of fuel cell known as
        the
“PEM” or proton exchange membrane fuel cell. Like
        a
        battery, a fuel cell converts hydrogen and oxygen into water, and this process
        produces electricity. Unlike a battery, chemicals constantly flow into the
        cell
        so the cell continues to operate. As long as chemicals flow into the cell,
        electricity flows out of the cell. In contrast, all of a battery’s chemicals are
        stored inside the battery, which means that a battery eventually runs out
        of
        energy, at which time it is either disposed of or recharged.
 
 A
        fuel
        cell provides a direct current voltage that can be used as a source of
        electrical power. Fuel cells are usually classified by the type of electrolyte
        they use. In a PEM fuel cell, the exchange of protons from the anode to the
        cathode is achieved by a solid, water-swollen membrane electrolyte impregnated
        with a strong acid. A PEM fuel cell uses hydrogen and oxygen to generate
        power.
        The hydrogen splits to release its electrons to the external circuit and
        provide
        power. The protons move across a PEM, attracted by the oxygen, and combine
        with
        the oxygen to form water at the opposite electrode surface.
 
 A
        single
        fuel cell produces only a small amount of voltage, so typically fuel cells
        are
        arranged in stacks to achieve useful levels of voltage.
 
 Fuel
        cells in general and PEM fuel cells in particular, have gained increasing
        attention in recent years as a potentially inexpensive and environmentally
        safe
        alternative source of energy. Increasing costs for fossil fuels and concern
        for
        the environment continue to drive fuel cell industry development. A number
        of
        issues, including the high cost and increasing rarity of platinum, a key
        material used in fuel cells, and the lack of a hydrogen supply infrastructure,
        have slowed the use of fuel cells.
 
 We
        began
        research and development in fuel cells in September 2004 and have filed seven
        patent applications relating to fuel cell devices, systems and processes,
        one of
        which has been issued as a patent. Our fuel cell subsidiary, EnerFuel, operates
        primarily from office and industrial space in West Palm Beach, Florida. We
        have
        substantially restructured our fuel cell activities and operations as of
        January
        2006, including hiring a President for EnerFuel who has over 10 years of
        fuel
        cell industry experience in management and operations.
 
 While
        EnerFuel has earned only nominal revenue to date, it has been awarded a DOE
        and
        state funded research grant by the Florida Hydrogen Initiative (“FHI”) for fuel
        cell development and expects to enter into a contract for the project
        shortly.
 
 *Planned
        Products and Services*
 
 EnerFuel
        plans to commercialize a sequence of fuel cell products as quickly as possible
        by using a building-block approach based on some common elements. EnerFuel’s
        planned products will expand on a common base, but will be designed to function
        as standalone products as well, providing a broad-based product platform
        while
        EnerFuel continues research and development of additional new products and
        services.
 
 To
        implement this strategy, EnerFuel is developing a broad range of fuel cell
        products and services. Products in development include fuel cell stacks and
        fuel
        cell stack components, fuel cell systems, components for fuel cell systems
        and
        integrated products containing fuel cell systems. Fuel cell stacks include
        both
        high and low temperature PEM fuel cells. A fuel cell system consists of a
        fuel
        cell and the other components required to convert chemical energy of a fuel
        into
        electricity. Integrated products are formed by adding hardware to a fuel
        cell
        system such that it is capable of providing some end-user function, such
        as an
        uninterruptible power supply (UPS). Our products may also include fuel cell
        testing equipment. Substantially all of our planned products are in an early
        stage of development and completion of prototypes will require additional
        time,
        effort and funding.
  15
 
 EnerFuel
        is developing what it believes will be the next generation of high-temperature
        fuel cells. These products are intended to address the fuel cell industry's
        need
        for fuel cells that are smaller and less costly and complex than those currently
        available. We believe EnerFuel’s planned high temperature PEM fuel cell
        application will be differentiated from existing fuel cells both as a result
        of
        its ability to operate at high temperatures and reduced cost through elimination
        of expensive catalyst materials.
 
 EnerFuel
        is also working on a new design for a modular PEM fuel cell. We believe this
        approach will improve reliability and reparability of the fuel cell - two
        basic
        concerns today. Each cell within the overall fuel cell would be self-contained
        (not stack dependent), unlike today’s standard designs. This would also reduce
        problems in stack sealing or flow distribution. Another advantage to this
        approach is that it would enable different stack sizes with same cell design.
        This, in turn, would limit the need to re-develop cells for each stack size
        and
        allow us to pursue many fuel cell different market segments simultaneously
        by
        quickly adapting different fuel cell stack configurations using our
        stack-independent fuel cells. EnerFuel plans to focus on a simple, compact,
        inexpensive design in order to make its planned products mass producible,
        allow
        individual cell replacement to minimize stack replacements and make the product
        generally more repairable and recyclable.
 
 Our
        services may include demonstration projects (such as the FHI project),
        technology development, design, fabrication, assembly and testing of fuel
        cell
        components, membrane electrode assembly ("MEA") performance and failure analysis
        and software development related to fuel cell operations.
 
 *Our
        Markets*
 
 Forecasts
        for size and growth of the markets for fuel cell products vary. We believe
        the
        overall markets for fuel cell products will experience substantial growth
        in the
        coming years. Global Information, Inc., in a study entitled World Fuel Cell
        to
        2009, published May 2005, has estimated that overall demand for all types
        of
        fuel cell products combined will rise from $375,000,000 in 2005 to
        $2,500,000,000 in 2009 and $13,500,000,000 in 2014 **.**
 
 EnerFuel
        is pursuing several emerging market sectors within the overall fuel cell
        market.
        These include the markets for portable power, auxiliary power, distributed
        power
        and backup power devices and systems. The market for portable power encompasses
        a variety of market segments from powering military equipment to powering
        OEM
        devices ranging from lawnmowers to robotics. The auxiliary power market supplies
        auxiliary power units that provide electricity used in a vehicle, such as
        a
        long-haul truck or boat, for applications other than propulsion. The distributed
        power market provides customers with the ability to generate power on-site.
        Uses
        of backup power range from providing assurance that applications will continue
        to function in the unlikely event of a blackout to augmenting unreliable
        power
        grids in many countries on a daily basis. ****
  EnerFuel’s
        potential market opportunities also include the market for remote sensors
        for
        video cameras (visible, IR, UV), weather instrumentation, tsunami and earthquake
        detection, among others.
 
 In
        the
        backup power supply market, the lack of an established hydrogen fuel supply
        infrastructure (i.e., availability of hydrogen supplies and transmission
        network) is less important as fuel is only consumed during power interruptions.
        We also believe that there is and will continue to be a high demand for fuel
        cells in nations with limited and unreliable power grids. We believe that
        fuel
        cells have several advantages over batteries in this market, including better
        energy storage, as well as advantages over internal combustion engines,
        including less noise and fumes and increased reliability.
  16
 
 *Competition*
 
 There
        are
        many companies in the fuel cell business generally that are larger and/or
        have
        greater resources than EnerFuel, such as Ballard, Plug Power, UTC and ReliOn.
        Some of these companies have been in the fuel cell industry for longer then
        EnerFuel and have more available capital and greater technical, marketing,
        sales, manufacturing, distribution and other resources than we do. We believe
        that EnerFuel's competitive advantages include, in additional to those it
        plans
        to design into its proposed products discussed above, its experienced technical
        team and its building block product development approach, which we believe
        will
        make it possible for EnerFuel to get its proposed products into the market
        more
        quickly.
 
 Within
        the fuel cell market, there are companies that operate in many areas of fuel
        cell technology and others that operate in narrowly defined areas, such as
        development and marketing of fuel cell stacks or PEMs or MEAs (membrane
        electrode assemblies). EnerFuel’s competition consists of mainly pure stack or
        pure membrane companies. Unlike these companies EnerFuel works in both stacks *and* membranes, and we believe it will be able to optimize both aspects in ways
        its
        competitors that do not operate in both sectors cannot because of the technical
        performance connections between these two components. Stack competitors include:
        Ballard, Plug Power, UTC and ReliOn. Membrane competitors include: Gore,
        DuPont.
        DeNora. Asahi Glass and PEMEAS. We believe that PEMEAS is the only company
        with
        commercially available high temperature MEAs at this time. EnerFuel plans
        to use
        low cost materials and possibly eliminate platinum as a catalyst to give
        it an
        edge in this market.
 
 We
        believe products based on EnerFuel’s technology will have several competitive
        advantages. These include:
 
 ·  Smaller,
        lighter weight, high temperature fuel cell
 ·  New,
        more
        attainable modular approach
 ·  Flexible
        design and easier reparability
 ·  Lower
        costs materials used in production
 ·  Lower
        cost MEA’s for EnerFuel Stacks
 ·  Membrane
        material is recycled to lower costs
 
 *Potential
        Customers*
 
 We
        plan
        to provide products and services for both corporate and government customers.
        Because EnerFuel is an early stage development company, at any given time
        its
        customer base may be limited. We plan to implement a customer diversification
        plan to attempt to avoid dependence on any one customer as EnerFuel grows.
 
 In
        2005,
        we were notified by the Florida Hydrogen Initiative that it had decided to
        award
        to us a $1.1 million 50% cost share contract under which the Florida state
        government and U.S. Department of Energy will provide $550,000 over 18 months
        to
        fund EnerFuel's research and product development, and EnerFuel will also
        be
        required to use the same amount of its own funds in performing the contract.
        EnerFuel is in contract negotiations to finalize the contract documentation
        for
        this work. The contract will require EnerFuel to design and implement a 10kW
        (kilowatt) fuel cell system using the chemical energy in waste orange peels
        to
        power a highway rest stop on a major Florida highway. This program is expected
        to demonstrate EnerFuel’s ability to develop and deploy complex fuel cell
        systems.
 
 EnerFuel
        has also performed a limited amount of subcontract services for a large company
        in the fuel cell sector, and has submitted several proposals for product
        development work and services. EnerFuel plans to heavily emphasize seeking
        work
        customer proposals heavily over the next several months in order to establish
        a
        revenue base to fund future operations and additional product development.
        This
        is part of our overall company strategy to increase focus on revenue while
        developing our planned future products.
  17
 
 *Technical
        Resources*
 
 Our
        management and engineering staff has technology expertise in the following
        areas:
 
 ·  Proton
        exchange membrane fuel cell (PEMFC) membrane electrode assembly
        (MEA)
 ·  Fuel
        cell
        stack design
 ·  Fuel
        cell
        system integration
 ·  Fuel
        cell
        system controls development
 ·  Reformat
        gas processing
 ·  Fuel
        processing
 ·  Fuel
        cell
        failure analysis and mechanisms
 ·  Electrolyzers
        (membrane, hardware, controls)
 
 Our
        West
        Palm Beach facility, leased in January 2006, is fully equipped for fuel cell
        development operations. We have recently purchased over $200,000 in fuel
        cell-specific engineering and development equipment for that
        facility.
 
 *Intellectual
        Property*
 
 EnerFuel
        has two issued patents  and
        nine
        pending patents, all related to fuel cell and related technologies. The issued
        patents expire after 20 years. Four of the patent applications are utility
        applications, and five are provisional. Provisional applications must be
        followed by utility applications within one year of the provisional filing
        to
        confirm the priority date established by the provision filing for protection
        of
        the patent rights involved if the patent is issued. The patent applications
        cover, among other things, intellectual property relating to method and
        apparatus for cold-starting of a PEM fuel cell, shut down of a PEM fuel cell,
        startup of a PEM fuel cell and other aspects of PEM fuel cell operation.
        EnerFuel’s development team continues to perform research and plans to file
        additional patent applications as appropriate.
 
 EnerFuel’s
        president and engineering team have developed substantial fuel cell know-how
        gained from their collective experience in fuel cell research and
        development.
 
 In
        addition to filing for patents on our inventions, we require our employees
        to
        sign confidentiality and work-for-hire agreements. We also enter into
        confidentiality agreement with third parties before discussing sensitive
        information with them.
 
 *Sources
        of Supply*
 
 EnerFuel
        sources fuel cell membranes from DuPont custom machined and/or molded bipolar
        plates from Imperial Custom Molding seals from E&T Plastics of Florida,
        Inc., and fittings, tubing and gages from Accutech Instrumentation. We believe
        that we can access alternate sources of supply for all of our major materials
        needs
 
 *Research
        and Development*
 
 During
        2004 and 2005 EnerFuel spent $923,000 and $1,154,000, respectively, on research
        and development. During 2004 and 2005, our research and development emphasized
        fuel cell control systems and similar components. We have refocused our research
        and development toward more specific products that have both near term and
        long
        term sales potential.
 
 *Facilities*
 
 EnerFuel
        leases two facilities: its headquarters in West Palm Beach, FL (7160 square
        feet) and facilities in Fort Lauderdale, FL (6413 square feet). Both facilities
        have offices and fuel cell specific laboratory space and equipment. The West
        Palm Beach facility also has a complete machine shop and is equipped with
        routed
        de-ionized water, cooling water, clean compressed air, hydrogen and other
        gases.
  18
 
 **Our
        Nanotechnology Operations**
 
 *Overview*
 
 Our
        nanotechnology operations currently consist of targeted research and development
        efforts to develop our patent pending vapor deposition/solidification or
        "VDS"
        process. VDS is a manufacturing process for depositing materials in
        microscopically thin layers on substrates used to form manufactured components.
        Initially, we have been testing our VDS process for use in building lithium
        battery electrodes, including the high-rate battery technology which we have
        been developing with EnerStruct. The VDS process is designed to facilitate
        precise deposition of the manufacturing materials so as to increase efficiency
        and speed of production while also increasing performance of the battery
        electrode by enhancing conductivity and producing increased electrical current.
 
 Our
        VDS
        process is implemented with computer controls to monitor and regulate key
        aspects of manufacturing at a precise micro-level. We believe that, if
        successful, this process may be useful in production of many other types
        of
        products in addition to battery components. Generally, control of the
        micron-level aspects of manufacturing using nanotechnology deposition processes
        allows for production of components that have special properties, facilitating
        stronger, lighter and more uniform coatings.
 
 We
        have
        set up a prototype manufacturing and testing facility in Ft. Lauderdale,
        which
        has produced samples of lithium battery electrodes for evaluation internally
        and
        externally.
 
 We
        are
        currently evaluating NanoEner's operations and business prospects in order
        to
        determine whether to continue to pursue our nanotechnology business as a
        separate line of business. We are also evaluating NanoEner’s capabilities of
        providing specialized nanotechnology coatings
        and nanostructured materials to our
        other business units. ****
 ****
 *Application
        of Nanotechnology to Batteries*
 
 We
        have
        researched the application of our VDS technology to production of batteries
        on a
        prototype basis. Our VDS process uses a special chamber into which we put
        a
        battery “substrate” (which is the material upon which we deposit materials to
        build battery electrodes). Through a highly calibrated and flexible computer
        control program that allows micromanagement of key process parameters, we
        are
        able to precisely control the formation of battery electrodes. The VDS process
        makes it possible to add the electrode materials and precisely control their
        structure on the substrate for a smoother, more even and more complete coverage
        of the substrate surface, with less surface imperfections. We believe that
        this
        process produces electrodes that have higher conductivity of electric current,
        which results in greater power output from the electrode. We think that the
        benefits of this production process for battery electrodes may
        include:
 
 ·
              Efficient
                  use of electrode materials to minimize
                  waste
 ·
              Manufacturing
                  at the “nano level” (<100 nanometers) for greater
                  precision
 ·
              Low
                  cost, rapid production of high-rate battery
                  electrodes
 ·
              Higher
                  possible battery discharge rates due to greater transmission of
                  current
 ·
              Reduced
                  costs due to (i) reduction of additives and process steps (i.e.,
                  coating,
                  plasticizers, baking) and (ii) fewer cells required in multi-cell
                  packs
 ·
              Higher
                  average current
 ·
              Excellent
                  adhesion and surface characteristics of
                  electrodes.
  19
  *Intellectual
        Property*
 
 We
        have
        three nanotechnology-based patents pending, including one covering our VDS
“thin
        films” deposition process. We have also licensed our VDS technology to
        EnerStruct for nonexclusive use in Japan. One of the patent applications
        is a
        utility application, and the other two are provisional
        applications.
 
 In
        addition to filing for patents on our inventions, we require our employees
        to
        sign confidentiality and work-for-hire agreements. We also enter into
        confidentiality agreement with third parties before discussing sensitive
        information with them.
  *Competition*
 
 There
        are
        numerous companies involved in the nanotechnology field and the term
“nanotechnology” has a broad range of descriptions. We have defined our
        participation in this field initially in terms of the above-described efforts
        in
        lithium battery development. We believe that among the other companies
        participating in the nanotechnology field, there are many with greater
        financial, technical,
        marketing, sales, manufacturing, distribution and other resources
        than our company.
 
 **Government
        Regulation and Approvals**
 
 Certain
        aspects of production and transportation of batteries and fuel cells and
        their
        components or raw materials are regulated on the international, national
        and
        state levels, as well as by private commercial organizations. Transportation
        of
        battery products is regulated by the U.S. Department of Transportation and
        other
        governmental departments and agencies. Their approvals may be required before
        we
        can ship our products on a commercial basis. We may need to obtain approvals
        for the storage or transportation of flammable or hazardous fuels before
        we are
        able to deliver some of our planned fuel cell systems. Future legislation
        and/or
        other regulation concerning the transportation and storage of hydrogen fuel
        and
        other fuels associated with fuel cells is expected in the future.
 
 We
        may be
        required to obtain certifications on our products and systems from
        product-safety testing and certification organizations such as “QPL” (Qualified
        Parts Laboratory - Crane, Indiana) and “UL” (Underwriters Laboratory), before we
        can sell them generally or to specific markets. Certain certifications may
        not
        be required for products imbedded into systems, (e.g., for certain OEM
        applications.)
 
 Future
        legislation and/or other regulation concerning the transportation and storage
        of
        hydrogen fuel and other fuels associated with fuel cells are expected in
        the
        future. As a result of any such legislation or regulation, we may need to
        obtain
        governmental approval for the storage or transportation of flammable or
        hazardous fuels before transporting fuel cell systems to our
        customers.
 
 In
        addition to the foregoing, we must comply with environmental regulations.
        These
        regulations may become more stringent, increasing the cost of compliance
        and the
        risk of failure to comply. In particular, there are environmental laws that
        provide for strict, unlimited liability in connection with releases of
“hazardous substances.” In the manufacturing of batteries and components and
        materials for batteries (and to a lesser extent in our fuel cell and
        nanotechnology operations), we may use hazardous substances that are regulated
        under these environmental laws. Our battery operations are currently classified
        as a “small generator of hazardous waste” and must operate in accordance with
        the applicable regulations. At this time, our costs for maintaining
        environmental, health and safety compliance are not material.
  20
 
 **Additional
        Information**
 
 We
        electronically file reports with the Securities and Exchange Commission (the
        "SEC"), including annual reports on Form 10-KSB, quarterly reports on Form
        10-QSB, current reports on Form 8-K and amendments to such reports. The public
        may read and copy any materials that we file with the SEC at the SEC's Public
        Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549. The public
        may
        obtain information on the operation of the Public Reference Room by calling
        the
        SEC at 1-800-SEC-0330. The SEC also maintains an internet site that contains
        reports, proxy and information statements, and other information regarding
        issuers that file electronically with the SEC at *http://www.sec.gov* .
 
 **ITEM
        2: PROPERTIES**
 
 Description
        of Properties
 
 Our
        headquarters are located in an office building in Fort Lauderdale, Florida
        under
        a lease that became effective in February 2004. The facility was finished
        to our
        office layout specifications. The lease of this 8,183 square foot office
        space
        expires February 28, 2009. The monthly rent plus common area charges currently
        total approximately $18,000 and are subject to annual increases **.**
 
 In
        2005,
        we established a corporate office in New York City, comprised of approximately
        6,600 square feet under a lease with monthly rent of $35,520, including
        operating expenses. This lease expires September 2010 **.** Effective
        as of February 1, 2006, this lease has been assigned to Ener1 Group.
 
 Ener1
        Battery owns a battery research and development facility, consisting of land
        and
        a 22,000 square foot building located in Fort Lauderdale, Florida. The building
        is in good condition and has been modified to suit our operations. The Fort
        Lauderdale facility is used exclusively by EnerDel, which incurs rent of
        $28,000
        per month to Ener1 Battery under a lease entered into in October 2004. Ener1
        Battery has guaranteed the performance of our obligations under our senior
        secured convertible debentures due January 2009 (the "2004 Debentures").The
        Fort
        Lauderdale land, building and equipment are pledged as collateral to secure
        the
        obligations of Ener1 Battery under this guarantee. As of December 31, 2005,
        $19,700,000 in aggregate principal amount of the 2004 Debentures was
        outstanding.
 
 Beginning
        in October 2004, EnerDel subleased 56,219 square feet of manufacturing and
        office space in Indianapolis, Indiana from Delphi Automotive Systems, LLC.
        EnerDel has research and development and manufacturing equipment in this
        facility. The monthly rent is $45,636.89. Delphi has filed for protection
        under
        Chapter 11 of the U.S. bankruptcy statutes and has rejected its prime lease
        in
        that proceeding. As a result, EnerDel has a month-to-month a short term lease
        directly with the prime landlord for the Indianapolis facility, pending
        negotiations of a longer term lease, which are ongoing. EnerDel has also
        identified alternate locations in the immediate Indianapolis area if the
        current
        negotiations are not completed satisfactorily or timely **.**
 
 EnerFuel
        leases 7,600 square feet of industrial and office space in West Palm Beach,
        Florida under a lease that began in January 2006 and expires December 31,
        2007.
        We have the option to extend the lease for two renewal terms of five years
        each.
        This space is used primarily for research and development of fuel cell products
        and also serves as EnerFuel’s administrative offices and primary services
        facility. EnerFuel also leases 6,413 square feet of industrial and office
        space
        approximately one mile from our headquarters in Fort Lauderdale, Florida.
        This
        lease expires on August 30, 2008. This space is used primarily for certain
        hardware development projects **.**
 
 Our
        subsidiary NanoEner, Inc. subsidiary leases 1,720 square feet of industrial
        and
        office space approximately one mile from our headquarters in Fort Lauderdale,
        Florida for a monthly rent of $1,863. This space is used for NanoEner’s
        prototype equipment and research and development. The lease expires in July
        2006.
  21
 
 Investment
        Policies
 
 We
        do not
        have specific limitations on the percentage of our assets that may be invested
        in any one investment or any specific limitation on the types of investments
        we
        may make. There is no specific shareholder vote requirement regarding changes
        in
        this policy. Generally, we acquire assets primarily for operating purposes
        and
        not for capital gains or income *per
        se* **.**
 
 **ITEM
        3: LEGAL PROCEEDINGS**
 
 We
        receive communications from time to time alleging various claims. These claims
        include, but are not limited to, allegations that certain of our products
        infringe the patent rights of other third parties. We cannot predict the
        outcome
        of any such claims or the effect of any such claims on our operating results,
        financial condition, or cash flows.
 
 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.
 
 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
        4: SUBMISSION OF MATTERS TO A VOTE FOR SECURITY HOLDERS**
 
 **None**
  22
  **PART
        II**
 **ITEM
        5: MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
        SMALL BUSINESS ISSUER PURCHASE OF EQUITY SECURITIES**
 
 The
        principal market for our stock was the Over-the-Counter Bulletin Board during
        the period from October 2001 through December 21, 2005, and since then, the
        principal market for our stock has been the Pink Sheets. On March 6, 2006,
        the
        closing price of our common stock was $0.42.
 
 The
        Pink
        Sheets is a centralized quotation service that collects and publishes market
        maker quotes for over-the-counter ("OTC") securities in real time. The OTC
        Electronic Bulletin Board is a regulated quotation service that displays
        real-time quotes, last-sale prices and volume information in OTC equity
        securities.
 
 The
        following table sets forth the high and low prices for our common stock for
        the
        period indicated as reported by the OTC Electronic Bulletin Board through
        December 21, 2005 and by the OTC Pink Sheets from December 22, 2005 through
        December 31, 2005. The quotations reflect inter-dealer prices, without retail
        mark-up, mark-down or commission and may not represent actual transactions.
 **Year**
                
                **Fiscal
                    Quarter Ended**
                
                **High**
                
                **Low**2004
                
                March
                    31, 2004
                
                2.00
                
                0.65June
                    30, 2004
                
                1.00
                
                0.45September
                    30, 2004
                
                0.75
                
                0.42December
                    31, 2004
                
                1.06
                
                0.422005
                
                March
                    31, 2005
                
                0.97
                
                0.53June
                    30, 2005
                
                0.64
                
                0.28September
                    30, 2005
                
                0.64
                
                0.13December
                    30, 2005
                
                0.60
                
                0.06
  As
        of
        March 6, 2006, there were 382,104,469
        shares of common
        stock outstanding held by approximately 300 shareholders of record. The number
        of shareholders of record does not include beneficial owners of common stock
        whose shares are held in the names of various dealers, clearing agencies,
        banks,
        brokers and other fiduciaries.
 
 We
        have
        not paid any cash dividends during the last two fiscal years and do not
        anticipate paying any cash dividends on our common stock.
 
 The
        terms
        of our senior secured convertible debentures restrict our ability to pay
        dividends on our common stock until we have met certain milestones set forth
        in
        the debentures or until less than $100,000 in aggregate principal amount
        of the
        debentures remains outstanding.
  23
 **ITEM
        6: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
        OPERATIONS**
 
 *The
        following Management’s Discussion and Analysis of Financial Condition and
        Results of Operations contain ”forward-looking statements” within the meaning of
        Section 27A of the Securities Act, and Section 23E of the Securities Exchange
        Act of 1934, as amended,* including statements *about our beliefs and expectations. There are many risks and uncertainties
        that
        could cause actual results to differ materially from those discussed in the
        forward-looking statements. Potential factors that could cause actual results
        to
        differ materially from those discussed in any forward-looking statements
        include, but are not limited to, those stated below under the headings
“Cautionary Statement Concerning Forward-Looking Statements” and “Risk Factors”
as well as those described from time to time in our filings with the Securities
        and Exchange Commission* .
 
 *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 filings with
        the
        Securities and Exchange Commission and the consolidated financial statements
        and
        the related notes included in this Annual 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.
 
 In
        June
        2005, we restructured EnerDel's operations based on a change in strategy
        to
        focus development and marketing efforts on U.S.-based production of Li-ion
        batteries for U.S. HEV manufacturing customers. This change in strategy was
        based on our determination that the high-rate-of-discharge battery technology
        and automated manufacturing process technologies we were able to acquire
        from
        EnerStruct would enable us to pursue the emerging market for HEV batteries
        more
        effectively. At this time, we discontinued all work on the Bellcore technology
        EnerDel had acquired from Delphi, which we determined EnerDel could not
        commercialize on a profitable basis due to the cost and complexity of the
        manufacturing process required.
 
 As
        a
        result of the decision in 2005 to refocus EnerDel's technology development
        efforts on Li-ion batteries for the HEV market and to cease using certain
        manufacturing equipment, we had to write down the value of these manufacturing
        assets and incurred a charge of $10,527,000. We also expensed a substantial
        amount of battery-related equipment in 2004 as a result of our determination
        that certain production equipment would be used for research and development
        ("R&D") purposes only.
 
 During
        the second half of 2005, we decided to consolidate our development engineering
        and production activities in our Indianapolis, Indiana facility. During the
        next
        24 months we intend to build a pilot production line to produce samples and
        ultimately produce product for HEVs. In order to execute these plans, we
        currently expect that during the next two years we will make capital
        expenditures of $20,000,000 and increase our research and development expenses
        to approximately $10,000,000 annually. We will need to raise between $30,000,000
        and $40,000,000 over the next two years to implement this strategy, and 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.
  24
  We
        restructured EnerFuel's fuel cell business plan and operations in January
        2006.
        EnerFuel now focuses on developing
        what it believes will be the next generation of high-temperature fuel cells
        intended to address the fuel cell industry's need for fuel cells that are
        smaller and less costly and complex. EnerFuel has hired a president with
        ten
        years of experience building a start-up fuel cell company and expanded its
        development team by hiring a team of engineers with experience at a major
        fuel
        cell industry participant. As part of the restructuring, EnerFuel also acquired
        additional fuel cell development equipment and leased a fuel cell development
        facility set up specially for fuel cell operations and has moved most of
        its
        operations there. EnerFuel is pursuing fuel cell related opportunities in
        the
        portable power, auxiliary power, distributed power and backup power markets.
 
 NanoEner,
        our nanotechnology subsidiary, has built prototype equipment that utilizes
        our
        patent pending vacuum deposition/solidification (“VDS”) process for depositing
        nanostructured materials onto battery electrodes as part of the battery cell
        manufacturing process. We are currently evaluating NanoEner's operations
        and
        business prospects in order to determine whether to continue to pursue our
        nanotechnology operations as a separate line of business. We are also evaluating
        NanoEner’s capabilities of providing nanotechnology to our other business
        units.
 
 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. We will
        need
        to raise between $30,000,000 and $40,000,000 over the next two years to
        implement this strategy, and 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.
 
 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 $153,296,000 as of
        December 31, 2005. 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, among others, will
        give
        rise to substantial doubt about Ener1's ability to continue as a going concern.
 
 We
        received $2,760,000 in early 2006 when Ener1 Group exercised warrants to
        purchase 34,500,000 shares of our common stock. We need additional capital
        to
        fund our operations through June 2006, at which time we intend to raise
        additional financing. We are currently negotiating the terms on which Ener1
        Group may agree to exercise additional warrants to purchase our common stock
        in
        order to provide us with additional working capital through June 2006.
 
 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, (or,
        additionally, with respect to the 2005 Debentures, if our common stock ceases
        to
        be listed or quoted on the OTC Bulletin Board, the NASDAQ®National
        Market, NASDAQ®SmallCap
        Market or the New York Stock Exchange),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, 2004 as a result of the fact that we determined we needed
        to
        restate our financial statements for the year ended December 31, 2004 and
        the
        three months ended March 31, 2005 and June 30, 2005. At
        December 31, 2005, the accumulated registration delay payments for the 2004
        and
        2005 Debentures were $374,000, and $270,000, respectively. 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 and until our common stock is quoted on the OTC Bulletin
        Board. The
        monthly registration delay payments of $213,375 (prorated for portions of
        a
        month) for the 2005 Debentures are required to be paid during any period
        of time
        during which we fail to maintain the listing of our common stock on the OTC
        Bulletin Board, the NASDAQ®National
        Market, NASDAQ®SmallCap
        Market or the New York Stock Exchange as required by the registration agreement
        for the 2005 Debentures. We
        intend
        to file a post-effective amendment to the registration statement for the
        common
        stock underlying the 2005 Debentures to update it with the information included
        in this Annual Report. The obligations to make registration delay payments
        and
        our inability to publicly offer our securities until we restate our financial
        statements has 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 and our
        common
        stock is quoted on the OTC Bulletin Board.
  25
 
 ***Critical
        Accounting Policies*** ****
 
 The
        preparation of financial statements and related disclosures in conformity
        with
        accounting principles generally accepted in the United States (“GAAP”) requires
        management to make estimates and assumptions that affect the reported amounts
        of
        assets and liabilities, the fair value of financial instruments such as
        derivatives, the disclosure of contingent assets and liabilities at the date
        of
        the financial statements and expenses during the period reported. The following
        accounting policies involve a “critical accounting estimate” because they are
        particularly dependent on estimates and assumptions made by management about
        matters that are highly uncertain at the time the accounting estimates are
        made.
        In addition, while we have used our best estimates based on facts and
        circumstances available to us at the time, different estimates reasonably
        could
        have been used in the current period. Changes in the accounting estimates
        we
        used are reasonably likely to occur from period to period, which may have
        a
        material impact on the presentation of our financial condition and results
        of
        operations. We review these estimates and assumptions periodically and reflect
        the effects of revisions in the period that they are determined to be
        necessary.
 
 *Accounting
        for Derivative Instruments*
 
 Statement
        of Financial Accounting Standard (“SFAS”) No. 133, “Accounting for Derivative
        Instruments and Hedging Activities,” as amended, requires all derivatives to be
        recorded on the balance sheet at fair value. These derivatives, including
        embedded derivatives in our structured borrowings, are separately valued
        and
        accounted for on our balance sheet. Fair values for exchange-traded securities
        and derivatives are based on quoted market prices. Where market prices are
        not
        readily available, fair values are determined using market based pricing
        models
        incorporating readily observable market data and requiring judgment and
        estimates.


In
          September 2000, the Emerging Issues Task Force ("EITF") issued EITF 00-19,
          "Accounting for Derivative Financial Instruments Indexed to and Potentially
          Settled in, a Company's Own Stock," ("EITF 00-19") which requires freestanding
          contracts that are settled in a company's own stock, including common stock
          warrants, to be designated as an equity instrument, asset or a liability.
          Under
          the provisions of EITF 00-19, a contract designated as an asset or a liability
          must be carried at fair value on a company’s balance sheet, with any changes in
          fair value recorded in the company’s results of operations. A contract
          designated as an equity instrument must be included within equity, and
          no fair
          value adjustments are required. In accordance with SFAS No. 133 and EITF
          00-19,
          we determined that several of the outstanding warrants to purchase our
          common
          stock and the embedded conversion feature and certain other features of
          several
          of our financial instruments should be separately accounted for as assets
          or
          liabilities. Our financial statements for the years ended December 31,
          2004 and
          2005 reflect the fair value of these warrants and the conversion and other
          embedded derivatives features on our balance sheet and the unrealized
          changes in the values of these derivatives in our consolidated statement
          of
          operations as “Gain (loss) on derivative liabilities.”
  We
          determined that the Battery Warrants were a derivative liability under
          EITF
          00-19 because share settlement of these warrants was not within the control
          of
          the Company as a result of the facts that: (1) the holder of the Battery
          Warrants was the controlling shareholder of the Company, and (2) the Battery
          Warrants contained dilution protection features, with no limit or cap on
          the
          number of shares that could be issued under the Battery Warrants. Therefore,
          we
          could not conclude that we had sufficient authorized and unissued shares
          to
          issue the number of shares potentially issuable under the Battery Warrants.
          We
          also determined that we could not conclude we had sufficient authorized
          and
          unissued shares to issue the number of shares required under the other
          warrants
          subsequently issued by the Company as described above. As a result, we
          determined that these warrants would also be treated as derivative liabilities
          because we could not conclude that we had sufficient authorized and unissued
          shares to settle the potential share issuances required under these warrants
          as
          long as the Battery Warrants were outstanding.
  We
          have
          evaluated our provisions of the registration rights agreements issued
          in connection with our 2004 Debentures which require us to
          make registration delay payments in combination with the respective
          financial instruments involved. The EITF recently deliberated the impact
          of
          liquidated damages clauses in registration rights agreements and the effect
          on
          accounting and classification of instruments subject to the scope of EITF
          00-19
          in EITF 05-04 *The
          Effect of a Liquidated Damages Clause on a Freestanding Financial Instrument
          Subject to Issue No. 00-19.* The
          EITF
          has not reached a consensus on this issue and has deferred deliberation
          until
          the FASB addresses certain questions which could impact a conclusion on
          this
          issue. Specifically, EITF 05-04 presents alternative views on whether the
          liquidated damages provisions in registration rights agreements should
          be
          combined with or treated separately from the associated financial instrument.
          As
          discussed above, we view the registration rights agreement and the financial
          instrument as one combined freestanding instrument under View A of EITF
          05-04.
          If the EITF were to adopt the view that the registration rights agreement
          should
          be viewed as a separate instrument from the financial instrument, we may
          have to account for additional derivatives or liabilities.
  The
          2004
          Debentures and 2005 Debentures both contain more than one embedded derivative
          feature which SFAS 133 requires be accounted for as 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 the lattice valuation model, with the assistance of a valuation
            consultant. The lattice model values the compound embedded derivatives
            based on
            a probability weighted discounted cash flow model. This model is based
            on future
            projections of the five primary alternatives possible for settlement
            of the
            features included within the compound embedded derivative, including:
            (1)
            payments are made in cash, (2) payments are made in stock, (3) the holder
            exercises its right to convert the debentures, (4) Ener1 exercises its
            right to
            convert the debentures and (5) Ener1 defaults on the debentures. We use
            the model to analyze (a) the underlying economic factors that influence
            which of these events will occur, (b) when they are likely to occur,
            and (c) the
            common stock price and specific terms of the debentures such as interest
            rate
            and conversion price that will be in effect when they occur. Based on
            the
            analysis of these factors, we use the model to develop a set of
            potential scenarios. Probabilities of each scenario occurring during
            the
            remaining term of the debentures are determined based on management's
            projections. These probabilities are used to create a cash flow projection
            over
            the term of the debentures and determine the probability that the projected
            cash
            flow would be achieved. A discounted weighted average cash flow for each
            scenario is then calculated and compared to the discounted cash flow
            of the
            debentures without the compound embedded derivative in order to determine
            a
            value for the compound embedded derivative.
 The
          primary determinants of the economic value of a compound embedded derivative
          under the lattice model are (1) the price of our common stock, (2) the
          volatility of our common stock price, (3) the likelihood that we will be
          required to pay registration delay payments, (4) the likelihood that an
          event of
          default or a change in control will occur, (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
            the issue
            date (January 2004) determined using the lattice valuation model was
            based on
            the following assumptions:
 
 -
                the
                    price of Ener1's common stock would increase at a rate commensurate
                    with
                    the cost of equity, with a volatility of 130%; -
                95%
                    likelihood that Ener1 would not be in default of its obligations
                    under the
                    resale registration agreement relating to the 2004
                    Debentures; -
                5%
                    likelihood that an event of default or a fundamental change would
                    occur,
                    increasing over time; -
                reset
                    events projected to occur with a weighted average adjustment
                    factor of
                    .989; -
                95%
                    likelihood that Ener1 would force the conversion of the 2004
                    Debentures if
                    the stock price reached $1.75; -
                the
                    holders of the 2004 Debentures would convert the 2004 Debentures
                    if
                    Ener1's common stock price was $3.50, the resale registration
                    statement
                    was effective and Ener1 was not in default under the 2004
                    Debentures; -
                Ener1
                    would redeem the 2004 Debentures following the third anniversary
                    of the
                    issue date if Ener1's common stock price reached $1.50 or higher; -
                0%
                    likelihood that Ener1 would be able to obtain alternative financing
                    that
                    would enable it to redeem the 2004 Debentures increasing 2.5%
                    per quarter
                    to a maximum of 25%; and -
                0%
                    likelihood that Ener1's common stock would be listed on an exchange
                    increasing 10% quarterly to a maximum of
                    90%. 
 Based
            on
            the management projections above, we assigned a probability to each scenario
            for
            each future period, and determined the appropriate cash flow for each
            scenario. This cash flow was then probability weighted and discounted
            to the
            present.
 
