UNITED STATESSECURITIES AND EXCHANGE
COMMISSION Washington, D.C. 20549

FORM 10-QSB

QUARTERLY REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

For the quarterly period
ending September 30, 2004

Commission File Number
0-21138

ENER1, INC. (Exact name of
registrant as specified in its charter)

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

500 West Cypress Creek
Road-Suite 100 Ft. Lauderdale, Florida 33309 (Address
of principal executive offices) (Zip Code)

(954) 556-4020(Registrants
telephone number, including area code)

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

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

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

|                                                         |                                                    
|-------------------------------------------------------- | ---------------------------------------------------
|Class       
Common stock, par value
     $.01 per share | Outstanding as of
November 12, 2004
    347,455,751

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

-*-

# ENER1, INC. AND
SUBSIDIARIES Form 10-QSB for the
Quarter Ended September 30, 2004

INDEX

| |  |  | Page    
| |  |  | --------
| |  |  | Part I. 
| |  |  | Item 1. 
| |  |  |         
| |  |  |         
| |  |  |         
| |  |  |         
| |  |  |         
| |  | 
| |  |  |         
| |  |  |         
| |  |  |         
| |  |  |         
| |  |  |         
| |  |  | Item 2. 
| |  |  |         
| |  | 
| |  |  | Item 3. 
| |  | 
| |  |  | Part II.
| |  | 
| |  |  | Item 1. 
| |  | 
| |  | 
| |  |  | Item 6. 
| |  | 
| |  |  |         
| |  |  |         

-1-

# Part I. FINANCIAL
INFORMATION

Item
1.  Financial Statements

# ENER1, INC. AND
SUBSIDIARIES CONDENSED CONSOLIDATED
BALANCE SHEET (Unaudited) (In thousands except
share and debt data)

|                                                           | September 30, 2004
|---------------------------------------------------------- | ------------------
|ASSETS                                                     |                   
|Current assets                                             |                   
|Cash and equivalents                                       |                   
|Prepaid expenses and other current assets                  |                   
|Assets held for disposal (Note 3)                          |                   
|Due from related parties                                   |                   
|                                                           |                   
|Total current assets                                       |                   
|Property and Equipment, net                                |                   
|Investment in EnerStruct (Note 10)                         |                   
|Other Assets (Note 11)                                     |                   
|                                                           |                   
|Total assets                                               |                   
|                                                           |                   
|LIABILITIES AND STOCKHOLDERS' EQUITY                       |                   
|Current liabilities                                        |                   
|Accounts payable                                           |                   
|Accrued expenses and other current liabilities (Note 6)    |                   
|Liabilities related to assets held for disposal (Note 3)   |                   
|Current portion of bank installment loan (Note 8)          |                   
|                                                           |                   
|Total current liabilities                                  |                   
|                                                           |                   
|Long-term liabilities                                      |                   
|Installment loan payable to bank (Note 8)                  |                   
|$19,700,000 senior secured 5% convertible debenture, net   |                   
|of discount attributable to debt issue costs, warrants,    |                   
|and beneficial conversion features of $19,700,000 (Note 9) |                   
|                                                           |                   
|Total liabilities                                          |                   
|Commitments and contingencies (Note 12)                    |                   
|Stockholders' equity                                       |                   
|Preferred stock, par value $.01 per share, 5,000,000       |                   
|shares authorized, none issued and outstanding             |                   
|Common stock, par value $.01 per share, 500,000,000        |                   
|shares authorized, 347,455,751 issued and outstanding      |                   
|Additional paid-in capital                                 |                   
|Accumulated deficit                                        |                   
|                                                           |                   
|Total stockholders' equity                                 |                   
|                                                           |                   
|Total liabilities and stockholders' equity                 |                   
|                                                           |                   

See notes to condensed consolidated financial statements.

-1-

# ENER1, INC. AND
SUBSIDIARIES CONDENSED CONSOLIDATED
STATEMENTS OF OPERATIONS(Unaudited) (In thousands except
per share data)

|                                                   | Three Months Ended
September 30 | Nine Months Ended
September 30 |   |        
|-------------------------------------------------- | ------------------------------- | ------------------------------ | - | -------
|
|Net sales                                          |                                 |                                | $ | --     
|Cost of goods sold                                 |                                 |                                |   | --     
|                                                   |                                 |                                |   |        
|Gross profit                                       |                                 |                                |   | --     
|Operating expenses:                                |                                 |                               
|Manufacturing pre-production costs                 |                                 |                                |   | 532    
|Research and development                           |                                 |                                |   | 576    
|Selling, general and administrative                |                                 |                                |   | 1,530  
|Interest Expense                                   |                                 |                                |   | 666    
|                                                   |                                 |                                |   |        
|Total operating expenses                           |                                 |                                |   | 3,204  
|                                                   |                                 |                                |   |        
|Loss from operations                               |                                 |                                |   | (3,204 
|Other income (expense), net                        |                                 |                                |   | 77     
|Equity in loss on investment in                    |                                 |                               
|EnerStruct  (Note 10)                              |                                 |                                |   | (139   
|                                                   |                                 |                                |   |        
|Loss from continuing operations                    |                                 |                                |   | (3,266 
|Loss from discontinued operations(Note 3)          |                                 |                                |   | (5     
|                                                   |                                 |                                |   |        
|Net Loss                                           |                                 |                                | $ | (3,271 
|                                                   |                                 |                                |   |        
|Loss per share from continuing operations (basic   |                                 |                               
|and diluted)                                       |                                 |                                | $ | (0.01  
|                                                   |                                 |                                |   |        
|                                                   |                                 |                                |   |        
|Loss per share from discontinued operations (basic |                                 |                                | $ | --     
|and diluted)                                       |                                 |                               
|Net loss per share - basic and diluted             |                                 |                                | $ | (0.01  
|Weighted average shares Outstanding                |                                 |                                |   | 347,276
|                                                   |                                 |                                |   |        

See
notes to condensed consolidated financial statements.

-2-

# ENER1, INC. AND
SUBSIDIARIES CONDENSED CONSOLIDATED
STATEMENTS OF CASH FLOWS(Unaudited) (In thousands)

|                                                                     | Nine months ended
September 30, | 
|-------------------------------------------------------------------- | ------------------------------- | 
|
|Cash provided by (used in):                                          |                                 | 
|Operating activities:                                                |                                 | 
|Net loss                                                             |                                 | 
|Depreciation and amortization                                        |                                 | 
|Amortization of Discount of 5% Sr. Secured Debenture (Note 9)        |                                 | 
|Equity from loss in investment in EnerStruct (Note 10)               |                                 | 
|Changes in assets and liabilities                                    |                                 | 
|Changes in assets and liabilities held for disposal (Note 3)         |                                 | 
|Compensation expense for stock and stock options issued for services |                                 | 
|                                                                     |                                 | 
|Net cash used in operating activities                                |                                 | 
|Investing activities:                                                |                                 | 
|Capital expenditures                                                 |                                 | 
|Minority interest in net proceeds from issuance of common stock      |                                 | 
|of subsidiary                                                        |                                 | 
|Investment in Splinex                                                |                                 | 
|Investment in Enerstuct                                              |                                 | 
|                                                                     |                                 | 
|Net cash used in investing activities                                |                                 | 
|                                                                     |                                 | 
|Financing activities:                                                |                                 | 
|Repayment of related party notes                                     |                                 | 
|Repayment of short term note payable                                 |                                 | 
|Repayment of guaranteed related party debt (note 8)                  |                                 | 
|Repayment of mortgage note payable (note 8)                          |                                 | 
|Repayment of bank loan (Note 8)                                      |                                 | 
|Repayment of bank installment loan (Note 8)                          |                                 | 
|Proceeds from advances from stockholder                              |                                 | 
|Proceeds from exercised employee stock options                       |                                 | 
|Proceeds from sale of common stock                                   |                                 | 
|Proceeds from exercise of warrants (Note 8)                          |                                 | 
|Proceeds from issuance of 5% senior secured                          |                                 | 
|convertible debentures net of costs (note 9)                         |                                 | 
|Proceeds from minority investment in subsidiary                      |                                 | 
|                                                                     |                                 | 
|Net cash provided by financing activities                            |                                 | 
|                                                                     |                                 | 
|Net increase (decrease) in cash and equivalents                      |                                 | 
|Cash and equivalents, balance at January 1                           |                                 | 
|                                                                     |                                 | 
|Cash and equivalents, balance at September 30                        |                                 | 
|                                                                     |                                 | 

