# UNITED STATESSECURITIES AND
EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

_________________

Form 10-KSB

[X]       
          ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
          1934

For The Fiscal Year
Ended December 31, 2004

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

For The Transition
Period From ____________ to ____________

Commission File Number
0-21138

Ener1, Inc. (Exact name of
registrant as specified in its charter)

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

500 West Cypress Creek
Road-Suite 100 Ft. Lauderdale,
Florida 33309 (954) 556-4020(Address,
including zip code, and telephone number, including area code, of principal executive
offices)

Securities registered
pursuant to Section 12(b) of the Act: NONE

Securities registered
pursuant to Section 12(g) of the Act:

COMMON STOCK, par value
$0.01 per share (title of class)

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

Yes |X| No [  ]

Check if there is no disclosure of
delinquent filers in response to Item 405 of Regulation S-B contained in this form, and no
disclosure will be contained, to the best of the issuers knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [  ]

The issuers revenue for its
fiscal year ended December 31, 2004 was $41,800.

The aggregate market value of voting
stock held by non-affiliates (37,524,867 shares) as of March 28, 2005: $24,391,164 based
on the $.65 closing bid price for the common stock quoted on the OTC Bulletin Board on
such date.

Shares of Common Stock outstanding as
of March 24, 2005: 347,455,751 shares.

Transitional Small
Business Disclosure Format: Yes |  | No |X|

-1-

# ENER1, INC. ANNUAL
REPORT ON FORM                                  10-KSB FOR THE YEAR ENDED DECEMBER 31,
2004

# INDEX

|         |                                                                | Page
|-------- | -------------------------------------------------------------- | ----
|PART I   |                                                                |     
|ITEM 1   | BUSINESS                                                       | 3   
|ITEM 2   | PROPERTIES                                                     | 12  
|ITEM 3   | LEGAL PROCEEDINGS                                              | 12  
|ITEM 4   | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS            | 12  
|        
|PART II 
|ITEM 5   | MARKET FOR THE REGISTRANT'S COMMON EQUITY, RELATED             | 13  
|         | STOCKHOLDER MATTERS AND SMALL BUSINESS ISSUER PURCHASES OF     |     
|         | EQUITY SECURITIES                                             
|ITEM 6   | MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION    | 14  
|         | AND RESULTS OF OPERATIONS                                     
|ITEM 7   | FINANCIAL STATEMENTS                                           | 25  
|ITEM 8   | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS                 
|         | ON ACCOUNTING AND FINANCIAL DISCLOSURE                        
|ITEM 8A  | CONTROLS AND PROCEDURES                                        | 54  
|ITEM 8B  | OTHER INFORMATION                                              | 54  
|         |                                                               
|PART III |                                                               
|        
|ITEM 9   | DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT                 | 54  
|ITEM 10  | EXECUTIVE COMPENSATION                                         | 57  
|ITEM 11  | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT | 60  
|         | AND RELATED STOCKHOLDER MATTERS                                |     
|ITEM 12  | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS                 | 61  
|ITEM 13  | EXHIBITS, LISTS AND REPORTS ON FORM 8-K                        | 63  
|ITEM 14  | PRINCIPAL ACCOUNTING FEES AND SERVICES                         | 67  
|         |                                                                |     
|         |                                                                |     

-2-

# PART I

# ITEM 1   BUSINESS

# Overview

We have three business lines, all of
which are conducted principally through three operating subsidiaries, which form our
Energy Group. Through our subsidiary, EnerDel, Inc., which is a joint venture we formed
with Delphi Corporation (which owns 19.5% of EnerDel), we develop, and market lithium
batteries, battery packs and components such as lithium battery electrodes and lithium
electronic controllers for lithium battery packs that we develop. Through our wholly owned
subsidiary, NanoEner, Inc., we develop technologies, materials and equipment for
nanomanufacturing, i.e., manufacturing processes that operate on a microscopic level.
Through our wholly owned subsidiary, EnerFuel, Inc., we develop fuel cell components and
systems and provide testing services for fuel cell components. We have a total of 90 full
time employees. EnerDel has 56 full time employees. EnerFuel has 8 full time employees.
NanoEner has 5 full time employees. We also employee 15 full time employees in our
administrative offices and 6 full time employees in research and development.

In October 2004, we acquired Delphi
Corporations lithium battery patents and equipment, and hired the personnel from Delphis former lithium battery
operations, when Delphi Corporation and Ener1 each contributed their respective lithium
battery assets to a EnerDel. We and Delphi hold 80.5% and 19.5%
interests, respectively, in EnerDel. EnerDel also has manufacturing facilities in Ft.
Lauderdale, Florida (the facilities we acquired when we purchased Ener1
Battery in September 2002) and Indianapolis, Indiana. All of our lithium battery
operations are now conducted through EnerDel, including component, cell and battery
production, testing, cell packaging, electronics and integration of the various battery
related operational systems such as cells, battery packs and lithium electronic
controllers. EnerDel is now developing and marketing lithium battery cells and
battery packs in prototype quantities to customers for their evaluation.

NanoEner, our nanotechnology
subsidiary, has built prototype equipment that utilizes our vacuum deposition system
(VDS) for depositing thin film materials onto battery electrodes
as part of the battery cell manufacturing process. We believe that our VDS process should
offer performance advantages and production cost savings for our lithium battery
operations and certain fuel cell components, and possibly in other types of manufacturing
that require deposition of materials with microscopic tolerances. We intend to utilize our
thin films VDS process to make electrodes for our lithium batteries and market VDS
licenses to battery and fuel cell manufacturers and other industries that need to
manufacture on a microscopic scale.

Our fuel cell operations are
currently conducted through EnerFuel, Inc. We are in the process of building our first
fuel cell prototypes that utilize technologies for which we have filed several patent
applications since the last quarter of 2003. These technologies relate to fuel cell
stacks, control systems, pressure regulators, solenoids, controls and sensors for
fuel cell systems. If we are able to successfully build and test prototype fuel cell
components and systems utilizing our technologies, we would then attempt to engage in
pilot-scale production testing and limited manufacturing of certain fuel cell components.
We have also developed fuel cell testing apparatus.

In January 2005, we announced that we
had signed a letter of intent to acquire Giner Electrochemical Systems, L.L.C.
(GES), a Boston, Massachusetts company engaged in research, development and
fabrication and sales of fuel cells, electrolyzers and other fuel cell related products
and services. GES has contracts for research, development and products
fabrication with several customers, including General Motors Corporation. GES also has 17
active patents, 9 pending patent applications and 3 provisional patent applications for
various fuel cell technologies, including direct methanol fuel cells, electrolyzers and
regenerative fuel cells. Closing of the transaction is subject to board approvals,
satisfactory results of due diligence and negotiation and execution of definitive
agreements. We can not provide any assurance that we will enter into definitive
agreements to purchase GES or that, if we do enter into such an agreement, we will be able
to close the acquisition or that the closing will take place at any particular time.

We also own 49% of Enerstruct, Inc.,
a joint venture with ITOCHU Corporation of Japan, which we formed to pursue technology
development and marketing opportunities for lithium batteries in Japan. ITOCHU has also
invested $4.5 million in our company in exchange for approximately 15.5 million shares of
our common stock (including $3.5 million for 14 million shares in July 2003). We and
ITOCHU have licensed to Enerstruct some of our respective battery technologies for use in
Japanese markets and are actively working together to pursue those markets. EnerDel
recently signed an agreement with Enerstruct for Enerstruct to provide engineering
services for joint development of Enerstructs patent pending high-rate lithium
battery technology and NanoEners VDS technology. Under the agreement, Enerstruct
will also assist EnerDel in optimizing EnerDels production facilities in Ft.
Lauderdale and Indianapolis and provide assistance to NanoEner in connection with the
latters pilot production facility in Ft. Lauderdale.

-3-

Company History

Founded in 1985 as Boca Research,
Inc., Ener1, Inc., is a Florida
Corporation, headquartered in Ft. Lauderdale, Florida. We changed are name during
2002, from Inprimis, Inc. to Ener1, Inc. Prior to 2002, we were engaged in
computer-related engineering and consulting services and the development and marketing of
associated hardware and software, particularly in the area of set top boxes for use in
hotels and hospitals. These set top boxes were used as a platform for providing various
menu-oriented software and communications services and capabilities for customers and
patients of those institutions. This business was, to some extent, an outgrowth of our
previous business of developing and marketing modems and network communications systems,
devices and software.

During the past three years, we have
substantially changed our business lines. We have transformed from a computer
hardware/software-oriented company to a clean energy technology company, a process that
began shortly after the transfer of control of our company in early 2002.

In January 2002, Ener1 Group, Inc., a
privately held technology incubator headquartered in Ft. Lauderdale, Florida, purchased
approximately 47 million shares of common stock in our company, which gave it ownership of
80% of our outstanding common stock after the purchase. As a result of subsequent
transactions, Ener1 Group now owns approximately 88% of our outstanding common stock.
Ener1 Group also has two representatives on our board of directors.

In September 2002, we acquired from
Ener1 Group its Ener1 Battery Company subsidiary, in return for a combination of stock and
notes. Ener1 Battery Company was at the time engaged in research, development and
marketing of lithium battery technologies. This acquisition provided us with several
pending patents for various lithium battery technologies, a staff of research and
development engineers, and land, building and lithium battery manufacturing equipment
valued at about $20 million.

After the acquisition of Ener1
Battery, we changed our name to Ener1, Inc. and began to phase out of our software
engineering and consulting/set top box business. In May 2003, we transferred substantially
all of that business and related assets to one of our subsidiaries, then known as EnerLook
Health Care Solutions, Inc. (EnerLook), which continued to pursue the
development and marketing of set top box technologies, products and services to hotel and
hospital customers. We transferred all of the assets of EnerLook to TVRC Communications,
LLC in return for a 5% interest therein in December 2004.

In September 2003, we began a
research and development program in fuel cells and related products and technologies.
Since then, we have added several scientists and engineers to our fuel cell staff and filed five patents
for various fuel cell technologies, systems and components.

# Our Battery Business

Our Principal Products
and Markets

The principal market for our battery
business consists of the users of high performance lithium batteries. Within this
principal market, we are focusing on applications for our products in power tools,
consumer appliances, uninterrupted power supply (UPS) and backup power, hybrid
electric vehicles and other automotive applications, remote asset tracking of containers
and other assets, electric propulsion for wheel chairs and other personal mobility
devices, military applications and healthcare.

Many of our products are in the
design or prototype/evaluation sample stage, and most were acquired from Delphi
Corporation when we formed EnerDel. We have delivered samples of some of our products to
potential customers, and they are currently evaluating these samples.

Our products and product designs
consist of primary (non-rechargeable) battery cells, secondary (rechargeable) battery
cells, battery packs and electronics for controlling the operation of the cells and packs.

Primary
Batteries

Our MO Series of batteries is
designed to provide power for automotive backup systems. We believe that this product will
be able to yield a high level of power output and performs at lower temperatures than
competing products. We are producing initial prototypes now for this product line.

Our VO Series of batteries is being
designed to produce a higher level of energy density than the MO Series and is targeted at
upper atmosphere vehicles and other military applications.

Energy density is basically the
amount of power that a battery can deliver per unit of volume or weight. This is a common
way for measuring battery capacity for putting out energy and is often stated in terms of
watt-hours per kilogram (Wh/kg). A kilogram is 2.2 pounds in weight or approximately the
mass of a liter of water. A watt-hour means the output of one watt for a period of one
hour. The watt is a basic unit of measurement for power. A watt is equal to one joule per
second. The joule is a basic measurement for energy, work or quantity of heat. One joule
is the energy that is expended when a force of one newton is applied over a displacement of one
meter in the direction of the force. A newton is the amount of force required to
accelerate a mass of one kilogram at a rate of one meter per second squared.

-4-

Secondary
Batteries

Our E Series of batteries is designed
to provide sustained low-power, high energy capacity discharges. Target applications
include storage of energy for standby power and certain military uses.

Our P Series of batteries is designed
to provide high-power pulses and/or a continuous high rate of discharge. Target
applications include hybrid electric vehicles (i.e., vehicles that use batteries as a
partial source of their power  HEVs), power tools and other devices that
require frequent but relatively short, powerful bursts of power.

Our EP Series of batteries is
designed to produce sustained energy with high-power pulses. Target applications include
electric vehicles, asset tracking devices, personal mobility devices, power tools and
other consumer appliances.

Lithium
Electronic Controllers

We have designed four models of our
lithium electronic controllers (LECs  electronic circuit boards used in
our battery packs) to provide electronic control of charging and discharging
characteristics of our batteries and battery packs. Through the use of special algorithms
implemented through electronic circuitry, these controllers are designed to regulate the
operation of our batteries and battery packs to make them operate more efficiently and
safely.

Our LECs are designed to regulate
cell voltage limits and cell temperature limits and provide protection from overcharge.
They are also designed to provide an indication of the state of charge and overall
condition of the cells and/or pack, as well as a data bus for communications. The LEC also
monitors each cells condition, and maintains the voltage balance among the cells
making up the battery in order to optimize cell life. Based on customer requirements, the
LEC may also be programmed to optimize charging, discharging and other operating
characteristics.

Battery
Packs

Our 12V4 Battery Pack is designed for
use in asset tracking applications. We are now producing evaluation samples of this
product for delivery to potential customers. Based on our initial testing, we believe this
lithium battery product can offer a useful life of more than two times that of similar
nickel-metal-hydride types of batteries and four times the useful life of lead-acid
batteries. Since frequent battery replacement is not easy in asset tracking applications,
we think this gives our 12V4 Battery Pack a competitive advantage.

Our 24V Battery Pack is designed for
use in wheel chairs and similar personal mobility devices. Our 18V Battery Pack is
designed for use in power tools. We plan to have evaluation samples of these products to
provide to potential customers during the second quarter of 2005.

We also have 200 volt and 300 volt
battery packs in development. We expect to be able to produce prototypes of the 200 volt
pack in the third quarter of 2005 and the 300 volt pack during 2006.

Sales and Marketing

We market our lithium battery
products through internal marketing and technical sales personnel and through professional
sales and marketing firms with whom we are negotiating formal marketing agreements. We
expect that these agreements will provide for commissions ranging from 3% to 5%.

-5-

Engineering and
Manufacturing Capabilities

We have a lithium battery product
engineering team consisting of 15 engineers, most of whom are former Delphi Corporation
employees. Our team has substantial experience in lithium battery product development,
including research and development, design, building of prototypes and testing. Their
experience spans both automotive and non-automotive fields and includes high-voltage power
systems.

We also have manufacturing
engineering capabilities, including standard quality control procedures, with ISO
(International Standards Organization) certification in process. ISO certification is
generally regarded as a reliable indicator of overall attention to quality control and we
believe that this will be helpful in qualifying us as a vendor to certain customers
because they are known to use this as a criteria in vendor selection. Our
systems engineering experience includes all major areas of battery cell, battery pack and
battery electronics design, testing and integration.

We have two manufacturing facilities,
one in Ft. Lauderdale, Florida, which is used mostly for primary battery products, and one
in Indianapolis, Indiana, which is used for secondary battery products. The main
characteristics of these two facilities are as follows.

The Ft. Lauderdale plant has three
primary lithium battery cell production lines that utilize sealed argon gas chambers. One
of these production lines is currently used occasionally for research and development.
Total plant capacity with future modifications and additional automated equipment is
estimated at 8 million cells per year at full production levels. Our ISO certification for
this facility is in process, in accordance with the most current standards.

Our Indianapolis plant, acquired from
Delphi in the EnerDel transaction, has a secondary lithium production line, dry room
production facility and automated cell and battery pack production equipment. At this
facility, we can also perform cell testing and high voltage battery pack testing. Current
capacity of this plant is approximately 864,000 cells per year. There is also
approximately 40,000 square feet available for expansion of this plant. ISO certification
is also in process for this plant.

Testing and Quality
Control

Consistent with industry practice, we
perform a wide range of safety and other testing for our battery products. This includes
testing for nail penetration, bar crush, impact, overcharge, overdischarge, short circuit,
thermal cycling, vibration, shock, altitude, salt, fog and humidity. All of our products
are tested to industry standards for (1) mechanical tests for sealed portable secondary
cells and batteries; (2) safety requirements for portable sealed secondary cells and
batteries; (3) safety of primary and secondary lithium cells and batteries during
transport; and (4) transportation of lithium cells and batteries.

In the battery business, particularly
lithium batteries, safety is a paramount concern. The potential for overheating,
explosions and reactions to stress or impact must be carefully evaluated and eliminated to
the fullest extent possible. In addition to the above testing, all of our batteries and
battery packs are designed to include three distinct and independent levels of safety
protection: (i) cell design  internal polymer shut-down separators cause improperly
operating cells to be shut down; (ii) electronic controls of cell charge and discharge
control, temperature monitoring and circuitry; and (iii) thermal shielding case materials
surrounding the outside of the battery pack.

-6-

Competition

The battery business is extremely
competitive. Many of our competitors are larger companies with more capital and other
resources than our company. The industry is subject to rapid technology changes that can
result in sudden obsolescence. Competition from low cost sources can result in downward
pricing pressure, making it difficult to recover costs. We believe that survival and
success in this industry depends on several factors: (1) revolutionary, as opposed to
incremental, performance advantages; (2) ability to control costs; and (3) leveraging
technology advantages through strategic alliances and low cost manufacturing resources. We
intend to establish offshore manufacturing capabilities within the next 2-3 years in order
to keep volume production costs as low as possible, so that we can continue to
competitively price our products. Through our association with Delphi in our EnerDel
subsidiary and the manufacturing expertise gained from Delphi (which includes setting up
offshore manufacturing facilities), we believe we will be able to control costs more
effectively.

Potential Customers and
Sales Cycles

Most of the customers to which we
market our lithium battery products are industrial corporations or value-added resellers.
We also market to agencies and departments of the United States government. In both cases,
the selling cycle can be quite long. There is often an iterative process involved, in
which the customer tests and evaluates prototypes or samples, and we modify the product
characteristics to match the particular requirements of the customer involved. Once this
is done, the ability to manufacture the specific product involved at sufficient volumes
for sufficiently low costs and with the required quality must be established. This process
accentuates the importance of product engineering  an area in which we believe we
have a competitive advantage because of the experience of our team of engineers.

Raw Materials, Suppliers
and Customers

We plan to have more than one source
for most if not all of our battery raw material needs when we approach production
quantities. Currently, we are producing battery cells and battery packs in prototype
quantities only. We expect to ramp up to production quantities for some of our lithium
battery products during the third quarter of 2005. The timing of this will depend in part
on the success of our current marketing and sample evaluations being performed by certain
of our potential customers.

At this time, we cannot predict to
what extent our sales, if and when they materialize, will or will not be dependent (and to
what extent) on a single customer or small group of customers. Over the next year or two,
a small number of customers may represent substantial portions of our sales because we
will be at the beginning of the development curve for our customer base. Our plan is to
try to offset this concentration risk through continuing marketing and sales to broaden
our potential customer base and through protective terms in long term contract with those
customers that do represent sizable portions of our total sales.

The Delphi-EnerDel
Transaction

On October 20, 2004, we and our Ener1
Battery Company subsidiary completed a series of transactions with Delphi Automotive
Systems, LLC and Delphi Technologies, Inc., subsidiaries of Delphi Corporation, through
which we formed a new company called EnerDel, Inc. As part of the transactions, we
received 80.5% of EnerDels issued and outstanding shares of common stock in return
for the contribution by us and our subsidiaries of the following assets to EnerDel:

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

| |  | 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, exercisable only upon termination of the security
interest held by the investors under our senior secured debentures due 2009;
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Ener1
Batterys battery-related intellectual property portfolio, which is licensed back to
us for uses not related to lithium batteries, under an exclusive, perpetual and
royalty-free license; and
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Our
Ener1 Ukraine subsidiarys battery-related intellectual property portfolio, which is
licensed back to us for uses not related to lithium batteries, under an exclusive,
perpetual and royalty-free license.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

-7-

In addition, Ener1 Battery agreed to
make available to EnerDel space in Ener1 Batterys building in Ft. Lauderdale.
EnerDel also acquired the use of our vapor deposition technology for lithium battery uses.

Also as part of the transactions,
Delphi received:

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

| |  | 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);
| | - | --------------------------------------------------------------------------------------------------------------------------------------------

| |  | Immediately
exercisable warrants, with a ten year term, to purchase up to 1.75 million shares of Ener1s
                  common stock for $0.70 per share; and
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Immediately
exercisable warrants, with a ten year term, to purchase up to 5.25 million shares of Ener1s
common stock for $1.00 per share.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------

The Series A Preferred Stock was
exchangeable, at any time prior to January 31, 2005, into up to 6,956,521 shares of our
common stock, based on an exchange rate of 869.5652 shares of our common stock for each
share of EnerDel Series A Preferred Stock. This exchange privilege expired without
exercise. The Series A Preferred Stock is required to 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 Series A Preferred Stock is not voluntarily 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.

Delphi contributed to EnerDel its
lithium battery-related manufacturing equipment and its lithium battery-related patent
portfolio, consisting of issued patents and pending patents, which are, in turn, licensed
back to Delphi for uses not involving lithium batteries, under an exclusive, perpetual and
royalty-free license. In addition, Delphi subleased to EnerDel those portions of
Delphis Indianapolis facilities that contained its lithium battery operations.

The EnerDel transactions provided us
with access to numerous lithium battery products that have been extensively tested. In
addition, we believe that there are several complementary aspects between our lithium
battery operations and the assets that Delphi contributed to EnerDel. A summary of these
is set forth below:

EnerDel Synergies

|                                             | 
|-------------------------------------------- | 
|Ener1                                        | 
|High discharge rate battery technologies    | 
|Primary battery technologies                | 
|Raw materials processing and cell           | 
|production capabilities                      | 
|Access to Far East markets, (e.g., Japanese | 
|power sector)                                | 
|Nanotechnology for production of low cost,  | 
|high discharge rate batteries                | 

-8-

# Our Nanotechnology
Business

Nature of the Business

Our nanotechnology business currently
involves our development efforts associated with our VDS process. VDS is a manufacturing process that we have developed for depositing
thin films in layers on substrates used to form manufactured components.
Initially, we are testing our VDS process for building lithium battery electrodes. The VDS
process is designed to facilitate precise deposition of the manufacturing materials in
such a way as to increase efficiency of production while also increasing performance of
the battery electrode.

Our VDS process is implemented with
computer controls to monitor and regulate key aspects of manufacturing at a precise
micro-level. We believe that, if successful, this process, may be useful in many other
types of products in addition to battery components. Generally, control of the micro-level
aspects of manufacturing using nanotechnology processes allows for production of
components that are cleaner, stronger, lighter, and more precise.

Our Application of
Nanotechnology to Battery Manufacturing

We are applying our VDS technology to
production of batteries on a prototype basis. Our VDS process, as we apply it to battery
manufacturing, uses a vacuum chamber into which we put a battery substrate
(which is the material upon which we deposit materials to build the battery electrodes).
Through a highly calibrated and flexible computer control program that allows
micromanagement of key process parameters, we are able to precisely control the formation
of battery electrodes. The VDS process makes it possible to add the electrode materials
and precisely control their structure on the substrate for a smoother, more
even and more complete coverage of the substrate surface, with less surface imperfections.
We believe that this provides higher conductivity of electric current, which results in
greater power output from the electrode. We think that additional benefits of this
production process for battery electrodes include:

| |  | Efficient
use of electrode materials to minimize waste
| | - | ------------------------------------------------------

| |  | Manufacturing
at the nano level (<100 nanometers) for greater precision
| | - | -------------------------------------------------------------------------

| |  | Low
cost, rapid production of high-rate battery electrodes
| | - | ----------------------------------------------------------

| |  | Higher
possible battery discharge rates due to greater transmission of current
| | - | ------------------------------------------------------------------------------

| |  | Reduced
costs due to (i) reduction of additives and process steps (i.e., coating, plasticizers,
baking) and (ii) fewer cells required in multi-cell packs
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Higher
average voltage
| | - | ----------------------

| |  | Excellent
adhesion and surface characteristics of electrodes.
| | - | -------------------------------------------------------------

Intellectual Property

We have a patent application pending
related to our VDS thin films deposition process and have set up a prototype
manufacturing and testing facility in Ft. Lauderdale, which has produced samples of
lithium battery electrodes that are being evaluated by potential customers and optimized
by our scientists and engineers. We have also licensed this technology to Enerstruct, Inc.
(in which we own 49% and ITOCHU Corporation owns 51%), for nonexclusive use in Japan. As
discussed above, EnerDel has recently signed a development agreement with Enerstruct to
advance the development of Enerstructs high discharge rate battery technology,
utilizing the VDS process.