 At
            the
            time of issue, we determined the probability weighed discounted cash
            flow of the
            2004 Debentres with the various embedded derivatives and determined the
            discounted cash flow of the 2004 Debentures without the embedded derivatives.
            The cash flows were discounted by the risk-free rate based on the remaining
            term
            of the 2004 Debentures. We determined that the  implied value of the
            compound embedded derivatives was $11,505,000 for the 2004 Debentures
            at the
            date of issue.
  The
          fair
          value of the compound derivative embedded in the 2004 Debentures as of
          December
          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 120%;
 -
                Ener1
                    would remain in default of its obligations under the resale
                    registration agreement relating to the 2004 Debentures for four
                    months
                    from December 31, 2005, after which there would be 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
                    .989;
 -
                95%
                    likelihood that Ener1 would force the conversion of the 2004
                    Debentures if Ener1's common stock price reached
                    $1.75;
 -
                the
                    holders of the 2004 Debentures would convert the 2004 Debentures
                    if
                    Ener1's common stock price reached $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 Ener1 to redeem the 2004
                    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, increasing 10% quarterly to a maximum likelihood of
                    90%.
 
 Based
          on
          these management assumptions, the fair value of the compound embedded derivative
          in the 2004 Debentures as of December 31, 2005 was calculated by management
          to
          be $5,980,000.
  The
          fair
          value of the compound derivative embedded in the 2004 Debentures as of
          December
          31, 2004 determined using the lattice valuation model was based on the
          following
          assumptions:
 
 -
                the
                    price of Ener1's common stock would increase at a rate commensurate
                    with
                    the cost of equity, with a volatility of 120%;-
                95%
                    likelihood that Ener1 would not be in default of its obligations
                    under the
                    resale registration agreement relating to the 2004
                    Debentures;
 -
                5%
                    likelihood that an event of default or a fundamental change would
                    occur;-
                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 Ener1 common stock price reached $1.75;-
                the
                    holders of the 2004 Debentures would convert the 2004 Debentures
                    if
                    Ener1's common stock price reached $3.50, the resale registration
                    statement was effective and Ener1 was not in default under the
                    2004
                    Debentures;
 -
                Ener1
                    would redeem the 2004 Debentures if Ener1's common stock price
                    reached
                    $1.50 or higher;-
                The
                    likelihood that Ener1 would be able to obtain alternative financing
                    that
                    would enable it to redeem the 2004 Debentures is 0%, increasing
                    2.5% per
                    quarter to a maximum likelihood of 25%;
                    and
 -
                0%
                    likelihood that Ener1's common stock would meet the listing requirement,
                    increasing 10% quarterly to a maximum likelihood of
                    90%.
 
 Based
          on
          these management assumptions, the fair value of the compound embedded derivative
          in the 2004 Debentures as of December 31, 2004 was calculated by management
          to
          be $14,319,000.
  The
            fair
            value of the compound derivative embedded in the 2005 Debentures as of
            the issue
            date (March 11, 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
                    .986; -
                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
            the management projections above, we assigned a probability to each scenario
            for
            each future period, and determined the appropriate cash flow for each
            scenario.
            This cash flow was then probability weighted and discounted to the
            present.
 
 At
            the
            time of issue, we determined the probability weighed discounted cash
            flow of the
            2005 Debentures with the various embedded derivatives and determined
            the
            discounted cash flow of the 2005 Debentures without the embedded derivatives.
            The cash flows were discounted by the risk-free rate based on the remaining
            term
            of the 2004 Debentures. We determined that the implied value of the compound
            embedded derivatives was $8,044,000 for the 2005 Debentures at the date
            of
            issue.
  The
          fair
          value of the compound derivative embedded in the 2005 Debentures as of
          December
          31, 2005 determined using the lattice valuation model was based on the
          following
          assumptions:
 
 -
                the
                    price of 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 its obligations under the resale registration
                    agreement relating to the 2005 Debentures for four months from
                    December
                    31, 2005, after which there would be 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 .1% per quarter;
 -
                Reset
                    events projected to occur with a weighted average adjustment
                    factor of
                    .893;
 -
                95%
                    likelihood that Ener1 would force the conversion of the 2005
                    Debentures if Ener1's 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 Ener1 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 December 31, 2005 was calculated by management
          to
          be $4,555,000.
  These
          assumptions are reviewed quarterly and are subject to change based primarily
          on
          management's assessment of the probability of the events described occurring.
          Accordingly, changes to these assessments could materially affect the
          valuation.
  ***Black
          Scholes Valuation Model***


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 features 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
                      
                      
                      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
  26
 
 *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 their carrying value.
 
 *Restatement
        of Financial Statements to Reflect Derivative Accounting*
 
 The
        consolidated financial statements for the years ended December 31, 2005 and
        2004
        included in this Annual Report have been restated to (1)
        reflect the accounting for and valuation of the additional compound
        embedded derivatives in our 2004 Debentures and 2005 Debentures, (2)
        revise the value of the initial discount and interest accretion on the 2004
        and
        2005 Debentures resulting from the revaluation of the compound embedded
        derivatives, (3) correct the value of the conversion feature derivative of
        the
        warrants issued with the 2004 Debentures and (4) record the value of
        our right to require Ener1 Group, Inc. to purchase shares of Series B
        Preferred Stock. The financial statements and other financial information
        included in this Amendment No. 2 to this Annual Report have been restated
        accordingly.
  We
        have
        determined that the conversion and other certain features of certain of our
        financial instruments, including our 2004 Debentures, 2005 Debentures and
        preferred stock and certain of the warrants and options to purchase our common
        stock are derivatives that we are required to account for as if they were
        free-standing instruments under GAAP. We have also determined that we are
        required to designate these derivatives as liabilities in our financial
        statements. In
        addition, we determined that an agreement under which Ener1 Group agreed
        to
        purchase at our request up to $3,000,000 worth of shares of Series B Preferred
        Stock was a financial instrument that we are required to value as a derivative
        asset and mark to market at each balance sheet date. We refer to this instrument
        as the "Series B Preferred Stock Put."As a result, we report the value
        of these derivatives net as current liabilities on our balance sheet and
        we
        report changes in the value of these derivatives as non-operating gains or
        losses on our statement of operations. The value of the derivatives is required
        to be recalculated (and resulting non-operating gains or losses reflected
        in our
        statement of operations and resulting adjustments to the associated liability
        amounts reflected on our balance sheet) on a quarterly basis.
  *Summary
          of Restatement Items*
 
 On
          December 15, 2005, we concluded that it was necessary to restate our
          financial results for the fiscal year ended December 31, 2004 and for the
          interim periods ended March 31, June 30 and September 30, 2004 and 2005
          to
          reflect additional non-operating gains and losses related to the classification
          of and accounting for: (1) the conversion feature of the 2004 Debentures
          and the 2005 Debentures, the warrants to purchase common stock associated
          with
          the 2004 and 2005 Debentures, the amortization expense associated with
          the
          discount recorded with respect to the 2004 and 2005 Debentures and financing
          costs incurred in connection with the 2004 Debentures, (2) the EnerDel,
          Inc.
          Non-Voting Cumulative and Redeemable Series A Convertible Preferred Stock
          issued
          in October, 2004 ("Series A Preferred Stock"), (3) warrants to purchase
          common
          stock issued to Ener1 Group in September 2002 (the "Battery Warrants")
          and
          November 2003 (the "Exchange Warrants"), and (4) options to purchase common
          stock issued to ITOCHU Corporation in July 2003 (the "ITOCHU Options"). We
          had previously classified the value of these conversion features and warrants
          to
          purchase common stock, when applicable, as equity. After further
          review, we determined that these instruments should have been
          classified as derivative liabilities and therefore, the fair value of each
          instrument must be recorded as a derivative liability on our balance sheet.
          Changes in the fair values of these instruments result in adjustments to
          the amount of the recorded derivative liabilities and the corresponding
          gain or
          loss is recorded in our statement of operations. At the date of the
          conversion of each
          respective instrument
          or portion thereof ( or
          exercise of the options or warrants  or
          portion thereof, as the
          case may be) ,
          the
          corresponding derivative liability will be reclassified as equity.
  In
            March
            2006, we filed this Annual Report with the SEC including financial
            statements for the fiscal year ended December 31, 2004, restated as described
            above, and financial statements for the fiscal year ended December 31,
            2005. In
            May 2006, we concluded it was necessary to amend this Annual Report in
            order to restate our financial statements for our 2004 and 2005 fiscal
            years to reflect the changes described below in our accounting for
            preferred stock and the calculation of diluted earnings or loss per
            share.
  We originally
          reported the Series A Preferred Stock and Series B Preferred Stock as long
          term
          liabilities at December 31, 2005 and 2004. The accompanying financial statements
          have been restated to show the Series A Preferred Stock and Series B Preferred
          Stock as temporary equity between long term liabilities and
          stockholder’s equity (deficit) at December 31, 2005 and 2004.
 We originally
            reported diluted earnings per share for the year ending December 31,
            2005 and
            2004 of $.06 and $(0.11) per share, respectively. Weighted average shares
            outstanding - diluted were originally reported as 411,515,000 and 347,089,000
            shares at December 31, 2005 and 2004, respectively. The originally reported
            diluted earnings per share did not reflect an adjustment to the numerator
            for
            the income statement effect of derivative gains or losses during the
            periods.
            Inclusion of the derivative gain in the computation resulted in the
            determination that the 2004 and 2005 Debentures were dilutive securities,
            and
            the effect of the weighted number of shares resulting from conversion
            is now
            included in the denominator of the earnings per share calculation. In
            addition,
            the adjustment to the numerator resulted in a diluted net loss per share,
            and as
            a result, all stock options were considered anti-dilutive and excluded
            from the
            revised computation of the weighted average shares outstanding - diluted.
 In
            July
            2006, we concluded that it was necessary to file a second amendment to this
            Annual Report in order to restate our financial statements for our
            2004 and 2005 fiscal years again to (1) reflect the corrected accounting
            for and valuation of additional 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 associated with the 2004 Debentures, (4) record the
            value of the Series B Preferred Stock Put, and (5) to
            reflect the Series A Preferred Stock dividends payable to the minority
            interest
            owner as a reduction in minority interest income.
  The
          accompanying financial statements for the year ended December 31, 2004
          and 2005
          have been restated to effect the changes described above. The impact of
          the
          adjustments related to the classification of and
          accounting for the derivative asset and liabilities for the years
          ended December 31, 2005 and 2004 are summarized below: (the
          following tables compare specific line items from our financial statements
          for
          the years ended December 31, 2004 and 2005 included in this Annual Report
          with
          the same line items from (1) our financial statements for fiscal 2004 as
          initially reported in our
          Annual Report filed with the SEC on April 15, 2005 and
          (2)
          our financial statements for fiscal 2005 as initially reported in our Annual
          Report filed with the SEC on March 10, 2006.)
  27


**Consolidated
              Statement of Operations Impact (in thousands except per share
              data)**
  **Year
                          Ended **December
                          31, 2004******As Initially
                        Reported**
                    
                    **Adjustment**
                    
                    
                    
                    **As
                        Restated**Gross
                        profit
                    
                    $
                    32
                    
                    
                    
                    
                    
                    
                    
                    $
                    32Operating
                        expenses
                    
                    
                    37,418
                    
                    
                    (298
                    )
                    
                    *(a*
                    *)*
                    
                    37,120Loss
                        from operations
                    
                    
                    (37,386
                    )
                    
                    298
                    
                    
                    
                    
                    
                    (37,088
                    )Other
                        income (expense)Interest
                        expense
                    
                    
                    (1,523
                    )
                    
                    (3,763
                    )
                    
                    *(b*
                    *)*
                    
                    (5,286
                    )Other
                        income (expense)
                    
                    
                    (330
                    )
                    
                    
                    
                    
                    
                    
                    
                    (330
                    )Gain
                        on derivative liability, net
                    
                    
                    -
                    
                    
                    46,727
                    
                    
                    *(c*
                    *)*
                    
                    46,727Total
                        other income (expense)
                    
                    
                    (1,853
                    )
                    
                    42,964
                    
                    
                    
                    
                    
                    41,111Income
                          (loss) before
                          minority interest, income taxes, and discontinued
                          operations
                    
                    
                    (39,239
                    )
                    
                    43,262
                    
                    
                    
                    
                    
                    4,023Minority
                        interest in losses and preferred dividends of consolidated
                        subsidiary
                    
                    
                    3,319
                    
                    
                    (327
                    )
                    
                    *(h*
                    *)*
                    
                    2,992Income from
                        discontinued operations
                    
                    
                    106
                    
                    
                    
                    
                    
                    
                    
                    
                    106Net
                        income (loss)
                    
                    
                    (35,814
                    )
                    
                    42,935
                    
                    
                    
                    
                    
                    7,121Preferred
                        stock dividends
                    
                    
                    (904
                    )
                    
                    379
                    
                    
                    *(d)(h*
                    *)*
                    
                    (525
                    )Net
                          income (loss) attributable to
                          common shareholders
                    
                    $
                    (36,718
                    )
                    $
                    43,314
                    
                    
                    
                    
                    $
                    6,596Basic
                        and diluted income (loss) per share:Basic
                    
                    $
                    (0.11
                    )
                    $
                    0.13
                    
                    
                    *(e*
                    *)*
                    $
                    0.02Diluted
                    
                    $
                    (0.11
                    )
                    $
                    0.04
                    
                    
                    *(f*
                    *)*
                    $
                    (0.07
                    )Weighted
                        average shares outstanding - Basic
                    
                    
                    347,089
                    
                    
                    -
                    
                    
                    
                    
                    
                    347,089Weighted
                        average shares outstanding - Diluted
                    
                    
                    347,089
                    
                    
                    77,239
                    
                    
                    *(g*
                    *)*
                    
                    424,328
  *(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 of $2,559,
                        amortization of bond issuance costs of $904 and early conversion
                        of $300
                        of principal of 2004
                        debentures.***********
 *(c)*
                    *To
                        record gain on derivatives based upon fair values at December
                        31, 2004.
                        See Note 19 to Ener1's consolidated financial
                        statements.************(d)*
                    *To
                        correct accretion of preferred stock as a
                        dividend.**(e)*
                    *To
                        reflect basic earnings per share based upon corrected net
                        income.**(f)*
                    *To
                        reflect diluted earnings per share based upon corrected net
                        income as
                        adjusted for *diluted
                        shares outstanding and the effects of dilutive adjustments
                        to reported
                        earnings.**
 *(g)*
                      *To
                          reflect additional diluted shares outstanding for shares
                          underlying
                          warrants and convertible securities.**(h)*
                      *To
                            reflect the Series A Preferred Stock dividends payable
                            to the minority
                            interest owner as a reduction in minority interest
                            income.*
 **Consolidated
              Statement of Operations Impact ( in thousands except per share
              data)**
 **Year
                          Ended December 31, 2005****As Initially**
                        **Reported**
                      
                      **Adjustment**
                      
                      
                      
                      **As
                          Restated**Gross
                          profit
                      
                      
                      60
                      
                      
                      
                      
                      
                      
                      
                      60Operating
                          expenses
                      
                      
                      33,209
                      
                      
                      -
                      
                      
                      
                      
                      33,209Loss
                          from operations
                      
                      
                      (33,149
                      )
                      
                      
                      
                      
                      
                      
                      (33,149
                      )Other
                          income (expense)Interest
                          expense
                      
                      
                      (10,735
                      )
                      
                      799
                      *(a*)**
                      
                      
                      
                      (9,936
                      )Other
                          income (expense)
                      
                      
                      (730
                      )
                      
                      
                      
                      
                      
                      
                      (730
                      )Gain
                          on derivative liability, net
                      
                      
                      68,916
                      
                      
                      1,933
                      *(b*)**
                      
                      
                      
                      70,849Total
                          other income (expense)
                      
                      
                      57,451
                      
                      
                      2,732
                      
                      
                      
                      
                      60,183Income
                          before minority interest and income taxes
                      
                      
                      24,302
                      
                      
                      2,732
                      
                      
                      
                      
                      27,034Income
                          taxes
                      
                      
                      -
                      
                      
                      
                      
                      
                      
                      
                      -Net
                          income before minority interest
                      
                      
                      24,302
                      
                      
                      2,732
                      
                      
                      
                      
                      27,034Minority
                          interest in losses and preferred dividends of consolidated
                          subsidiary
                      
                      
                      3,760
                      
                      
                      (2,190
                      )*(e*)**
                      
                      
                      
                      1,570Net
                          income
                      
                      
                      28,062
                      
                      
                      542
                      
                      
                      
                      
                      28,604Preferred
                          stock dividends
                      
                      
                      (5,116
                      )
                      
                      2,190
                      *(e)*
                      
                      
                      
                      (2,926
                      )Net
                          income attributableto
                          common shareholders
                      
                      $
                      22,946
                      
                      $
                      2,732
                      
                      
                      
                      $
                      25,678Basic
                          and diluted income (loss) per shareBasic
                      
                      $
                      0.07
                      
                      $
                      -
                      
                      
                      
                      $
                      0.07Diluted
                      
                      $
                      0.06
                      
                      $
                      (0.08
                      )*(c*)**
                      
                      
                      $
                      (0.02
                      )Weighted
                          average shares outstanding:Basic
                      
                      
                      347,456
                      
                      
                      -
                      
                      
                      
                      
                      347,456Diluted
                      
                      
                      411,515
                      
                      
                      21,513
                      *(d*)**
                      
                      
                      
                      433,028
  *(a)*
                      *Change
                          due to reduced accretion of discount of bond issuance
                          costs.*
 *(b)*
                      *To
                          correct gain on derivatives based upon fair values at December
                          31, 2005.
                          See Note 19 to Ener1's consolidated financial
                          statements.*
 *(c)*
                      *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.*
 *(d)*
                      *To
                          reflect additional diluted shares outstanding for shares
                          underlying
                          convertible securities net of  the reduction of diluted shares
                          outstanding for shares underlying anti-dilutive stock
                          options.* *(e)*
                      *To
                          reflect the Series A Preferred Stock dividends payable
                          to the minority
                          interest owner as a reduction in minority interest
                          income.*
 28
  ***Balance
            Sheet Impact***
 
 In
            addition to the effects on Ener1's 2005 and 2004 consolidated statement
            of
            operations discussed above, the restatement impacted Ener1's consolidated
            balance sheet as of December 31, 2005 and 2004. The following table sets
            forth
            the effects of the restatement adjustments on Ener1’s consolidated balance sheet
            as of December 31, 2004 as
            compared to the consolidated balance sheet as of December 31, 2004 initially
            reported onApril
            15,
            2005:
  (dollars
                      in thousands)
                    
                    **December
                            31, 2004****As Initially
                        Reported**
                    
                    **Adjustment**
                    
                    **(Restated)****ASSETS**Current
                        assetsCash
                        and equivalents
                    
                    $
                    14,091
                    
                    
                    
                    
                    $
                    14,091Prepaid
                        expenses and other current assets
                    
                    
                    190
                    
                    
                    
                    
                    
                    190Due
                        from related parties
                    
                    
                    119
                    
                    
                    
                    
                    
                    119Total
                        current assets
                    
                    
                    14,400
                    
                    
                    
                    
                    
                    14,400Property
                        and equipment, net
                    
                    
                    13,390
                    
                    
                    
                    
                    
                    13,390Investment
                        in EnerStruct, Inc.
                    
                    
                    1,185
                    
                    
                    
                    
                    
                    1,185Deferred
                        debenture costs, net of amortization of $905
                    
                    
                    -
                    
                    
                    3,621
                    *(a)*
                    
                    3,621Other
                    
                    
                    443
                    
                    
                    
                    
                    
                    443Total
                        assets
                    
                    $
                    29,418
                    
                    
                    
                    
                    $
                    33,039**LIABILITIES
                        AND STOCKHOLDERS' DEFICIT**Current
                        liabilitiesCurrent
                        portion of installment loan
                    
                    
                    23
                    
                    
                    
                    
                    
                    23Accounts
                        payable and accrued expenses
                    
                    
                    2,301
                    
                    
                    
                    
                    
                    2,301Liabilities
                        of discontinued operations
                    
                    
                    307
                    
                    
                    
                    
                    
                    307Derivative
                        liability, net
                    
                    
                    
                    
                    
                    130,157
                    *(b)*
                    
                    113,87548,996
                    *(c)*-
                    
                    
                    (65,278
                    )*(d)*Total
                        current liabilities
                    
                    
                    2,631
                    
                    
                    
                    
                    
                    116,506Long-term
                        portion of installment loan
                    
                    
                    91
                    
                    
                    
                    
                    
                    91$19,700
                        convertible debentures, net of discount of $17,144
                    
                    
                    -
                    
                    
                    2,559
                    *(e)*
                    
                    2,559Total
                        liabilities
                    
                    
                    2,722
                    
                    
                    
                    
                    
                    119,156Redeemable
                        preferred stock:EnerDel,
                        Inc. Series A Preferred, $.01 par value
                    
                    
                    4,130
                    
                    
                    (1,561
                    )*(f)*
                    
                    2,569Series
                        B Convertible Preferred, $.01 par value
                    
                    
                    10,893
                    
                    
                    (788
                    )*(g)*
                    
                    10,105Minority
                        interest
                    
                    
                    3,951
                    
                    
                    
                    
                    
                    3,951Commitments
                        and contingencies**STOCKHOLDERS'
                        DEFICIT**Common
                        stock, $.01 par value, 750,000,000 shares authorized 347,455,751
                        issued
                        and outstanding
                    
                    
                    3,475
                    
                    
                    
                    
                    
                    3,475Additional
                        paid in capital
                    
                    
                    100,246
                    
                    
                    (23,571
                    )*(h)*
                    
                    76,675Accumulated
                        deficit
                    
                    
                    (95,999
                    )
                    
                    (86,893
                    )*(i)*
                    
                    (182,892
                    )Total
                        stockholders' deficit
                    
                    
                    7,722
                    
                    
                    
                    
                    
                    (102,742
                    )Total
                        liabilities and stockholders' deficit
                    
                    $
                    29,418
                    
                    
                    
                    
                    $
                    33,039
  *(a)*
                      *Change
                          due to recording deferred financing cost of $4,526 net
                          of amortization of $905 on the 2004
                          Debentures.**(b)*
                      *To
                          record initial carrying value of 2003 derivatives, which
                          includes $96,600
                          for Battery Warrants, *$19,600
                          for Exchange Warrants and $13,957 for ITOCHU
                          Options.**
 *(c)*
                      *To
                          record initial carrying value of derivatives in 2004 including
                          $26,400 for
                          the 2004 Debentures Warrants, $11,505 for the 2004 Debentures
                          compound
                          embedded derivative, $4,620 for the *Delphi
                          Warrants, $1,183 for the Series A Preferred Stock  and $5,288
                          for the Series B Preferred Stock
                          Warrants.**
 *(d)*
                      *To
                          record gain on derivatives based upon fair values at December
                          31,
                          2004.*
 *(e)*
                      *Change
                          due to accretion of discount of bond issuance costs of
                          $2,859 and
                          conversion of $300 of principal of 2004
                          Debentures.*
 *(f)*
                      *To
                            correct the value of the Series A Preferred by $1,503
                            and correct prior
                            period accretion of discount *on
                            preferred of
                            $58.**
 *(g)*
                      *To
                          correct the value of the Series B Preferred by $750 and
                          correct prior
                          period accretion of discount *on
                          preferred of $38.**
 *(h)*
                      *To
                          reduce paid in capital for value of 2004 Debentures of
                          $18,527, Series A
                          Preferred Stock Warrants of $3,725, Series B Preferred
                          Stock Warrants of
                          $4,666, and beginning paid in capital of $575, and *increase
                          paid in capital for deferred debenture costs paid with
                          warrants of $3,053
                          and accretion totaling $223 and the value of the Series
                          B Preferred Stock
                          Put of $645.**
 *(i)*
                      *To
                          reflect aggregate effect of income statement
                          adjustments.*
  The
                  following sets forth the effects of the restatement adjustments
                  on Ener1’s
                  consolidated balance sheet as of December 31, 2005 as
                  compared to the consolidated balance sheet as of December 31, 2005
                  initially
                  reported on March 10, 2006:
 (dollars
                        in thousands)
                      
                      **December
                          31,**
                      
                      
                      
                      
                      
                      **December
                          31,****2005**
                      
                      
                      
                      
                      
                      **2005****ASSETS**
                      
                      **As
                          Initially**
                        **Reported**
                      
                      **Adjustment**
                      
                      
                      
                      **(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 amortizationof
                          $2,082
                      
                      
                      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, 750,000,000 shares authorized
                      
                      
                      3,475
                      
                      
                      
                      
                      
                      
                      
                      3,475347,455,751
                          issued and outstandingAdditional
                          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 change in derivative value of Series B Preferred
                          Stock
                          Put.*
 *(c)*
                      *To
                          correct derivative liability on 2005
                          Debentures.*
 (d)
                      *To
                          correct derivative liability on 2005 Debentures
                          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.*
 *(h)*
                      *To
                          reflect aggregate effect of income statement adjustments.*
 29
 
 **Results
          of Operations for Years Ended December 31, 2004 and 2005**
 
 *Net
          income* .
          We
          reported net income of $28,604,000 for the year ended December 31, 2005,
          an
          increase of $21,483,000 when compared to net income of $7,121,000 for the
          year
          ended December 31, 2004. Our
          net
          income includes $70,849,000 and $46,727,000 in gain on derivative liability
          resulting from non cash changes in the accounting value of derivative
          liabilities for the years ended December 31, 2005 and 2004, respectively.
 
 *Losses
          from operations* .
          We
          reported losses from operations of $33,149,000 for the year ended December
          31,
          2005, compared to losses from operations of $37,088,000 for the year ended
          December 31, 2004, or a decrease of $3,939,000. The decrease in operating
          losses
          was attributable primarily to decreases in impairment losses and manufacturing
          pre-production expenses (we incurred $8,289,000 of impairment losses and
          $3,282,000 manufacturing pre-production expenses in 2004 and none in 2005),
          offset by a $1,030,000 increase in research and development expenses and
          a
          $6,275,000 increase in general and administrative costs. We had no significant
          sales from continuing operations in 2004 or 2005. All sales reported were
          for
          sales of sample battery and fuel cell products.
 
 *Research
          and development (“R&D”) Expenses.* Our
          R&D expenses were $19,042,000 and $18,012,000 for the years ended December
          31, 2005 and 2004, respectively. R&D expenses include a charge of
          $10,527,000 in 2005 which represents the book value of battery production
          assets
          that were charged to R&D expenses as a result of our
          decision in 2005 to dedicate our Fort Lauderdale battery plant to R&D
          activities and
          a
          charge of $14,923,000 in 2004 which represents the value of assets used
          in
          R&D activities contributed to EnerDel from Delphi and Ener1 in connection
          with the formation of EnerDel. Exclusive of these charges, R&D expenses
          increased $5,156,000 or 167% from $3,089,000 in 2004 to $8,245,000 in 2005.
          This
          increase primarily resulted from increased R&D activities related to
          EnerDel’s Li-ion development activities.
  30


R&D
        expenses for fiscal 2005 included $6,300,000 of expenses incurred in connection
        with our battery business, $1,154,000 of expenses incurred in connection
        with
        our fuel cell business, and $791,000 of expenses incurred in connection with
        our
        nanotechnology business. R&D expenses for fiscal 2004 included $1,422,000 of
        expenses incurred in connection with our battery business, $898,000 of expenses
        incurred in connection with our fuel cell business, and $434,000 of expenses
        incurred in connection with our nanotechnology business. The largest components
        of our fiscal 2005 R&D expenses for our battery business were $2,327,000 for
        labor; $1,014,000 for rent and utilities, $1,435,000 for R&D materials and
        $1,704,000 for contracted R&D labor.


*General
          and administrative expenses ("G&A").* G&A
          increased $6,275,000, or 86%, to $13,609,000 in fiscal 2005 compared to
          $7,334,000 in the prior year. The major components of the increase in G&A
          expenses in 2005 were: $1,419,000, or a 63% increase, in employee compensation;
          $665,000 in severance payments with no corresponding expense in 2004; $1,058,000
          increase, in stock based compensation with no corresponding expense in
          2004;
          $835,000, or 319%, increase in rent and facilities costs due to new offices
          for
          our nanotechnology, fuel cell and corporate operations; an increase of
          $528,000,
          or 77%, in outside services primarily consisting of contracted services
          from
          Delphi to support operations at our Indiana battery facility; $344,000
          increase,
          or 97%, in insurance premiums; $294,000 increase, or 118%, in travel expense;
          and $261,000, increase or 14%, in professional fees.
 
 *Manufacturing
          pre-production expenses* .
          In
          2004, we incurred manufacturing pre-production expenses of $3,282,000 to
          prepare
          our Fort Lauderdale plant for production; we ceased these activities and
          did not
          incur any such expense in 2005.
 
 *Loss
          from Asset Impairment* In 2004
          we recorded a charge to earnings of $8,289,000 due to the impairment of
          a
          portion of our battery manufacturing assets at our Ft. Lauderdale plant
          because
          we no longer expected to recognize revenues and positive net cash flows
          in
          excess of the asset carrying values from the use of the assets.
  *Gain
          on derivative liability net*The gain on derivative liability for the year
          ended December 31, 2005 increased by $24,122,000 to $70,849,000 compared
          to
          $46,727,000 for 2004. The increase was due to a corresponding decrease
          in the
          value of freestanding derivatives and embedded derivatives.
  *Provision
          for income taxes* The
          effective tax rate in 2004 and 2005 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 the deferred tax asset valuation allowance.
 
 *Interest
          expense* Interest
          expense was $9,936,000 and $5,286,000 in 2005 and 2004, respectively, an
          increase of 88%. Interest payments were $3,786,000 and $1,195,000 for fiscal
          2005 and 2004, respectively; non cash interest expense related to the
          amortization of financing costs and bond discounts was $6,140,000 and $3,464,000
          for fiscal 2005 and 2004, respectively. The increase in interest payment
          is
          primarily due to the issuance of $14,225,000 in aggregate principal amount
          of
          the 2005 Debentures and an increase in the interest rate of the 2004 Debentures
          to 15% in January 2005. The interest rate on our 2005 Debentures will increase
          from 7.5% to 15% on March 14, 2006 if we do not satisfy milestones specified
          in
          the 2005 Debentures, which we do not expect to meet.
  31
 
 **Liquidity
          and Capital Resources**
 
 At
          December 31, 2005, we had a working capital deficit of $55,627,000 primarily
          due
          to a derivative liability of $54,979,000. Our working capital deficit excluding
          the derivative liability was $648,000. Our cash at December 31, 2005 was
          $2,306,000. We
          used
          $24,333,000 of cash in operations which was funded through financing activities
          of $13,361,000 and beginning cash on hand of $14,091,000.
  In
          January and February 2006, Ener1 Group exercised warrants to purchase a
          total of
          34,500,000 shares of our common stock for an aggregate purchase price of
          $2,760,000. We are using these funds for working capital.
 
 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 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. We are currently negotiating the terms on which Ener1
          Group
          would exercise warrants to purchase an additional 34,500,000 shares of
          our
          common stock in order to provide us with additional working capital through
          June
          2006. If we do not obtain additional financing, such a condition, among
          others,
          will give rise to substantial doubt about our ability to continue as a
          going
          concern.
 
 Since
          2003, we have primarily funded our operations through the sale of equity
          and
          debt securities, and, to a lesser degree, loans from affiliates **.** In
          January 2004, we raised additional capital through the private placement
          of
          $20,000,000 in aggregate principal amount of our 2004 Debentures and warrants
          to
          purchase up to 16,000,000 shares of common stock. We used a portion of
          the
          proceeds to pay the expenses of the offering and to repay existing debt
          of
          $3,600,000, including related party debt. We used the remaining proceeds
          for the
          purchase of manufacturing equipment and to fund general working capital
          requirements.
 
 In
          October 2004, we raised $15,000,000 **** of
          additional capital through the private placement of 150,000 shares of our
          Series
          B convertible preferred stock and warrants. We contributed this amount,
          along
          with various equipment use rights and other intellectual property, to EnerDel
          in
          return for 80.5% of EnerDel’s outstanding common stock.
 
 In
          March
          2005, we raised $14,225,000 through the private placement of our 2005 Debentures
          and warrants to purchase up to 7,526,250 shares of common stock. We used  a
          portion of the proceeds to pay the expenses of the offering and the
          remainder to purchase equipment and to fund general working capital
          requirements.
  **Cautionary
          Statement Concerning Forward-Looking Statements**
 
 We
          have
          made forward-looking statements in this Annual Report and make forward
          looking
          statements in our press releases that are subject to risks and uncertainties.
          Forward-looking statements include information that is not purely historic
          fact
          and include, without limitation, statements concerning our financial outlook
          for
          2006 and beyond, our possible or assumed future results of operations generally,
          and other statements and information regarding assumptions about our revenues,
          cash flow from operations, available cash, operating costs, capital and
          other
          expenditures, financing plans, capital structure, contractual obligations,
          legal
          proceedings and claims, future economic performance, management’s plans, goals
          and objectives for future operations and growth and markets for our planned
          products and stock. The sections of this Annual Report which contain
          forward-looking statements include “Business,” “Properties,” “Legal
          Proceedings,” “Management’s Discussion and Analysis of Financial Condition and
          Results of Operations” and our consolidated financial statements and related
          notes.
  32
 
 Our
          forward-looking statements are also identified by words such as “believes,”
“expects,” “thinks,” “anticipates,” “intends,” “estimates” or similar
          expressions. You should understand that these forward-looking statements
          are
          necessarily estimates reflecting our judgment, not guarantees of future
          performance. They 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 factors discussed
          in
“Risk Factors” below and 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.  Accordingly, you should not place undue reliance on
          forward-looking statements, which speak only as of the date of this Annual
          Report. All subsequent written and oral forward-looking statements attributable
          to us or any person acting on our behalf are expressly qualified in their
          entirety by the cautionary statements contained or referred to in this
          section.
          We do not undertake any obligation to release publicly any revisions to
          these
          forward-looking statements to reflect events or circumstances after the
          date of
          this Annual Report or to reflect the occurrence of unanticipated
          events.
 