See notes to condensed consolidated financial statements

-3-

# ENER1, INC. AND
SUBSIDIARIES  NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS

1.    
          BASIS OF PRESENTATION

The accompanying unaudited condensed
consolidated financial statements for Ener1, Inc. (Ener1 or the
Company) have been prepared in accordance with accounting principles generally
accepted in the United States of America for interim financial information and with the
instructions to Form 10-QSB for quarterly reports under Section 13 or 15 (d) of the
Securities Exchange Act of 1934. Accordingly, they do not include all of the information
and footnotes required by accounting principles generally accepted in the United States of
America for complete financial statements. In the opinion of management, all adjustments
considered necessary for a fair presentation have been included and such adjustments are
of a normal recurring nature. Operating results for the three and nine months ended
September 30, 2004 are not necessarily indicative of the results that may be expected for
the year ending December 31, 2004. The audited financial statements at December 31, 2003,
which are included in the Companys Annual Report on Form 10-KSB, should be read in
conjunction with these condensed consolidated financial statements.

2.    
          GOING CONCERN

The accompanying condensed
consolidated financial statements have been prepared on a going concern basis, which
contemplates the realization of assets and the satisfaction of liabilities in the normal
course of business. The Company has experienced net operating losses since 1997 and
negative cash flows from operations since 1999 through September 30, 2004, and has an
accumulated deficit of $70 million as of September 30, 2004. It is likely that the
Companys operations will continue to incur negative cash flows through September 30,
2005. In addition, should the company not be able to meet the terms of the Senior Secured
Convertible Debentures (see note 9), $19,700,000 would become immediately due.
Additional financing will be required to fund the Companys planned operations
through September 30, 2005, and the Company intends to seek additional debt or equity
financing as required. If additional financing is not obtained, such a condition, among
others, will give rise to substantial doubt about the Companys ability to continue
as a going concern for a reasonable period of time. The condensed consolidated financial
statements do not include any adjustments relating to the recoverability and
classification of recorded asset amounts or the amounts and classifications of liabilities
that might be necessary should the Company be unable to continue as a going concern.

3.    
          NATURE OF BUSINESS AND DISCONTINUED OPERATIONS

Nature of Business

Ener1s primary lines of
business consist of development and marketing of advanced lithium batteries and certain
battery components such as electrodes, fuel cells, fuel cell systems and components and
nanotechnology-related manufacturing processes and materials. The Companys current
business line focus is the result of changes over the past several years arising from new
investments in the Company, changes in research and development activities and acquisition
of a battery business from its majority shareholder in 2002.

-4-

Ener1 is a Florida corporation
founded in 1985. Ener1 was formerly named Inprimis, Inc. and before that it was named Boca
Research, Inc. During 2002 and 2003, the Company manufactured set-top boxes and other
digital entertainment products through subcontractors and marketed those products to the
hospitality and healthcare markets through its 49% owned subsidiary EnerLook Healthcare
Solutions, Inc. (EnerLook), and to other markets through its former Digital
Media Technologies Division. In 2003, the majority of the assets in the Digital Media
Technologies Division were transferred to EnerLook (see Discontinued Operations and
Sale of Assets of EnerLook below).

In January 2002, Ener1 Group, Inc.
(Ener1 Group) acquired a majority interest in the Company and as a result of
subsequent transactions, owned, along with its affiliates, approximately 88% of the
outstanding common stock of the Company at September 30, 2004. Ener1 Group is a privately
held company in Ft. Lauderdale, Florida that provides financial and management resources
to its portfolio of incubator technology companies.

One of Ener1 Groups
subsidiaries, Ener1 Battery Company (Ener1 Battery or the Battery
Company), became a wholly owned subsidiary of the Company on September 6, 2002 when
the Company acquired 100% of its outstanding capital stock from Ener1 Group. Ener1 Battery
is in the business of developing and marketing lithium ion and other lithium technology
batteries for use in military, industrial and consumer applications. The Battery Company
is a development stage company that has recorded nominal revenue since its formation.

Concurrent with the acquisition of
the Battery Company in 2002, the Company began to transition its business away from the
set-top box and engineering services businesses of its Digital Media Technologies Division
and EnerLook and focus instead on the businesses of the Battery Company. In addition, the
Company began developing fuel cells and systems and components for fuel cells, and the
fuel cell operations of the Company have continued to expand through 2004.

In January 2002, the Company began to
develop products for neutralizing the harmful effects of electromagnetic radiation in
electric power transmission lines and equipment through its wholly owned subsidiary, Ener1
Technologies, Inc. (Technologies). Technologies is also a development stage
company and it has not recorded any revenue since its formation.

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 exclusively in Japanese markets.

On September 12, 2003, the Battery
Company finalized the acquisition of Ener1s research and development partner company
in Ukraine, Ener1 Ukraine, Inc. (Ener1 Ukraine). Ener1 Ukraine conducts
research and development activities for the Company at facilities in Ukraine.

The Company formed NanoEner, Inc.
(NanoEner) on April 2, 2004 to develop new markets and applications for
Ener1s proprietary technologies to manufacture nanomaterials. Ener1 currently uses
its nanomaterials manufacturing technologies in the development of nanomaterials for
lithium batteries and other high-energy storage devices.

-5-

The Company and Delphi Corporation formed a new company called EnerDel, Inc.  The
Company received 80.5% of EnerDels common stock in consideration for the contribution of the following assets:
(i) $15,000,000 in cash; (ii) certain rights to the Companys lithium battery manufacturing-related equipment;
and (iii) certain rights to the battery-related intellectual property portfolios of Ener1 Battery and Ener1
Ukraine.  Delphi contributed their lithium battery-related manufacturing equipment and their
lithium battery-related patent portfolio to EnerDel, in consideration for which they received (i) 19.5% of
EnerDels common stock, (ii) 8,000 shares of EnerDels 8.25% Series A Preferred Stock with an aggregate
liquidation value of $8,000,000 (the Series A Preferred Stock), (iii) immediately exercisable warrants with a
ten year term to purchase up to 1,750,000 shares of common stock of the Company for $0.70 per share, and (iv)
immediately exercisable warrants with a ten year term to purchase up to 5,250,000 shares of common stock of the
Company for $1.00 per share.   The Series A Preferred Stock is exchangeable, at any time prior to January 31,
2005, at the option of the holder, into up to 6,956,521 shares of the common stock of the Company, based on an
exchange rate of 869.5652 shares of the Companys common stock for each share of Series A Preferred Stock. The
Series A Preferred Stock is subject to redemption by EnerDel upon certain circumstances.
The Company formed a new subsidiary, EnerFuel, Inc., on October 29, 2004.  In the future, all of the Companys
fuel cell related operations will be conducted through EnerFuel.