-9-

Competition

There are numerous companies involved
in nanotechnology, and the term nanotechnology has a broad range
of descriptions. We have defined our participation in this field initially in terms of the
above-described efforts in lithium battery development. We believe that among the other
companies participating in nanotechnology, broadly defined, there are many with greater
resources than our company. We believe that our VDS process will allow significant
performance advantages in our planned lithium batteries and are working to test the
validity of our research in this area through prototypes.

# Our Fuel Cell Business

Introduction

Less than one year after entering the
lithium battery business with our acquisition of Ener1 Battery Company in September 2002,
we determined that fuel cell technologies represented a logical extension of our existing
development work in batteries, solar cells and other energy storage devices. We believe
that many of our technologies have applications to both batteries and fuel cells, so that
our research in one of these areas may be leveraged in the other area. The market for fuel
cell energy is driven largely by the need for a clean, efficient energy source due to
environmental concerns, increasing costs and uncertainty of supply for fossil fuels.

Fuel cells convert chemical energy
into electrical power with less steps than other energy technologies. Fuel cells do not
store energy, but convert it from one form to another and continue to operate as long as
fuel is provided. The general advantages of fuel cells over other energy sources include
clean, safe, quiet performance, high energy efficiency, low emissions and ease of
operation. The range of potential applications for fuel cells is quite broad, including
portable/battery substitution (portable appliances and power tools, small personal
vehicles, consumer electronics, backup power), transportation (automotive, public
transportation, commercial transportation, marine, military) and distributed power (to
homes and small businesses, commercial and industrial sites, remote power (not on standard
electrical grid systems)).

We began our fuel cell research and
development in mid-2003 and now have eight full time employees engaged in research and
development of a broad range of fuel cell related technologies. We have filed five patent
applications with the U.S. Patent and Trademark Office and begun work on
prototypes to test these technologies. We expect our first fuel cell control system
prototype to be completed in the third quarter of 2005. We have also built testing
fixtures that we have sold to third parties through our investor and joint venture
partner, ITOCHU Corporation, for use in testing fuel cell components. We plan to continue
soliciting military and government research grants to continue developing hydrogen/oxygen
fuel cell technologies.

In March 2005, we were notified of a
decision by the Florida Hydrogen Initiative to award to us a grant of $550,000 for 18
months to develop a renewable energy source that will power an entire rest area on an
interstate highway. We plan to build a 10 kilowatt, integrated hydrogen fuel cell that
will create energy from the byproducts of food waste from theme parks and orange peels
from citrus processing. The grant will require us to spend an additional $550,000 of our
own funds in cash or in-kind expenditures to qualify for the entire amount of the grant.
We have applied for additional grants involving development of other fuel cell
technologies.

Competition

The markets for fuel cells and
related products and systems are intensely competitive and the manufacturing of fuel cells
is extremely capital-intensive. Among our most active potential competitors in the fuel
cell business are companies such as Ballard, UTC Fuel Cell Division, Plug Power, Hydrogenics and Teledyne Energy Systems. Many of these
companies have greater financial and marketing resources, greater name recognition and
more experience in the fuel cell business than we have.

We believe that if we can
develop successful prototypes of our planned fuel cells, we will be able to obtain the
resources to implement the manufacturing of those products or enter into strategic
alliances with larger companies to license them to manufacture fuel cells. While other
companies in the fuel cell business will undoubtedly be attempting to accomplish some of
these same things, we believe that we have some competitive advantage over companies
offering fuel cell technologies only because we have technologies in batteries, fuel cells
andnanotechnology that we believe are complementary, providing us with the ability
to offer a broader range of energy solutions, enhancing our fuel cell capabilities.

-10-

Research and Development

In addition to issued patents and
pending patent applications for technology developed internally over the past several
years, we obtained additional issued patents and pending patent applications for various
lithium battery technologies when we formed EnerDel. While we will continue to explore,
expand and develop our existing and new lithium battery technologies, we  also intend
on shifting our focus toward prototyping, marketing, selling and production of products implementing
technologies that we have already developed, substantially developed or acquired. Many of the
secondary cell technologies gained in the EnerDel transaction, for example, are now in the
design and prototype testing process and some have already been tested extensively for
safety and operating characteristics.

In the fuel cell business, we have
several patent applications pending.

In 2003 and 2004 we spent $1,402,192 and $18,012,332, respectively, in the aggregate, on research and
development. The 2004 amount included $14,923,076 for a charge to research and development
expense taken for the fair value of equipment, intangible assets and supplies transferred to EnerDel during the formation
of EnerDel that were considered to be acquired for research and development purposes with no alternative future use (see
Note 11  Notes to Consolidated Financial Statements in Item 7 herein).

We are also exploring potential
licensing transactions for acquiring additional battery and fuel cell technologies that we
believe are worthy of commercializing and that complement our existing technology
portfolios.

Government Regulation and
Approvals

Certain aspects of production and
transportation of batteries and fuel cells and their components or raw materials are
regulated on the international, national and state levels, as well as by private
commercial organizations. In addition to obtaining certain certifications that may be
required on our products that we plan to sell on a standalone basis rather than in
systems, there are various other approvals or certifications that we may need before we
can sell certain of our proposed battery and fuel cell products such as QPL
(Qualified Parts Laboratory  Crane, Indiana) for military sales and UL
(Underwriters Laboratory) for sales generally. (Certain certifications, such as UL, may
not be required for products imbedded into systems, e.g., for certain OEM applications.)

Transportation of battery products is
regulated by the U.S. Department of Transportation and other governmental departments and
agencies. Their approvals may be required before we can ship our products on a commercial
basis.

In addition to the foregoing, we must
comply with environmental regulations. While we believe that we have obtained all
necessary environmental approvals and permits necessary for the current conduct of our
operations, environmental regulations may become more stringent, increasing the cost of
compliance and the risk of failure to comply. In particular, there are environmental laws
that provide for strict, unlimited liability in connection with releases of
hazardous substances. In the manufacturing of batteries and components and
materials for batteries, we use a number of hazardous substances that are regulated by
these environmental laws. While we believe that we have minimized environmental risks in
our Ft. Lauderdale facility by operating with an essentially closed system
 i.e., a system that is self-contained and that recycles substantially all of the
materials used in the system, we are currently classified as a small generator of
hazardous waste for that facility and operate in accordance with the regulations for
this class of business. At this time, our costs for maintaining environmental, health and
safety compliance are not material.

We are currently in the process of
obtaining ISO9001:2000 certification (see previous discussions of this above) for various
aspects of our lithium battery components manufacturing. Our ability to obtain this
certification would indicate to our potential customers that we meet the independent
international quality idea and maintenance standards that have been accepted by a
substantial number of major manufacturing companies around the world. We view such
certification as an important factor in establishing our credibility with our intended
customers.

-11-

# ITEM 2: PROPERTIES

Description of Property

Our headquarters are located in a new
9,000 square foot facility in Ft. Lauderdale, Florida that we leased beginning in February
2004. The facility was finished to our office layout specifications and contains
additional space for expansion. The lease is for a term of six years, and the monthly rent
is currently approximately $11,000 plus operating costs.

Ener1 Battery owns a manufacturing
facility, consisting of land and a 22,000 square foot building located in Ft. Lauderdale,
Florida. This building is 25 years old, and we have added more than $500,000 in
improvements to make the building suitable for our lithium battery manufacturing
equipment. Ener1 Battery has guaranteed our performance of our obligations under $20
million of senior secured convertible debentures due January 2009 that we issued in
January 2004. The real property and manufacturing facility owned by Ener1 Battery, as well
as the production equipment located at the manufacturing facility, is pledged to secure
the obligations of Ener1 Battery under this guarantee. As of March 31, 2005, $19,700,000
in aggregate principal amount of our these senior secured convertible debentures due
January 2009 was outstanding.

Some of our computers, additional
office equipment and other equipment of ours and our subsidiaries are subject to security
interests granted in connection with our receipt of purchase money financing or
refinancing for this equipment.

Beginning in October 2004, our subsidiary EnerDel subleased 56,219 square feet of manufacturing and office space in
Indianapolis, Indiana from Delphi Automotive Systems, LLC.  EnerDels Indianapolis lithium battery manufacturing
equipment is located in this facility.  This lease expires in January 2007.  The monthly rent is $45,636.89.  At the
expiration of the lease term, EnerDel is required to reimburse Delphi for $487,129 for certain improvements allocated to
the leasehold premises, unless the landlord agrees to extend the lease term.

Our NanoEner, Inc. subsidiary leases
1,720 square feet of industrial and office space approximately one mile from our
headquarters in Ft. Lauderdale, Florida. This space is used primarily for NanoEners
prototype equipment and operations. The initial term of the lease expires during the
summer of 2005.

Investment Policies

We do not have specific limitations
on the percentage of our assets that may be invested in any one investment. There is no
specific shareholder vote requirement regarding changes in this policy. Generally, we
acquire assets primarily for operating purposes and not for capital gains or incomeper
se.

# ITEM 3: LEGAL PROCEEDINGS

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

# ITEM 4: SUBMISSION OF
MATTERS TO A VOTE FOR SECURITY HOLDERS

On November 24, 2004 (the
Record Date), our Board of Directors voted unanimously to authorize and
recommend that its shareholders approve a proposal to increase our authorized shares of
common stock to 750,000,000 shares by amending our articles of incorporation. On the
Record Date, our majority shareholder, owning approximately 88% of our issued and outstanding shares of common
stock  approved the amendment by written consent. No other shareholders of the
Company voted on the matter. If the amendment was not adopted by written consent, it would
have been required to be considered by the our shareholders at a special or annual
stockholders meeting convened for the specific purpose of approving the amendment. In
order to eliminate the costs and management time involved in holding a special meeting,
our Board of Directors and our majority shareholder elected to approve the amendment by
written consent in accordance with our organizational documents and Florida law.

On or about December 6, 2004 an
information statement filed with the SEC describing the amendment was furnished to our
shareholders as of the Record Date. The amendment became effective on December 29, 2004.

-12-

# PART II

# ITEM 5: MARKET FOR
THE REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND SMALL BUSINESS
ISSUERPURCHASE OF EQUITY SECURITIES

Our
common stock was traded on The NASDAQ Stock Market® until October 2001. As of October
29, 2001, our shares were quoted on the OTC Bulletin Board under the ticker symbol INPM.
On October 23, 2002, we amended our Articles of Incorporation to change our name from
Inprimis, Inc. to Ener1, Inc. Our stock is traded on the Over-the-Counter Bulletin Board
under the symbol ENEI. On March 28, 2005 the closing sales price of our common stock was
$.65.

The
OTC Electronic Bulletin Board is a regulated quotation service that displays real-time
quotes, last-sale prices and volume information in over-the counter (OTC) equity
securities. OTC Electronic Bulletin Board securities are traded by a community of
registered market makers that enter quotes and trade reports.

The
following table sets forth the high and low  prices for our common stock for the
period indicated as reported by the OTC Electronic Bulletin Board. The quotations reflect
inter-dealer prices, without retail mark-up, mark-down or commission and may not represent
actual transactions.

|Year | Fiscal Quarter Ended | High | Low
|---- | -------------------- | ---- | ---
|2003 | March 31, 2003       | .10  | .03
|     | June 30, 2003        | .65  | .05
|     | September 30, 2003   | .90  | .24
|     | December 31, 2003    | 2.05 | .58
|    
|2004 | March 31, 2004       | 2.00 | .65
|     | June 30, 2004        | 1.00 | .45
|     | September 30, 2004   | .75  | .42
|     | December 31, 2004    | 1.06 | .42

As
of March 28, 2005, there were 347,455,751 shares of common stock outstanding held by
approximately 320 shareholders of record. This number does not include beneficial owners
of common stock whose shares are held in the names of various dealers, clearing agencies,
banks, brokers and other fiduciaries.

We
have not paid any dividends during the last two fiscal years and do not anticipate paying
any cash dividends on our common stock. The terms of our senior secured convertible
debentures due January 2009 restrict our ability to pay dividends on our common stock
until we have met certain milestones set forth in the debentures or until less than
$100,000 in aggregate principal amount of the debentures remains outstanding.

# RELATED STOCKHOLDER
MATTERS

All issuances of securities during
the year ended December 31, 2004 have been previously disclosed on current reports on Form
8-K and quarterly reports on Form 10-QSB.

-13-

# ITEM 6:
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following Managements Discussion and Analysis of Financial Condition and Results
of Operations contain forward-looking statements within the meaning of Section
27A of the Securities Act, and Section 23E of the Securities Exchange Act of 1934, as
amended, including statementsabout our beliefs and expectations. There are many
risks and uncertainties that could cause actual results to differ materially from those
discussed in the forward-looking statements. Potential factors that could cause actual
results to differ materially from those discussed in any forward-looking statements
include, but are not limited to, those stated below under the headings Cautionary
Statement Concerning Forward-Looking Statements and Risk Factors as well
as those described from time to time in our filings with the Securities and Exchange
Commission.

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

# Overview

During 2003, we devoted substantially
all of our attention to the continued development of high energy lithium batteries and
fuel cells and delivered several battery prototypes to prospective future customers.

In the second quarter of 2003, we
transferred certain assets of our former Digital Media division to EnerLook Solutions,
Inc. (now Ener EL Holdings, Inc. -EnerLook) in order to consolidate within EnerLook our set top box
business, which delivered 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 Solutions. In the fourth quarter of 2003, we decided to discontinue our
involvement in EnerLooks business and on December 15, 2003, we entered into an
arrangement with T. & V. Rental Co., Inc. (TVR) under which TVR would manage
EnerLooks business and fund its operations for a six-month period in return for any
profits earned from that business. TVR also was granted an option to purchase the assets
of EnerLook if specific conditions were met. Accordingly, our EnerLook segment was deemed
to be held-for-sale and its revenues, expenses, assets and liabilities are classified as
discontinued operations. TVR exercised its option to purchase the assets of EnerLook, and
in December 2004 we sold substantially all of the assets of EnerLook to TVR Communications
LLC, in return for a 5% ownership position in TVR which was valued at $115,000.

We formed NanoEner, Inc. on April 2,
2004 to develop new markets and applications for our technologies to manufacture
nanomaterials. We currently use our nanomaterials manufacturing technologies in the
development of nanomaterials for lithium batteries and other high-energy storage devices.

During 2004, we substantially
completed equipping our battery manufacturing plant in Ft. Lauderdale, Florida and began
preproduction activities. Also during 2004, we and Delphi Corporation formed a new company
called EnerDel, Inc., of which we own 80.5% and Delphi owns 19.5%. Delphi contributed to
EnerDel its lithium battery manufacturing equipment, and EnerDel is leasing the associated
space in Indianapolis, Indiana from Delphi. Delphi also contributed to EnerDel its lithium
battery patents and rights in its lithium battery patent applications. Our subsidiary,
Ener1 Battery Company, contributed to EnerDel its rights in its lithium battery patent
applications, and Ener1 Ukraine contributed to EnerDel its patents and rights in patent
applications. We intend to conduct all of our future battery related operations through
EnerDel.

We formed a new subsidiary, EnerFuel,
Inc., on October 29, 2004 to operate our fuel cell business.

In January 2005, we announced we had
signed a letter of intent to acquire Giner Electrochemical Systems, L.L.C.
(GES), a joint venture company established in 2000 by Giner, Inc., a 30 year
old fuel cell research and development company, and General Motors Corporation. As part of
this acquisition, if consummated, we would acquire GES long term contracts, patents
for technologies in fuel cells and related products, such as electrolyzers for producing
oxygen, the opportunity to work with General Motors in fuel cell research and
development, and GES fuel cell scientists and engineers. Closing of the transaction
is subject to board approval, satisfactory results of due diligence and negotiation and
execution of definitive agreements. We can not provide assurance that we will enter into
such an agreements that will be able to close the acquisition or that the closing will take
place at any particular time.

-14-

# Critical Accounting
Policies

Deferred Tax Assets. We have recorded
a deferred tax asset of approximately $43,595,000 at December 31, 2004, which is
completely offset by a valuation allowance. Realization of approximately $17,000,000 of
the deferred tax asset is limited to the extent we have offsetting income arising from
appreciation of assets through January 2002, which we believe is unlikely. Realization of
the balance of the deferred tax asset is dependent on generating sufficient taxable income
in the future. The amount of the deferred tax asset considered realizable could change in
the near term if estimates of future taxable income are modified.

Depreciation and Amortization.
Depreciation and amortization are computed using the straight-line method over the
estimated useful lives of the assets, which are as follows:

|                              | Ener1, Inc. | Battery Company | EnerDel, Inc. | Ener1 Technologies
|----------------------------- | ----------- | --------------- | ------------- | ------------------
|Building                      | Na          | 39 years        | Na            | Na                
|Building improvements         | Na          | Na              | 5 to 39 Years | Na                
|Furniture and fixtures        | 5 years     | Na              | 5 years       | Na                
|Equipment and machinery       | 5 years     | Na              | 5 years       | Na                
|Battery plant equipment       | Na          | Na              | 10 Years      | Na                
|Computer and office equipment | 3 years     | Na              | 3 years       | Na                
|Software                      | 3 years     | Na              | 3 years       | Na                
|Automobile                    | 3 years     | Na              | Na            | Na                
|Telephone equipment           | 5 years     | Na              | 7 years       | Na                

Long-lived Assets: We account for the impairment and disposition of long-lived assets
in accordance with Statement of Financial Accounting Standard (SFAS) No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets. In accordance
with SFAS No. 144, long-lived assets to be held are reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of the asset may not
be recoverable. Impairment is determined when the sum of the undiscounted cash flows
estimated to be generated by those assets is less than their carrying value. We recorded
charges for asset impairment of $8.3 million in 2004.

Stock Compensation: Options granted to employees under our stock option plans are
accounted for by using the intrinsic method under APB Opinion 25, Accounting for Stock
Issued to Employees (APB 25). In October 1995, the Financial Accounting Standards Board
issued Statement No. 123, Accounting for Stock-Based Compensation (SFAS 123), which
defines a fair value base method of accounting for stock options. Certain aspects of the
accounting standards prescribed by SFAS 123 are optional and therefore, we have continued
to account for stock options under the intrinsic value method specified in APB 25. We have
adopted the disclosure-only provisions of SFAS No. 123, Accounting for Stock-Based
Compensation (SFAS 123). Accordingly, compensation cost has been recognized
for the stock option 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 awards
consistent with the provisions of SFAS 123, our net loss and loss per share would have
been as indicated below for the years ended December 31, 2003 and 2004:

|                                                                                 | 2003 | 2004
|-------------------------------------------------------------------------------- | ---- | ----
|Net loss, as reported                                                            |      |     
|Plus: compensation recorded for stock options issued                             |      |     
|and variable options                                                             |      |     
|Less: proforma stock based employee compensation                                 |      |     
|                                                                                 |      |     
|                                                                                 |      |     
|                                                                                 |      |     
|                                                                                 |      |     
|                                                                                 |      |     
|Loss per share (including preferred stock dividends and accretion of discounts): |      |     
|Basic and diluted as reported                                                    |      |     
|Basic and diluted proforma                                                       |      |     

-15-

# Results of Operations
for Years Ended December 31, 2003 and 2004

Net Sales We had no significant sales from continuing operations in 2003 or 2004

Gross
Profit: We had no significant gross profit from continuing operations in 2003 or 2004

Net Loss:We incurred a Net Loss for the twelve months ended December 31, 2004 of
$35,815,497.  The net loss increased 301%, or $26.9 million due primarilyto an increase of 58% or $2.9 million in SGA; an increase of 120%, or $1.7 million in research and developement; an increase of 62%, or $0.6 million in intrest expense; $8.3 million in asset impairment charges; $3.3 million in manufacturing expenses; and, $14.9 million in charges to R&D for assets acquired for use in R&D efforts by our EnerDel subsidiary in the EnerDel transaction with Delphi Corporation and for which there was deemed to be no alternative future use. (See Note 11 - Notes to Consolidated Financial Statements.)

Preproduction
Expense: During 2004 we incurred $3,281,821 for expenses related to the start-up of
our production facilities in our Ft. Lauderdale, Florida manufacturing plant. These
expenses were for labor, materials and overhead consumed in the efforts, including
training, to make our equipment and personnel ready to produce our products for sale.

Research
and Development Expenses: In 2003, we incurred $1,402,192 for research and development
(R&D) expenses related to our battery and fuel cell businesses. In 2004 we incurred
$18,012,332 for R&D expenses; $ 1,756,879 was for our battery business; $898,040 was
for our fuel cell business; $434,337 was for our nanotechnology business; and, $14,923,076
for charges to R&D expense taken for the fair value of equipment, intangible assets and supplies
transferred to our new subsidiary, EnerDel, Inc. (EnerDel), during the formation of
EnerDel that were considered to be acquired for R&D purposes with no alternative
future use (see Note 11-Notes to Consolidated Financial Statements).

Selling, General and Administrative Expenses. Selling, general and administrative expenses ("SG&A") related to
continuing operations were $4,955,665 in 2003, and $7,835,128 in 2004, a year to year increase of $2,879,463. This
increase in SG&A was primarily due to an increase of 58% or $1,358,000 in wages and related payroll taxes; an increase of
128% or $1,047,000 in professional fees ; an increase of 509% or $525,000 in outside services; an increase of 94% or
$173,000 in insurance expenses; an increase of 100% or $134,000 in recruiting expenses; an increase of 19% or $42,000 in
travel expenses; offset by a decrease of 47% or $142,000 in public relations expenses; a decrease of 20% or $67,000 in
rent and utilities; and, a net decrease of 31% or $190,000 in all other expense categories.

We
and our majority shareholder, Ener1 Group, Inc., have shared some common facilities,
personnel, and other resources. Allocation of expenses is made between these companies,
utilizing systematic methods. These expenses, which were included in selling, general, and
administrative expenses, were as follows for 2003 and 2004.

|            | 2003 | 2004
|----------- | ---- | ----
|1st Quarter |      |     
|2nd quarter |      |     
|3rd Quarter |      |     
|4th Quarter |      |     
|            |      |     
|            |      |     
|Total       |      |     
|            |      |     

Loss
from Asset Impairment:In 2004 we recorded a charge to earnings to recognize the
impairment of a portion of our manufacturing related assets, the use of which was
transferred to EnerDel. The amount of this charge was $8.3 million. Management determined
that as a result of the reallocation of manufacturing capabilities caused in connection
with the formation of EnerDel, we no longer expected to recognize revenues and positive
net cash flows in excess of the equipment carrying values from the use of the equipment.
The carrying value of the equipment was reduced to its estimated fair market value.

Loss
from Operations Held for Disposal: In 2004 we recorded a net gain of $105,572 on
disposal of assets that were held for disposal. This gain was recorded as a result of the
December 7, 2004 closing on the sale of substantially all of the assets of our 49% owned
subsidiary EnerLook Healthcare Solutions, Inc. (see Notes 2 & 8  Notes to
Consolidated Financial Statements).

Provision
for Income Taxes: The effective tax rate in 2003 and 2004 was zero percent, due to
increases in the deferred tax asset valuation allowance.

-16-

# Liquidity and Capital
Resources

As
of December 31, 2004, our working capital had increased by $19.2 million from December 31,
2003. This increase was primarily the result of the sale of our equity and debt securities
in the transactions described below. We had working capital of $11.8 million as of
December 31, 2004.

We
had negative cash flows from operations of $5.4 million in 2003 and $13.9 million in 2004.
Our total net losses were $8.9 million in 2003 and $35.8 million in 2004.

On
July 25, 2003, we issued 14,000,000 shares of our common stock in a private sale to ITOCHU
Corporation at a price of $0.25 per share for a total of $3.5 million in cash. In
addition, we granted the following options to ITOCHU to increase its ownership of common
stock at the following prices: During the six month period from July 25, 2003 through
January 24, 2004, ITOCHU had the option to purchase up to 12,461,861 shares of our common
stock, for $0.70 per share. During January 2004, ITOCHU exercised a portion of these
options and purchased 1,500,000 shares for $1,050,000. All of the remaining $0.70 options
expired. Also pursuant to the Subscription and Investment Agreement, during the period
from January 25, 2004 through July 24, 2004, ITOCHU had options to purchase up to
9,346,396 shares of our common stock for $2.50 per share. In connection with ITOCHUs
exercise of its options, in January 2004 we amended our Subscription and Investment
Agreement with ITOCHU to extend the exercise expiration date for the 9,346,396 options to
January 31, 2005 and increased the exercise price for all of those options to $4.00 per
share. These options expired on January 31, 2005.