 **RISK
          FACTORS**
 
 In
          addition to the other information in this Annual Report, readers should
          consider
          carefully the following factors that may affect our future
          performance.
 
 **We
          will need additional capital, which may not be accessible on attractive
          terms or
          at all.**
 
 For
          the
          last several years, we have financed our operations through the sale of
          our
          securities and by borrowing money. We will need to raise additional funds
          through public or private financing. Our ability to obtain additional financing
          will be subject to a number of factors, including market conditions, our
          operating performance and the terms of our existing indebtedness. The terms
          of
          our senior secured convertible debentures limit our ability to incur additional
          debt because any such additional debt we incur must be contractually
          subordinated, as to payment and liquidation, to the payment in full of
          the
          debentures. We cannot assure you that we will be able to raise additional
          funds
          on terms favorable to us or at all. If we raise additional funds through
          the
          sale of equity or convertible debt securities, your ownership percentage
          of our
          common stock will be reduced. In addition, any such transactions may dilute
          the
          value of our common stock. We may have to issue securities that have rights,
          preferences and privileges senior to our common stock. The terms of any
          additional indebtedness may include restrictive financial and operating
          covenants that would limit our ability to compete and expand. Our failure
          to
          obtain any required future financing could materially and adversely affect
          our
          financial condition. Our ability to obtain financing from government grants
          and
          public financing is subject to the availability of funds under applicable
          government programs and approval of our applications to participate in
          such
          programs. We cannot assure you that our efforts to obtain such funds from
          these
          government sources will be successful. Our failure to obtain any required
          future
          financing could materially and adversely affect our financial
          condition.
 
 **We
          have a history of operating losses.**
 
 We
          have
          experienced net operating losses since 1997, incurred negative cash flows
          from
          operations since 1999 and, as of December 31, 2005, had an accumulated
          deficit
          of $152,000,000. Cash used in operations for the years ended December 31,
          2003,
          2004, and 2005 was $5,400,000, $13,945,000, and $24,333,000 respectively.
          We
          expect that we will continue to incur negative cash flows and require additional
          cash to fund our operations and implement our business plan. The continued
          development of our energy-related technology and products will require
          significant additional capital investment.
  33
 
 **Our
          financial statements include substantial non-operating gains or losses
          resulting
          from required quarterly revaluation under GAAP of our outstanding derivative
          instruments.**
 
 Generally
          accepted accounting principles in the United States require that we report
          the
          value of certain derivatives in instruments we have issued as current
          liabilities on our balance sheet and report changes in the value of these
          derivatives as non-operating gains or losses on our statement of
          operations. The value of the derivatives is required to be recalculated
          (and
          resulting non-operating gains or losses reflected in our statement of operations
          and resulting adjustments to the associated liability amounts reflected
          on our
          balance sheet) on a quarterly basis. The valuations are based upon a
          number of factors and estimates including estimates based upon management's
          judgment. Certain of the derivative values are directly correlated to
          the value of our common stock. Due to the nature of the required
          calculations and the large number of shares of our common stock involved
          in such
          calculations, changes in our common stock price and or changes in management's
          assumptions may result in significant changes in the value of the derivatives
          and resulting gains and losses on our statement of operations.
 
 **The
          terms of our senior secured convertible debentures issued in January 2004
          and
          March 2005 restrict our operations.**
 
 Our
          senior secured convertible debentures issued in January 2004 and March
          2005,
          both due 2009, contain restrictive covenants that limit our ability to,
          among
          other things: dispose of assets; incur debt; pay dividends; repurchase
          our
          capital stock and debt securities; create liens on our assets; and, engage
          in
          transactions with our affiliates
 
 These
          covenants may significantly limit our ability to respond to changing business
          and economic conditions and to secure additional financing, and we may
          be
          prevented from engaging in transactions that might be considered important
          to
          our business strategy or otherwise beneficial to us.
 
 **We
          may never complete the research and development of commercially viable
          products.**
 
 Although
          we have conducted other business activities in the past, we have only in
          the
          past four years reorganized our activities to focus on the development
          of
          alternative energy products and services (primarily Li-ion batteries and
          fuel
          cells). We do not know when or whether we will successfully complete research
          and development of commercially viable energy products. If we are unable
          to
          develop commercially viable products, we will not be able to generate sufficient
          revenue to become profitable. The commercialization of our products depends
          on
          our ability to control the costs of manufacturing, and we cannot assure
          you that
          we will be able to sufficiently control these costs. We must complete
          substantial additional research and development before we will be able
          to
          manufacture a commercially viable battery product in commercial quantities
          In
          addition, while we are conducting tests to predict the overall life of
          our
          products, we may not have tested our products over their projected useful
          life
          prior to large-scale commercialization. As a result, we cannot be sure
          that our
          products will last as long as predicted, and, if they do not, we may incur
          liability under warranty claims.
 
 **We
          have only recently acquired our energy business, and your basis for evaluating
          us is limited.**
 
 We
          acquired Ener1 Battery Company in September 2002, began work in fuel cells
          in
          September 2003 and began work in nanotechnology shortly thereafter. Accordingly,
          there is only a limited basis upon which you can evaluate our business
          and
          prospects. We have an unproven business plan and do not expect to be profitable
          for the next several years. During the past three years, we have shifted
          our
          business from providing engineering services and interactive products to
          focus
          primarily on developing technologies, products and services related to
          Li-ion
          batteries fuel cells and nanotechnology **.** Before
          investing in our securities, you should consider the challenges, expenses
          and
          difficulties that we will face as a company seeking to develop and manufacture
          new products.
  34
 
 **Viable
          markets for our products may never develop, may take longer to develop
          than we
          anticipate or may not be sustainable.**
 
 Our
          energy products and technologies target emerging markets and we do not
          know the
          extent to which our technologies and products will be accepted. We do not
          currently have any commercially viable products. We must be able to develop
          a
          commercially viable product for our business to succeed. If a viable market
          fails to develop or develops more slowly than we anticipate, we may be
          unable to
          recover the losses we will have incurred to develop our products and may
          be
          unable to achieve profitability. We will need to develop or acquire adequate
          marketing and manufacturing capabilities in order to develop a commercially
          successful product. In addition, the development of a viable market for
          our
          products may be impacted by many factors which are partly or totally out
          of our
          control, including:
 
 ·
                  the
                      cost competitiveness of our
                      products;
 ·
                  consumer
                      reluctance to try a new
                      product;
 ·
                  consumer
                      perceptions of our products’
safety;
 ·
                  regulatory
                      requirements;
 ·
                  barriers
                      to entry created by existing energy providers;
                      and
 ·
                  emergence
                      of newer, more competitive technologies and
                      products.
 
 **We
          have no experience manufacturing battery, fuel cell or nanotechnology-based
          products on a large-scale commercial basis and may be unable to do
          so.**
 
 Since
          we
          acquired Ener1 Battery Company and began our efforts in fuel cells and
          nanotechnology *,* we have
          focused primarily on research and development and have no experience
          manufacturing our any of our planned products on a commercial basis. We
          are
          developing new battery products that will use high volume battery manufacturing
          processes and equipment. We have no experience using such equipment for
          the
          products we are developing, We do not know whether or when we will be able
          to
          develop efficient, low-cost manufacturing capabilities and processes that
          will
          enable us to manufacture our products in commercial quantities while meeting
          the
          quality, price, engineering, design and production standards required to
          successfully market our products. Our failure to develop such manufacturing
          processes and capabilities could have a material adverse effect on our
          business,
          financial condition, results of operations and prospects.
 
 **We
          may not meet our development and commercialization milestones.**
 
 We
          have
          established product development and commercialization milestones that we
          use to
          assess our progress toward developing commercially viable products. These
          milestones relate to technology and design improvements as well as to dates
          for
          achieving development goals. To gauge our progress, we plan to operate,
          test and
          evaluate our products. If our systems or products exhibit technical defects
          or
          are unable to meet cost or performance goals, including power output, useful
          life and reliability, our commercialization schedule could be delayed and
          potential purchasers of our initial commercial battery and energy products
          may
          decline to purchase them. We cannot assure you that we will successfully
          achieve
          our milestones in the future or that any failure to achieve these milestones
          will not result in potential competitors gaining advantages in our target
          market. Failure to meet our development and commercialization milestones
          might
          have a material adverse effect on our operations and our stock
          price.
 
 **We
          may be unable to establish relationships with third parties for aspects
          of
          product development, manufacturing, distribution and servicing and the
          supply of
          key components for our products.**
 
 We
          will
          need to enter into additional strategic relationships in order to complete
          our
          current product development and commercialization plans. We will also require
          partners to assist in the distribution, servicing and supply of components
          for
          our anticipated fuel cell products which are in development. If we are
          unable to
          identify or enter into satisfactory agreements with potential partners,
          we may
          not be able to complete our product development and commercialization plans
          on
          schedule or at all. We may also need to scale back these plans in the absence
          of
          needed partners, which would adversely affect our future prospects. In
          addition,
          any arrangement with a strategic partner may require us to make large cash
          payments to the partner, issue a significant amount of equity securities
          to the
          partner, provide the partner with the opportunity to have representation
          on our
          board of directors, agree to exclusive purchase or other arrangements with
          the
          partner and/or commit significant financial resources to fund our product
          development efforts in exchange for their assistance or the contribution
          to us
          of intellectual property. Any such issuance of equity securities would
          reduce
          the percentage ownership of our then current stockholders. While we have
          entered
          into relationships with suppliers of some key components for our products,
          we do
          not know when or whether we will secure supply relationships for all required
          components and subsystems for our products, or whether such relationships
          will
          be on terms that will allow us to achieve our objectives. Our business,
          prospects, results of operations and financial condition could be harmed
          if we
          fail to secure relationships with entities which can develop or supply
          the
          required components for our products and provide the required distribution
          and
          servicing support. Additionally, the agreements governing our current
          relationships allow for termination by our partners under some
          circumstances.
  35
 
 **We
          will rely on third parties to develop and provide key components for our
          products.**
 
 We
          will
          rely on third party suppliers to develop and supply key components that
          we will
          use in our products. If those suppliers fail to develop and supply these
          components in a timely manner or at all, or fail to develop or supply components
          that meet our quality, quantity or cost requirements, and we are unable
          to
          obtain substitute sources of these components on a timely basis or on terms
          acceptable to us, we may not be able to manufacture our products. In addition,
          to the extent that our supply partners use technology or manufacturing
          processes
          that are proprietary, we may be unable to obtain comparable components
          from
          alternative sources.
 
 We
          do not
          know when or whether we will secure long-term supply relationships with
          any
          suppliers or whether such relationships will be on terms that will allow
          us to
          achieve our objectives. Our business, prospects, results of operations
          and
          financial condition could be harmed if we fail to secure long-term relationships
          with entities that will supply the required components for our battery
          and
          energy related products.
 
 **We
          face high levels of competition and may be unable to compete
          successfully.**
 
 The
          markets in which we intend to compete are highly competitive. There are
          a number
          of companies located in the United States, Canada and abroad that are developing
          battery and fuel cell technologies and other energy products that will
          compete
          with our technologies and planned products. Some of our competitors are
          much
          larger than we are and may have the manufacturing, marketing and sales
          capabilities to complete research, development and commercialization of
          commercially viable products more quickly and effectively than we
          can.
 
 Not
          only
          do we face competition from other companies that are developing battery
          and fuel
          cell technologies, but we also face competition from companies that provide
          energy products based on traditional energy sources, such as oil and natural
          gas. We also face competition from companies that are developing energy
          products
          based on alternative energy sources as a significant amount of public and
          private funding is currently directed toward development of a number of
          types of
          distributed generation technology, including microturbines, solar power,
          wind
          power and other types of fuel cell technologies. Technological advances
          in
          alternative energy products, improvements in the electric power grid or
          other
          fuel cell technologies may make some of our planned products less attractive
          or
          render them obsolete. There are many companies engaged in all areas of
          traditional and alternative energy generation in the United States, Canada
          and
          abroad, including, among others, major electric, oil, chemical, natural
          gas,
          batteries, generators and specialized electronics firms, as well as
          universities, research institutions and foreign government-sponsored companies.
          Many of these entities have substantially greater financial, research and
          development, manufacturing and marketing resources than we do.
  36
 
 **We
          intend to offer Li-ion batteries to the automotive industry, which is a
          very
          competitive and cost focused industry. We have no automotive industry
          experience.**
 
 Supplying
          Li-ion batteries to the automotive industry has significant risks for a
          new
          company. We will be competing against much larger suppliers that have greater
          financial, marketing and other resources; more experience in low cost,
          high
          volume manufacturing operations; existing relationships with automotive
          purchasing and engineering development departments; and increased ability
          to
          take advantage of economies of scale in purchasing raw materials, than
          we have.
          The automotive industry is extremely competitive and competition to supply
          vehicle components to manufacturers focuses on cost, weight and size of
          such
          components. The ability of domestic automobile manufacturers to adopt new
          battery technologies for HEVs will depend on many factors outside our control,
          including their ability to develop HEV vehicle platforms. If the HEV industry
          does not accept Li-ion battery technology, or if our Li-ion batteries do
          not
          meet industry requirements for battery cost, weight and size, our batteries
          will
          not gain market acceptance.
 
 **Failure
          of our planned products to pass testing could negatively impact demand
          for our
          planned products.**
 
 We
          may
          encounter problems and delays during testing of our planned products for
          a
          number of reasons, including the failure of our technology or the technology
          of
          third parties, as well as our failure to maintain and service our planned
          products properly. Many of these potential problems and delays are beyond
          our
          control. Any problem or perceived problem with test results for our planned
          products could materially harm our reputation and impair market acceptance
          of,
          and demand for, any products that we make.
 
 **Regulatory
          and other changes in the energy industry may adversely affect our ability
          to
          produce, and reduce demand for, our planned products.**
 
 The
          market for our technologies and products may be heavily influenced by federal,
          state, local and foreign government laws, regulations and policies concerning
          the energy industry. A change in the current regulatory policies could
          make it
          more difficult or costly for us to develop, manufacture or market our products.
          Any such changes could also deter further investment in the research and
          development of alternative energy sources, including fuel cells, which
          could
          significantly reduce demand for our technologies and products. We cannot
          predict
          how changes in regulation or other industry changes will affect the market
          for
          our products or impact our ability to distribute, install and service our
          products.
 
 **We
          could be liable for environmental damages resulting from our research,
          development or manufacturing**  **operations.**
 
 Our
          business exposes us to the risk that harmful substances may escape into
          the
          environment, resulting in personal injury or loss of life, damage to or
          destruction of property, and natural resource damage. Our insurance policies
          may
          not adequately reimburse us for costs incurred in defending and settling
          environmental damage claims, and in some instances, we may not be reimbursed
          at
          all. Our business is subject to numerous federal, state and local laws
          and
          regulations that govern environmental protection and human health and safety.
          These laws and regulations have changed frequently in the past and it is
          reasonable to expect there will be additional changes in the future. If
          our
          operations do not comply with current or future environmental laws and
          regulations, we may be required to make significant unanticipated capital
          and
          operating expenditures to bring our operations into compliance. If we fail
          to
          comply with applicable environmental laws and regulations, governmental
          authorities may seek to impose fines and penalties on us or to revoke or
          deny
          the issuance or renewal of operating permits and private parties may seek
          damages from us. Under those circumstances, we might be required to curtail
          or
          cease operations, conduct site remediation or other corrective action,
          or pay
          substantial damage claims.
  37
 
 **Our
          products may use materials that are inherently dangerous substances which
          could
          subject our business to product liability claims.**
 
 Our
          energy technologies and products may use lithium, hydrogen or other materials
          that could leak and combust if ignited by another source. These technologies
          and
          products expose us to potential product liability claims that are inherent
          in
          lithium, hydrogen and products that use either. Hydrogen is a flammable
          gas and
          therefore a potentially dangerous product. Hydrogen is typically generated
          from
          gaseous and liquid fuels that are also flammable and dangerous, such as
          propane,
          natural gas or methane, in a process known as reforming. Natural gas and
          propane
          could leak into a residence or commercial location and combust if ignited
          by
          another source. In addition, our products may operate at high temperatures,
          which could expose us to potential liability claims, in the event of accidents
          involving combustion or explosion. Accidents involving our products or
          other
          hydrogen-based products could materially impede widespread market acceptance
          and
          demand for, or heighten regulatory scrutiny of, our products. In addition,
          we
          might be held responsible for damages beyond the scope of our insurance
          coverage. We also cannot predict whether we will be able to maintain our
          insurance coverage on acceptable terms.
 
 **Product
          liability or defects could negatively impact our results of
          operations.**
 
 Any
          liability we incur for damages resulting from malfunctions or design defects
          of
          our products could be substantial and could materially adversely affect
          our
          business, financial condition, results of operations and prospects. In
          addition,
          a publicized actual or perceived problem could adversely affect the market’s
          perception of our products resulting in a decline in demand for our products
          and
          could divert the attention of our management, which may materially and
          adversely
          affect our business, financial condition, results of operations and
          prospects.
 
 **Future
          acquisitions may disrupt our business, distract our management and reduce
          the
          percentage ownership of our stockholders.**
 
 As
          part
          of our business strategy, we may seek to acquire complementary technologies,
          products, expertise and/or other valuable assets. However, we may not be
          able to
          identify suitable acquisition candidates. If we do identify suitable candidates,
          we may not be able to complete the acquisitions on commercially acceptable
          terms
          or at all. We may not be able to successfully integrate the acquired business
          into our existing business in a timely and non-disruptive manner. We may
          have to
          devote a significant amount of time and management and financial resources
          to do
          so. Even with this investment of management and financial resources, an
          acquisition may not produce the desired revenues, earnings or business
          synergies. In addition, an acquisition may reduce the percentage ownership
          of
          our then current stockholders. If we fail to integrate the acquired business
          effectively or if key employees of that business leave, the anticipated
          benefits
          of the acquisition would be jeopardized. The time, capital and management
          and
          other resources spent on an acquisition that fails to meet our expectations
          could cause our business and financial condition to be materially and adversely
          affected. In addition, as a result of any acquisition, we may incur
          non-recurring charges and be required to amortize of significant amounts
          of
          intangible assets, which could adversely affect our results of
          operations.
 
 **We
          may not be able to protect the intellectual property upon which we depend
          and we
          could incur substantial costs defending against claims that our products
          infringe on the proprietary rights of others.**
 
 Our
          ability to compete effectively will depend, in part, on our ability to
          protect
          our proprietary technologies, systems designs and manufacturing processes.
          We
          rely on patents, trademarks, and other policies and procedures related
          to
          confidentiality to protect our intellectual property. However, some of
          our
          intellectual property is not covered by any patent or patent application.
          Moreover, we do not know whether any of our pending patent applications
          will
          issue or, in the case of patents issued or to be issued, that the claims
          allowed
          are or will be sufficiently broad to protect our technology or processes.
          Even
          if all of our patent applications are issued and are sufficiently broad,
          our
          patents may be challenged or invalidated. We could incur substantial costs
          in
          prosecuting or defending patent infringement suits or otherwise protecting
          our
          intellectual property rights. While we have attempted to safeguard and
          maintain
          our proprietary rights, we do not know whether we have been or will be
          completely successful in doing so. Moreover, patent applications filed
          in
          foreign countries may be subject to laws, rules and procedures that are
          substantially different from those of the United States, and any resulting
          foreign patents may be difficult and expensive to enforce. In addition,
          we do
          not know whether the U.S. Patent & Trademark Office will grant federal
          registrations based on our pending trademark applications. Even if federal
          registrations are granted to us, our trademark rights may be challenged.
          It is
          also possible that our competitors or others will adopt trademarks similar
          to
          ours, thus impeding our ability to build brand identity and possibly leading
          to
          customer confusion. We could incur substantial costs in prosecuting or
          defending
          trademark infringement suits.
  38
 
 Further,
          our competitors may independently develop or patent technologies or processes
          that are substantially equivalent or superior to ours. If we are found
          to be
          infringing third party proprietary rights, we could be required to pay
          substantial royalties and/or damages, and we do not know whether we will
          be able
          to obtain licenses to use the intellectual property at issue on acceptable
          terms, if at all. Failure to obtain needed licenses could delay or prevent
          the
          development, manufacture or sale of our products, and could necessitate
          the
          expenditure of significant resources to develop or acquire non-infringing
          intellectual property.
 
 Asserting,
          defending and maintaining our intellectual property rights could be difficult
          and costly and failure to do so may diminish our ability to compete effectively
          and may harm our operating results. We may need to pursue lawsuits or legal
          action in the future to enforce our intellectual property rights, to protect
          our
          trade secrets and domain names and to determine the validity and scope
          of the
          proprietary rights of others. If third parties prepare and file applications
          for
          trademarks used or registered by us, we may oppose those applications and
          be
          required to participate in proceedings to determine priority of rights
          to the
          trademark. Similarly, competitors may have filed applications for patents,
          may
          have received patents and may obtain additional patents and proprietary
          rights
          relating to products or technology that block or compete with ours. We
          may have
          to participate in interference proceedings to determine the priority of
          invention and the right to a patent for the technology. Litigation and
          interference proceedings, even if they are successful, are expensive to
          pursue
          and time consuming, and we could use a substantial amount of our financial
          resources in either case.
 
 **We
          rely, in part, on contractual provisions to protect our trade secrets and
          proprietary knowledge.**
 
 Confidentiality
          agreements to which we are party may be breached, and we may not have adequate
          remedies for any breach. Our trade secrets may also become known without
          breach
          of such agreements or may be independently developed by competitors. Our
          inability to maintain the proprietary nature of our technology and processes
          could allow our competitors to limit or eliminate any competitive advantages
          we
          may have.
 
 **Our
          business depends on retaining and attracting highly capable management
          and
          operating personnel.**
 
 Our
          success depends in large part on our ability to retain and attract management
          and operating personnel, our officers and other key employees. Our business
          requires highly skilled specialized workforce, including scientists, engineers,
          researchers and manufacturing and marketing professionals, who are in high
          demand and are often subject to competing offers. To retain and attract
          key
          personnel, we use various measures, including employment agreements, a
          stock
          incentive plan and incentive bonuses for key employees. These measures
          may not
          be enough to retain and attract the personnel we need or to offset the
          impact on
          our business of the loss of the services of key officers or
          employees.
 
 **We
          face risks associated with our plans to market, distribute and service
          our
          products internationally.**
 
 We
          may
          market, distribute and service our products internationally. We have limited
          experience developing and no experience manufacturing our products to comply
          with the commercial and legal requirements of international markets. Our
          success
          in international markets will depend, in part, on our ability and that
          of our
          partners to secure relationships with foreign sub-distributors, and our
          ability
          to manufacture products that meet foreign regulatory and commercial
          requirements. Additionally, our planned international operations are subject
          to
          other inherent risks, including potential difficulties in enforcing contractual
          obligations and intellectual property rights in foreign countries and
          fluctuations in currency exchange rates.
  39
 
 **Government
          contracts could restrict our ability to effectively commercialize our
          technology.**
 
 Contracts
          we enter into with government agencies are subject to the risk of termination
          at
          the convenience of the contracting agency and potential disclosure of our
          confidential information to third parties. Under the Freedom of Information
          Act,
          any documents that we have submitted to the government or to a contractor
          under
          a government funding arrangement may be subject to public disclosure that
          could
          compromise our intellectual property rights unless these documents are
          exempted
          as trade secrets or as confidential information, appropriately legended
          by us,
          and treated accordingly by such government agencies.
 
 As
          a
          government contractor, we must comply with and are affected by federal
          government regulations relating to the formation, administration and performance
          of government contracts. These regulations will affect how we do business
          with
          our customers and may impose added costs on our business. Any failure to
          comply
          with applicable laws and regulations could result in contract termination,
          price
          or fee reductions or suspension or debarment from contracting with the
          federal
          government.
 
 In
          addition, Federal government agencies routinely audit government contracts.
          These agencies review a contractor’s performance on its contract, pricing
          practices, cost structure and compliance with applicable laws, regulations
          and
          standards. These audits may occur several years after completion of the
          audited
          work. An audit could result in a substantial adjustment to our revenues
          because
          any costs found to be improperly allocated to a specific contract will
          not be
          reimbursed, while improper costs already reimbursed must be refunded. If
          a
          government audit uncovers improper or illegal activities, we may be subject
          to
          civil and criminal penalties and administrative sanctions, including termination
          of contracts, forfeiture of profits, suspension of payments, fines and
          suspension or debarment from doing business with federal government agencies.
          In
          addition, our reputation could be harmed if allegations of impropriety
          were made
          against us.
 
 **We
          may be unable to manage rapid growth effectively.**
 
 We
          expect
          to rapidly expand our manufacturing capabilities, accelerate the
          commercialization of our products and enter a period of rapid growth, which
          will
          place a significant strain on our senior management team and our financial
          and
          other resources. The proposed expansion will expose us to increased competition,
          greater overhead, marketing and support costs and other risks associated
          with
          the commercialization of a new product. Our ability to manage our rapid
          growth
          effectively will require us to continue to improve our operations, to improve
          our financial and management information systems and to train, motivate
          and
          manage our employees. Difficulties in effectively managing the budgeting,
          forecasting and other process control issues presented by such a rapid
          expansion
          could harm our business, prospects, results of operations and financial
          condition.
 
 **Our
          stock price has been and could remain volatile.**
 
 The
          market price of our common stock has historically experienced and may continue
          to experience significant volatility. Our progress in developing and
          commercializing our products, our quarterly operating results, announcements
          of
          new products by us or our competitors, our perceived prospects, changes
          in
          securities’ analysts’ recommendations or earnings’ estimates, changes in general
          conditions in the economy or the financial markets, adverse events related
          to
          our strategic relationships and other developments affecting us or our
          competitors could cause the market price of our common stock to fluctuate
          substantially. In addition, in recent years, the stock market, and in particular
          the market for technology-related stocks, has experienced significant price
          and
          volume fluctuations. This volatility has affected the market prices of
          securities issued by many companies for reasons unrelated to their operating
          performance and may adversely affect the price of our common stock. In
          addition,
          we may be subject to additional securities class action litigation as a
          result
          of volatility in the price of our common stock, which could result in
          substantial costs and diversion of management’s attention and resources and
          could harm our stock price, business, prospects, results of operations
          and
          financial condition.
  40


**Our
        principal stockholder has substantial control over our
        affairs.**
 Ener1
          is
          controlled by Ener1 Group, which owns approximately 90% of our outstanding
          common stock. Three of Ener1 Group’s board members are also members of our Board
          of Directors and a fourth Ener1 board member acts as a Strategic Advisor
          to
          Ener1 Group. Ener1 Group has the ability to exert substantial influence
          over all
          matters submitted to a vote of the stockholders of Ener1, including the
          election
          and removal of directors and any merger, consolidation or sale of all or
          substantially all of our assets. In addition, Ener1 Group may dictate the
          management of our business and affairs. This concentration of ownership
          could
          have the effect of delaying, deferring or preventing a change in control
          or
          impeding a merger or consolidation, takeover or other business combination
          which
          you, as a stockholder, may view favorably.
 
 **Future
          sales of our common stock may adversely affect our common stock
          price.**
 
 If
          our
          stockholders sell a large number of shares of common stock or if we issue
          a
          large number of shares in connection with future acquisitions or financings,
          the
          market price of our common stock could decline significantly. In addition,
          the
          perception in the public market that our stockholders might sell a large
          number
          of shares of common stock could cause a decline in the market price of
          our
          common stock.
 
 **Our
          certificate of incorporation and Florida law could adversely affect our
          common
          stock price.**
 
 Provisions
          of our certificate of incorporation and Florida law could discourage potential
          acquisition proposals and could delay or prevent a change in control of
          us.
          These provisions could diminish the opportunities for a stockholder to
          participate in tender offers, including tender offers at a price above
          the then
          current market value of our common stock. These provisions may also inhibit
          fluctuations in the market price of our common stock that could result
          from
          takeover attempts. In addition, the Board of Directors, without further
          stockholder approval, may issue additional series of preferred stock that
          could
          have the effect of delaying, deterring or preventing a change in control
          of us.
          The issuance of additional series of preferred stock could also adversely
          affect
          the voting power of the holders of common stock, including the loss of
          voting
          control to others.
  41
 
 **ITEM
          7: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA**
 
 **Financial
          Statements**
 **Page**Financial
                    StatementsReport
                    of Independent Registered Public Accounting Firm
                43Consolidated
                    Balance Sheet
                44Consolidated
                    Statements of Operations
                45Consolidated
                    Statements of Stockholders' Equity
                46Consolidated
                    Statements of Cash Flows
                47Notes
                    to Consolidated Financial Statements
                49
 
 
 42
 
 **REPORT
          OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**
 
 
 To
          the
          Board of Directors
 Ener1,
          Inc.
 Fort
          Lauderdale, Florida
 
 We
          have
          audited the accompanying consolidated balance sheets of Ener1, Inc. and
          subsidiaries (the "Company") as of December 31, 2005 and 2004 and the related
          consolidated statements of operations, stockholders' equity, and cash flows
          for
          each of the two years in the period ended December 31, 2005. These financial
          statements are the responsibility of the Company's management. Our
          responsibility is to express an opinion on these financial statements based
          on
          our audits.
 
 We
          conducted our audits in accordance with standards of the Public Company
          Accounting Oversight Board (United States). Those standards require that
          we plan
          and perform the audits to obtain reasonable assurance about whether the
          financial statements are free of material misstatement. An audit includes
          examining, on a test basis, evidence supporting the amounts and disclosures
          in
          the financial statements. An audit also includes assessing the accounting
          principles used and significant estimates made by management, as well as
          evaluating the overall financial statement presentation. We believe that
          our
          audits provide a reasonable basis for our opinion.
 
 In
          our
          opinion, the financial statements referred to above present fairly, in
          all
          material respects, the financial position of the Company, as of December
          31,
          2005 and 2004, and the results of its operations and its cash flows for
          each of
          the two years in the period ended December 31, 2005 in conformity with
          accounting principles generally accepted in the United States of
          America.
 
 The
          accompanying financial statements have been prepared assuming that the
          Company
          will continue as a going concern. As discussed in Note 2 to the financial
          statements, the Company has suffered recurring losses from operations,
          has
          negative cash flow from operations, and has an accumulated deficit, which
          raises
          substantial doubt about its ability to continue as a going concern. Management's
          plans regarding these matters also are described in Note 2. The financial
          statements do not include any adjustments that might result from the outcome
          of
          this uncertainty.
  As
            discussed in Note 4 to the financial statements, errors resulting in
            an
            understatement of earnings; and understatement of basic and diluted earnings
            (loss) per share; and an understatement of liabilities in 2004 and an
            understatement of earnings and overstatement of diluted earnings per
            share and understatement of liabilities in 2005 were discovered by
            management in 2006. Accordingly, adjustments have been made as of and
            for the
            years ended December 31, 2005 and 2004, to correct the
            errors.
 MALONE
          & BAILEY, PC
 www.malone-bailey.com
 Houston,
          Texas
 
 March
          9,
          2006, except for Notes 3, 4, 5, 7, 12, 13, 17, 18, 19 and 20 which are as
          of August 4, 2006
  43
 
 ENER1,
          INC. AND SUBSIDIARIES
 CONSOLIDATED
          BALANCE SHEETS
 (dollars
          in thousands)
 **December
                      31,**
                  
                  **December
                      31,****2005**
                  
                  **2004****ASSETS**
                  
                  **(Restated)**
                  
                  **(Restated)**Current
                      assetsCash
                      and equivalents
                  
                  $
                  2,306
                  
                  $
                  14,091Prepaid
                      expenses and other current assets
                  
                  
                  189
                  
                  
                  190Due
                      from related parties
                  
                  
                  157
                  
                  
                  119Total
                      current assets
                  
                  
                  2,652
                  
                  
                  14,400Property
                      and equipment, net
                  
                  
                  3,042
                  
                  
                  13,390Investment
                      in EnerStruct, Inc.
                  
                  
                  805
                  
                  
                  1,185Deferred
                      debenture costs, net of amortizationof
                      $2,082 and $905
                  
                  
                  3,748
                  
                  
                  3,621Other
                  
                  
                  202
                  
                  
                  443Total
                      assets
                  
                  $
                  10,449
                  
                  $
                  33,039**LIABILITIES
                      AND STOCKHOLDERS' DEFICIT**Current
                      liabilitiesCurrent
                      portion of installment loan
                  
                  
                  24
                  
                  
                  23Accounts
                      payable and accrued expenses
                  
                  
                  2,969
                  
                  
                  2,301Liabilities
                      of discontinued operations
                  
                  
                  307
                  
                  
                  307Derivative
                      liability
                  
                  
                  54,979
                  
                  
                  113,875Total
                      current liabilities
                  
                  
                  58,279
                  
                  
                  116,506Long-term
                      portion of installment loan
                  
                  
                  67
                  
                  
                  91$19,700
                      convertible debentures, net of discount of $13,970 and
                      $17,141
                  
                  
                  5,730
                  
                  
                  2,559$14,225
                      convertible debentures, net of discount of $10,064
                  
                  
                  4,161
                  
                  
                  —Total
                      liabilities
                  
                  
                  68,237
                  
                  
                  119,156Redeemable
                      preferred stock:EnerDel,
                      Inc. Series A Preferred, $.01 par value, 500,000 shares
                      authorized,8,000
                      shares issued and outstanding; liquidation preference
                      $8,000
                  
                  
                  4,967
                  
                  
                  2,569Series
                      B Convertible Preferred, $.01 par value, 180,000 shares
                      authorized,152,500
                      shares issued and outstanding; liquidation preference
                      $15,250
                  
                  
                  13,188
                  
                  
                  10,105Minority
                      interest
                  
                  
                  —
                  
                  
                  3,951Commitments
                      and contingencies**STOCKHOLDERS'
                      DEFICIT**Common
                      stock, $.01 par value, 750,000,000 shares authorized
                  
                  
                  3,475
                  
                  
                  3,475347,455,751
                      issued and outstandingAdditional
                      paid in capital
                  
                  
                  72,830
                  
                  
                  76,675Accumulated
                      deficit
                  
                  
                  (152,248
                  )
                  
                  (182,892
                  )Total
                      stockholders' deficit
                  
                  
                  (75,943
                  )
                  
                  (102,742
                  )Total
                      liabilities and stockholders' deficit
                  
                  $
                  10,449
                  
                  $
                  33,039
 
 See
          notes
          to consolidated financial statements.
  44
  ENER1,
          INC. AND SUBSIDIARIES
 CONSOLIDATED
          STATEMENTS OF OPERATIONS
 (In
          thousands except per share data)
 **Year
                      Ended December 31,****2005**
                  
                  **2004****(Restated)**
                  
                  **(Restated)**Net
                      sales
                  
                  $
                  60
                  
                  $
                  42Cost
                      of sales
                  
                  
                  —
                  
                  
                  10Gross
                      profit
                  
                  
                  60
                  
                  
                  32Operating
                      expensesManufacturing
                      pre-production costs
                  
                  
                  —
                  
                  
                  3,282General
                      and administrative
                  
                  
                  13,609
                  
                  
                  7,334Depreciation
                  
                  
                  558
                  
                  
                  203Research
                      and development
                  
                  
                  19,042
                  
                  
                  18,012Loss
                      on impairment of assets
                  
                  
                  —
                  
                  
                  8,289Total
                      operating expenses
                  
                  
                  33,209
                  
                  
                  37,120Loss
                      from operations
                  
                  
                  (33,149
                  )
                  
                  (37,088
                  )Other
                      income (expense)Interest
                      expense
                  
                  
                  (9,936
                  )
                  
                  (5,286
                  )Equity
                      in loss of EnerStruct, Inc.
                  