Discontinued Operations
and Sale of Assets of EnerLook

On December 15, 2003, the Company,
EnerLook, Ener1 Group and T.& V. Rental Co., Inc. (TVR) entered into an
arrangement pursuant to which (1) TVR agreed to manage EnerLooks business for up to
six months in return for any profits earned by EnerLook, (2) EnerLook was granted the
option, exercisable at any time on or before June 15, 2004, to acquire 100% of TVRs
outstanding stock for $16,000,000 in cash, plus 4,000,000 shares of the Companys
stock held by Ener1 Group; and (3) TVR was granted the option to acquire substantially all
of the assets of EnerLook in exchange for 5% of a limited liability company that would own
all the respective assets of TVR and EnerLook, such option to become exercisable if
EnerLook did not exercise the option described in clause (2) above. EnerLook did not
exercise the option described in clause (2) and on June 15, 2004, TVR notified EnerLook of
TVRs intent to exercise its option to acquire substantially all of the assets of
EnerLook, and the EnerLook employees became employees of TVR Communications, LLC, a
limited liability company formed by TVR to hold all of TVRs and EnerLooks
assets. The Company, EnerLook, Ener1 Group and TVR Communications, LLC entered into an
Asset Purchase Agreement dated as of June 30, 2004, providing for the sale of
substantially all of EnerLooks assets to TVR Communications, LLC, in exchange for a
5% membership interest in TVR Communications, LLC. The asset sale is expected to close in
November, 2004, subject to satisfaction of certain conditions.

TVR paid EnerLook approximately
$550,000 to fund EnerLooks operations from December 15, 2003 through June 15, 2004.

The Companys Digital
Media/EnerLook segment was deemed by the Company to be held-for-sale, and certain of the
revenues, expenses, assets and liabilities of this segment were classified as discontinued
operations. Management believes that substantially all remaining resources of the Company
will be redirected for use in the Companys continuing operations, and the Company
will continue to incur corporate and overhead costs; accordingly, these costs and related
liabilities are included in continuing operations.

-6-

4.    
          SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation: The
accompanying condensed consolidated financial statements include Ener1, Inc. and its
wholly owned subsidiaries: the Battery Company, NanoEner, Ener1 Ukraine; Technologies,
EnerNow Technologies, Inc. Boca Research International, Inc., Boca Research Holland B.V.,
Boca Research (UK) Limited, Boca Research International Holdings Ltd., Boca Global, Inc.
and AppsCom, Inc. It also includes the operations of EnerLook as discontinued operations.
Intercompany accounts and transactions have been eliminated in consolidation. The Battery
Company, NanoEner and Ener1 Ukraine have ongoing operations; however the Battery Company
operations are limited as of October 20, 2004 to holding real estate and equipment assets,
the use of which is made available to EnerDel under certain agreements. The Companys
new subsidiary, EnerFuel, Inc. will operate the Companys fuel cell business going
forward. Ener1 Technologies has also conducted operations, but is not currently active.

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

Investment in EnerStruct: The
Companys 49% investment in EnerStruct is accounted for using the equity method (Note
10).

Research and Development Costs:
Research and development costs 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 the differences between the financial statement carrying values and the
tax bases of assets and liabilities and carry-forwards that will result in taxable or
deductible amounts in the future based on enacted tax laws and rates applicable to the
periods in which the differences are expected to affect taxable income. Valuation
allowances are established when necessary to reduce deferred tax assets to the amount more
likely than not to be realized. Income tax expense or benefit is the tax payable or
refundable for the period plus or minus the change during the period in deferred tax
assets and liabilities.

Reclassifications: Certain prior year
amounts, most notably amounts relating to discontinued operations and research and
development, have been reclassified to conform to the fiscal 2004 presentation.

Loss per share: Basic loss per share
is computed by dividing the loss attributable to common shareholders by the
weighted-average number of common shares outstanding for the period. Diluted loss per
share reflects the potential dilution that could occur if securities or other contracts to
issue common stock were exercised or converted into common stock or resulted in the
issuance of common stock that then shared in the earnings of the Company. Diluted loss per
share is computed by dividing loss available to common shareholders by the sum of the
weighted average number of common shares outstanding for the period plus common shares
issuable under common stock equivalents (all related to outstanding stock options,
warrants and convertible debt) unless consideration of such common share equivalents
would result in anti-dilution. Common stock equivalents were not considered in the
calculation of diluted loss per share, as their effect would have been anti-dilutive for
the periods ended September 30, 2004 and 2003.

-7-

Stock compensation: Options granted
to employees under the Companys stock option plans are accounted for using the
intrinsic method under Accounting Principles Board Opinion No. 25, Accounting for
Stock Issued to Employees (APB 25). In October 1995, the Financial
Accounting Standards Board issued Statement of Financial Accounting Standards No. 123,
Accounting for Stock-Based Compensation (SFAS 123), which defines
the fair value base method of accounting for stock options. Certain aspects of the
accounting standards prescribed by SFAS 123 are optional and therefore, the Company has
continued to account for stock options under the intrinsic value method specified in APB
25. The Company has adopted the disclosure-only provisions of SFAS 123. Accordingly,
compensation cost has been recognized for the stock options plans only when the exercise
prices of employee stock options are less than the market prices of the underlying stock
on the date of grant. If compensation cost had been determined based on the fair value at
the grant date for all option awards consistent with the provisions of SFAS 123, the
Companys net loss and loss per share would have been as indicated below for the
periods ended September 30, 2004 and 2003:

|                                  | Three months
ended September 30 | Nine months
ended September 30 |   |       
|--------------------------------- | ------------------------------- | ------------------------------ | - | ------
|
|
|Net Loss as Reported              |                                 |                                | $ | (3,271
|Plus:                             |                                 |                               
|Compensation recorded for stock   |                                 |                               
|options issued & variable options |                                 |                                |   | 197   
|Less:                             |                                 |                               
|Pro forma stock based employee    |                                 |                               
|compensation, net of tax          |                                 |                                |   | (798  
|                                  |                                 |                                |   |       
|                                  |                                 |                                |   |       
|                                  |                                 |                                | $ | (4,022
|                                  |                                 |                                |   |       
|Loss per share:                   |                                 |                               
|Basic and diluted, as reported    |                                 |                                | $ | (0.01 
|Basic and diluted, pro forma      |                                 |                                | $ | (0.01 
|                                  |                                 |                                |   |       

5.    
          SEGMENT REPORTING The Company is organized based upon the following segments:
          Digital Media Division / EnerLook (which is classified as discontinued
          operations), the Battery Company, Fuel Cell Division, Nanotechnology Division,
          and Technologies.

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

-8-

|                        | Three months
ended September 30 | Nine months
ended September 30 |   |       
|----------------------- | ------------------------------- | ------------------------------ | - | ------
|
|
|Sales                   |                                 |                                |   |       
|Discontinued operations |                                 |                                | $ | --    
|Battery                 |                                 |                                |   | --    
|                        |                                 |                                |   |       
|Net sales               |                                 |                                | $ | --    
|Net Loss                |                                 |                               
|Discontinued operations |                                 |                                | $ | (5    
|                        |                                 |                                |   |       
|Corporate               |                                 |                                |   | (2,156
|Battery                 |                                 |                                |   | (828  
|Ener1 Technologies      |                                 |                                |   | (40   
|Fuel cell               |                                 |                                |   | (197  
|Nanotechnology          |                                 |                                |   | (82   
|                        |                                 |                                |   |       
|Net Loss                |                                 |                                | $ | (3,271
|                        |                                 |                                |   |       
|Assets                  |                                 |                               
|Discontinued operations |                                 |                                |   |       
|Corporate               |                                 |                                |   |       
|Battery                 |                                 |                                |   |       
|Ener1 Technologies      |                                 |                                |   |       
|Fuel cell               |                                 |                                |   |       
|Nanotechnology          |                                 |                                |   |       
|                        |                                 |                                |   |       
|Total Assets            |                                 |                                |   |       

6.    
          ACCRUED EXPENSES AND OTHER LIABILITIES Accrued expenses and other liabilities
          principally consist of accrued salaries, bonuses and related benefits and
          accrued professional fees.