In November 2003, we issued to Ener1
Group, Mike Zoi and Peter Novak a total of 17,027,579 shares of our common stock and
warrants to purchase up to 18,494,767 shares of our common stock (warrants to purchase
9,247,383 shares were issued with an exercise price of $1.50 per share and warrants to
purchase 9,247,384 shares were issued with an exercise price of $2.00 per share) in
satisfaction of approximately $13,300,000 in debt including $11,700,000 in debt owed to
Ener1 Group (including $4,800,000 in intercompany advances from Ener1 Group), $300,000 in
debt owed to Mr. Zoi and $1,300,000 in debt owed to Dr. Novak. These funds were advanced
by Ener1 Group, Mr. Zoi and Dr. Novak to the Company over the last two years to fund
operations and equipment acquisitions. The accrued interest on the debt which was
exchanged as of the date of the Debt Exchange was converted into two year promissory notes
issued to Ener1 Group, Mr. Zoi and Dr. Novak, respectively, with principal amounts equal
to the accrued interest on the notes that were exchanged, totaling $ 1,040,817. As a
result of the exchange, Ener1Group received 14,829,288 shares and warrants to purchase up
to 16,107,061 shares of common stock, Mr. Zoi received 399,876 shares and warrants to
purchase up to 434,330 shares of common stock, and Dr. Novak received 1,798,415 shares and
warrants to purchase up to 1,953,376.

Also in November 2003, Ener1 Group
purchased 1,388,889 shares of common stock and warrants to purchase up to 1,505,232 shares
(warrants to purchase 752,616 shares were issued with an exercise price of $1.50 per share
and warrants to purchase 752,616 shares were issued with an exercise price of $2.00 per
share), for an aggregate purchase price of $1,000,000.

In January 2004, we raised additional
capital through the private placement of $20,000,000 in aggregate principal amount of our
senior secured convertible debentures due 2009 (the January 2004 Debentures) and
warrants to purchase up to 16,000,000 shares of common stock. We used a portion of the
proceeds to pay the expenses of the offering and to repay existing debt of $3,600,000,
including related party debt and the promissory notes described above issued to Ener1
Group and Peter Novak in November 2003. We used the remaining proceeds for the purchase of
manufacturing equipment and to fund general working capital requirements.

In October, 2004 we raised
$15,000,000 additional capital through the private placement of 150,000 shares of our
Series B convertible preferred stock. We contributed the gross proceeds, along with
various equipment use rights and various intellectual property, to our newly formed
EnerDel, Inc. subsidiary in return for 80.5% of EnerDels outstanding common stock.
Delphi Automotive Systems, LLC and Delphi Technologies, Inc. together contributed their
lithium battery related manufacturing equipment and intellectual property to EnerDel in
return for 19.5% of EnerDel, Inc. outstanding common stock. (See Notes 11&12 
Notes to consolidated financial statements)

-17-

In March of 2005 we raised additional
capital through the private placement of $14,225,000 in aggregate principal amount of our
senior secured convertible debentures due March 2009 (the March 2009
Debentures) and warrants to purchase up to 7,526,250 shares of common stock. We used
a portion of the proceeds to pay the expenses of the offering and we expect to use the
remaining proceeds for the purchase of manufacturing equipment and to fund general working
capital requirements.

We regularly evaluate acquisitions of
businesses, technologies, or products complementary to our business. In the event that we
decide to pursue one or more acquisitions, our remaining cash balances may be utilized to
finance such acquisitions, and additional sources of liquidity, such as debt or equity
financing, will in all likelihood be required for such acquisitions or to meet additional
resulting working capital needs. There can be no assurance that additional capital beyond
the amounts forecasted will not be required or that any such additional required capital
will be available on terms acceptable to us, if at all, at such time or times as required
by us.

# Commitments and
Contingencies

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

# Cautionary Statement
Concerning Forward-Looking Statements

We have made forward-looking
statements in this Annual Report and make forward looking statements in our press releases
that are subject to risks and uncertainties. Forward-looking statements include
information that is not purely historic fact and include, without limitation, statements
concerning our financial outlook for 2005 and beyond, our possible or assumed future
results of operations generally, and other statements and information regarding
assumptions about our revenues, cash flow from operations, available cash, operating
costs, capital and other expenditures, financing plans, capital structure, contractual
obligations, legal proceedings and claims, future economic performance, managements
plans, goals and objectives for future operations and growth and markets for our stock.
The sections of this Annual Report which contain forward-looking statements include
Business, Properties, Legal Proceedings,
Managements Discussion and Analysis of Financial Condition and Results of
Operations and our consolidated financial statements and related Notes.

Our forward-looking statements are
also identified by words such as believes, expects,
thinks, anticipates, intends, estimates or
similar expressions. You should understand that these forward-looking statements are
necessarily estimates reflecting our judgment, not guarantees of future performance. They
are subject to a number of assumptions, risks and uncertainties that could cause actual
results to differ materially from those expressed or implied in the forward-looking
statements. The factors discussed in Risk Factors below and in our filings
with the Securities and Exchange Commission from time to time, and other unforeseen events
or circumstances could affect our future results and could cause those results or other
outcomes to differ materially from those expressed or implied in our forward-looking
statements.  Accordingly, you should not place undue reliance on forward-looking
statements, which speak only as of the date of this Annual Report. All subsequent written
and oral forward-looking statements attributable to us or any person acting on our behalf
are expressly qualified in their entirety by the cautionary statements contained or
referred to in this section. We do not undertake any obligation to release publicly any
revisions to these forward-looking statements to reflect events or circumstances after the
date of this Annual Report or to reflect the occurrence of unanticipated events.

# Risk Factors

In addition to the other information
in this Annual Report, readers should consider carefully the following factors that may
affect our future performance.

# We have a history of
operating losses.

We have experienced net operating
losses since 1997, incurred negative cash flows from operations since 1999 and, as of
December 31, 2004, had an accumulated deficit of $96 million. Cash used in operations
for the years ended December 31, 2002, 2003, and 2004 was $7,600,000, $5,400,000, and
$13,945,000 respectively. We expect that we will continue to incur negative cash flows and
require additional cash to fund our operations and implement our business plan. The
continued development of our energy-related technology and products will require
significant additional capital investment.

-18-

The terms of our senior secured
convertible debentures restrict our operations.

Our senior secured convertible
debentures due 2009 contain restrictive covenants that limit our ability to, among other
things:

| |  | dispose
of assets;
| | - | ------------------

| |  | incur
debt;
| | - | -----------

| |  | pay
dividends;
| | - | --------------

| |  | repurchase
our capital stock and debt securities;
| | - | -------------------------------------------------

| |  | create
liens on our assets; and
| | - | -------------------------------

| |  | engage
in transactions with our affiliates.
| | - | -------------------------------------------

These covenants may significantly
limit our ability to respond to changing business and economic conditions and to secure
additional financing, and we may be prevented from engaging in transactions that might be
considered important to our business strategy or otherwise beneficial to us.

We may never complete the research
and development of commercially viable products.

Although we have conducted other
business activities in the past, we have only recently reorganized our activities to focus
on the development of energy and battery related products. We do not know when or whether
we will successfully complete research and development of commercially viable energy
products. If we are unable to develop commercially viable products, we will not be able to
generate sufficient revenue to become profitable. The commercialization of our products
depends on our ability to control the costs of manufacturing, and we cannot assure you
that we will be able to sufficiently control these costs. We must complete substantial
additional research and development before we will be able to manufacture a commercially
viable battery product in commercial quantities In addition, while we are conducting tests
to predict the overall life of our products, we may not have tested our products over
their projected useful life prior to large-scale commercialization. As a result, we cannot
be sure that our products will last as long as predicted, and, if they do not, we may
incur liability under warranty claims.

We have only recently acquired our
energy business, and your basis for evaluating us is limited.

We acquired our energy products
business in September 2002. Accordingly, there is only a limited basis upon which you can
evaluate business and prospects. We have an unproven business plan and do not expect to be
profitable for the next several years. During the past three years, we have shifted our
business from providing engineering services and interactive products to focus primarily
on developing technologies and products for the battery and fuel cell industries.
Before investing in our securities, you should consider the challenges, expenses and
difficulties that we will face as a development stage company seeking to develop and
manufacture new products.

Viable markets for our products
may never develop, may take longer to develop than we anticipate or may not be
sustainable.

Our energy products and technologies
target emerging markets and we do not know the extent to which our technologies and
products will be accepted. To date we do not have any commercially viable products. We
must be able to develop a commercially viable product for our business to succeed. If a
viable market fails to develop or develops more slowly than we anticipate, we may be
unable to recover the losses we will have incurred to develop our products and may be
unable to achieve profitability. Our target customers for our battery products include
customers in the Department of Defense and military forces, and in the transportation,
medical and other industries. We also plan to license our technologies for others to use
to manufacture battery products for the consumer product sector. Our target fuel cell
customers include automobile companies and other companies to whom we would license our
fuel cell technologies for use in manufacturing fuel cell products and systems. We will
need to develop or acquire adequate marketing and manufacturing capabilities in order to
develop a commercially successful product. In addition, the development of a viable market
for our products may be impacted by many factors which are out of our control, including:

| |  | the
cost competitiveness of our products;
| | - | -----------------------------------------

| |  | consumer
reluctance to try a new product;
| | - | -----------------------------------------

| |  | consumer
perceptions of our productssafety;
| | - | --------------------------------------------

| |  | regulatory
requirements;
| | - | ------------------------

| |  | barriers
to entry created by existing energy providers; and
| | - | -----------------------------------------------------------

| |  | emergence
of newer, more competitive technologies and products.
| | - | ---------------------------------------------------------------

-19-

We may need additional capital,
which may not be accessible on attractive terms or at all.

For the last several years, we have
financed our operations through the sale of our securities and by borrowing money. We may
need to raise additional funds through public or private financing. Our ability to obtain
additional financing will be subject to a number of factors, including market conditions,
our operating performance and the terms of our existing indebtedness. The terms of our
senior secured convertible debentures due 2009 prevent us from incurring additional debt
until the registration statement registering the resale of the common shares underlying
the debentures is declared effective; at such time, any additional debt we incur must be
contractually subordinated, as to payment and liquidation, to the payment in full of the
debentures. We cannot assure you that we will be able to raise additional funds on terms
favorable to us or at all. If we raise additional funds through the sale of equity or
convertible debt securities, your ownership percentage of our common stock will be
reduced. In addition, these transactions may dilute the value of our common stock. We may
have to issue securities that have rights, preferences and privileges senior to our common
stock. The terms of any additional indebtedness may include restrictive financial and
operating covenants that would limit our ability to compete and expand. Our failure to
obtain any required future financing could materially and adversely effect our financial
condition.

We have no experience
manufacturing battery products on a large-scale commercial basis and may be unable to do
so.

Since we acquired our energy products
business, we have focused primarily on research and development and have no
experience manufacturing our battery products on a commercial basis. We do not know
whether or when we will be able to develop efficient, low-cost manufacturing capabilities
and processes that will enable us to manufacture our battery products in commercial
quantities while meeting the quality, price, engineering, design and production standards
required to successfully market our battery products. Our failure to develop such
manufacturing processes and capabilities could have a material adverse effect on our
business, financial condition, results of operations and prospects. Even if we are
successful in developing our manufacturing capabilities and processes, we do not know
whether we will do so in time to meet our battery product commercialization schedule,
which calls for us to begin manufacturing our battery products by the end of 2005 and to
produce commercial quantities of such products in 2006, or to satisfy the requirements of
potential distributors or customers.

# We may not meet our
development and commercialization milestones.

We have established product
development and commercialization milestones that we use to assess our progress toward
developing commercially viable battery and other energy related products, including fuel
cell systems. These milestones relate to technology and design improvements as well as to
dates for achieving development goals. To gauge our progress, we plan to operate, test and
evaluate our battery and energy related products. If our systems or products exhibit
technical defects or are unable to meet cost or performance goals, including power output,
useful life and reliability, our commercialization schedule could be delayed and potential
purchasers of our initial commercial battery and energy products may decline to purchase
them. We cannot assure you that we will successfully achieve our milestones in the future
or that any failure to achieve these milestones will not result in potential competitors
gaining advantages in our target market. Failure to meet our development and
commercialization milestones might have a material adverse effect on our operations and
our stock price.

We may be unable to establish
relationships with third parties for aspects of product development, manufacturing,
distribution and servicing and the supply of key components for our products.

We will need to enter into additional
strategic relationships in order to complete our current product development and
commercialization plans. We will also require partners to assist in the distribution,
servicing and supply of components for our anticipated fuel cell products which are in
development. If we are unable to identify or enter into satisfactory agreements with
potential partners, we may not be able to complete our product development and
commercialization plans on schedule or at all. We may also need to scale back these plans
in the absence of needed partners, which would adversely affect our future prospects. In
addition, any arrangement with a strategic partner may require us to make large cash
payments to the partner, issue a significant amount of equity securities to the partner,
provide the partner with the opportunity to have representation on our board of directors,
agree to exclusive purchase or other arrangements with the partner and/or commit
significant financial resources to fund our product development efforts in exchange for
their assistance or the contribution to us of intellectual property. Any such issuance of
equity securities would reduce the percentage ownership of our then current stockholders.
While we have entered into relationships with suppliers of some key components for our
products, we do not know when or whether we will secure supply relationships for all
required components and subsystems for our products, or whether such relationships will be
on terms that will allow us to achieve our objectives. Our business, prospects, results of
operations and financial condition could be harmed if we fail to secure relationships with
entities which can develop or supply the required components for our products and provide
the required distribution and servicing support. Additionally, the agreements governing
our current relationships allow for termination by our partners under some circumstances.

-20-

We will rely on third parties to
develop and provide key components for our battery and energy related products.

We will rely on third party suppliers
to develop and supply key components that we will use in our battery and energy related
products. If those suppliers fail to develop and supply these components in a timely
manner or at all, or fail to develop or supply components that meet our quality, quantity
or cost requirements, and we are unable to obtain substitute sources of these components
on a timely basis or on terms acceptable to us, we may not be able to manufacture our
products. In addition, to the extent that our supply partners use technology or
manufacturing processes that are proprietary, we may be unable to obtain comparable
components from alternative sources.

We do not know when or whether we
will secure long-term supply relationships with any suppliers or whether such
relationships will be on terms that will allow us to achieve our objectives. Our business,
prospects, results of operations and financial condition could be harmed if we fail to
secure long-term relationships with entities that will supply the required components for
our battery and energy related products.

We face high levels of competition
and may be unable to compete successfully.

The markets in which we intend to
compete are highly competitive. There are a number of companies located in the United
States, Canada and abroad that are developing battery and fuel cell technologies and
energy products that will compete with our technologies and products. Some of our
competitors are much larger than we are and may have the manufacturing, marketing and
sales capabilities to complete research, development and commercialization of commercially
viable products more quickly and effectively than we can.

Not only do we face competition from
other companies that are developing battery and fuel cell technologies, but we also face
competition from companies that provide energy products based on traditional energy
sources, such as oil and natural gas. We also face competition from companies that are
developing energy products based on alternative energy sources as a significant amount of
public and private funding is currently directed toward development of a number of types
of distributed generation technology, including microturbines, solar power, wind power and
other types of fuel cell technologies. Technological advances in alternative energy
products, improvements in the electric power grid or other fuel cell technologies may make
our products less attractive or render them obsolete. There are many companies engaged in
all areas of traditional and alternative energy generation in the United States, Canada
and abroad, including, among others, major electric, oil, chemical, natural gas,
batteries, generators and specialized electronics firms, as well as universities, research
institutions and foreign government-sponsored companies. Many of these entities have
substantially greater financial, research and development, manufacturing and marketing
resources than we do.

Failure of our planned products to
pass testing could negatively impact demand for our products.

We may encounter problems and delays
during testing of our products for a number of reasons, including the failure of our
technology or the technology of third parties, as well as our failure to maintain and
service our products properly. Many of these potential problems and delays are beyond our
control. Any problem or perceived problem with our product tests could materially harm our
reputation and impair market acceptance of, and demand for, our products.

Regulatory and other changes in
the energy industry may adversely affect our ability to produce, and reduce demand for,
our products.

The market for our technologies and
products may be heavily influenced by federal, state, local and foreign government laws,
regulations and policies concerning the energy industry. A change in the current
regulatory policies could make it more difficult or costly for us to develop, manufacture
or market our products. Any such changes could also deter further investment in the
research and development of alternative energy sources, including fuel cells, which could
significantly reduce demand for our technologies and products. We cannot predict how
changes in regulation or other industry changes will affect the market for our products or
impact our ability to distribute, install and service our products.

We could be liable for
environmental damages resulting from our research, development or manufacturing
operations.

Our business exposes us to the risk
that harmful substances may escape into the environment, resulting in personal injury or
loss of life, damage to or destruction of property, and natural resource damage. Our
insurance policies may not adequately reimburse us for costs incurred in defending and
settling environmental damage claims, and in some instances, we may not be reimbursed at
all. Our business is subject to numerous federal, state and local laws and regulations
that govern environmental protection and human health and safety. These laws and
regulations have changed frequently in the past and it is reasonable to expect there will
be additional changes in the future. If our operations do not comply with current or
future environmental laws and regulations, we may be required to make significant
unanticipated capital and operating expenditures to bring our operations into compliance.
If we fail to comply with applicable environmental laws and regulations, governmental
authorities may seek to impose fines and penalties on us or to revoke or deny the issuance
or renewal of operating permits and private parties may seek damages from us. Under those
circumstances, we might be required to curtail or cease operations, conduct site
remediation or other corrective action, or pay substantial damage claims.

-21-

Our products may use materials
that are inherently dangerous substances which could subject our business to product
liability claims.

Our energy technologies and products
may use hydrogen or other materials that could leak and combust if ignited by another
source. These technologies and products expose us to potential product liability claims
that are inherent in hydrogen and products that use hydrogen. Hydrogen is a flammable gas
and therefore a potentially dangerous product. Hydrogen is typically generated from
gaseous and liquid fuels that are also flammable and dangerous, such as propane, natural
gas or methane, in a process known as reforming. Natural gas and propane could leak into a
residence or commercial location and combust if ignited by another source. In addition,
our products may operate at high temperatures, which could expose us to potential
liability claims, in the event of accidents involving combustion or explosion. Accidents
involving our products or other hydrogen-based products could materially impede widespread
market acceptance and demand for, or heighten regulatory scrutiny of, our products. In
addition, we might be held responsible for damages beyond the scope of our insurance
coverage. We also cannot predict whether we will be able to maintain our insurance
coverage on acceptable terms.

Product liability or defects could
negatively impact our results of operations.

Any liability we incur for damages
resulting from malfunctions or design defects of our products could be substantial and
could materially adversely affect our business, financial condition, results of operations
and prospects. In addition, a publicized actual or perceived problem could adversely
affect the markets perception of our products resulting in a decline in demand for
our products and could divert the attention of our management, which may materially and
adversely affect our business, financial condition, results of operations and prospects.

Future acquisitions may disrupt
our business, distract our management and reduce the percentage ownership of our
stockholders.

As part of our business strategy we
may seek to acquire complementary technologies, products, expertise and/or other valuable
assets. However, we may not be able to identify suitable acquisition candidates. If we do
identify suitable candidates, we may not be able to complete the acquisitions on
commercially acceptable terms or at all. We may not be able to successfully integrate the
acquired business into our existing business in a timely and non-disruptive manner. We may
have to devote a significant amount of time and management and financial resources to do
so. Even with this investment of management and financial resources, an acquisition may
not produce the desired revenues, earnings or business synergies. In addition, an
acquisition may reduce the percentage ownership of our then current stockholders. If we
fail to integrate the acquired business effectively or if key employees of that business
leave, the anticipated benefits of the acquisition would be jeopardized. The time, capital
and management and other resources spent on an acquisition that fails to meet our
expectations could cause our business and financial condition to be materially and
adversely affected. In addition, as a result of any acquisition, we may incur
non-recurring charges and be required to amortize of significant amounts of intangible
assets, which could adversely affect our results of operations.

We may not be able to protect the
intellectual property upon which we depend and we could incur substantial costs defending
against claims that our products infringe on the proprietary rights of others.

Our ability to compete effectively
will depend, in part, on our ability to protect our proprietary technologies, systems
designs and manufacturing processes. We rely on patents, trademarks, and other policies
and procedures related to confidentiality to protect our intellectual property. However,
some of our intellectual property is not covered by any patent or patent application.
Moreover, we do not know whether any of our pending patent applications will issue or, in
the case of patents issued or to be issued, that the claims allowed are or will be
sufficiently broad to protect our technology or processes. Even if all of our patent
applications are issued and are sufficiently broad, our patents may be challenged or
invalidated. We could incur substantial costs in prosecuting or defending patent
infringement suits or otherwise protecting our intellectual property rights. While we have
attempted to safeguard and maintain our proprietary rights, we do not know whether we have
been or will be completely successful in doing so. Moreover, patent applications filed in
foreign countries may be subject to laws, rules and procedures that are substantially
different from those of the United States, and any resulting foreign patents may be
difficult and expensive to enforce. In addition, we do not know whether the U.S. Patent
& Trademark Office will grant federal registrations based on our pending trademark
applications. Even if federal registrations are granted to us, our trademark rights may be
challenged. It is also possible that our competitors or others will adopt trademarks
similar to ours, thus impeding our ability to build brand identity and possibly leading to
customer confusion. We could incur substantial costs in prosecuting or defending trademark
infringement suits.

-22-

Further, our competitors may
independently develop or patent technologies or processes that are substantially
equivalent or superior to ours. If we are found to be infringing third party proprietary
rights, we could be required to pay substantial royalties and/or damages, and we do not
know whether we will be able to obtain licenses to use the intellectual property at issue
on acceptable terms, if at all. Failure to obtain needed licenses could delay or prevent
the development, manufacture or sale of our products, and could necessitate the
expenditure of significant resources to develop or acquire non-infringing intellectual
property.

Asserting, defending and maintaining
our intellectual property rights could be difficult and costly and failure to do so may
diminish our ability to compete effectively and may harm our operating results. We may
need to pursue lawsuits or legal action in the future to enforce our intellectual property
rights, to protect our trade secrets and domain names and to determine the validity and
scope of the proprietary rights of others. If third parties prepare and file applications
for trademarks used or registered by us, we may oppose those applications and be required
to participate in proceedings to determine priority of rights to the trademark. Similarly,
competitors may have filed applications for patents, may have received patents and may
obtain additional patents and proprietary rights relating to products or technology that
block or compete with ours. We may have to participate in interference proceedings to
determine the priority of invention and the right to a patent for the technology.
Litigation and interference proceedings, even if they are successful, are expensive to
pursue and time consuming, and we could use a substantial amount of our financial
resources in either case.

We rely, in part, on contractual
provisions to protect our trade secrets and proprietary knowledge.

Confidentiality agreements to which
we are party may be breached, and we may not have adequate remedies for any breach. Our
trade secrets may also become known without breach of such agreements or may be
independently developed by competitors. Our inability to maintain the proprietary nature
of our technology and processes could allow our competitors to limit or eliminate any
competitive advantages we may have.

Our business depends on retaining
and attracting highly capable management and operating personnel.

Our success depends in large part on our
ability to retain and attract management and operating personnel, including our Chairman
and Chief Executive Officer, Kevin P. Fitzgerald, our officers and other key employees.
Our business requires highly skilled specialized workforce, including scientists,
engineers, researchers and manufacturing and marketing professionals, who are in high
demand and are often subject to competing offers. To retain and attract key personnel, we
use various measures, including employment agreements, a stock incentive plan and
incentive bonuses for key employees. These measures may not be enough to retain and
attract the personnel we need or to offset the impact on our business of the loss of the
services of Mr. Fitzgerald or other key officers or employees.

We face risks associated with our
plans to market, distribute and service our products internationally.

We intend to market, distribute and
service our products internationally. We have limited experience developing and no
experience manufacturing our products to comply with the commercial and legal requirements
of international markets. Our success in international markets will depend, in part, on
our ability and that of our partners to secure relationships with foreign
sub-distributors, and our ability to manufacture products that meet foreign regulatory and
commercial requirements. Additionally, our planned international operations are subject to
other inherent risks, including potential difficulties in enforcing contractual
obligations and intellectual property rights in foreign countries and fluctuations in
currency exchange rates.

Government contracts could
restrict our ability to effectively commercialize our technology.

Our contracts with government
agencies are subject to the risk of termination at the convenience of the contracting
agency and potential disclosure of our confidential information to third parties. Under
the Freedom of Information Act, any documents that we have submitted to the government or
to a contractor under a government funding arrangement may be subject to public disclosure
that could compromise our intellectual property rights unless these documents are exempted
as trade secrets or as confidential information, appropriately legended by us, and treated
accordingly by such government agencies.

As a government contractor, we must
comply with and are affected by federal government regulations relating to the formation,
administration and performance of government contracts. These regulations will affect how
we do business with our customers and may impose added costs on our business. Any failure
to comply with applicable laws and regulations could result in contract termination, price
or fee reductions or suspension or debarment from contracting with the federal government.