                  
                  (380
                  )
                  
                  (591
                  )Other
                  
                  
                  (350
                  )
                  
                  261Gain
                      on derivative liability
                  
                  
                  70,849
                  
                  
                  46,727Total
                      other income (expense)
                  
                  
                  60,183
                  
                  
                  41,111Income
                      before income taxes
                  
                  
                  27,034
                  
                  
                  4,023Income
                      taxes
                  
                  
                  —
                  
                  
                  —Net
                      income before minority interestand
                      discontinued operations
                  
                  
                  27,034
                  
                  
                  4,023Minority
                      interest in losses and preferred dividends of consolidated
                      subsidiary
                  
                  
                  1,570
                  
                  
                  2,992Net
                      income from continuing operations
                  
                  
                  28,604
                  
                  
                  7,015Income
                      from discontinued operations
                  
                  
                  —
                  
                  
                  106Net
                      income
                  
                  
                  28,604
                  
                  
                  7,121Preferred
                      stock dividends
                  
                  
                  (2,926
                  )
                  
                  (525
                  )Net
                      income attributableto
                      common shareholders
                  
                  $
                  25,678
                  
                  $
                  6,596Net
                      income from continuing operations, basic and dilutedBasic
                      net income per share
                  
                  $
                  0.07
                  
                  $
                  0.02Diluted
                      net (loss) per share
                  
                  $
                  (0.02
                  )
                  $
                  (0.07
                  )Net
                      income from discontinued operations, basic and dilutedBasic
                      net income per share
                  
                  $
                  —
                  
                  $
                  —Diluted
                      net income per share
                  
                  $
                  —
                  
                  $
                  —Weighted
                      average shares outstanding:Weighted
                      average shares outstanding - Basic
                  
                  
                  347,456
                  
                  
                  347,089Weighted
                      average shares outstanding - Diluted
                  
                  
                  433,028
                  
                  
                  424,328
 
 
 See
          notes
          to consolidated financial statements.
  45
  ENER1,
          INC. AND SUBSIDIARIES
 CONSOLIDATED
          STATEMENTS OF STOCKHOLDERS' EQUITY
 FOR
          THE
          YEARS ENDED DECEMBER 31, 2004, AND 2005
 (In
          thousands except share data)
 Common
                      Stock
                  
                  Additional
                  
                  AccumulatedShares
                  
                  Amount
                  
                  Paid
                      In Capital
                  
                  Deficit
                  
                  TotalBalance
                      at December 31, 2003
                  
                  
                  345,248,751
                  
                  $
                  3,453
                  
                  $
                  72,013
                  
                  $
                  (190,340
                  )
                  $
                  (114,874
                  )Employee
                      stock options exercised
                  
                  
                  407,000
                  
                  
                  4
                  
                  
                  18
                  
                  
                  —
                  
                  
                  22Exercise
                      of stock options
                  
                  
                  1,500,000
                  
                  
                  15
                  
                  
                  1,035
                  
                  
                  —
                  
                  
                  1,050Conversion
                      of senior secured debenturesto
                      common stock
                  
                  
                  240,000
                  
                  
                  2
                  
                  
                  427
                  
                  
                  —
                  
                  
                  429Common
                      stock and stock options issued forservices
                  
                  
                  60,000
                  
                  
                  1
                  
                  
                  1,312
                  
                  
                  —
                  
                  
                  1,313Accretion
                      of discount on preferred stock
                  
                  
                  —
                  
                  
                  —
                  
                  
                  (279
                  )
                  
                  —
                  
                  
                  (279
                  )Accrued
                      dividends on preferred stock
                  
                  
                  —
                  
                  
                  —
                  
                  
                  (204
                  )
                  
                  —
                  
                  
                  (204
                  )Discount
                      on stock issued to minority stockholder
                  
                  
                  —
                  
                  
                  —
                  
                  
                  (1,018
                  )
                  
                  —
                  
                  
                  (1,018
                  )Warrants
                      issued in connection with debt placement services
                  
                  
                  —
                  
                  
                  —
                  
                  
                  3,053
                  
                  
                  —
                  
                  
                  3,053Series
                    B Put option received
                  
                  
                  —
                  
                  
                  —
                  
                  
                  645
                  
                  
                  —
                  
                  
                  645Net
                      Income (including preferred dividends payable to minority interest
                      owner
                      charged to paid in capital)
                  
                  
                  —
                  
                  
                  —
                  
                  
                  (327
                  )
                  
                  7,448
                  
                  
                  7,121Balance
                      December 31, 2004 (Restated)
                  
                  
                  347,455,751
                  
                  
                  3,475
                  
                  
                  76,675
                  
                  
                  (182,892
                  )
                  
                  (102,742
                  )Stock
                      options issued for servicesand
                      compensation due to variable options
                  
                  
                  —
                  
                  
                  —
                  
                  
                  1,080
                  
                  
                  —
                  
                  
                  1,080Delphi
                      minority interest in Enerdel
                  
                  
                  —
                  
                  
                  
                  
                  
                  (18
                  )
                  
                  
                  
                  
                  (18
                  )Accretion
                      of discount on preferred stock
                  
                  
                  —
                  
                  
                  —
                  
                  
                  (1,865
                  )
                  
                  —
                  
                  
                  (1,865
                  )Accrued
                      dividends on preferred stock
                  
                  
                  —
                  
                  
                  —
                  
                  
                  (1,065
                  )
                  
                  —
                  
                  
                  (1,065
                  )Warrants
                      issued in connection with debtplacement
                      services
                  
                  
                  —
                  
                  
                  —
                  
                  
                  213
                  
                  
                  —
                  
                  
                  213Dividend
                      of Splinex Shares
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  (150
                  )
                  
                  (150
                  )Net
                      income (including preferred dividends payable to minority interest
                      owner
                      charged to paid in capital)
                  
                  
                  —
                  
                  
                  —
                  
                  
                  (2,190
                  )
                  
                  30,794
                  
                  
                  28,604Balance
                      December 31, 2005 (Restated)
                  
                  
                  347,455,751
                  
                  $
                  3,475
                  
                  $
                  72,830
                  
                  $
                  (152,248
                  )
                  $
                  (75,943
                  )
 
 
 
 See
          notes
          to consolidated financial statements.
  46
  ENER1,
          INC. AND SUBSIDIARIES
 CONSOLIDATED
          STATEMENTS OF CASH FLOWS
 (In
          thousands)
 **Year
                        Ended December 31,****2005**
                    
                    **2004****(Restated)**
                    
                    **(Restated)**Cash
                        flows from operating activities:Net
                        income
                    
                    $
                    28,604
                    
                    $
                    7,121Adjustments
                        to reconcile net income to cash used by operating
                        activities:Gain
                        on derivative liability
                    
                    
                    (70,849
                    )
                    
                    (46,727
                    )Asset
                        impairment
                    
                    
                    —
                    
                    
                    8,289Plant
                        assets expensed to research and development
                    
                    
                    10,602
                    
                    
                    15,096Minority
                        interest in losses and preferred dividends of consolidated
                        subsidiary
                    
                    
                    (1,570
                    )
                    
                    (2,992
                    )Non
                        cash interest expense related to financing costs
                    
                    
                    1,177
                    
                    
                    905Accretion
                        of discount on debentures
                    
                    
                    4,963
                    
                    
                    2,559Depreciation
                    
                    
                    558
                    
                    
                    203Compensation
                        expense for stock grants and options
                    
                    
                    1,080
                    
                    
                    1,313Equity
                        in loss from investment in Enerstruct
                    
                    
                    380
                    
                    
                    590Changes
                        in current assets and liabilities
                    
                    
                    721
                    
                    
                    (184
                    )Changes
                        in assets and liabilities held for disposal
                    
                    
                    1
                    
                    
                    (118
                    )Net
                        cash used in operating activities
                    
                    
                    (24,333
                    )
                    
                    (13,945
                    )Investing
                        activities:Capital
                        expenditures
                    
                    
                    (813
                    )
                    
                    (1,054
                    )Investment
                        in Splinex
                    
                    
                    —
                    
                    
                    (150
                    )Net
                        cash used in investing activities
                    
                    
                    (813
                    )
                    
                    (1,204
                    )Financing
                        activities:Proceeds
                        from issuance of senior secured debentures, net of costs
                    
                    
                    13,134
                    
                    
                    18,527Proceeds
                        from sale of preferred stock
                    
                    
                    250
                    
                    
                    15,000Repayment
                        of related party notes
                    
                    
                    —
                    
                    
                    (1,041
                    )Repayment
                        of guaranteed related party debt
                    
                    
                    —
                    
                    
                    (2,200
                    )Repayment
                        of long term debt
                    
                    
                    (23
                    )
                    
                    (2,318
                    )Proceeds
                        from employee stock options exercised
                    
                    
                    —
                    
                    
                    22Proceeds
                        from exercise of options
                    
                    
                    —
                    
                    
                    1,050Net
                        cash provided by financing activities
                    
                    
                    13,361
                    
                    
                    29,040Net
                        increase (decrease) in cash and equivalents
                    
                    
                    (11,785
                    )
                    
                    13,891Cash
                        and cash equivalents beginning balance
                    
                    
                    14,091
                    
                    
                    200Cash
                        and cash equivalents ending balance
                    
                    $
                    2,306
                    
                    $
                    14,091
 See
          notes
          to consolidated financial statements.
  47
 
 ENER1,
          INC. AND SUBSIDIARIES
 CONSOLIDATED
          STATEMENTS OF CASH FLOWS (continued)
 (In
          thousands)
 **Year
                        Ended December 31,****Supplemental
                        Disclosure of Cash Flow Information**
                    
                    **2005**
                    
                    **2004****(Restated)**Cash
                        paid during the year forIncome
                        taxes
                    
                    $
                    —
                    
                    $
                    —Interest
                    
                    
                    3,786
                    
                    
                    1,195Non-cash
                        investing and financing activitiesIntellectual
                        property, equipment, and supplies contributed byminority
                        stockholder in subsidiary
                    
                    $
                    —
                    
                    $
                    13,761Accrued
                        dividends on preferred stock
                    
                    
                    1,533
                    
                    
                    309Accretion
                        of discounts on preferred stock
                    
                    
                    3,586
                    
                    
                    501Spin-off
                        of Splinex shares
                    
                    
                    150
                    
                    
                    —Warrants
                        issued in connection with the issuance of debt
                    
                    
                    213
                    
                    
                    3,052Warrants
                        issued in connection with the formation of EnerDel, Inc.
                    
                    
                    —
                    
                    
                    3,725Series
                        B Preferred Stock Put
                    
                    
                    —
                    
                    
                    645
 See
          notes
          to consolidated financial statements.
  48
 
 ENER1,
          INC. AND SUBSIDIARIES
 NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
 
 
 1.
          NATURE
          OF BUSINESS
 
 Ener1,
          Inc.'s ("Ener1" or the "Company") 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 Li-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 owns approximately 88% of the outstanding
          common stock of the Company as of December 31, 2005. Prior to 2002, the
          Company
          manufactured set top boxes and other digital entertainment products through
          its
          Digital Media Technologies Division. In 2003, the Company classified the
          operations of its Digital Media Technologies Division as discontinued operations
          and transferred the majority of the related assets to a subsidiary, EnerLook
          Solutions, Inc. ("EnerLook"). EnerLook subsequently sold substantially
          all of
          its assets to TVR Communications LLC in return for a 5% membership interest
          in
          TVR Communications LLC ( See
          Note
          6.)
 
 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.
 
 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
          lithium 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.
 
 2.  GOING
          CONCERN
  The
          accompanying consolidated financial statements have been prepared on a
          going
          concern basis, which contemplates the realization of assets and the satisfaction
          of liabilities in the normal course of business. Ener1 has experienced
          net
          operating losses since 1997 and negative cash flows from operations since
          1999,
          and had an accumulated deficit of $153,000,000 as of December 31, 2005.
          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.
 
 Subsequent
          to December 31, 2005, 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 during 2006. 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.
  49
 
 3. SIGNIFICANT
          ACCOUNTING POLICIES
 
 Principles
          of Consolidation: The accompanying consolidated financial statements include
          Ener1, Inc. and its wholly-owned subsidiaries and its majority (80.5%)
          owned
          subsidiary, EnerDel. Intercompany accounts and transactions have been eliminated
          in consolidation. EnerDel, NanoEner and EnerFuel have ongoing operations.
          The
          Company’s 48% investment in EnerStruct is accounted for on the equity method
          (See Note 14). The accompanying consolidated financial statements also
          include
          as discontinued operations the Company’s 49% owned subsidiary, EnerLook.
 
 Use
          of
          Estimates: The preparation of consolidated financial statements in conformity
          with accounting principles generally accepted in the United States of America
          requires management to make estimates and assumptions that affect the reported
          amounts of assets and liabilities and disclosure of contingent assets and
          liabilities at the date of the financial statements and the reported amounts
          of
          revenues and expenses during the reporting period. Actual results could
          differ
          materially from those estimates. In particular, the application of reasonable
          alternative estimates associated with the valuation of financial instruments
          that have derivative features could significantly affect the reported amounts
          in
          the financial statements and related disclosures. See Note 19.
 Restatements:
            Restatements of 2005 and 2004 were made. See Note 4.
 Cash
          and
          Cash Equivalents: The Company considers liquid instruments purchased with
          a
          maturity of three months or less to be cash and cash equivalents. The Company
          may, in the normal course of operations, maintain cash balances in excess
          of
          federally insured limits.
 
 Property
          and Equipment: Property and equipment are recorded at cost. Expenditures
          for
          major betterments and additions are charged to the asset accounts, while
          replacement, maintenance and repairs, which do not extend the lives of
          the
          respective assets, are charged to expense in the period incurred.
 
 Depreciation
          and amortization are computed using the straight-line method over the estimated
          useful lives of the assets, which are as follows (in years):
 **Asset
                      Category**Building
                  
                  
                  39Building
                      Improvements
                  
                  
                  39Leasehold
                      Improvements
                  
                  
                  2Furniture
                      and fixtures
                  
                  
                  5Equipment
                      and machinery
                  
                  
                  5Battery
                      Plant Equipment
                  
                  
                  10Computer
                      and office equipment
                  
                  
                  3Software
                  
                  
                  3Automobile
                  
                  
                  5Telephone
                      equipment
                  
                  
                  5
 
 Long-lived
          Assets: The Company accounts for the impairment and disposition of long-lived
          assets in accordance with Statement of Financial Accounting Standard No.
          144,
“Accounting for the Impairment or Disposal of Long-Lived Assets.” ("SFAS No.
          144"). In accordance with SFAS No. 144, long-lived assets to be held 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 when the sum of the undiscounted cash flows estimated
          to be
          generated by the asset is less than its carrying value. See Note 16 for
          a
          discussion of charges incurred by the Company when it determined that a
          portion
          of its manufacturing assets were impaired.
 
 Earnings
          Per Share: Basic net earnings (loss) per common share are computed by dividing
          net earnings (loss) applicable to common shareholders by the weighted-average
          number of common shares outstanding during the period. Diluted net earnings
          (loss) per common share is determined using the weighted-average number
          of
          common shares outstanding during the period, adjusted for the dilutive
          effect of
          common stock equivalents. In periods when losses are reported, the
          weighted-average number of common shares outstanding excludes common stock
          equivalents, because their inclusion would be anti-dilutive.
  50





The
          dilutive effect of outstanding stock options and warrants is reflected
          in
          diluted earnings per share by application of the treasury stock method.
          The
          dilutive effect of outstanding convertible securities is reflected in
          diluted earnings per share by application of the if-converted
          method.
 
 Stock
          Compensation: Options granted to employees under the Company’s stock option
          plans are accounted for by using the intrinsic method under APB Opinion
          25,
“Accounting for Stock Issued to Employees” (“APB 25”). In October 1995, the
          Financial Accounting Standards Board issued Statement No. 123, Accounting
          for
          Stock-Based Compensation (SFAS No.123), which defines a fair value based
          method
          of accounting for stock options. Certain aspects of the accounting standards
          prescribed by SFAS No.123 are optional and therefore the Company has continued
          to account for stock options under the intrinsic value method specified
          in APB
          25. The Company has adopted the disclosure-only provisions of SFAS No.123.
          Accordingly, compensation cost has been recognized in connection with grants
          under the stock option plans only when the exercise prices of employee
          stock
          options are less than the market prices or fair values of the underlying
          stock
          on the date of grant. If compensation cost had been determined based on
          the fair
          value of the underlying stock at the grant date for all awards consistent
          with
          the provisions of SFAS  123 , the
          Company’s net income and income per share would have been as indicated below for
          the years ended December 31, 2004 and 2005 (in thousands):
 **2005**
                  
                  **2004**Net
                      income as reported
                  
                  $
                  28,604
                  
                  $
                  7,121Plus:
                      compensation for stock options issued and variable options
                  
                  
                  1,080
                  
                  
                  714Less:
                      pro-forma stock based employee compensation
                  
                  
                  (2,707
                  )
                  
                  (2,087
                  )Pro
                      forma net income
                  
                  
                  26,977
                  
                  
                  5,748Preferred
                      stock dividends
                  
                  
                  (2,926
                  )
                  
                  (525
                  )Pro
                      forma net income attributable to common shareholders
                  
                  $
                  24,051
                  
                  $
                  5,223Income
                      per share (including preferred stockdividends
                      and acretion of discount)Pro-forma
                      Basic net income per share
                  
                  $
                  0.07
                  
                  $
                  0.02Pro-forma
                      Diluted net income per share
                  
                  $
                  (0.02
                  )
                  $
                  (0.07
                  )
  Research
          and Development Costs: Research and Development costs, including the cost
          of
          equipment and other assets used in research and development activities
          that do
          not have alternative future use, are expensed as incurred.
 
 Income
          Taxes: The Company provides for income taxes in accordance with the liability
          method. Deferred income tax assets and liabilities are computed for differences
          between the financial statement carrying values and the tax bases of assets
          and
          liabilities and carryforwards that will result in taxable or deductible
          amounts
          in the future based on enacted tax laws and rates applicable to the periods
          in
          which the differences are expected to affect taxable income. Valuation
          allowances are established when necessary to reduce deferred tax assets
          to the
          amount more likely than not to be realized. Income tax expense or benefit
          is the
          tax payable or refundable for the period plus or minus the change during
          the
          period in deferred tax assets and liabilities.
  51
 
 Ener1
          calculates its income taxes as if it filed a separate return. Ener1 Group
          files
          a consolidated federal income tax return and certain state income tax returns
          which include Ener1 and its subsidiaries. Ener1 and Ener1 Group have adopted
          a
          tax sharing agreement which provides for the allocation of income taxes
          between
          the two groups. I ntergroup
          tax payments are made only when a payment is required or a refund is received
          on
          the consolidated tax return of Ener1 Group. When determining any Federal
          income
          tax payments due by Ener1 in any year, for purposes of the tax allocation
          agreement, Ener1 shall be credited the tax benefit of all of Ener1’s net
          operating losses generated after January 3, 2003 plus the tax benefit of
          any of
          Ener1’s net operating losses generated before January 3, 2003 that are allowable
          under the Internal Revenue Code, plus any payments Ener1 has made under
          the tax
          allocation agreement, less any payments Ener1 has received under the tax
          allocation agreement.
 
 Issuance
          or sale of stock by subsidiary: Changes in the Company’s equity in a subsidiary
          caused by issuances or sales of the subsidiary’s stock are accounted for as
          capital transactions.
 
 Reclassifications:
          Certain prior year amounts have been reclassified to conform to the fiscal
          2005
          presentation.
 
 Fair
          Value of Financial Instruments: The carrying value of cash and cash equivalents,
          trade receivables, accounts payable and accrued expenses and other liabilities
          approximates fair value due to the short term maturity of these instruments
          or
          the fact that they are carried at fair value, as applicable. The carrying
          value
          of the installment loan approximates fair value as the interest rates are
          not
          significantly different from the current market rates available to the
          Company
          for similar type loans. The face value of the senior secured convertible
          debentures and the stated value of the redeemable preferred stock approximate
          fair value.
 
 Foreign
          Currency Transactions: The recorded balances that are required to be paid
          in
          foreign currencies at December 31, 2004 are adjusted to reflect the exchange
          rate at the balance sheet date.
 *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 the Company’s structured borrowings, are separately
              valued and accounted for on the Company’s 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 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 from period to period. In accordance
              with
              SFAS No. 133 and EITF 00-19, certain of the Company’s warrants to purchase
              common stock and the embedded conversion feature of several of the
              Company’s
              financial instruments are separately accounted for as liabilities.
              The fair
              value of these warrants and conversion features are shown on the Company’s
              balance sheet and the unrealized changes in the values of these derivatives
              are
              shown in the Company’s consolidated statement of operations as “Gain (loss) on
              derivative 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 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.
  For
                      instruments with a single derivative, such as the Company's
                      warrants and the
                      conversion feature derivatives of our preferred stock, the
                      Company uses the Black Scholes pricing model for determining the fair
                      values of the derivatives. For instruments with compound embedded
                      derivatives,
                      such as the Company's 2004 Debentures and 2005 Debentures the Company uses
                      a lattice valuation model to value the derivatives. The
                      Company believes 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***
 
 The
                      Company valued the compound embedded derivatives in the 2004 Debentures and
                      2005 Debentures using a lattice valuation model, with the assistance
                      of a
                      valuation consultant . The
                      lattice model values the compound embedded derivatives based
                      on a probability
                      weighted discounted cash flow model. This model is based on
                      future projections
                      of the five primary alternatives possible for settlement of
                      the features
                      included within the compound embedded derivative, including:
                      (1) payments are
                      made in cash, (2) payments are made in stock, (3) the holder
                      exercises its right
                      to convert the debentures, (4) Ener1 exercises its right to
                      convert the
                      debentures and (5) Ener1 defaults on the debentures. The Company
                      uses the model
                      to analyze (a) the underlying economic factors that influence
                      which of these
                      events will occur, (b) when they are likely to occur, and (c)
                      the common stock
                      price and specific terms of the debentures such as interest
                      rate and conversion
                      price that will be in effect when they occur. Based on the
                      analysis of these
                      factors, the Company uses the model to develop a set of potential
                      scenarios.
                      Probabilities of each scenario occurring during the remaining
                      term of the
                      debentures are determined based on management's projections.
                      These probabilities
                      are used to create a cash flow projection over the term of
                      the debentures and
                      determine the probability that the projected cash flow would
                      be achieved. A
                      discounted weighted average cash flow for each scenario is
                      then calculated and
                      compared to the discounted cash flow of the debentures without
                      the compound
                      embedded derivative in order to determine a value for the compound
                      embedded
                      derivative. See
                      Note
                      19.
  ***Black
                    Scholes Valuation
                    Model***
 
 The
                    Company valued the asset value of the Series B Preferred Stock
                    Put using
                    the Black Scholes pricing model, with the assistance of a valuation
                    consultant .
                    The model uses a number of inputs including the value of the
                    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%.
                    See Note
                    19.
 
 The
                    Company used the Black Scholes pricing model to determine the
                    fair values of the
                    conversion feature derivatives of its warrants and 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, the Company uses volatility rates based upon the
                    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
                    to this period
                    do not reflect the ongoing business valuation of the Company’s current
                    operations. The Company uses a risk free interest rate which is the U.
                    S. Treasury bill rate for a security with a maturity that approximates
                    the
                    estimated expected life of our derivative or security. The Company uses the
                    closing market price of the Company’s 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 Black Scholes has a significant
                    effect on the
                    resulting valuation of the derivative liabilities on the Company’s balance
                    sheet. The volatility has ranged from 296% to 135% during the
                    years ending
                    December 31, 2003, 2004 and 2005. The Company’s volatility rate will likely
                    change in the future. The Company’s stock price will also change in the future.
                    To the extent that the Company’s stock price increases or decreases, the
                    Company’s derivative liability will also increase or decrease, absent
                    any change
                    in volatility rates. See Note 19.
 Recently
          Issued Accounting Pronouncements and Interpretations:
 
 SFAS
          No. 154, “Accounting Changes and Error Corrections,” ("SFAS 154") was
          issued in May 2005 and replaces APB Opinion No. 20 and SFAS No. 3.  SFAS
          No. 154 requires retrospective application for voluntary changes in accounting
          principle in most instances and is required to be applied to all accounting
          changes made in fiscal years beginning after December 15, 2005.  The
          Company’s expected adoption of SFAS No. 154 is not expected to have a material
          impact on the Company’s financial position, results of operations or cash
          flows.
 
 In
          December 2004, the FASB issued SFAS No. 123 (revised 2004), “Share-Based
          Payment,” (“SFAS 123(R)”), which is a revision of SFAS 123. SFAS 123(R)
          supersedes APB 25, Accounting for Stock Issued to Employees, and amends
          FASB
          Statement No. 95, Statement of Cash Flows. SFAS 123(R) requires all share-based
          payments to employees, including grants of employee stock options, to be
          recognized at the date of grant in the income statement based on their
          fair
          values. Pro forma disclosure is no longer an alternative. SFAS 123(R) is
          effective at the beginning of the first interim or annual period beginning
          after
          December 15, 2005. The
          Company is currently analyzing impacts of the requirement of the adoption
          of
          SFAS No 123 (R).
  52
 
 4.  RESTATEMENT
          AND RECLASSIFICATIONS OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS
  ***Summary
            of Restatement Items***
 
 On
            December 15, 2005, Ener1 concluded that it was necessary to restate its
            financial results for the fiscal year ended December 31, 2004 and for
            the
            interim periods ended March 31, June 30 and September 30, 2004 and 2005
            to
            reflect additional non-operating gains and losses related to the classification
            of and accounting for: (1) the conversion feature of the 2004 Debentures
            and the
            2005 Debentures the warrants to purchase common stock associated with
            the 2004
            and 2005 Debentures, the amortization expense associated with the discount
            recorded with respect to the 2004 and 2005 Debentures and financing costs
            incurred in connection with the 2004 Debentures, (2) the EnerDel, Inc.
            Non-Voting Cumulative and Redeemable Series A Convertible Preferred Stock
            issued
            in October, 2004 ("Series A Preferred Stock") and (3) warrants to purchase
            common stock issued to Ener1 Group in September 2002 and November 2003
            and
            options to purchase common stock issued to ITOCHU Corporation in July
            2003.
            Ener1 had previously classified the value of these conversion features
            and
            warrants to purchase common stock, when applicable, as equity. After
            further
            review, Ener1 has determined that these instruments should have been
            classified
            as derivative liabilities and therefore, the fair value of each instrument
            must
            be recorded as a derivative liability on Ener1's balance sheet. Changes
            in the
            fair values of these instruments will result in adjustments to the amount
            of the
            recorded derivative liabilities and the corresponding gain or loss will
            be
            recorded in Ener1's statement of operations. At the date of the conversion
            of each
            respective instrument
            or portion thereof ( or
            exercise of the options or warrants  or
            portion thereof, as the
            case may be) ,
            the
            corresponding derivative liability will be reclassified as equity.
  In
              March
              2006, Ener1 restated its financial statements for the fiscal year ended
              December
              31, 2004 to reflect the changes described above. In May 2006, Ener1
              concluded it
              was necessary to restate its financial statements for its 2004 and
              2005 fiscal
              years again to reflect the changes described below in Ener1's accounting
              for preferred stock and its calculation of diluted earnings or loss
              per
              share.
  The
            Company originally reported the Series A Preferred Stock and Series B
            Preferred
            Stock as long term liabilities at December 31, 2005 and 2004. The 2004 and
            2005 financial statements were restated to show the Series A Preferred
            Stock and Series B Preferred Stock as temporary equity between long
            term liabilities and stockholder’s equity (deficit) at December 31, 2005 and
            2004 because both the Series A Preferred Stock and Series B Preferred
            Stock
            contain condtional redemption features.
 The
              Company originally reported diluted earnings per share for the year
              ending
              December 31, 2005 and 2004 of $.06 and $(0.11) per share, respectively.
              Weighted
              average shares outstanding - diluted were originally reported as 411,515,000
              and
              347,089,000 shares at December 31, 2005 and 2004, respectively. The
              originally
              reported diluted earnings per share did not reflect an adjustment to
              the
              numerator for the income statement effect of derivative gains or losses
              during
              the periods. Inclusion of the derivative gain in the computation resulted
              in the
              determination that the 2004 and 2005 Debentures were dilutive securities,
              and
              the effect of the weighted number of shares resulting from conversion
              is now
              included in the denominator of the earnings per share calculation.
              In addition,
              the adjustment to the numerator resulted in a diluted net loss per
              share, and as
              a result, all stock options were considered anti-dilutive and excluded
              from the
              revised computation of the weighted average shares outstanding - diluted.
 In
              July
              2006, Ener1 concluded that it was necessary to restate its financial
              statements
              for its 2004 and 2005 fiscal years again to (1) reflect the corrected
              accounting
              for and valuation of additional compound embedded derivatives in the 2004
              Debentures and 2005 Debentures (2) revise the valuation of the initial
              discount
              and interest accretion on the 2004 Debentures and 2005 Debentures resulting
              from
              the accounting for and valuation of the compound embedded derivatives,
              (3)
              record the correct value of the 2004 Debentures Warrants, and (4) record
              the
              value of Ener1's right to require Ener1 Group to purchase the Series
              B Preferred
              Stock.
  The
            Company 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
            accompanying financial statements for the year ended December 31, 2005
            and 2004
            have been restated to effect the changes described above. The impact
            of the
            adjustments related to the classification of and
            accounting for the conversion features and warrants for the year ended
            December
            31, 2005 and 2004 are summarized below (the
            following tables compare specific line items from these financial statements
            for
            the years ended December 31, 2004 and 2005 with the same line items from
            the
            financial statements for the years ended December 31, 2005 and 2005 as
            initially
            reported by the Company on April 15, 2005 and March 10, 2006,
            respectively):
  53





**Consolidated
              Statement of Operations Impact (in thousands except per share
              data)**
  **Year
                            Ended****December
                            31, 2004****As
                          Initially Reported**
                      
                      **Adjustment**
                      
                      
                      
                      **As
                          Restated**Gross
                          profit
                      
                      $
                      32
                      
                      
                      
                      
                      
                      
                      
                      $
                      32Operating
                          expenses
                      
                      
                      37,418
                      
                      
                      (298
                      )
                      
                      *(a*
                      *)*
                      
                      37,120Loss
                          from operations
                      
                      
                      (37,386
                      )
                      
                      298
                      
                      
                      
                      
                      
                      (37,088
                      )Other income
                          (expense)Interest
                          expense
                      
                      
                      (1,523
                      )
                      
                      (3,763
                      )
                      
                      *(b*
                      *)*
                      
                      (5,286
                      )Other
                          income (expense)
                      
                      
                      (330
                      )
                      
                      
                      
                      
                      
                      
                      
                      (330
                      )Gain
                          on derivative liability, net
                      
                      
                      -
                      
                      
                      46,727
                      
                      
                      *(c*
                      *)*
                      
                      46,727Total
                          other income (expense)
                      
                      
                      (1,853
                      )
                      
                      42,964
                      
                      
                      
                      
                      
                      41,111Income
                              (loss) before minority interest, income taxes, and
                              discontinued
                              operations
                      
                      
                      (39,239
                      )
                      
                      43,262
                      
                      
                      
                      
                      
                      4,023Minority
                          interest in losses and preferred dividends of consolidated
                          subsidiary
                      
                      
                      3,319
                      
                      
                      (327
                      )
                      
                      *(h*
                      *)*
                      
                      2,992Income from
                          discontinued operations
                      
                      
                      106
                      
                      
                      
                      
                      
                      
                      
                      
                      106Net
                          income (loss)
                      
                      
                      (35,814
                      )
                      
                      42,935
                      
                      
                      
                      
                      
                      7,121Preferred
                          stock dividends
                      
                      
                      (904
                      )
                      
                      379
                      
                      
                      *(d)(h*
                      *)*
                      
                      (525
                      )Net
                              income (loss) attributable to common
                              shareholders
                      
                      $
                      (36,718
                      )
                      $
                      43,314
                      
                      
                      
                      
                      $
                      6,596Basic
                          and diluted income (loss) per share:Basic
                          net income (loss) per share
                      
                      $
                      (0.11
                      )
                      $
                      0.13
                      
                      
                      *(e*
                      *)*
                      $
                      0.02Diluted
                          net loss per share
                      
                      $
                      (0.11
                      )
                      $
                      0.04
                      
                      
                      *(f*
                      *)*
                      $
                      (0.07
                      )Weighted
                          average shares outstanding - Basic
                      
                      
                      347,089
                      
                      
                      
                      
                      
                      
                      
                      
                      347,089Weighted
                          average shares outstanding - Diluted
                      
                      
                      347,089
                      
                      
                      77,239
                      
                      
                      *(g*
                      *)*
                      
                      424,328
  *(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 of
                          $2,559, 
                          amortization of bond issuance costs of $904 and early conversion
                          of $300
                          of principal of 2004
                          Debentures.***********
 *(c)*
                      *To
                          record gain on derivatives based upon fair values at December
                          31, 2004.
                          See Note
                          19.************(d)*
                      *To
                          correct accretion of preferred stock as a
                          dividend.**(e)*
                      *To
                          reflect basic earnings per share based upon corrected net
                          income.*
 *(f)*
                      *To
                          reflect diluted earnings per share based upon corrected
                          net income as
                          adjusted for *diluted
                          shares outstanding and the effects of dilutive adjustments
                          to reported
                          earnings.**
 *(g)*
                      *To
                          reflect additional diluted shares outstanding for shares
                          underlying
                          warrants and convertible securities.**(h)*
                      *To
                          reflect the Series A Preferred Stock dividends payable
                          to the minority
                          interest owner as a reduction in minority interest
                          income.*
  **Consolidated
              Statement of Operations Impact (in thousands except per share
              data)**
  **Year
                        Ended December 31, 2005****As
                        Initially**
                      **Reported**
                    
                    **Adjustment**
                    
                    
                    
                    **As
                        Restated**Gross
                        profit
                    
                    
                    60
                    
                    
                    
                    
                    
                    
                    
                    60Operating
                        expenses
                    
                    
                    33,209
                    
                    
                    
                    
                    
                    
                    
                    33,209Loss
                        from operations
                    
                    
                    (33,149
                    )
                    
                    
                    
                    
                    
                    
                    (33,149
                    )Other
                        income (expense)Interest
                        expense
                    
                    
                    (10,735
                    )
                    
                    799
                    *(a*)**
                    
                    
                    
                    (9,936
                    )Other
                        income (expense), net
                    
                    
                    (730
                    )
                    
                    
                    
                    
                    
                    
                    (730
                    )Gain
                        on derivative liability
                    
                    
                    68,916
                    
                    
                    1,933
                    *(b*)**
                    
                    
                    
                    70,849Total
                        other income (expense)
                    
                    
                    57,451
                    
                    
                    2,732
                    
                    
                    
                    
                    60,183Income
                        before minority interest and  income taxes
                    
                    
                    24,302
                    
                    
                    2,732
                    
                    
                    
                    
                    27,034Income
                        taxes
                    
                    
                    -
                    
                    
                    
                    
                    
                    
                    
                    -Net
                        income before minority interest
                    
                    
                    24,302
                    
                    
                    2,732
                    
                    
                    
                    
                    27,034Minority
                        interest in losses and preferred dividends of consolidated
                        subsidiary
                    
                    
                    3,760
                    
                    
                    2,190
                    *(e*)**
                    
                    
                    
                    1,570Net
                        income
                    
                    
                    28,062
                    
                    
                    542
                    
                    
                    
                    
                    28,604Preferred
                        stock dividends
                    
                    
                    (5,116
                    )
                    
                    2,190
                    *(e*)**
                    
                    
                    
                    (2,926
                    )Net
                        income attributableto
                        common shareholders
                    
                    $
                    22,946
                    
                    $
                    2,732
                    
                    
                    
                    $
                    25,678Basic
                        and diluted net income (loss) per shareBasic
                        net income per share
                    
                    $
                    0.07
                    
                    $
                    -
                    
                    
                    
                    $
                    0.07Diluted
                        net income (loss) per share
                    
                    $
                    0.06
                    
                    $
                    (0.08
                    )*(c*)**
                    
                    
                    $
                    (0.02
                    )Weighted
                        average shares outstanding:Weighted
                        average shares outstanding - Basic
                    
                    
                    347,456
                    
                    
                    -
                    
                    
                    
                    
                    347,456Weighted
                        average shares outstanding - Diluted
                    
                    
                    411,515
                    
                    
                    21,513
                    *(d*)**
                    
                    
                    
                    433,028
   *(a)*
                    *Change
                        due to reduced accretion of discount of bond issuance
                        costs.* *(b)*
                      *To
                          correct gain on derivatives based upon fair values at December
                          31, 2005.
                          See Note 19.*
 *(c)*
                      *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.*
 *(d)*
                      *To
                          reflect additional diluted shares outstanding for shares
                          underlying
                          convertible securities net of the reduction of diluted shares
                          outstanding for shares underlying anti-dilutive stock
                          options.* *(e)*
                      *To
                          reflect the Series A Preferred Stock dividends payable
                          to the minority
                          interest owner as a reduction in minority interest
                          income.*
 54
  ***Balance
            Sheet Impact***
 In
              addition to the effects on Ener1's 2005 and 2004 consolidated statement
              of
              operations discussed above, the restatement impacted Ener1's consolidated
              balance sheet as of December 31, 2005 and 2004. The following table
              sets forth
              the effects of the restatement adjustments on Ener1’s consolidated balance sheet
              as of December 31, 2004 as
              compared to the consolidated balance sheet as of December 31, 2004
              initially
              reported onApril
              15,
              2005:
 (dollars
                      in thousands)
                    
                    **December
                        31, **2004******As Initially
                        Reported**
                    
                    **Adjustment**
                    
                    **As
                        Restated****ASSETS**Current
                        assetsCash
                        and equivalents
                    
                    $
                    14,091
                    
                    
                    
                    
                    $
                    14,091Prepaid
                        expenses and other current assets
                    
                    
                    190
                    
                    
                    
                    
                    
                    190Due
                        from related parties
                    
                    
                    119
                    
                    
                    
                    
                    
                    119Total
                        current assets
                    
                    
                    14,400
                    
                    
                    
                    
                    
                    14,400Property
                        and equipment, net
                    
                    
                    13,390
                    
                    
                    
                    
                    
                    13,390Investment
                        in EnerStruct, Inc.
                    