7.    CONSOLIDATION OF
49% SUBSIDIARY (ENERLOOK SOLUTIONS, INC.)

When formed in February 2002,
EnerLook was a 51% subsidiary of the Company. In early 2003, EnerLook issued (i) 333,333
shares of common stock to Solution Investment Group, LLC in exchange for $250,000 and (ii)
125,000 shares of common stock to an EnerLook employee, reducing the Companys
ownership to approximately 49%. Ener1 Group owns approximately 42% of the outstanding
common stock of EnerLook. Since EnerLook was formed, the Company has consolidated
EnerLooks results of operations and its balance sheet as part of the Companys
consolidated financial statements. Ownership of a subsidiary below 51% is typically
recorded under the equity method of accounting, rather than consolidating the
subsidiarys results of operations with a parent company owning less than 51% of the
subsidiary, as it is presumed that the 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 that exercise
substantial control over the activities of EnerLook and own an aggregate of approximately
91% of EnerLooks outstanding common stock. Management believes that the reduction in
its ownership percentage of EnerLooks common stock from 51% to approximately 49%
does not materially reduce the control the Company exercises over EnerLooks
operations.

-9-

In the second quarter of 2003, the
Company transferred certain assets of its Digital Media Division to EnerLook in order to
consolidate the Companys set top box business, which delivers interactive
information and entertainment systems and services to customers in vertical markets such
as hospitality and healthcare. As part of this restructuring, the Company transferred net
assets in the amount of approximately $1.0 million to EnerLook, resulting in an
intercompany receivable from EnerLook in the amount of $1.0 million.

Effective December 15, 2003,
EnerLooks operations were deemed to be discontinued operations (Note 3), and on that
date management conveyed operating control of this segment to TVR, a third party (Note 3).

8.    
          DEBT AND DEBT GUARANTEES

At December 31, 2003, the Battery
Company was the mortgagor under a mortgage note payable to Interbay Funding, LLC in the
amount of $703,896. The mortgage note was collateralized by the land and building owned by
the Battery Company.

Also at December 31, 2003, the
Battery Company was indebted under two loan agreements with Saint Petersburg Joint Stock
Bank Tavricheskiy, in the amounts of $1,200,000 and $400,000, respectively. The
obligations under the $1,200,000 note were collateralized by a pledge of a patent owned by Ener1
Ukraine, which is a 100% subsidiary of Ener1 Battery. The $400,000 note was unsecured. The
combined principal balances on both notes as of December 31, 2003 totaled $1,600,000.

The majority of the Companys
equipment had certain liens against it as of December 31, 2003, as described below. As of
December 31, 2003, Ener1 s.r.l., an Italian company related to the Company by common
ownership (the Italian Company), had a loan outstanding to Meliorbanca Gallo
S.p.A.(the Italian Bank) in the amount of EURO 1,877,685. Ener1, Ener1 Group,
the Battery Company and two individuals who were directors of all three companies, were
guarantors of this loan. The Italian Companys obligations to the Italian Bank in the
amount of EURO 5,000,000 were collateralized by a pledge of specified battery production
equipment of the Battery Company, which had been transferred from the Italian Company to
the Battery Company in a series of transactions prior to the Companys acquisition of
the Battery Company. The U.S. dollar value of this collateral was approximately $6,200,000
at December 31, 2003.

In January 2004, the Company issued
$20,000,000 in aggregate principal amount of 5% senior secured convertible debentures due
2009, and warrants to purchase up to 16,000,000 shares of common stock, in a private
placement (Note 9). In connection with the issuance of the debentures, the Company was
required to have all security interests in the land, building, patents, and production
equipment owned by the Battery Company released. In order to effect this release, in
January 2004, the Company paid $2.2 million to the Italian Bank to satisfy the Italian
Companys obligations, and paid all of the outstanding balances due to Interbay
Funding and to Petersburg Joint Stock Bank Tavricheskiy.

-10-

In March 2004, the Battery Company
obtained a loan secured by a vehicle. The total amount due under the loan is $125,000 plus
interest payable over 5 years in equal monthly payments of approximately $2,600.

9.    
          5% SENIOR SECURED CONVERTIBLE DEBENTURES DUE 2009

In January 2004, the Company issued
$20,000,000 in aggregate principal amount of 5% senior secured convertible debentures due
2009. The Companys obligations under the debentures are secured by the land and
building owned by the Battery Company, as well as by certain battery production equipment
owned by the Battery Company. The debentures are convertible into common stock of Ener1 at
an initial conversion price of $1.25 per share. As part of the transaction, the Company
issued warrants with a ten-year term to purchase a total of 16,000,000 common shares at an
initial price of $2.51 per share. Proceeds from the sale were used to pay expenses of the
sale and repay debt, including $1,040,817 owed to related parties. Direct costs associated
with the debentures of approximately $1,473,000, including $1,200,000 of investment
banking fees, were incurred.

Accounting Principles Board Opinion
No. 14, entitled Accounting for Convertible Debt Issued with Stock Purchase
Warrants, provides that the portion of the proceeds from debt securities issued with
detachable stock purchase warrants that is allocable to the warrants should be accounted
for as paid-in capital. The allocation should be based on the relative fair values of the
two securities at time of issuance. Any resulting discount or premium on the debt
securities should be accounted for as such. In addition, Emerging Issues Task Force
Release Nos. 98-5 and 00-27 state that any embedded beneficial conversion features present
in convertible securities should be valued separately at issuance. The embedded beneficial
conversion feature should be recognized and measured by allocating a portion of the
proceeds equal to the intrinsic value of that feature to additional paid-in capital. That
amount should be calculated at the commitment date as the difference between the effective
conversion price and the fair value of the common stock or other securities into which the
security is convertible, multiplied by the number of shares into which the security is
convertible. The Emerging Issues Task Force observed that in certain circumstances, the
intrinsic value of the beneficial conversion feature may be greater than the proceeds
allocated to the convertible instrument. In those situations, the amount of the discount
assigned to the beneficial conversion feature is limited to the amount of the proceeds
allocated to the convertible instrument. For convertible instruments that have a stated
redemption date (such as debt and mandatorily redeemable preferred stock) the discount
resulting from recording a beneficial conversion option should be accreted from the date
of issuance to the stated redemption date of the convertible instrument. In the event of
early conversion or default, the remaining discount would be recognized as interest
expense during the period in which such early conversion or default occurs.

-11-

In applying the provisions of the
above pronouncements, the Company has recorded a discount on the convertible debentures in
the amount of $20,000,000. This discount is being accreted to interest expense using the
interest method over the life of the debentures (five years). As the effective interest
rate, which is determined by dividing the actual interest rate on the convertible
debentures by the discounted debt amount, approaches infinity, the interest expense to be
recorded approximates the future cash payments. Total interest expense on the debentures
for the three and nine months ended September 30, 2004 was $356,697 and $817,909
respectively. Interest expense recorded related to the accretion of the discount for the
three and nine months ended September 30, 2004 was $300,000. The discount on the
convertible debentures as of September 30, 2004 was $19,700,000, after early conversion of
$300,000 of debentures.

Interest expense related to the
accretion of the discount for the calendar years ending after December 31, 2003 is
expected to be as follows and would be accelerated upon early conversion or default of the
instrument:

|                             | 
|---------------------------- | 
|Year ended December 31, 2004 | 
|Year ended December 31, 2005 | 
|Year ended December 31, 2006 | 
|Year ended December 31, 2007 | 
|Year ended December 31, 2008 | 
|Year ended December 31, 2009 | 

Subject to the conditions and
limitations specifically provided in the Securities Purchase Agreement under which the
debentures were sold, the holders of the debentures have the right to convert, at any time
and from time to time after the issue date, all or any part of the outstanding and unpaid
principal amount of the debentures into shares of the common stock of the Company. During
the three months ended September 30, 2004, $300,000 in principal amount of the debentures
was converted into common stock of the Company at the conversion price of $1.25 per share
in accordance with the terms and conditions of the debenture. The discount associated with
the conversion of $300,000 of principal was $300,000 and was recognized as interest expense in
accordance with generally accepted accounting principles.