In addition, Federal government
agencies routinely audit government contracts. These agencies review a contractors
performance on its contract, pricing practices, cost structure and compliance with
applicable laws, regulations and standards. These audits may occur several years after
completion of the audited work. An audit could result in a substantial adjustment to our
revenues because any costs found to be improperly allocated to a specific contract will
not be reimbursed, while improper costs already reimbursed must be refunded. If a
government audit uncovers improper or illegal activities, we may be subject to civil and
criminal penalties and administrative sanctions, including termination of contracts,
forfeiture of profits, suspension of payments, fines and suspension or debarment from
doing business with federal government agencies. In addition, our reputation could be
harmed if allegations of impropriety were made against us.

-23-

# We may be unable to
manage rapid growth effectively.

We expect to rapidly expand our
manufacturing capabilities, accelerate the commercialization of our products and enter a
period of rapid growth, which will place a significant strain on our senior management
team and our financial and other resources. The proposed expansion will expose us to
increased competition, greater overhead, marketing and support costs and other risks
associated with the commercialization of a new product. Our ability to manage our rapid
growth effectively will require us to continue to improve our operations, to improve our
financial and management information systems and to train, motivate and manage our
employees. Difficulties in effectively managing the budgeting, forecasting and other
process control issues presented by such a rapid expansion could harm our business,
prospects, results of operations and financial condition.

# Our stock price has been
and could remain volatile.

The market price of our common stock
has historically experienced and may continue to experience significant volatility. Our
progress in developing and commercializing our products, our quarterly operating results,
announcements of new products by us or our competitors, our perceived prospects, changes
in securities analysts recommendations or earnings estimates, changes in
general conditions in the economy or the financial markets, adverse events related to our
strategic relationships and other developments affecting us or our competitors could cause
the market price of our common stock to fluctuate substantially. In addition, in recent
years, the stock market, and in particular the market for technology-related stocks, has
experienced significant price and volume fluctuations. This volatility has affected the
market prices of securities issued by many companies for reasons unrelated to their
operating performance and may adversely affect the price of our common stock. In addition,
we may be subject to additional securities class action litigation as a result of
volatility in the price of our common stock, which could result in substantial costs and
diversion of managements attention and resources and could harm our stock price,
business, prospects, results of operations and financial condition.

# Our principal
stockholder has substantial control over our affairs.

Ener1 is controlled by Ener1 Group,
which owns approximately 88% of our outstanding common stock. Two of Ener1 Groups
board members are also members of our Board of Directors. Ener1 Group has the ability to
exert substantial influence over all matters submitted to a vote of the stockholders of
Ener1, including the election and removal of directors and any merger, consolidation or
sale of all or substantially all of our assets. In addition, Ener1 Group may dictate the
management of our business and affairs. This concentration of ownership could have the
effect of delaying, deferring or preventing a change in control or impeding a merger or
consolidation, takeover or other business combination which you, as a stockholder, may
view favorably.

Future sales of our common stock
may adversely affect our common stock price.

If our stockholders sell a large
number of shares of common stock or if we issue a large number of shares in connection
with future acquisitions or financings, the market price of our common stock could decline
significantly. In addition, the perception in the public market that our stockholders
might sell a large number of shares of common stock could cause a decline in the market
price of our common stock.

Our certificate of incorporation
and Florida law could adversely affect our common stock price.

Provisions of our certificate of
incorporation and Florida law could discourage potential acquisition proposals and could
delay or prevent a change in control of us. These provisions could diminish the
opportunities for a stockholder to participate in tender offers, including tender offers
at a price above the then current market value of our common stock. These provisions may
also inhibit fluctuations in the market price of our common stock that could result from
takeover attempts. In addition, the Board of Directors, without further stockholder
approval, may issue additional series of preferred stock that could have the effect of
delaying, deterring or preventing a change in control of us. The issuance of additional
series of preferred stock could also adversely affect the voting power of the holders of
common stock, including the loss of voting control to others.

-24-

# ITEM 7: FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA

# Financial Statements

|                                                        | Page 
|------------------------------------------------------- | -----
|Financial Statements                                    |      
|Report of Independent Registered Public Accounting Firm | 26   
|Consolidated Balance Sheet                              | 27   
|Consolidated Statements of Operations                   | 28   
|Consolidated Statements of Stockholders' Equity         | 29   
|Consolidated Statements of Cash Flows                   | 30-31
|Notes to Consolidated Financial Statements              | 32   

-25-

# REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM

To the StockholdersFt. Lauderdale, Florida

We have audited the accompanying
consolidated balance sheet of Ener1, Inc. and Subsidiaries (the Company) as of
December 31, 2004 and the related consolidated statements of operations,
stockholders equity and cash flows for each of the two years in the period ended
December 31, 2004. These consolidated financial statements are the responsibility of the
Companys management. Our responsibility is to express an opinion on the consolidated
financial statements based on our audits.

We conducted our audits in accordance
with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the consolidated financial statements. An audit also
includes assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.

As discussed in Note 10 of the
financial statements, the Company issued $20,000,000 in aggregate principal amount of
senior secured convertible debentures due in 2009, and recorded a discount on the
debentures of $20,000,000 related to the issuance of warrants to purchase common stock of
the Company and beneficial conversion features. Accordingly no monetary amount is
reflected as a liability on the accompanying balance sheet, although $19,700,000 in
aggregate principal amount of the debentures was outstanding at December 31, 2004.

In our opinion, the consolidated
financial statements referred to above present fairly, in all material respects, the
financial position of Ener1, Inc. and Subsidiaries as of December 31, 2004, and the
results of their operations and their cash flows for each of the two years in the period
ended December 31, 2004 in conformity with accounting principles generally accepted in the
United States of America.

Kaufman, Rossin & Co., P.A.

Miami, FloridaApril 13,
2005

-26-

ENER1, INC. AND
SUBSIDIARIES CONSOLIDATED BALANCE SHEET

|                                                                                 | December 31,
2004
|-------------------------------------------------------------------------------- | -----------------
|ASSETS                                                                           |                  
|Current Assets:                                                                  |                  
|Cash and cash equivalents                                                        |                  
|Prepaid expenses                                                                 |                  
|Due from related parties                                                         |                  
|                                                                                 |                  
|Total current assets                                                             |                  
|                                                                                
|Property and equipment, net (Note 5)                                             |                  
|Investment in EnerStruct (Note 14)                                               |                  
|Other Investments                                                                |                  
|Other assets                                                                     |                  
|                                                                                 |                  
|TOTAL ASSETS                                                                     |                  
|                                                                                 |                  
|                                                                                
|LIABILITIES AND STOCKHOLDERS' EQUITY                                             |                  
|Current liabilities:                                                             |                  
|Accounts payable                                                                 |                  
|Accrued expenses and other liabilities (Note 7)                                  |                  
|Current portion of bank installment loan payable (Note 9)                        |                  
|Liabilities of discontinued operations (Note 2)                                  |                  
|                                                                                 |                  
|Total current liabilities                                                        |                  
|Long Term Liabilities                                                            |                  
|                                                                                
|Bank installment loan payable  (Note 9)                                          |                  
|$19,700,000 senior secured convertible debenture, net of discount of $19,700,000 |                  
|attributable to warrants and beneficial conversion features (Note 10)            |                  
|                                                                                 |                  
|Total Liabilities                                                                |                  
|                                                                                
|Commitments and contingencies (Note 18)                                          |                  
|Redeemable preferred stock (Notes 11,12 & 20)                                    |                  
|Minority Interest (Note 11)                                                      |                  
|Stockholders' equity:                                                            |                  
|Common stock, $.01 par value:                                                    |                  
|750,000,000 shares authorized and 347,455,751 shares issued and outstanding      |                  
|Additional paid-in capital                                                       |                  
|Accumulated deficit                                                              |                  
|                                                                                 |                  
|Total stockholders' equity                                                       |                  
|                                                                                 |                  
|TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                                       |                  
|                                                                                 |                  

See notes to
consolidated financial statements.

-27-

ENER1, INC. AND
SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS

|                                                                                  | Year ended December 31, | 
|--------------------------------------------------------------------------------- | ----------------------- | 
|
|Net sales (Note 22)                                                               |                         | 
|Cost of sales                                                                     |                         | 
|                                                                                  |                         | 
|Gross profit (loss)                                                               |                         | 
|Operating expenses:                                                               |                         | 
|Research and development (Note 11)                                                |                         | 
|Selling, general and administrative                                               |                         | 
|Manufacturing pre-production costs                                                |                         | 
|Interest expense                                                                  |                         | 
|Loss on impairment of assets (Note 17)                                            |                         | 
|                                                                                  |                         | 
|Total operating expenses                                                          |                         | 
|                                                                                  |                         | 
|Loss from operations                                                              |                         | 
|Non-operating income (expense):                                                   |                         | 
|Interest income                                                                   |                         | 
|Other income (expense), net                                                       |                         | 
|Equity in loss on investment in EnerStruct (Note 14)                              |                         | 
|                                                                                  |                         | 
|Total non-operating income (expense)                                              |                         | 
|                                                                                  |                         | 
|Loss before minority interest, income taxes and discontinued operations           |                         | 
|Minority interest (Note 11)                                                       |                         | 
|Income taxes (Note 6)                                                             |                         | 
|                                                                                  |                         | 
|Loss from continuing operations                                                   |                         | 
|Gain (Loss) from operations held for disposal (Note 2)                            |                         | 
|                                                                                  |                         | 
|Net Loss                                                                          |                         | 
|Preferred stock dividends and accretion of discounts (Note 12)                    |                         | 
|                                                                                  |                         | 
|Net loss applicable to common stockholders                                        |                         | 
|                                                                                  |                         | 
|                                                                                 
|                                                                                 
|Weighted average shares                                                           |                         | 
|Loss from continuing operations including preferred stock dividends and accretion |                         | 
|of discounts  - basic and diluted                                                 |                         | 
|Loss from discontinued operations - basic and diluted                             |                         | 
|Net loss per share - basic and diluted                                            |                         | 

See notes to
consolidated financial statements.

-28-

ENER1, INC. AND
SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER
31, 2003 AND 2004

|                                                               | Common Stock | Additional
Paid-in | Accumulated |             | 
|-------------------------------------------------------------- | ------------ | ------------------ | ----------- | ----------- | 
|
|Balance at December 31, 2002                                   |              |                    |             | 309,447,020 | 
|Employee stock purchase plan                                   |              |                    |             | 4,000       | 
|Employee stock options exercised                               |              |                    |             | 1,052,346   | 
|Sale of common stock                                           |              |                    |             | 14,000,000  | 
|Investment in Enerlook Healthcare                              |              |                   
|Solutions by minority interest                                 |              |                    |             |             | 
|Stock issued for services                                      |              |                    |             | 2,328,917   | 
|Capital contributions by majority                              |              |                   
|Stockholder (Note 16)                                          |              |                    |             |             | 
|Stock options issued for services and                          |              |                   
|compensation due to variable options                           |              |                    |             |             | 
|Stock and warrants issued in exchange for                      |              |                   
|Debt (Note 15)                                                 |              |                    |             | 17,027,579  | 
|Sale of common stock and warrants to                           |              |                   
|majority stockholder (Note 15)                                 |              |                    |             | 1,388,889   | 
|Guarantee of related party debt (Note 9)                       |              |                    |             |             | 
|Net Loss                                                       |              |                    |             |             | 
|                                                               |              |                    |             |             | 
|Balance at December 31, 2003                                   |              |                    |             | 345,248,751 | 
|Employee stock options exercised                               |              |                    |             | 407,000     | 
|Exercise of stock options (Note 14)                            |              |                    |             | 1,500,000   | 
|Discount on issuance of senior secured debentures,             |              |                   
|net of related placement costs of $1,473,438 (Note 10)         |              |                    |             |             | 
|Conversion of senior secured debentures to common   stock      |              |                    |             | 240,000     | 
|Warrants issued in connection with convertible                 |              |                   
|preferred stock (Note 12)                                      |              |                    |             |             | 
|Common stock and stock options issued for services   (Note 19) |              |                    |             | 60,000      | 
|Accretion of discount on preferred stock (Note 20)             |              |                    |             |             | 
|Accrued dividends on preferred stock (Notes 12 & 20)           |              |                    |             |             | 
|Warrants issued in connection with the formation of            |              |                   
|EnerDel, Inc.(Note 11)                                         |              |                    |             |             | 
|Discount on stock issued to minority stockholder   (Note 11)   |              |                    |             |             | 
|Net Loss                                                       |              |                    |             |             | 
|                                                               |              |                    |             |             | 
|Balance at December 31, 2004                                   |              |                    |             | 347,455,751 | 
|                                                               |              |                    |             |             | 

See
notes to consolidated financial statements.

-29-

ENER1, INC. AND
SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS

|                                                                               | 2003 | 2004
|------------------------------------------------------------------------------ | ---- | ----
|OPERATING ACTIVITIES                                                           |      |     
|Net loss                                                                       |      |     
|Adjustments to reconcile net loss to net cash used in operating activities:    |      |     
|Depreciation and amortization                                                  |      |     
|Amortization of discount on senior subordinated debentures                     |      |     
|Foreign currency transaction loss                                              |      |     
|Non-Cash research and development expenses (Note 11)                           |      |     
|Asset impairment (Note 17)                                                     |      |     
|Equity in loss from investment in EnerStruct (Note 14)                         |      |     
|Compensation expense for stock and options issued for services (Note 19)       |      |     
|Minority interest (Note 11)                                                    |      |     
|Non cash proceeds from sale of assets held for disposal (Note 2)               |      |     
|Change in assets and liabilities:                                              |      |     
|(Increase) decrease in:                                                        |      |     
|Trade receivables                                                              |      |     
|Prepaid expenses and other assets                                              |      |     
|Operating assets held for disposal (Note 2)                                    |      |     
|Increase (decrease) in:                                                        |      |     
|Accounts payable                                                               |      |     
|Accrued expenses and other liabilities (Note 7)                                |      |     
|Liabilities and minority interest related to assets held for disposal (Note 2) |      |     
|                                                                               |      |     
|Net cash used in operating activities                                          |      |     
|                                                                              
|INVESTING ACTIVITIES                                                           |      |     
|Investment in EnerStruct (Note 14)                                             |      |     
|Investment in Splinex                                                          |      |     
|Capital expenditures (Notes 4 & 5)                                             |      |     
|                                                                               |      |     
|Net cash used in investing activities                                          |      |     
|                                                                              
|FINANCING ACTIVITIES                                                           |      |     
|Repayment of related party notes (Note 15)                                     |      |     
|Repayment of guaranteed related party debt (Note 9)                            |      |     
|Repayment of mortgage payable (Note 9)                                         |      |     
|Repayment of short term note payable                                           |      |     
|Repayment of bank loan (Notes 9 & 10)                                          |      |     
|Repayment of bank installment loan (Note 9)                                    |      |     
|Proceeds from issuance of common stock to majority stockholder and employees   |      |     
|Proceeds from sale of stock to ITOCHU Corporation (Note 14)                    |      |     
|Proceeds from advances from stockholders                                       |      |     
|Proceeds from exercised employee stock options                                 |      |     
|Proceeds from sale of preferred stock and warrants (Note 12)                   |      |     
|Proceeds from exercise of options (Note 14)                                    |      |     
|Proceeds from issuance of senior secured convertible debentures, net of        |      |     
|costs of $1,473,438 (Note 10)                                                  |      |     
|Proceeds from minority investment in subsidiary                                |      |     
|                                                                               |      |     
|Net cash provided by financing activities                                      |      |     
|                                                                               |      |     
|Net increase (decrease) in cash and cash equivalents                           |      |     
|                                                                               |      |     
|Cash and cash equivalents at beginning of year                                 |      |     
|Cash and cash equivalents at end of year                                       |      |     

See notes to
consolidated financial statements.

-30-

ENER1, INC. AND
SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

SUPPLEMENTAL DISCLOSURE
OF CASH FLOW INFORMATION:

|                                                                             | 2003 | 2004
|---------------------------------------------------------------------------- | ---- | ----
|Cash paid during the year for                                                |      |     
|Income taxes                                                                 |      |     
|Interest                                                                     |      |     
|Non-cash investing and financing activities:                                 |      |     
|Advances from stockholders converted to additional paid in capital (Note 16) |      |     
|Loans and advances from stockholders converted to stock and additional       |      |     
|Paid in capital (Note 16)                                                    |      |     
|Interest payable to related parties converted to debt (Note 15)              |      |     
|Reduction in property and equipment and accounts payable for adjustment      |      |     
|to purchase price of equipment                                               |      |     
|Equipment purchased not paid for as of year end                              |      |     
|Reduction in property and equipment and due to stockholder                   |      |     
|Intellectual property contributed by minority interest stockholder (Note 11) |      |     
|Equipment contributed by minority interest stockholder (Note 11)             |      |     
|Supplies contributed by minority interest stockholder (Note 11)              |      |     
|Accrued dividends on preferred stock (Notes 11 & 12)                         |      |     
|Accretion of discounts on preferred stock                                    |      |     
|Warrants issued in connection with the formation of EnerDel, Inc             |      |     
|Discount on stock issued to minority stockholder                             |      |     

-31-

See notes to
consolidated financial statements.

ENER1, INC. AND
SUBSIDIARIES NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS

1.    
          NATURE OF BUSINESS

Nature of Business

Ener1s primary lines of
business consist of the 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.

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 Solutions,
Inc. (f/k/a EnerLook Health Care Solutions, Inc. and now known as Ener EL Holdings,
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 as of March 31, 2005.

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s business of developing and marketing lithium ion and other lithium
technology batteries is now operated by the Companys EnerDel subsidiary (see below).

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 to focus instead on the clean energy business and lithium batteries in
particular. In addition, the Company recently 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 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 in Japanese markets.

On September 12, 2003, the Battery
Company finalized the acquisition of Ener1s research and development partner company
in Ukraine, known as Ener1 Ukraine (Ener1 Ukraine). Ener1 Ukraine conducts
research and development activities for the Company at facilities in Ukraine. Ener1
Ukraines battery-related patents and rights patent applications were assigned to
EnerDel in October 2004.

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.

On October 20, 2004, the Company and
a unit of Delphi Corporation each contributed lithium battery related assets to EnerDel,
Inc., which was formed on October 18, 2004 in preparation for that transaction. The
Company owns 80.5% of the outstanding stock of EnerDel, and Delphi owns 19.5%. All of the
Companys lithium battery business has been conducted through EnerDel since its
formation.

The Company formed a new subsidiary,
EnerFuel, Inc., on October 29, 2004 for use in conducting the Companys fuel cell
related operations.

-32-

2.    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 September 30, 2004, providing for the sale of
substantially all of EnerLooks assets to TVR Communications, LLC, in exchange for a
5% membership interest in TVR Communications, LLC. The asset sale to TVR closed on
December 7, 2004.

TVR paid EnerLook approximately
$550,000 to fund EnerLooks operations from December 15, 2003 through June 15, 2004
and the 5% membership interest acquired from the December 7, 2004 asset sale to TVR was
valued at $115,000, which amount is included in gain (loss) from operations held for
disposal on the accompanying consolidated statements of operations.

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. Substantially all remaining resources were redirected to the Companys
continuing operations, accordingly, these costs are included in continuing operations.

3.    
          SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation: The
accompanying consolidated financial statements include Ener1, Inc. and its wholly owned
subsidiaries: Ener1 Battery Company; Ener1 Technologies, Inc; EnerNow Technologies, Inc.;
Boca Research of Delaware, Inc.; Boca Research International, Inc.; Boca Research Holland
B.V.; Boca Research (UK) Limited; Boca Research International Holdings Ltd.; Boca Global,
Inc.; AppsCom, Inc.; Ener1 Ukraine; EnerDel, Inc. (80.5% owned); NanoEner, Inc.; and
EnerFuel, Inc. It also includes as discontinued operations the Companys 49% owned
subsidiary, EnerLook Solutions, Inc. Intercompany accounts and transactions have been
eliminated in consolidation. EnerDel, NanoEner, EnerFuel, and Ener1 Ukraine (see above)
have ongoing operations. The Battery Company operations are limited as of October 20, 2004
to holding real estate, the use of which is made available to EnerDel under certain
agreements. 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.

The Company has recorded a deferred
tax asset of approximately $43,595,000 at December 31, 2004, which is completely offset by
a valuation allowance. Realization of approximately $17 million of the deferred tax asset
is limited to offsetting income arising from appreciation of assets through January 2002,
which the Company believes is unlikely. Due to the change in control in 2002, realization of the balance of the deferred tax
asset is dependent on generating sufficient taxable income in the future. The amount of
the deferred tax asset considered realizable could change in the near term if estimates of
future taxable income are modified.

-33-

Cash and Cash Equivalents: The
Company considers liquid instruments purchased with a maturity of three months or less to
be cash and cash equivalents. The Company may, in the normal course of operations,
maintain cash balances in excess of federally insured limits.

Property and Equipment: Property and
equipment are recorded at cost. Expenditures for major betterments and additions are
charged to the asset accounts, while replacement, maintenance and repairs, which do not
extend the lives of the respective assets, are charged to expense in the period incurred.

Depreciation and amortization are
computed using the straight-line method over the estimated useful lives of the assets,
which are as follows:

# Asset Category

|                              | Ener1, Inc. | Battery Company | EnerDel, Inc. | Ener1 Technologies
|----------------------------- | ----------- | --------------- | ------------- | ------------------
|Building                      | Na          | 39 years        | Na            | Na                
|Building improvements         | Na          | Na              | 5 to 39 Years | Na                
|Furniture and fixtures        | 5 years     | Na              | 5 years       | Na                
|Equipment and machinery       | 5 years     | Na              | 5 years       | Na                
|Battery plant equipment       | Na          | Na              | 10 Years      | Na                
|Computer and office equipment | 3 years     | Na              | 3 years       | Na                
|Software                      | 3 years     | Na              | 3 years       | Na                
|Automobile                    | 3 years     | Na              | Na            | Na                
|Telephone equipment           | 5 years     | Na              | 7 years       | Na                

Long-lived Assets: The Company
accounts for the impairment and disposition of long-lived assets in accordance with
Statement of Financial Accounting Standard (SFAS) No. 144, Accounting
for the Impairment or Disposal of Long-Lived Assets. In accordance with SFAS No.
144, long-lived assets to be held are reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount of the asset may not be recoverable. An
impairment is determined when the sum of the undiscounted cash flows estimated to be
generated by those assets is less than their carrying value. See note 17 for a discussion
of asset impairment.

Loss Per Share: Basic loss per share
excludes dilution and is computed by dividing the loss attributable to common stockholders
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 entity. Diluted
loss per share is computed by dividing income or loss available to common stockholders by
the weighted average number of common shares outstanding for the period and dilutive
potential common shares outstanding (all related to outstanding stock options and warrants
discussed in Note 19) unless consideration of such dilutive potential common shares 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 years
ended December 31, 2003 and 2004. Securities that could potentially dilute basic earnings
per share in the future that were not included in the computation of diluted loss per
share because their effect was anti-dilutive are discussed in Note 19.

-34-

Stock Compensation: Options granted
to employees under the Companys Stock Option Plans are accounted for by using the
intrinsic method under APB Opinion 25, Accounting for Stock Issued to Employees (APB 25).
In October 1995, the Financial Accounting Standards Board issued Statement No. 123,
Accounting for Stock-Based Compensation (SFAS 123), which defines a 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 No. 123, Accounting for Stock-Based
Compensation (SFAS 123). Accordingly, compensation cost has been
recognized for the stock option plans only when the exercise prices of employee stock
options are less than the market prices or fair values of the underlying stock on the date
of grant. If compensation cost had been determined based on the fair value at the grant
date for all 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 years ended December
31, 2003 and 2004:

|                                                                                 | 2003 | 2004
|-------------------------------------------------------------------------------- | ---- | ----
|Net loss, as reported                                                            |      |     
|Plus: compensation recorded for stock options and variable options               |      |     
|Less: proforma stock based employee compensation                                 |      |     
|                                                                                 |      |     
|                                                                                 |      |     
|Net loss, proforma                                                               |      |     
|                                                                                 |      |     
|                                                                                 |      |     
|Loss per share (including preferred stock dividends and accretion of discounts): |      |     
|Basic and diluted as reported                                                    |      |     
|Basic and diluted proforma                                                       |      |     

Investment in EnerStruct: The
Companys 49% investment in EnerStruct is accounted for on the equity method (See
Note 14).

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

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

Issuance or sale of stock by
subsidiary: Changes in the Companys equity in a subsidiary caused by issuances or
sales of the subsidiarys stock are accounted for as capital transactions.

Recently Issued Accounting
Pronouncements and Interpretations:

In January 2003, the FASB issued FASB
Interpretation No. 46 (FIN 46), Consolidation of Variable Interest
Entities, an Interpretation of ARB No. 51 and revised it in December 2003. FIN 46
requires certain variable interest entities to be consolidated by the primary beneficiary
of the entity if the equity investors in the entity do not have the characteristics of a
controlling financial interest or do not have sufficient equity at risk for the entity to
finance its activities without additional subordinated financial support from other
parties. FIN 46R was effective for the first interim period ending after March 15, 2004
for all new and existing variable interest entities. The adoption of this Statement did
not have a material impact on the consolidated financial statements.