                    
                    1,185
                    
                    
                    
                    
                    
                    1,185Deferred
                        debenture costs, net of amortization of $905
                    
                    
                    -
                    
                    
                    3,621
                    *(a)*
                    
                    3,621Other
                    
                    
                    443
                    
                    
                    
                    
                    
                    443Total
                        assets
                    
                    $
                    29,418
                    
                    
                    
                    
                    $
                    33,039**LIABILITIES
                        AND STOCKHOLDERS' DEFICIT**Current
                        liabilitiesCurrent
                        portion of installment loan
                    
                    
                    23
                    
                    
                    
                    
                    
                    23Accounts
                        payable and accrued expenses
                    
                    
                    2,301
                    
                    
                    
                    
                    
                    2,301Liabilities
                        of discontinued operations
                    
                    
                    307
                    
                    
                    
                    
                    
                    307Derivative
                        liability
                    
                    
                    
                    
                    
                    130,157
                    *(b)*
                    
                    113,87548,996
                    *(c)*-
                    
                    
                    (65,278
                    )*(d)*Total
                        current liabilities
                    
                    
                    2,631
                    
                    
                    
                    
                    
                    116,506Long-term
                        portion of installment loan
                    
                    
                    91
                    
                    
                    
                    
                    
                    91$19,700
                        convertible debentures, net of discount of $17,141
                    
                    
                    -
                    
                    
                    2,559
                    *(e)*
                    
                    2,559Total
                        liabilities
                    
                    
                    2,722
                    
                    
                    
                    
                    
                    119,156Redeemable
                        preferred stock:EnerDel,
                        Inc. Series A Preferred, $.01 par value
                    
                    
                    4,130
                    
                    
                    (1,561
                    )*(f)*
                    
                    2,569Series
                        B Convertible Preferred, $.01 par value
                    
                    
                    10,893
                    
                    
                    (788
                    )*(g)*
                    
                    10,105Minority
                        interest
                    
                    
                    3,951
                    
                    
                    
                    
                    
                    3,951Commitments
                        and contingencies**STOCKHOLDERS'
                        DEFICIT**Common
                        stock, $.01 par value, 750,000,000 shares authorized 347,455,751
                        issued
                        and outstanding
                    
                    
                    3,475
                    
                    
                    
                    
                    
                    3,475Additional
                        paid in capital
                    
                    
                    100,246
                    
                    
                    (23,571
                    )*(h)*
                    
                    76,675Accumulated
                        deficit
                    
                    
                    (95,999
                    )
                    
                    (86,893
                    )*(i)*
                    
                    (182,892
                    )Total
                        stockholders' deficit
                    
                    
                    7,722
                    
                    
                    
                    
                    
                    (102,742
                    )Total
                        liabilities and stockholders' deficit
                    
                    $
                    29,418
                    
                    
                    
                    
                    $
                    33,039
  *(a)*
                        *Change
                            due to recording deferred financing cost of $4,526 net
                            of amortization of $905 on the 2004
                            Debentures.**(b)*
                        *To
                            record initial carrying value of 2003 derivatives, which
                            includes $96,600
                            for Battery Warrants, *$19,600
                            for Exchange Warrants and $13,957 for ITOCHU
                            Options.***(c)*
                        *To
                            record initial carrying value of derivatives in 2004
                            including $26,400 for
                            the 2004 Debentures Warrants, $11,505 for the 2004 Debentures
                            compound
                            embedded derivative, $4,620 for the *Delphi
                            Warrants, $1,183 for the Series A Preferred Stock and $5,288 for
                            the Series B Preferred Stock
                            Warrants.***(d)*
                        *To
                            record gain on derivatives based upon fair values at
                            December 31,
                            2004.*
 *(e)*
                        *Change
                            due to accretion of discount of bond issuance costs of
                            $2,859 and
                            conversion of $300 of principal of 2004
                            Debentures.*
 *(f)*
                        *To
                              correct the value of the Series A Preferred by $1,503
                              and correct prior
                              period accretion of discount *on
                              preferred of $58.***(g)*
                        *To
                            correct the value of the Series B Preferred by $750 and
                            correct prior
                            period accretion of discount *on
                            preferred of $36.**
 *(h)*
                        *To
                            reduce paid in capital for value of 2004 Debentures of
                            $18,527, Series A
                            Preferred Stock Warrants of $3,725, Series B Preferred
                            Stock Warrants of
                            $4,666,  and beginning paid in capital of $575, *and
                            increase paid in capital for deferred debenture costs
                            paid with warrants
                            of $3,053 and accretion totaling $223, and the value
                            of the Series B
                            Preferred Stock Put of
                            $645.**
 *(i)*
                        *To
                            reflect aggregate effect of income statement
                            adjustments.*
  The
                    following sets forth the effects of the restatement adjustments
                    on Ener1’s
                    consolidated balance sheet as of December 31, 2005 as
                    compared to the consolidated balance sheet as of December 31,
                    2005 initially
                    reported on March 10, 2006:
  (dollars
                      in thousands)
                    
                    **December
                        31,**
                    
                    
                    
                    
                    
                    **December
                        31,****2005**
                    
                    
                    
                    
                    
                    **2005****ASSETS**
                    
                    **As
                        Initially**
                      **Reported**
                    
                    **Adjustment**
                    
                    
                    
                    **(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 amortizationof
                        $2,082 and $905
                    
                    
                    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, 750,000,000 shares authorized
                    
                    
                    3,475
                    
                    
                    
                    
                    
                    
                    
                    3,475347,455,751
                        issued and outstandingAdditional
                        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 change in derivative value of Series B Preferred Stock
                          Put.*
 *(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 upon
                          issuance.*
 *(h)*
                      *To
                          reflect aggregate effect of income statement
                          adjustments.*
   55
  5.
            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 (loss) 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. In calculating diluted net income
            (loss) per share, the numerator is also adjusted to: (1) add back interest
            expense in the convertible debentures; and (2) subtract the derivative
            gains on
            convertible securities to the extent the effect is dilutive. Weighted-average
            common shares do not include the common stock equivalents resulting from
            common
            stock options because their inclusion would be anti-dilutive. The Company’s
            Series B Convertible Preferred Stock (the "Series B Preferred Stock")
            was not
            convertible at December 31, 2004 or 2005 and these common stock equivalents
            were
            excluded from the earnings per share calculations. 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:
 **Year
                        Ended December 31,****2005**
                    
                    **2004****(Restated)**
                    
                    **(Restated)**Weighted
                        Average Shares Outstanding - Basic
                    
                    
                    347,455,751
                    
                    
                    347,089,054Plus
                        net shares from assumed conversion of warrantsunder
                        treasury stock method
                    
                    
                    58,176,471
                    
                    
                    62,100,000Plus
                        shares from assumed conversion ofconvertible
                        instruments:2004
                        Debentures
                    
                    
                    11,380,000
                    
                    
                    15,138,6572005
                        Debentures
                    
                    
                    16,016,260
                    
                    
                    -Weighted
                        Average Shares Outstanding - Diluted
                    
                    
                    433,028,482
                    
                    
                    424,327,711
 The
            following potential common shares have been excluded from the computation
            of
            diluted net loss per share for all periods presented because the securities
            were
            not in the money (the exercise price was above the average stock price
            for the
            period) or the effect of including would have been
            antidilutive:
 **Year
                      Ended December 31,****2005**
                  
                  **2004****(Restated)**
                  
                  **(Restated)**Stock
                      options that were not in the money
                  
                  
                  9,768,901
                  
                  
                  7,416,943Stock
                      options excluded because effect was anti-dilutive
                  
                  
                  5,721,981
                  
                  
                  8,276,073Warrants
                      that were not in the money
                  
                  
                  60,931,471
                  
                  
                  51,503,331Series
                      A Preferred Stock
                  
                  
                  -
                  
                  
                  1,353,186Total
                      options, warrants and convertiblesecurities
                      excluded from weighted average shares
                  
                  
                  76,422,353
                  
                  
                  68,549,533
 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:
 **Year
                        Ended December 31,****2005**
                    
                    **2004****(Restated)**
                    
                    **(Restated)**Net
                        income as reported
                    
                    $
                    28,604
                    
                    $
                    7,121Less
                        preferred stock dividends and accretion
                    
                    
                    (2,926
                    )
                    
                    (525
                    )Add
                        interest expense and accretion of discount onconvertible
                        debentures
                    
                    
                    8,749
                    
                    
                    3,755Less
                        derivative gain on convertible debentures
                    
                    
                    (11,827
                    )
                    
                    (2,795
                    )Less
                        derivative gain on warrants
                    
                    
                    (31,740
                    )
                    
                    (38,640
                    )Net
                        loss computed for diluted net loss per share
                    
                    $
                    (9,140
                    )
                    $
                    (31,084
                    )
  56
  At
          December 31, 2005 and 2004, the Company had 64,059,236 and 70,769,823 dilutive
          common stock equivalents outstanding, respectively, consisting of shares
          issuable under stock options and warrants at December 31, 2005 and shares
          issuable under stock options, warrants and convertible redeemable preferred
          stock at December 31, 2004.
 
 6. DISCONTINUED
          OPERATIONS AND SALE OF ASSETS OF ENERLOOK
 
 In
          2003,
          the Company’s Digital Media Technologies segment was deemed by the Company to be
          held-for-sale, and certain of the revenues, expenses, assets and liabilities
          of
          this segment were classified as discontinued operations.
 
 On
          December 15, 2003, the Company entered into an arrangement pursuant to
          which T.
& V. Rental Co., Inc. (“TVR”) agreed to manage EnerLook’s business in return
          for any profits earned by EnerLook and was granted the option to acquire
          substantially all of the assets of EnerLook in exchange for 5% of a limited
          liability company that would own all the respective assets of TVR and EnerLook.
          TVR exercised the option and pursuant to an Asset Purchase Agreement dated
          as of
          September 30, 2004, acquired EnerLook’s assets in exchange for a 5% membership
          interest in TVR Communications, LLC ("TVRC"). The asset sale to TVR closed
          on
          December 7, 2004.
 
 TVR
          paid
          EnerLook approximately $550,000 to fund EnerLook’s operations from December 15,
          2003 through June 15, 2004 and the 5% membership interest acquired from
          the
          December 7, 2004 asset sale to TVR was valued at $115,000, which amount
          is
          included in gain (loss) from operations held for disposal on the accompanying
          consolidated statements of operations.
 
 7. SEGMENT
          REPORTING
 
 As
          of
          December 31, 2005, 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.
  57
  The
          table
          below provides segment financial information. (in thousands).
 **2005**
                  
                  **2004**Net
                      salesBattery
                      business
                  
                  $
                  45
                  
                  $
                  42Fuel
                      Cell business
                  
                  
                  15
                  
                  
                  —Total
                      Net Sales
                  
                  
                  60
                  
                  
                  42Interest
                      expenseCorporate
                  
                  
                  10,735
                  
                  
                  6,672Total
                      interest expense
                  
                  
                  10,735
                  
                  
                  6,672Depreciation
                      and amortization expenseCorporate
                  
                  
                  127
                  
                  
                  73Battery
                  
                  
                  416
                  
                  
                  128Fuel
                      Cell
                  
                  
                  8
                  
                  
                  1Nanotechnology
                  
                  
                  7
                  
                  
                  1Total
                      depreciation and amortization expense
                  
                  
                  558
                  
                  
                  203Net
                      income (loss)Corporate
                  
                  
                  48,307
                  
                  
                  37,310Battery
                  
                  
                  (16,802
                  )
                  
                  (28,627
                  )Fuel
                      Cell
                  
                  
                  (1,636
                  )
                  
                  (924
                  )Nanotechnology
                  
                  
                  (1,265
                  )
                  
                  (744
                  )Discontinued
                      segments
                  
                  
                  —
                  
                  
                  106Net
                      income (loss)
                  
                  
                  28,604
                  
                  
                  7,121AssetsCorporate
                  
                  
                  5,937
                  
                  
                  6,560Battery
                  
                  
                  4,338
                  
                  
                  26,469Fuel
                      Cell
                  
                  
                  141
                  
                  
                  9Nanotechnology
                  
                  
                  33
                  
                  
                  1Total
                      assets
                  
                  
                  10,449
                  
                  
                  33,039Capital
                      ExpendituresCorporate
                  
                  
                  243
                  
                  
                  307Battery
                  
                  
                  387
                  
                  
                  731Fuel
                      Cell
                  
                  
                  108
                  
                  
                  2Nanotechnology
                  
                  
                  75
                  
                  
                  14Total
                      capital expenditures
                  
                  $
                  813
                  
                  $
                  1,054
 
 58
  8.
          PROPERTY AND EQUIPMENT
 
 Property
          and equipment consisted of the following at December 31, 2005 (in
          thousands):
 Corporate
                  
                  Battery
                  
                  Nano
                    Technology
                  
                  Fuel
                      Cell
                  
                  TotalBuilding
                      and building improvements
                  
                  $
                  —
                  
                  $
                  1,551
                  
                  $
                  —
                  
                  $
                  —
                  
                  $
                  1,551Leasehold
                      improvements
                  
                  
                  67
                  
                  
                  706
                  
                  
                  —
                  
                  
                  16
                  
                  
                  789Furniture
                      and fixtures
                  
                  
                  182
                  
                  
                  15
                  
                  
                  —
                  
                  
                  —
                  
                  
                  197Office
                      equipment
                  
                  
                  189
                  
                  
                  274
                  
                  
                  13
                  
                  
                  17
                  
                  
                  493Equipment
                      and machinery
                  
                  
                  65
                  
                  
                  160
                  
                  
                  18
                  
                  
                  87
                  
                  
                  330Automobile
                  
                  
                  174
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  174Total
                      cost
                  
                  
                  677
                  
                  
                  2,706
                  
                  
                  31
                  
                  
                  120
                  
                  
                  3,534Less
                      accumulated depreciation
                  
                  
                  199
                  
                  
                  278
                  
                  
                  7
                  
                  
                  8
                  
                  
                  492Net
                      property, plant,and
                      equipment
                  
                  $
                  478
                  
                  $
                  2,428
                  
                  $
                  24
                  
                  $
                  112
                  
                  $
                  3,042
 
 Property
          and equipment consisted of the following at December 31, 2004 (in
          thousands):
 Corporate
                  
                  Battery
                  
                  Nano
                    Technology
                  
                  Fuel
                      Cell
                  
                  TotalBuilding
                      and building improvements
                  
                  $
                  —
                  
                  $
                  1,545
                  
                  $
                  —
                  
                  $
                  —
                  
                  $
                  1,545Leasehold
                      improvements
                  
                  
                  14
                  
                  
                  657
                  
                  
                  —
                  
                  
                  —
                  
                  
                  671Furniture
                      and fixtures
                  
                  
                  49
                  
                  
                  10
                  
                  
                  —
                  
                  
                  —
                  
                  
                  59Office
                      equipment
                  
                  
                  139
                  
                  
                  149
                  
                  
                  1
                  
                  
                  9
                  
                  
                  299Equipment
                      and machinery
                  
                  
                  64
                  
                  
                  10,776
                  
                  
                  13
                  
                  
                  —
                  
                  
                  10,853Automobile
                  
                  
                  174
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  174Total
                      cost
                  
                  
                  439
                  
                  
                  13,138
                  
                  
                  14
                  
                  
                  9
                  
                  
                  13,601Less
                      accumulated depreciation
                  
                  
                  73
                  
                  
                  137
                  
                  
                  1
                  
                  
                  1
                  
                  
                  211Net
                      property, plant,and
                      equipment
                  
                  $
                  366
                  
                  $
                  13,002
                  
                  $
                  14
                  
                  $
                  9
                  
                  $
                  13,390
 
 The
          land,
          building and certain machinery and equipment owned by the Battery Company
          (which
          machinery and equipment is used exclusively by EnerDel) are pledged as
          security
          under the terms of the 2004 Debentures.
 
 Depreciation
          expense for property and equipment for the years ended December 31, 2005
          and
          2004 was $557,000 and $201,000, respectively.
 
 9. INCOME
          TAXES
 
 The
          Company has deferred tax assets of $40,540,000 and $26,645,000 at December
          31,
          2005 and 2004, respectively, which are completely offset by valuation
          allowances. The deferred tax assets reflect a reduction of approximately
          $17,000,000 to reflect the limits on the Company’s ability to use net operating
          loss carryforwards in existence in January 2002 due to the change in control
          that occurred in 2002.
  59
  Deferred
          income tax assets in the accompanying balance sheet as of December 31,
          2005 and
          2004 are attributable to the following items:
 2005
                  
                  2004Goodwill
                  
                  $
                  2,277,000
                  
                  $
                  2,001,000Depreciation,
                      amortization and start-up costs
                  
                  
                  (148,000
                  )
                  
                  120,000Federal
                      and state net operating loss carryforwards
                  
                  
                  25,500,000
                  
                  
                  15,716,000Impairment
                      losses
                  
                  
                  3,119,000
                  
                  
                  3,119,000R&D
                      expense taken on equipment and intellectual property
                  
                  
                  9,707,000
                  
                  
                  5,616,000Other
                  
                  
                  85,000
                  
                  
                  73,000Gross
                      deferred tax asset
                  
                  
                  40,540,000
                  
                  
                  26,645,000Valuation
                      allowance
                  
                  
                  40,540,000
                  
                  
                  26,645,000Net
                      deferred tax asset
                  
                  $
                  —
                  
                  $
                  —
 
 The
          Company has federal and Florida net operating loss (“NOL”) carryforwards
          available to offset future taxable income of approximately $57,000,000
          and
          $104,000,000 at December 31, 2005, respectively and approximately $22,000,000
          and $75,000,000 at December 31, 2004, respectively. The federal NOL
          carryforwards will begin to expire in 2018, while the Florida NOL carryforwards
          will begin to expire in 2011. The federal NOL carryforwards of $50,677,000
          in
          existence at the time of change in ownership in January 2002 are subject
          to
          substantial restrictions and may only be utilized to offset approximately
          $40,000 of annual taxable income, as well as any unrealized appreciation
          on
          assets existing at the time of the ownership change.
 
 A
          valuation allowance is established when it is more likely than not that
          some
          portion of the Company’s deferred tax assets will not be realized. Management
          has evaluated the available evidence about the Company’s future taxable income
          and other possible sources of realization of deferred tax assets, and as
          a
          result, the valuation allowance was increased by the full amount of the
          tax
          benefit from the net operating loss in the years ended December 31, 2004
          and
          2005. The valuation allowance recorded in the financial statements reduces
          deferred tax assets to an amount that represents management’s best estimate of
          the amount of such deferred tax assets that more likely than not will be
          realized.
 
 The
          components of income taxes (benefit) in the accompanying statements of
          operations are as follows:
 **2005**
                  
                  **2004**FederalCurrent
                  
                  $
                  —
                  
                  $
                  —Deferred
                  
                  
                  —
                  
                  
                  —Total
                  
                  $
                  —
                  
                  $
                  —
 
 The
          Company's effective income tax rate differs from the statutory federal
          rate of
          35% as follows:
 **2005**
                  
                  **2004**Statutory
                      rate applied to income before taxes
                  35.0%
                  
                  35.0%Non
                      taxable items - derivative income
                  -49.8%
                  
                  -177.1%State
                      income tax net of federal tax benefit
                  3.3%
                  
                  3.3%Increase
                      in valuation allowance
                  11.5%
                  
                  138.8%Total
                      income tax provision
                  0.0%
                  
                  0.0%
  60


10. ACCOUNTS
        PAYABLE AND ACCRUED EXPENSES


Accrued
          expenses and other liabilities principally consist of the following at
          December
          31, 2005 and 2004.
 **At
                      December 31, 2005**
                  
                  **At
                      December 31, 2004**Accounts
                      payable
                  
                  $
                  1,409,000
                  
                  $
                  1,020,000Accrued
                      severance
                  
                  
                  200,000
                  
                  
                  —Accrued
                      rent and utilities
                  
                  
                  271,000
                  
                  
                  96,000Accrued
                      debenture penalties
                  
                  
                  644,000
                  
                  
                  —Accrued
                      salaries and vacation
                  
                  
                  225,000
                  
                  
                  693,000Accrued
                      accounting and legal fees
                  
                  
                  220,000
                  
                  
                  198,000Other
                  
                  
                  —
                  
                  
                  294,000Total
                      accounts payable and accrued expenses
                  
                  $
                  2,969,000
                  
                  $
                  2,301,000
 11. CONSOLIDATION
          OF 49% SUBSIDIARY (ENERLOOK SOLUTIONS, INC.)
 
 The
          Company has consolidated EnerLook’s results of operations and its balance sheet
          as part of the Company’s consolidated financial statements. However, during the
          past three years, the Company has owned approximately 49% of EnerLook,
          with
          Ener1 Group (the Company’s majority shareholder), owning approximately 43%.
          Ownership of a subsidiary below 51% is most often recorded under the equity
          method of accounting, rather than consolidating the subsidiary’s results of
          operations with the less than 51% parent company, as it is presumed that
          the
          less than 51% parent company does not control the subsidiary. The Company
          has
          elected to continue consolidating this subsidiary as part of its financial
          statements because the Company and Ener1 Group are related parties which
          exercise substantial control over the activities of EnerLook and own an
          aggregate of 92% of EnerLook’s outstanding common stock. For the above reasons,
          management believes that its ownership percentage of EnerLook’s common stock of
          49% does not materially reduce the control the Company exercises over EnerLook’s
          operations. Effective December 15, 2003, EnerLook’s operations were deemed to be
          discontinued operations.
 
 In
          the
          second quarter of 2003, the Company transferred certain assets of its Digital
          Media Technologies Division to EnerLook. In December 2003, management decided
          to
          discontinue the operations of this segment and conveyed operating control
          of
          this operating segment to TVR. In December 2004, the Company sold substantially
          all of its assets of EnerLook to TVR in return for 5% of TVRC (see Note
          6).
 
 12. DEBT
          AND DEBT GUARANTEES
 
 In
          March
          2004, the Battery Company obtained a $125,000 loan secured by a vehicle.
          The
          total amount due under the loan is $91,000 and $114,000 at December 1,
          2005 and
          2004, respectively, and is payable over 5 years in equal monthly payments
          of
          approximately $2,600. The interest rate is 8.25% **.**
 
 ***$19,700,000
          SENIOR SECURED CONVERTIBLE DEBENTURES DUE 2009***
 
 On
          January 20, 2004, Ener1 issued $20,000,000 in aggregate principal amount
          of 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 guaranteed by Enerl Battery,
          and the guaranty is secured by collateral including land, building and
          battery
          production equipment owned by Ener1 Battery and used by EnerDel.
  Interest
          is due quarterly. 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
          registering the resale of the shares underlying the 2004 Debentures and
          warrants
          is available to cover resales of such shares or such shares may be immediately
          sold to the public under Rule 144(k) (the latter being two years from the
          date
          of issuance of the Debentures and associated warrants - January 21, 2004);
          (2) Ener1 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 result in
          an
          Event of Default, shall not have occurred and be continuing; and (4) the
          closing
          bid price for Ener1 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 milestones 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.All or a portion of the accrued and unpaid interest
          may be converted at the option of the debenture holder at any time under
          the
          same conversion terms as the principal. To date, interest of $4,113,455 has
          been
          paid, no interest
          wa s
          accrued
          at December 31, 2005 and $261,506
          of interest
          has been converted.
  61
  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 $374,000 had accrued through the period ending December 31,
            2005. From
            January 20, 2007 to January 20, 2008, Ener1 may prepay some or the entire
            principal at a price of 103% of unpaid principal plus accrued interest.
            From
            January 21, 2008 to January 20, 2009, Ener1 may prepay some or the entire
            principal at 101% of unpaid principal plus accrued interest.
 
 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 December 31,
          2005, the
          conversion price was $1.23 as a result of such adjustment. 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 in principal into
          common shares. The conversion was accounted for by debiting the debenture
          and
          crediting common stock and additional paid in capital for the principal
          converted as well as adjusting the conversion option derivative to fair
          value
          immediately prior to conversion through gain (loss) on embedded derivative
          liability and then reducing the derivative liability by the proportionate
          amount
          of principal converted against additional paid in capital.
 
 The
          2004
          Debentures are senior to Ener1’s existing and future indebtedness and pari passu
          with the 2005 Debentures. In the event of any event of default or fundamental
          change as defined under the agreement, the holder will be entitled to require
          Ener1 to redeem the 2004 Debentures at 101% of the unpaid principal and
          accrued
          interest if the holder provides notice of the default to Ener1 and Ener1
          fails
          to cure such default within the specified cure period (if
          applicable).
  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 December 31, 2005, the exercise price was
          $2.37
          per share as a result of the adjustment. 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. The fair market value
          of these
          warrants was $3,052,800 and was allocated to deferred debenture costs.
          Ener1
          also incurred $1,473,000 in placement fees.
 
 As
          discussed in Note 19, Ener1 is accounting for the conversion option and
          other features in the 2004 Debentures and the associated warrants as
          derivative liabilities in accordance with SFAS 133 “Accounting for Derivative
          Instruments and Hedging Activities” (“SFAS 133”) and EITF 00-19 "Accounting for
          Derivative Financial Instruments Indexed to and Potentially Settled in
          a
          Company’s Own Stock” (“ EITF 00-19”).
  The
            2004
            Debentures contain more than one embedded derivative feature which SFAS
            133
            requires be accounted for as separate derivative instruments. The various
            embedded derivative features have been bundled together as a single,
            compound
            embedded derivative instrument that has been bifurcated from the debenture
            in
            accordance with Derivatives Implementation Group Issue No. B15. The derivative
            features that have been bundled together in the compound embedded derivative
            include: (1) the conversion feature of the debentures, (2) the holder's
            right to
            force Ener1 to redeem the debentures after an event of default, (3) the
            holder's
            right to force Ener1 to redeem the debentures after a change in control,
            (4)
            Ener1's right to redeem the debentures after 3 years, (5) the requirement
            to pay
            an increased interest rate if Ener1 fails to achieve certain milestones,
            and (6)
            Ener1's right to convert the debentures into common stock if certain
            conditions
            are satisfied. The value of the compound embedded derivative liability
            was
            bifurcated from the debenture and recorded as a derivative liability,
            which
            results in a reduction of the initial carrying amount (as unamortized
            discount)
            of the related debenture at inception. The unamortized discount is being
            amortized to interest expense using the effective interest method over
            the life
            of the debenture.
  ***$14,225,000
          SENIOR SECURED CONVERTIBLE DEBENTURES DUE 2009***
 
 On
          March
          14, 2005, Ener1 issued $14,225,000 in aggregate principal amount of 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 be
          required to pledge certain collateral to secure its obligations under the
          2005
          Debentures.
 
 Interest
          is due quarterly. The
          initial rate on the 2005 Debentures was initially 7.5% per year. The 2004
          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 2004 Debentures)
          or an
          event that, with the passage of time or giving of notice, 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 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, the interest rate increased to
          15% per
          year, effective March 14, 2006. All or a portion of the accrued and
          unpaid interest may be converted at the option of the debenture holder
          at any
          time under the same conversion terms as the principal. To date, interest
          of $868,318
          has been
          paid, no interest wa s
          accrued
          at December 31, 2005 and no interest has been converted **.**
  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 $270,000 had accrued at December 31, 2005.
  62
 
 At
          the
          issuance date, the 2005 Debentures are convertible by the holder at any
          time
          into common shares at a price of $1.00 per share subject to adjustment
          upon
          certain events such as the sale of equity securities by Ener1 at a price
          below
          the then current conversion price of the debenture. As of December 31,
          2005, the
          conversion price was $1.00 and had not changed as a result of the any
          adjustments. 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 the entire principal
          of the 2005 Debentures at 103% of the principal, plus accrued interest.
 
 The
          2005
          Debentures are senior to Ener1’s existing and future indebtedness and pari passu
          with the 2004 Debentures.
 
 In
          the
          event of any event of default as defined under the agreement, the holder
          will be
          entitled to require Ener1 to redeem the 2005 Debentures at the greater
          of 105%
          of the unpaid principal and accrued interest or the value of the shares
          the
          principal and accrued interest could be converted into at the time of default
          multiplied by the then market price if the holder provides notice of the
          default
          to Ener1 and, if applicable, Ener1 fails to cure such default within the
          specified cure period. In the event of any fundamental change as defined
          under
          the agreement, the holder will be entitled to require Ener1 to redeem the
          2005
          Debentures at 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 occurrence of an event of default, or an event that
          with
          notice and/or the passage of time will become an event of default, under
          the
          2004 Debentures is an event of default under the 2005 Debentures.
 
 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 up to 4,267,500 shares of common stock, which is 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 Debentures divided by the conversion
          price
          for an exercise price of $1.15 per share. Each Series B warrant entitles
          the
          holders to purchase up to 2,845,000 shares of common stock which is 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 Debentures 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.
 
 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 $213,375 and was allocated
          to
          deferred debenture costs. Ener1 also incurred $1,091,218 in placement fees.
          Ener1 is accounting for the conversion option in the 2005 Debentures and
          the
          associated warrants as derivative liabilities in accordance with SFAS 133
          and
          EITF 00-19.
  As
          discussed in Note 19, Ener1 is accounting for the
          conversion option and other features in the 2005 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
            2005
            Debentures contain more than one embedded derivative feature which SFAS
            133
            requires be accounted for as separate derivative instruments. The various
            embedded derivative features have been bundled together as a single,
            compound
            embedded derivative instrument that has been bifurcated from the debenture
            in
            accordance with Derivatives Implementation Group Issue No. B15. The derivative
            features that have been bundled together in the compound embedded derivative
            include: (1) the conversion feature of the debentures, (2) the holder's
            right to
            force Ener1 to redeem the debentures after an event of default, (3) the
            holder's
            right to force Ener1 to redeem the debentures after a change in control,
            (4)
            Ener1's right to redeem the debentures after 3 years, (5) the requirement
            to pay
            an increased interest rate if Ener1 fails to achieve certain milestones,
            and (6)
            Ener1's right to convert the debentures into common stock if certain
            conditions
            are satisfied. The value of the compound embedded derivative liability
            was
            bifurcated from the debenture and recorded as a derivative liability,
            which
            results in a reduction of the initial carrying amount (as unamortized
            discount)
            of the related debenture at inception. The unamortized discount is being
            amortized to interest expense using the effective interest method over
            the life
            of the debenture.
  13. FINANCING
          AGREEMENTS WITH ENER1 GROUP
 
 *Debt
          Exchange Agreement with Ener1 Group, Mr. Zoi and Dr. Novak*
 
 In
          November 2003, the Company issued common stock and warrants in satisfaction
          of
          approximately $13,300,000 in debt owed to Ener1 Group, Mr. Zoi and Dr.
          Novak
          (the “Exchange Debt”). The Exchange Debt resulted from previous advances by
          Ener1 Group, Mr. Zoi and Dr. Novak to fund the Company’s operations. As a result
          of the exchange, Ener1 Group received 14,829,288 shares and warrants to
          purchase
          up to 16,107,061 shares of common stock, Mr. Zoi received 399,876 shares
          and
          warrants to purchase up to 434,330 shares of common stock, and Peter Novak
          received 1,798,415 shares and warrants to purchase up to 1,953,376 shares
          of
          common stock.
  63
 
 The
          accrued interest on the Exchange Debt on the date of the Debt exchange
          was
          converted into two year promissory notes issued to Ener1 Group, Mr. Zoi
          and Dr.
          Novak totaling approximately $1,000,000. These notes were all paid in full
          with
          proceeds from the 2004 Debentures in January 2004.
 
 *Series
          B Preferred Financing Agreements*
  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 $100.00 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 March 2005, at the Company’s request, Ener1 Group purchased
          2,500 of the Company’s Series B Preferred stock and warrants to purchase 69,445
          shares of the Company’s common stock at an exercise price of $1.25 and 69,445
          shares of the Company’s Common Stock at an exercise price of $1.50 per share,
          for an aggregate purchase price of $250,000, and Ener1 paid Ener1 Group
          a fee of
          $83,333. See Note 18.
 
 14. ITOCHU
          CORPORATION INVESTMENT AND INVESTMENT IN ENERSTRUCT
 
 On
          July
          25, 2003, the Company entered into a Subscription and Investment Agreement
          with
          ITOCHU Corporation, under which the Company issued 14,000,000 shares of
          its
          common stock in a private sale to ITOCHU Corporation at a price of $0.25
          per
          share, for $3,500,000. In addition, the Company granted the following options
          to
          ITOCHU to increase its ownership of common stock at the following prices:
          During
          the six month period from July 25, 2003 through January 24, 2004, ITOCHU
          had the
          option to purchase up to 12,461,861 shares of common stock, for $0.70 per
          share.
          In January 2004, ITOCHU exercised a portion of these options and purchased
          1,500,000 shares for $1,050,000. The remaining $.70 options expired. During
          the
          period from January 25, 2004 through January 31, 2005, ITOCHU had the option
          to
          purchase up to 9,346,396 shares of common stock for $4.00 per share. These
          options expired unexercised on January 31, 2005.
 
 Using
          the
          proceeds of the ITOCHU investment, the Company invested $2,003,339 in a
          new
          Japanese company called EnerStruct, Inc. (“EnerStruct”), in exchange for an
          initial 49% ownership interest in EnerStruct. ITOCHU owns the remaining
          initial
          51% of EnerStruct, for which it invested $1,100,000 plus equipment totaling
          approximately $500,000. During 2005, the Company’s ownership was reduced to 48%
          due to additional capital investment in EnerStruct by a third party. The
          Company's original investment in EnerStruct was reduced by $1,198,420 which
          represents the Company’s share of losses through December 31, 2005 **.**
 
 In
          connection with the foregoing activities, the Company and Ener1 Battery
          entered
          into a license agreement with ITOCHU and EnerStruct and agreed to provide
          EnerStruct with an exclusive license (for Japan only) to use the technologies
          covered by two of Ener1 Battery Company’s pending patent applications. This
          license became nonexclusive on July 25, 2004. ITOCHU has also licensed
          to
          EnerStruct, on an exclusive basis, several of its patents relating to its
          lithium battery technologies.
  64
 
 Summarized
          information of EnerStruct is as follows as of December 31, 2005 and for
          the
          twelve month period then ended:
 **2005**
                  
                  **2004**Cash
                  
                  $
                  624,000
                  
                  $
                  1,534,000Total
                      assets
                  
                  
                  1,354,000
                  
                  
                  1,857,000Total
                      liabilities
                  
                  
                  260,000
                  
                  
                  63,000Net
                      loss
                  
                  
                  783,000
                  
                  
                  1,206,000
 
 15. RELATED
          PARTY TRANSACTIONS
 
 Ener1
          Group and its subsidiaries have from time to time used various services
          and
          employees of the Company. The Company billed Ener1 Group and its subsidiaries
          for the actual cost of these services and employees. Similarly, the Company
          has
          from time to time used various services and employees of Ener1 Group and
          its
          subsidiaries and Ener1 Group has billed the Company for the actual cost
          of these
          services and employees. During 2005, Ener1 Group and its subsidiaries billed
          the
          Company $109,000 and the Company billed Ener1 Group and its subsidiaries
          $152,922, in each case for services and employees of the other party. As
          of
          December 31, 2005, the net balance due to the Company from Ener1 Group
          and its
          subsidiaries was $103,000.
 