Under the terms of the debentures interest is due quarterly. The
interest rate was to remain at 5% if the Company achieved certain milestones set forth in
the debentures by July 19, 2004. The Company did not achieve these milestones and, as a
result, the interest rate charged on the debentures was increased to 7.5%, effective July
19, 2004. .  If the Company does not achieve certain milestones by January 21, 2005, the interest rate increases to 15%.

Notwithstanding the financial
statement presentation required by the above pronouncements, the Company remains legally
obligated to repay the aggregate principal amount of the outstanding debentures plus all
accrued interest thereon at the rate(s) set forth in the debentures. As of September 30,
2004, $19,700,000 in aggregate principal amount of the debentures was outstanding. The
principal amount of any debentures that are converted to common stock of the Company
pursuant to the terms of the debentures shall not be deemed outstanding immediately
following such conversion.

-12-

10.    
          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 an aggregate purchase price of $3.5
million. In addition, the Company granted options to ITOCHU to increase its ownership of
common stock. In January 2004, ITOCHU exercised options to purchase 1,500,000 shares for
$1,050,000. During the period from January 25, 2004 through January 31, 2005, ITOCHU has
the option to purchase up to an additional 9,346,396 shares of common stock for $4.00 per
share.

Using the proceeds of the ITOCHU
investment, the Company invested $2,003,339 in a new Japanese company called EnerStruct,
Inc. (EnerStruct), in exchange for a 49% ownership interest in EnerStruct.
ITOCHU owns the remaining 51% of EnerStruct, for which it invested $1,100,000 plus
equipment totaling approximately $500,000. At September 30, 2004, the Companys
original investment in EnerStruct was reduced by approximately $654,000, which represents
the Companys share of EnerStructs losses through that date.

In connection with the foregoing
activities, the Company and the Battery Company have entered into a license agreement with
ITOCHU and EnerStruct and agreed to provide EnerStruct with an exclusive license (for
Japan only) subsequently converted to non-exclusive to use the technologies covered by two of the Battery Companys pending
patent applications. ITOCHU has also licensed to EnerStruct, on an exclusive basis,
several of its patents relating to its lithium battery technologies.

Summarized financial information for
EnerStruct is as follows as of September 30, 2004, and for the period from inception
through September 30, 2004:

|                  | 
|----------------- | 
|Cash              | 
|Total assets      | 
|Total liabilities | 
|Net loss          | 

11.    
          RELATED PARTY TRANSACTIONS:

During the nine months ended
September 30, 2003, the Company leased a portion of its office facilities from Ener1
Group. The Company also shared common facilities, personnel and other resources with Ener1
Group. Allocation of expenses has been made between these parties utilizing systematic
methods. The net expense allocated to the Company for the three and nine months ended
September 30, 2003, aggregated approximately $86,062 and $491,158. During the nine and
three months ended September 30, 2003 allocations and advances (including the allocations
of expenses above) aggregated approximately $3,394,000 and $586,000, respectively, of
which approximately $909,000 was converted to capital in 2003. There was no expense
allocated to the Company for shared resources during the nine months ended September 30,
2004 as the Company leased its own office space in January 2004 and no longer shares
personnel and other resources with Ener1 Group.

Ener1 Group and its subsidiaries have
from time to time used various services and employees of the Company. The Company billed
Ener1 Group and its subsidiaries for the actual cost of these services and employees.
Similarly, the Company has from time to time used various services and employees of Ener1
Group and its subsidiaries and Ener1 Group has billed the Company for the actual cost of
these services and employees. During the three and nine months ended September 30, 2004,
Ener1 Group and its subsidiaries billed the Company $49,697 and $102,697 respectively and
the Company billed Ener1 Group and its subsidiaries $77,451 and $165,452 respectively, in
each case for services and employees of the other party. As of September 30, 2004, the net
balance due to the Company from Ener1 Group and its subsidiaries was $62,754.

-13-

The Company, its wholly owned
subsidiary, Ener1 Acquisition Corp. (Acquisition), and Splinex Technology,
Inc. (Splinex) have entered into an Agreement and plan of merger dated as of June 9, 2004,
and amended as of October 13, 2004, providing for the merger of Acquisition with and into
Splinex. Upon closing, the Company will receive 5,000,000 shares of Splinex common stock,
which will represent 5% of the outstanding shares of Splinex common stock, and, in
accordance with the  Agreement and plan of Merger, will declare a dividend to distribute these shares
to the Companys shareholders. Closing of the merger is subject to the satisfaction
of certain conditions, including, among others, the effectiveness of the registration
statement on Form S-1 filed on June 24, 2004 by Splinex with the Securities and Exchange
Commission to register the dividend by the Company of the shares of Splinex common stock
to be issued in the merger.

In accordance with the First
Amendment to the Agreement And Plan Of Merger, the Company agreed to pay up to  $150,000 of
expenses incurred in connection with the Registration Statement filed by Splinex to register the dividend by the
Compnay of the shares of Splinex common stock issued in the merger. These amounts are included in other assets.

Splinex, a Delaware corporation, is a
development-stage company formed in February 2004. It is currently a private company, and
all of its outstanding shares are held by one stockholder, Splinex, LLC. Splinex is
developing multi-dimensional graphics visualization products, including three-dimensional
graphics products, related compression and signal processing utilities and discrete
software modules that enable the user to accurately and rapidly manipulate highly complex,
visually rich, multi-dimensional digital content.

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

Two of the Companys directors,
Kevin P. Fitzgerald and Peter Novak, are also directors of Splinex. Dr. Novak was also the
President of Splinex from its inception February 7, 2004 to August 31, 2004.

-14-

12.    
          COMMITMENTS AND CONTINGENCIES

Litigation

The Company receives communications
from time to time alleging various claims against the Company and its subsidiaries. These
claims include, but are not limited to, allegations that certain of the Companys
products infringe the proprietary rights of other third parties. The Company cannot
predict the outcome of any such claims or the effect of any such claims on its operating
results, financial condition, or cash flows. The Company was named as a co-defendant in an action brought in the United States District Court for the District
of Massachusetts on September 24, 1999 by NEC Technologies, Inc. (NEC). The suit alleges that the Company
supplied modem hardware to NEC, which was combined by NEC with software supplied by another co-defendant, Ring
Zero Systems, Inc. (Ring Zero).

NEC was subsequently sued for patent infringement by PhoneTel Communications, Inc. (PhoneTel), allegedly as a
result of NECs combination of modem hardware and software supplied by the vendors of its personal computer
products. NEC alleges that the Company and Ring Zero are obligated to indemnify NEC for NECs costs of defense
and settlement of the PhoneTel suit, in the amount of $327,000. This action was dismissed without prejudice on
April 25, 2000; however, the reason for the dismissal was procedural. While it is possible that NEC might attempt
to refile this action in an appropriate jurisdiction in the future, NEC has not taken any such action against the
Company to date. The Company cannot predict at this time whether any future claim brought by NEC would have a
material adverse effect on its operating results, financial condition, or cash flows.
The Company and its Boca Global, Inc. subsidiary (Boca Global) were named as co-defendants in an action brought
in the United States District Court for the District of South Dakota, by Gateway, Inc. (Gateway). Global
Village, Inc. had contracted to supply its FaxWorks software to be bundled with Gateway personal computers.
Gateways complaint against the Company and Boca Global alleged that either or both of the Company and Boca
Global assumed the liabilities of Global Village, Inc. with respect to the FaxWorks product. Gateway sought
indemnification for payment in the amount of approximately $5 million, which it claims to have paid to settle
patent infringement litigation brought by PhoneTel. In addition to the Company and Boca Global, another unrelated
co-defendant was named as a party to the action. On January 19, 2001, a motion to dismiss was granted with
respect to the Company. On March 20, 2004, the Court dismissed, without prejudice, the action against Boca Global
and the other co-defendant, for failure of Gateway to prosecute. Gateway subsequently refiled its complaint
against Boca Global and the Company and, in addition to the claims described above, alleged in the alternative
that the Company was in breach of a settlement agreement under which the Company had purportedly agreed to pay
Gateway $50,000, only $5,000 of which had been paid. On May 13, 2004, the Company and Gateway settled all claims
against the Company and Boca Global for payment of $45,000 by the Company to Gateway.