-35-

In November 2004, the FASB issued
SFAS No. 151, Inventory Costs, an amendment of ARB No. 43, Chapter 4. SFAS No.
151 amends the guidance in ARB No. 43, Inventory Pricing,  for abnormal
amounts of idle facility expense, freight, handling costs, and wasted material (spoilage)
requiring that those items be recognized as current-period expenses regardless of whether
they meet the criterion of so abnormal. This statement also requires that
allocation of fixed production overheads to the costs of conversion be based on the normal
capacity of the production facilities. The statement is effective for inventory costs
incurred during the fiscal years beginning after June 15, 2005. Management does not expect
this statement to have a material impact on the Companys consolidated financial
position or results of operations.

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

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

Reclassifications: Certain prior year
amounts have been reclassified to conform to the fiscal 2004 presentation.

Fair Value of Financial Instruments:
The carrying value of cash and cash equivalents, trade receivables, accounts payable, and
accrued expenses and other liabilities approximates fair value due to the short term
maturity of these instruments or the fact that they are carried at fair value, as
applicable. The carrying value of the bank installment loan approximates fair value as the
interest rates are not significantly different from the current market rates available
to the Company for similar type loans. The fair value of the Senior Secured Convertible
Debentures approximates the face amount based upon a discounted cash flow analysis using the
Companys incremental borrowing rate for similar types of borrowing arrangements. The carrying value of redeemable preferred stock approximates fair value.

Foreign Currency Transactions: The
recorded balances that are required to be paid in foreign currencies at December 31, 2004
are adjusted to reflect the exchange rate at the balance sheet date.

4.    
          SEGMENT REPORTING

As of December 31, 2004 the Company
is organized based upon the following segments: Digital Media Division / EnerLook (which
is classified as discontinued operations), EnerDel, Inc., EnerFuel, Inc., NanoEner, Inc.,
Ener1 Battery Company, and Ener1 Technologies, Inc. EnerDel, Inc. develops and markets
advanced lithium batteries. EnerFuel, Inc. develops and markets fuel cells and fuel cell
systems. NanoEner, Inc. is developing nanotechnology related manufacturing processes and
materials. Ener1 Battery Company provides equipment and facilities to EnerDel, Inc.

-36-

The accounting policies of the
segments are the same as those described in the Summary of Significant Accounting
Policies. Transactions between segments, consisting principally of product sales and
purchases, are recorded at the consummated sales price. The Company evaluates the
performance of its segments and allocates resources to them based on anticipated future
contribution.

|                                            | 2003 | 2004
|------------------------------------------- | ---- | ----
|Net sales                                   |      |     
|Ener1 Battery Company                       |      |     
|Discontinued Segments                       |      |     
|                                            |      |     
|                                            |      |     
|                                           
|Net sales                                   |      |     
|Interest expense                            |      |     
|Corporate                                   |      |     
|Ener1 Battery Company                       |      |     
|                                            |      |     
|                                            |      |     
|Interest expense                            |      |     
|                                           
|Depreciation and amortization expense       |      |     
|Corporate                                   |      |     
|Ener1 Battery Company                       |      |     
|Ener1 Technologies, Inc.                    |      |     
|EnerDel, Inc.                               |      |     
|EnerFuel                                    |      |     
|NanoEner                                    |      |     
|Discontinued Segments                       |      |     
|                                            |      |     
|                                            |      |     
|Total depreciation and amortization expense |      |     
|                                           
|Net loss                                    |      |     
|Corporate                                   |      |     
|Minority interest                           |      |     
|Ener1 Battery Company                       |      |     
|Ener1 Technologies, Inc.                    |      |     
|EnerDel, Inc.                               |      |     
|EnerFuel                                    |      |     
|NanoEner                                    |      |     
|Discontinued Segments                       |      |     
|                                            |      |     
|                                            |      |     
|Net loss                                    |      |     
|                                           
|Assets                                      |      |     
|Corporate                                   |      |     
|Ener1 Battery Company                       |      |     
|Ener1 Technologies, Inc.                    |      |     
|EnerDel, Inc.                               |      |     
|EnerFuel                                    |      |     
|NanoEner                                    |      |     
|                                            |      |     
|Total assets                                |      |     
|                                           
|Capital expenditures                        |      |     
|Corporate                                   |      |     
|Ener1 Battery Company                       |      |     
|EnerDel, Inc.                               |      |     
|EnerFuel                                    |      |     
|NanoEner                                    |      |     
|Discontinued Segments                       |      |     
|                                            |      |     
|                                            |      |     
|Total capital expenditures                  |      |     

-37-

5.       PROPERTY AND
EQUIPMENT

Property and equipment
consisted of the following at December 31, 2004::

|                                | Corporate
Division | Battery
Company | EnerDel, Inc. | Ener1
Technologies,
Inc. | Total
|------------------------------- | ------------------ | --------------- | ------------- | ------------------------ | -----
|Building                        |                    |                 |               |                          |      
|Building/Leasehold Improvements |                    |                 |               | 14,195                   |      
|Software                        |                    |                 |               | 44,991                   |      
|Computer and office equipment   |                    |                 |               | 102,826                  |      
|Furniture and fixtures          |                    |                 |               | 48,894                   |      
|Machinery and equipment         |                    |                 |               | 76,835                   |      
|Telephone equipment             |                    |                 |               | 1,431                    |      
|Automobile                      |                    |                 |               | 173,575                  |      
|                                |                    |                 |               |                          |      
|                                |                    |                 |               |                          |      
|Total Cost                      |                    |                 |               | 462,747                  |      
|Less: Accumulated Depreciation  |                    |                 |               | 74,347                   |      
|                                |                    |                 |               |                          |      
|                                |                    |                 |               |                          |      
|Net property and equipment      |                    |                 |               | 388,400                  |      
|                                |                    |                 |               |                          |      
|                                |                    |                 |               |                          |      

| | (1) | Principally
all held for production and not currently being used or depreciated.
| | --- | --------------------------------------------------------------------------------

The building and certain machinery
and equipment owned by the Battery Company (which machinery and equipment are
substantively owned by EnerDel) are pledged as security under the terms of the
Companys senior secured convertible debentures due January 2009 (see Note 10).

Depreciation expense for property and
equipment for the years ended December 31, 2003 and 2004 was $127,500 and $200,567,
respectively.

-38-

6.    
          INCOME TAXES

Deferred income tax assets in the
accompanying balance sheet as of December 31, 2004 are attributable to the following
items:

|                                                          | 
|--------------------------------------------------------- | 
|Goodwill                                                  | 
|Depreciation, amortization and start-up costs             | 
|Federal and state net operating loss carryforwards        | 
|Impairment losses                                         | 
|R&D expenses taken on equipment and intellectual property | 
|Other                                                     | 
|Gross deferred tax asset                                  | 
|Valuation allowance                                       | 

The Company has Federal and Florida
net operating loss carryforwards available to offset future taxable income of
approximately $84 million and $75 million, respectively. The federal net operating loss
carryover will begin to expire in 2018, while the Florida net operating loss carryforward
will begin to expire in 2011. Due to the change in ownership in January 2002,
carryforwards approximating $51 million are subject to substantial restrictions and may
only be utilized to offset approximately $40,000 of annual taxable income as well as any
unrealized appreciation on assets existing at the time of the ownership change.

A valuation allowance is provided
when it is more likely than not that some portion of the Companys deferred tax
assets will not be realized. Management has evaluated the available evidence about the
Companys future taxable income and other possible sources of realization of deferred
tax assets, and as a result, the valuation allowance was increased by $22.1 million in the
year ended December 31, 2004. The valuation allowance recorded in the financial statements
reduces deferred tax assets to an amount that represents managements best estimate
of the amount of such deferred tax assets that more likely than not will be realized.

The
components of income taxes (benefit) in the accompanying statements of operations are as
follows:

|         | 2003 | 2004
|-------- | ---- | ----
|Federal: |      |     
|Current  |      |     
|Deferred |      |     
|         |      |     
|         |      |     
|Total    |      |     
|         |      |     
|State:   |      |     
|Current  |      |     
|Deferred |      |     
|         |      |     
|         |      |     
|Total    |      |     
|         |      |     

The Company's effective
income tax rate differs from the statutory federal rate of 35% as follows:

|                                                   | 2003 | 2004
|-------------------------------------------------- | ---- | ----
|Statutory rate applied to loss before income taxes |      |     
|Decrease in income taxes (benefit) resulting from: |      |     
|Rate differential                                  |      |     
|Valuation allowance                                |      |     
|State income tax benefit                           |      |     

-39-

7.    
          ACCRUED EXPENSES AND OTHER LIABILITIES

Accrued expenses and other
liabilities principally consist of accrued salaries, bonuses and related benefits and
accrued professional fees.

8.    
          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 333,333
shares of common stock to Solution Investment Group, LLC in exchange for $250,000 and
125,000 shares to an employee, reducing the Companys ownership to 49%. Ener1 Group
owns 43% of the outstanding common stock of EnerLook. Since EnerLook was formed, the
Company has consolidated EnerLooks results of operations and its balance sheet as
part of the Companys consolidated financial statements. Ownership of a subsidiary
below 51% is most often recorded under the equity method of accounting, rather than
consolidating the subsidiarys results of operations with the less than 51% parent
company, as it is presumed that the less than 51% parent company does not control the
subsidiary. The Company has elected to continue consolidating this subsidiary as part of
its financial statements because the Company and Ener1 Group are related parties which
exercise substantial control over the activities of EnerLook and own an aggregate of 92%
of EnerLooks outstanding common stock. Management believes that the reduction in its
ownership percentage of EnerLooks common stock from 51% to 49% does not materially
reduce the control the Company exercises over EnerLooks operations. Effective
December 15, 2003, EnerLooks operations were deemed to be discontinued operations.

In the second quarter of 2003, the
Company transferred certain assets of its Digital Media 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. In December 2003,
management decided to discontinue the operations of this segment and conveyed operating
control of this operating segment to T. & V. Rental Co., Inc. (TVR) a third party. In
December, 2004 the Company sold substantially all of the assets of EnerLook to TVR (see
Note 2).

9.    
          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 secured 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 secured 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.

-40-

In January 2004, the Company issued
$20,000,000 in aggregate principal amount of senior secured convertible debentures due
January 2009, and warrants to purchase up to 16,000,000 shares of common stock, in a
private placement (Note 10). 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 $2,200,000 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.

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.

10.    
          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
January 2009. The interest rate under these debentures is currently 15%. The
Companys obligations under the debentures are collateralized by the land and building owned
by the Battery Company, as well as by certain battery production equipment owned by the
Battery Company and substantively transferred to EnerDel. 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.

In applying the provisions of the
above pronouncements, the Company 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 twelve months ended December 31, 2004 was $1,195,392. Interest expense recorded
related to the accretion of the discount for the year ended December 31, 2004 was
$300,000. The remaining discount on the convertible debentures as of December 31, 2004 was
$19,700,000, after early conversion of $300,000 of debentures.

-41-

Interest expense related to the
accretion of the discount for the calendar years ending after December 31, 2004 is
expected to be as follows and would be accelerated upon early conversion or default of the
instrument:

|                             |  | 
|---------------------------- |  | 
|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 year ended December 31, 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 and 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. In addition, the company did not achieve
certain milestones as of January 21, 2005 and accordingly, the interest rate increased 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 December 31,
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.

11.    
          ENERDEL FORMATION 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:

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

| |  | the
right to use certain lithium battery related equipment in Ener1 Battery Companys
Ft. Lauderdale manufacturing facility valued at $11,938,315, 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;
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| |  | 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.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

-42-

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 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:

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

| |  | 8,000
shares of EnerDels 8.25% Series A Preferred Stock with an aggregate face and
liquidation value of $8 million (the Series A Preferred Stock) (see Note 20);
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | 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
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | 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.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------

This transaction resulted in a
charge to additional paid in capital of approximately $1 million resulting from Ener1s
contribution of assets in excess of its proportionate ownership.

The Series A Preferred Stock was
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 Series A Preferred Stock. The holder of the Series A
Preferred Stock did not exercise its option to exchange its shares into Ener1 common
stock.

The 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 Series A Preferred Stock is not redeemed within four
(4) years after issuance, then at the holders option, it may 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 equipment valued at $8,517,600 and its lithium battery-related patent
portfolio valued at $5,100,000, which is licensed back to Delphi for non-lithium battery
uses under an exclusive, perpetual and royalty-free license. In addition, Delphi entered
into an agreement with EnerDel pursuant to which EnerDel subleased those portions of
Delphis Indianapolis facilities that contain lithium battery operations.

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 issueable 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.

A number of the assets transferred
from Delphi and Ener1 during the formation of EnerDel were considered to be assets to be
used in Research and Development Activities (R&D) because the assets were being used
in product development and prototyping efforts at the time of the transfer. It is
anticipated that EnerDel will continue to use the transferred assets in R&D activities
on future product development and prototyping projects and alternatively EnerDel intends
to use certain of the transferred assets for production of lithium batteries in response
to anticipated future customer orders. As such uses are contingent upon the successful completion of current R&D projects, this equipment was expensed to R&D
upon acquisition in accordance with SFAS No.2.

-43-

Statement of Financial Accounting
Standards No.2 Accounting for Research and Development Costs require that assets to
be used in R&D activities are to be immediately charged to income unless an
alternative future use for the asset exists. AICPA Practice Aid, Assets
Acquired in a Business Combination to be Used in Research and Development Activities
states that for an asset acquired for use in an R&D activity to have an alternative
future use; (a) it is reasonably expected that the combined enterprise will use the
asset acquired in the alternative manner and that the asset embodies an
anticipated capacity singly or in combination with other assets, to contribute directly or
indirectly to future net cash flows (economic benefit) from that alternative
use; (b) the combined enterprises use of the asset acquired is not
contingent on further development of the asset subsequent to the acquisition date (that
is, the asset can be used in the alternative manner in the condition in which it existed
at the acquisition date), and (c) is identified by the acquiring company at
the acquisition date. Though the Company intends to use the equipment in future
product development projects and for future production it is unable to specifically
identify the projects or products at this time due to the indeterminable nature of
specific future customer needs and therefore does not meet the requirement (c) above for
alternative future uses. Similarly, because of the currently indeterminable
nature of future customer needs, a projection can not be made of the economic
benefit of specific future R&D projects or of future anticipated customer
production and therefore the Company does not meet the requirement (a) above for
alternate uses. Finally, because future specific customer requirements may
require modification, or further development, of the transferred assets before future
product development projects or customer production can commence, the Company does not
meet the requirement (b) above. Consequently, due to the inability to meet the
requirements for alternate future uses above, the Company has charged Research
and Development (R&D) expense for the value of the certain assets that were
transferred to EnerDel at its formation. The schedule below illustrates the R&D
charges:

|                                                                              | 
|----------------------------------------------------------------------------- | 
|Value of machinery and equipment transferred from Ener1 Battery Company to be | 
|used in research and development activities                                   | 
|Value of intellectual property transferred from Delphi                        | 
|Value of machinery and equipment transferred from Delphi                      | 
|R & D materials acquired from Delphi                                          | 
|                                                                              | 
|Total charges to research and development for transferred assets              | 
|                                                                              | 

12.    
          SALE of SERIES B PREFERRED STOCK and WARRANTS to PURCHASE COMMON STOCK In order
          to finance its contribution of $15 million in cash to EnerDel (see Note 11), 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.

The Company issued the following
securities to Cofis in exchange for an aggregate purchase price of $15 million in cash:

| |  | 150,000
shares of Series B 7% Convertible Preferred Stock, par value $0.01 per share (the Series
B Preferred) (see Note 20);
| | - | ------------------------------------------------------------------------------------------------------------------------------

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

| |  | 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, and, as of December 31, 2004, there was an accrued
dividend payable recorded of $204,247.

-44-

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 100% of
the Debentures are converted or repaid.

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.

13.    
          AGREEMENT WITH ENER1 GROUP Effective as of October 15, 2004, the Company entered
          into an agreement with Ener1 Group, Inc., its majority shareholder, under which
          Ener1 Group agreed to purchase, from time to time, at the Companys
          request, up to 30,000 shares of the Series B Preferred at a purchase price of
          $100.00 per share (or an aggregate purchase price of $3 million), 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.

In March, 2005, at the Companys
request, Ener1 Group purchased 2,500 of the Companys Series B Preferred shares, and
warrants to purchase 13,889 shares of the Companys common stock, for an aggregate
purchase price of $250,000.

14.    
          ITOCHU CORPORATION INVESTMENT and INVESTMENT in ENERSTRUCT

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

Using the proceeds of the ITOCHU
investment, the Company invested $2,003,339 in a new Japanese company called EnerStruct,
Inc. (EnerStruct), in exchange for a 49% ownership interest in EnerStruct.
ITOCHU owns the remaining 51% of EnerStruct, for which it invested $1,100,000 plus
equipment totaling approximately $500,000. At December 31, 2004 the Companys
original investment in EnerStruct was reduced by $817,974 which represents the
Companys share of EnerStructs losses through that date.

In connection with the foregoing
activities, the Company and Ener1 Battery have entered into a license agreement with
ITOCHU and EnerStruct and agreed to provide EnerStruct with an exclusive license (for
Japan only) to use the technologies covered by two of Ener1 Battery Companys pending
patent applications. ITOCHU has also licensed to EnerStruct, on an exclusive basis,
several of its patents relating to its lithium battery technologies.

-45-

Summarized information of EnerStruct
is as follows as of December 31, 2004 and for the twelve month period then ended:

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

15.    
          DEBT EXCHANGE AGREEMENT with ENER1 GROUP, MR. ZOI and DR. NOVAK, and ADDITIONAL
          INVESTMENT BY ENER1 GROUP

In November 2003, the Company issued
17,027,579 shares of common stock and warrants to purchase up to 18,494,767 shares of
common stock (warrants to purchase 9,247,383 shares were issued with an exercise price of
$1.50 per share and warrants to purchase 9,247,384 shares were issued with an exercise
price of $2.00 per share) in satisfaction of approximately $12,700,000 in debt including
approximately $11,000,000 in debt owed to Ener1 Group (including approximately $3,100,000
in inter-company advances from Ener1 Group), approximately $300,000 in debt owed to Mr.
Zoi and approximately $1,400,000 in debt owed to Dr. Novak. These funds were advanced by
Ener1 Group, Mr. Zoi and Dr. Novak to the Company over the last two years to fund
operations. As a result of the exchange, Ener1Group received 14,829,288 shares and
warrants to purchase up to 16,107,061 shares of common stock, Mr. Zoi received 399,876
shares and warrants to purchase up to 434,330 shares of common stock, and Dr. Novak
received 1,798,415 shares and warrants to purchase up to 1,953,376 shares of common stock.

The accrued interest on the debt
which was exchanged was converted into two year promissory notes issued to Ener1 Group,
Mr. Zoi and Dr. Novak with principal amounts totaling $1,040,817.

Also in November 2003, Ener1 Group
purchased 1,388,889 shares of common stock and warrants to purchase up to 1,505,232 shares
(warrants to purchase 752,616 shares were issued with an exercise price of $1.50 per share
and warrants to purchase 752,616 shares were issued with an exercise price of $2.00 per
share), for an aggregate purchase price of $1,000,000.

16.    
          RELATED PARTY TRANSACTIONS:

During 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 during 2003 aggregated approximately $244,000. During 2003, $908,747 of
accumulated allocations was converted to capital. There was no expense allocated to the
Company for shared resources during 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 2004, Ener1 Group and its subsidiaries billed the
Company $127,585 and the Company billed Ener1 Group and its subsidiaries $187,678, in each
case for services and employees of the other party. As of December 31, 2004, the net
balance due to the Company from Ener1 Group and its subsidiaries was $118,638.

The Company, its wholly owned
subsidiary, Ener1 Acquisition Corp. (Acquisition), and Splinex Technology,
Inc. (Splinex) entered into a Merger Agreement dated as of June 9, 2004, and
amended as of October 7, 2004, providing for the merger of Acquisition with and into
Splinex. Upon closing, which occurred in January 2005, the Company received 5,000,000
shares of Splinex common stock, which represented 5% of the outstanding shares of Splinex
common stock, and, in accordance with the Merger Agreement, the Company declared a
dividend to distribute these shares to the Companys shareholders of record as of
January 17, 2005. Closing of the merger was 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.

-46-

In accordance with the First
Amendment to the Agreement and Plan of Merger, the Company paid $150,000 of expenses
incurred in connection with Splinex Registration Statement.

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.

17.    
          ASSET IMPAIRMENT AND OTHER CHARGES

The Company recorded a charge to
earnings in 2003 to recognize the impairment of a technology license in the amount of
$1,046,250, which is included in loss from operations held for disposal in the
accompanying statement of operations. Management determined during the fourth quarter of
2003 that the Company would not allocate the resources necessary to develop the technology
required to recognize revenues related to the license. The carrying value of the license
was reduced to its estimated fair market value.

In 2004 the Company recorded a charge
to earnings to recognize the impairment of a portion of its manufacturing related assets,
the use of which was transferred to EnerDel. The amount of this charge was $8,288,959.
Management determined that with the reallocation of manufacturing capabilities caused by
the formation of EnerDel, The Company no longer expected to recognize revenues and
positive net cash flows in excess of the equipment carrying values from the use of the
equipment. The carrying value of the equipment was reduced to its estimated fair market
value which was determined based upon a valuation of the equipment performed in accordance
with the provisions of SFAS No.144.

18.    
          COMMITMENTS AND CONTINGENCIES

Litigation

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

Lease Commitments

In January 2004, the Company entered
into a 6 year operating lease for office facilities. The lease provides for 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 October 2004, the Company entered
into a sublease agreement with the minority interest shareholder of Delphi for office and
warehouse facilities in Indianapolis, Indiana. The lease provides for monthly rent of
approximately $46,000, plus maintenance and other charges, and expires in January 2007.
The lease also provides for a payment of $487,129 to the landlord at the expiration of the
sublease term. In accordance with Statement of Financial Accounting Standards No. 13, the
Company records rent on a straight-line basis over the term of the lease. Accordingly, the
Company has recorded approximately $52,000 in deferred rent at December 31, 2004, which is
included in accrued expenses and other liabilities in the accompanying consolidated
balance sheet.

Approximate future minimum payments
for all operating leases for years subsequent to December 31, 2004 are as follows:

|           | 
|---------- | 
|2005       | 
|2006       | 
|2007       | 
|2008       | 
|2009       | 
|Thereafter | 
|           | 
|           | 
|           | 

-47-

19.    
          STOCK OPTION AND PURCHASE PLANS

In April and May of 2002, the Board
of Directors and shareholders adopted the 2002 Stock Participation Plan (the 2002
Plan) pursuant to which, the number of shares of Common Stock reserved for grants
thereunder was set at 6,836,503 shares. The 2002 Plan also provides that no more than
1,500,000 shares of Common Stock may be issued to any employee in any one calendar year.
Under the 2002 Plan, incentive stock options or nonqualified stock options may be issued
to persons selected by the administrators of the Plan from a class of employees, officers,
and consultants, including non-employees who render valuable contributions to the Company.
The exercise price of the options (which in the case of an incentive stock option cannot
be less than the fair market value of the common stock on the date of grant or less than
110% of fair market value in the case of employees or officers holding 10% or more of the
voting stock of the Company) shall be as determined by the Compensation Committee of the
Board of Directors. The 2002 Plan replaces the Companys 1992 Stock Option Plan.
However, any options issued and still in effect under the 1992 Plan follow the rules of
the 1992 Plan.

Also in April and May of 2002, the
Board of Directors and shareholders adopted the 2002 Non-Employee Director Stock Option
Plan (the Director Stock Option Plan) pursuant to which 2,000,000 shares of
common stock are reserved for issuance under this plan to ensure that a sufficient number
of shares are available for issuance to non-employee directors. The plan provides for each
non-employee director first elected to the Board of Directors to receive an automatic
grant of nonqualified stock options for 10,000 shares on the date of his or her election.
The Director Stock Option Plan administrators, in their sole discretion, determine which
non-employee directors are to be awarded options, the number of shares subject to the
options and the exercise price and other terms of the options. However, non-employee
directors who are elected to the Board after the effective date of the Directors Plan will
receive an automatic grant of nonqualified stock options to purchase 10,000 shares of
common stock. The 2002 Plan replaces the previous 1992 Directors Plan and the 1996
Directors Plan.