 Ener1,
          Ener1's wholly-owned subsidiary, Ener1 Acquisition Corp. (“Acquisition Sub”),
          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 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.
 
 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
          88% 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. .
  65





16. ASSET
        IMPAIRMENT AND OTHER CHARGES
 In
          2004,
          the Company recorded a charge to earnings to recognize the impairment of
          a
          portion of its manufacturing related assets, the use of which was transferred
          to
          EnerDel. The amount of this charge was $8,289,000. Management determined
          that as
          a result of the reallocation of manufacturing capabilities in connection
          with
          the formation of EnerDel, the Company no longer expected to recognize revenues
          and positive net cash flows in excess of the equipment carrying values
          from the
          use of the equipment. The carrying value of the equipment was reduced to
          its
          estimated fair market value which was determined based upon a valuation
          of the
          equipment performed in accordance with the provisions of SFAS No.
          144.
 
 17. WARRANTS,
          STOCK OPTION AND STOCK PURCHASE PLANS ******
 
 The
          Company has granted stock options under employee stock option plans adopted
          in
          1992 and 2002 and a non-employee director option plan, and granted options
          to
          executives and consultants outside of these plans **.**
 
 In
          2002,
          the Board of Directors and shareholders adopted the 2002 Ener1 Inc. Employee
          Stock Participation Plan (the “2002 Plan”) pursuant to which the number of
          shares of Common Stock reserved for grants under the 2002 Plan was set
          at
          6,836,503 shares. The 2002 Plan provides that no more than 1,500,000 shares
          of
          Common Stock may be issued to any employee in any one calendar year. Under
          the
          2002 Plan, incentive stock options or nonqualified stock options may be
          issued
          to persons selected by the administrators of the Plan from a class of employees,
          officers, and consultants, including non-employees who render valuable
          contributions to the Company. The exercise price of the options is determined
          by
          the Board of Directors. Options to purchase 22,000 shares at an exercise
          price
          of $4.93 were outstanding under the 1992 Stock Option Plan as of December
          31,
          2005. Options
          granted under the 1992 Plan and the 2002 Plan expire no later than ten
          years
          from the date of grant.
 
 In
          2002,
          the Board of Directors and shareholders adopted the 2002 Non-Employee Director
          Stock Option Plan (the “Director Stock Option Plan”) pursuant to which 2,000,000
          shares of common stock are reserved for issuance. The plan provides for
          each
          non-employee director first elected to the Board of Directors to receive
          an
          automatic grant of nonqualified stock options for 10,000 shares on the
          date of
          his or her election. Additional annual grants, their exercise price and
          other
          terms of any additional option awards are determined by the plan administrators.
          The 2002 Plan replaces the Company’s previous 1992 Directors Plan and the 1996
          Directors Plan. There were no options cancelled or exercised in the Director
          Stock Option Plan during 2004 and 2005.
 
 Under
          an
          employment agreement effective September 8, 2003, the Company granted stock
          options to its chief executive officer (the “CEO Option Plan”) In September
          2003, the Company granted stock options to purchase 9,716,716 shares of
          common
          stock at an exercise price of $0.30 per share, vesting ratably over a period
          of
          36 months, beginning October 1, 2003. The Company recorded compensation
          expense
          related to the issuance of these options of approximately $194,000 during
          2004
          and $194,000 during 2005. On December 31, 2004, the Company granted stock
          options to purchase 5,159,943 shares of common stock at an exercise price
          of
          $0.97 per share which vest ratably in each of the following 24 months.
          The
          Company did not record any compensation expense related to these options
          because
          the exercise price exceeded the market price of the Company’s common stock on
          the date of grant. On December 31, 2005, the Company granted stock options
          to
          purchase 2,706,958 shares of common stock at an exercise price of $0.54
          per
          share which vest ratably in equal installments in each of the following
          24
          months. The Company did not record any compensation expense related to
          these
          options because the exercise price exceeded the market price of the Company’s
          common stock on the date of grant. All of these options have a term of
          ten
          years. On December 31, 2005, 9,867,513 options were vested under the CEO
          Option
          Plan. On the date of the chief executive officer’s termination on January 9,
          2006, options to purchase 10,465,210 shares were vested under the CEO 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 in a separate option plan
          at the
          exercise price of $.49, 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.
  66
 
 The
          Company has issued options to three individuals who are non-board members
          of its
          Advisory Committee to its Board of Directors. The Company recorded approximately
          $130,000 in compensation expense in 2004 and $16,500 in 2005 related to
          these
          options.
 
 In
          2004,
          an employee was granted options to purchase 1,000,000 shares of the Company’s
          common stock at an exercise price of $.50 per share and options to purchase
          2,000,000 shares of the common stock of EnerDel at an exercise price equal
          to
          the net book value per share of EnerDel common stock outstanding at the
          time of
          the option grant. The options were to vest in three equal annual installments
          beginning one year from the option grant. The employee was terminated on
          September 27, 2005, and all options previously granted to him terminated
          without
          vesting.
 
 In
          May
          2004, the Company awarded options to purchase 300,000 shares of the Company’s
          common stock to two employees of ITOCHU for their services to EnerStruct.
          The
          options have an exercise price of $.50 per share, vest over five years
          and
          expire in May 2014. The Company recorded approximately $61,000 in compensation
          expense in 2004 and $5,000 in 2005 related to these options. **
 
 A
          summary
          of the changes in the stock options outstanding under all of the Company’s stock
          option plans described above as of December 31, 2004, and 2005 and changes
          during such years is presented below:
 2004
                  
                  
                  
                  2005Weighted
                  
                  
                  
                  Weighted2004
                  
                  Average
                  
                  2005
                  
                  AverageShares
                  
                  Exercise
                      Price
                  
                  Shares
                  
                  Exercise
                      PriceOutstanding
                      at beginning of year
                  
                  
                  10,665,716
                  
                  $
                  0.29
                  
                  
                  21,028,659
                  
                  $
                  0.56Granted
                  
                  
                  11,019,943
                  
                  $
                  0.79
                  
                  
                  4,816,958
                  
                  $
                  0.50Exercised
                  
                  
                  407,000
                  
                  $
                  0.05
                  
                  
                  —
                  
                  $
                  —Cancelled
                      / terminated
                  
                  
                  250,000
                  
                  $
                  0.15
                  
                  
                  1,240,000
                  
                  $
                  0.87Outstanding
                      at end of year
                  
                  
                  21,028,659
                  
                  $
                  0.56
                  
                  
                  24,605,617
                  
                  $
                  0.53Exercisable
                      at end of year
                  
                  
                  4,801,790
                  
                  $
                  0.36
                  
                  
                  12,089,513
                  
                  $
                  0.49
 
 The
          following table summarizes information about Ener1 employee stock options
          outstanding under all of the Company’s stock option plans described above at
          December 31, 2005.
 OptionsOutstanding
                  
                  
                  
                  OptionsRange
                      of
                  
                  Number
                  
                  Weighted
                      Average
                  
                  Weighted
                      Average
                  
                  Exercisable
                  
                  Weighted
                      AverageExercise
                  
                  Outstanding
                  
                  Remaining
                  
                  Exercise
                  
                  Number
                  
                  ExercisePrice
                  
                  At
                      12/31/2005
                  
                  Contractual
                      life
                  
                  Price
                  
                  At
                      12/31/2005
                  
                  Price$0.00
                  
                  100,000
                  
                  9.8
                  
                  $0.00
                  
                  100,000
                  
                  $0.00$.05
                      - $.10
                  
                  1,620,000
                  
                  8.06
                  
                  $0.09
                  
                  516,667
                  
                  $0.10$.28
                      - $.50
                  
                  13,116,716
                  
                  8.07
                  
                  $0.34
                  
                  7,964,203
                  
                  $0.31$.51
                      - $.60
                  
                  2,956,958
                  
                  10
                  
                  $0.54
                  
                  183,333
                  
                  $0.56$.70
                      - $.97
                  
                  5,489,943
                  
                  8.96
                  
                  $0.96
                  
                  2,836,643
                  
                  $0.95$1.
                      to $1.09
                  
                  1,300,000
                  
                  8.13
                  
                  $1.08
                  
                  466,667
                  
                  $1.80$4.93
                  
                  22,000
                  
                  0
                  
                  $4.93
                  
                  22,000
                  
                  $4.9324,605,617
                  
                  
                  
                  
                  
                  12,089,513
 
 The
          weighted average fair value of the options granted during 2004 and 2005
          was
          estimated at $0.59 and $.36, respectively, using the Black-Scholes
          option-pricing model with the following weighted average assumptions: no
          dividend yield, expected volatility of 100% and 172% respectively, weighted
          average risk-free interest rate of approximately 3.50% and 3.81%, respectively,
          and expected lives of three to ten years.
  67
 
 EnerDel
          Stock Options
 
 EnerDel
          intends to establish a stock option plan under which it may issue options
          to
          purchase up to 5,000,000 shares of EnerDel common stock as incentive
          compensation to its employees. As of December 31, 2005 EnerDel was obligated
          to
          grant options to its employees to purchase up to 360,000 shares of EnerDel
          common stock.
 
 At
          December 31, 2005 the Company had the following warrants
          outstanding:
 **Number****Grant**
                  
                  **Of**
                  
                  **Exercise**
                  
                  **Expiration****Warrant
                      Holder**
                  
                  **Date**
                  
                  **Shares**
                  
                  **Price**
                  
                  **Date**Battery
                      Warrants - Ener1 Group, Inc.
                  
                  
                  09/06/02
                  
                  
                  69,000,000
                  
                  $
                  0.08
                  
                  
                  09/06/12Debt
                      Exchange Warrants - Ener1 Group, Inc.
                  
                  
                  11/14/03
                  
                  
                  8,806,146
                  
                  $
                  1.50
                  
                  
                  11/14/13Debt
                      Exchange Warrants - Ener1 Group, Inc.
                  
                  
                  11/14/03
                  
                  
                  8,806,147
                  
                  $
                  2.00
                  
                  
                  11/14/13Debt
                      Exchange Warrants - Dr. Peter Novak
                  
                  
                  11/14/03
                  
                  
                  976,688
                  
                  $
                  1.50
                  
                  
                  11/14/13Debt
                      Exchange Warrants - Dr. Peter Novak
                  
                  
                  11/14/03
                  
                  
                  976,688
                  
                  $
                  2.00
                  
                  
                  11/14/13Debt
                      Exchange Warrants - Mike Zoi
                  
                  
                  11/14/03
                  
                  
                  217,165
                  
                  $
                  1.50
                  
                  
                  11/14/13Debt
                      Exchange Warrants - Mike Zoi
                  
                  
                  11/14/03
                  
                  
                  217,165
                  
                  $
                  2.00
                  
                  
                  11/14/13Consultant
                  
                  
                  01/08/04
                  
                  
                  200,000
                  
                  $
                  0.10
                  
                  
                  01/08/062004
                      Debenture Holders
                  
                  
                  01/21/04
                  
                  
                  16,000,000
                  
                  $
                  2.48
                  
                  
                  01/21/142004
                      Debenture Placement Agent
                  
                  
                  01/21/04
                  
                  
                  1,920,000
                  
                  $
                  2.51
                  
                  
                  01/21/14Delphi
                      Automotive Systems, LLC
                  
                  
                  10/20/04
                  
                  
                  1,750,000
                  
                  $
                  0.70
                  
                  
                  10/20/11Delphi
                      Automotive Systems, LLC
                  
                  
                  10/20/04
                  
                  
                  5,250,000
                  
                  $
                  1.00
                  
                  
                  10/20/11Series
                      B Preferred - Cofis
                  
                  
                  10/15/04
                  
                  
                  4,166,666
                  
                  $
                  1.25
                  
                  
                  10/15/14Series
                      B Preferred - Cofis
                  
                  
                  10/15/04
                  
                  
                  4,166,666
                  
                  $
                  1.50
                  
                  
                  10/15/14***Warrant
                      issuances in 2005:***Series
                      B Preferred - Ener1 Group
                  
                  
                  02/11/05
                  
                  
                  69,445
                  
                  $
                  1.25
                  
                  
                  02/14/15Series
                      B Preferred - Ener1 Group
                  
                  
                  02/11/05
                  
                  
                  69,445
                  
                  $
                  1.50
                  
                  
                  02/14/152005
                      Debenture Holders
                  
                  
                  03/11/05
                  
                  
                  4,267,500
                  
                  $
                  1.15
                  
                  
                  03/11/102005
                      Debenture Holders
                  
                  
                  03/11/05
                  
                  
                  2,845,000
                  
                  $
                  1.25
                  
                  
                  03/11/102005
                      Debenture Placement Agent
                  
                  
                  03/11/05
                  
                  
                  426,750
                  
                  $
                  0.75
                  
                  
                  05/17/10Total
                      Warrants Outstanding at December 31, 2005
                  
                  
                  
                  
                  
                  130,131,471
  In
          addition to the above warrants, in connection with the purchase of common
          stock
          of the Company, ITOCHU in July 2003 obtained options to acquire up to 12,461,861
          shares of common stock at $0.70 per share, of which 1,500,000 were exercised
          in
          January 2004, and the remainder of these options expired January 31, 2004.
          As
          part of the same transaction, ITOCHU also received options to acquire 9,346,396
          shares of common stock at the original price of $2.50 per share (amended
          to
          $4.00 per share in January 2004), all of which options expired on January
          31,
          2005.
 The
            Battery Warrants are immediately exercisable at an exercise price $.08
            per share
            and have a term of ten years. The warrants have provisions requiring
            that the
            number of shares available for exercise and/or the exercise price for
            the shares
            be adjusted to reflect stock splits, stock dividends and similar transactions,
            including the issuance of other shares of our common stock, except for
            employee
            stock options, at prices below the exercise price stated in the warrants.
            The
            warrants also provide for cashless exercise in accordance with a formula
            stated
            therein.
  In
          January 2004, the Company issued warrants to purchase 200,000 shares of
          common
          stock to a consultant. The warrants have an exercise price of $0.10 per
          share
          and expire in January 2006. The Company recorded approximately $324,000
          in
          compensation expense in 2004 related to these warrants.
 
 In
          January 2004, in connection with the issuance of the 2004 Debentures, the
          Company issued warrants to purchase 1,920,000 shares of common stock to
          the
          placement agent engaged by the Company. The warrants have an exercise price
          of
          $2.51 and expire 10 years from the grant date. The value of these warrants
          at
          the time of the grant of approximately $3,053,000 was included in additional
          paid in capital as offering costs and is being amortized using the straight
          line
          method over the remaining term of the debt.
  68





In
          March
          2005, in connection with the issuance of the 2005 Debentures, the Company
          issued
          warrants to purchase 426,750 shares of common stock to the placement agent
          engaged by the Company. The warrants have an exercise price of $.75 and
          expire
          10 years from the grant date. The value of these warrants at the time of
          the
          grant of approximately $213,000 was included in additional paid in capital
          as
          offering costs and is being amortized using the straight line method over
          the
          remaining term of the debt.
  18.
            REDEEMABLE PREFERRED STOCK
 
 *Ener1,
            Inc. Series B Cumulative and Redeemable Convertible Preferred Stock*
  In
            October 2004, Ener1 sold 150,000 shares of Series B Preferred Stock plus
            warrants to purchase 4,166,666 shares of common stock at an exercise
            price of
            $1.25 and warrants to purchase 4,166,666 shares of common stock at an
            exercise
            price of $1.50 per share, for an aggregate purchase price of $15,000,000.
            The
            Series B Preferred Stock has a liquidation preference of $100 per share.
            Ener1
            is accounting for the warrants in accordance with SFAS
            133
            and EITF 00-19 .
            The
            proceeds were first allocated to the fair value of the freestanding warrants.
            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 to Ener1 Group 2,500 shares
            of Series B Preferred Stock, plus warrants to purchase 69,445 shares
            of common
            stock at an exercise price of $1.25 and warrants to purchase 69,445 shares
            of
            common stock at an exercise price of $1.50 per share, for an aggregate
            purchase
            price of $250,000.
  The
            holder’s ability to exercise the conversion feature for the Series B Preferred
            Stock is contingent upon Ener1 filing a registration statement with the
            Securities and Exchange Commission to register an underwritten offering
            of
            common stock. The holders of Series B Preferred Stock will have the right
            to
            convert up to one-half of their shares of Series B Preferred Stock into
            common
            stock for sale pursuant to the registration statement, subject to the
            discretion
            of the underwriters of the offering. The conversion ratio shall be established
            by dividing the liquidation value per share of the Series B Preferred
            Stock by
            the price for the common stock sold in the registered offering. Because
            of this
            contingency, the conversion option is not within the scope of SFAS 133
            and EITF
            00-19. If the contingency is triggered in the future and the holder receives
            the
            ability to convert, Ener1 will need to reassess whether the conversion
            feature
            meets the definition of a derivative under SFAS 133.
  The
            holders of the Series B Preferred Stock are entitled to dividends payable
            semi-annually in the arrears at the annual rate of 7%, which is payable
            in kind
            for the first two years after issuance, and thereafter is payable in
            cash. The
            dividends are cumulative. The Series B Preferred 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,
            plus
            accrued and unpaid dividends. The Series B Preferred is also redeemable
            at the
            option of the holder once none of the 2004 Debentures are outstanding.
            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.
 69
 
 *EnerDel
          Non-Voting Cumulative and Redeemable Series A Preferred Stock*
 
 In
          October 2004, Delphi Corporation purchased 8,000 shares of Non-Voting,
          Cumulative and Redeemable Series A Convertible Preferred Stock of EnerDel
          (“Series A Preferred Stock”) with an aggregate initial liquidation value of
          $8,000,000, and warrants to purchase Ener1 common stock, for an aggregate
          consideration of $8,000,000. The Series A Preferred Stock has a liquidation
          preference of $1,000 per share plus accrued and unpaid dividends. The holders of
          the Series A Preferred Stock are entitled to dividends as declared by the
          EnerDel Board of Directors at the annual rate of 8.25%, which are payable
          when
          declared in cash annually on December 31. The dividends are
          cumulative. Under the terms of the Series A Preferred Stock, the holder had
          the option, expiring on January 31, 2005, to exchange each share of Series
          A
          Preferred Stock for 869.5652 shares of Ener1 common stock. Ener1 is accounting
          for the warrants and conversion option in accordance with SFAS 133 and
          EITF
          00-19. The
          proceeds were first allocated to the fair value of the freestanding warrants.
          The remaining proceeds were next allocated based on the with-and-without
          method
          first to the embedded conversion feature of the Series A Preferred Stock
          and
          then to the host instrument (Series A Preferred Stock). When
          the
          term of the conversion option expired with no value in January 2005, the
          remaining liability of $1,183,000 was recorded as reduction
          in the derivative liability and a correspondinggain on derivative
          liability in the first quarter of 2005.
  If
          EnerDel has not redeemed all shares of the Series A Preferred Stock on
          or before
          the fourth anniversary of the date of the certificate of designations for
          such
          stock, the holders may require EnerDel to redeem all of the Series A Preferred
          Stock. The Company has the option to pay the redemption price by issuing
          a note
          payable in four equal quarterly payments with interest at an annual rate
          of
          8.25%. The Series A Preferred Stock is classified as temporary equity in
          accordance with EITF D-98 as
          the
          redemption features are not solely with the control of the
          Company.
  In
          connection with the formation of EnerDel, the Company issued warrants to
          purchase up to 1,750,000 shares of the Company’s 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 **.** The
          relative fair value of the warrants, $2,928,685, was recorded as a discount
          to
          the Series A Preferred Stock. This amount is being amortized against additional
          paid-in capital using the interest method through October 2008, at which
          time,
          the holder may require EnerDel to redeem all of the Series A Preferred
          shares,
          as noted above. The relative fair value of these warrants was determined
          utilizing the Black-Scholes stock option valuation model. The significant
          assumptions used in the valuation were: 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. ****
  70
 
 The
          table
          below is an explanation of the components of redeemable preferred stock
          as of
          December 31, 2005:
 Ener1
                    
                    
                    EnerDelSeries
                        B
                    
                    
                    Series
                        AFace
                        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
                    
                    
                    2,197Cumulative accretion
                        of discounts
                    
                    
                    2,182
                    
                    
                    1,980Cumulative
                        dividends
                    
                    
                    1,270
                    
                    
                    790Carrying
                        value December 31, 2005
                    
                    $
                    13,188
                    
                    $
                    4,967
 19.  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,
                    redemption
                    premium, forced conversion 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.
  71





The
          impact of the application of SFAS 133 and EITF 00-19 on the balance sheet
          as of
          December 31, 2004 and the impact on the balance sheet and statements of
          operations as of December 31, 2005 is as follows:
  (dollars
                    in thousands)
                  
                  **December
                      31,**
                    **2004**
                  
                  **December
                      31,**
                    **2005**
                  
                  **Gain**(Restated)
                  
                  (Restated)
                  
                  (Restated)2004
                      Debentures conversion
                  
                  $
                  14,319
                  
                  $
                  5,980
                  
                  $
                  8,3392004
                      Debenture Warrants
                  
                  
                  11,040
                  
                  
                  3,520
                  
                  
                  7,5202005
                      Debentures conversion
                  
                  
                  —
                  
                  
                  4,555
                  
                  
                  3,4892005
                      Debenture Warrants
                  
                  
                  —
                  
                  
                  2,205
                  
                  
                  1,607EnerDel
                      Series A Preferred Stock conversion
                  
                  
                  1,183
                  
                  
                  —
                  
                  
                  1,183Delphi
                      Warrants
                  
                  
                  5,944
                  
                  
                  2,660
                  
                  
                  3,284Series
                      B Preferred Stock Warrants
                  
                  
                  7,095
                  
                  
                  3,135
                  
                  
                  4,057Series
                      B Preferred Stock Put
                  
                  
                  (266
                  )
                  
                  (496
                  )
                  
                  230Debt
                      Exchange Warrants
                  
                  
                  16,600
                  
                  
                  7,200
                  
                  
                  9,400ITOCHU
                      options (1)
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —Battery
                      Warrants
                  
                  
                  57,960
                  
                  
                  26,220
                  
                  
                  31,740Total
                  
                  $
                  113,875
                  
                  $
                  54,979
                  
                  $
                  70,849
 
 (1)
            The
            ITOCHU Options had no value at December 31, 2004 and expired in January
            2005.
  Because
          the conversion option for the Series B Preferred Stock is contingent, the
          Series
          B Preferred Stock is not within the scope of SFAS 133 and EITF 00-19. If
          the
          contingency is resolved in the future and the holder becomes able to
          convert, Ener1 will assess whether the conversion option meets the definition
          of
          a derivative under SFAS 133.
 For
              instruments with a single derivative, such as the warrants and the
              conversion
              feature derivatives of preferred stock, t he
              Company uses the Black Scholes pricing model for determining the fair
              values. For instruments
              with compound embedded derivatives such as the 2004 Debentures and
              2005
              Debentures, t he
              Company uses a lattice valuation model to value the compound embedded
              derivatives in the 2004 Debentures and 2005 Debentures
 
 The
              Company valued the compound embedded derivative instruments in the
              2004
              Debentures and 2005 Debentures using a lattice valuation model, with
              the
              assistance of a valuation consultant. The
              lattice model values the compound embedded derivatives based on a probability
              weighted discounted cash flow model. This model is based on future
              projections
              of the five primary alternatives possible for settlement of the features
              included within the compound embedded derivative, including: (1) payments
              are
              made in cash, (2) payments are made in stock, (3) the holder exercises
              its right
              to convert the debentures, (4) Ener1 exercises its right to convert
              the
              debentures and (5) Ener1 defaults on the debentures. The Company uses
              the model
              to analyze (a) the underlying economic factors that influence which
              of these
              events will occur, (b) when they are likely to occur, and (c) the common
              stock
              price and specific terms of the debentures such as interest rate and
              conversion
              price that will be in effect when they occur. Based on the analysis
              of these
              factors, the Company uses the model to develop a set of potential
              scenarios. Probabilities of each scenario occurring during the remaining
              term of
              the debentures are determined based on management's projections. These
              probabilities are used to create a cash flow projection over the term
              of the
              debentures and determine the probability that the projected cash flow
              would be
              achieved. A discounted weighted average cash flow for each scenario
              is then
              calculated and compared to the discounted cash flow of the debentures
              without
              the compound embedded derivative in order to determine a value for
              the compound
              embedded derivative.
 The
                primary determinants of the economic value of a compound embedded
                derivative
                under the lattice model are (1) the price of Ener1's common stock,
                (2) the
                volatility of Ener1's common stock price, (3) the likelihood that
                Ener1 will be
                required to pay registration delay payments, (4) the likelihood that
                an event of
                default or a change in control will occur, (4) the likelihood that
                the
                conversion price will be adjusted, (5) the likelihood that the Ener1
                common
                stock will be listed on an exchange, (6) the likelihood that Ener1
                will be able
                to obtain alternative financing and (7) the likelihood that Ener1
                would be able
                to force conversion of the debentures.
  The
                fair
                value of the compound derivative embedded in the 2004 Debentures
                as of the issue
                date (January 20, 2004) determined using the lattice valuation model
                was based
                on the following assumptions:
 -
                      the
                          price of Ener1's common stock would increase at a rate
                          commensurate with
                          the cost of equity, with a volatility of 130%; -
                      95%
                          likelihood that Ener1 would not be in default of its obligations
                          under the
                          resale registration agreement relating to the 2004
                          Debentures; -
                      5%
                          likelihood that an event of default or a fundamental change
                          would occur,
                          increasing over time; -
                      reset
                          events projected to occur with a weighted average adjustment
                          factor of
                          .989; -
                      95%
                          likelihood that Ener1 would force the conversion of the
                          2004 Debentures if
                          the stock price reached $1.75; -
                      the
                          holders of the 2004 Debentures would convert the 2004 Debentures
                          if
                          Ener1's common stock price was $3.50, the resale registration
                          statement
                          was effective and Ener1 was not in default under the 2004
                          Debentures; -
                      Ener1
                          would redeem the 2004 Debentures following the third anniversary
                          of the
                          issue date if Ener1's common stock price reached $1.50
                          or higher; -
                      0%
                          likelihood that Ener1 would be able to obtain alternative
                          financing that
                          would enable it to redeem the 2004 Debentures increasing
                          2.5% per quarter
                          to a maximum of 25%; and -
                      0%
                          likelihood that Ener1's common stock would be listed on
                          an exchange
                          increasing 10% quarterly to a maximum of
                          90%.
 Based
                  on
                  the management projections above, the Company assigned a probability
                  to each
                  scenario for each future period, and determined the appropriate
                  cash flow for
                  each scenario. This cash flow was then probability weighted and
                  discounted to
                  the present.
  At
                  the
                  time of issue, the Company determined the probability weighed
                  discounted cash flow of the 2005 Debentures with the various embedded
                  derivatives and determined the discounted cash flow of the 2005
                  Debentures
                  without the embedded derivatives. The cash flows were discounted
                  by the
                  risk-free rate based on the remaining term of the 2005 Debenturs.
                  The Company
                  determined that the implied value of the compound embedded derivatives was
                  $11,505,000 for the 2004 Debentures at the date of issue.
  The
                fair
                value of the compound derivative embedded in the 2004 Debentures
                as of December
                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 120%;·
                        Ener1
                            would remain in default of its obligations under the
                            resale registration
                            agreement relating to the 2004 Debentures for four months
                            from December
                            31, 2005, after which there would be 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 .1% per quarter;·
                        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 Ener1 common stock price reached $1.75;·
                        the
                            holders of the 2004 Debentures would convert the 2004
                            Debentures if
                            Ener1's common stock price reached $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;·
                        The
                            likelihood that Ener1 would be able to obtain alternative
                            financing that
                            would enable it to redeem the 2004 Debentures is 0%,
                            increasing 2.5% per
                            quarter to a maximum likelihood of 25% in the tenth quarter
                            from December
                            31, 2005; and
 ·
                        0%
                            likelihood that Ener1's common stock would be listed
                            on an exchange,
                            increasing 10% quarterly to a maximum likelihood of 90%
                            within nine
                            quarters.
 Based
              on
              these management assumptions, the fair value of the compound embedded
              derivative
              in the 2004 Debentures as of December 31, 2005 was calculated by management
              to
              be $5,980,000.
 The
              fair
              value of the compound derivative embedded in the 2004 Debentures as
              of December
              31, 2004 determined using the lattice valuation model was based on
              the following
              assumptions:
  ·
                    the
                        price of Ener1 common stock would increase at a rate
                        commensurate with the cost of equity, with a volatility of
                        120%;
 ·
                    Ener1 would
                        remain in default of its obligations under the resale registration
                        agreement relating to the 2005 Debentures for four months
                        from December
                        31, 2005, after which there would be 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
                        .989;
 ·
                    95%
                        likelihood that Ener1 would force the conversion of the 2005
                        Debentures if its common stock price reached
                        $1.50;
 ·
                    the
                        holders of the 2005 Debentures would convert the 2005 Debentures
                        if
                        Ener1 common stock price reached $1.75, the resale registration
                        statement was effective and Ener1 were not in default under the
                        2004 Debentures;
 ·
                    Ener1 would
                        redeem the 2005 Debentures following the third anniversary
                        of the issue
                        date if its 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 common stock would be listed on an
                        exchange, increasing 10% quarterly to a maximum likelihood of 90%
                        within nine quarters.
 
 Based
              on
              these management assumptions, the fair value of the compound embedded
              derivative
              in the 2005 Debentures as of December 31, 2005 was calculated by
              management to be $14,359,000.
  The
              fair
              value of the compound derivative embedded in the 2005 Debentures as
              of the issue
              date (March 11, 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;
 -
                    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
              the management projections above, the Company
              assigned a probability to each scenario for each future period, and
              determined the appropriate cash flow for each scenario. This cash flow
              was then
              probability weighted and discounted to the present.
  At
                the
                time of issue, the Company determined the probability weighed
                discounted cash flow of the 2005 Debentures with the various embedded
                derivatives and determined the discounted cash flow of the 2005 Debentures
                without the embedded derivatives. The cash flows were discounted
                by the
                risk-free rate based on the remaining term of the 2005 Debentures.
                The Company
                determined that the implied value of the compound embedded derivatives was
                $8,044,000 for the 2005 Debentures at the date of issue.
  The
              fair
              value of the compound derivative embedded in the 2005 Debentures as
              of December
              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 120%;·
                      Ener1
                          would remain in default of its obligations under the resale
                          registration
                          agreement relating to the 2005 Debentures for four months
                          from December
                          31, 2005, after which there would be 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
                          .893;
 ·
                      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%
                          within nine
                          quarters.
  Based
              on
              these management assumptions, the fair value of the compound embedded
              derivative
              in the 2005 Debentures as of December 31, 2005 was calculated by management
              to be $4,555,000.
 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 occuring. 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
            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.
 **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
                  
                  
                  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
  20. ENERDEL
          FORMATION
 
 On
          October 26, 2004, the Company and each of Delphi Automotive Systems, LLC
          and
          Delphi Technologies, Inc. (collectively, “Delphi”) contributed their lithium
          battery assets to a newly organized Delaware corporation, EnerDel, Inc.
          (“EnerDel”). The Company completed the transactions pursuant to, among other
          documents, a Formation, Subscription and Stockholders’ Agreement (the “Formation
          Agreement”) by and between the Company and Delphi, dated as of October 20, 2004.
          Pursuant to the Formation Agreement, the Company received 80.5% of EnerDel’s
          issued and outstanding shares of common stock in consideration for the
          contribution by the Company and its subsidiaries of $15 million in cash,
          the
          right to use a building and certain lithium battery equipment owned by
          the
          Battery Company with an option to purchase such equipment for $1, and ownership
          of certain intellectual property, subject to exclusive, perpetual and
          royalty-free licenses granting Ener1 the right to use such intellectual
          property
          in areas not related to lithium batteries.
 
 Also,
          pursuant to the Formation Agreement, Delphi received 19.5% of EnerDel's
          issued
          and outstanding shares of common stock, 8,000 shares of EnerDel’s Series A
          Preferred Stock (see Note 18); immediately exercisable
          warrants with a seven year term to purchase up to 1.75 million shares of
          the
          Company's common stock for $0.70 per share; and immediately exercisable
          warrants
          with a seven year term to purchase up to 5.25 millionshares 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
            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 100% of the dividends and accretion on the EnerDel
            Series A Preferred Stock in the amount of $406,000 and $2,364,000 for
            the years
            ending December 31, 2005 and 2004, respectively. The minority interest
            balance
            sheet amount was subsequently 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.
 72
 
 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 consulting used the income approach to value the lithium
          battery related equipment and intellectual property contributed by Delphi
          to
          EnerDel. In developing a value for the developed and in-process technology,
          the
          Company considered all available valuation methods and employed a form
          of the
          Income Approach known as the Multi-Period Excess Earnings Model. Management
          attempted to quantify the magnitude of earnings generated by the specific
          asset
          being examined and then discount that flow of cash to present value using
          a
          discount rate reflective of the relevant level of associated risk.
 
 The
          primary assumption used in the application of the Multi-Period Excess Earnings
          Model is the discount rate used to calculate present value. The discount
          rate
          employed in the valuation of the assets contributed by Delphi to EnerDel
          was
          26.3%
  21. COSTS
          ASSOCIATED WITH EXIT OR DISPOSAL ACTIVITIES
  On
          June
          23, 2005 EnerDel decided to acquire new battery cell and automated battery
          cell
          manufacturing technology for high-rate batteries from Enerstruct, Ener1's
          joint
          venture with ITOCHU. In connection with this decision, EnerDel began
          restructuring its manufacturing facilities in Indianapolis and Fort Lauderdale
          to use the new battery cell and automated battery cell manufacturing technology.
          A total of 37 employees were terminated in Indianapolis and Fort Lauderdale
          and
          Ener1 determined that the equipment in the Fort Lauderdale facility would
          be
          used for R&D activities going forward. Ener1 charged the remaining net book
          value of the Fort Lauderdale's facility equipment of approximately $10,527,000
          to R&D expenses. EnerDel incurred exit and disposal costs during 2005
          associated with these changes in the amount of $1,040,000, and no additional
          costs are expected. These costs are predominantly severance and contract
          termination costs. In accordance with FASB No. 146, these costs are included
          in
          results of operations as research and development, selling, general, and
          administrative expenses.
  73
 
 22.
          IMPAIRMENT
 
 In
          2004,
          the Company recorded a charge to earnings to recognize the impairment of
          a
          portion of its battery manufacturing related assets located in its Fort
          Lauderdale facility. The amount of this charge was $8,289,000. Management
          determined that as a result of the reallocation of manufacturing capabilities
          in
          connection with the formation of EnerDel, the Company no longer expected
          to
          recognize revenues and positive net cash flows in excess of the equipment
          carrying values from the use of the equipment. The carrying value of the
          equipment was reduced to its estimated fair market value, which was determined
          based upon a valuation of the equipment performed in accordance with the
          provisions of SFAS No. 144, “Accounting for the Impairment or Disposal of
          Long-Lived Assets" ("SFAS No. 144").
 
 The
          valuation was performed using the guidance prescribed in SFAS No. 144 for
          “long-lived assets to be held and used” because the Company expected to use the
          equipment in future operations and the requirements for the “held for sale”
model were determined not to have been met. In accordance with SFAS No.
          144, the
          valuation specialist engaged by the Company calculated fair value as the
          amount
          at which the assets could be bought or sold in a current transaction between
          willing parties and not as a forced or liquidation sale. The valuation
          specialist determined the fair value of the equipment in accordance with
          the
          standards of SFAS No. 144 was approximately $11,900,000, resulting in an
          impairment loss of approximately $8,289,000.
 