Lease Commitments

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

In June 2004, the Company entered
into a twelve-month operating lease for office facilities for the Nanotechnology division.
The lease requires twelve equal monthly lease payments of approximately $1,860.

Other Commitments

The Battery Company has entered into
a Cooperative Research and Development Agreement (CRADA) with Battelle, as the
operator of Pacific Northwest National Laboratories under a contract with the U.S.
Department of Energy, for research and development work involving lithium batteries. The
CRADA requires the Battery Company to spend a total of $399,000 for each year of the
agreement, which could have a term of up to two years, which is in the form of in-kind
contributions.

13.
                    STOCK AND OPTION ISSUANCES DURING THE NINE MONTHS ENDED SEPTEMBER 30,
2004

In January 2004, ITOCHU exercised its
options to purchase 1,500,000 shares of the Companys common stock for $1,050,000. On
January 25th, 2004, an unexercised option to purchase 10,961,861 shares of the
Companys common stock expired. During the period from January 25, 2004 through
January 31, 2005, ITOCHU has the option to purchase up to 9,346,396 shares of common stock
for $4.00 per share.

-15-

Effective as of January 1, 2004,
pursuant to a consulting agreement with Capital Investment Services, Inc., the Company
issued 60,000 shares of common stock at a price of $0.10 per share. The Company recorded
$84,000 of compensation expense related to this transaction.

Effective as of January
8th, 2004, pursuant to an Investment Banking Agreement with Thornhill Group,
Inc., the Company issued a warrant to Thornhill Group to purchase up to 200,000 shares of
common stock at an exercise price of $.10 per share. The Company recorded compensation
expense of $324,400 related to these warrants.

Effective May 20, 2004, the Company
issued options to purchase 100,000 shares of Common Stock with an exercise price of $0.57 per share
to Karl Gruns, as compensation for his services as director, including his services as the
sole member of the Audit Committee of the board of directors. Mr. Gruns will also receive
options to purchase an additional 50,000 shares of Common Stock to be granted for each
year in which he remains on the Board of Directors.

Effective May 18th, 2004,
in consideration for services rendered to Enerstruct, Inc. the Company awarded options to
purchase 150,000 shares of common stock at an exercise price of $0.50 per share to Mr.
Tatsuo Shimizu, for his services as Chief Technical Officer of Enerstruct, and 150,000
shares of common stock at an exercise price of $0.50 per share to Mr. Zenzo Hashimoto, for his
services as Chief Research Officer of Enerstruct, Inc.

During the nine months ended
September 30, 2004, options to purchase a total of 3,965,000 shares of common stock were
granted under the Companys 2002 Stock Option Plan, no options were terminated or
expired, and options to purchase 407,000 options were exercised.During the Quarter ended September 30, 2004, $300,000 of the Senior Secured Convertible Debentures
was converted into 240,000 shares of common stock. During the nine months ended Septermber 30, 2004, the Company recorded $925,000 of compensation expense for all
stock and stock option related transactions.

14.      SUBSEQUENT EVENTS

On October 26, 2004, the
Company combined its lithium battery assets with those of Delphi Automotive Systems, LLC
and Delphi Technologies, Inc. (collectively, Delphi) into 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 the following assets to EnerDel:

| | o | $15
million in cash;
| | - | --------------------

| | o | the right to use certain lithium battery manufacturing-related equipment in Ener1 Battery
Companys Ft. Lauderdale manufacturing facility, along with a nominally-priced
purchase option for such equipment, which option is exercisable only upon termination of
the security interest granted in favor of the holders of the Debentures;
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | o | Ener1 Batterys battery-related intellectual property portfolio, which is licensed
Ener1 for non-lithium battery uses under an exclusive, perpetual and royalty-free license;
and
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | o | Ener1 Ukraines battery-related intellectual property portfolio, which is licensed to
Ener1 for non-lithium battery uses under an exclusive, perpetual and royalty-free license.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

-16-

In addition, Ener1 Battery agreed to
make available to EnerDel space in Ener1 Batterys building in Fort Lauderdale
containing Ener1 Battery's above-described battery manufacturing-related equipment. Ener1 also caused
to be licensed to EnerDel certain vapor deposition technology for lithium battery use.

Pursuant to the Formation Agreement,
Delphi received:

| | o | 19.5%
of EnerDel's issued and outstanding shares of common stock;
| | - | -----------------------------------------------------------------

| | o | 8,000 shares of EnerDels 8.25% Series A Preferred Stock with an aggregate
liquidation value of $8 million (the Series A Preferred Stock);
| | - | --------------------------------------------------------------------------------------------------------------------------------------------

| | o | immediately
exercisable warrants with a ten year term to purchase up to 1.75 million shares of the Company's
                  common stock for $0.70 per share; and
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | o | immediately exercisable warrants with a ten year term to purchase up to 5.25 million
shares of the Company's common stock for $1.00 per share.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------

The EnerDel Series A Preferred Stock
is exchangeable, at any time prior to January 31, 2005, at the option of the holder, into
up to 6,956,521 shares of Ener1 common stock, based on an exchange rate of 869.5652 shares
of our common stock for each share of EnerDel Series A Preferred Stock. The EnerDel Series
A Preferred Stock must be redeemed by EnerDel for cash, at the liquidation value plus
accrued and unpaid dividends upon certain circumstances (including the completion of an
initial public offering of EnerDels common stock). If the EnerDel Series A Preferred
Stock is not redeemed within four (4) years after issuance, then at the holders
option, it must be redeemed by EnerDel at the liquidation value plus accrued and unpaid
dividends in exchange for cash, an EnerDel promissory note, or a combination of both, at
EnerDels option, such note to be payable in four equal quarterly installments and
bearing interest at 8.25% per annum.

In consideration of the foregoing,
Delphi contributed to EnerDel its lithium battery-related manufacturing equipment and its
lithium battery-related patent portfolio, 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.

Pursuant to the Registration Rights
Agreement dated as of October 20, 2004 by and between the Company and Delphi Automotive,
the EnerDel shares of common stock issued in the transaction and the shares of its common
stock issuable upon exercise of the EnerDel warrants are subject to demand, piggyback and
other registration rights. In addition, pursuant to the Formation Agreement, the Company
and Delphi have agreed to provide one another with certain tag-along rights and rights of
first refusal in the event either party desires to sell any of its respective EnerDel
securities received in the transaction.

In order to finance its contribution
of $15 million in cash to EnerDel, the Company entered into a Subscription Agreement as of
October 15, 2004, with Cofis Compagnie Fiduciaire S.A., a Swiss trust company
(Cofis). The securities issued pursuant to the Subscription Agreement are
beneficially owned by an affiliate of Ener1 Group, Inc., the Companys majority
shareholder.