The Company entered into an
Employment Agreement with Kevin Fitzgerald, the Companys Chief Executive Officer
which was effective as of September 8, 2003. Pursuant to this Agreement, Mr. Fitzgerald
was granted options to purchase 9,716,716 shares of common stock at an exercise price of
$0.30 per share, vesting ratably in equal amounts on the first day of each month for a
period of 36 months, beginning October 1, 2003. The Company recorded compensation related
to the issuance of these options of approximately $65,000 during 2003 and $193,000 during
2004. Mr. Fitzgeralds Employment Agreement also provides that the Company will award
additional options to him: (1) on December 31, 2004, equal to 1% of the then fully diluted
common stock as of that date, at an exercise price equal to $500,000,000 divided by the
number of fully diluted shares of common stock as of that date, vesting ratably in each of
the 24 months following that date; and (2) on December 31, 2005 equal to 0.5% of the then
fully diluted common stock as of that date, at an exercise price equal to $1 billion
divided by the number of fully diluted shares of common stock as of that date, vesting
ratably in each of the 24 months following that date. On December 31, 2004, pursuant to
his Employment Agreement, Mr. Fitzgerald was awarded options to purchase 5,159,943 shares
of common stock at an exercise price of $0.97 per share which vest ratably in each of the
following 24 months.

Advisory Committee Options

The Company has issued options to
three individuals who are members of its Advisory Committee to its Board of Directors.
These individuals are not members of the Board, but act in an advisory role only. The
Advisory Committee Members and the number of options granted to each are as follows: (1)
Philip Carlson  150,000; ITOCHU Corporation (in behalf of Toshihiko Fujioka) 
70,000; and (3) Wilson Greatbatch  100,000. The Company recorded approximately
$130,000 in compensation expense in 2004 related to these options.

EnerDel Stock Options

EnerDel, Inc., a subsidiary of the
Company, will issue options to purchase the common stock of EnerDel, as incentive
compensation to its employees. Currently, the EnerDel Stock Option Plan is planned to have
5,000,000 shares with which to fund such options. As of December 31, 2004 EnerDel had
promised to grant options to purchase 3,040,000 shares of EnerDel common shares.

-48-

Pankaj Dhingra Options

Pankaj Dhingra, President of the
Companys Energy Group, was granted, pursuant to the terms of an employment agreement
with the Company, options to purchase 1,000,000 shares of the Companys common stock
at an exercise price of $.50 per share, vesting in three equal annual installments,
beginning one year from the option grant (December 15, 2004), and 2,000,000 shares of the
common stock of the Companys EnerDel, Inc. subsidiary at an exercise price equal to
the net book value per share of EnerDel common stock outstanding at the time of the option
grant, vesting in three equal annual installments beginning one year from the option
grant. If and when the cumulative revenue of the Companys Energy Group reaches $50
million, the Company will grant to Mr. Dhingra options to purchase an additional 1,000,000
shares of EnerDel common stock at an exercise price equal to two times the net book value
per share of EnerDel common stock on December 15, 2004.

Consultants Options

In January 2004, the Company issued
warrants to purchase 200,000 shares of common stock to a consultant. The warrants have an
exercise price of $0.10 per share and expire in January 2006. The Company recorded
approximately $324,000 in compensation expense in 2004 related to these warrants.

In January 2004, in connection with
securing the Debentures, the Company issued warrants to purchase 1,920,000 shares of
common stock to a consultant. The warrants have an exercise price of $2.51 and expire 10
years from the grant date. The value of these warrants of approximately $2.2 million, is
included in additional paid in capital as offering costs.

In May 2004, the Company awarded
options to acquire 300,000 shares of common stock to various employees of Enerstruct. The
options have an exercise price of $.50 per share, vest over 5 years and expire in May
2014. The Company recorded approximately $61,000 in compensation expense in 2004 related
to these warrants.

A summary of the status of the
Companys employee stock options as of December 31, 2003 and 2004 and changes during
the years ended on those dates is presented below:

|                                 | 2003
Shares | 2003
Weighted
Average
Exercise
Price | 2004
Shares | 2004
Weighted
Average
Exercise
Price
|-------------------------------- | ----------- | ------------------------------------ | ----------- | ------------------------------------
|Outstanding at beginning of year | 948,679     | $0.16                                | 10,665,716  | $     0.29                          
|Granted                          | 11,101,716  | $0.28                                | 11,019,943  | $     0.79                          
|Exercised                        | 1,052,346   | $0.05                                | 407,000     | $     0.05                          
|Cancelled/terminated             | 332,333     | $0.05                                | 250,000     | $     0.15                          
|Outstanding at end of year       | 10,665,716  | $0.29                                | 21,028,659  | $     0.56                          
|Exercisable at end of year       | 1,682,802   | $0.22                                | 4,801,790   | $     0.36                          

The following table
summarizes information about employee stock options outstanding at December 31, 2004.

-49-

|Range of
Exercise Price | Number
Outstanding
at 12/31/04 | Options
Outstanding
Weighted-Average
Remaining
Contractual Life | Weighted-Average
Exercise Price | Options Exercisable
Number
Exercisable
at 12/31/04 | Weighted-Average
Exercise Price
|----------------------- | ------------------------------ | --------------------------------------------------------------- | ------------------------------- | -------------------------------------------------- | -------------------------------
|$0.30                   | 9,716,716                      | 8.3                                                             | $0.30                           | 4,318,540                                          | $     0.30                     
|$0.88-0.97              | 5,729,943                      | 9.9                                                             | $0.96                           | 35,000                                             | $     0.88                     
|$4.93                   | 22,000                         | 7.0                                                             | $4.93                           | 22,000                                             | $     4.93                     
|$0.57-0.76              | 550,000                        | 8.5                                                             | $0.69                           | 241,667                                            | $     0.68                     
|$0.055                  | 70,000                         | 8.0                                                             | $0.06                           | 70,000                                             | $     0.06                     
|$0.10                   | 1,550,000                      | 9.0                                                             | $0.10                           | --                                                 | $   --                         
|$0.50                   | 1,525,000                      | 9.5                                                             | $0.50                           | --                                                 | $   --                         
|$1.09                   | 1,865,000                      | 9.0                                                             | $1.09                           | 114,583                                            | $     1.09                     

The weighted average fair value of
the options granted during 2003 and 2004 was estimated at $0.84 and $0.59, respectively,
based upon the date of grant using the Black-Scholes option-pricing model with the
following weighted average assumptions: no dividend yield, expected volatility of 100%,
weighted average risk-free interest rate of approximately 3.50% and 3.50%, respectively,
and expected lives of three to ten years.

In addition to the above employee
stock options, at December 31, 2003 the Company had the following options and warrants
outstanding:

| | a) | In
connection with the purchase of common stock of the Company, Itochu obtained options to
acquire up to
| | -- | --------------------------------------------------------------------------------------------------------

| | 12,461,861
shares of common stock at $0.70 per share, of which 1,500,000 were exercised in January
2004, and options to acquire 9,346,396 shares of common stock at $4.00 per share as
discussed in Note 14.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | b) | In connection with the Debt Exchange Agreement discussed in Note 15, certain
               majority stockholders were granted warrants to acquire an aggregate of
               20,000,000 shares of common stock at $1.50  $2.00 per share.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | c) | In 2002, in connection with the merger of the Company and Ener1 Battery, the
               majority stockholder obtained warrants to purchase up to 69,000,000 shares of
               common stock at $0.08 per share. In January 2004, the stockholder a) agreed that
               the Company was not required to reserve shares for issuance upon the exercise of
               the warrants until such time as sufficient authorized shares become available.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

20.
               REDEEMABLE PREFERRED STOCK

EnerDel Series A
Preferred Stock

On October 20, 2004, the Board of
Directors of EnerDel Inc. approved the creation of EnerDel Series A Preferred Stock. The
shares of such series were designated: Non Voting, Cumulative and Redeemable Series A
Preferred Stock, with a par value of $ 0.01, and a Face Value of $1,000. There are 500,000
shares authorized and 8,000 shares outstanding at December 31, 2004.

The holders of EnerDel Series A
Preferred Stock are entitled to receive dividends as declared by the Board of Directors at
the rate of 8.25% of the Face Value per share, per annum, payable in cash annually,
commencing on December 31, 2005, and thereafter on the last day of December of each year
that any EnerDel Series A Preferred Stock is outstanding.

The shares of Series A Preferred
Stock are redeemable as follows: a) EnerDel may acquire shares in the market; b) if
EnerDel proposes to register shares of common stock under the Securities Act of 1933, then
EnerDel must redeem all Series A Preferred Stock in full, including all accrued and unpaid
dividends for cash, from the proceeds received from the closing of such completed public
offering; c) all EnerDel Series A Preferred Stock must be redeemed in full, including all
accrued and unpaid dividends, concurrently with and out of the proceeds of the completion
of any public offering for cash registering EnerDel Common Stock for stockholders of
EnerDel that have contractual rights to require EnerDel to register shares of common stock
as part of such proposed registration; d) in the event that EnerDel has not redeemed all
shares of EnerDel Series A Preferred Stock on or before the 4th anniversary of the date of
the certificate, then the holder(s) of the EnerDel Series A Preferred Stock shall have the
option to require EnerDel company to redeem all of the EnerDel Series A Preferred Stock
within 10 days after notifying the company of their exercise of such option.

-50-

The initial carrying amount of the
EnerDel Series A Preferred Stock was recorded at its fair value of $3,700,000. The
carrying amount of the EnerDel Series A Preferred Stock was increased by $299,531 due to
accretion of the discount, and by $130,192 due to accrued dividends. The carrying amount
of the EnerDel Series A Preferred Stock at December 31, 2004 was $4,129,723.

Ener1, Inc. Series B
Convertible Preferred Stock

On October 13th, 2004 the Board of
Directors of Ener1, Inc. approved the creation of Ener1 Series B Convertible Preferred
Stock. The shares of such series were designated: Series B Convertible Preferred Stock,
with a par value of $0.01, and a Face Value of $100. There are 180,000 shares authorized
and 150,000 shares outstanding at December 31, 2004.

The Ener1 Series B Convertible
Preferred Stock ranks: a) junior to any other class or series of capital stock of Ener1
hereafter created, specifically ranking by its terms, senior to the Ener1 Series B
Convertible Preferred Stock; b) senior to Ener1s common stock; c) senior to any
class or series of capital stock hereafter created not specifically ranking by its
terms senior to the Ener1 Series B Convertible Preferred Stock; and, d) pari passuwith any class or series of capital stock created specifically ranking by its terms on
parity with the Ener1 Series B Convertible Preferred Stock.

The holders of Ener1 Series B
Convertible Preferred Stock are entitled to dividends payable: a) semi-annually, in
arrears, on November 1 of each year during which the Ener1 Series B Convertible Preferred
Stock is outstanding beginning November 1, 2005; b) for the first two years after issuance
of the Ener1 Series B Convertible Preferred Stock, payment-in-kind, in the form of
additional shares of Ener1 Series B Convertible Preferred Stock, at the rate of 7.0% of
the Face Value; c) thereafter, in the form of cash at the rate of 7.0% of the Face Value.
The dividends are cumulative.

The shares of Ener1 Series B
Convertible Preferred Stock are redeemable by Ener1 at any time in part or whole at 100%
of the Face Value, plus accrued and unpaid dividends. The Ener1 Series B Convertible
Preferred Stock is redeemable by the holder when 100% of the Corporations 5% Senior
Secured Debentures due January 20, 2009 (Note 10) are liquidated. If liquidation of the 5%
Senior Secured Debentures occurs in full before January 20, 2009, redemption shall be in
24 equal monthly installments beginning 30 days from the date of notice by the holder.

On October 15, 2004 the Company
entered into a subscription agreement with Cofis Compagnie Fiduciaire S.A., for the sale
of 150,000 shares of the Ener1 Series B Convertible Preferred Stock, and warrants to
purchase 4,166,666 shares of the Companys common stock at an exercise price of $1.25
and warrants to purchase 4,166,666 of the Companys common stock at an exercise price
of $1.50 per share for an aggregate consideration of $15,000,000.

The initial carrying amount of the
Ener1 Series B Convertible Preferred stock was recorded at its fair value. The company,
utilizing the Black Scholes Model calculated the discount on the preferred stock
attributed to the warrants to be $4,666,666. The carrying amount of $10,333,334, which is
net of discounts, was recorded as Redeemable Preferred Stock. The carrying amount will be
periodically increased by accretion of the discount and  dividends charged to
Paid-in-Capital. The carrying amount of the Ener1 Series B Convertible Preferred Stock at
December 31, 2004 was $10,891,622; consisting of the original net fair value of
$10,333,334; accretion of the discount of $354,041; and accrued dividends of $204,247.

The table below is an explanation
of the components of redeemable preferred stock as of December 31, 2004

|                                   | Ener1
Series B | EnerDel
Series A | Total
|---------------------------------- | -------------- | ---------------- | -----
|Carrying amount                    |                |                  | $    
|Accumulated accretion of discounts |                |                  |      
|Accrued dividends                  |                |                  |      
|                                   |                |                  |      
|                                   |                |                  | $    
|                                   |                |                  |      
|                                   |                |                  |      

-51-

21.    
          SAVINGS PLAN

In January 1992, the Board of
Directors adopted a Savings Incentive Plan (the Savings Plan) pursuant to
Section 401(k) of the Internal Revenue Code. This plan was terminated effective November
2003.

While the plan was effective all
employees were eligible to participate in the Savings Plan upon completion of six months
of employment. Each employee could elect to contribute to the Savings Plan through payroll
deductions in an amount not to exceed the amount permitted under the Internal Revenue
Code. The Company had the discretion to make matching contributions on behalf of the
participants. Employees were fully vested in their contributions. Company contributions
vested at a rate of 33% on each anniversary date of employment. Amounts credited to an
employees account could have been distributed to the employee at the earliest of (a)
the termination of the employees employment with the Company; (b) the termination of
the Plan; or (c) a withdrawal due to financial hardship. Under the Internal Revenue Code,
neither the employee nor Company contributions to the Savings Plan were taxable to the
employee until such amounts were distributed to the employee. However, contributions made
by the Company were tax deductible. During the years ended December 31, 2003 and 2004 the
Companys contribution expense to the Savings Plan aggregated $7,037 and $0,
respectively.

22.    
         CONCENTRATION OF CUSTOMERS

One customer accounted for 100% of
sales for the year ended December 31, 2004. Four customers accounted for approximately
47%, 16%, 13%, and 11%, respectively, of sales for the year ended December 31, 2003.

23.    
         FOURTH QUARTER RESULTS

As discussed further in Notes 11 and
17, during the quarter ended December 31, 2004, the Company recorded research and
developement expenses of $14,923,076 relating to certain assets transferred to EnerDel
and charges to earnings to recognize impairment of a portion of its manufacturing related
assets aggregating $8,288,959.

24.    
          SUBSEQUENT EVENTS

Splinex closing

The Company and its
wholly-owned subsidiary, Ener1 Acquisition Corp. (Acquisition) and Splinex
Technology, Inc. (Splinex) entered into a merger agreement in June 2004. In
accordance with that merger agreement, Acquisition was merged into Splinex. The Company
received 5,000,000 shares of Splinex common stock in the merger and declared a dividend of
these shares of Splinex common stock (the Distribution) to the Ener1
shareholders of record as of January 17, 2005, prorata in accordance with their respective
ownership interests in the Company. After the Distribution, Ener1 shareholders owned
approximately 5% of the outstanding common stock of Splinex.

7.5% senior secured debentures due 2009

On March 11, 2005,  the Company entered into a securities purchase
agreement under which Ener1 agreed to issue $14.225 million in aggregate principal amount
of 7.5% Senior Secured Convertible Debentures (the Debentures) and Warrants to
purchase 7,112,500 shares of common stock of Ener1. The securities were issued on March
14, 2005. The Debentures mature on March 14, 2009. Interest is payable quarterly in
arrears on March 31, June 30, September 30 and December 31, beginning March 31, 2005. The
interest rate will increase to 15% per year if Ener1 fails to meet certain milestones as
of the first anniversary of the date of issuance of the Debentures.

The Debentures are convertible by the
holder at any time prior to maturity into shares of common stock of the Company, initially
at $1.00 per share, subject to adjustment upon certain events, including as a result of
the sale of equity securities by the Company at a price below the conversion price. Ener1
may require that a specified amount of the principal of the Debentures be converted if the
Milestones are satisfied for a period of 22 consecutive trading days.

At any time on or after March 14,
2008, Ener1 may prepay some or the entire principal of the Debentures at a price of one
hundred and three percent (103%) of the amount of unpaid principal, plus accrued interest.
Upon certain change in control events or upon an event of default (as defined in the
Debentures) a holder may require Ener1 to repurchase such holders Debentures in cash
at the price specified in the Debentures.

-52-

The Debentures are senior to
Ener1s existing and future indebtedness and pari passu with Ener1s Senior
Secured Debentures due 2009 issued in January 2004 (the Existing Debentures).
The Security Agreement provides that Ener1 will grant a security interest in favor of the
investors in certain collateral if certain events occur.

In connection with the issuance of
the Debentures, Ener1 issued warrants to the investors to purchase an aggregate of up to
4,267,500shares at $1.15 per share and an aggregate of up to
2,845,000 shares at $1.25 per share. The initial exercise prices are subject to adjustment
upon certain events, including as a result of the sale of equity securities by the Company
at a price below the exercise price. Ener1 also agreed to issue Warrants to purchase up to
426,750 shares to SG Cowen & Co., LLC, which acted as placement agent for the private
placement.

The Warrants are exercisable (in
whole or in part) at any time on or before March 14, 2010.

If Ener1 or any of its subsidiaries
issue capital stock prior to March 15, 2006, the purchasers of the Debentures have the
right, with certain exceptions, to purchase up to twenty percent of the capital stock
issued by Ener1 or its subsidiary.

Ener1 will be required to make
certain payments to the holders of the Debentures and the Warrants if certain deadlines
are not met or if a shelf registration statement is otherwise unavailable for the resale
of the securities.

GINER TRANSACTION

As of January 7, 2005 Ener1, Inc. has
entered into non-binding letters of intent to acquire 100% of the outstanding membership
interests of Giner Electrochemical Systems, LLC (GES), a privately held
company located in Newton, Massachusetts, that specializes in the development and testing
of fuel cell technologies and products. GES is currently owned by Giner, Inc. and General
Motors Corp. (GM).

Under the proposed terms of the
acquisition, GES would maintain its existing GM multi-year contracts and its research and
development relationship with GM going forward.

Completion of the acquisition is
subject to various conditions, including due diligence, necessary corporate and other
applicable approvals, and negotiation and execution of definitive transaction agreements.

-53-

# ITEM 8: CHANGES IN AND
DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None

# ITEM 8A: CONTROLS AND
PROCEDURES

Evaluation of disclosure controls and
procedures

As of the end of the period covered
by this report, the Company carried out an evaluation of the effectiveness of the design
and operation of its disclosure controls and procedures pursuant to Exchange Act Rule
13a-14. This evaluation was done under the supervision and with the participation of the
Companys Principal Executive Officer and Principal Financial Officer. Based upon
that evaluation, they concluded that the Companys disclosure controls and procedures
are effective in gathering, analyzing and disclosing information needed to satisfy the
Companys disclosure obligations under the Exchange Act.

Changes in internal controls

There
were no significant changes in the Companys internal controls or in other factors
that could significantly affect those controls since the most recent evaluation of such
controls.

# ITEM 8B: OTHER
INFORMATION

None.

# PART III

# ITEM 9 DIRECTORS,
OFFICERS AND CONTROL PERSONS

The term of office of each of our
directors will expire at our next shareholders meeting. Our directors and executive
officers are as follows:

|Name                     | Age | Position                                                         
|------------------------ | --- | -----------------------------------------------------------------
|Kevin P. Fitzgerald      | 48  | Director, Chairman of the Board and Chief Executive Officer      
|Karl Gruns               | 57  | Director                                                         
|Mike Zoi                 | 39  | Director                                                         
|Peter Novak              | 52  | Director                                                         
|Carlos  E. Mendez-Penate | 53  | Director                                                         
|Ronald N. Stewart        | 57  | Director, Executive Vice President, General Counsel and Secretary
|Randall Paulfus          | 58  | Chief Financial Officer                                          
|Pankaj Dhingra           | 44  | President, Energy Group and President, EnerDel, Inc.             

Kevin P. Fitzgerald has been a
director and Chief Executive Officer of Ener1 since September 2003. Prior to joining
Ener1, he was President of Edison Advisors, LLC, an investment banking firm, from 2002 to
2003. From 2000 to 2001, Mr. Fitzgerald was President and Chief Executive Officer of
Globaltron Corp., a public telecommunications company. Mr. Fitzgerald was President and
Chief Executive Officer of Neff Corp., an industrial and construction equipment rental
company, from 1995 to 2000. Mr. Fitzgerald has an undergraduate degree in Electrical
Engineering and a Masters degree in Finance. As an engineer, Mr. Fitzgerald worked for
General Dynamics and Sperry Corporation. Mr. Fitzgerald also worked at Deloitte &
Touche for seven years.

Karl Gruns has been a director of
Ener1 since August 1999. He is a Certified Public Accountant. Since 2001, Mr. Gruns has
owned and operated a management consulting practice in Germany for international clients.
From 1998 to 2001, he was Chief Financial Officer of Infomatec Integrated Information
Systems AG. Previously, Mr. Gruns owned and operated an audit and consulting practice, and
he was formerly with KPMG Certified Public Accountants. He is Chairman of the Board for
sportwetten.de AG, a publicly traded company in Germany.

-54-

Mike Zoi has been a director of Ener1
since February 2002. Since 2001, he has been the President and a director of Ener1 Group.
Since 1991, Mr. Zoi has worked with Dr. Peter Novak, focusing on bringing advanced
electronic technologies to market. In 1998, Mr. Zoi worked with Dr. Novak to form On Power
Battery s.r.l. (subsequently renamed Ener1 s.r.l.), an Italian company developing a
research, development and production facility for advanced, lithium metal batteries in
Italy. For the next three years, Mr. Zoi worked with Dr. Novak to manage the start-up
business operations of Ener1 s.r.l., including negotiations with potential licensees for
the technology, obtaining grant and loan financing for the start-up business, and
relationships with vendors. In 2001, Mr. Zoi and Dr. Novak formed Ener1 Holdings, Inc.
(now Ener1 Group, Inc.).

Dr.
          Peter Novak has been a director of Ener1 since February 2002. Since 2001, he has
          been the Chief Technology Officer and a director of Ener1 Group. Since 1991, Dr.
          Novak has worked with Mike Zoi, focusing on bringing advanced electronic
          technologies to market. In 1998, Dr. Novak worked with Mr. Zoi to form On Power
          Battery s.r.l. (subsequently renamed Ener1 s.r.l.). Dr. Novak has been the
          sole administrator, a position equivalent to president, and sole
          director, for Ener1 s.r.l. Ener1 s.r.l. commenced development of a research,
          development and production facility for advanced lithium metal batteries in
          Italy in 1998. For the next three years, Dr. Novak worked with Mr. Zoi to manage
          the start-up business operations of Ener1 s.r.l. Dr. Novak was, during that
          period, and is now, primarily responsible for technology development. In that
          capacity, he performed and supervised research and development, developed
          numerous technologies for which patent applications are now in process at the
          United States Patent and Trademark office and elsewhere, and also assisted Mr.
          Zoi in the business matters referred to under Mr. Zois background
          description above. In 2001, Dr. Novak and Mr. Zoi formed Ener1 Holdings, Inc.
          (now Ener1 Group, Inc.). As Chief Technology Officer of Ener1 Group, he is
          responsible for all technology development, licensing and patent matters. He
          also assists in the management of the business affairs of Ener1 Group.

Ronald N. Stewart has been a director
since 2002 and serves as our Executive Vice President, General Counsel and Secretary. He
has been our General Counsel since April 2002 when he joined Ener1 Group and Ener1. He was
also our Chief Executive Officer from May 2003 to September 2003 and our Chief Financial
Officer from August 2003 to November 2003. He is Chief Operating Officer of Ener El Holdings. Prior to joining Ener1 Group and Ener1, from 1999 to 2002, Mr.
Stewart was engaged in private law practice as a sole practitioner where he counseled
clients primarily in mergers and acquisitions, corporate and securities matters,
government and commercial contracts, and technology and software licensing. From August
1989 to April 1999, Mr. Stewart worked in the Office of General Counsel at ICF Kaiser
International, Inc., an international consulting, engineering and construction firm, where
he was vice president and assistant general counsel.

Carlos E. Mendez-Peñate has
been a director of Ener1 since 2005. He is a partner in the law firm of Thompson &
Knight LLP. From 1998 through 2004, he was a partner in the law firm of Coudert Brothers,
LLP. Mr. Peñate is admitted to practice law in New York, Connecticut and Florida.
His practice focuses on representation of multinational and foreign corporations,
partnerships, and investment funds, in all aspects of mergers and acquisitions,
financings, private equity investments, and securities offerings in Latin America and
elsewhere; representation of multinational oil companies in emerging market investments;
and representation of foreign high net worth families and individuals. Mr. Peñate
graduated from the Yale undergraduate and law schools.