 Depreciation
          was suspended after the assets were determined to be impaired. Subsequently,
          the
          remaining value of the assets was expensed to R&D after it
          was
          determined that the equipment would be used for R&D activities .
          See
          Notes 19 and 20. The battery equipment was originally acquired in 2002
          from a
          company under common control. The Company initially accounted for the equipment
          in accordance with the provisions of SFAS 141 at its historical cost basis.
  23. COMMITMENTS
            AND CONTINGENCIES
 *Litigation*
 
 The
          Company receives communications from time to time alleging various claims.
          These
          claims include, but are not limited to, allegations that certain of the
          Company’s products infringe the patent rights of other third parties. The
          Company cannot predict the outcome of any such claims or the effect of
          any such
          claims on the Company’s operating results, financial condition, or cash
          flows.
 
 On
          February 10, 2006, Kevin P. Fitzgerald, the Company’s former Chairman and Chief
          Executive Officer, filed a two count complaint against the
          Company in the Circuit Court for Broward County, Florida for breach of
          contract
          seeking money damages and specific performance based on the
          Company’s alleged breach of his employment agreement with him dated
          September 8, 2003.  Mr. Fitzgerald was dismissed as the Company’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 and unreimbursed expenses and benefits in an unspecified amount for
          the
          alleged breach of contract and seeks a court order extending the time period
          he
          purportedly has to require the Company to repurchase certain vested options
          pursuant to the terms of his employment agreement through and including
          April
          10, 2006.  The complaint also seeks attorney’s fees. The Company
          intends to vigorously defend this litigation.
  74
  On
          January 13, 2006 Pankaj Dhingra, the former president of the Company's
          energy
          division, filed a one count complaint against the Company in the Circuit
          Court
          for Broward County Florida. The complaint claims the Company breached Mr.
          Dhingra's employment contract dated December 5, 2004, by failing to provide
          30
          days written notice of termination without cause, which Mr. Dhingra claims
          would
          have entitled him to an additional $25,000 in compensation, failing to
          pay a
          discretionary bonus in the amount of $250,000 and failing to reimburse
          certain
          expenses. The complaint also seeks attorney's fees in an unspecified sum.
          The
          Company intends to vigorously defend 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 that the
          Company
          breached 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 reimbursable
          expenses.  The complaint alleges Mr. Toth was dismissed without cause
          and that he was 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 this
          litigation.
 
 *Lease
          Commitments*
 Approximate
                      future payments for all operating leases for years subsequent
                      to December
                      31, 2005 are as follows:2006
                  
                  
                  655,0192007
                  
                  
                  448,8492008
                  
                  
                  335,3632009
                  
                  
                  264,5102010
                  
                  
                  44,235Total
                  
                  $
                  1,747,974
  The
          2005
          table includes three months of rent payments in 2006 totaling $136,000
          for rent
          of a plant under a month to month lease.
 
 24. SUBSEQUENT
          EVENTS
 
 On
          January 27, 2006, Ener1 Group exercised warrants to purchase a total 2,625,000
          shares of the Company's common stock, and on February 7, 2006 Ener1 Group
          exercised warrants to purchase a total of 31,875,000 shares of the Company's
          common stock (for a total of 34,500,000 shares), all at an exercise price
          of
          $.08 per share. Total proceeds to the Company from the two exercise transactions
          were $2,760,000. The expiration date of the exercised warrants was
          2012.
  75
 **ITEM
          8: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
          DISCLOSURE**
  None
 
 **ITEM
          8A: CONTROLS AND PROCEDURES**
 
 As
          of the
          end of the period covered by this report, we carried out an evaluation
          of the
          effectiveness of the design and operation of our disclosure controls and
          procedures pursuant to Exchange Act Rule 13a-15. This evaluation was done
          under
          the supervision and with the participation of our principal executive officer
          and principal financial officer. Based on their evaluation of our disclosure
          controls and procedures (as defined in the Exchange Act Rule 13a-15e),
          our
          principal executive officer and principal financial officer have concluded
          that
          as of the end of the period covered by this report, such disclosure controls
          and
          procedures were not effective due to deficiencies that existed in the design
          or
          operation of our internal control over financial reporting that adversely
          affected our disclosure controls and that may be considered to be “material
          weaknesses.” The Public Company Accounting Oversight Board has defined a
          material weakness as a “significant deficiency or combination of significant
          deficiencies that results in more than a remote likelihood that a material
          misstatement of the annual or interim financial statements will not be
          prevented
          or detected.”
 
 Specifically,
          we identified deficiencies in our internal controls and disclosure controls
          related to the accounting for convertible debt with detachable warrants
          and
          convertible preferred stock with detachable warrants, primarily with respect
          to
          accounting for derivative liabilities in accordance with EITF 00-19 and
          SFAS
          133. We restated our consolidated financial statements for the year ended
          December 31, 2004 in order to correct the accounting in such financial
          statements with respect to derivative liabilities in accordance with EITF
          00-19
          and SFAS 133. Since the fourth quarter of 2005, we have been improving
          our
          internal controls in an effort to remediate these deficiencies through
          the
          following efforts: 1) hiring a new Chief Financial Officer in February
          2006, 2) implementing better controls and procedures over the accounting
          for
          debt and preferred stock, and 3) 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.
 
 Any
          failure to implement and maintain improvements in the controls over our
          financial reporting could cause us to fail to meet our reporting obligations
          under SEC rules and regulations. Any failure to improve our internal controls
          to
          address the weaknesses we have identified could also cause investors to
          lose
          confidence in our reported financial information, which could have a negative
          impact on the trading price of our common stock.
 
 **ITEM
          8B: OTHER INFORMATION**
 
 None.
  76
  **PART
          III**
 
 **ITEM
          9 DIRECTORS, OFFICERS AND CONTROL PERSONS**
 
 The
          term
          of office of each of our directors will expire at our next shareholders
          meeting.
          Our directors and executive officers are as follows:
 
 **Name**
                
                **Age**
                
                **Position**Charles
                    Gassenheimer
                
                32
                
                Director,
                    Chairman of the BoardMarshall
                    Cogan
                
                68
                
                DirectorKarl
                    Gruns
                
                58
                
                DirectorLudovico
                    Manfredi
                
                43
                
                DirectorPeter
                    Novak
                
                52
                
                DirectorMike
                    Zoi
                
                40
                
                DirectorRonald
                    N. Stewart
                
                58
                
                Interim
                    Chief Executive Officer, General Counsel and SecretaryGerard
                    A. Herlihy
                
                53
                
                Chief
                    Financial OfficerUlrik
                    Grape
                
                45
                
                Executive
                    Vice PresidentRex
                    Hodge
                
                40
                
                Executive
                    Vice President
 
 **Charles
          Gassenheimer** has been
          our Chairman and one of our directors since January 2006. He has also been
          the
          Chief Executive Officer and a director of Ener1 Group since January 2006.
          From
          2002 **** through
          2005, Mr. Gassenheimer was Portfolio Manager of Satellite Asset Management's
          Convertible Arbitrage Division and Managing Director and Portfolio Manager
          of
          its Private Investment Group. From 2001 through 2002, he was a Portfolio
          Manager
          and head of the distressed securities investment group at Tribeca Investments
          (Citigroup Global Investments). Mr. Gassenheimer has also been a Vice President
          with Credit Suisse First Boston, where he served as Investment Manager
          of a
          proprietary hedge fund focused on private investments in public equity
          securities, and a Turnaround Management Consultant at Coopers & Lybrand. Mr.
          Gassenheimer has a B.S. in Economics from the University of
          Pennsylvania.
 
 **Marshall
          S. Cogan** has been
          one of our directors since February 2006.  Since July 2004, he has been
          Chairman and a director of Greystone Logistics.  Since 1986, Mr.
          Cogan has been a member of the board of trustees for N.Y.U. Medical Center
          and a trustee of the Museum of Modern Art.   Previously Mr. Cogan was
          a Director of Sheller Globe, a manufacturer of steering wheels and related
          automotive components; he founded and was Chairman of United Auto Group
          (UAG) he
          was also Chairman of Knoll International, Sheller Globe, Foamex International
          and the '21' Club.  Mr. Cogan received his B.A. and M.B.A. from Harvard
          University
 
 **Karl
          Gruns,** a
          Certified Public Accountant, has been a director of our company since August
          1999 and chairman of our audit committee since 2002. Since 2001, Mr. Gruns
          has
          owned and operated a management consulting practice in Germany for international
          clients. From 1998 to 2001, he was Chief Financial Officer of Infomatec
          Integrated Information Systems AG. Previously, Mr. Gruns owned and operated
          an
          audit and consulting practice, and he was formerly with KPMG Certified
          Public
          Accountants in USA and Germany. He currently is Chairman of the Board of
          Directors for SPORWETTEN.DE AG, a publicly traded company in Germany, and
          Sellexx AG, a privately held corporation in Munich Germany.
 Mr.
          Gruns
          received his degree in Business Administration, with a major in Accountancy,
          from Northern Illinois University.
  77
 
 **Ludovico
          Manfredi** has been
          a director of our company and member of the Audit Committee since April
          2005.
          Since 2000, Mr. Manfredi has been employed as a marketing and business
          development executive for Cheyne Capital, a London-based hedge fund management
          company. He is responsible for Cheyne Capital’s European strategic relationships
          and business development activities. Prior to joining Cheyne Capital, from
          1997
          through 1999, Mr. Manfredi founded and managed Newfield Group, a company
          active
          in soft commodities and investments in South America, the Caribbean and
          Western
          Europe. Previously, Mr. Manfredi worked in commodities trading with the
          European
          trading firms of Sucres et Denrees in Paris and Riz et Denrees in Paris
          and New
          York. Mr. Manfredi has an M.B.A from the Wharton School of Business, University
          of Pennsylvania, with a concentration in Finance and he received his initial
          degree from Institut d’Etudes Politiques de Paris, with a major in Economics and
          Finance.
 
 **Dr.
          Peter Novak** has been
          a director of our company since February 2002. Since 2001, he has been
          the Chief
          Technology Officer and a director of Ener1 Group. Since 1991, Dr. Novak
          has
          worked with Mike Zoi, focusing on bringing advanced electronic technologies
          to
          market. In 1998, Dr. Novak worked with Mr. Zoi to form Ener1 s.r.l. Dr.
          Novak
          has been the “sole administrator”, a position equivalent to president, and sole
          director, for Ener1 s.r.l. Ener1 s.r.l. commenced development of a research,
          development and production facility for advanced lithium metal batteries
          in
          Italy in 1998. For the next three years, Dr. Novak worked with Mr. Zoi
          to manage
          the start-up business operations of Ener1 s.r.l. Dr. Novak was, during
          that
          period, and is now, primarily responsible for technology development. In
          that
          capacity, he performed and supervised research and development, developed
          numerous technologies for which patent applications are now in process
          at the
          United States Patent and Trademark office and elsewhere, and also assisted
          Mr.
          Zoi in the business matters referred to under Mr. Zoi’s background description
          above. In 2001, Dr. Novak and Mr. Zoi formed Ener1 Group, Inc. As Chief
          Technology Officer of Ener1 Group, he is responsible for all technology
          development, licensing and patent matters. He also assists in the management
          of
          the business affairs of Ener1 Group. Dr. Novak graduated from the Ural
          Polytechnic Institute, Physics and Technical Department specializing in
          experimental nuclear physics, and has a doctoral degree in solid-state
          physical
          chemistry.
 
 **Mike
          Zoi** has been
          a director of our company since February 2002. Since 2001, he has been
          the
          President and a director of Ener1 Group. Since 1991, Mr. Zoi has worked
          with Dr.
          Peter Novak, focusing on bringing advanced electronic technologies to market.
          In
          1998, Mr. Zoi worked with Dr. Novak to form Ener1 s.r.l., an Italian company
          developing a research, development and production facility for advanced
          lithium
          metal batteries in Italy. For the next three years, Mr. Zoi worked with
          Dr.
          Novak to manage the start-up business operations of Ener1 s.r.l., including
          negotiations with potential licensees for the technology, obtaining grant
          and
          loan financing for the start-up business, and relationships with vendors.
          In
          2001, Mr. Zoi and Dr. Novak formed Ener1 Group
 
 **Ronald
          N. Stewart** is
          our
          Interim Chief Executive Officer, General Counsel and Secretary. From October
          2002 to April 2005, he was one of our directors. He has been our General
          Counsel
          since April 2002 when he joined our company. He was also our Chief Executive
          Officer from May 2003 to September 2003 and our Chief Financial Officer
          from
          August 2003 to November 2003. Mr. Stewart is Chief Operating Officer of
          Ener El
          Holdings and Ener1 Battery Company and General Counsel and Secretary for
          all of
          our operating subsidiaries. Prior to joining us, from 1999 to 2002, Mr.
          Stewart
          was engaged in private law practice as a sole practitioner where he counseled
          clients primarily in mergers and acquisitions, corporate and securities
          matters,
          government and commercial contracts, and technology and software licensing.
          From
          August 1989 to April 1999, Mr. Stewart worked in the Office of General
          Counsel
          at ICF Kaiser International, Inc., an international consulting, engineering
          and
          construction firm, where he was vice president and assistant general counsel.
          He
          has a B.A and J.D. from George Washington University.
  78
 
 **Gerard
          Herlihy** has been
          our chief financial officer since January 2005. Mr. Herlihy will devote
          substantially all of his time to his role at Ener1. However, Mr. Herlihy
          is also
          the President and Chief Financial Officer of Splinex Technology, Inc.
          ("Splinex"), positions he has held since September 1, 2005 and June 1,
          2004,
          respectively. Splinex is an affiliate of Ener1 that is controlled by certain
          direct and indirect beneficial owners of Ener1 Group. Prior to joining
          Splinex,
          Mr. Herlihy provided accounting, financing and acquisition advisory
          consulting services to public and private companies. From 2001 through
          2003, he
          was also the founder and chief executive officer of Putt Trak Inc., a vision
          systems software development company for sports training devices. From
          1996 to
          2000, Mr. Herlihy was chief financial and administrative officer of
          Williams Controls, Inc., a publicly-held manufacturer of sensors and controls
          for automotive and truck. Mr. Herlihy held previous positions directing
          turnarounds in public and private companies and in investment banking and
          public
          accounting. Mr. Herlihy has a Masters of Business Administration degree
          from the Harvard Business School and a Bachelor of Science degree from
          the
          University of Rhode Island and is a Certified Public Accountant (inactive
          status).
 
 **Ulrik
          Grape** has
          been
          our Executive Vice President since January 2006. He was Chief Executive
          Officer
          of EnerDel from October 2005 to January 2006, at which time he became President
          of EnerDel. From 2004 to 2005, Mr. Grape was Business Development Manager
          for
          Gold Peak Industries (N.A.), Inc. in connection with a joint venture between
          Gold Peak and Danionics A/S. From 1994 to 2004, Mr. Grape was employed
          by
          Danionics A/S, an international lithium battery company headquartered in
          Denmark, where he was Sales and Marketing Director and Vice President,
          U.S.
          Prior to that, he was Managing Director for Volund A/S, a privately held
          Danish
          industrial group manufacturing mobile access platforms and other structures,
          and
          Associate at Trap & Kornum A/S, a mergers and acquisition firm operating in
          the Scandinavian market. Mr. Grape earned a Bachelor's degree in International
          Politics and Affairs from Georgetown University and a Masters of Business
          Administration degree from French business school INSEAD.
 
 **Rex
          Hodge** has
          been
          our Executive Vice President and President of EnerFuel since January
          2006. **** From
          1993
          to 2005, Mr. Hodge was employed by Anuvu, Inc., which he founded and for
          which
          he served as President and Chief Executive Officer. Anuvu developed fuel-cell
          products for cars, trucks, scooters and boats. Prior to founding Anuvu,
          Mr.
          Hodge was employed for six years by the Aerojet Propulsion Division of
          GenCorp,
          where he was a Project Engineer. At Aerojet, he developed fuel cells using
          rocket technology. Mr. Hodge is a graduate of the University of California
          at
          Davis, with a B.S. degree in mechanical engineering.
 
 **Meetings
          of the Board of Directors**
 
 The
          board
          of directors held nine meetings during 2005.
 
 **Committees
          of the Board of Directors**
 
 The
          board
          of directors has established two standing committees to assist it in discharging
          its responsibilities: the Audit Committee and the Governance and Nominating
          Committee.
 
 The
          Audit
          Committee reviews our accounting functions, operations and management,
          our
          financial reporting process and the adequacy and effectiveness of our internal
          controls and internal auditing methods and procedures. The Audit Committee
          represents the Board in overseeing our financial reporting processes, and,
          as
          part of this responsibility, consults with our independent public accountants
          and with personnel from our internal audit and financial staffs with respect
          to
          corporate accounting, reporting, and internal control practices. The Audit
          Committee recommends to the board the appointment of our independent public
          accountants and is responsible for oversight of our independent public
          accountants. The Audit Committee held eight meetings during 2005.
 
 Our
          Audit
          Committee has two members: Karl Gruns and Ludovico Manfredi. Both are
“independent” as defined under Rule 4200(a) (15) of the National Association of
          Securities Dealers’ (“NASD”) Listing Standards for NASDAQ-listed companies. The
          Board has determined Mr. Gruns meets the SEC criteria of an “audit committee
          financial expert.”
  79
 
 The
          Governance and Nominating Committee is responsible for recommending to
          the full
          board candidates for officer positions and vacancies on the board. Karl
          Gruns is
          currently the sole member of this committee. The Governance and Nominating
          Committee did not meet during 2005.
 
 **Code
          of Ethics**
 
 During
          the year ended December 31, 2004 we adopted a Code of Ethics, which remains
          in
          effect. The code applies to our officers and directors. The code provides
          written standards that are reasonably designed to deter wrongdoing and
          promote:
          (1) honest and ethical conduct, including the ethical handling of actual
          or
          apparent conflicts of interests between personal and professional relationships;
          (2) full, fair, accurate, timely and understandable disclosure in reports
          and
          documents that we file with or submit to the SEC or in other public
          communications we make; (3) compliance with applicable laws, rules and
          regulations; (4) prompt reporting of internal violations of the code; and
          (5)
          accountability for the adherence to the code **.**
 
 **Section
          16(a) Beneficial Ownership Reporting Compliance**
 
 Section
          16(a) of the Securities Exchange Act of 1934, as amended, requires our
          officers
          and directors and persons who beneficially own more than 10% of our common
          stock
          to file with the SEC initial reports of ownership and reports of changes
          in
          ownership of our common stock. Based solely upon our review of copies of
          such
          forms we have received, and other information available to us, to the best
          of
          our knowledge:
 
 Kevin
          Fitzgerald, a former officer, failed to file in a timely manner a Form
          4
          reporting one transaction. The transaction was reported late on March 7,
          2006.
 
 Carlos
          Mendez-Peñate, a former director, failed to file in a timely manner a Form 3 and
          one report reporting one transaction. This transaction as well as the
          commencement of Mr. Mendez-Penate's insider status was reported late on
          November
          30, 2004.
 
 Karl
          Gruns, a director of the Company, failed to file in a timely manner a Form
          4
          reporting one transaction. This transaction was reported late on March
          6,
          2006.
 
 A.
          Ernest
          Toth Jr., a former officer, failed to file in a timely manner a Form 3
          and one
          report reporting one transaction. This transaction as well as the commencement
          of Mr. Toth's insider status was reported late on July 8, 2005.
 
 Ener1
          Group failed to file one report reporting five transactions, one report
          reporting four transactions, one report reporting two transactions and
          twelve
          reports each reporting one transaction. Ener1 Group is working with outside
          legal counsel to remedy these filings.
 
 Mr.
          Rex
          Hodge failed to file in a timely manner a Form 3. The commencement of his
          insider status was reported late on March 2, 2006.
 
 Mr.
          Ulrik
          Grape failed to file in a timely manner a Form 3. The commencement of his
          insider status was reported late on March 2, 2006.
  80
  **ITEM
          10 EXECUTIVE COMPENSATION**
 
 **Summary
          Compensation Table**
 
 The
          following table sets forth information regarding the compensation paid
          during
          2005, 2004 and 2003 to all individuals serving during that time as our
          Chief
          Executive Officer and
          each
          of our four most highly compensated executive officers who were serving
          as
          executive officers on December 31, 2005, and one additional individual
          whose employment terminated during 2005 (whom we refer to collectively
          as the
“named executive officers”).
 **Other**
                    
                    
                    
                    
                    **All****Annual**
                    
                    
                    **Securities**
                    
                    **Other****Compens-**
                    
                    
                    **Underlying**
                    
                    **Compens-****Name
                        and Principal Position**
                    
                    **Year**
                    
                    **Salary
                        $**
                    
                    **Bonus
                        $**
                    
                    **ation
                        $**
                    
                    
                    **Options
                        #**
                    
                    **ation
                        $**Kevin
                        Fitzgerald (1)
                    
                    
                    2005
                    
                    
                    366,214
                    
                    
                    355,625
                    
                    
                    106,143
                    
                    
                    
                    2,706,958
                    
                    
                    15,384
                    
                    (5)Chief
                        Executive Officer
                    
                    
                    2004
                    
                    
                    343,911
                    
                    
                    550,000
                    
                    
                    13,461
                    
                    
                    
                    
                    5,159,143
                    
                    
                    —2003
                    
                    
                    78,685
                    
                    
                    —
                    
                    
                    111,605
                    
                    (3)
                    
                    9,716,716Pankaj
                        Dhingra (4)
                    
                    
                    2005
                    
                    
                    231,924
                    
                    
                    15,000
                    
                    
                    9,104
                    
                    (7)
                    
                    
                    
                    
                    62,500
                    
                    (6)President
                        of Energy Group
                    
                    
                    2004
                    
                    
                    13,654
                    
                    
                    75,000
                    
                    
                    481
                    
                    (7)
                    
                    1,000,000
                    
                    
                    748,000
                    
                    (11)Ronald
                        Stewart
                    
                    
                    2005
                    
                    
                    189,792
                    
                    
                    35,000
                    
                    
                    41,955
                    
                    (8)
                    
                    —
                    
                    
                    —Executive
                        VP, General Counsel
                    
                    
                    2004
                    
                    
                    179,167
                    
                    
                    75,000
                    
                    
                    19,258
                    
                    (9)
                    
                    500,000
                    
                    
                    —Secretary,
                        and Former Chief
                    
                    
                    2003
                    
                    
                    126,000
                    
                    
                    4,000
                    
                    
                    37,755
                    
                    (10)
                    
                    70,000
                    
                    
                    —Executive
                        OfficerA.
                        Ernest Toth (12)Chief
                        Financial Officer,
                    
                    
                    2005
                    
                    
                    120,288
                    
                    
                    —
                    
                    
                    
                    
                    
                    
                    
                    250,000
                    
                    
                    4,697
                    
                    (5)Ulrik
                        Grape (13)
                    
                    
                    2005
                    
                    
                    62,500
                    
                    
                    70,000
                    
                    
                    —
                    
                    
                    
                    
                    1,100,000
                    
                    
                    —Chief
                        Executive Officer of EnerDel
 
 (1)
                Mr.
                    Fitzgerald was as our Chief Executive Officer from September
                    2003 until
                    January 2006.(2)
                Amount
                    includes payment of $106,143 for housing allowance in 2005.(3)
                Amount
                    includes $108,000, which represents the fair market value as
                    of the date
                    of grant of
                    a stock grant of 300,000 shares, and payment of $3,605 for unused
                    vacation.(4)
                Mr.
                    Dhringa was President of EnerDel and President of the Energy
                    Group from
                    December 2004 until
                    September 2005.(5)
                Amount
                    represents payment for vacation paid at termination in January
                    2006.(6)
                Amount
                    represents severance payments.(7)
                Amount
                    represents payment of accrued and unused vacation and automobile
                    allowance.(8)
                Amount
                    includes payment of $9,071 for automobile allowance and $32,883
                    of accrued
                    and unused vacation.(9)
                Amount
                    includes payment of $3,024 for automobile allowance and $16,234
                    of accrued
                    and unused vacation.(10)
                Includes
                    $21,000, which represents the fair market value as of the date
                    of grant of
                    a stock grant of
                    300,000 shares and payment of $10,729 for accrued and unused
                    vacation and
                    a $6,026 car allowance.(11)
                Mr.
                    Dhingra received an option to purchase 2,000,000 shares of
                    EnerDel.(12)
                Mr.
                    Toth was our Chief Financial Officer from June 2005 until January
                    2006.(13)
                Mr.
                    Grape became the Chief Executive Officer of EnerDel in October
                    2005.
  81
 The
          following table sets forth information with respect to the grant of options
          to
          purchase shares of our common stock during 2005 that were made to the named
          executive officers during 2005 **.** ******
 **%
                      of Total****Number
                      of**
                  
                  **Options**
                  
                  **Exercise****Securities**
                  
                  **Granted**
                  
                  **or****Underlying**
                  
                  **to**
                  
                  **Base****Options**
                  
                  **Employees**
                  
                  **Price**
                  
                  **Expiration****Granted**
                  
                  **in
                      2005**
                  
                  **($/
                      Share)**
                  
                  **Date**Kevin
                      Fitzgerald
                  
                  
                  2,706,958
                  
                  
                  56%
                  
                  $
                  0.54
                  
                  
                  12/31/2015Pankaj
                      Dhingra
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —Ronald
                      Stewart
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —A.
                      Ernest Toth
                  
                  
                  250,000
                  
                  
                  5%
                  
                  $
                  0.28
                  
                  
                  7/8/2015Ulrik
                      Grape
                  
                  
                  1,000,000
                  
                  
                  21%
                  
                  $
                  0.49
                  
                  
                  9/29/2015Ulrik
                      Grape
                  
                  
                  100,000
                  
                  
                  2.00%
                  
                  $
                  —
                  
                  
                  9/29/2015
 
 The
          option granted to Mr. Fitzgerald vests
          in
          24 monthly installments.
 
 The
          option granted to Mr. Toth vests in four annual installments.
 
 Mr.
          Ulrik
          received an option to purchase 1,000,000 shares of our common stock that
          vests
          in four annual installments. Mr. Ulrik's right to exercise this option
          is
          subject to EnerDel's achievement of specified revenue targets. He also
          received
          a fully vested option to purchase 100,000 shares of our common stock at
          an
          option price of $.00. The closing price of our common stock on the date
          of grant
          was $.49.
 
 **Option
          Exercises and Year-End Option Values**
 
 None
          of
          our named officers exercised options during 2005. The following table sets
          forth
          information with respect to the exercise by the named executive officers
          of
          options to purchase shares of our common stock during 2005 and the value
          of
          in-the-money options held by the named executive officers as of December
          31,
          2005.
 **Aggregated
                      Option Exercises in 2005 and****2005-End
                      Option Values**
  Number
                      of Securities Underlying
                    Unexercised
                      Options/SARS
                    at
                      Dec 31, 2005 #
                  Value
                      of Unexercised
                    In-the-Money
                      Options
                    at
                      Dec 31, 2005 $Name
                  Exercisable
                      / Unexercisable
                  Exercisable
                      / UnexercisableKevin
                      Fitzgerald
                  10,117,513
                      / 7,716,104
                  $678,378
                      / $218,626Pankaj
                      Dhingra
                  0
                      /
                      0
                  $0
                      / $0Ronald
                      Stewart
                  250,000
                      / 250,000
                  $72,500
                      / $72,500Ulrik
                      Grape
                  100,000
                      / 1,000,000
                  $49,000
                      / $0A.
                      Ernest Toth
                  0
                      /
                      250,000
                  $0
                      / $27,500
 
 82
  **Employment
          Agreements**
 
 On
          July
          27, 2005, EnerDel entered into an Employment Agreement with Ulrik Grape,
          who is
          the President of EnerDel and one of our executive vice presidents. The
          employment agreement provides for Mr. Grape’s employment to begin on October 1,
          2005 and continue until terminated in accordance with the terms of the
          agreement. The agreement provides for a $70,000 signing bonus, an annual
          salary
          of $250,000 and the potential for a bonus equal to up to 100% of annual
          salary
          based on the performance of Mr. Grape and EnerDel. Under the terms of this
          agreement, Mr. Grape received a fully vested option to purchase 100,000
          shares
          of our common stock for $0.00 per share. He also received an option to
          purchase
          1,000,000 shares for $0.49 per share that vests in four, equal, annual
          installments; he may not exercise this option until EnerDel reports revenue
          equal to $1,500,000 for 2005 and $7,000,000 for 2006, as confirmed by review
          or
          audit by EnerDel’s independent public accountants. If EnerDel’s revenue falls
          short of these target(s) by 20% or more, the option may not be exercised
          unless
          and until EnerDel’s revenue reaches more than 80% of the target revenue. If
          EnerDel terminates Mr. Grape’s employment without cause (as defined in the
          agreement) or Mr. Grape terminates his employment with good reason (as
          defined
          in the agreement), he is entitled to severance payments equal, in the aggregate,
          to six months of his base salary, payable at regular payroll intervals,
          during
          which time Mr. Grape is prohibited from competing with EnerDel.
 
 Mr.
          A.
          Ernest Toth, Jr., our former Chief Financial Officer was hired pursuant
          to an
          offer letter that provided to we would pay to him severance in an amount
          equal
          to six months of his base salary if we terminated his employment without
“cause”
as defined in the letter. As described in "Legal Proceedings," Mr. Toth
          has
          filed a complaint against us alleging that we breached our obligation to
          pay him
          severance.
 
 On
          September 8, 2003, we entered into an Employment Agreement with Kevin P.
          Fitzgerald, who was our Chief Executive Officer and Chairman of our Board
          of
          Directors until he was dismissed in January 2006. The agreement provided
          that if
          Mr. Fitzgerald's employment was terminated for any reason (other than fraud, theft or other crimes of moral
          turpitude), we (or the shareholders of Ener1 Group), if requested by Mr.
          Fitzgerald, will pay him the amount equal to the difference between the
          aggregate exercise price of any vested options to purchase our common stock
          and
          fair market value of our common stock. If Mr. Fitzgerald's employment is
          terminated without cause (as defined in the agreement) he is entitled to
          receive
          severance payments equal to two years' base salary. Mr. Fitzgerald agreed
          not to
          compete with us for two years following termination of his employment,
          unless he
          terminated his employment for good reason (as defined in the agreement). As
          described in "Legal Proceedings," Mr. Fitzgerald has filed a complaint
          against
          us alleging breach of his employment agreement.
 
 On
          December 6, 2004 we entered into an Employment Agreement with Pankaj Dhingra,
          who was the President of our Energy Group (consisting of our subsidiaries,
          EnerDel, Inc., EnerFuel, Inc. and NanoEner, Inc.) and President of
          EnerDel **** until
          September 2005.
 
 Mr.
          Dhingra’s employment agreement provided that if Mr. Dhingra’s employment was
          terminated without cause by us, or for “good reason” (as defined in the
          employment agreement) by Mr. Dhingra, he would receive severance payments
          at our
          regular payroll intervals equal in the aggregate to one year’s base salary;
          payment for insurance coverage, also at our regular payroll intervals,
          for a
          period of one year; and payment of the pro rata portion of any annual
          performance bonus earned as of the termination date. Mr. Dhingra agreed
          not to
          compete with our Energy Division or solicit for employment any of the Energy
          Division’s employees during the term of the employment agreement and for one
          year following termination of his employment in certain circumstances.
          These
          severance amounts are currently being paid to Mr. Dhingra. As described
          in
          "Legal Proceedings," Mr. Dhingra has filed a complaint against us alleging
          breach of his employment agreement.
 
 We
          have
          agreed with Splinex and Mr. Herlihy, our Chief Financial Officer, that
          he will
          devote substantially all of his time to his role at Ener1, but that he
          will
          continue to serve as the President and Chief Financial Officer of Splinex.
          We
          will pay $190,000, or approximately 76% of Mr. Herlihy's aggregate salary
          from
          the two companies, and Splinex will pay $60,000.
  83
 
 **Compensation
          of Directors**
 
 Mr.
          Gruns
          is paid $7,500 per calendar quarter for his services as our director, plus
          $2,500 per quarter for his services as Chairman of our Audit Committee
          and
          specific cash amounts for his services on specific projects as an Independent
          Director. He also receives 50,000 options to purchase our common stock
          each year
          as part of his director’s compensation for each additional year in which he
          serves as our director. He received $30,000 and 50,000 options to purchase
          our
          common stock for his services as a director in 2005, $10,000 for his services
          as
          Chairman and Sole Member of the Audit Committee during that period, and
          $3,500
          for his services on specific projects as our Independent Director, all
          during
          2005.
 
 During
          2004 and 2005, we paid each of Dr. Novak and Mr. Zoi annual compensation
          of
          $250,000. We also paid Dr. Novak and Mr. Zoi $46,450 and $32,125 respectively
          during 2004 and $36,485 and $48,934 respectively in 2005 **** for
          medical insurance benefits and we paid $31,560 and $31,560 in both 2004
          and 2005
          for an automobile allowance for Dr. Novak.
 
 A
          former
          director, Carlos E. Mendez-Peñate received upon his appointment as director, an
          option under our Non-Employee Director Stock Option Plan to purchase 100,000
          shares of our common stock (vesting 33 1/3 percent on each of the first
          three
          anniversaries of the date of grant) He was paid $10,000 per quarter for
          his
          services as our outside director and 50,000 additional stock options (beginning
          December 31, 2005) for each additional year of services as our outside
          director.
          On January 30, 2006, Mr. Mendez-Peñate resigned as our director.
 
 Mr.
          Ludovico Manfredi received upon his appointment as director, an option
          to
          purchase 110,000 shares of our common stock (vesting 33 1/3% on each of
          the
          first three anniversaries of the date of the option grant) upon his appointment
          as director. He is paid $10,000 per quarter for his services as our outside
          director (including his participation as a member of our Audit Committee)
          and
          50,000 additional stock options (beginning December 31, 2006 **)** for each
          additional year of services as one of our outside directors.
 
 Charles
          Gassenheimer became the Chairman of our company in January 2006. He currently
          does not receive a salary or other compensation from our company.
 
 All
          directors are reimbursed for expenses incurred to attend Board and Committee
          meetings. Other than as described in these paragraphs, our directors do
          not
          receive compensation for their services as directors.
  84
 
 **ITEM
          11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
          RELATED
          STOCKHOLDER MATTERS**
 
 **Equity
          Compensation Plan Information**
 
 The
          following table provides information regarding common stock authorized
          for
          issuance under Ener1‘s equity compensation plans as of December 31, 2005:
 **(
                      c )****Number
                      of****Securities****Remaining****(a)**
                  
                  **(b)**
                  
                  **Available
                      for****Number
                      of**
                  
                  **Weighted-**
                  
                  **Future
                      Issuance****Securities
                      to be**
                  
                  **Average**
                  
                  **Under****Issued
                      Upon**
                  
                  **Exercise**
                  
                  **Equity****exercise
                      of**
                  
                  **Price
                      Of**
                  
                  **Compensation****Outstanding**
                  
                  **Outstanding**
                  
                  **Plans
                      (excluding****Options,**
                  
                  **Options,**
                  
                  **securities****Warrants,
                      and**
                  
                  **Warrants
                      and**
                  
                  **reflected
                      in****Plan
                      Category**
                  
                  **Rights**
                  
                  **Rights**
                  
                  **column
                      (a))**Equity
                      Compensation Plans Approvedby
                      Security Holders
                  
                  
                  5,402,000
                  
                  $
                  0.51
                  
                  
                  3,176,503Equity
                      Compensation Plans NotApproved
                      by Security Holders
                  
                  
                  19,203,617
                  
                  $
                  0.53
                  
                  
                  —Total
                  
                  
                  24,605,617
                  
                  $
                  —
                  
                  
                  3,176,503
  Five
          of
          our equity compensation plans have not been approved by our shareholders,
          the
          Chief Executive Officer Option Plan, the Advisory Board Option Plan, the
          2004
          Advisory Board Option Plan, the Grape Option Plan, and the EnerStruct Plan.
 