As further described in a Current
Report on Form 8-K filed with the SEC on October 21, 2004, pursuant to the Subscription
Agreement, the Company issued the following securities to Cofis in exchange for an
aggregate purchase price of $15 million in cash:

| | o | 150,000
shares of Series B 7% Convertible Preferred Stock, par value $0.01 per share (the
"Series B                   Preferred");
| | - | ----------------------------------------------------------------------------------------------------------------------------------

| | o | a
warrant to purchase 4,166,666 shares of common stock at an exercise price of $1.25
per share; and
| | - | ---------------------------------------------------------------------------------------------------

| | o | a
warrant to purchase 4,166,666 shares of common stock at an exercise price of $1.50
per share.
| | - | -----------------------------------------------------------------------------------------------

The Series B Preferred has a
liquidation preference of $100.00 per share. Dividends accrue on each share of Series B
Preferred at the annual rate of seven percent of the liquidation value and are payable
semi-annually, beginning November 1, 2005. Dividends are payable in the form of additional
shares of Series B Preferred for the first two years following issuance of the Series B
Preferred and in cash thereafter. If the Company filesa registrationstatement with the SEC to register an offering of Common Stock, the holder of the
Series B Preferred shall have the right to convert that number of shares of Series B
Preferred equal to up to 50% of the then-unredeemed aggregate liquidation value of said
Series B Preferred into Common Stock in order to include such Common Stock in the
registration statement. The conversion ratio shall be established by dividing the
liquidation value per share of Series B Preferred by the price established for the Common
Stock in the offering. These rights to convert the Series B Preferred and to include the
Common Stock issued upon conversion in the registration statement are subject to the
discretion of the underwriters for the offering. The Series B Preferred is redeemable by
the Company at any time in part or whole at 100% of the liquidation value, plus accrued
and unpaid dividends. Any such redemption at Ener1s option would only be effected
with consent of Debenture holders pursuant to the terms of the documents related to the
Debentures. The Series B Preferred is redeemable at the option of the holder once none of
the Debentures are outstanding. Each of the warrants has a term of ten years and may be
exercised in whole or in part at any time prior to the expiration of the warrants. The
exercise price must be paid in cash. The holder of the warrants may not transfer the
warrants without Ener1s consent.

Also effective as of October 15,
2004, the Company entered into an agreement with Ener1 Group, Inc., its majority
shareholder, under which Ener1 Group agreed to purchase, from time to time, at the
Companys request, up to 30,000 shares of the Series B Preferred at a purchase price
of $100.00 per share (or an aggregate purchase price of $3 million), 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.

If the Company requires Ener1 Group
to purchase all of the Series B Preferred and warrants pursuant to this agreement, it will
pay Ener1 Group a fee equal to one third of the aggregate purchase price for the
securities purchased specifically by Ener1 Group, in return for Ener1 Groups
assistance in arranging the sales of Series B Preferred.

-17-

Item 2.  Managements
Discussion and Analysis of Financial Condition and Results of Operations

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

All
forward-looking statements are based on information available to us on the date of this
filing, and we assume no obligation to update such statements. The following discussion
should be read in conjunction with our Annual Reports on Form 10-KSB, Quarterly Reports on
Form 10-QSB and other filings with the Securities and Exchange Commission and the
condensed consolidated financial statements and related notes included in this Quarterly
Report.

-18-

On
October 18, 2004, in exchange for $15 million, we issued 150,000 shares of our Series B 7%
Convertible Preferred Stock, par value $0.01 per share (the Series B
Preferred), warrants to purchase up to 4,166,666 shares of our common stock at $1.25
per share and warrants to purchase up to 4,166,666 shares of our common stock at $1.50 per
share to a Swiss trust company that holds the securities for the benefit of an affiliate
of Ener1 Group, our majority shareholder. The terms of these securities are described in
our Current Report on Form 8-K filed on October 21, 2004. We used the proceeds of $15 million from the issuance of the Series B Preferred and warrants  to purchase 80.5% of the outstanding common stock of
EnerDel, Inc., as more fully described below and in Note 14 (Subsequent Events) to the Financial Statements.

Ener1
Group has agreed to purchase, at our request, at an aggregate purchase
price of $3 million, up to 30,000 shares of Series B Preferred Stock, warrants to purchase
up to 833,334 shares of our common stock at $1.25 per share and warrants to purchase up to
833,334 shares of our common stock at $1.50 per share. If we require Ener1 Group to
purchase these securities, we will pay Ener1 Group a fee equal to one third of the
aggregate purchase price for the securities purchased in exchange for Ener1 Groups
assistance in arranging the sales of Series B Preferred.

On
October 20, 2004, we combined certain of our lithium battery assets with those of Delphi
Automotive Systems, LLC and Delphi Technologies, Inc. (collectively, Delphi)
into a newly organized Delaware corporation, EnerDel, Inc. (EnerDel). We
received 80.5% of EnerDels issued and outstanding shares of common stock and Delphi
received 19.5%. We contributed $15 million in cash to EnerDel to use as working capital.
We also issued warrants to Delphi to purchase up to 1,750,000 shares of our common stock
at $0.70 per share and up to 5,250,000 shares of our common stock at $1.00 per share. The
EnerDel formation transaction is more fully described in our Current Report on form 8-K filed on
October 27, 2004.

# Results of Operations

Net Sales. Our net sales for
the three-month and nine-month periods ended September 30, 2004, were $0 and $41,000
respectively. These sales were made pursuant to a Small Business Innovative Research
contract with the United States Missile Defense Agency. We recorded no sales from
continuing operations during the same period in 2003.

Manufacturing Pre-production
Costs. During the second quarter of 2004, we began preparing our battery manufacturing
plant to begin production, in addition to continuing our research and development
activities. A significant portion of resources previously devoted to battery research and
development and selling, general and administrative expenses were reallocated to
implementing a new manufacturing infrastructure, including new personnel, policies and
procedures. Manufacturing pre-production costs for the three and nine months ended
September 30, 2004 totaled $532,000 and $1,048,000, respectively.

Research and Development Expenses
(R&D). R&D for the three and nine month periods ended September
30, 2004 increased by 52% to $576,000 and by 53% to $1,753,000,
when compared to the same periods in 2003. These increases were due primarily to increases
in salaries, benefits and outside services related to our fuel cell segment and our
recently formed nanotechnology subsidiary, slightly offset by decreases in battery related
research and development

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Selling, General and
Administrative Expenses (SG&A). SG&A for the three and nine month
periods ended September 30, 2004 decreased by 7% to $1,430,000 and increased by 78% to
$5,596,000, respectively, when compared to the same periods in 2003. The increase in
SG&A for the nine month period ended September 30 was due primarily to increases in:
salaries, wages and benefits; relocation fees; professional fees; and investor relations
expenses. Expenses for rents, insurance, and general administrative expenses also
increased.

# Liquidity and Capital
Resources

As
of December 31, 2003, we had a working capital deficit of $7.4 million. During the nine
months ended September 30, 2004, our working capital increased by $9.4 million, resulting
in positive working capital of $2.0 million as of September 30, 2004. This increase in
working capital was primarily due to an increase in cash and a decrease in current debt
and liabilities, as a result of the sale and partial use of proceeds to repay debt, in
January 2004, of $20.0 million in aggregate principal amount of our senior secured
convertible debentures due 2009 and the purchase by ITOCHU Corporation in January, 2004 of
1,500,000 shares of our common stock for net proceeds of $1,050,000. See Note 9 of the
Notes to Condensed Consolidated Financial Statements for an explanation of the
accounting treatment of the debenture financing.

During
the nine month period ended September 30, 2004, we expended $1,322,000 for capital
equipment, of which: $480,753 was for manufacturing equipment for our battery
manufacturing plant; $195,680 was for administrative equipment, primarily computing
equipment; $472,850 was for research and development equipment; and $173,000 was for two
vehicles.

We
will require additional capital to support our activities through September 30, 2005. We
intend to seek additional financing as required, which may take the form of equity or
debt. We cannot assure you that any such required capital will be available on terms
acceptable to us, if at all.

# Critical Accounting
Policies

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

-20-

Accounting for employee
stock options

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

Consolidation of 49% Subsidiary
(EnerLook Solutions Inc.)