Randall Paulfus, our Chief Financial
Officer, joined Ener1 in October 2003. Since 1999, Mr. Paulfus has been, and continues as,
a partner in Tatum CFO Partners, an international partnership of professional chief
financial officers. Prior to joining Ener1, and as a partner with Tatum, Mr. Paulfus was
engaged as Chief Financial Officer or as a consultant with several companies, including:
Mosler, Inc. as Chief Financial Officer during 2000 and 2001; Breed Technologies, Inc. as
a consultant during 1999; and Eaton Corp. as a consultant during 2000. Prior to joining
Tatum, Mr. Paulfus served in senior financial management positions with several publicly
traded, high tech, manufacturing and service companies, including as Chief Financial
Officer of Advanced Electronic Support Products, Inc. from 1997 to 1998. Mr. Paulfus is an
inactive CPA, holds a BS in Business Management from Florida Atlantic University and
completed his accounting educational requirements at the University of Florida Graduate
School of Business.

Pankaj Dhingra, President of our
Energy Group, joined Ener1 in December 2004. During the period from 1999 to his
appointment with the Company, Mr. Dhingra worked for Delphi Corporation. He was Assistant
Finance Director, Delphi Energy and Chassis Division from 1999 to 2001 and Business Line
Executive, Energy Management, from 2001 to 2004. From 1993 to 1999, Mr. Dhingra worked for
General Motors Corporation in various financial and management positions, most recently as
Director, Strategic Planning, for that companys international operations.

-55-

# Meetings of the Board of
Directors

The
board of directors held three meetings during 2004. Each incumbent director attended at
least 50% of the aggregate of the total number of meetings of the board of directors and
the total number of meetings held by all committees of the board of directors on which he
or she served.

# Committees of the Board
of Directors

The
board of directors has established two standing committees to assist it in discharging
its responsibilities: the Audit Committee and the Governance and Nominating Committee.

The
Audit Committee reviews our accounting functions, operations and management, our financial
reporting process and the adequacy and effectiveness of our internal controls and internal
auditing methods and procedures. The Audit Committee also recommends to the board the
appointment of our independent public accountants. The Audit Committee held four meetings
during 2004.

The
sole member of the Audit Committee of the Board of Directors is Karl Gruns, who is
independent as defined under Rule 4200(a) (15) of the National Association of
Securities Dealers (NASD) Listing Standards for NASDAQ-listed companies.
The Audit Committee is responsible for the appointment, compensation and oversight of the
independent auditors. The Audit Committee also represents the Board in overseeing our
financial reporting processes, and, as part of this responsibility, consults with our
independent auditors and with personnel from our internal audit and financial staffs with
respect to corporate accounting, reporting, and internal control practices. The Board has
also determined that Mr. Gruns meets the SEC criteria of an audit committee
financial expert.

The
Governance and Nominating Committee is responsible for recommending to the full board
candidates for officer positions and vacancies on the board. During 2004, the Governance
and Nominating Committee consisted of our entire board, however the Governance and
Nominating Committee did not meet during 2004.

# Code of Ethics

During
the year ended December 31, 2004, we adopted a Code of Ethics. The code applies to our
officers and directors. The code provides written standards that are reasonably designed
to deter wrongdoing and promote: (1) honest and ethical conduct, including the ethical
handling of actual or apparent conflicts of interests between personal and professional
relationships; (2) full, fair, accurate, timely and understandable disclosure in reports
and documents that we file with or submit to the SEC or in other public communications we
make; (3) compliance with applicable laws, rules and regulations; (4) prompt reporting of
internal violations of the code; and (5) accountability for the adherence to the code.

Section 16(a) of the Securities Exchange Act of 1934, as amended, requires our directors, executive officers and holders
of more than 10% of our common stock to file with the Securities and Exchange Commission reports regarding their
ownership and changes in ownership of the common stock. Based solely upon a review of copies of forms furnished to our
company or written representations from certain reporting persons, certain of our officers and directors and holders of
more than 10% of our common stock have not made required filings pursuant to Section 16(a) during the year ended December
31, 2004. We have instructed all insiders to file required reports and such persons have informed our company that they
intend to make the required filings. Section 16(a), however, contains no provisions allowing an insider to file a late
report.

-56-

# ITEM 10 EXECUTIVE
COMPENSATION

# Summary Compensation
Table

|Name and Principal
Position | Year | Salary    | Bonus      | Other Annual
Compensation |     | Restricted
Stock Award(s) | Securities
Underlying
Options | All Other
Compensation |     | 
|--------------------------- | ---- | --------- | ---------- | ------------------------- | --- | ------------------------- | ----------------------------- | ---------------------- | --- | 
|Kevin Fitzgerald,           | 2004 | $343,911  | $550,000   | $  13,461                 | (2) |                           | 5,159,143                     | --                     |    
|Chief Executive Officer(1)  | 2003 | $  78,685 | --         | $111,605                  | (3) | $64,800                   | 9,716,716                     | --                    
|                           
|Pankaj Dingra,              | 2004 | $  13,654 | $  75,000  | $       481               | (2) | --                        | 1,000,000                     | --                     | (5)
|President, EnerDel,        
|Inc.(4)                    
|                           
|Ronald Stewart,             | 2004 | $179,167  | $  75,000  | $  19,258                 | (2) | --                        | 500,000                       | --                    
|Executive VP, General,      | 2003 | $126,000  | $    4,000 | $  37,755                 | (7) | $12,600                   | 70,000                        | --                    
|Counsel, Secretary, and     | 2002 | $115,000  | --         | --                        |     |                           | --                            | $       1,167          | (9)
|Former Chief Executive     
|Officer. (6)               
|                           
|Randall Paulfus,            | 2004 | $145,690  | $    3,000 | $  10,109                 | (2) | --                        | --                            | --                    
|Chief Financial Officer (8) | 2003 | $  21,125 | --         | --                        |     | --                        | 200,000                       | --                    
|                            |      |           |            |                           |     |                           |                               |                        |    

| | (1) | Mr.
Fitzgerald joined Ener1 in September 2003 as our Chief Executive Officer and           is
currently paid an annual salary of $350,000.
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------

| | (2) | Amount
represents accrued           vacation earned and automobile allowance.
| | --- | -----------------------------------------------------------------------------

| | (3) | Includes
$108,000, which represents the fair market value as of the date of           grant of a
stock grant of 300,000 shares, and payment of $3,605 for accrued and           unused
vacation.
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (4) | Mr.
Dhingra joined Ener1 in December of 2004 as President           of EnerDel, Inc. His
annual salary is $300,000.
| | --- | -------------------------------------------------------------------------------------------------------------------

| | (5) | Mr.
Dhingra was granted           2,000,000 options in EnerDel, Inc. on December 15, 2004.
| | --- | ------------------------------------------------------------------------------------------

| | (6) | Mr.
Stewart became           our Executive Vice President in 2003. He was our Chief Executive
Officer from           May 2003 to September 2003 and our Chief Financial Officer from
August 2003 to           November 2003. He has been our General Counsel since 2002.
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (7) | Includes
$21,000, which represents the fair market value as of the date of grant           of a
stock grant of 300,000 shares and payment of $10,729 for accrued and unused
          vacation and a $6,026 car allowance.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (8) | Mr.
Paulfus joined Ener1 in November           2003 as our Chief Financial Officer and is
paid an annual salary of $155,833. In           connection with Mr. Paulfus employment,
Tatum CFO Partners was paid           $30,167 in 2004.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (9) | Includes
Ener1s contribution to the executive           officers account under the
Ener1 401(k) plan. Option Grants in Last Fiscal           Year
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------

-57-

The following table sets forth
information with respect to the grant of options to purchase shares of our common stock
during 2004 that were made to the named executive officers.

|                 | Number of
Securities
Underlying
Options Granted | % of Total
Options Granted
to Employees in 2004 | Exercise or
Base
Price
($/Share) | Expiration Date
|---------------- | ----------------------------------------------- | ----------------------------------------------- | -------------------------------- | ---------------
|Kevin Fitzgerald |                                                 |                                                 |                                  | 5,159,943      
|Ronald Stewart   |                                                 |                                                 |                                  | 500.000        
|Randall Paulfus  |                                                 |                                                 |                                  | --             
|Pankaj Dhingra   |                                                 |                                                 |                                  | 1,000,000      

# Option Exercises and
Year-End Option Values

The following table sets forth
information with respect to the exercise by the named executive officers of options to
purchase shares of our common stock during 2004 and the value of in-the-money options held
by the named executive officers as of December 31, 2004.

Aggregated Option
Exercises in 2004 and 2004-End Option Values

|Name             | Shares
Acquired
on Exercise | Value
Realized | Number of Securities
Underlying Unexercised
Options/ at FY-End (#)
Exercisable/Unexercisable | Value of Unexercised
In-the-Money Options
at FY-End($)
Exercisable/Unexercisable
|---------------- | --------------------------- | -------------- | -------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------
|Kevin Fitzgerald | --                          | --             | 4,048,632/10,828,027                                                                         | $1,902,857/$2,664,000                                                           
|Ronald Stewart   | 70,000                      | $68,950        | 250,000/250,000                                                                              | $167,500/$167,500                                                               
|Randall Paulfus  | --                          | --             | 66,667/133,333                                                                               | $667/$1,333                                                                     
|Pankaj Dhingra   | --                          | --             | 0/1,000,000                                                                                  | $0/$270,000                                                                     

# Employment agreements

We entered into an Employment
Agreement with Kevin P. Fitzgerald to become our Chief Executive Officer, Director and
Chairman of our Board of Directors, effective as of September 8, 2003, for a term lasting
until December 31, 2005, with automatic annual renewals thereafter unless terminated by us
or Mr. Fitzgerald. Under the Employment Agreement, we are obligated to pay Mr. Fitzgerald
a beginning annual salary of $250,000. The Employment Agreement calls for us to make
certain option grants to Mr. Fitzgerald, the terms of which are described in the section
titled Equity Compensation Plan Information. The Employment Agreement also
provides for cash bonuses to Mr. Fitzgerald, including a bonus of $250,000 if the market
capitalization of our company reaches $200,000,000 on rolling 30-day average basis, and an
increase in annual compensation to $350,000 if Mr. Fitzgerald obtains additional financing
for us of $3,000,000 or more. Both of these events have occurred.

On November 5, 2003, we entered into
an employment agreement with Randall Paulfus, our Chief Financial Officer. Mr.
Paulfus base salary under the agreement is $145,833 per year. In addition, Mr.
Paulfus was granted options to purchase up to 200,000 shares of our common stock with
vesting of 66,667 shares a year for the next three years. If we terminate Mr. Paulfus
other than for cause, we will pay severance in an amount of one months
salary during the first three months of employment and two months salary after the
first three months of employment.

In connection with the employment of
Mr. Paulfus, we entered into a Resource Agreement with Tatum CFO Partners, LLP. We agreed
to pay a fee to Tatum CFO Partners of 20% of all amounts paid to Mr. Paulfus for salary or
severance and in the event Mr. Paulfus is paid a bonus, we will pay an additional 30% of
such amount to Tatum.

On December 6, 2004 we entered into
an employment agreement with Pankaj Dhingra, under which Mr. Dhingra serves as President
of our Energy Group (consisting of our subsidiaries, EnerDel, Inc., EnerFuel, Inc. and
NanoEner, Inc.) and President of EnerDel, Inc. Mr. Dhingras employment under the
employment agreement commenced on December 15, 2004 and is for a term of 3 years.

-58-

Under the agreement, Mr. Dhingra will
receive a base salary of $300,000 per year and be eligible to earn an annual bonus equal
to up to 100% of his base salary, based on the achievement of certain business and
personal performance objectives to be mutually agreed upon by Mr. Dhingra and our board.
On December 15, 2004, Mr. Dhingra became entitled to receive options to purchase 1,000,000
shares of our common stock at an exercise price of $.50 per share, vesting in three equal
annual installments, beginning one year from the option grant, and 2,000,000 shares of the
common stock of our EnerDel, Inc. subsidiary at an exercise price equal to the net book
value per share of EnerDel common stock outstanding at the time of the option grant,
vesting in three equal annual installments beginning one year from the option grant. If
and when the cumulative revenue of our Energy Group reaches $50 million, we will grant to
Mr. Dhingra options to purchase an additional 1,000,000 shares of EnerDel common stock at
an exercise price equal to two times the net book value per share of EnerDel common stock
on December 15, 2004. If Mr. Dhingras employment is terminated without cause by us,
or for good reason (as defined in the employment agreement) by Mr. Dhingra, we
will pay him an amount equal to one years base salary and the pro rata portion of
any annual performance bonus earned as of the termination date. Mr. Dhingra agreed not to
compete with our Energy Division or solicit for employment any of the Energy
Divisions employees during the term of the employment agreement and for one year
following termination of his employment in certain circumstances.

# Compensation of Directors

Directors who are employees of Ener1,
namely, Mr. Fitzgerald and Mr. Stewart, receive salaries from us for their services as our
officers. On January 1, 2003, we issued 50,000 shares of our common stock, $.01 par value,
to Mr. Gruns, as compensation for his services as our director. Mr. Gruns is paid $10,000
per calendar quarter for his services as our outside director, plus $2,500 per quarter for
his services as Chairman and Sole Member of our Audit Committee and specific cash amounts
for his services on specific projects as our Independent Director. He also receives 50,000
options for our common stock each year as part of his directors compensation for
each additional year in which he serves as our director. He received $30,000 and 100,000
options for his services as a director in 2004, $10,000 for his services as Chairman and
Sole Member of the Audit Committee during that period, and $5,000 for his services on
specific projects as our Independent Director, all during 2004. During 2003, Mr. Zoi and
Dr. Novak received annual compensation of $250,000 each and insurance benefits, as well as
annual automobile allowances of $0 and $31,560, respectively. Dr. Novak and Mr. Zoi will
continue to receive this compensation from Ener1 in 2005.

Carlos E. Mendez-Peñate
received 100,000 options (vesting one third per year for each of the next three years)
upon his appointment as director. He is paid $10,000 per quarter for his services as our
outside director and 50,000 additional stock options (beginning December 31, 2005) for
each additional year of services as our outside director.

All directors are reimbursed for
expenses incurred to attend Board and Committee meetings. Other than as described in these
paragraphs, our directors do not receive compensation for their services as directors.

-59-

# ITEM 11. SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

# Equity Compensation Plan
Information

The following table provides
information regarding common stock authorized for issuance under Ener1s equity
compensation plans as of December 31, 2004:

|Plan Category                 | (a)
Number of
Securities to be
Issued Upon
Exercise of
Outstanding
Options,
Warrants and
Rights | (b)
Weighted-Average
Exercise Price of
Outstanding
Options, Warrants
and Rights | (c)
                                                                                                 Number of Securities
                                                                                                Remaining Available for
                                                                                                 Future Issuance Under
                                                                                                  Equity Compensation
                                                                                                   Plans (excluding
                                                                                                securities reflected in
                                                                                                     column (a))
|----------------------------- | ----------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Equity Compensation Plans     |                                                                                                 |                                                                                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|Approved by Security Holders  |                                                                                                 |                                                                                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|Equity Compensation Plans Not |                                                                                                 |                                                                                
|Approved by Security Holders  |                                                                                                 |                                                                                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|Total                         |                                                                                                 |                                                                                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            

# Security Ownership of
Certain Beneficial Owners and Management

The table below contains information
as of December 31, 2004 about stockholders whom we believe are the beneficial owners of
more than five percent (5%) of our outstanding common stock, as well as information
regarding stock ownership by our directors, our Chief Executive Officer, our other four
most highly compensated executive officers (our named executive officers) and
our directors and named executive officers as a group. Except as described below, we know
of no person that beneficially owns more than 5% of our outstanding common stock. As of
December 31, 2004, there were 347,455,751 shares of common stock outstanding. Except as
otherwise noted below, each person or entity named in the following table has the sole
voting and investment power with respect to all shares of our common stock that he, she or
it beneficially owns. Except as otherwise noted below, the address of each person or
entity named in the following table is c/o Ener1, Inc., 500 West Cypress Creek Road, Suite
100, Fort Lauderdale, Florida 33309.

|Name                          | Amount of Beneficial
Ownership | Percent
of Class
|----------------------------- | ------------------------------ | ----------------
|Ener1 Group, Inc.(1)          | 393,356,886                    | 90.62%          
|Kevin P. Fitzgerald(2)        | 5,860,442                      | 1.66%           
|Boris Zingarevich (3)         | 200,000                        | *               
|Karl Gruns (4)                | 242,000                        | *               
|Mike Zoi (3)(5)               | 2,339,438                      | *               
|Peter Novak (3)(6)            | 5,257,023                      | 1.5%            
|Ronald N. Stewart (7)         | 620,000                        | *               
|Randall Paulfus (8)           | 66,667                         | *               
|Pankaj Dhingra                | *                             
|All officers and directors as
|A group (8 people) (3)        | 14,625,570                     | 4.08            

* Less than 1%.

| | (1) | Includes
86,612,293 shares issuable under outstanding warrants exercisable during the 60 day
period following December 31, 2004. Mike Zoi, Dr. Peter Novak and Boris Zingarevich
indirectly beneficially own 24.16%, 24.16% and 51.68%, respectively, of Ener1 Groups
outstanding securities.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (2) | Includes
5,483,442 shares issuable under outstanding options exercisable during the 60 day period
following December 31, 2004.
| | --- | ------------------------------------------------------------------------------------------------------------------------------

| | (3) | The
amount of securities shown does not include any securities indirectly beneficially owned
through Ener1 Group.
| | --- | -----------------------------------------------------------------------------------------------------------------

| | (4) | Includes
192,000 shares issuable under outstanding options exercisable during the 60 day period
following December 31, 2004.
| | --- | ----------------------------------------------------------------------------------------------------------------------------

| | (5) | Includes
1,939,562 shares issuable under outstanding warrants exercisable during the 60 day period
following December 31, 2004.
| | --- | -------------------------------------------------------------------------------------------------------------------------------

| | (6) | Includes
3,458,608 shares issuable under outstanding warrants exercisable during the 60 day period
following December 31, 2004.
| | --- | -------------------------------------------------------------------------------------------------------------------------------

| | (7) | Includes
250,000 shares issuable under outstanding options exercisable during the 60 day period
following December 31, 2004.
| | --- | ----------------------------------------------------------------------------------------------------------------------------

| | (8) | Includes
66,667 shares issuable under outstanding options exercisable during the 60 day period
following December 31, 2004.
| | --- | ---------------------------------------------------------------------------------------------------------------------------

-60-

# ITEM 12. CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS

# Allocation of Expenses
to Us from Ener1 Group

We share office space with Ener1
Battery and Ener1 Group. During 2003 and a portion of 2004, we and Ener1 Battery utilized
Ener1 Group personnel for various administrative and other functions, which included the
services of Mike Zoi and Peter Novak. A portion of Ener1 Groups expenses for such
office space and personnel was allocated to us based on the usage by us and Ener1 Battery.
Our portion of these expenses, including Ener1 Batterys pro rata share of these
expenses, was $491,158 in 2003 and $60,093 in 2004. We are no longer charged a portion of
the expenses for these services because substantially all of the services involved are now
provided to us by our own personnel.

# Loans and Advances to Us
from Ener1 Group

Ener1 Group has made various loans,
advances and capital contributions to us since it first acquired a majority interest in
Ener1 in early 2002. With the exception of approximately $1,000,000 of accrued interest on
some of these loans, all of these loans were satisfied when they were exchanged for our
common stock and warrants in November 2003, pursuant to our Debt Exchange Agreement with
Ener1 Group, Mr. Zoi and Dr. Novak. As part of this exchange, we issued promissory notes
to Ener1 Group, Mr. Zoi and Dr. Novak in aggregate principal amount of approximately
$1,000,000 representing the amount owed in accrued interest on advances. These notes were
paid in full using the proceeds of our issuance in January 2004 of our 5% senior secured
convertible debentures due 2009.

# Payments to Mr. Zoi and
Dr. Novak

In November 2003, we reimbursed Ener1
Group, $128,586 and $113,915, representing our allocated share of expenses incurred by
Ener1 Group for the annual salaries, automobile allowances and insurance benefits paid by
Ener1 Group in 2002 to Mr. Zoi and Dr. Novak, respectively. At the same time, we also
reimbursed Ener1 Group $82,516 and $71,862, representing our allocated share of expenses
incurred by Ener1 Group in 2003 for the salaries, automobile allowances and insurance
benefits paid to Mr. Zoi and Dr. Novak, respectively. In July 2003, we began making
payments directly to Mr. Zoi and Dr. Novak, including annual compensation of $250,000 and
$250,000, respectively, and their automobile allowances and insurance benefits. We will
continue making these payments directly to Mr. Zoi and Dr. Novak in return for their
services. We paid $46,450 and $32,125 for insurance benefits during 2004 for Mike Zoi and
Peter Novak respectively.

# Debt Exchange Agreement
with Ener1 Group, Mr. Zoi and Dr. Novak

In November 2003, we issued
17,027,579 shares of common stock and warrants to purchase up to 18,494,767 shares of our
common stock (warrants to purchase 9,247,383 shares were issued with an exercise price of
$1.50 per share and warrants to purchase 9,247,384 shares were issued with an exercise
price of $2.00 per share) in satisfaction of approximately $13,300,000 in debt including
$11,700,000 in debt owed to Ener1 Group (including $4,800,000 in intercompany advances
from Ener1 Group), $300,000 in debt owed to Mr. Zoi and $1,300,000 in debt owed to Dr.
Novak. These funds were advanced by Ener1 Group, Mr. Zoi and Dr. Novak to us over the past
two years to fund our operations. The accrued interest on the debt which was exchanged as
of the date of the Debt Exchange was converted into two year promissory notes issued to
Ener1 Group, Mr. Zoi and Dr. Novak with principal amounts equal to the accrued interest on
the notes, totaling approximately $1,000,000. These notes were all paid in full with
proceeds from our 5% Senior Secured Debentures issued in February 2004. As a result of the
exchange, Ener1 Group received 14,829,288 shares and warrants to purchase up to 16,107,061
shares of common stock, Mr. Zoi received 399,876 shares and warrants to purchase up to
434,330 shares of common stock, and Peter Novak received 1,798,415 shares and warrants to
purchase up to 1,953,376 shares of common stock.

# Additional Investment by
Ener1 Group

In November 2003, Ener1 Group
purchased an additional 1,388,889 shares of common stock from us and warrants to purchase
up to 1,505,232 shares (warrants to purchase 752,616 shares were issued with an exercise
price of $1.50 per share and warrants to purchase 752,616 shares were issued with an
exercise price of $2.00 per share), for an aggregate purchase price of $1,000,000.

Pursuant to an agreement dated
October 15, 2004 (See Note 13  Notes to Consolidated Financial Statements), in
March, 2005, at the Companys request, Ener1 Group purchased 2,500 of the
Companys Series B Preferred shares, and warrants to purchase 13,889 shares of the
Companys common stock, for an aggregate purchase price of $250,000.

# Ener1 Group, Inc.
Acquisition of Control of Ener1, Inc.

In December 2001, we entered into a
Securities Purchase Agreement with Ener1 Group under which Ener1 Group acquired a
controlling interest in our company. Two of our directors, Mr. Zoi and Dr. Novak each
indirectly beneficially own 24.16% of Ener1 Groups outstanding securities. Under the
Securities Purchase Agreement, Ener1 Group agreed to purchase 47,126,416 shares of our
common stock at a price of $.0254634 per share, for the original purchase price of
$1,200,000. The shares purchased by Ener1 Group represented 80% of the issued and
outstanding capital stock of our company at the time. On January 3, 2002, we issued
12,500,001 shares of our common stock to Ener1 Group, representing a majority of our
issued and outstanding common on that date and a convertible promissory note in the
principal amount of $481,785; and placed 15,708,821 shares into escrow. We issued the
remaining 34,626,418 shares of our common stock to Ener1 Group, on March 15, 2002
following: (1) the automatic conversion of the convertible promissory note issued to Ener1
Group into 18,917,597 shares of our common stock and (2) the release from escrow of
15,708,821 shares of our common stock. Each of these events took place upon the approval
of our stockholders of an amendment to our Articles of Incorporation to increase in the
number of our authorized shares of common stock, which was obtained on March 11, 2002.

On February 22, 2002, the original
purchase price was reduced by $200,000 to $1,000,000 under the terms of the Agreement
because we did not meet specific stockholder equity targets as of December 31, 2001. To
pay this amount, we issued a one-year promissory note bearing interest at 8% to Ener1
Group. In November 2003, the debt represented by this note together with other obligations
we had to Ener1 Group and others was exchanged for shares of our common stock, warrants
and notes. See   Debt Exchange Agreement with Ener1 Group, Mr. Zoi and Dr.
Novak for a description of this exchange.