 Under
          the
          Chief Executive Officer Option Plan, and in accordance with his employment
          agreement. on September 8, 2003, we issued to Kevin Fitzgerald, our former
          Chief
          Executive Officer an option to purchase 9,716,716 shares of our common
          stock at
          an exercise price of $0.30 per share, vesting ratably in equal amounts
          on the
          first day of each month for a period of 36 months, beginning October 1,
          2003.
          Under this option plan, on December 31, 2004, we also issued to Mr. Fitzgerald
          an option to purchase 5,159,943 shares of our common stock, at an exercise
          price
          of $0.97 per share, vesting ratably in each of the 24 months following
          December
          31, 2004. On December 31, 2005, we issued to Mr. Fitzgerald an option to
          purchase 2,706,958 shares of our common stock, at an exercise price of
          $.54 per
          share, vesting ratably in each of the 24 months following that date. No
          additional shares are reserved for issuance in connection with this
          plan.
 
 Options
          to purchase a total of 220,000 shares have been granted in connection with
          our
          Advisory Board Option Plan; no additional shares are reserved for issuance
          in
          connection with this plan. This plan provides for the grant of options
          to
          members of our Advisory Board, or to the entities with whom our Advisory
          Board
          members are affiliated. The members of our Advisory Board provide advice
          to our
          executives and Board of Directors regarding industry matters and company
          marketing strategy. The terms of these option grants were determined by
          our
          Board of Directors, in their sole discretion, including, without limitation,
          the
          number of shares subject to an option and the applicable exercise price,
          vesting
          schedule and term. Each of the options granted under this plan has a ten
          year
          term, vests over a two year period and an exercise price equal to fair
          market
          value of our common stock on the date of grant.
 
 Options
          to purchase of 100,000 shares have been granted in connection with the
          2004
          Advisory Board Option Plan; no additional shares are reserved for issuance
          in
          connection with this plan. This plan provides for the grant of options
          to a
          member of our Advisory Board. The members of our Advisory Board provide
          advice
          to our executives and Board of Directors regarding industry matters and
          company
          marketing strategy. The terms of this option grant were determined by our
          Board
          of Directors, in their sole discretion, including, without limitation,
          the
          number of shares subject to the option and the applicable exercise price,
          vesting schedule and term. The option granted under this plan has a ten
          year
          term, vests over a three year period and an exercise price equal to fair
          market
          value of our common stock on the date of grant.
  85
 
 We
          granted an option to Mr. Grape in accordance with his employment agreement
          under
          the Grape Option Plan to purchase 1,000,000 shares of our common stock,
          vesting
          25% per year, with an exercise price equal to fair market value on the
          date of
          grant. Mr. Grape may not exercise any portion of this option until EnerDel
          reports revenue equal to $1,500,000 for 2005 and $7.0 million for 2006.
          If
          EnerDel's revenue falls short of these target(s) by 20% or more, the options
          may
          not be exercised until EnerDel’s revenue reaches more than 80% of the target
          revenue. This option has a ten year term. No additional shares are reserved
          for
          issuance in connection with this plan.
 
 In
          2004,
          we granted options to acquire 300,000 shares of common stock to two employees
          of
          EnerStruct. under the EnerStruct Plan.. The options have an exercise price
          of
          $.50 per share, vest over five years and expire in May 2014. No
          additional shares are reserved for issuance in connection with this
          plan.
  86
  **Security
          Ownership of Certain Beneficial Owners and Management**
 
 The
          table
          below contains information as of March 1, 2006 about stockholders whom
          we
          believe are the beneficial owners of more than five percent (5%) of our
          outstanding common stock, as well as information regarding stock ownership
          by
          our directors, named executive officers” who are currently serving as our
          officers and our directors and executive officers as a group. Except as
          described below, we know of no person that beneficially owns more than
          5% of our
          outstanding common stock. As of March 1, 2006, 416,604,469 shares
          of
          common stock were outstanding. Except as otherwise noted below, each person
          or
          entity named in the following table has the sole voting and investment
          power
          with respect to all shares of our common stock that he, she or it beneficially
          owns. Except as otherwise noted below, the address of each person or entity
          named in the following table is c/o Ener1, Inc., 500 West Cypress Creek
          Road,
          Suite 100, Fort Lauderdale, Florida 33309.
 **Amount
                      Of**
                  
                  **Percent****Beneficial**
                  
                  **Of****Name**
                  
                  **Ownership**
                  
                  **Class**Ener1
                      Group, Inc. (1)
                  
                  
                  393,859,413
                  
                  90.7%Charles
                      Gassenehimer
                  
                  
                  —
                  
                  *Marshall
                      Cogan
                  
                  
                  —
                  
                  *Karl
                      Gruns (2)
                  
                  
                  292,000
                  
                  *Mike
                      Zoi (3) (7)
                  
                  
                  2,339,438
                  
                  *Peter
                      Novak (4) (7)
                  
                  
                  5,257,023
                  
                  1.4%Ronald
                      Stewart (5)
                  
                  
                  870,000
                  
                  *Gerard
                      Herlihy
                  
                  
                  —
                  
                  *Ulrik
                      Grape
                  
                  
                  100,000
                  
                  *Rex
                      Hodge
                  
                  
                  —
                  
                  *Ludovico
                      Manfredi (8)
                  
                  
                  36,667
                  
                  *Directors
                      and officers as a group (6) (ten persons)
                  
                  
                  8,895,128
                  
                  2.3%
  Notes:*
                      Less than 1%(1)
                  Includes
                    52,251,183 shares issuable under outstanding warrants exercisable
                    during
                    the
                    60 day period following March 1, 2006.(2)
                  Includes
                      242,000 shares issuable under outstanding options exercisable
                      during the
                      sixty day period following March 1, 2006.(3)
                  Includes
                      1,939,562 shares issuable under outstanding options exercisable
                      during
                      the
                      sixty day period following March 1, 2006.(4)
                  Includes
                      3,458,608 shares issuable under outstanding options exercisable
                      during
                      the
                      sixty day period following March 1, 2006.(5)
                  Includes
                      500,000 shares issuable under outstanding options exercisable
                      during the
                      sixty day period following March 1, 2006.(6)
                  Includes
                      6,193,503 shares issuable under outstanding options exercisable
                      during
                      the
                      sixty day period following March 1, 2006.(7)
                  The
                      amount shown does not include common stock beneficially owned
                      by Ener1
                      Group, Inc., a company of which Dr. Novak and Mr. Zoi are directors.
Dr.
                      Novak and Mr. Zoi disclaim beneficial ownership of any Ener1
                      common stock
                      beneficially
                      owned by Ener1 Group, Inc.(8)
                  Includes
                      36,667 shares issuable under outstanding options exercisable
                      during the
                      sixty day period following March 1,
                      2006.
  87
 **ITEM
            12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS**
 
 **Relationship
            with Ener1 Group**
 
 Ener1
            Group, Inc. owned 88% of our outstanding capital stock as of December
            31, 2005.
            Mr. Zoi and Dr. Novak are each an officer, director and beneficial owner
            of
            Ener1 Group. Charles
            Gassenheimer, chairman of Ener1, is chief executive officer and a director
            of
            Ener1 Group. Marshall Cogan, a director of Ener1, is a strategic advisor
            to
            Ener1 Group.
  Ener1
            and
            Ener1 Group are parties to a Tax Allocation Agreement dated March 1,
            2006 which
            provides for the allocation of income taxes between the two groups.
            I ntergroup
            tax payments are made only when a payment is required or a refund is
            received on
            the consolidated tax return of Ener1 Group. When determining any Federal
            income
            tax payments due by Ener1 in any year, for purposes of the tax allocation
            agreement, Ener1 shall be credited for the tax benefit of all of Ener1’s net
            operating losses generated after January 3, 2003 plus the tax benefit
            of any
            Ener1 net operating losses generated before January 3, 2003 that are
            allowable
            under the Internal Revenue Code, plus any payments Ener1 has made under
            the tax
            allocation agreement, less any payments Ener1 has received under the
            tax
            allocation agreement Both
            Ener1 Group and Ener1 have had net operating losses for all periods since
            Ener1
            Group acquired a majority of Ener1's common stock, and no intergroup
            tax
            payments have been made to date.
 
 **2006
            Warrant Exercises by Ener1 Group**
 
 On
            January 27, 2006, Ener1 Group exercised warrants to purchase 2,635,000
            shares of
            our common stock for the aggregate purchase price of $210,000. On February
            7,
            2006, Ener1 Group exercised warrants to purchase an additional 31,875,000
            shares
            of our common stock for an aggregate purchase price of $2,550,000.
 
 **Intercompany
            Services Between Ener1 and Ener1 Group**
 
 Ener1
            Group and its subsidiaries have from time to time used various services
            and
            employees of ours and we have billed Ener1 Group and its subsidiaries
            for the
            actual cost of these services and employees. Similarly, we have from
            time to
            time used various services and employees of Ener1 Group and its subsidiaries
            and
            Ener1 Group has billed us for the actual cost of these services and employees.
            During 2004, Ener1 Group and its subsidiaries billed us 127,585 and we
            billed
            Ener1 Group and its subsidiaries $187,678, in each case for services
            and
            employees of the other party. During 2005, Ener1 Group and its subsidiaries
            billed us $109,635 and we billed Ener1 Group and its subsidiaries $152,922,
            in
            each case for services and employees of the other party. As of December
            31,
            2005, the net balance due to us from Ener1 Group and its subsidiaries
            was
            $103,381.
 
 **November
            2003 Exchange Agreement**
 
 In
            November 2003, we issued stock and warrants in satisfaction of approximately
            $13,300,000 in debt owed to Ener1 Group, Mr. Zoi and Dr. Novak (the “Exchange
            Debt”). The Exchange Debt resulted from previous advances by Ener1 Group,
            Mr.
            Zoi and Dr. Novak to fund our operations. As a result of the exchange,
            Ener1
            Group received 14,829,288 shares of our common stock and warrants to
            purchase up
            to 16,107,061 shares of our common stock, Mr. Zoi received 399,876 shares
            of our
            common stock and warrants to purchase up to 434,330 shares of our common
            stock,
            and Peter Novak received 1,798,415 shares of our common stock and warrants
            to
            purchase up to 1,953,376 shares of our common stock.
 
 The
            accrued interest on the Exchange Debt on the date of the exchange was
            converted
            into two year promissory notes issued to Ener1 Group, Mr. Zoi and Dr.
            Novak
            totaling approximately $1,000,000. These notes were all paid in full
            with
            proceeds from the 2004 Debentures in January 2004.
  88
  **Loans
            and Advances to Us from Ener1 Group**
 
 Ener1
            Group has made various loans, advances and capital contributions to us
            since it
            first acquired a majority interest in Ener1 in early 2002. With the exception
            of
            approximately $1,000,000 of accrued interest on some of these loans,
            all of
            these loans were satisfied in November 2003, at which time we issued
            promissory
            notes to Ener1 Group, Mr. Zoi and Dr. Novak in aggregate principal amount
            of
            approximately $1,000,000 representing the amount owed in accrued interest
            on
            advances. These notes were paid in full using the proceeds of our issuance
            in
            January 2004 of our senior secured convertible debentures due 2009.
 
 **Payments
            to Mr. Zoi and Dr.
            Novak**
 
 In
            2004
            and 2005, we paid each of Dr. Novak and Mr. Zoi annual compensation of
            $250,000.
            We also paid $46,450 and $32,125 to Dr. Novak and Mr. Zoi, respectively,
            during
            2004 and $36,485 and $48,934 respectively in 2005 **** for
            medical insurance benefits and we paid $31,560 and $31,560 in both 2004
            and 2005
            respectively for automobile allowance for Peter Novak.
 
 **Series
            B Preferred Stock**
 
 We
            entered into an agreement dated October 15, 2004 with Ener1 Group under
            which
            Ener1 Group is required, at our option, to purchase, for an aggregate
            purchase
            price of $3,000,000, up to 30,000 shares of our Series B Preferred Stock
            plus
            warrants to purchase (1) up to 833,334 shares of our common stock at
            an exercise
            price of $1.50 and (2) up to 833,334 shares of our common stock at an
            exercise
            price of $2.00. The agreement also provided that Ener1 Group was entitled
            to be
            paid $1 for every $3 in proceeds from such purchases. Pursuant to that
            agreement, in February, 2005, at our request, Ener1 Group purchased,
            for an
            aggregate purchase price of $250,000, 2,500 shares of our Series B Preferred
            stock and (1) warrants to purchase up to 69,445 shares of our common
            stock at an
            exercise price of $1.50 per share and (2) warrants to purchase up to
            69,445
            shares of our common stock at an exercise price of $2.00 per share. Pursuant
            to
            the agreement, in connection with this purchase transaction, we paid
            Ener1 Group
            $83,333.
 
 **Ener1
            Battery Equipment Acquisitions and Related Loan
            Transactions**
 
 In
            June
            2002, Ener1 Battery acquired from Ener1 Group manufacturing equipment
            with an
            aggregate value of approximately $13,488,000 in a series of transactions
            from
            Ener1 s.r.l., an Italian company controlled by Mr. Zoi and Dr. Peter
            Novak.
 
 When
            Ener1 Battery received the equipment described above, the equipment was
            subject
            to a security interest in favor of Meliorbanca Gallo S.p.A., an Italian
            bank,
            securing Ener1 s.r.l.‘s obligations in connection with loans previously made to
            Ener1 s.r.l. In March 2003, the Meliorbanca loans were restructured into
            a new
            loan agreement and Meliorbanca was granted a security interest in Ener1
            Battery’s equipment of up to 5,000,000 Euros (approximately US $6,000,000). We,
            Ener1 Group, Ener1 Battery, Mr. Zoi and Dr. Novak were all named as guarantors
            of the Ener1 s.r.l. obligations under the March 2003 loan
            agreement.
 
 The
            Meliorbanca loan was paid in full in January 2004, and Meliorbanca’s security
            interest in Ener1 Battery’s equipment, and all of the guarantors’ obligations to
            Meliorbanca, were released.
 
 **Security
            Interest held by BZINFIN S.A.**
 
 BZINFIN,
            S.A., an affiliate of ours through common ownership, held a security
            interest in
            Ener1 Battery’s battery manufacturing equipment as collateral securing Ener1
            Group’s obligations under a $1,000,000 loan to Ener1 Group, made in January
            2003, the proceeds of which were invested in Ener1. BZINFIN released
            its
            security interest in the equipment in January 2004.
  89
 **Merger
            of Ener1 Acquisition Corp. into Splinex Technology Inc.**
 
 In
            January 2005, in accordance with an Agreement and Plan of Merger dated
            as of
            June 9, 2004, as amended, Ener1 Acquisition Corp., our wholly-owned subsidiary,
            was merger with and into Splinex Technology Inc. In the merger, we received
            5,000,000 shares of Splinex common stock and declared a dividend to distribute
            these shares to our shareholders of record as of January 17, 2005. We
            agreed to
            pay up to $150,000 of expenses incurred in connection with the Registration
            Statement filed by Splinex to register our dividend of the shares of
            Splinex
            common stock issued in the merger. As of February 1, 2006, approximately
            63% of
            Splinex’s outstanding common stock is owned by Splinex, LLC. Two of our
            directors, Dr. Peter Novak and Mike Zoi, 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. One of our directors, Dr. Peter
            Novak, is
            also a director of Splinex. Dr. Novak was also the President of Splinex
            from its
            inception February 7, 2004 to August 31, 2004 and became the Chairman
            on
            September 1, 2005. Kevin Fitzgerald, our former Chief Executive Officer,
            was
            also a director of Splinex until December 2005. Gerard A. Herlihy, President,
            Chief Operating Officer and Chief Financial Officer of Splinex, is our
            Chief
            Financial Officer.
  90
  **ITEM
            13: 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
                    
                    Articles
                        of 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
                    
                    Articles
                        of 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
                    
                    Articles
                        of Amendment to Amended and Restated Articles of Incorporation,
                        incorporated by reference to Exhibit A of the Registrant's
                        Schedule 14C
                        filed on December 6, 2004.3.5
                    
                    By-laws
                        of the Registrant, incorporated by reference to Exhibit 3.4
                        of the
                        Registrant's Registration Statement on Form SB-2 (Registration
                        No.
                        333-112837), filed February 13, 2004.3.6
                    
                    Certificate
                        of Designations of Series B Convertible Preferred Stock,
                        dated October 15,
                        2004, incorporated by reference to Exhibit 3.2 of the Registrant’s Annual
                        Report on Form 10-KSB for the year ended December 31,
                        2004.4.1
                    
                    Form
                        of 5% Senior Secured Convertible Debenture incorporated by
                        reference to
                        Exhibit 4.1 to the Registrant's Current Report on Form 8-K
                        dated January
                        21, 2004.4.2
                    
                    Form
                        of Warrant to Purchase Common Stock issued pursuant to Securities
                        Purchase
                        Agreement, dated January 16, 2004, incorporated by reference to Exhibit
                        4.2 to the Registrant's 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
                    
                    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 of
                        the Registrant’s Annual Report on Form 10-KSB for the year ended December
                        31, 2004.4.5
                    
                    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 of
                        the Registrant’s Annual Report on Form 10-KSB for the year ended December
                        31, 2004.4.6
                    
                    Warrant
                        to Purchase Common Stock issued October 20, 2004 to Delphi
                        Automotive
                        Systems, LLC, to purchase up to 7,000,000 shares of Common
                        Stock,
                        incorporated by reference to Exhibit 4.6 of the Registrant’s Annual Report
                        on Form 10-KSB for the year ended December 31, 2004.4.7
                    
                    Registration
                        Rights Agreement dated as of October 20, 2004, by and between
                        Ener1, Inc.
                        and Delphi Automotive Systems LLC, incorporated by reference
                        to Exhibit
                        4.7 of the Registrant’s Annual Report on Form 10-KSB for the year ended
                        December 31, 2004.
  91
  4.8
                    
                    Registration
                        Rights Agreement dated as of October 20, 2004, by and between
                        EnerDel,
                        Inc., Delphi Automotive Systems, LLC and Ener1, Inc, incorporated
                        by
                        reference to Exhibit 4.8 of the Registrant’s Annual Report on Form 10-KSB
                        for the year ended December 31, 2004.4.9
                    
                    Form
                        of 7.5% Senior Secured Convertible Debenture issued pursuant
                        to Securities
                        Purchase Agreement dated March 11, 2005, incorporated by
                        reference to
                        Exhibit 4.1 of the Registrant’s current report on Form 8-K dated March 11,
                        2005.4.10
                    
                    Form
                        of Warrant to Purchase Common Stock issued pursuant to Securities
                        Purchase
                        Agreement, dated March 11, 2005 incorporated by reference
                        to Exhibit 4.2
                        of the Registrant’s current report on Form 8-K filed March 15,
                        2005.4.11
                    
                    Registration
                        Rights 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 Exhibit 4.3 of the Registrant’s current
                        report on Form 8-K filed March 15, 2005.4.12
                    
                    Warrant
                        Certificate to Purchase Common Stock of Ener1, dated December
                        9, 2004
                        Issued to Merriman Curhan Ford & Co., incorporated by reference to
                        Exhibit 4.10 to the Registrant’s Registration Statement on Form SB-2
                        (Registration No. 333-124745), filed May 9, 2005.4.13
                    
                    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, 2004.10.1
                    
                    1992
                        Non-Employee Director Stock Option Plan, incorporated by
                        reference to
                        Exhibit 10.1 of the Registrant’s Registration Statement on Form SB-2
                        (Registration No. 333-124745), filed May 9, 2005.10.2
                    
                    2002
                        Stock Participation Plan incorporated by reference to Exhibit
                        C of the
                        Registrant's Schedule 14A filed on April 15, 2002.10.3
                    
                    2002
                        Non-Employee Director Stock Participation Plan incorporated
                        by reference
                        to Exhibit D of the Registrant’s Schedule 14A filed on May 15,
                        2002.10.4
                    
                    Employment
                        Agreement by the Registrant and Kevin P. Fitzgerald, dated
                        September 8,
                        2003, incorporated by reference to Exhibit 10.6 to the Registrant’s
                        Quarterly Report on Form 10-QSB for the quarter ended September
                        30,
                        2003.10.5
                    
                    License
                        and Royalty Agreement by and among the Registrant, Ener1
                        Battery Company
                        and ITOCHU Corporation, dated July 25, 2003, incorporated
                        by reference to
                        Exhibit 10.2 to the Registrant’s Quarterly Report on Form 10-QSB for the
                        quarter ended September 30, 2003.10.6
                    
                    Shareholders
                        Agreement by and between ITOCHU and the Registrant, dated
                        July 25, 2003,
                        incorporated by reference to Exhibit 10.5 to the Registrant’s Quarterly
                        Report on Form 10-QSB for the quarter ended September 30,
                        2003.10.7
                    
                    Amendment
                        to Subscription and Investment Agreement by ITOCHU Corporation
                        and the
                        Registrant, dated January 31, 2004 incorporated by reference
                        to Exhibit
                        10.20 to the Registrant’s Annual Report on Form 10-KSB for the period
                        ended December 31, 20032004.10.8
                    
                    Securities
                        Purchase Agreement, dated as of January 16, 2004 by and among
                        Ener1, Inc.
                        and the entities whose names appear on the signature pages
                        thereof
                        incorporated by reference to Exhibit 10.1 to the Registrant's
                        Current
                        Report on Form 8-K dated January 21,
                        2004.
  92
  10.9
                    
                    Security
                        Agreement dated as of January 16, 2004 by and among Ener1
                        Battery Company
                        and the entities whose names appear on the signature pages
                        thereof,
                        incorporated by reference to Exhibit 10.2 to the Registrant's
                        Current
                        Report on Form 8-K dated January 21, 2004.10.10
                    
                    Subsidiary
                        Guaranty dated January 16, 2004 made by Ener1 Battery Company
                        in favor of
                        the Investors named therein incorporated by reference to
                        Exhibit 10.3 to
                        the Registrant’s Current Report on Form 8-K dated January 21,
                        2004.10.11
                    
                    Mortgage,
                        Security Agreement and Assignment of Leases and Rents dated
                        January 16,
                        2004 by Ener1 Battery Registrant to Satellite Asset Management,
                        L.P.,
                        incorporated by reference to Exhibit 10.4 to the Registrant’s Current
                        Report on Form 8-K dated January 21, 2004.10.12
                    
                    Waiver
                        Agreement dated January 2004 by and between the Registrant
                        and Ener1
                        Group, Inc. incorporated by reference to Exhibit 10.31 to
                        the Registrant’s
                        Annual Report on Form 10-KSB for the period ended December
                        31, 2003 filed
                        on March 31, 2004.10.13
                    
                    EnerDel,
                        Inc. Formation, Subscription and Stockholders’ Agreement entered into by
                        and between Delphi Automotive Systems LLC and Ener1, Inc.,
                        dated as of
                        October 20, 2004 incorporated by reference to Ener1, Inc.’s Form 8-K filed
                        on October 26, 2004.10.14
                    
                    Form
                        of Subscription Agreement dated as of October 15, 2004, by
                        and between
                        Ener1, Inc. and various investors for the purchase of 150,000
                        shares of
                        Ener1, Inc.’s Series B 7% Convertible Preferred Stock, incorporated by
                        reference to Exhibit 10.20 to Registrant’s Annual Report on Form 10-KSB
                        for the period ending December 31, 2004.10.15
                    
                    Sublease
                        Agreement dated as of October 20, 2004, is entered into by
                        and between
                        Delphi Automotive Systems LLC and EnerDel, Inc, incorporated
                        by reference
                        to Exhibit 10.21 to Registrant’s Annual Report on Form 10-KSB for the
                        period ending December 31, 2004.10.16
                    
                    Lease
                        Agreement dated October 20, 2004 between Ener1 Battery Company
                        and
                        EnerDel, Inc, incorporated by reference to Exhibit 10.22
                        to Registrant’s
                        Annual Report on Form 10-KSB for the period ending December
                        31,
                        2004.10.17
                    
                    Bill
                        of Sale dated October 20, 2004, by Delphi Automotive Systems
                        LLC in favor
                        of EnerDel, Inc. in favor of transactions contemplated by
                        the Formation,
                        Subscription and Shareholders’ Agreement of EnerDel, Inc. dated as of
                        October 20, 2004 by and among Delphi, Ener1 Inc. and EnerDel,
                        incorporated
                        by reference to Exhibit 10.23 to Registrant’s Annual Report on Form 10-KSB
                        for the period ending December 31, 2004.10.18
                    
                    Delphi
                        Technologies, Inc. Assignment of Certain Inventions or Improvements
                        dated
                        October 20, 2004, incorporated by reference to Exhibit 10.24
                        to
                        Registrant’s Annual Report on Form 10-KSB for the period ending December
                        31, 2004.10.19
                    
                    License
                        Agreement by and between Delphi Technologies, Inc. and EnerDel,
                        Inc. by
                        reference to Exhibit 10.25 to Registrant’s Annual Report on Form 10-KSB
                        for the period ending December 31, 2004.10.20
                    
                    Ener1
                        Battery Company Assignment of Intellectual Property to EnerDel,
                        Inc, dated
                        October 20, 2004, incorporated by reference to Exhibit 10.26
                        to
                        Registrant's Annual Report on Form 10-KSB for the period
                        ending December
                        31, 2004.
  93
  10.21
                    
                    License
                        Agreement dated October 20, 2004 by and between Ener1, Inc.
                        and EnerDel,
                        Inc, incorporated by reference to Exhibit 10.27 to Registrant's
                        Annual
                        Report on Form 10-KSB for the period ending December 31,
                        2004.10.22
                    
                    Ener1
                        Daughter Enterprise with Foreign Investments of Ener1 Battery
                        Company
                        Assignment of Intellectual Property to EnerDel, Inc, incorporated
                        by
                        reference to Exhibit 10.28 to Registrant's Annual Report
                        on Form 10-KSB
                        for the period ending December 31, 2004.10.23
                    
                    Option
                        to Purchase Agreement dated October 20, 2004 between EnerDel,
                        Inc.; Ener1,
                        Inc.; and Ener1 Battery Company, incorporated by reference
                        to Exhibit
                        10.29 to Registrant's Annual Report on Form 10-KSB for the
                        period ending
                        December 31, 2004.10.24
                    
                    Ener1
                        Services Agreement effective October 20, 2004 by and between
                        EnerDel, Inc.
                        and Ener1, Inc, incorporated by reference to Exhibit 10.30
                        to Registrant’s
                        Annual Report on Form 10-KSB for the period ending December
                        31,
                        2004.10.25
                    
                    Engineering
                        Services Agreement effective October 20, 2004 by and between
                        EnerDel, Inc.
                        and Delphi Automotive Systems LLC, incorporated by reference
                        to Exhibit
                        10.31 to Registrant’s Annual Report on Form 10-KSB for the period ending
                        December 31, 2004.10.26
                    
                    Transition
                        Services Agreement dated as of October 20, 2004 entered into
                        by and
                        between Delphi Automotive Systems LLC and EnerDel, Inc, incorporated
                        by
                        reference to Exhibit 10.32 to Registrant’s Annual Report on Form 10-KSB
                        for the period ending December 31, 2004.10.27
                    
                    Assignment/Assumption
                        of License Agreement dated October 20, 2004, among Ener1,
                        Inc., Ener1
                        Battery Company and EnerDel, Inc., incorporated by reference
                        to Exhibit
                        10.34 of the Registrant’s Annual Report on Form 10-KSB for the period
                        ending December 31, 2004.*10.28
                    
                    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 and Warrants to purchase shares of common stock,
                        incorporated
                        by reference to Exhibit 10.1 of the Registrant’s current report on Form
                        8-K filed March 15, 2005.10.29
                    
                    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 Exhibit 10.2 of the Registrant’s current
                        report on Form 8-K filed March 15, 2005.10.30
                    
                    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 7.5% Senior Secured Convertible
                        Debentures, incorporated by reference to Exhibit 10.3 of
                        the Registrant’s
                        current report on Form 8-K filed March 15, 2005.10.31
                    
                    Employment
                        Agreement by Registrant and Pankaj Dhingra dated December
                        1, 2004,
                        incorporated by reference to Exhibit 10.38 pf the Registrant’s Annual
                        Report on Form 10-KSB for the period ended December 31,
                        2004.10.32
                    
                    Agreement
                        and Plan of Merger, dated as of June 9, 2004 by and among
                        Ener1, Inc.,
                        Ener1 Acquisition Corp. and Splinex Technology Inc. incorporated
                        by
                        reference to Exhibit 2.1 to the registration statement on
                        Form S-1 filed
                        by Splinex Technology Inc. on June 24, 2004.
  94
  10.33
                    
                    First
                        Amendment, dated as of October 7, 2004, to Agreement and
                        Plan of Merger,
                        dated as of June 9, 2004 by and among Ener1, Inc., Ener1
                        Acquisition Corp.
                        and Splinex Technology Inc., incorporated by reference to
                        Exhibit 10.3 of
                        Amendment No. 1 to Ener1's Quarterly Report on Form 10-QSB/A
                        for the
                        period ending September 30, 2004.10.34
                    
                    Subscription
                        Agreement, dated as of October 15, 2004, between the Registrant
                        and Cofis
                        Compagnie Fiduciaire S.A. incorporated by reference to Exhibit
                        10.20 the
                        Registrant’s Annual Report on Form 10-KSB for the period ending December
                        31, 2004.10.35
                    
                    Ener1,
                        Inc. Form of Option Grant Agreement Under Employment Agreement
                        with Kevin
                        P. Fitzgerald, incorporated by reference to Exhibit 10.39
                        of Registrant’s
                        Registration Statement on Form SB-2 (Registration No. 333-124745),
                        filed
                        May 9, 2005.10.36
                    
                    Agreement
                        between EnerDel, Inc. and Enerstruct, Inc., entered into
                        as of April 12,
                        2005, incorporated by reference to Exhibit 10.40 of Registrant’s
                        Registration Statement on Form SB-2 (Registration No. 333-124745),
                        filed
                        May 9, 2005.10.37
                    
                    Form
                        of Stock Option Agreement under the Registrant’s 2002 Non-Employee
                        Director Stock Participation Plan, incorporated by reference
                        to Exhibit
                        10.41 of Registrant’s Registration Statement on Form SB-2 (Registration
                        No. 333-124745), filed May 9, 2005.10.38
                    
                    Form
                        of Director Appointment Letter, incorporated by reference
                        to Exhibit 10.42
                        of Registrant’s Registration Statement on Form SB-2 (Registration No.
                        333-124745), filed May 9, 2005.10.39
                    
                    Letter
                        Agreement between the Registrant and Ener1 Group, Inc., dated
                        October 15,
                        2004, regarding a financing commitment provided by Ener1
                        Group, Inc. to
                        the Registrant, incorporated by reference to Exhibit 10.43
                        of Registrant’s
                        Registration Statement on Form SB-2 (Registration No. 333-124745),
                        filed
                        May 9, 2005.10.40
                    
                    Director
                        Appointment Letter Agreement between the Registrant and Carlos
                        E.
                        Mendez-Penate, dated October 11, 2004, incorporated by reference
                        to
                        Exhibit 10.44 of Registrant’s Registration Statement on Form SB-2
                        (Registration No. 333-124745), filed May 9, 2005.10.41
                    
                    Indemnification
                        Agreement between the Registrant, Carlos E. Mendez-Penate
                        and Coudert
                        Brothers LLP, dated October 11, 2004, incorporated by reference
                        to Exhibit
                        10.45 of Registrant’s Registration Statement on Form SB-2 (Registration
                        No. 333-124745), filed May 9, 2005.10.42
                    
                    Option
                        Agreement between Ener1, Inc. and Ulrik Grape dated October
                        1,
                        2005.*10.43
                    
                    Employment
                        Agreement between EnerDel, Inc. and Ulrik Grape dated October
                        1,
                        2005.*10.44
                    
                    Tax
                        Allocation Agreement dated March 1, 2006 between the Registrant
                        and Ener1
                        Group, Inc.*14.
                    
                    Code
                        of Ethics,incorporated
                        by reference to Exhibit 14.0 of Registrant's Annual Report
                        on Form 10-KSB
                        for the period ended December 31, 2004.21
                    
                    Subsidiaries
                        of the Registrant.*31.1
                    
                    Rule
                        13a-14(a)/15(d)-14(a) Certification of Chief Executive
                        Officer.*
  95
  31.2
                    
                    Rule
                        13a-14(a)/15(d)-14(a) Certification of Chief Financial
                        Officer.*32
                    
                    Section
                        1350 Certifications.*
 *
            Filed
            herewith
  96
  **ITEM
            14: PRINCIPAL ACCOUNTANT FEES AND SERVICES**
 
 Year
            ended December 31, 2005
 
 Audit
            Fees: The aggregate fees, including expenses, billed by the Company’s
            principal accountant in connection with the audit of our consolidated
            financial
            statements for the most recent fiscal year and for the review of our
            financial
            information included in our Annual Report on Form 10-KSB; and our quarterly
            reports on Form 10-QSB during the fiscal year ending December 31, 2005
            were
            $347,077
 
 Audit-Related
            Fees: The aggregate fees, including expenses, billed by the Company’s principal
            accountant for services reasonably related to the audit for the year
            ended
            December 31, 2005 were $-0-
 
 Tax
            Fees:
            The aggregate fees, including expenses, billed by the Company’s principal
            accountant for services reasonably related to tax services during the
            year 2005
            were $8,751.
 
 All
            Other
            Fees:  The aggregate fees, including expenses, billed for all other
            services rendered to the Company by its principal accountant during year
            2005
            was $0.
 
 Year
            ended December 31, 2004
 
 Audit
            Fees: The aggregate fees, including expenses, billed by the Company’s
            principal accountant in connection with the audit of our consolidated
            financial
            statements for the most recent fiscal year and for the review of our
            financial
            information included in our Annual Report on Form 10-KSB; and our quarterly
            reports on Form 10-QSB during the fiscal year ending December 31, 2004
            were
            $350.644.
 
 Audit-Related
            Fees: The aggregate fees, including expenses, billed by the Company’s principal
            accountant for services reasonably related to the audit for the year
            ended
            December 31, 2004 were $-0-
 
 Tax
            Fees:
            The aggregate fees, including expenses, billed by the Company’s principal
            accountant for services reasonably related to tax services during the
            year 2004
            were $-0-
 
 All
            Other
            Fees:  The aggregate fees, including expenses, billed for all other
            services rendered to the Company by its principal accountant during year
            2004
            were $30,673
 
 The
            Board
            of Directors has considered whether the provisions of the services covered
            above
            under the captions “Financial Information Systems Design and Implementation
            Fees” and “All Other Fees” is compatible with maintaining the auditor’s
            independence.
  97
  SIGNATURES
 
 Pursuant
            to the requirements of Section 13 or 15(d) of the Securities Exchange
            Act of
            1934, the registrant has duly caused this Amendment No. 2 to Annual
            Report on Form 10-KSB to be signed on its behalf by the undersigned,
            thereunto
            duly authorized.
  **Ener1,
                    Inc.**Date: August 8,
                    2006
                  By:
                  /s/ Ronald
                    StewartRonald
                      Stewart
                    Interim
                      Chief Executive Officer
  Pursuant
            to the requirements of the Securities Exchange Act of 1934, this Amendment
            No. 2 has been signed below by the following persons on behalf of the
            registrant and in the capacities and on the dates indicated.
   **Signature**
                      
                      **Title**
                      **Date**/s/
                        Charles Gassenheimer
                      
                      Chairman
                        of the Board, Director
                      August
                          8, 2006Charles Gassenheimer/s/
                          Ronald Stewart
                      
                      Interim
                        Chief Executive Officer, General Counsel and Secretary
                      August
                              8, 2006Ronald Stewart
                      
                      (Principal
                        Executive Officer)/s/
                          Gerard A. Herlihy
                      
                      Chief
                        Financial Officer
                      August
                              8, 2006Gerard A. Herlihy
                      
                      (Principal
                        Financial Officer and Principal Accounting Officer)Director
                      August
                              8, 2006Marshall Cogan/s/
                          Karl Gruns
                      
                      Director
                      August
                              8, 2006Karl Gruns/s/
                          Ludovico Manfredi
                      
                      Director
                      August
                              8, 2006Ludovico Manfredi/s/
                          Dr Peter Novak
                      
                      Director
                      August
                              8, 2006Dr. Peter NovakDirector
                      August
                              8, 2006Mike Zoi
  98