When formed in February 2002,
EnerLook Healthcare Solutions, Inc. (EnerLook) was our 51% subsidiary. In
early 2003, EnerLook issued (i) 333,333 shares of common stock to Solution Investment
Group, LLC in exchange for $250,000 and (ii) 125,000 shares of common stock to an EnerLook
employee, reducing our ownership to approximately 49%. Ener1 Group owns approximately 42%
of the outstanding common stock of EnerLook. Since EnerLook was formed, we have
consolidated EnerLooks results of operations and its balance sheet as part of our
consolidated financial statements. Ownership of a subsidiary below 51% is typically
recorded under the equity method of accounting, rather than consolidating the
subsidiarys results of operations with a parent company owning less than 51% of the
subsidiary, as it is presumed that the parent company does not control the subsidiary. We
have elected to continue consolidating this subsidiary as part of its financial statements
because we and Ener1 Group are related parties that exercise substantial control over the
activities of EnerLook and own an aggregate of approximately 91% of EnerLooks
outstanding common stock. Management believes that the reduction in its ownership
percentage of EnerLooks common stock from 51% to approximately 49% does not
materially reduce the control we exercise over EnerLooks operations.

In the second quarter of 2003, we
transferred certain assets of our Digital Media Division to EnerLook in order to
consolidate our set top box business, which delivers interactive information and
entertainment systems and services to customers in vertical markets such as hospitality
and healthcare. As part of this restructuring, we transferred net assets in the amount of
approximately $1.0 million to EnerLook, resulting in an intercompany receivable from
EnerLook in the amount of $1.0 million.

Effective December 15, 2003,
EnerLooks operations were deemed to be discontinued operations, and on that date we
conveyed operating control of this segment to TVR Communications, LLC, a third party. We,
EnerLook, Ener1 Group and TVR Communications, LLC entered into an Asset Purchase Agreement
dated as of June 30, 2004, providing for the sale of substantially all of EnerLooks
assets to TVR Communications, LLC, in exchange for a 5% membership interest in TVR
Communications, LLC. The asset sale is expected to close in November, 2004, subject to
satisfaction of certain conditions..

-21-

# Item 3.  Controls
and Procedures

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

As
of September 30, 2004, we carried out an evaluation, under the supervision and with the
participation of our management, including our Chief Executive Officer and our Chief
Financial Officer, of the effectiveness of the design and operation of our disclosure
controls and procedures. Based on the foregoing, our Chief Executive Officer and Chief
Financial Officer concluded that our disclosure controls and procedures were effective and
were operating at the reasonable assurance level.

There
have been no changes in our internal control over financial reporting during our most
recent fiscal quarter that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.

-22-

# PART II. OTHER
INFORMATION

Item
1.  Legal Proceedings

We receive communications from time
to time alleging various claims against us and our subsidiaries. These claims include, but
are not limited to, allegations that certain of our products infringe the patent rights of
other third parties. We cannot predict the outcome of any such claims or the effect of any
such claims on our operating results, financial condition, or cash flows. We were named as a co-defendant in an action brought in the United States District Court for the District of
Massachusetts on September 24, 1999 by NEC Technologies, Inc. (NEC). The suit alleges that we supplied modem
hardware to NEC, which was combined by NEC with software supplied by another co-defendant, Ring Zero Systems,
Inc. (Ring Zero).

NEC was subsequently sued for patent infringement by PhoneTel Communications, Inc. (PhoneTel), allegedly as a
result of NECs combination of modem hardware and software supplied by the vendors of its personal computer
products. NEC alleges that we and Ring Zero are obligated to indemnify NEC for NECs costs of defense and
settlement of the PhoneTel suit, in the amount of $327,000. This action was dismissed without prejudice on April
25, 2000; however, the reason for the dismissal was procedural. While it is possible that NEC might attempt to
refile this action in an appropriate jurisdiction in the future, NEC has not taken any such action against us to
date. We cannot predict at this time whether any future claim brought by NEC would have a material adverse effect
on our operating results, financial condition, or cash flows.
We and our Boca Global, Inc. subsidiary ("Boca Global") were named as co-defendants in an action brought in the
United States District Court for the District of South Dakota, by Gateway, Inc. (Gateway). Global Village, Inc.
had contracted to supply its FaxWorks software to be bundled with Gateway personal computers. Gateway's complaint
against us and Boca Global alleged that either or both of us and Boca Global assumed the liabilities of Global
Village, Inc. with respect to the FaxWorks product. Gateway sought indemnification for payment in the amount of
approximately $5 million, which it claims to have paid to settle patent infringement litigation brought by
PhoneTel. In addition to us and Boca Global, another unrelated co-defendant was named as a party to the action.
On January 19, 2001, a motion to dismiss was granted with respect to us. On March 20, 2004, the Court dismissed,
without prejudice, the action against Boca Global and the other co-defendant, for failure of Gateway to
prosecute. Gateway subsequently refiled its complaint against Boca Global and us and, in addition to the claims
described above, alleged in the alternative that we were in breach of a settlement agreement under which we had
agreed to pay Gateway $50,000, only $5,000 of which had been paid. On May 13, 2004, we and Gateway settled all
claims against us and Boca Global for payment of $45,000 by us to Gateway.

Item 6.  Exhibits

| | 3.1 | Amended
and Restated Articles of Incorporation of the Registrant, dated February 12, 1993,
                  incorporated by reference to Exhibit 3(i) to our 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 our 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 our current report on
Form 8-K dated                   October 28, 2002.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 3.4 | Bylaws
of the Registrant, incorporated by reference to Exhibit 3.4 of our Registration
                  Statement on Form SB-2 filed with the Securities and the Exchange
Commission on February                   13, 2004 (SEC File No. 333-112837).
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 3.5 | Articles
of Amendment to Amended and Restated Articles of Incorporation, dated October 18,
                  2004.
| | --- | ------------------------------------------------------------------------------------------------------------------

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

| | 4.2 | Form
of Warrant to Purchase Common Stock incorporated by reference to Exhibit 4.2 to our
                  Current Report on Form 8-K dated January 21, 2004.
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | 4.4 | Form
of Warrant to Purchase Common Stock of Ener1, dated October 20, 2004 Issued to Delphi
                  Automotive Systems, LLC.
| | --- | -------------------------------------------------------------------------------------------------------------------------------------

| | 4.5 | Registration
Rights Agreement by and between Ener1 and Delphi Automotive Systems LLC, Form
                  of Warrant to Purchase Common Stock of Ener1, dated October 20, 2004
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 4.6 | Certificate
of Designation of Non-Voting, Cumulative and Redeemable Series A Preferred
                  Stock of EnerDel, Inc., dated October 20, 2004.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.1 | Formation,
Subscription and Stockholders' Agreement of EnerDel, Inc., dated as of October
                  20, 2004, by and between Delphi Automotive Systems, LLC and the
Registrant, incorporated by                   reference to Exhibit 10.1 to our Current
Report on Form 8-K dated October 26, 2004.
| | ---- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.2 | Subscription
Agreement, dated as of October 15, 2004, between the Registrant and Cofis
                  Compagnie Fiduciaire S.A.
| | ---- | ----------------------------------------------------------------------------------------------------------------------------------

| | 10.3 | 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..
| | ---- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | 31.2 | Certification
of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act
                  of 2002
| | ---- | ------------------------------------------------------------------------------------------------------------------------

| | 32.1 | Certification
of Principal Executive Officer pursuant to 18 U.S.C. Sec. 1350, as adopted
                  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
| | ---- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 32.2 | Certification
of Principal Financial Officer pursuant to 18 U.S.C. Sec. 1350, as adopted
                  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
| | ---- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------

-23-

# ENER1, INC. AND
SUBSIDIARIES

# SIGNATURES

Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf of the undersigned thereunto duly authorized.

|Dated: November 15, 2004 |  | ENER1, INC.BY: /S/ Kevin Fitzgerald
Kevin FitzgeraldChief Executive Officer(Principal Executive Officer)
|------------------------ |  | ----------------------------------------------------------------------------------------------------------------------

|Dated: November 15, 2004 |  | ENER1, INC.BY: /S/ Randall N. Paulfus
Randall N. PaulfusChief Financial Officer(Principal Financial and Accounting Officer)
|------------------------ |  | -----------------------------------------------------------------------------------------------------------------------------------------

-24-