# Our Acquisition of Ener1
Battery from Ener1 Group

On September 6, 2002, we entered into
a merger agreement with Ener1 Group pursuant to which we acquired 100% of the outstanding
capital stock of Ener1 Battery from Ener1 Group. As a result of the acquisition, Ener1
Groups ownership of our common stock increased to 96.1% of our then outstanding
shares and approximately 96.8% of our fully diluted common share equivalents, after giving
effect to exercise of all warrants and mandatory conversion of our Series A Convertible
Preferred Stock issued in connection with the acquisition.

In exchange for 100% of the stock in
Ener1 Battery, we paid the following consideration to Ener1 Group:

|(a) | 50,000,000 shares of our common stock.
|--- | --------------------------------------

|(b) | 3,930,000 shares of our Series A Preferred Stock, par value $0.01 per share.
          The preferred stock had the rights, preferences and designations set forth in
          the Certificate of Designations included as Exhibit A to the merger agreement.
          In October 2002, the Series A Preferred Stock automatically converted into
          196,500,000 shares of our common stock after we amended our articles of
          incorporation to increase the number of our authorized shares of common stock.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(c) | Warrants to purchase up to 48,402,985 shares of our common stock at an exercise
          price of $0.08 per share. The warrants have a 10-year term. None of these
          warrants have been exercised.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(d) | A $1,161,850 promissory note payable to Ener1 Group, bearing interest at 10%
          per annum and due on September 1, 2003. In November 2003, this note and other
          obligations was exchanged for our common stock, warrants and notes, along with
          other obligations we had to Ener1 Group and others.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

In connection with the merger
transaction, Ener1 Group made capital contributions to Ener1 Battery totaling $4,700,000.

-61-

# Additional Ener1Group
Investments in Ener1

Beginning in May 2002, Ener1 Group
made capital contributions to us totaling $2,000,000 to fund the operations of our (now
former) Digital Media Technologies Division. In connection with these capital
contributions, in September 2002 we issued the following securities to Ener1 Group:

|(a) | 80,000 shares of our Series A Preferred Stock, par value $0.01 per share. Each
          preferred share automatically converted into 50 shares of our common stock in
          October 2002 upon the amendment of our Articles of Incorporation to increase our
          authorized shares.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(b) | Warrants to purchase up to 20,597,015 shares of our common stock with an
          exercise price of $0.08 per share. These warrants have a 10-year term. None of
          these warrants have been exercised.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# Ener1 Battery Equipment
Acquisitions and Related Loan Transactions

In June 2002, Ener1 Battery acquired
from Ener1 Group manufacturing equipment with an aggregate value of approximately
$13,488,000 in a series of transactions from Ener1 s.r.l., an Italian company. Mr. Zoi and
Dr. Peter Novak and companies controlled by them own 99% of the outstanding securities of
Ener1 s.r.l. The equipment acquired was valued at the lower of the net book value of Ener1
s.r.l in such equipment or fair market value. In connection with these acquisitions, Ener1
Battery assumed promissory notes originally payable by Ener1 s.r.l. to (1) Mr. Zoi, for
$139,994.87 and $148,552.46, respectively, (2) Dr. Novak, for $394,949.24 and $902,774.22,
respectively, (3) ZN, LLC (a company controlled by Mr. Zoi and Dr. Novak), for $371,555.56
and (4) Tavricheskiy Bank, for $1,200,000, plus accrued interest. In November, 2002, Ener1
Battery obtained an additional loan from Tavricheskiy Bank for $400,000, of which
approximately $371,555.56 was used to pay off the note to ZN, LLC. As part of the
transactions under which Ener1 Battery acquired this equipment from Ener1 Group, Ener1
Battery issued a promissory note to Ener1 Group for $5,500,000 at 10% annual interest.
This note was cancelled in exchange for stock, warrants and notes under our Debt Exchange
Agreement with Ener1 Group in November 2003.

When Ener1 Battery received the
equipment described above, the equipment was subject to a security interest in favor of
Meliorbanca Gallo S.p.A., an Italian bank, securing Ener1 s.r.l.s obligations in
connection with loans previously made to Ener1 s.r.l. In March 2003, the Meliorbanca loans
were restructured into a new loan agreement in which the Meliorbanca security
interest in Ener1 Batterys equipment was limited to 5,000,000 Euros (approximately
US$6,000,000). We, Ener1 Group, Ener1 Battery, Mr. Zoi and Dr. Novak were all named as
guarantors of the Ener1 s.r.l. obligations under the March 2003 loan agreement.

The Meliorbanca loan was paid in full
in January, 2004, and Meliorbancas security interest in Ener1 Batterys
equipment, and all of the guarantors obligations to Meliorbanca, were released. The
equipment is now pledged as security for Ener1 Batterys guaranty of Ener1s
obligations under the $20,000,000 in aggregate principal amount of senior secured
convertible debentures due January 2009 that we issued in January 2004.

# BZINFIN S.A. Loans to
Ener1 Group

Our parent company, Ener1 Group, has,
from time to time, had loans from its principal investor, BZINFIN, S.A.,. Mr. Boris
Zingarevich, who is a director of Ener1 Group, is an officer of BZINFIN and controls
BZINFIN. Mr. Zoi and Dr. Novak,
also directors of Ener1 Group and directors of our company, own all of the outstanding
securities of ZN, LLC, which, together with BZINFIN, owns 100% of Ener1 Group.

BZINFIN formerly held assignments of
the rights to three of Ener1 Batterys five pending battery-related patent
applications at the U.S. Patent and Trademark Office as collateral for the loans from
BZINFIN to Ener1 Group, the proceeds of which were used to finance Ener1 Batterys
operations. BZINFIN also had a security interest in Ener1 Batterys battery
manufacturing equipment as collateral securing Ener1 Groups obligations under a
$1,000,000 loan to Ener1 Group dated January 2003. One of the collateral assignments was
released in connection with the purchase of our stock by ITOCHU Corporation in July 2003.
The other two collateral assignments and the equipment security interests were fully
released in connection with our issuance in January 2004 of our senior secured convertible
debentures due January 2009.

# Merger of Ener1
Acquisition Corp. into Splinex Technology Inc.

In January 2005, in accordance with
an Agreement and plan of Merger dated as of June 9, 2004, as amended, Ener1 Acquisition
Corp., our wholly-owned subsidiary, was merger with and into Splinex Technology Inc. In
the merger, we received 5,000,000 shares of Splinex common stock, and declared a dividend
to distribute these shares to our shareholders. We agreed to pay up to $150,000 of
expenses incurred in connection with the Registration Statement filed by Splinex to
register our dividend of the shares of Splinex common stock issued in the merger.
Approximately 95% of Splinexs outstanding common stock is owned by Splinex, LLC. Two
of our directors, Dr. Peter Novak and Mike Zoi, beneficially own an aggregate of 25% of
the voting membership interests (and an aggregate of 25.5% of the economic membership
interests) of Splinex, LLC. Two of our 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.

-62-

# ITEM 13: EXHIBITS, LIST
AND REPORTS ON FORM 8-K

(a) Financial Statements
and Schedules

The Financial Statements and
Schedule filed as part of this Annual Report on Form 10-KSB are listed in the index for
Item 7.

(b)        Reports on
Form 8-K

During the last quarter of the fiscal
year covered by this report the following reports on Form 8-K were filed by the Company:

On October 13, 2004 the Company filed a
Current Report on Form 8-K to report events under Items 1.01 and 5.02.

On October 21, 2004 the Company filed
a Current Report on Form 8-K to report events under Items 1.01, 3.02 and 5.03.

On October 26, 2004 the Company filed a
Current Report on Form 8-K to report events under Items 1.01, 2.01, 3.02 and 9.01.

On November 30, 2004 the Company
filed a Current Report on Form 8-K to report events under Item 8.01.

On December 13, 2004 the Company filed
a Current Report on Form 8-K to report events under Items 1.01, 3.02 and 5.02.

(c) Exhibits

| | 2.1 | Securities
Purchase Agreement dated as of December 21, 2001, by and between the Registrant and Ener1
Holdings,          Inc., incorporated by reference to Exhibit No. 2 of the Registrant's
current report on Form 8-K dated January 18,          2002.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 2.2 | Merger
Agreement between the Registrant and Ener1 Group, Inc., effective as of August 31, 2002
and incorporated          by reference to Exhibit No 2.1 of the Registrant's current
report on Form 8-K dated September 23, 2002.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 3.1 | Amended
and Restated Articles of Incorporation of the Registrant, dated February 12, 1993,
incorporated by          reference to Exhibit 3(i) to the Registrant's Quarterly Report
on Form 10-Q for the quarter ended September 30,          2000.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 3.2 | Amendment
to Amended and Restated Articles of Incorporation, dated March 11, 2002, incorporated by
reference to          Exhibit 3.2 of the Registrant's Annual Report on Form 10-K for the
year ended December 31, 2001.
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 3.3 | Amendment
to Amended and Restated Articles of Incorporation, dated October 21, 2002, incorporated
by reference to          Exhibit 3.1 of the Registrant's current report on Form 8-K dated
October 28, 2002.
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 3.4 | Amendment
to Amended and Restated Articles of Incorporation, dated December 29, 2004, incorporated
by reference          to Exhibit A of the Registrant's Schedule 14C filed on December 6,
2004.
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 3.5 | Bylaws
of the Registrant, incorporated by reference to Exhibit 3.4 of the Registrant's
Registration Statement No.          333-112837.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------

| | 3.6 | Designation
of Series B Convertible Preferred Stock dated October 15, 2004.*
| | --- | ----------------------------------------------------------------------------

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

-63-

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

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

| | 4.4 | Warrant
issued to Cofis Compagnie Fiduciaire S.A. dated October 15, 2004 to purchase from Ener1,
Inc., 4,166,666          shares of Common Stock of the Company at a price per share of
$1.25.*
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 4.5 | Warrant
issued to Cofis Compagnie Fiduciaire S.A. dated October 15, 2004 to purchase from Ener1,
Inc., 4,166,666          shares of Common Stock of the Company at a price per share of
$1.50.*
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 4.6 | Warrant
to Purchase Common Stock issued October 20, 2004 to Delphi Automotive Systems, LLC, to
purchase up to          7,000,000 shares of Common Stock.*
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------

| | 4.7 | Registration
Rights Agreement dated as of October 20, 2004, by and between Ener1, Inc. and Delphi
Automotive          Systems LLC.*
| | --- | -----------------------------------------------------------------------------------------------------------------------------------

| | 4.8 | Registration
Rights Agreement dated as of October 20, 2004, by and between EnerDel, Inc., Delphi
Automotive          Systems, LLC and Ener1, Inc.*
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------

| | 4.9 | Form
of 7.5% Senior Secured Convertible Debenture issued pursuant to Securities Purchase
Agreement dated March          11, 2005, incorporated by reference to Exhibit No. 4.1 of
the Registrants current report on Form 8-K dated March          11, 2005.
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 4.10 | Form
of Warrant to Purchase Common Stock issued pursuant to Securities Purchase Agreement,
incorporated by          reference to Exhibit No. 4.2 of the Registrants current report
on Form 8-K dated March 11, 2005.
| | ---- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 4.11 | Registration
Rights Agreement, dated as of March 14, 2005 by and among Ener1, Inc. and the purchasers
of Ener1's          7.5% Senior Secured Convertible Debentures, incorporated by reference
to Exhibit No. 4.3 of the Registrants          current report on Form 8-K dated March
11, 2005.
| | ---- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.1 | 1992
Stock Option Plan incorporated by reference to Exhibit 10.3 to the Registration Statement
No. 33-56530 filed          with the Securities and the Exchange Commission.
| | ---- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.2 | 1992
Non-Employee Director Stock Option Plan, incorporated by reference to Exhibit 10. 4 to
the Registration          Statement No. 33-56530.
| | ---- | ---------------------------------------------------------------------------------------------------------------------------------------------

| | 10.3 | 2002
Stock Participation Plan incorporated by reference to Exhibit C of the Registrant's
Schedule 14A filed on          April 15, 2002.
| | ---- | ---------------------------------------------------------------------------------------------------------------------------------------

| | 10.4 | 2002
Non-Employee Director Stock Participation Plan incorporated by reference to Exhibit D of
the Registrants          Schedule 14A filed on May 15, 2002.
| | ---- | -----------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.5 | Master
Agreement by Itochu Corporation and the Registrant, dated July 25, 2003, incorporated by
reference to          Exhibit 10.1 to the Registrants Quarterly Report on Form 10-QSB
for the quarter ended September 30, 2003.
| | ---- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.6 | License
and Royalty Agreement by the Registrant and Ener1 Battery Company, dated July 25, 2003,
incorporated by          reference to Exhibit 10.2 to the Registrants Quarterly Report
on Form 10-QSB for the quarter ended September 30,          2003.
| | ---- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

-64-

| | 10.7 | Subscription
and Investment Agreement by Itochu Corporation and the Registrant, dated July 25, 2003,
incorporated          by reference to Exhibit 10.3 to the Registrants Quarterly Report
on Form 10-QSB for the quarter ended September          30, 2003.
| | ---- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.8 | Common
Stock Subscription Agreement by EnerStruct and the Registrant, incorporated by reference
to Exhibit 10.4          to the Registrants Quarterly Report on Form 10-QSB for the
quarter ended September 30, 2003.
| | ---- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.9 | Shareholders
Agreement by Itochu and the Registrant, dated July 25, 2003, incorporated by reference to
Exhibit          10.5 to the Registrants Quarterly Report on Form 10-QSB for the quarter
ended September 30, 2003.
| | ---- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.10 | Amendment
to Subscription and Investment Agreement by Itochu Corporation and the Registrant, dated
January 31,          2004 incorporated by reference to Exhibit 10.20 to the Registrants
Annual Report on Form 10-KSB for the period          ended December 31, 2003 filed on
March 31, 2004.
| | ----- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.11 | Employment
Agreement by the Registrant and Kevin P. Fitzgerald, dated September 8, 2003,
incorporated by          reference to Exhibit 10.6 to the Registrants Quarterly Report
on Form 10-QSB for the quarter ended September 30,          2003 .
| | ----- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.12 | Employment
Agreement by the Registrant and Randall Paulfus, dated November 5, 2003 incorporated by
reference to          Exhibit 10.24 to the Registrants Annual Report on Form 10-KSB for
the period ended December 31, 2003 filed on          March 31, 2004.
| | ----- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.13 | Agreement
by the Registrant and Tatum CFO Partners, dated November 5, 2003 incorporated by
reference to Exhibit          10.25 to the Registrants Annual Report on Form 10-KSB for
the period ended December 31, 2003 filed on March 31,          2004.
| | ----- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.14 | Exchange
Agreement dated November 14, 2003 by the Registrant, Ener1 Group, Inc., Ener1 Battery
Registrant,          EnerLook Solutions, Inc., Mike Zoi and Peter Novak incorporated by
reference to Exhibit 10.26 to the Registrants          Annual Report on Form 10-KSB for
the period ended December 31, 2003 filed on March 31, 2004.
| | ----- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.15 | Securities
Purchase Agreement, dated as of January 16, 2004 by and among Ener1, Inc. and the
entities whose names          appear on the signature pages thereof incorporated by
reference to Exhibit 10.1 to the Registrant's Current          Report on Form 8-K dated
January 21, 2004.
| | ----- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.16 | Subsidiary
Guaranty dated January 16, 2004 made by Ener1 Battery Company in favor of the Investors
named therein          incorporated by reference to Exhibit 10.3 to the Registrants
Current Report on Form 8-K dated January 21, 2004.
| | ----- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.17 | Subsidiary
Guaranty dated January 16, 2004 made by Ener1 Battery Company in favor of the Investors
named therein          incorporated by reference to Exhibit 10.3 to the Registrants
Current Report on Form 8-K dated January 21, 2004.
| | ----- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.18 | Mortgage,
Security Agreement and Assignment of Leases and Rents dated January 16, 2004 by Ener1
Battery          Registrant to Satellite Asset Management, L.P., incorporated by
reference to Exhibit 10.4 to the Registrants          Current Report on Form 8-K dated
January 21, 2004.
| | ----- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.19 | Waiver
Agreement dated January 16, 2004 by the Registrant and Ener1 Group, Inc. incorporated by
reference to          Exhibit 10.31 to the Registrants Annual Report on Form 10-KSB for
the period ended December 31, 2003 filed on          March 31, 2004.
| | ----- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.20 | Subscription
Agreement dated effective as of October 15, 2004, by and between Ener1, Inc. and Investor
for the          purchase of 150,000 shares of Ener1, Inc.s Series B 7% Convertible
Preferred Stock.*
| | ----- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.21 | Sublease
Agreement dated as of October 20, 2004, is entered into by and between Delphi Automotive
Systems LLC and          EnerDel, Inc.*
| | ----- | -----------------------------------------------------------------------------------------------------------------------------------------

-65-

| | 10.22 | Lease
Agreement dated October 20, 2004 between ENER1 Battery Company and EnerDel, Inc.*
| | ----- | ---------------------------------------------------------------------------------------

| | 10.23 | Bill
of Sale dated October 20, 2004, by Delphi Automotive Systems LLC in favor of EnerDel,
Inc. in favor of          transactions contemplated by the Formation, Subscription and
Shareholders Agreement of EnerDel, Inc. dated as of          October 20, 2004 by and
among Delphi, Ener1 Inc. and EnerDel.*
| | ----- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.24 | Delphi
Technologies, Inc. Assignment of Certain Inventions or Improvements dated October 20,
2004.*
| | ----- | ---------------------------------------------------------------------------------------------------

| | 10.25 | License
Agreement by and between Delphi Technologies, Inc. and EnerDel, Inc.*
| | ----- | -----------------------------------------------------------------------------

| | 10.26 | Ener1
Battery Company Assignment of Intellectual Property to EnerDel, Inc.*
| | ----- | ---------------------------------------------------------------------------

| | 10.27 | License
Agreement dated October 20, 2004 by and between Ener1, Inc. and EnerDel, Inc.*
| | ----- | --------------------------------------------------------------------------------------

| | 10.28 | Ener1
Daughter Enterprise with Foreign Investments of Ener1 Battery Company Assignment of
Intellectual Property          to EnerDel, Inc.*
| | ----- | ------------------------------------------------------------------------------------------------------------------------------------------

| | 10.29 | Option
to Purchase Agreement dated October 20, 2004 between EnerDel, Inc.; Ener1, Inc.; and
Ener1 Battery          Company.*
| | ----- | ----------------------------------------------------------------------------------------------------------------------------

| | 10.30 | Ener1
Services Agreement effective October 20, 2004 by and between EnerDel, Inc. and Ener1,
Inc.*
| | ----- | -------------------------------------------------------------------------------------------------

| | 10.31 | Engineering
Services Agreement effective October 20, 2004 by and between EnerDel, Inc. and Delphi
Automotive          Systems LLC.*
| | ----- | -----------------------------------------------------------------------------------------------------------------------------------

| | 10.32 | Transition
Services Agreement dated as of October 20, 2004 entered into by and between Delphi
Automotive Systems          LLC and EnerDel, Inc.*
| | ----- | ------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.33 | Certificate
of Designation on Non-Voting, Cumulative and Redeemable Series A Preferred Stock of
EnerDel, Inc.*
| | ----- | --------------------------------------------------------------------------------------------------------------

| | 10.34 | Assignment/Assumption
of License Agreement dated October 20, 2004*
| | ----- | ------------------------------------------------------------------

| | 10.35 | Form
of Securities Purchase Agreement, dated as of March 11, 2005 by and among Ener1, Inc. and
the purchasers of          Ener1's 7.5% Senior Secured Convertible Debentures and
Warrants to purchase shares of common stock, incorporated          by reference to
Exhibit No. 10.1 of the Registrants current report on Form 8-K dated March 11, 2005.
| | ----- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.36 | Form
of Security Agreement dated as of March 14, 2005 by and among Ener1, Inc. and the
purchasers of Ener1s 7.5%          Senior Secured Convertible Debentures, incorporated
by reference to Exhibit No. 10.2 of the Registrants current          report on Form 8-K
dated March 11, 2005.
| | ----- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.37 | Form
of Intercreditor Agreement dated as of March 11, 2004, among Ener1, Inc., the purchasers
of Ener1's 7.5%          Senior Secured Convertible Debentures and the purchasers of
Ener1, Inc.s 7.5% Senior Secured Convertible          Debentures, incorporated by
reference to Exhibit No. 10.3 of the Registrants current report on Form 8-K dated
         March 11, 2005.
| | ----- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.38 | Employment
Agreement by Registrant and Pankaj Dhingra dated December 1, 2004.*
| | ----- | ------------------------------------------------------------------------------

| | 14.0 | Code
of Ethics.*
| | ---- | ----------------

| | 21.1 | Subsidiaries
of the Registrant.*
| | ---- | --------------------------------

| | 23.1 | Consent
of Kaufman, Rossin & Co.*
| | ---- | ---------------------------------

| | 31.1 | Rule
13a-14(a)/15(d)-14(a) Certification of Chief Executive Officer.*
| | ---- | ---------------------------------------------------------------------

| | 31.2 | Rule
13a-14(a)/15(d)-14(a) Certification of Chief Financial Officer.*
| | ---- | ---------------------------------------------------------------------

| | 32.1 | Section
1350 Certifications.*
| | ---- | -----------------------------

* Filed herein

-66-

ITEM 14: PRINCIPAL
ACCOUNTANT FEES AND SERVICES

Year ended December 31,
2004

Audit Fees: The aggregate fees,
including expenses, billed by the Companys principal accountant in connection with
the audit of our consolidated financial statements for the most recent fiscal year and for
the review of our financial information included in our Annual Report on Form 10-KSB; and
our quarterly reports on Form 10-QSB during the fiscal year ending December 31, 2004 was
$251,340.

Audit Related Fees: The aggregate
fees, including expenses, billed by the Companys principal accountant for services
reasonably related to the audit for the year ended December 31, 2004 were $-0-

Tax Fees: The aggregate fees,
including expenses, billed by the Companys principal accountant for services
reasonably related to tax services during the year 2004 were $-0-

All Other Fees:  The
aggregate fees, including expenses, billed for all other services rendered to the Company
by its principal accountant during year 2004 was $30,673

Year ended December 31,
2003

Audit Fees: The aggregate fees,
including expenses, billed by the Companys principal accountant in connection with
the audit of our consolidated financial statements for the fiscal year ended December 31,
2003 and for the review of our financial information included in our Annual Report on Form
10-KSB for the fiscal year ended December 31, 2003; and our quarterly reports on Form
10-QSB during the fiscal year ending December 31, 2003 was $205,040

Audit Related Fees: The aggregate
fees, including expenses, billed by the Companys principal accountant for services
reasonably related to the audit for the year ended December 31, 2003 were $-0-

Tax Fees: The aggregate fees,
including expenses, billed by the Companys principal accountant for services
reasonably related to tax services during the year 2003 were $19,000. (1)

All Other Fees:  The
aggregate fees, including expenses, billed for all other services rendered to the Company
by its principal accountant during year 2003 was $-0-.

The Board of Directors has considered
whether the provisions of the services covered above under the captions Financial
Information Systems Design and Implementation Fees and All Other Fees is
compatible with maintaining the auditors independence.

-67-

SIGNATURES

Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.

|Date: April 15, 2005 |  | Ener1, Inc.BY: /S/ Kevin P. Fitzgerald
Kevin P. FitzgeraldChairman and Chief Executive Officer
|-------------------- |  | ------------------------------------------------------------------------------------------------------------

Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been signed
below by the following persons on behalf of the registrant and in the capacities and on
the dates indicated.

|Signature                    | Title                                                | Date          
|---------------------------- | ---------------------------------------------------- | --------------
|/s/ Kevin P. Fitzgerald      | Chairman and Chief Executive Officer                 | April 15, 2005
|Kevin P. Fitzgerald          | (Principal Executive Officer)                       
|                            
|/s/ Randall Paulfus          | Chief Financial Officer                              | April 15, 2005
|Randall Paulfus              | (Principal Financial Officer and Principal          
|                             | Accounting Officer)                                 
|                            
|/s/ Carlos E. Mendez-Penates |                                                      | April 15,2005 
|Carlos E. Mendez-Penates     | Director                                            
|                            
|/s/ Karl Gruns               | Director                                             | April 15, 2005
|Karl Gruns                  
|                            
|/s/ Mike Zoi                 | Director                                             | April 15, 2005
|Mike Zoi                    
|                            
|/s/ Dr Peter Novak           | Director                                             | April 15, 2005
|Peter Novak                 
|                            
|/s/ Ronald N. Stewart        | Director, Executive Vice President, General Counsel, | April 15, 2005
|Ronald N. Stewart            | Secretary                                           

-68-